Abstract
The objective of this dissertation is to examine the role played by stabilization programs, IMF-supported or otherwise, in shaping public expenditure in a sample of developing countries, and how changes in the composition of expenditures can affect growth. Two questions are addressed. First, which categories of expenditure appear to be the disproportionate victims in the process of stabilization. Second, how instability in the paths of the different categories of expenditure may affect the path of economic growth.
The results indicate that there is no definitive evidence that stabilization efforts significantly changed the composition of spending in a systematic fashion. Even though significant effects were found for large number of the countries in the sample, these effects were not consistent for the different categories of expenditure. An interesting result was that the degree of variation in the path of an expenditure category within a country did, in many instances, determine whether that category of expenditures had its share significantly altered during fiscal adjustment.
Across countries, the results were inconsistent for the different definitions of the stabilization-program variable used in this study, as well as for the different categories of expenditure. The categories that consistently produced the strongest results were health and education.
The regression results for the second proposition indicted that growth is affected by the composition of spending to varying degrees. The study of individual countries did not produce definitive results. Defense spending was the one category that clearly demonstrated adverse effects on growth. Cross-section results showed, however, that variability in real expenditures, as well as the capital and defense expenditure shares contributed to the instability of output growth.
In view of the widespread concern about the detrimental effects of stabilization programs, one emerging conclusion is that stabilization programs do not appear to consistently shift public expenditure away from growth-augmenting areas. Although the behavior of the shares of expenditure does become important in determining the rate of growth of the economy, this study has found little evidence to support the assessment that IMF-type stabilization programs can, to a significant degree, explain changes in the composition of public expenditures.