There are many conflicting views on the subject, so perhaps a survey can help you summarize all that stuff. There's a recent one (Bergh and Henrekson, 2011) called "Government Size and Growth: A Survey and Interpretation of the Evidence" where you can find a discussion on the specific subject of public spending and GDP per capita growth rates.
Referring to many literatures (as well as history of economic world), the general conception is that increasing public spending could stimulate for economic growth. But the question is not whether public spending stimulates economic growth, but rather how a nation raises its public spending (fiscal policy)...
There was lately a controversy between Paul Krugman Carmen Reinhart and Kenneth Rogoff regarding that issue. Refer to Reinhart and Rogof.
Thanks for the information!, I am going to search the papers that you indicate
Public spending increases employment ->production->Income:>Saving-> Investment-> and so enhances economic growth
Hi Isaac,
there are a lot of papers that analyze the effects of public spending on economic growth. Among them, and considering a particular type of public expense - public investment in transportation infrastructures - there are several articles including some paper that I have co-authorship. Please have a look at my profile.
Jorge
If you refer to Reihnart and Rogoff, take also into account the work of Thomas Herndon.:http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/
The following is a sample of different papers, techniques and issues involved in the nexus of public spending and growth. I suggest to check the classic paper by Aschauer and then more recent papers, including by Sanjeev Gupta et al. http://www.imf.org/external/pubs/ft/wp/2006/wp06244.pdf which explores the link between fiscal adjustment and growth.
Also, Alberto Alesina has a very intersting paper: http://www.nber.org/digest/jan00/w7207.html
Further, the following, very recent paper is interesting in that it explores the impact of the recomposion of public spending on long-run growth and emphasizes the role of education. http://www.imf.org/external/pubs/ft/wp/2013/wp13162.pdf
Finally, in the following paper I explored determinants of public expenditures on infrastructure: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=620528
Gordon Tullock one of the last publications telld a good story on the topic:http://www.econlib.org/library/Enc1/GovernmentSpending.html many years passed but he coauthored with late Buchannan the following in 1997: http://www.jstor.org/discover/10.2307/30022984?uid=3737608&uid=2129&uid=2&uid=70&uid=4&sid=21102566943327
Gemmell, Norman, Richard Kneller, and Ismael Sanz. "Fiscal decentralization and economic growth: spending versus revenue decentralization." Economic Inquiry (2012). This paper covers the topic is a succinct manner.
There is also a recent paper on public sending in a particular sector (education) and its impact on economic growth; it is an India based study. [Dastidar, Sayantan Ghosh, Sushil Mohan, and Monojit Chatterji. "The relationship between public education expenditure and economic growth: The case of India." (2013).]
This is a very important issue, yet difficult to answer in few lines. Recent research in this area spurt by the seminal paper of Giavazzi and Pagano (1990) has pointed out on the possibility for "non-Keynesian" effects of government spending. The papers which test their existence emphasize both on the size and composition of public spending and the impact on growth in the short-, medium- or a long run.
Why don't you read the econometric
work of Robert Barro (Harvard), his answer is
more Hayekian than Keynesian
Hans W. Gottinger
There are many conflicting views on the subject, so perhaps a survey can help you summarize all that stuff. There's a recent one (Bergh and Henrekson, 2011) called "Government Size and Growth: A Survey and Interpretation of the Evidence" where you can find a discussion on the specific subject of public spending and GDP per capita growth rates.
There are economists who do not recognise who spends money: government or people but government has only money taken from people today or in future (debts). High public spending can enhance economic growth (mostly on paper) but big spending equals big wasting and ineffectivness what means uneconomic and political allocation of resources what in long run leads to decrease of economic growth.
I agree with your position Leszek, the key is the quality of public spending and funding sources. Take this opportunity to invite to publish an article in Nóesis. Revista de Ciencias Sociales, autors´ guidelines in ww.revistanoesis.net
I don't think it's true (as Mr Jurdziak assumes) that governments are necessarily less efficient than private sector. For example, the USA has the highest per capita health spending in the world, but its health indicators are in many cases closer to those of the third world. And the reason is an inefficient private health system. Similar things happen with technological change.
