Empirical Analysis of the Relation between Social Spending and Economic Growth: Developing Countries and OECD Members

Abstract

Most previous empirical approaches examined the relationship between social spending and economic growth only in developed countries or OECD member countries, and show little or no efforts to compare the effects of social spending in developing countries with those in developed or OECD member countries; however, developing countries can be in very different social, economic, and institutional settings.

Therefore, we examined this relationship, drawing a comparison between the result of developing countries and that of developed (or OECD member) and semi-developed countries with the same data source, the IMFs Government Finance Statistics data of 85 countries over the period from 1990 to 2007, using time-series cross-section regression model.

We found that estimated coefficient on social spending is positive and statistically significant in the sample of developing countries, while a significant negative relationship between social spending and economic growth is observed in the sample of developed countries. The results of this study can suggest that assumption of a tradeoff between efficiency and equity could be not well applied in the developing countries. Therefore, this finding can imply that we have to consider not only what to do but also where to do, when we discuss the social spending effect and give policy advises to developing countries.