PUBLIC EXPENDITURE AND strongECONOMICstrong GROWTH A DISAGGREGATED.pdfVIP

The Manchester School Vol 75 No. 5 September 2007 1463–6786 533–556 PUBLIC EXPENDITURE AND ECONOMIC GROWTH: A DISAGGREGATED ANALYSIS FOR DEVELOPING COUNTRIES* by NILOY BOSE University of Manchester and University of Wisconsin-Milwaukee M. EMRANUL HAQUE and DENISE R. OSBORN† University of Manchester In this paper, we examine the growth effects of government expenditure for a panel of 30 developing countries over the 1970s and 1980s, with a particular focus on disaggregated government expenditures. Our meth- odology improves on previous research on this topic by explicitly recog- nizing the role of the government budget constraint and the possible biases arising from omitted variables. Our primary results are twofold. First, the share of government capital expenditure in GDP is positively and significantly correlated with economic growth, but current expendi- ture is insignificant. Second, at the disaggregated level, government investment in education and total expenditures in education are the only outlays that are significantly associated with growth once the budget constraint and omitted variables are taken into consideration. 1 Introduction The recent revival of interest in growth theory has also revived interest among researchers in verifying and understanding the linkages between fiscal policies and economic growth. Over the past decade and a half, a substantial volume of empirical research has been directed towards identifying the elements of public expenditure (at its aggregate and disaggregate levels) that bear signifi- can