Does Government Expenditure Matter for Economic Growth?
| Author | Emmanuelle Taugourdeau,Marion Laboure |
| Published date | 01 May 2018 |
| Date | 01 May 2018 |
| DOI | http://doi.org/10.1111/1758-5899.12540 |
Does Government Expenditure Matter for
Economic Growth?
Marion Laboure
Harvard University
Emmanuelle Taugourdeau
National French Institute for Scientific Research (CNRS, CREST)
Abstract
This paper aims to determine how the composition of public expenditure affects countries’economic growth depending on
their level of development. We show that there is a strong association between a country’s level of development and the
amount of public spending. Productive spending dominates in poorer countries while richer countries have a higher proportion
of unproductive spending. Furthermore, productive spending has a greater effect on growth in poorer countries. We illustrate
our findings using dynamic panel GMM estimators with data from 147 countries (31 low, 69 medium and 47 high-income coun-
tries) covering the period 1970–2008. We also find that education expenditures are the more productive public spending.
Policy implications
•High-income countries should decrease their overall expenditure and reconsider their education and health expenditures
in a more productive way.
•High-income countries should reduce their public spending until reaching the productive level threshold.
•Low-income countries have some leverage to increase further their public spending (and especially on education and
health).
•Education expenditure should be favored by all income level countries (low-, middle- and high-income countries).
1. An overview of the States along the economic
development
The objectives of governments fluctuate and shift as the
local economy develops. They evolve from fulfilling only
basic ‘survival’needs to providing goods and services and
then to ensuring the well-being of the population. The com-
position of public spending reflects the evolution of these
objectives due to demographic trends, the differing priori-
ties of different governments and economic growth. The
first objective of this paper is to see if, in analogy to the
Armey curve, there is a threshold government size below
which increases in government spending have positive
effects, while increases above the threshold have negative
effects on economic growth. Second, this paper aims to
determine how the composition of public expenditure
affects countries’long-term economic growth and develop-
ment. The contribution of the paper is twofold. First, this is,
to our knowledge, the first paper that analyses the composi-
tion of public spending over a long time period for low,
middle and high-income countries. This allows us to deter-
mine the impact of public spending on growth at different
stages of the economic development process. Second, our
analysis considers the specific makeup of public spending.
In our theoretical model, a portion of this expenditure can
be both productive and benefit the agent as a public good.
In our numerical exercise, we determine which components
of public expenditure correspond to this type of public
good and calculate the magnitude of these effects on
growth as a function of countries’income levels.
There are three basic models of government. The first is
the minimal state: the government’s only responsibilities are
to protect their citizens from coercion, fraud and theft, com-
pensate victims, and defend the country from foreign
threats. The state’s role is limited to sovereign functions,
commonly internal security (policing and justice), external
security (military) and currency management. This model of
government is typical of low-income countries. The second
model is the developmental state: governments implement
a state-led macroeconomic plan and take full responsibility
for economic development. Expenditure is aimed at foster-
ing production/economic output. Governments decrease
their involvement and allow market forces to take over once
a certain level of development is reached. This approach has
been adopted by several East Asian countries (e.g., Japan,
South Korea, China and Singapore). The third model is the
welfare state: governments take responsibility for the wel-
fare and well-being of their citizens and ensure their physi-
cal, material and social needs. Their main (stated) objective
is to establish an egalitarian society and to minimize income
Global Policy (2018) 9:2 doi: 10.1111/1758-5899.12540 ©2018 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 9 . Issue 2 . May 2018 203
Research Article
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