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

Shaheen Naseer


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

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