Expenditure Composition and Growth
Expenditure Composition and Growth
capital formation can also promote growth. Investments in physical capital, such as roads and other infrastructure, can increase the economy’s productive
capacity.23 Although the efficacy of such investment varies across
projects and countries, recent research indicates that it may have a significant
impact on economic growth. One study finds, for instance, that an
increase in public investment in transportation and communication of
1 percent of GDP is associated, on average, with an increase in annual per
capita GDP growth of as much as 0.6 percentage points.24
A better-educated and healthier population contributes to growth. Beyond
their direct effects on well-being, improvements in the education and
health status of the population also increase worker productivity. Reductions
in communicable diseases such as malaria have positive spillover effects
on growth by promoting tourism and foreign direct investment.25 Indeed,
it has been estimated that each 10 percent improvement in life
expectancy at birth can raise the per capita GDP growth rate by 0.4 percentage
points.26 Although it has been difficult for economic research to
quantify the magnitude of the effect of education on growth, there is
nonetheless evidence that it can be significant.27 Economic growth, in
turn, has beneficial effects on education attainment and health status, contributing
to a virtuous cycle of stronger education, health, and growth.
Physical and human capital spending should also be protected during
fiscal adjustments. Fiscal consolidations that protect capital expenditure
tend to be both more sustainable and better for growth.28 This finding reinforces
the notion that reorienting public expenditures away from less
productive spending, such as untargeted subsidies, and toward more productive
spending, such as investments in physical and human capital, facilitates
growth in many countries in both the short and long runs.
However, capital accumulation should not come at the expense of unsustainable
damage to the environment. Economies that derive much of
their income from natural resources cannot sustain growth by substituting
physical capital accumulation for deteriorating natural capital. Severe environmental
degradation can affect a country’s long-run macroeconomic
performance. The impact of this may be most devastating for the poor, who
often depend on natural resources for their income and have few possibilities
for substituting other assets. In the long run, growth strategies that pay
attention to environmental quality and the efficiency of natural resource use
contribute to investment, economic growth, and human welfare.29
Increased public expenditure on other items, such as law enforcement
and the judiciary, may also be important for growth. However, data problems
have significantly limited research on the impact of these outlays on
growth.
Improving the composition of government outlays is an important element
of the IMF’s fiscal policy advice. Under reform programs supported
by the IMF’s PRGF, physical capital expenditures are targeted to rise, on
average, by #/4 of 1 percentage point of GDP. At the same time, many of
these programs involve measures to improve the efficiency of government
spending and increases in spending for human development and poverty
reduction (see the section on “Fiscal Policy, Human Development, and the
MDGs”).30
Fiscal Dimensions of Sustainable Development
Prepared for
World Summit on Sustainable Development
Johannesburg, August 26–September 4, 2002
Expenditure Composition and Growth - To learn more about this author, visit International Monetary Fund's Website.
Like this article? Share it with your friends
Allocating a higher share of public spending to physical and human
capital formation can also promote growth. Investments in physical capital, such as roads and other infrastructure, can increase the economy’s productive
capacity.23 Although the efficacy of such investment varies across
projects and countries, recent research indicates that it may have a significant
impact on economic growth. One study finds, for instance, that an
increase in public investment in transportation and communication of
1 percent of GDP is associated, on average, with an increase in annual per
capita GDP growth of as much as 0.6 percentage points.24
A better-educated and healthier population contributes to growth. Beyond
their direct effects on well-being, improvements in the education and
health status of the population also increase worker productivity. Reductions
in communicable diseases such as malaria have positive spillover effects
on growth by promoting tourism and foreign direct investment.25 Indeed,
it has been estimated that each 10 percent improvement in life
expectancy at birth can raise the per capita GDP growth rate by 0.4 percentage
points.26 Although it has been difficult for economic research to
quantify the magnitude of the effect of education on growth, there is
nonetheless evidence that it can be significant.27 Economic growth, in
turn, has beneficial effects on education attainment and health status, contributing
to a virtuous cycle of stronger education, health, and growth.
Physical and human capital spending should also be protected during
fiscal adjustments. Fiscal consolidations that protect capital expenditure
tend to be both more sustainable and better for growth.28 This finding reinforces
the notion that reorienting public expenditures away from less
productive spending, such as untargeted subsidies, and toward more productive
spending, such as investments in physical and human capital, facilitates
growth in many countries in both the short and long runs.
However, capital accumulation should not come at the expense of unsustainable
damage to the environment. Economies that derive much of
their income from natural resources cannot sustain growth by substituting
physical capital accumulation for deteriorating natural capital. Severe environmental
degradation can affect a country’s long-run macroeconomic
performance. The impact of this may be most devastating for the poor, who
often depend on natural resources for their income and have few possibilities
for substituting other assets. In the long run, growth strategies that pay
attention to environmental quality and the efficiency of natural resource use
contribute to investment, economic growth, and human welfare.29
Increased public expenditure on other items, such as law enforcement
and the judiciary, may also be important for growth. However, data problems
have significantly limited research on the impact of these outlays on
growth.
Improving the composition of government outlays is an important element
of the IMF’s fiscal policy advice. Under reform programs supported
by the IMF’s PRGF, physical capital expenditures are targeted to rise, on
average, by #/4 of 1 percentage point of GDP. At the same time, many of
these programs involve measures to improve the efficiency of government
spending and increases in spending for human development and poverty
reduction (see the section on “Fiscal Policy, Human Development, and the
MDGs”).30
Fiscal Dimensions of Sustainable Development
Prepared for
World Summit on Sustainable Development
Johannesburg, August 26–September 4, 2002
Expenditure Composition and Growth - To learn more about this author, visit International Monetary Fund's Website.
Like this article? Share it with your friends
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