The composition of public expenditure and economic growth

Shantayanan Devarajan, Vinaya Swaroop and Heng-Fu Zou ()
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Shantayanan Devarajan: Policy Research Department, The World Bank
Vinaya Swaroop: Policy Research Department, The World Bank

No 77, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: Noting that the literature has focused on the link between the level of public expenditure and growth, we derive conditions under which a change in the composition of expenditure leads to a higher steady-state growth rate of the economy. The conditions depend not just on the physical productivity of the different components of public expenditure but also on the initial shares. Using data from 43 developing countries over 20 years we show that an increase in the share of current expenditure has positive and statistically significant growth effects. By contrast, the relationship between the capital component of public expenditure and per-capita growth is negative. Thus, seemingly productive expenditures, when used in excess, could become unproductive. These results imply that developing-country governments have been misallocating public expenditures in favor of capital expenditures at the expense of current expenditures.

Keywords: Productive and unproductive government expenditures; Economic growth; Developing countries (search for similar items in EconPapers)
JEL-codes: E62 H50 (search for similar items in EconPapers)
Pages: 32 pages
Date: 1996
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Citations: View citations in EconPapers (653)

Published in Journal of Monetary Economics, Volume 37, Issue 2, April 1996, Pages 313-344

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Journal Article: The composition of public expenditure and economic growth (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:77

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