Effect of Capital Expenditure on Socio-Economic Development of Libya from 1970 to 2005

The effects of government expenditure and its size have stimulated controversy in macro economics in recent time especially on a long run economic growth. Public expenditure policies respecting sound government finances are key to fostering growth and preserving macroeconomic stability because public expenditure supports growth via public services. Libyan government expenditure has been on the increase for some time now. The problem is how effective (in terms of stimulating economic growth) are the government expenditure and what we the causes of this increasing government expenditure.This paper is based on an economic analysis of Libya's capital expenditure on socio-economic development during the period 1970-2005. In addition, the research is aimed at finding the causes of the increase in Libya's government expenditure from 1970 to 2005 and what is going to be the impact of such increase on the economic growth. The data is sourced from annual report of Central Bank of Libya from the period of 1970-2005. In addition, to estimate the effect of government expenditure on economic growth, the Error Correction and Granger Causality Model are estimated (for effect of economic growth on government expenditure as well). The findings indicate that no consistent evidence that changes in government spending has an impact on per capita real output growth. The flow of causality seems to be running in the other direction from output growth to government spending. Therefore, an important implication of the analysis for the conduct of public policy in Libya is that the government can face its deficit by shrinking its size and limiting its role in the economy.