Once I read a paper (I think it was in the IMF Working Papers) where the authors, besides including a public sector size variable, included fixed regional effects. And they found that in most Asian countries government size was positively correlated with growth, whereas in Latinamerica it was negatively correlated.
So perhaps there's no direct relation between government size and economic growth because the sign of the coefficient depends on each country quality of government. There’s another clear case: governments in Europe are way bigger than in the USA and Europeans enjoy a lot of services from their governments who charge high taxes. ¿And what happened? ¿did European growth stalled due to high taxes? Not at all: per capita growth rates in Europe and the USA are the same. So the fairy neoliberal tale of a small government with low taxes that enhances growth is just that: a false assumption repeated one million times.
There’s so many inconclusive literature on the subject, there have been so many failed attempts of neoliberals to find a clear negative correlation in data panel models, that my personal view on the economic literature on this subject is that there’s almost no effect of government size on economic growth. I guess it’s not a matter of size but of quality.
Very good analysis Juan, at the end we don´t have any conclusive answer. My target now is find evidence at regional level to demonstrate that more public spending supports economic growth.
I am sorry if I give the same answer but the formula to calculate Gross domestic product (GDP) is GDP=Government spending (G)+corporate investment (I) + consumer consumer consumption (C)+Export (Ex) - Import (Im) and economic growth is annual growth of GDP. So there is positive correlation
A good survey has been published recently:
Bergh A. and M. Henrekson (2011), Government Size And Growth: A Survey And Interpretation Of The Evidence, Journal of Economic Surveys, 25(5), pp. 872-895
Same paper. Rising government spending, as Michal says, is the essence of Keynesian and Kaleckian fiscal expansions which have been successful in the short term to accelerate growth, for example after a recession. But in the long term -the time scope relevant to analyse economic growth- there are more things to consider (and Keynes was very well aware of it, he designed those policies to accelerate growth in times of economic crisis not to increase long term growth rates). One of those things is the dynamics of debt; if the government spends more they will have to raise taxes, use earnings from its companies instead of reinvesting them or issue debt that will have to be paid at some time with the same sources. So the initial increase in government spending has costs in future growth.
In the end the question is which investments are more profitable in social terms in the long term, those of the government or those of the private sector. And it’s not clear from just looking at equations which is the outcome; you have to look at the data. And what historical panel data show is inconclusive because it’s different in every sector and in every country.
! There are a few basic mistaks in some of the above answers. First, GDP is a statistical indicator based on some accounting principles (+ it is just an estimate.). So if you increase public spending you can increase GDP one year but it does not secure an increase in economic activity (potential product). You can e.g increase short term consumption expenditure, distort market signals, change the economic structure. So you have to distinguish between "growth" measured by GDP and "real sustainable growth of potential GDP". E.G. Suppose being able to secure building of infrastructure at lower prices (e.g. due to new system of public procurement processes) - your expenditures in real prices will be lower and so the GDP will be, but you can have more infrastrucure and some multiple effects may come...etc etc... There are many other examples, I have no time to react at this moment...
The current sovereign debt crisis brought into the public domain an old and widely discussed topic in the academic and scientific professions: the burden of the public debt. It is argued that present public debt is equivalent to the present value of future taxes charged to companies and families who were not asked (by vote) about this additional taxes.
Any undergraduate student of Economics knows that this equivalence is a fallacy. In a growing economy future generations will be healthier than present ones. In fact if the annual average growth rate is 2.5%, GDP will double every 27,7 years…
The real debt burden are the annual interests implicit in the public debt. On way to stabilize the real value of the public debt (which implies that the debt-GDP ratio is decreasing…) is to pay an amount of public debt interests given by the real interest rate implicit in the debt.
