Public spending and outcomes: Does governance matter?

This paper studies the links between public spending, governance, and outcomes. We examine the role of governance–measured by the level of corruption and the quality of bureaucracy–in determining the efficacy of public spending in improving human development outcomes. Our analysis contributes to our understanding of the relationship between public spending, governance and outcomes, and helps explain the surprising result that public spending often does not yield the expected improvement in outcomes. We show empirically that the differences in the efficacy of public spending can be largely explained by the quality of governance. Public health spending lowers child mortality rates more in countries with good governance. Similarly, public spending on primary education becomes more effective in increasing primary education attainment in countries with good governance. More generally, public spending has virtually no impact on health and education outcomes in poorly governed countries. These findings have important implications for enhancing the development effectiveness of public spending. The lessons are particularly relevant for developing countries, where public spending on education and health is relatively low, and the state of governance is often poor.     

Short- and long-term relation between economic development and government spending: the role of quality of institutions

ABSTRACT

This paper tests the Wagner’s assumption of the one-sided directional flow moving from economic growth to public spending considering an international database over the 1996–2012 period. By using indicators on the level of country control of corruption, government effectiveness, political stability, rule of law, regulatory quality and voice and accountability, the paper analyses the economic performance-public spending nexus controlling for the quality of the institutions. The empirical evidence supports the existence of the Wagner’s law, showing that, in the short-run, public spending positively reacts to a positive shock in national income, with a lower magnitude for democratic countries. In the long run, the error-correction model shows the convergence between public spending and national output occurring less quickly for non-democratic, low-income and to a smaller extent for non-OECD countries. Institutional quality, such as effort in controlling corruption and the presence of regulations that permit and promote private sector development, may help reducing the amount of per capita public spending and making it more productive. Higher expenses in compositional amenities such as public services for the elderly may explain why public spending per capita will increase the most in economies with a higher share of the population that need healthcare facilities.     

Corruption and growth in Africa

A major concern in the development of African economies is the impact of corruption on economic growth and while there is general agreement on its detrimental effects, there is considerable debate over its nature and importance. In particular there is little work on the interaction between corruption, government expenditures and how this influences economic growth in countries in the region. This paper takes an endogenous growth model, extends it to include different categories of government spending and then introduces the possibility of corruption, which is allowed to have different effects on each of the categories. The results confirm the negative effect of corruption and military spending, but also show that corruption interacts with military burden, through indirect and complementary effects, to further increase its negative effect. The policy implications are that the effects of corruption on economic growth are worse than was thought in countries which have high military burdens.     

THE TWO‐WAY RELATIONSHIP BETWEEN GOVERNMENT SPENDING AND CORRUPTION AND ITS EFFECTS ON ECONOMIC GROWTH

The existing empirical evidence suggests that in low‐income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two‐way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low‐income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth. (JEL H3, O11, O41)     

行政腐败的宏观经济学分析

本文在增长模型中引入行政腐败和由行政腐败而引起的调整成本 ,考察其对经济增长的影响。通过模型分析得出 ,当政府公共支出的边际生产率比较高 ,税率比较低以及由腐败引致的调整成本比较高时 ,行政腐败对经济增长的负面影响占主导地位。通过对我国行政腐败与公共支出、经济增长率之间关系进行实证分析得出 :在我国市场化过程中 ,行政腐败降低了我国经济增长率 ;在我国公共支出领域 ,行政腐败行为的发生浪费了大量的公共支出。不论以受贿金额占GDP的比重 ,还是以腐败涉及县处以上官员的变动作为衡量行政腐败的指标 ,行政腐败与公共支出占GDP的比重都呈现正相关关系 ;在我国经济发展的过程中 ,存在着大量的预算外支出。预算外支出为腐败行为的发生提供了便利。而且 ,预算外支出由地方或政府官员控制 ,由此引起围绕公共支出的调整成本上升。这表明 ,预算外支出就整体而言阻碍了经济增长。     

Government size,composition of public spending and economic growth in Brazil

The performance of the fiscal policy is largely affected by the relationship between government size, composition of public spending and economic growth. We use a theoretical framework to find optimal relations among these variables and confront them with a panel data for the Brazilian states. Private capital and government spending are substitute inputs in production as the Brazilian states require provision of public spending to fill gaps in the underdeveloped private sector. Public investment and current government expenditures are combined in fixed ratios in the overall government spending due to strong rigidity of the public budget. The optimal share of public investment is considerably lower than current expenditures, as occurs in developing countries characterized by low economic dynamism. Finally, the average tax burden from the data is below the estimated optimal level, meaning that there is space for increasing tax rate without harming economic growth for some Brazilian states.     

Corruption and military spending

Anecdotal evidence relates corruption with high levels of military spending. This paper tests empirically whether such a relationship exists. The empirical analysis is based on data from four different sources for up to 120 countries during 1985–1998. The association between military spending and corruption is investigated by using cross-section and panel regression techniques. The results suggest that corruption is associated with higher military spending as a share of both GDP and total government spending, as well as with arms procurement in relation to GDP and total government spending. The results can be interpreted as evidence that defense spending may be used as a component of an indicator of the quality of governance.     

