Abstract

This paper exploits the unique institutional features of South Africa to estimate the impact of provincial public spending on firm productivity. In contrast to existing microeconomic evidence, we explore the effects of fiscal expenditures and remove the effects of revenue raising policies. Our identification strategy is based on differences in the effects of public spending across firms within the same industry and province. We show that public spending composition affects productivity depending on the capital intensity of firms, with less capital intensive firms being particularly affected. These effects appear to be robust.

Highlights

  • It has long been understood within theories of economic growth and development that changes to ...scal policy, including changes in the composition of public spending, a¤ect aggregate outcomes such as the rate of economic growth (Barro, 1990; Devarajan et al 1996)

  • This paper examines whether changes in the composition of public spending a¤ects ...rm productivity and whether these e¤ects depend on ...rm characteristics

  • We show that an increase in education, health and transport spending compensated by a pro-rata decrease in other types of expenditure so as to leave total expenditure constant matters for ...rm productivity, and that there is evidence that its e¤ects vary across ...rms depending on their capital intensities

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Summary

Introduction

It has long been understood within theories of economic growth and development that changes to ...scal policy, including changes in the composition of public spending, a¤ect aggregate outcomes such as the rate of economic growth (Barro, 1990; Devarajan et al 1996). Adam and Bevan (2005), López and Miller (2007), and Hong and Ahmed (2009) all ...nd for example, that greater productive expenditures, usually de...ned as including spending on transport, communication, education, and health, have signi...cant positive growth e¤ects (Gemmell et al, 2012, provide a recent survey). The consistency of these ...ndings suggests that they are robust. Complementary evidence at the micro level is relatively uncommon and focused on a relatively narrow set of questions ; an outcome of limited availability of ...scal expenditure data measured at a sub-national level. As a consequence the literature has concentrated on the e¤ects of changes to transport infrastructure, see for example Datta (2012), Shirley and Winston (2004) and Reinikka and Svensson (2002), and Arnold et al (2008), or the investment climate more generally, see for example Bastos and Nasir (2004) and Dollar et al (2005).[1]

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