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Expenditure Composition, Fiscal Adjustment, and Growth in Low-Income Countries

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  • Benedict J. Clements
  • Sanjeev Gupta
  • Emanuele Baldacci
  • Carlos Mulas-Granados

Abstract

This paper assesses the effects of expenditure composition as well as fiscal adjustment on economic growth in a sample of 39 low-income countries during the 1990s. The paper finds that strong budgetary positions and fiscal consolidation are generally associated with higher economic growth in both the short and long terms. The composition of public outlays also matters: Countries where spending is concentrated on wages tend to have lower growth, while those that allocate higher shares to capital and nonwage goods and services enjoy faster output expansion. Expenditure composition, along with the size of the fiscal consolidation and initial fiscal conditions, affects the sustainability of adjustment. Initial fiscal conditions also have a bearing on the nexus between fiscal deficits and growth.

Suggested Citation

  • Benedict J. Clements & Sanjeev Gupta & Emanuele Baldacci & Carlos Mulas-Granados, 2002. "Expenditure Composition, Fiscal Adjustment, and Growth in Low-Income Countries," IMF Working Papers 02/77, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:02/77
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    Cited by:

    1. World Bank, 2004. "Stabilization and Fiscal Empowerment : The Twin Challenges Facing India's States, Volume 2. Detailed Report," World Bank Other Operational Studies 16775, The World Bank.
    2. Saleh M. Nsouli & Norbert Funke, 2003. "The New Partnership for Africa's Development (NEPAD) Opportunities and Challenges," IMF Working Papers 03/69, International Monetary Fund.
    3. Carlos Mulas-Granados, 2003. "The Trade-Off between Growth & Equality and the Economic Impact of Alternative Fiscal Adjustment Strategies in the EU," European Economy Group Working Papers 20, European Economy Group.
    4. Alptekin, Aynur & Levine, Paul, 2012. "Military expenditure and economic growth: A meta-analysis," European Journal of Political Economy, Elsevier, vol. 28(4), pages 636-650.
    5. Edward Buffie & Christopher Adam & Stephen O'Connell & Catherine Pattillo, 2004. "Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 126-160, June.
    6. Paweł Borys & Piotr Ciżkowicz & Andrzej Rzońca, 2014. "Panel Data Evidence on the Effects of Fiscal Policy Shocks in the EU New Member States," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 189-224, June.
    7. Augustin Fosu, 2010. "The External Debt-Servicing Constraint and Public-Expenditure Composition in Sub-Saharan Africa," African Development Review, African Development Bank, vol. 22(3), pages 378-393.
    8. Buffie, Edward & Adam, Christopher & O'Connell, Stephen & Pattillo, Catherine, 2008. "Riding the wave: Monetary responses to aid surges in low-income countries," European Economic Review, Elsevier, vol. 52(8), pages 1378-1395, November.
    9. Bayraktar, Nihal & Moreno-Dodson, Blanca, 2010. "How can public spending help you grow? an empirical analysis for developing countries," Policy Research Working Paper Series 5367, The World Bank.
    10. Kalle Kukk, 2007. "Fiscal Policy Effects on Economic Growth: Short Run vs Long Run," Working Papers 167, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
    11. Manh Vu LE & Terukazu Suruga, 2005. "The Effects of FDI and Public Expenditure on Economic Growth: From Theoretical Model to Empirical Evidence," GSICS Working Paper Series 2, Graduate School of International Cooperation Studies, Kobe University.
    12. Anthony J. Pellechio & Saqib Rizavi & Phebby Kufa, 2003. "Fiscal Sustainability and Policy Issues in the Eastern Caribbean Currency Union," IMF Working Papers 03/162, International Monetary Fund.
    13. M E Haque & D H Kim, 2003. "Public Investment in Transportation and Communication and Growth:A Dynamic Panel Approach," Centre for Growth and Business Cycle Research Discussion Paper Series 31, Economics, The Univeristy of Manchester.
    14. repec:rss:jnljee:v3i2p4 is not listed on IDEAS
    15. Baldacci, Emanuele & Hillman, Arye L. & Kojo, Naoko C., 2004. "Growth, governance, and fiscal policy transmission channels in low-income countries," European Journal of Political Economy, Elsevier, vol. 20(3), pages 517-549, September.
    16. Carlos Mulas-Granados, 2005. "Fiscal Adjustments and the Short-Term Trade-Off between economic growth and equality," Hacienda Pública Española, IEF, vol. 172(1), pages 61-92, June.
    17. Benedict J. Clements & Sanjeev Gupta & Hong-Sang Jung, 2003. "Real and Distributive Effects of Petroleum Price Liberalization; The Case of Indonesia," IMF Working Papers 03/204, International Monetary Fund.
    18. Augustin Kwasi Fosu, 2008. "Implications of the External Debt-servicing Constraint for Public Health Expenditure in Sub-Saharan Africa," Oxford Development Studies, Taylor & Francis Journals, vol. 36(4), pages 363-377.
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