Description:
Although many studies indicate that both
the level and composition of public spending are significant
for economic growth, the results in the empirical literature
are still mixed. This paper studies the importance of
country sample selection and expenditure classification in
explaining these conflicting results. It investigates a set
of fast-growing countries versus a mix of countries with
different growth patterns. The regression specifications
include different components of public expenditure and total
fiscal revenues, always considering the overall government
budget constraint. Total public spending is first
disaggregated using a definition that classifies public
spending as productive versus unproductive components, an a
priori criterion that is based on the expected impact of
public spending items on the private sector production
function. After empirically confirming the validity of this
definition in the panel analysis, the authors suggest and
test an alternative definition of "core" public
spending that may be more appropriate for developing
countries. The empirical analysis shows that the link
between growth and public spending, especially the
productive and "core" components, is strong only
for the fast-growing group. In addition, macroeconomic
stability, openness, and private sector investment are
significant in the fast-growing group, which points to the
existence of an economic policy environment more conducive
to growth in the first group of countries. The authors
conclude that public spending can be a significant
determinant of growth for countries that are capable of
using funds for productive purposes.