Optimal Adjustment of the Composition of Public Expenditure in Developing Countries

Abstract

This paper analyses how the composition of public expenditure should be adjusted to maximize the economic growth rate in developing countries. We first apply a theoretical framework to empirical data from 50 countries. We then demonstrate how each country should adjust public expenditure for the purpose of maximizing growth. Results show that developing countries in Asia, the Middle East and Eastern Europe have generally misallocated public expenditures in favour of defence, at the expense of public services. Other region‐specific results suggest that Asian developing countries should increase expenditure on education, and that Middle Eastern countries should decrease expenditure on education in favour of health.