DP2010-15

Fiscal Stim ulus, Agr icultural Growthand Poverty in As ia*
Raghav GAIHA
Katsushi S. IMAI
Ganesh THA PA
Woojin KANG
April 30, 2010

* The Discussion Papers are a series of research papers in their draft form, circulated to encourage
discussion and comment. Citation and use of such a paper should take account of its provisional character.
In some cases, a written consent of the author may be required.

Fiscal Stimulus, Agricultural Growth and Poverty in Asia *Raghav Gaiha
Faculty of Management Studies, University of Delhi, India
Katsushi S. Imai †Economics, School of Social Sciences, University of Manchester, UK and
Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan
Ganesh Thapa
International Fund for Agricultural Development, Rome, Italy&
Woojin Kang
Economics, School of Social Sciences, University of Manchester, UK
Abstract
Recent debates on a sustainable recovery of the global economy have tended tooveremphasise the “savings glut” hypothesis and the unavoidable imperative of
higher consumption in China and other emerging Asian countries. That
oversaving and not underinvestment is coming in the way of a quicker and more
durable recovery is not just simplistic but misleading from a medium- term
growth perspective for emerging Asian countries and other developing countries
in this region. Drawing upon country panel data for developing countries and a
sub-sample of Asian countries during the period 1991 to 2007, the present study
makes a case for a bold and coordinated fiscal stimulus, directed to stimulating
agricultural and overall growth, and mitigation of poverty and hunger. Our
simulations further suggest that poverty reduction is likely to be larger if the
fiscal stimulus is directed to social spending in health and education sectors.
Indeed, if our simulations of fiscal impacts have any validity, the dire predictionsof millions getting trapped in poverty and hunger may turn out to be exaggerated.
The prospects of a strong recovery led by fiscal stimulus are thus real andachievable.
Key words: Government Expenditure, Fiscal Policy, Economic Growth,
Agricultural Growth, Poverty, Asia.
JEL codes: C 21, C 33, E 62†

Corresponding Author: Katsushi Imai (Dr) Department of Economics, School of Social
Sciences, University of Manchester, Arthur Lewis Building, Oxford Road, Manchester
M13 9PL, UK, Phone: +44-(0)161-275-4827, Fax: +44-(0)161-275-4928, E-mail:Katsushi.Imai@manchester.ac.uk.
*

We are grateful to T. Elhaut for his support and guidance at all stages of this study.
Raghbendra Jha and Anil Deolalikar offered useful advice on econometric estimation. S.
Jha graciously arranged for access to the rich database of ADB. Our thanks are also due
to V. Camaleonte and S. Vaid for valuable research assistance. Research support from
RIEB, Kobe University for the second author is highly appreciated. The views expressed,
however, are personal and not necessarily of the institutions to which the authors areaffiliated.

Fiscal Stimulus, Agricultural Growth and Poverty in Asia

1. INTRODUCTION
The seeds of the present recession were sown in the underpricing of risk and the resulting
excessive leverage. Defaults on subprime mortgages led to repricing of risk. As a result, there
were sharp falls in the prices of mortgage-backed securities, share prices and home values.
Destruction of wealth in turn caused cuts in consumer spending, business investment and incommercial real estate values.
Continuing declines in the values of mortgaged-based securities and of the derivatives
based on them fed fears of further mortgage defaults. Erosion of capital of financial
institutions weakened their willingness to make loans. Thus a dysfunctional credit market
emerged that no longer gave loans or responded to changes in the interest rates (Feldstein,
2009, Krugman, 2009a).
Total capitalisation of world stock markets almost halved in 2008 (i.e. nearly $30 trillion
of wealth disappeared). Market recovery so far is about $2 trillion (Lin, 2009). Losses of thismagnitude have significant wealth effects on consumption and saving.
Although governments in USA and Europe acted promptly and decisively, they failed toprevent the financial crisis from spreading to the real sector. Globally, industrial production
declined by 28 per cent in the first quarter of 2009 before easing to a pace of contraction of
19 per cent in April (on a rolling quarterly basis). During the first quarter of 2009, exports inEast Asia (e.g. China and Japan) declined by 50 percent or more, and in Korea by 43 per cent,presaging the largest trade contraction since 1929 (Lin, 2009). Other transmission channels
through which the contagion spread include sharp reductions in investment, and remittances 1 .

