Public Investments, Human Capital, and Political Stability: The Triptych of Economic Success

Ioannis Kostakis

doi:10.1155/2014/709863

Abstract

This study assesses the effects of fiscal policy on economic growth in a sample of 96 countries from 1990 to 2010. Ordinary Least Squares (OLS) and Extreme Bound Analysis are mainly estimated in order to investigate whether public investments, human capital, and political stability affect growth controlling for initial output and human capital levels. Furthermore, in this empirical research four subsets of independent variables were used: (a) demographic factors, (b) political determinants, (c) region variables, and (d) variables regarding macroeconomic policy. Empirical results suggest that there is an important difference in the impact of public and private sector investments on the growth of per capita income. Moreover, political indicators such as corruption control, rule of law, and government effectiveness have a high impact on economic growth. Demographic factors, including fertility rate and mortality growth, as well as several macroeconomic variables, like inflation rate index and government consumption, were estimated to be statistically significant factors of economic performance. Fiscal volatility may also be a new possible channel of macroeconomic instability that leads to lower growth. Policy implications of the findings are discussed in detail.

Highlights

A question of considerable empirical and theoretical interest is whether countries reach growth rate at the same steadystate [1]
Bad political indices, low levels of physical and human capital, and harmful macroeconomic and demographic indicators concentrate on African countries, possibly, being related to some initial reasons why these countries have such dismal growth performance
Empirical results suggest that government policy may affect the performance of an economy

Summary

Introduction

A question of considerable empirical and theoretical interest is whether countries reach growth rate at the same steadystate [1]. On the basis of neoclassical growth model, exogenous parameters, such as technological progress and growth of population, constitute the major drivers of the growth rate at the steadystate, while its shift path to that state is affected by fiscal policy [2]. Solow’s steady-state growth model of neoclassical general equilibrium was, for over thirty years, the dominant model in the theory of economic growth [4]. Based on this model, conditional convergence can be observed due to the diminishing returns of capital

Objectives

Results

Conclusion