Composition of Government Expenditure, Human Capital Accumulation, and Welfare

This paper examines the effects of the composition of government expenditure on growth and economic welfare. There are several reasons for pursuing this line of inquiry. First, most developing countries are faced with difficult choices when undertaking fiscal reforms in the composition of government expenditure. Such choices include possible changes in public expenditures on social safety nets, health, education, firm subsidies and public infrastructure. The proper approach to making...
More Description

This paper examines the effects of the composition of government expenditure on growth and economic welfare. There are several reasons for pursuing this line of inquiry. First, most developing countries are faced with difficult choices when undertaking fiscal reforms in the composition of government expenditure. Such choices include possible changes in public expenditures on social safety nets, health, education, firm subsidies and public infrastructure. The proper approach to making the right choice depends on the implications of each of these types of expenditures for long-term productivity, growth and welfare of agents. Second, while all available evidence suggests that investment in human capital is as important as physical. capital accumulation, most dynamic studies have ignored the dynamic efficiency effects of the composition of government expenditure on human capital accumulation. In particular, there is the question as to whether agents substitute between physical and human capital under different policy environments.