Is social spending pro‐poor in developing countries? The role of governance and political freedom

Abstract

AbstractThis article extends the existing literature on the social spending‐poverty nexus by testing the proposition that the quality of governance and the political freedom status determine social spending effectiveness in developing countries (DCs). Our analysis helps explain the surprising result documented in prior studies, of no clear evidence that higher social spending, especially on education and health, translates to a significant reduction in poverty in DCs. Using unbalanced panel data of a large sample of DCs covering the period 1980–2019, we demonstrated that the impact of public spending on poverty is significantly reduced in countries that have a poor quality of governance and in those with relatively few political freedoms. This result is robust to a change in the poverty indicator and type, and the estimator used in regression models. This finding implies that improving the efficacy of social spending through improving governance and political freedom is as crucial as increasing the scale of this spending in the poverty alleviation strategy of DCs, especially those with limited public resources. Our empirical analysis also revealed other novel results about the socioeconomic factors most likely to explain poverty in DCs.