Democracy,Rule of Law,Corruption Incentives,and Growth

We bridge the gap between the standard theory of growth and the mostly static theory of corruption. Some public investment can be diverted from its purpose by corrupt individuals. Voters determine the level of public investment subject to an incentive constraint equalizing the returns from productive and corrupt activities. We concentrate on two exogenous institutional parameters: the “technology of corruption” is the ease with which rent‐seekers can capture a proportion of public spending. The “concentration of political power” is the extent to which rent‐seekers have more political influence than other people. One theoretical prediction is that the effects of the two institutional parameters on income growth and equilibrium corruption are different according to the constraints that are binding at equilibrium. In particular, the effect of judicial quality on growth should be stronger when political power is concentrated. We estimate a system of equations where both corruption and income growth are determined simultaneously and show that income growth is more affected by our proxies for legal and political institutions in countries where political rights and judicial institutions, respectively, are limited.     

Algeria: A three-sector macrofiscal model for debt sustainability and growth policy analysis

In this paper, we present a dynamic general equilibrium (DGE) model to address the macrofiscal vulnerabilities and the effects of fiscal policy on growth and employment in Algeria. We first discuss the baseline scenario over the period 2021–2040. According to our baseline results, without fundamental changes in fiscal policies, even relatively high growth will not be sufficient to put public debt on a sustainable path. We then conduct four experiments and assess their impact on fiscal accounts, growth, and unemployment: an increase in the efficiency of public spending on infrastructure investment, a gradual reduction in the share of noninterest government spending in GDP, the same gradual reduction in spending combined with a permanent increase in the share of investment in infrastructure in total noninterest government expenditure, and a composite fiscal reform program that combines these individual policies, respectively. The results suggest that public debt sustainability can be achieved, and growth and employment can be promoted, as long as an ambitious fiscal reform program involving tax, spending, and governance reforms is implemented. Importantly, our quantitative analysis shows that, with a well-designed fiscal program, there may be no trade-off between fiscal consolidation and economic growth.     

Does too much government spending depress the economic development of transition economies? Evidences from dynamic panel threshold analysis

This paper investigates the relationship between government size and economic growth and determines the optimal level of government spending to maximize economic growth. The paper applies a dynamic panel data analysis based upon a threshold model to test the threshold effect of government spending in 26 transition economies over the period spanning 1993–2016. According to the analysis results, government expenditures have a threshold effect on economic growth, and there is a non-linear relationship depicted as an Armey curve in these transition economies. The findings indicate that a government size above the threshold government spending level adversely affects economic growth, while a government size below the threshold level has a positive effect. Furthermore, there is a statistically significant relationship between the two variables above and below that optimal level, even if we divide the sample into developed and developing countries. Our findings suggest that governments in transition economies should consider optimal government size at around the estimated threshold level to support sustainable economic growth.     

Functional components of public expenditure,fiscal consolidations,and economic activity

This paper analyses how the functional components of public expenditure and spending‐driven consolidations affect the economic growth, unemployment, and income inequality. A dynamic panel data least squares dummy variable estimator estimator is employed over a sample of 15 European Union countries during the period 1990–2012. The empirical results show that real GDP growth decreases when fiscal austerity measures are implemented, especially if they are spending‐driven. Cuts in public expenditure undermine economic growth, namely if they slash spending on public order, recreation, and education. Spending cuts on education, in particular, affect the investment in human capital, harming not only growth but also economic, social, and human development. The unemployment rate also proved to be significantly boosted when austerity measures restrict spending on education, whereas income inequality rises when social protection expenditures are cut.     

Public finance,government spending and economic growth: the case of local governments in Brazil

The impact of local government spending on output growth is estimated using a panel of Brazilian municipalities during 1985–1994. Attention is focused on three expenditure categories, housing/urbanization, health/sanitation, and transport services, which are expected to be growth-enhancing, and their sources of finance (local taxes, intergovernmental transfers, and borrowing). The determinants of these spending categories are also examined. The size of the municipality, measured by the resident population, is shown to affect government spending nonlinearly. This is a contribution to the recent empirical literature on the linkages between decentralized government spending, public finances, and economic growth at the local, rather than national, level.     

HOW CAN PUBLIC SPENDING HELP YOU GROW? AN EMPIRICAL ANALYSIS FOR DEVELOPING COUNTRIES

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 mixed. This paper suggests that the country sample selection and expenditure classification are important in explaining these conflicting results. The empirical analysis shows that the link between growth and public spending, especially its core component, is strong only for countries with macroeconomic stability and fast GDP per capita growth dynamics, which are also capable of using public funds for productive purposes.     

