Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 215: The Role of Government in Capital Constrained Economies

Tove Strauss
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Tove Strauss: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: Is the role of government different in poor countries? We examine the government's role for growth in 40 LDCs with low infrastructure levels and limited access to capital. We consider both expenditure and financing aspects of government activity, but cannot conclude that governments in LDCs differ substantially from those with more efficient allocation mechanisms for private capital. However, we find that government consumption expenditure is a negative robust determinant of growth, emphasizing the importance of efficient allocation of government expenditure to reproductive investment. Although the debt-service ratio is not significant, increased public borrowing is a robust negative determinant of growth.

Keywords: Growth; developing countries; government; public investment; public debt

JEL-codes: C21; E62; H54; H63; O40

36 pages, December 15, 1997

Note: This working paper is replaced by no. 275

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