Examining the moderating effects of financial leakages and sanctions on relationship between capital expenditure and economic growth

Abstract

The modern-day theory of economic growth contends that capital expenditure is an engine for economic growth. This study examines the moderating effects of financial leakages and sanctions on capital expenditure impacts on economic growth in Zimbabwe. The moderating effects of these variables, in Zimbabwe, have not been empirically examined. The methodology of the study was guided by positivism philosophy. This study used quantitative secondary data largely from the World Bank and the Government of Zimbabwe, using autoregressive distribution lag (ARDL) to interrogate the relationship between capital expenditure and economic growth. The annual Gross Domestic Product and capital expenditure for this period were interpolated into quarterly figures using the Lisman and Sandee Quarterly Distribution Formula. An empirical analysis of the data for the study period was therefore conducted using the quarterised data. The main findings were that capital expenditure has positive effects on economic growth. However, both financial leakages and economic sanctions have significant negative moderating effects in the short-run and long-run on the relationship between capital expenditure and GDPgrowth rates. Financial leakages (Corruption) cause misallocation of state resources resulting in reduced impact of capital expenditure on GDP growth rates. Sanctions exert adverse effects on free inflows of Foreign Direct Investments and international trade of goods and services causing deceleration of economic growth in Zimbabwe. The recommendations of the study are that the government of Zimbabwe should deploy even more resources towards capital expenditure to stimulate economic growth. However, very strong measures to eradicate corruption should be enforced through transparent and accountable accounting and reporting system particularly on state procurement system. The signing of integrity pledges should be made mandatory to all public servants including politicians. The government of Zimbabwe should directly engage the United States of America government to have the Zimbabwe Democracy and Economic Recovery Act repealed. This would create an environment conducive for free international trade of goods and services. Furthermore, it would attract inflow of quality Foreign Direct Investments, which is usually accompanied by transfer of latest technology.