Taxation,corruption, and growth

We build an endogenous growth model to analyze the relationships between taxation, corruption, and economic growth. Entrepreneurs lie at the center of the model and face disincentive effects from taxation but acquire positive benefits from public infrastructure. Political corruption governs the efficiency with which tax revenues are translated into infrastructure. The model predicts an inverted-U relationship between taxation and growth, with corruption reducing the optimal taxation level. We find evidence consistent with these predictions and the entrepreneurial channel using data from the Longitudinal Business Database of the US Census Bureau. The marginal effect of taxation for growth for a state at the 10th or 25th percentile of corruption is significantly positive; on the other hand, the marginal effects of taxation for growth for a state at the 90th percentile of corruption are much lower across the board. We make progress towards causality through Granger-style tests and by considering periphery counties where effective tax policy is largely driven by bordering states. Finally, we calibrate our model and find that the calibrated taxation rate of 37% is fairly close to the model׳s estimated welfare maximizing taxation rate of 42%. Reducing corruption provides the largest potential impact for welfare gain through its impact on the uses of tax revenues.     

Democracy, Governance, and Economic Growth: Theory and Evidence

The paper examines how democracy affects long-run growth by influencing the quality of governance. Empirical evidence is first presented showing that measures of the quality of governance are substantially higher in more democratic countries. A general-equilibrium, endogenous growth model is then built to show how a governance-improving democracy raises growth. In this model, stronger democratic institutions influence governance by constraining the actions of corrupt officials. Reducing corruption, in turn, stimulates technological change and spurs economic growth. Empirical evidence is presented showing that democracy is in fact a significant determinant of total factor productivity (TFP) growth between 1960 and 1990 in a cross-section of countries. But this contribution occurs only insofar as stronger democratic institutions are associated with greater quality of governance.     

Corruption: The good,the bad,and the uncertain

This paper argues that the relationship between corruption and economic growth is dependent upon the uncertainty involved. Employing data on a cross‐section of countries, this paper uses an interaction between the frequency of bribery payments and the uncertainty regarding the delivery of the service in exchange for these bribes to show that corruption has a negative association with growth unless the uncertainty is minimal. Furthermore, the negative association becomes larger in magnitude with higher levels of uncertainty. At extremely high levels of uncertainty a relatively small increase in corruption, equivalent to moving from Sweden to the United States for example, is associated with economically large decreases in economic growth.     

Democracy comes to Europe: Franchise extension and fiscal outcomes 1830-1938

This paper examines the relation between public spending and the spread of democracy in Western Europe during the period 1830-1938. Our data set includes measures of the size of the electorate, the election rule, and electoral participation, as well as measures of the size and composition of central government expenditures for 12 countries. We estimate panel regressions, and find that (1) the gradual lifting of socio-economic restrictions on the voting franchise contributed to growth in government spending mainly by increasing spending on infrastructure and internal security; (2) the female suffrage had a weak positive effect, through spending on health, education and welfare; (3) the change from majority to proportional rule, which took place in 10 of the countries, did not contribute to growth in government spending, and held back spending on health, education and welfare; (4) there exists (weak) complementarity between economic development and the spread of democracy.     

The effectiveness of government spending on education and health care in developing and transition economies

Recent studies show that corruption is associated with higher military spending [Eur. J. Polit. Econ. 17 (2001) 794] and lower government spending on education and health care [J. Publ. Econ. 69 (1998) 263]. This suggests that policies aimed at reducing corruption may lead to changes in the composition of government outlays toward more productive spending. However, little empirical evidence has been presented to support the claim that public spending improves education and health indicators in developing and transition countries. This paper uses cross-sectional data for 50 such countries to show that increased public expenditure on education and health care is associated with improvements in both access to and attainment in schools, and reduces mortality rates for infants and children. The education regressions are robust to different specifications, but the relationship between health care spending and mortality rates is weaker.     

政府公共支出结构对腐败的影响效应分析

政府公共支出结构是影响腐败的主要经济因素之一。本文建立腐败的客观衡量指标,采用固定效应模型,定量分析政府公共支出结构及政府支出规模、市场化程度、教育水平、工资水平以及经济发展水平等对腐败的影响,研究结果表明:减少寻租性支出、提高生产性支出对腐败有着显著的抑制作用,同时控制政府支出规模、提高私有化程度对反腐败也有显著正效应;提高人均收入水平和经济增长率对腐败存在着预期的负效应,但在统计上并不显著;教育水平和政府公务员相对工资的提高不利于反腐败,这与大多数实证分析的结果相反。     

Growth effects of public expenditure on the state and local level: evidence from a sample of rich governments

There is a vast empirical literature investigating the relationship between government size and economic growth. But the empirical evidence of growth effects of public expenditure using cross-country regressions is still inconclusive. According to a number of authors this is not surprising since the negative relationship only applies for rich countries with a large public sector. Restricting their analysis on rich countries only they can show the predicted negative impact. Naturally, a selection of a sub-sample of rich countries is always somewhat arbitrary. Another possibility is to concentrate on governments within a rich country. However, only few studies investigate the effect of state and local spending on economic growth. This study concentrates on the relationship between public expenditure and economic growth within a rich country using the full sample of state and local governments from Switzerland over the 1981–2001 period. The general finding is a fairly robust negative relationship between government size and economic growth. However, in contrast to public spending from operating budgets there is no significant impact on economic growth by expenditure from capital budgets.