How Does the Composition of Public Spending Matter?

World Bank Policy Research Working Paper No. 3555

39 Pages Posted: 12 May 2005

See all articles by Stefano Paternostro

Stefano Paternostro

World Bank - Poverty Reduction Group (PRMPR)

Erwin R. Tiongson

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS); Institute for the Study of Labor (IZA); University College London - CReAM - Centre for Research and Analysis of Migration; Asian Institute of Management

Anand Rajaram

World Bank; London School of Economics & Political Science (LSE) - The International Growth Centre

Date Written: March 2005

Abstract

Public spending has effects which are complex to trace and difficult to quantify. But the composition of public expenditure has become the key instrument by which development agencies seek to promote economic development. In recent years, the development assistance to heavily indebted poor countries (HIPCs) has been made conditional on increased expenditure on categories that are thought to be pro-poor.

This paper responds to the growing concern being expressed about the conceptual foundations and the empirical basis for the belief that poverty can be reduced through targeted public spending. While it is widely accepted that growth and redistribution are important sources of reduction in absolute poverty, a review of the literature confirms the lack of an appropriate theoretical framework for assessing the impact of public spending on growth as well as poverty. There is a need to combine principles of both public economics and growth theory to develop appropriate theoretical guidance for public expenditure policy.

This paper identifies a number of approaches that are beginning to address this gap. Building on these approaches, it proposes a framework that has its foundation in a broadly articulated development strategy and its economic goals such as growth, equity, and poverty reduction. It recommends the use of public economics principles to clarify the roles of the private and public sectors and to recognize the complementarity of spending, taxation, and regulatory instruments available to affect public policy. With regard to the impact of any given type of public spending, policy recommendations must be tailored to countries and be based on empirical analysis that takes account of the lags and leads in their effects on equity and growth and ultimately on poverty. The paper sketches out such a framework as the first step in what will have to be a longer-term research agenda to provide theoretically and empirically robust and verifiable guidance to public spending policy.

Keywords: expenditure allocation, poverty reduction, growth, equity

JEL Classification: H11, H50, I38

Suggested Citation

Paternostro, Stefano and Tiongson, Erwin R. and Rajaram, Anand, How Does the Composition of Public Spending Matter? (March 2005). World Bank Policy Research Working Paper No. 3555. Available at SSRN: https://ssrn.com/abstract=722649

Stefano Paternostro (Contact Author)

World Bank - Poverty Reduction Group (PRMPR) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-3492 (Phone)
202-473-8466 (Fax)

Erwin R. Tiongson

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS) ( email )

Washington, DC 20057
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University College London - CReAM - Centre for Research and Analysis of Migration ( email )

Drayton House
30 Gordon Street
London, WC1H 0AX
United Kingdom

Asian Institute of Management ( email )

123 Paseo de Roxas
Makati, 1260
Philippines

Anand Rajaram

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

London School of Economics & Political Science (LSE) - The International Growth Centre ( email )

32 Lincoln’s Inn Fields
Houghton Street
London, WC2A 2AE
United Kingdom

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