1

Total FDI and private capital flows to developing countries are estimated to decline from $1.2
trillion in 2007 to $363 billion in 2009. Remittances are likely to fall from $328 billion to $305 billion(Lin, 2009).
2

The GDP growth rate in developing countries in 2009 is estimated to drop to 1.2 per cent,a precipitous decline from 8.1 per cent in 2007 and 5.9 per cent in 2008. Recent World Bank
estimates show that the sharp deceleration of growth would trap 53 million more in poverty(living on less than $1.25 a day), and 65 million on the higher cut-off of $2 per day. If therecession persists, much larger numbers are likely to get trapped in poverty. Another dire
forecast is that an average of 200,000 to 400,000 more children per year, a total of 1.4 to 2.8
million, may die during 2009 to 2015 if the crisis persists. While the gravity of the concerns
raised cannot be disputed, the present study makes a strong case for the strategic role ofagriculture in breaking out of this recession, and in mitigating poverty and other associatedhardships.

2. WHY FISCUL STIMULUS?
Experience has shown that in general monetary policy is ineffective in stimulating
investment and consumption in excess capacity situations. Fiscal stimulus, on the other hand,
has the potential of working by releasing bottlenecks to growth in developing countries 2 . It
must, however, be bold, global, and generate an immediate and sustained increase in global
demand and productivity.
There are two major limitations of current fiscal stimulus programmes. First, mostdeveloping countries are constrained by either fiscal space or/and foreign exchange reserves,and thus over a period of time will not be able to pursue counter-cyclical policies. Fiscal
position was in large measure undermined by the fuel and food crises, resulting in expansionof subsidies. Moreover, an estimated one-third of developing countries have large current

2

For an emphatic endorsement, see Krugman (2009b). He in fact argues that fiscal expansion does not
crowd out private investment — on the contrary, there’s crowding in, because a stronger economy
leads to more investment. So, fiscal expansion increases future potential, rather than reducing it.

3

account deficits of 10 per cent of their GDP. Second, contrary to Keynesian theory, the socalled Ricardian equivalence theorem points to the possibility that households adjust their
behaviour for consumption or saving on the basis of expectations about the future. Any fiscal
stimulus package-spending or tax cuts- is then perceived as a liability which will need to be
repaid in the future. In such a situation, the multiplier could be less than 1, with the GDP seen
as given so that an increase in government spending does not lead to an equal rise in otherparts of GDP. A case in point is Japan’s experience during the “lost decade”. The government
was aggressive in implementing its fiscal stimulus. In 1991, public debt was 60 per cent of
the country’s GDP. By 2002, it had risen to 140 per cent, implying a large stimulus of 7 percent of GDP per year. Yet, Japan did not get out of the crisis. This is because people chose toincrease saving, which mitigated the effects of government spending. So the lesson is clear:even if governments around the world agree to implement coordinated fiscal stimulus
packages, there is still the issue of whether these fiscal programmes will increase aggregate
demand enough to offset the excess capacity that has been built up during the 2002-07 bubble(Lin, 2008, 2009).
If public spending delivers higher levels of investment and rational economic agentsbelieve that their income will not be taxed for repayment in the future, the Ricardianequivalence effect will be weak, if any. If policy makers can design a system that allows
projects/programmes to generate enough returns to repay themselves, the chance of success ishigh. So, if governments use fiscal stimulus to release bottlenecks to growth, economic
growth will be accelerated and marginal returns to private investment will also be higher.
China’s economic stimulus of 1998-2002 illustrates this view. In the midst of the Asianfinancial crisis, when sharp economic slumps in Indonesia, Korea, Malaysia, Philippines, andThailand prompted all the neighbours to depreciate their currencies, China issued an
estimated RMB 660 billion in bonds specifically to finance infrastructure, inducing four4

times more of bank loans, private and local government investment. As a result, China went
through deflation but recorded an average growth rate of 7.8 per cent. An important feature of
the stimulus was that it was targeted to the release of bottlenecks to growth. Examples
include the highway system, port facilities, telecommunications and education. The Chinese
economy got out of deflation in 2003, and growth of GDP accelerated to 10.8 per cent in
2003-08. This then resulted in an increase in revenue which brought about a reduction of
public debt from 30 per cent of the GDP in the 1990s to 20 per cent in 2007 (Lin, 2009).
High return opportunities may be limited in developed countries where a high level ofinvestment and consumption has already been realised under the market system. By contrast,
such projects tend to abound in developing countries-especially in the rural areas. Clearly,
some fraction of fiscal resources must be injected in developed countries that are theepicentre of the crisis, but the main objective must be to create demand quickly andefficiently. So channelling of investment to where it can be most effectively utilised –especially in the developing countries-is a high priority. Infrastructural investment –bothdomestically and regionally-can generate strong backward and forward linkages with othersectors and facilitate growth and further investment in traditionally poorer areas.
However, there is one important difference in the present situation. In the past crises,some countries could depreciate their currencies and increase exports to get out of therecession. But in the present global slowdown, currency depreciation and greater exports are
not an option. This of course does not rule out greater trade within a region-for example,
within Asia and/or between developing regions and/or between emerging economies. China’s
rapid expansion of trade with Japan is a case in point. But this is more a question of
exploitation of intra-region or inter-region trade potential and not one of using “beggar thy
neighbour policies”. While erosion of trade of East Asian countries (e.g. China) with USA

