Public Spending and Economic Growth in Developing Countries: a Synthesis

The purpose of this study is to critically analyze the theorical and empirical literature on the relationship between public expenditures and economic growth. This relationship has been source of controversy with liberal economists, Keynesians and proponents of endogenous growth. Liberal theories promoted selfregulating markets mechanisms. But these theories have also revealed the conditions of state intervention in the economy. According to Keynes, unemployment is not only linked to labor market. It is linked to other markets and especially to finance. Keynes advocated state intervention via public expenditure. That intervention should take two dominant forms, namely the economic policies in favor of investment and income redistribution policies. Robert Barro showed the contribution of public spending to economic growth, with particular emphasis on public infrastructures. He argued that government spending on infrastructure investment improves private companies' productivity. Thus, it causes increasing return to scale, in the long run. He recommended therefore its funding through taxation. The theories listed above focused on the necessity of state intervention in the economy. They addressed indirectly the impact of public spending on economic growth. Nevertheless, it should be stressed that the evolution of public spending may depend on economic growth. Adolph Wagner showed that public expenditures increase more than proportionally in relation to economic growth. Numerous empirical studies tested the relationship between the two variables in developing countries. These studies involved the level of public spending and its composition. In both cases, the results are controversial. A number of studies confirmed Wagner' law; other studies validated the Keynesian assumption. Other studies rejected both Wagner's law and Keynesian assumption.