Concept of Public Finance

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EPTD DISCUSSION PAPER NO. 99

PUBLIC SPENDING IN DEVELOPING COUNTRIES: TRENDS, DETERMINATION, AND IMPACT Shenggen Fan and Neetha Rao

Environment and Production Technology Division International Food Policy Research Institute 2033 K Street, N.W. Washington, D.C. 20006 U.S.A.

February 2003

EPTD Discussion Papers contain preliminary material and research results, and are circulated prior to a full peer review in order to stimulate discussion and critical comment. It is expected that most Discussion Papers will eventually be published in some other form, and that their content may also be revised.

ABSTRACT

The objective of this paper is to review trends in government expenditures in the developing world, to analyze the causes of change, and to develop an analytical framework for determining the differential impacts of various government expenditures on economic growth. Contrary to common belief, it is found that structural adjustment programs increased the size of government spending, but not all sectors received equal treatment. As a share of total government spending, expenditures on agriculture, education, and infrastructure in Africa; on agricultural and health in Asia; and on education and infrastructure in Latin America, all declined as a result of the structural adjustment programs. The impact of various types of government spending on economic growth is mixed. In Africa, government spending on agriculture and health was particularly strong in promoting economic growth. Asia’s investments in agriculture, education, and defense had positive growth-promoting effects. However, all types of government spending except health were statistically insignificant in Latin America. Structural adjustment programs promoted growth in Asia and Latin America, but not in Africa. Growth in agricultural production is most crucial for poverty alleviation in rural areas. Agricultural spending, irrigation, education, and roads all contributed strongly to this growth. Disaggregating total agricultural expenditures into research and non-research spending reveals that research had a much larger impact on productivity than non-research spending.

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Table of Contents 1. Introduction ........................................................................................................................... 1 2. Government Spending: Trends, Size, and Composition ....................................................... 3 3. Determination of Government Expenditures ...................................................................... 13 4. Impact of Government Spending on Growth ...................................................................... 20 5. Major Findings and Recommendations .............................................................................. 28 References ................................................................................................................................ 30 Appendix 1: Data Sources and Measurement Issues ............................................................... 33

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PUBLIC SPENDING IN DEVELOPING COUNTRIES: TRENDS, DETERMINATION, AND IMPACT1 Shenggen Fan and Neetha Rao2

1. INTRODUCTION Many developing countries are currently undergoing substantial macroeconomic adjustments. It is not clear how such programs are affecting government expenditure and hence longer-term economic growth and poverty reduction. Thus, it is important to monitor trends in the levels and composition of government expenditures, and to assess the causes of change over time. It is even more important to analyze the relative contribution of various expenditures to production growth and poverty reduction, as this will provide important information for more efficient targeting of these limited and often declining financial resources in the future. There have been numerous studies on the role of government spending in the long-term growth of national economies (Aschauer 1989; Barro 1990; Tazi and...
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