5and Europe during the last two quarters may not be fully compensated, there are substantial
possibilities of trade expansion within Asia and with other developing countries (Petri, 2006).
Not only is this opportunity glossed over or sidetracked in recent debates but there is also
an overemphatic endorsement of the “savings” glut hypothesis and consequently higher
consumption in China, in particular, and India and other high saving emerging countries, ingeneral, to prevent the global slowdown from turning into a deep recession 3 . In line with thepronouncements of US Treasury and a galaxy of development economists, various
researchers from the Asian Development Bank (notably Park and Shin, 2009, Jha et al. 2009)
have drawn attention to rebalancing of growth in emerging Asian countries- a euphemism forraising consumption. While recognising that both underinvestment and oversaving contributeto the current account surplus, Park and Shin (2009) assert that the contribution is
predominantly from oversaving rather than underinvestment 4 . While as an empiricalobservation this is not false, it is not sufficient to shift the policy emphasis from raising
investment to cutting down oversaving 5 . From a medium-term perspective, the impediments
to agricultural growth are many and persistent. These include limited access to markets, weakfinancial intermediation, fragile extension systems, and high vulnerability to diverse market
and non-market risks. As market failures are rampant, public expenditure has a vital role.
Moreover, public investment multipliers-including not just infrastructure but also educationand health- are generally found to be larger than public expenditure ones (net of investment).
Indeed, as pointed out by Sachs (2009), the present crisis is an opportunity to rebalance thepublic and private sectors, and to link the short-term macro stimulus with the long-termsustainability agenda.

3See, for example, Prasad (2009). For a reexamination of the “savings glut” hypothesis, see Gaiha etal. (2010).
4This is buttressed by decompositions of growth in Jha et al. (2009).
5
In fact, the Park-Shin analysis (2009) is deeply problematic both methodologically andinterpretationally. For details, see Gaiha et al. (2010).
6

Further doubts arise about the rebalancing argument if account is taken of recent estimatesof consumption growth in emerging Asia. A recent issue of The Economist (June 25th, 2009)
draws attention to Asia’s emerging economies bouncing back. Their GDP grew by anannualised 7 per cent in the second quarter of 2009.
(Figure 1 to be inserted around here)

Consumers’ appetite to spend varies hugely across this region. In China, India andIndonesia spending has increased by annual rates of more than 5 per cent during the global
downturn In China, real spending has grown at an impressive rate of 9 per cent. Elsewhere in
the region, however, spending has stumbled, squeezed by higher unemployment and lower
wages.
During the past five years consumer spending in emerging Asia has grown by an annual
average of 6.5 per cent, much faster than in any other part of the world. Consumption as aproportion of GDP has fallen but that is because investment and exports have grown evenfaster and not because spending has been weak. Relative to American consumer spending,
Asian consumption has soared, as shown in Figure 1.
Nonetheless China has done much to boost consumption-rural residents are given
subsidies for buying vehicles, televisions and refrigerators-as there is huge potential forhigher consumption in the rural areas when incomes rise. The government has also
introduced social safety net measures-spending more on health care, pensions and payments
to low income households. These could lead low income households to save less and spend
more. But a bigger test of Asian governments’ resolve to shift the balance of growth fromexports towards domestic spending is, as argued in different issues of The Economist and7elsewhere, whether they will allow their exchange rate to appreciate 6 . A revaluation would
lift consumers’ real purchasing power and allow firms to shift production towards domestic
demand. That this is not just oversimple but also a short-sighted and potentially misleading
view is elaborated below. Specifically, fiscal stimulus directed to investments in rural andother areas has considerable potential for expanding output and incomes in a sustainable way,
through domestic and external demand, without drastic exchange rate adjustments 7 .

3. MACRO POLICY OPTIONS
Recent assessments (Krugman, 2009a, b, Feldstein, 2009, ADB, 2009, The Economist,2009) of fiscal stimulus reflect a growing consensus on the continuing need for it until global
recovery stabilises. While there is cautious endorsement of sustainability of fiscal expansionin emerging and other developing countries, depending on the fiscal space and debt burden,
there is also awareness of the painful lessons learnt from an early withdrawal of fiscal
stimulus during the Great Depression of the 1930s and the more recent experience of therecession in Japan in the 1990s. In fact, there are some -notably Krugman (2009 b)- who areemphatic in their endorsement of a second round of fiscal stimulus.
A general consensus is that all major actors need to respond quickly and in a morecoordinated manner -endorsed also by the recently concluded G-20 Summit in Pittsburgh.
These actors include developing countries that are now responsible for a large share of the
global economy and trade flows.

