Substitution between private and government consumption in African economies

In a context of elevated public debt and slower global growth, many countries in Africa are facing the prospect of sustained declines in public consumption. The macroeconomic impact of such adjustments will depend importantly on whether a decline in government consumption increases or decreases the marginal utility of private consumption. Employing a cointegration-panel approach, we estimate the intratemporal elasticity of substitution between private and government consumption in 24 African countries. Our estimates suggest that for plausible values of the relevant intertemporal elasticity, private and public consumption are Edgeworth substitutes in private utility. Countries facing fiscal consolidation can therefore expect some degree of demand-side offset to reductions in public consumption, and some resulting moderation in the impact of austerity on real GDP. In the presence of fungibility, our results also imply a labor-supply offset to declines in foreign aid for public investment. Country-level analysis suggests that these impacts of declines in public consumption may be heterogeneous across countries.