This paper examines the role of the state in economic development. In particular, we test the impact of aggregated and sectoral government expenditures on economic performance in developing countries. Our findings suggest that total government expenditures are negatively related to economic development in both low income and middle income developing countries. However, we find particular evidence that government expenditures prove to be more beneficial for growth when a country is characterized by a well-functional institutional design.
In contrast to previous studies, we do not find positive and significant results for sectoral government expenditures. In fact, our findings suggest that transport and communication, defense and health expenditures are negatively related to economic development. At the same time, public and private investments appear to be positively related to economic development throughout our analysis. Therefore, we conclude that – instead of government expenditures – stimulating investments and institutional reforms should play a major part on the political agenda of developing countries.
Table of Contents
1. Introduction
2. Literature Review
2.1 Theories of Economic Development
2.2 The Role of the State in Economic Development
2.3 Government Expenditures, Institutional Quality and Growth
2.4 Sectoral Government Expenditures and Growth
3. Data and Methodology
3.1 Economic Model
3.2 Data Sources
4. Results
4.1 Baseline Results
4.2 Robustness Tests
5. Policy Implications and Concluding Remarks
6. Limitations
7. References
8. Appendix
Research Objectives and Topics
This thesis investigates the relationship between government expenditures and economic performance in developing countries by analyzing the impact of aggregated and sectoral spending alongside institutional quality.
- The impact of total government expenditures on economic development.
- The role of institutional quality in moderating government spending effectiveness.
- The effectiveness of sectoral government spending (e.g., education, infrastructure).
- The distinction between public and private investment impacts on growth.
- Comparison of neoclassical and structural change growth theories.
Excerpt from the Book
1. Introduction
The nation state and its policies played and still play an important role in the economic and socio-political development process of developing countries. In some developing countries, government activities and industrial policies were the main driver for growth, in other cases market liberalizations and a restrained government state were beneficial for economic development (Szirmai 2015). Therefore, it is not surprising that the role of the state in economic development remains one of the most controversial debates in economic literature. Whereas some researchers emphasize the developmental power of state interventions and government expenditures, others criticize that government activities may actually lead to market inefficiencies and therefore hamper economic development. For instance, Ram (1986), Romer (1989), Romer (1990) and Rubinson (1977) find that total government expenditures have a positive effect on growth and development. On the contrary, researchers such as Barro & Lee (1994), Afonso & Furceri (2010) and Dar & AmirKhalkhali (2002) emphasize that government spending has a rather deteriorative effect on economic performance.
In addition to that, other studies take the effect of disaggregated government spending into account and investigate the effectiveness of sectoral government expenditures for economic development, such as public education, defense, transport and health expenditures. In this regard, findings are equally ambiguous. For some sectoral government expenditures, researchers suggest a positive and significant relationship relative to economic development. Simultaneously, others doubt the relevance of sectoral expenditures with regard to growth and development (see for example Bose, Haque, & Osborn 2007 and Fan, Rao & Rao 2003).
Summary of Chapters
1. Introduction: This chapter introduces the research context, highlighting the ongoing debate regarding the role of government interventions in developing economies and presenting the primary research question.
2. Literature Review: This section covers neoclassical and structural change growth theories and summarizes previous empirical findings on aggregated and sectoral government spending.
3. Data and Methodology: This chapter defines the econometric models used for analysis and details the data sources, specifically the SPEED database and governance indicators.
4. Results: This chapter presents the regression outcomes, including baseline estimations and robustness tests, assessing the impact of government spending on real GDP per capita.
5. Policy Implications and Concluding Remarks: This section synthesizes the empirical findings to provide policy recommendations, emphasizing the importance of institutional quality and private investment.
6. Limitations: This chapter addresses constraints such as the focus on developing countries and potential omitted variable bias in the econometric framework.
Keywords
government expenditures, institutional quality, economic development, sectoral spending, real GDP per capita, developing countries, neoclassical growth, structural change, public investment, private investment, fiscal policy, econometric model, panel data, human capital, infrastructure
Frequently Asked Questions
What is the core focus of this thesis?
The thesis examines whether government expenditures promote economic development in 35 selected developing countries between 1995 and 2012.
What are the primary thematic areas covered?
The research covers aggregated total government spending, disaggregated sectoral expenditures, the role of institutional quality, and the influence of both public and private investments.
What is the central research question?
The primary research question is: Can government expenditures promote economic development in developing countries?
Which methodology is applied in the study?
The study uses a neoclassical Solow growth model framework and employs fixed effects panel data estimations, incorporating time and country-specific effects with heteroskedastic robust standard errors.
What topics are discussed in the main body of the work?
The main body discusses theoretical frameworks (neoclassical vs. structural change), evaluates current empirical evidence, presents a new econometric analysis based on a panel dataset, and discusses the robustness of these findings.
Which keywords best describe this research?
Key terms include government expenditures, institutional quality, economic development, sectoral spending, and investment impacts.
How does the author define a "developmental state" versus a "classical state"?
A classical state focuses on market liberalization and core functions like law enforcement, while a developmental state actively intervenes to support industrialization and economic growth.
What role does institutional quality play in the research findings?
The study finds that the positive impact of government expenditures on economic development is more significant in countries characterized by a well-functioning institutional design.
What does the study conclude regarding sectoral expenditures?
Contrary to the initial hypothesis, the analysis suggests that most sectoral government expenditures are not consistently associated with higher economic growth in the sample of developing countries.
- Citar trabajo
- David Schmengler (Autor), 2018, The Role of the State in Economic Development. Do Government Expenditures Promote Growth in Developing Countries?, Múnich, GRIN Verlag, https://www.grin.com/document/921004