6

In an admirably clear and cogent exposition, Corden (2009) cautions against a simplistic view of
exchange rate adjustments -especially appreciation of the renminbi- as key to correcting global current
account imbalances. He makes two important points: (i) the current account balance has not beenplanned by the central authorities but instead has been an unplanned by-product of a variety ofdevelopment and policies-including rapid productivity growth. Exchange rate policy has been just one
key element in this story. (ii) While exchange rate policy can and does affect the surplus, it was
targeted on a different objective-to maintain employment in export industries and to curb speculative
attacks.
7
On this, see Rodrik (2007, 2009).
8

In general, developing countries are in some respects better poised to deal with the shocks
that have rippled through the global economy, relative to the earlier crises. Their macroeconomic policies -including their fiscal and external positions- are designed to make themless vulnerable to such shocks. Sovereign debt is better managed than at the time of the East
Asian financial crisis while flexible exchange rates allow external shocks to be absorbed lessdisruptively. The number of extremely poor has also declined appreciably-by more than 300
million since the East Asian Financial Crisis (Chen and Ravallion, 2008). Diminishedinflationary expectations together with reduction of commodity prices (for net importers)
have further eased macro-economic strains for some developing countries.
There are two main policy tools- monetary and fiscal policies- that developing countries
must combine in a contextually appropriate manner. It may be imperative for some to tightenmonetary policy by raising interest rates to avoid excessive currency depreciation or capitaloutflows while others may have room to lower interest rates to stimulate investment insectors in which they have comparative advantage.
There is a variety of fiscal options. Injection of domestic demand could help offset the lossof foreign demand. Public investment -especially in infrastructure- is a key option. Of
particular importance is rural infrastructure, given the disparity between rural and urban
areas 8 . Another area of investment is social protection and human development. Examples
include conditional cash transfers to keep disadvantaged children in school, public works
employment (a case in point is National Rural Employment Guarantee Scheme in India) andsubsidies on inferior food. Such fiscal stimulus is likely to work in countries with healthy
reserves, current account surplus or small deficits, and fiscal balance. However, the policy
dilemma that confronts governments in developing countries is whether they can respond in acountercyclical manner by increasing domestic demand without risking their fundamentals8

See, for example, the evidence on easier market access benefiting smallholders more thanproportionately in an Indian state (Shilpi and Umali-Deininger, 2007).
9

fiscal position, debt level, domestic inflation and the banking sector. Few countries havescope to do this while others are constrained fiscally (India more than China, for example) or
experiencing capital flight out to safer havens.

4. EVIDENCE ON ASIA
Given the focus of our study on Asia, a review of this region’s experience is given below.
Here we draw upon Jongwanich et al. (2009). Overall the fiscal stimulus has been too small
to achieve potential output, as shown in Table 1. Even the relatively strong package in China
covers only half the output gap. Most stimulus efforts cover much less. In South Asia, theproblem has been lack of fiscal space. In others, failure to manage the stimulus (e.g.
absorptive and institutional capacity) has been a constraint.
(Table 1 to be inserted around here)

The results given in Table 2 show the effects of fiscal stimulus of 4 countries/regions. 9 A
brief summary of the results is given below. First, the impacts of the stimulus packages add
between 0.2 per cent and 6 per cent to GDP growth in 2009, and between 0.9 per cent and 5.5
per cent in 2010. Second, even though the stimulus packages are large, and the impacts on
growth positive, the stimulus packages will not reverse the impacts of the crisis in 2009.
China is an exception as it benefits from its own large stimulus package. Third, all countries
and regions, except Other Developing Asia, will experience positive growth at the end of2010 despite the financial crisis. Fourth, most countries/regions are projected to experience asignificant boost in their exports, especially for manufactured products. Services andagricultural exports are also projected to increase. Somewhat surprisingly, China is projected
to see a significant rise in agriculture and processed food exports but a reduction in services
9

The results for Japan, China, North America OECD, and European OECD are omitted. For details,
see ADB (2009).
10

exports. Fifth, in general, protectionism has a negative impact on the countries/regions that
follow that route. India and Southeast Asia stand out as they could impact other regions incase they raise their tariffs to binding levels. China, on the other hand, lacks protectionist
potential from raising applied tariff rates to binding rates in the Asia region. Finally, although
few countries/regions experience a rise in exports, resulting from trade diversion created byaccentuating tariff preferences for regional trade partners, the overwhelming effect is to
reduce trade. Southeast Asia’s exports decrease the most, followed by East Asia.
(Table 2 to be inserted around here)

