Public finance and social policy - explanations of trends and developments : the case of developing countries

This paper has examined the progress made in health and education in developing countries during the last two decades. It has further indicated that a more rational allocation of expenditures would bring further improvements in the future. At the same time, investment in human capital in the form of improvements in health and education has been shown to contribute to economic growth. The paper has further considered the employment and the efficiency effects of social policies. It appears that social security schemes, minimum wage legislation, wage determination in the public sector, labor legislation, and the taxation of labor incomes have increased the cost of labor in the formal sector of developing economies. At the same time, policy-imposed distortions in capital markets have reduced the cost of capital, thereby further raising wage/rental ratios. The rise of wage/rental ratios, in turn, has tended to discourage employment in the formal sector and has created distortions in the allocation of resources. Employment has also been adversely affected by protection that has further reduced the cost of capital and has generally favored capital intensive activities.