I agree. As economic growth is more people spend money on tourism,medical tour,use health products etc. Very good example is America. every year people go for tour from their spending.Now India is a ideal place for them to make medical tour.So economy growth decide public spending.
Yeah as long as debt doesn't grow faster than GDP (and the country doesn't face a liquidity constraint) it can be paid, it's no problem. Japan has a debt over 200% of GDP and nobody worries. But I don’t think the point in the discussion on economic growth and government size is just debt sustainability; the points are if it's worthwhile to increase debt and if it’s worth to have a big government. And there's no single answer to those questions for every country, because it depends on the quality of governments.
Perhaps If you have an educated population who cares about politics, you can have a big efficient and healthy government that does things better than private sector in a many sectors. While in closed societies where people don’t care about politics and where there isn’t a democracy de facto, governments can be very corrupted and inefficient, and making them bigger would be a drag to the whole economy. Data panels with fixed country effects suggest that, for example, Asian or some European public spending is very productive in the long term while Latin American governments are not.
Maybe we should study first deeper determinants of economic growth like education or political institutions before taking sides in a discussion on government size because a big or a small government don’t seem to be good or bad per se.
Dear Juan:
Using your answer, I think a good book to understand the economic growth and development is: Why nations fail, write by Daron Acemoglu y James Robinson. The key are the economic and political institutions.
Sure institutions are very important and the book explains beautifully this aspect of growth, But in the book Mr Robinson tries to neglect the role of culture, education and geography, as if institutiuons were the only important thing, and that may be exagerated; culture and geography do have a role because it's people who create and use those institutions.
There is direct relationship between public spending and economic growth. Government should spend money for economy but there is limit to spend. Wagner's law is important for public spending. Government can borrow money and spend but it should not spend on unproductive things. All governments are investing money and it is growing continuously.
Issac
Es fundamental que revises la reciente "controversia deuda-crecimiento" generada por la critica al paper (Growth in a Time of Debt) de Reinhart y Rogoff, debido a que es éste documento el que da sustento a las políticas económicas mundiales de gasto.
Así mismo revisa la crítica realizada por Herndon en el articulo (Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff) que es el documento que ha despertado cierto debate
You might find the literature review and methodological approach used in this study useful http://www.usc.es/economet/reviews/aeid435.pdf
According to finance theory high levels of debt would reduce future growth rates for the economy.
Hi Mr. Isaac,
Pls Find few important citations which will give you lucid answer:
http://www.fatih.edu.tr/~jesr/jesr.alexiou.pdf
http://www.cis.wtamu.edu/home/index.php/swer/article/viewFile/114/107
http://www.ucema.edu.ar/publicaciones/download/volume8/loizides.pdf
http://www.eeri.eu/documents/wp/EERI_RP_2012_06.pdf
Best,
Vijay
Thanks Vijay, take this opportunity to invite you to publish in www.revistanoesis.net we receive papers in english. Thanks!
I have several published articles about the impact of public investment on economic growth. Please check my profile. Contact me for any specific issues.
Dear Isaac: In addition to the good answers I saw below, I suggest to look at a few papers such as the following:
Agenor: http://onlinelibrary.wiley.com.libproxy-wb.imf.org/doi/10.1111/j.1467-9957.2011.02197.x/pdf
Latest IMF Working Paper: http://www.imf.org/external/pubs/ft/wp/2013/wp13162.pdf
There is a number of World Bank studies and papers, for example by Stefano Paternostro, and Sanjeev Gupta of the IMF. My coauthor Johannes Fedderke and I have done work on the links between infrastructure and productivity on South African data. Public choice literature on the size of government, as pointed out by the colleagues, is highly relevant. Warm regards, Zeljko
At international or domestic level? See attached paper. It may help.
Article Arms Trade, Military Spending, and Economic Growth
These are actually subjects in macroeconomics and public finance. Maybe you could refer to books on these areas. I'm sure there are lots ob books in your library related to these to major subjects.
Simeon Karafolas,
I attach a paper on the Greek case examining the public financail support to investments; that may interest you.