5. EXIT OPTIONS AND INFLATIONS IN ASIA
Our analysis will demonstrate significant growth acceleration through fiscal stimulus in asample of Asian countries. As fiscal policy acts over a period-especially infrastructure
spending-an inflationary impact in the short-run is not unlikely. However, the balance ofevidence continues to point to the imperative of further fiscal stimulus. A related issue iswhether it is also necessary to tighten monetary policy to further undermine inflationary
tendencies. However, any change of policy stance must be informed by a clear understandingof source of inflation in Asia. An important recent contribution (Jongwanich and Park, 2008)
throws valuable light. In particular, the focus is on the relative importance of demand-pulland cost-push factors. A notable feature is that the analysis is based on a sample of Asian
countries over the period 1996Q1-2009Q1 10 .
Briefly, the main cost-push factors are international oil and food prices, while the main
demand-pull factors are excess aggregate demand, proxied by the output gap, and inflationary
expectations (defined as a function of lagged domestic inflation). The implications ofdecomposition of inflation into these factors have policy significance. In the case of cost-push10

The sample of countries includes China, India, Indonesia, Korea, Malaysia, Philippines, Singapore,
Thailand and Vietnam.
11inflation- driven by the rising input costs of goods and services- a marked slowdown andrising unemployment are likely to accompany higher inflation. A tight monetary policy
would come with the high cost of slower growth and higher unemployment. Nor would
loosening monetary policy in response to declining global oil and food prices help in pushingup growth and employment. In contrast, tightening monetary policy would contain inflation if
inflation were of the demand-pull type. In that case, a tight monetary policy would dampen
aggregate demand.
Inflationary expectations reinforce the case for monetary policy, regardless of the sourceof inflation. There is often a risk that inflationary expectations get entrenched and cause acost-price spiral. A case in point is the stagflation experience of industrialised countries in the
1970s, triggered by the 1973-74 oil price shock. In other words, even if there is cost-pushinflation, inflationary expectations may be formed, requiring monetary policy intervention.
The upshot is that monetary policy will continue to have a role in curbing inflation.
Combining it with the expansionary effect of fiscal stimulus, a larger output gap is notunlikely. If, however, as our analysis suggests, the fiscal stimulus is contingent on better
infrastructural support, and agricultural expansion, the trend output growth without inflation
may also accelerate and thus offset the enlargement of the output gap. A subtle balancing of a
gradually tightening monetary stance and more effective but continuing fiscal stimulus would
allay inflationary apprehensions. From this perspective, this analysis of inflation offers some
new insights into why an early exit is not warranted.

6. ECONOMRTRIC ANALYSIS
Objectives
The objective of our analysis is to focus on the potential of public expenditure for growthand poverty reduction in a sample of developing countries. Our points of departure from the12extant literature are the following: first, an attempt is made to analyse the effects of public
expenditure and its two components: infrastructure and net of infrastructure, on agriculturaland overall growth in several different specifications. In other variants, we examine theseparate effects of agriculture and different components of public expenditure-including a
reclassification of public expenditure on infrastructure and health and education- on overall
growth. Second, combining these results with a range of poverty-growth elasticities
computed under different assumptions in Imai et al. (2010), we offer an assessment of the
impact of fiscal stimulus and its components-through overall and agricultural growth- on
poverty in Asia and the Pacific Region. A limitation of our analysis, however, is that it isconfined to the contemporaneous impact of fiscal stimulus 11 .

Specification
The objective of the econometric analysis is to assess the impacts of government
expenditure on the growth rates of per capita GDP and agricultural value added, after
controlling for the effects of other variables. Total public expenditure as an aggregate, and its
disaggregation into infrastructure and non-infrastructure spending are considered separately.
This analysis is supplemented by counterfactual simulations, focusing on their poverty
impacts.
To focus on GDP per capita growth, we estimate the following model:
(GPi,t )  0  1(INFi,t )   2 (NetINFi,t )  3( AGPi,t )   4initialGPi 5Trade 6Crisis* Asia Yeardummy Countrydummy ui,t(1)

where (GPi ,t )  GPi ,t  GDPi ,t 1 ;  ( INFi ,t )  INFi ,t  INFi ,t 1 ;
 ( NetINFi ,t )  NetINFi ,t  NetINFi ,t 1

