THE COMPOSITION OF PUBLIC-EXPENDITURE AND ECONOMIC-GROWTH

Noting that the literature has focused on the link between the level o f public expenditure and growth, we derive conditions under which a ch ange in the composition of expenditure leads to a higher steady-state growth rate of the economy. The conditions depend not just on the phys ical productivity of the different components of public expenditure bu t also on the initial shares. Using data from 43 developing countries over 20 years we show that an increase in the share of current expendi ture has positive and statistically significant growth effects. By con trast, the relationship between the capital component of public expend iture and per-capita growth is negative. Thus, seemingly productive ex penditures, when used in excess, could become unproductive. These resu lts imply that developing-country governments have been misallocating public expenditures in favor of capital expenditures at the expense of current expenditures.