GOVERNMENT SPENDING IN DEVELOPING COUNTRIES

Throughout the twentieth century governments have been spending ever larger proportions of national income. Three issues arise in discussions about the growth of such spending as it pertains to developing countries: How does it compare with expenditure in industrial nations? What explains the growth in spending by developing country governments? And what are the effects on economic growth? Government expenditure as a share of GDP in low- and middle-income countries, on average, is lower than comparable shares in industrial market economies and, with few exceptions, is growing. Many factors, including ideology, demographics, a positive income elasticity for public goods, the rising cost of public goods relative to private goods, and perhaps development theory and practice, explain this growth. As for the relationship between government expenditure and economic growth, the empirical evidence does not reveal any strong correlation. The size of government may engender strong ideological debate, but the position that the aggregate level of government expenditure is a significant determinant of growth rates receives little support.