11

and ( AGPi ,t )  AGPi ,t  AGPi ,t 1

Data constraints precluded a broader focus.
13Note that  1,  2 and  3 are central to our purpose. As the variables are in log, thecoefficient estimates of 1,  2 and  3 represent the elasticity of per capita GDP growth withrespect to (i) growth of government infrastructure expenditure, (ii) growth of government
expenditure net of infrastructure or growth of non-infrastructure spending, and (iii)
agricultural growth per capita. We also test whether high debt-GDP ratio has an adverse
effect on growth. The fiscal multipliers in the long-run may also be lower as fiscal expansion
is not sustainable when the debt-GDP ratio is high. Besides, whether per capita agricultural
growth affects per capita GDP growth is examined.
Similarly, we estimate the determinants of per capital agricultural growth as specified
below:
( AGPi,t )  0  1(INFi,t )   2 (NetINFi,t )  3initialAGPi   4Trade 5 Landpci,t  6Crisis* Asia Yeardummy Countrydummy  i,t(2)

Three stage least square (3SLS) estimator is applied here to estimate equations (1) and (2)to circumvent possible reverse causality between, say, GDP per capita growth andagricultural value added growth per capita, among others. Total public expenditure,
infrastructure spending and government expenditure net of infrastructure were instrumented
by their lagged values, and country and time effects in separate equations, respectively, while
they are used as right side variables in overall growth equations. In addition, using 3SLS, we
also allow for contemporaneous correlation between u i ,t and  i ,t .

Data
The data for the present study are taken from IMF’s Government Financial Statistics(GFS), Asian Development Bank’s key indicators and World Development Indicators (WDI).

14

The total sample consists of 23 countries of Asia, Latin America and Africa 12 . The period
covered is from 1993 to 2006. Because of missing observations in government expenditure
data, it was difficult to construct annual time-series for most of the countries. While realising
it is not an ideal solution, we have divided the entire period into 7 sub-periods by taking 2
year average for all variables (that is, 1993-4, 1995-6, and so on up to 2005-6).
We have modified the IMF and ADB data on government expenditure classified by its
functional outlay into two components of expenditure categories 13 : (a) expenditure on
infrastructure; (b) total expenditure minus infrastructure expenditure. Expenditure on
infrastructure is the sum of expenditures on electricity, gas and fuel, and transport andcommunication.
The variables used in the present study are listed below.
GP: Log of GDP per capita (constant US$ in 2000)
AGP: Log of per capita agricultural value added (constant US$ in 2000)
TE: Log of total government expenditure in value (constant US$ in 2000)
INF: Log of government expenditure on infrastructure (constant US$ in 2000)
NetINF: Log of total government expenditure minus infrastructure expenditure (constant
US$ in 2000)
Trade: Log of share of trade in GDP
Debt ratio: Log of share of central government debt to GDP
Working population ratio: Log of share of population aged 16-64 to total population
12

The countries are Bangladesh, Cambodia, India, Indonesia, Nepal, Philippines, Sri Lanka, Brunei,
Malaysia, Maldives, Thailand, Mongolia for Asia; Costa Rica, Guatemala, Mexico, Panama for Latin
American Countries; Burundi, Cameroon, Egypt, Ethiopia, Kenya, Tunisia and Zambia for SubSaharan African countries. These countries are selected only based on the availability of relatively
complete data of government expenditure. We run the regressions for total sample countries and only
for Asian countries.
13

Public expenditure refers to central government expenditure only for all countries except India. We
have used state-level government expenditure for India as a large share of expenditure on agriculture
and rural areas is undertaken by state governments (Fan et al., 1999).

15

Land per capita.: Log of arable land (hectare) per person
Initial GP: Log of initial value of per capita GDP (constant US$ in 2000)
Initial AGP: Log of initial value of per capita agricultural value added (constant US$ in 2000)
Crisis*Asia: A dummy variable for whether a country belongs to Asia region and the period
is 1997-8
Crisis*Sea: A dummy variable for whether a country belongs to Southeast Asia region andthe period is 1997-8.
Given the importance of public expenditure on health and education-especially from a
medium term perspective-a sub- section is devoted to reestimation of growth and poverty
reduction due to a broadening of public expenditure to include physical infrastructure andhealth and education.

7. ECONOMETRIC RESULTS

Public Expenditure Impact
Table 3 provides the econometric results to estimate the impact on public expenditure on
growth. Case A, based on the complete sample, shows a significant positive contribution of
government expenditure to overall economic growth: the elasticity of per capita GDP growthwith respect to the growth of total expenditure is 0.669. The negative coefficient of theinteraction term of Asian Financial Crisis and Asian countries (Crisis*Asia) confirms that
Asian countries were more affected from the crisis in 1997/98 than the rest of the sample.
(Table 3 to be inserted around here)

Turning to agricultural growth (Case B), government expenditure has a positive role. The
growth elasticity of per capita agriculture value added with respect to government total
expenditure growth is 0.655. The positive coefficient of initial agriculture GDP per capita

16

implies divergence (i.e. the difference in per capita agricultural value added between sample
countries is expected to widen).
The important findings from the sub-sample of Asian countries are the following. The
significant role of public expenditure on overall growth is also evident in the sub-sample of
Asian countries, and it is in fact larger (Case C). A 1 percent higher expenditure growthincreases GDP per capita growth by approximately 1.29 percent. Public expenditure growthshows a strong association with agricultural growth as well-the elasticity being 1.25. In large
measure, the differences in the results are due to the use of different samples (aggregate andthe Asian sub-sample).

