Public spending and growth: the role of government accountability

This paper examines the role of institutions in the nexus between public spending and economic growth. Using a newly assembled dataset of 80 countries over the 1970-2010 period, we show that only when institutions prompt governments to be accountable to the general citizen does the capital component of public spending significantly promote growth. The critical role of accountability remains regardless of the financing sources of capital spending, including a reallocation from current spending, an increase in revenue, and a rise in the budget deficit. Meanwhile, current spending does not show a robust growth-fostering effect, for any level of government accountability. We highlight that it is the type of institutions affecting the state-citizen relations that plays a key role in the capital spending-growth nexus, not the country's income level or the type of institutions affecting citizen-citizen relations. Our interpretation of the distinct role of government accountability in this nexus is that ineficiencies induced by unaccountable oficials' rent-seeking behavior in public investment mitigate otherwise growth-fostering effects of capital spending.