Thanks to all of you. This is an area of interest and I truly appreciate you spending the time to upload the papers and to make those wonderful comments. I am trying to investigate the effectiveness of public expenditure in Caribbean economies.
Haslinger a. Ziesemer 1996, Glomm a. Ravikumar 1997 a. FOSU, Getachew, Ziesemer each survey a broad part of the public investment an growth literature.
In my opinion, the topic is/has been seminal within a couple of decades ago. In theory, I believe there is a link between the two factors, but in practices, it is hard to account public spending and to measure its outcomes through growth due to several reasons. One of the reasons is methodological issue in terms of government spending decisions, the differences between apprpriation and outlays recorded by governments and the spending that does not contribute directly to economic growth but only indirectly to recreation and quality of life. The spending outcome is rarely captured by GDP growth. Andrew Huangwaug (speeling?) wrote a paper discussing this methodogical problem. I have a couple of them, one is at the US States level and another is at teh county levels.
The question whether or not government expansion causes economic growth has divided policy makers into two distinctive theoretical camps, as proponents of either big government or small government. Economic theory would suggest that on some occasions lower levels of government spending would enhance economic growth while on other occasions higher levels of government spending would be more desirable. From an empirical perspective the evidence generated becomes more confusing as a number of studies favor one or the other approach.
The substantial growth of the size of government expenditures in both the developed and developing nations since World War II, and its effect(s) on long-run economic growth (or vice versa), has spawned a vast literature that offers diverse attempts to explain the observed phenomenon. On the one hand, public finance studies have been directed towards identifying the principal causes of public sector growth. Wagner’s Law of public expenditure is one of the earliest attempts that emphasize economic growth as the fundamental determinant of public sector growth. The literature on this topic is immense to say the least. Some studies find a significant positive relationship between public sector growth and economic growth only developing nations but not for developed countries. Others even report a negative relationship between government spending and GNP.
On the other hand, macroeconomics, especially the Keynesian school of thought puts the emphasis on a different place. The analysis bears upon the question of the role of government in economic growth. A considerable amount of attention has been directed towards assessing the effect of the general flow of government services on economic growth. During the last twenty years or so, studying the underlying causal process Henrekson and Lybeck (1988) provide an excellent survey of various hypothesis between government spending and GDP, or their close variants, has made parallel efforts. The principle reason that led researchers to this field of analysis was the difficulty of a possible feedback in macro relations, which tend to obscure both the direction and the nature of causality.
According to some authors, there are two macroeconomic reasons why government spending can undermine economic performance. The first reason is “resource displacement.” Every time government spends money, it is using labor and/or capital and those resources no longer are available for private sector uses.
The second macroeconomic issue associated with government spending is the “financing cost.” When government taxes, it not only takes money from the productive sector, but it also raises revenue by means of a tax system that generally reduces incentives to work, save, and invest. And if it finances spending with debt, it siphons money out of private credit markets.
The economic impact of government spending can be presented in graphical form by Rahn Curve ho is the equivalent for expenditure to Laffer Curve. In 1986, Richard Rahn, then the chief economist for the U.S. Chamber of Commerce, charted an inverse relationship between government spending and economic growth for the seven major industrialized countries in the form of a curve, not unlike the "Laffer Curve," which focused on the incentive effects of taxation.
The theory behind the "Rahn Curve" is that, at first, low levels of government spending on basic public services, such as law and order and a judicial system to enforce contracts, stimulate growth in the economy. But as spending rises as a share of the economy, its contribution to economic growth diminishes. Government spending eventually reaches a point where it actually retards economic growth.
There are several reasons for this. First, the growing public sector "crowds out" private sector activity, and it often uses the economy's resources far less efficiently. Second, as government grows bigger, it tends to accept broader responsibilities such as reducing poverty. This increased spending on welfare and income transfer programs, however, creates severe work disincentives. Third, an expanding government bureaucracy usually is accompanied by more complicated and burdensome regulation that stifles innovation and productivity. Fourth, the higher tax burdens necessary to finance bigger government at some point damage incentives to work, save and invest. The weakened economy fails to generate enough tax revenue to finance the ever-growing spending share, resulting in increased public sector borrowing and debt service burdens.
