Public spending and growth: The role of government accountability

Atsuyoshi Morozumi and Francisco José Veiga

When do public policies have the desired outcomes? For example, suppose that the government's objectives are to raise citizens' education attainment and reduce mortality rates. Then, would increased education and health spending always help achieve these objectives? Rajkumar and Swaroop (2008) suggest that it may not, showing that for those policies to work, they need to be accompanied by good governance, namely by a government that is accountable for its actions or a bureaucracy with a professional ethos. Further, suppose that the objective is to control inflation rates. Would policy reforms aimed at increasing central bank independence necessarily help achieve this objective? Acemoglu et al. (2008) suggest that it may not, arguing that whether the reform works or not depends on institutions. For example, if incumbent policymakers are unconstrained to pursue personal rents, they may not properly implement reforms which could jeopardize their own privilege, resulting in the failure of these reforms. Thus, the general message appears to be that institutions that prompt a government to be accountable to the general public are critical for policies to yield the desired outcomes.

In this Nottingham School of Economics working paper, published in the European Economic Review, Atsuyoshi Morozumi and Francisco José Veiga examine the impact of institutions, particularly those affecting government accountability to the general public, on the effectiveness of public spending as a growth-promoting policy. Their empirical results, based on a newly assembled dataset of 80 countries over the 1970-2010 period, suggest that public capital spending promotes growth when institutions prompt governments to be accountable to the general citizen. Specifically, the growth-promoting effect of this spending under an accountable government prevails for various financing sources, including a reallocation of funds from current spending, an increase in revenue, and a rise in the budget deficit. However, government accountability does not play a role in the growth effects of current spending. The authors interpret the key role of government accountability in the capital spending-growth nexus as follows. While capital spending has a large growth-promoting potential by accumulating public capital and thus promoting private firms' productivity, its positive effect can be critically mitigated by inefficiencies arising when unconstrained officeholders exploit the large room for discretion typically inherent in this type of spending. As for why government accountability may not play a role in the current spending-growth nexus, their view is that this spending, often based on explicit entitlements/commitments (eg wages and pensions), provides officeholders with smaller room for discretion and thus yields smaller efficiency loss even when they are less constrained/accountable.

European Economic Review, "Public spending and growth: The role of government accountability", by Atsuyoshi Morozumi and Francisco José Veiga. http://dx.doi.org/10.1016/j.euroecorev.2016.07.001

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