The Impact of Government Spending on Service Sector Growth in Indonesia: A VECM Model Approach
Keywords:
Keynesian theory, Service sector, VECMAbstract
The service sector is crucial for economic development in developed and developing countries. However, many developing nations, including Indonesia, face challenges in expanding their service sectors, often underestimating their potential. In line with Keynesian theory, government spending is key to stimulating sectoral growth. This research seeks to address the gap in the existing literature by exploring the relationship between specific government expenditures—on subsidies, education, health, and infrastructure—and the growth of Indonesia's service sector between 1990 and 2019. The study aims to answer the following research questions: (1) how does government spending in these four areas influence the growth of the service sector, and (2) which government spending has a significant impact on service sector growth in the short and long term? Using time-series data from the Indonesian Central Bureau of Statistics and the Ministry of Finance, the study employs the Vector Error Correction Model (VECM) to analyze short-term and long-term effects. The results reveal that government spending in education, subsidies, health, and infrastructure significantly contributes to service sector growth in the long term, while no significant short-term effects are observed.
References
Alexiou, C. (2009). Government Spending and Economic Growth: Econometric Evidence from the South Eastern Europe (SEE). Journal of Economic and Social Research, 11(1), 1–16.
Alshahrani, S. A., Alsadiq, A. J., Alshahrani, S., & Alsadiq, A. (2014). Economic Growth and Government Spending in Saudi Arabia: an Empirical Investigation IMF Working Paper Fiscal Affairs Department Economic Growth and Government Spending in Saudi Arabia: An Empirical Investigation.
Aregbeyen, O., & Kolawole, B. O. (2015). Oil Revenue, Public Spending and Economic Growth Relationships in Nigeria. Journal of Sustainable Development, 8(3). https://doi.org/10.5539/jsd.v8n3p113
Arpaia, A., & Turrini, A. (2008). Government expenditure and economic growth in the EU: long-run tendencies and short-term adjustment (No. Economic Papers No. 300).
Butkiewicz, J. L., & Yanikkaya, H. (2011). Institutions and the Impact of Government Spending on Growth. Journal of Applied Economics, 14(2), 319–341. https://doi.org/10.1016/S1514-0326(11)60017-2
Chude, P. N., & Chude, I. D. (2013). Impact of government expenditure on economic growth in Nigeria. International Journal of Business and Management Review, 1(4), 64–71. https://doi.org/10.1007/s13398-014-0173-7.2
Eichengreen, B., & Gupta, P. (2009). The Two Waves of Service Sector Growth (No. NBER Working Paper Series, No. 14968).
Francois, J. (1990). Trade in nontradables: proximity requirements and the pattern of trade in services. Journal of Economic Integration, 5(1), 31–46.
Journal of Policy and Sustainable Development Studies, Vol 1, No 1, 2026 13
Gukat, B. T., & Ogboru, I. (2016). An Empirical Analysis of Government Expenditure and Economic Growth in Nigeria. Journal of Economics and Development Studies, 5(4), 122–134. https://doi.org/10.15640/jeds.v5n2a11
Jhingan, M. I. (2009). Advanced economic theory. Delhi: Vrinda Publications.
Kim, J., & Wood, J. (2020). Service sector development in Asia: an important instrument of growth. Asian-Pacific Economic Literature, 34(1), 12–25. https://doi.org/10.1111/apel.12282
Myrdal, G., & Sitohang, P. (1957). Economic theory and under-developed regions. London.
Nworji, I. ., & Oluwalaiye, O. . (2012). Government Spending on Road Infrastructure and Its Impact on the Growth of Nigerian Economy. International Journal of Management & Business Studies, 2(2), 24–30.
Nwosa, P. I., & Tijani, S. O. (2020). Government expenditure and service sector growth in Nigeria. Journal of Economics and Management, 40(2), 74–90. https://doi.org/10.22367/jem.2020.40.04
Rasaki .O, K., Hakeem. A, B., Gbenga, A., Najeem.O, B., Sunday. E, O., & Rukayat, A. (2014). The Impact of Public Sector Spending on Economic Growth of Nigeria. Journal of Economics and Sustainable Development, 5(3), 216–224.
Wu, S.-Y., Tang, J.-H., & Lin, E. S. (2010). The impact of government expenditure on economic growth: How sensitive to the level of development? Journal of Policy Modeling, 32(6), 804–817.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Journal of Policy and Sustainable Development Studies
This work is licensed under a Creative Commons Attribution 4.0 International License.
Abstract views: 3
,
PDF Downloads: 0
