Government expenditure, corruption and growth

D'Agostino, Giorgio

Abstract

This thesis has undertaken a comprehensive theoretical and empirical analysis of the relationship between public spending and economic growth in a neoclassical framework. The focus of the analysis has been to underline two different rules that determine the allocation of public resources across different categories of expenditure. The first rule considers the effective needs of each category and their productivity, relative to the other categories and to private capital. This allows the effect of each category of expenditure on the growth rate of the economy, when productive, to be determined.
Following this line of argument, the standard model (a model which only includes this rule) pre- dicts a non-linear relationship between the components of public spending and economic growth, justifying both positive and negative impacts of these components on the economy’s growth rate. When applied to the defence sector, this model can show that the contradictory results found in the literature for the relationship between military burden and economic growth may be explained by an excessive amount of resources attributed to this sector, when its productivity level is lower than that of the other parts of the public sector.
A second rule that drives public allocation decisions is not linked to any economic considerations, but to the possibility for the politician can collect bribes by misallocating public resources. As pointed out by many researchers, it is easier to collect bribes from infrastructure projects or highly sophisticated defence equipment than textbooks or teachers’ salaries. In other areas, such as health, this picture is less clear-cut, as opportunities to collect bribes may be abundant in the procurement of hospital buildings, but more limited in the payment of doctors’ and nurses’ salaries. This differential impact of corruption can be used to explain the non-linearities that emerge in the standard model. The underlying conjecture is that, since corruption has a nega- tive impact on growth and given that politicians may favour less productive public sectors, the complementarities between these two mechanisms may explain the low growth rates in those countries in which corruption is more endemic. A related contribution in the thesis is to consider the way corruption is introduced into estimated of growth equations. While several recent papers have considered the underlying causes and consequences of corruption, little (and only recent) attention has been given to the methodological question of how ”corruption” is measured by international organisations and whether there construction of indices may bias empirical results and suggestions for policy. The final part of the thesis considers these issues.

• Thesis Type: Thesis
• Keywords: development economics, public spending, economic growth
• Public URL: https://uwe-repository.worktribe.com/output/937640
• Award Date: Jan 1, 2013