Having all of the above valuable body of knowledge, I thought I could forward one simple but important structural macroeconomic equation/ model.
GDP = C + G + I + NX, where as you all know, C- Household consumption, G-Government expenditure, I-Investment and NX- is net export.
SO according to the above equation, given other variables constant, an increase in Government expenditure, particularly public spending in education, health, infrastructure, research & development, promotion of small enterprises, etc. could increase the GDP. Public spending particularly assisting Consumption and Investment and even that of more export than import is paramount to foster economic growth.
But excessive public spending could also cause inflation. So proper fiscal and monetary policy are important to bring about steady economic growth.
Unfortunately I dont have that information, but I think this is a interesting study on the Mediterranean countries due the economic and financial crisis today.
Best wishes Isaac
Isaac to find data you can use, I suppose AMECO database. Do you have yet the database or selected the countries?
Best wishes
Dear Maria, I am working with sub-nation data from Mexico, thanks for your help!
Dear Isaac many thanks for your kindly answer.
Best wishes
Public Spending and economic growth have positive relations in any economy.
That cannot be right, for two reasons. First, there’s no “generic” public spending – it’s all spent on something in particular, and the choices make a difference. For example, Eden and Kraay show that in most but not all low-income countries, public investment “crowds in” private investment and thus promotes faster growth. In contrast, greater public consumption will generally reduce the availability of funds available for private investment, and so will impose a cost in terms of slower growth. (This is not to suggest that all government consumption is bad – simply that there’s no free lunch.) The second point is that all public spending must be financed, and the manner in which it is financed makes a big difference in terms of the big impact on growth.
I completely agree with Jorge Morales Pedraza. But still there is a problem of capturing effects of public spending on economic growth. Public spending creates social capital( like education, health etc) apart from physical infrastructure and their effect on economic growth is not immediate.
There is a deep research on the effects of public spending on economic growth. Please check my publications in Research gate where you can find some published research on this issue as weel as several other references
May I draw your attention to the Solution of the World Bank Model in the positive mode. Will these views still be valid? The model argues that government spending and economic growth are negatively related If I got it correctly. Correct me If I am wrong.
Dear Don Sillers, increase in public consumption does not affect adversely on private investment through making less availability of fund. Private investment always expects good profit which is possible only when there is good demand for their goods and services; mere increase in availability of fund through low public consumption does not induce private investment. Public spending generally benefits the economy in two ways; first, that encourages both public and private investment activities, for instance infrastructure development; second public spending increases purchasing power of the people that takes the price and profit-size to rise-up that boots private investment activities, for instance, public spending on social security schemes. In economic growth of India, since 1951, public spending has played a vital role.
There are various pieces by Robert Barro, in his books, and more recently in editorial pieces in the WSJ where he argues, by econometric evidence, that public spending has a very limited impact on economic growth and in some cases is even counterproductive: low multiplier effects. In my opinion, these cases are quite convincing.
In a recent study, Ramphul finds an empirical evidence of unidirectional causality running from government expenditure to economic growth in India. Finance India. 2012, Volume: XXVI, No. 4, pp. 1275-1290. Causality between Government Expenditure and Economic Growth in India: An Empirical Investigation
Public Consumption is very important because promote economic growth. When the government invest in infraestructure has effects in many economic sectors; there is multiplier effect. Its important to point out "quality" in the spending.
An economic growth of any country is different data series and public spending is different series . Both series not necessary that they will be co-related with each other.
Hello Isaac
The Impact of Government Spending on Economic Growth,
Daniel Mitchell
Former McKenna Senior Fellow in Political Economy
I to attach it
Best Regards
Impact of Government Spending on Economic Growth, As it is a Keynesian strategy, there is already a lot of literature about it.
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