Impacts of Infrastructure and Non-Infrastructure Expenditure
Table 4 examines the impact of public expenditure on infrastructure and non-infrastructure
on growth. The result in Case A further confirms that per capita GDP growth is positively
and significantly influenced by both public infrastructure spending and non-infrastructure
spending in the aggregate sample: a 1 percent increase in the growth of non- infrastructure
expenditure increases GDP per capita growth by 0.31 percent whilst a 1 percent change ininfrastructure expenditure is associated with 0.047 percent change in GDP growth. While thismay seem intriguing in view of the evidence cited earlier, it is not so since infrastructure isdefined somewhat narrowly (education and health, for example, are excluded). As expected,
agricultural growth has a significant positive effect on overall growth even after allowing forthe effects of infrastructure and non-infrastructure spending. Specifically, the elasticity of percapita GDP growth with respect to per capita agricultural growth is 0.134. The debt-GDP
ratio is negatively associated with economic growth, implying the constraining influence ofdebt repayment on public investment. The negative coefficient estimate of the interaction

17

term of Crisis and Asia (i.e. Crisis*Asia) implies that per capita GDP growth rates of Asian
countries were more negatively affected by the Asian Financial Crisis.
(Table 4 to be inserted around here)

In Cases B, there is a strong influence of non-infrastructure expenditure on per capita
agricultural growth: a 1 percent increase in spending increases per capita agricultural value
added growth by 1.11 percent. The growth elasticity of agricultural value added with respect
to infrastructure expenditure is also positive but relatively small (0.08 per cent). There are atleast two reasons why this effect is small. One is the narrow focus of infrastructure spending.
Another is the failure to distinguish between rural and urban infrastructure spending. This is adata constraint that we are unable to overcome. Nevertheless these results further confirm theimportant role of increased government spending in promoting agricultural growth.
Turning to the results obtained from the sub-sample of Asian countries in Case A of
Table 5, we find that both components of government expenditure are positively associatedwith per capita GDP growth: the elasticity of per capita GDP growth with respect toinfrastructure expenditure growth and to net expenditure growth are 0.087 and 0.465,
respectively. The positive influence of non- infrastructure expenditure is also observed in the
agricultural value added per capita growth equation in Case B of Table 5: a 1 percent increasein this expenditure is associated with 0.85 percent increase in growth of agricultural value
added per capita. The effect of infrastructure spending on agriculture growth is positive but
statistically not significant (or not significantly different from 0). For the reasons statedearlier, this is not so surprising.
(Table 5 to be inserted around here)18

Extensions
We have carried out a few extensions using 3- year averages instead of 2- year averages
mainly as a robustness check 14 . Here a few changes have been made to the previous
specifications. First, government infrastructure expenditure is broadened to include
government expenditure on education and health services. Hence infrastructure expenditure
now refers to both physical and social government spending. Second, we have included
money supply or M2 to examine the effects of monetary policy on economic growth. In otherwords, this is a step towards a closer integration of the real and monetary markets.
With the aggregate sample, a positive and significant coefficient estimate of government
expenditure on physical infrastructure and health and education is obtained. If a government
raises this component of public expenditure by one percent, 0.282 percent higher overall
economic growth is likely.
After controlling for the effects of money supply, we obtained a positive effect of
infrastructure on economic growth. The effect of money supply on per capita GDP growth ispositive. With or without a control for money supply, agricultural growth has a substantiallygreater effect on overall growth (the elasticity ranges from 0.38 per cent to 0.41 per cent).
In sum, the main findings are summarised as follows. First, agricultural growth has asubstantial effect on overall growth. Second, public expenditure growth has a positive effecton overall growth, as also growth of the components of the former (infrastructure and noninfrastructure spending). Third, the effect of growth of non-infrastructure spending is often
considerably larger than that of infrastructure spending. This is not surprising for two
reasons: narrow definition of infrastructure spending, and failure to account for its longerterm impact. Finally, agricultural growth is also highly sensitive to growth of public

14

It would be ideal to use a longer time span (e.g. 6- year averages) instead of 3- year averages to test
the longer-term effect, but the data do not allow this. The econometric results are not shown to savethe space, but will be provided on request.
19

expenditure or non-infrastructure spending, and less so to infrastructure spending. The latteris presumably a consequence of our failure to disaggregate infrastructure spending into ruraland urban.

