Public Spending, Quality of Bureaucracy and Economic Growth: A Theoretical Analysis

Abstract

This paper develops a theoretical framework to investigate the relationship between public spending and economic growth, where public spending provides both productive capital and unproductive services. We take into account the quality of bureaucracy with the possibility of rent-seeking motives. A key feature of the model is that it distinguishes between utility enhancing and productivity enhancing public spending. In the absence of rent-seeking motives, the paper demonstrates that public spending will promote economic growth only if marginal productivity of spending is high enough to offset the potential output loss due to increased taxation. In the presence of rent-seeking, however, the impact of public spending on economic growth depends on the quality of bureaucracy and how the latter impinges upon the rentseeking behaviour. The analysis shows that while improvement in bureaucratic quality would unambiguously raise the share of utility enhancing public spending, its impact on economic growth would depend on how bureaucratic quality influences the relative magnitudes of the two types of public spending as well as on how far bureaucratic extraction will be controlled as a result of improvement in bureaucratic quality. Bureaucratic extraction is likely to be minimised with strong institutions and effective monitoring and accountability mechanisms thereby improving the prospects of economic growth. JEL Classification: C61, D23, D61, D73, H50 Keywords: Rent-seeking, Quality of Bureaucracy, Public Goods, Public Expenditures