Government Spending and Growth in Latin America and the Caribbean
- Submitted by: Rudy
- Views: 2003
- Category: Politics: Economics
- Date Submitted: 04/06/2010 01:17 PM
- Pages: 42
- Report this Essay
GOVERNMENT SPENDING AND ECONOMIC GROWTH IN LATIN AMERICA AND THE CARIBBEAN by Rudolph C. Matthias Anthony Birchwood July 2002
INTRODUCTION
An important issue in development economics concerns the role governments1 should play in the economy. There are two main views on the role of government. One view is that a smaller role for government will be less distortionary and therefore governments should limit their roles to some core functions.2 This view is associated with the neo-classicals and has gained orthodoxy in recent times. For them the market is the supreme mechanism for the distribution and allocation of resources. Hence, they see government intervention as being distortionary. One of the major concerns of those advocating less government intervention and a smaller role for government is the tendency for ―big‖ governments to run large and persistent fiscal deficits, generate high inflation and accumulate large public debt, which usually generate marginal welfare gains at the cost of creating disincentives for private sector investment. Proponents of public spending, on the other hand, argue that downsizing as an ultimate policy goal makes little sense since governments can play a pivotal role in the economy, through both the size and allocation of their expenditure.3 For example, Musgrave (1997) argues that public finances are needed (a) to provide services where externalities cause market failure, (b) to address issues of distribution, and (c) to share in the conduct of macroeconomic policy. Governments may also play a meaningful role in the economy by spending on maintaining law and order to help provide an environment conducive to private investment, and by spending on education and health to raise the productivity of labour. Hall and Jones (1997, pp. 173) support this latter view of the role of government. They view government activity together with the laws and institutions as an important and integral part of the infrastructure or the economic...
INTRODUCTION
An important issue in development economics concerns the role governments1 should play in the economy. There are two main views on the role of government. One view is that a smaller role for government will be less distortionary and therefore governments should limit their roles to some core functions.2 This view is associated with the neo-classicals and has gained orthodoxy in recent times. For them the market is the supreme mechanism for the distribution and allocation of resources. Hence, they see government intervention as being distortionary. One of the major concerns of those advocating less government intervention and a smaller role for government is the tendency for ―big‖ governments to run large and persistent fiscal deficits, generate high inflation and accumulate large public debt, which usually generate marginal welfare gains at the cost of creating disincentives for private sector investment. Proponents of public spending, on the other hand, argue that downsizing as an ultimate policy goal makes little sense since governments can play a pivotal role in the economy, through both the size and allocation of their expenditure.3 For example, Musgrave (1997) argues that public finances are needed (a) to provide services where externalities cause market failure, (b) to address issues of distribution, and (c) to share in the conduct of macroeconomic policy. Governments may also play a meaningful role in the economy by spending on maintaining law and order to help provide an environment conducive to private investment, and by spending on education and health to raise the productivity of labour. Hall and Jones (1997, pp. 173) support this latter view of the role of government. They view government activity together with the laws and institutions as an important and integral part of the infrastructure or the economic...