Business Cycles and Social Spending in Developing Countries: Implications for South Korea’s Foreign Aid Strategy

Abstract

The present paper contributes to the literature by providing arguments and evidence on volatility of government expenditure, especially social spending and the role of foreign aid. Empirical findings from government spending data for 27 countries between 1990 and 2008 suggest that social spending is procyclical and more volatile in developing countries, while it is countercyclical and less volatile in advanced economies. Because countries with volatile social spending rely more on foreign aids, donor countries need to concentrate more on social sector aid so that recipient countries can reduce their social spending volatility, and possibly respond to crises in countercyclical manners. South Korea has allocated about half of its foreign aids to social sector, but only with significant fluctuation across time – the coefficient of variation is the highest among donor countries. A steady flow of social sector aid would support the living condition of the poor in developing countries, providing protection when they need it. JEL code: E62, F35, H50