8. SIMULATIONS OF GROWTH AND POVERTY REDUCTION
A selection of our results is given in Table 6 and 7, based on counterfactual simulations ofincreases in public expenditure, and its components, on agricultural and overall growth.
Combining these with poverty elasticities of overall growth and agricultural growth, weobtain likely impacts of fiscal stimulus on the poverty head-count ratio 15 . Efficacy ofdifferent routes of fiscal and agricultural expansion is examined. The important role of fiscal
stimulus in reviving the Asian economies and in maintaining the progress towards the MDG
of halving of the head-count index of poverty is illustrated – in both relative and absoluteterms.
(Table 6 to be inserted around here)

As shown in Table 6, with a 10 per cent higher growth of public expenditure, the growthrate of GDP per capita will increase by 20.85 per cent (in comparison with the reference case),
and with a doubling of the growth of public expenditure, the GDP growth rate accelerates by
41.14 percent. Although the reductions estimated in the poverty ratio- rising from 6.80 per
cent in the reference case to 8.26 per cent and 9.70 per cent in the two counterfactual
scenarios of higher growth of public expenditure- seem small, the reductions in the number ofpoor (on the $1.25 per day criterion) are large: 10.30 and 20.44 million, respectively.
In the lower panel of this table, we assess the impact through a higher growth rate of
agricultural value added per capita. Note that the poverty elasticity with respect to15

For computational details of poverty elasticities with respect to GDP per capita and agriculturalvalue added per capita, see Imai et al. (2010).
20

agricultural value added is less than half that of GDP per capita (-0.52 as against -1.22) 16 . So,
while agricultural growth rate accelerates and there are small reductions in the poverty headcount ratios, the reductions in the number of poor are still substantial (4.25 million and 8.50
million, respectively). It follows, therefore, that fiscal stimulus operating through agricultural
growth continues to have considerable potential for poverty reduction 17 .
A disaggregated analysis of fiscal stimulus is given in Table 7. To avoid cluttering the text,
a selection of results is given.
(Table 7 to be inserted around here)

Given the narrow definition of infrastructure, as also the fact that our analysis is confinedto the contemporaneous impacts, it is not surprising that a more rapid growth of infrastructure
spending has small growth and poverty impacts while those of non-infrastructure spending
are substantially larger, operating through acceleration of GDP and agricultural growth. Witha 20 per cent faster growth of non-infrastructure spending, for example, agricultural growth
accelerates from 2.30 per cent in the reference case to 4.05 per cent, and the number of poor
drops by just under 7 million.
To supplement these results, Table 8 illustrates the likely effects of combining government
expenditure on health and education with that on infrastructure on growth and poverty. Thereis a substantial decline in the number of the poor when physical and social infrastructure
spending rises. Relative to the reference case, with a 10% (20%) higher growth in physicaland social spending, overall growth rate will increase by 3.37% (6.73%). The estimatedreduction in the number of poor is 2.52 (5.04) million. This is in striking contrast to ourearlier results implied by simulated increases in physical infrastructure expenditure. For
instance, the simulation exercise suggests that, with a 10% (20%) higher growth in physical16
17

For estimation details, see Imai et al. (2010).
Note that these simulations exclude China.
21

infrastructure spending, barely 0.27 (0.64) million poor cease to be poor. The importance ofsocial spending in reducing poverty is thus strongly corroborated by our simulations. Given
the importance of social spending in the medium –term, the effects on growth and poverty
reduction are likely to be larger.
(Table 8 to be inserted around here)
Juxtaposed against the trapping of 53 million in poverty in the developing world due to theglobal slowdown, as noted by Lin (2009), our simulation results are reassuring. Whether abold and coordinated fiscal stimulus directed to agriculture and rural areas in Asia and thePacific region is feasible, time alone will confirm.

9. CONCLUSIONS
To put the analysis in perspective, we reject the savings glut hypothesis as sufficient toshift the emphasis from investment to cutting oversaving in emerging Asian countries as away out of the global slowdown. Arguing that underinvestment must remain the focus ofmacro policies, a case is made for a bold and coordinated fiscal stimulus.
Drawing upon country panel data for developing countries and a sub-sample of Asian
countries during the period 1991 to 2007, we have analysed the effects of government
expenditure on GDP and agricultural value added growth, and their implications for poverty
reduction. One of our main findings is that, despite the decline in the share of agriculture in
GDP, it has a major role in growth acceleration. But, more importantly, in the context of the
global slowdown and faltering signs of recovery, the case for a bold fiscal stimulus iscorroborated. Although impacts of public expenditure in the aggregate as well as of its
components -especially infrastructure spending- vary depending on the model and sample
used, their growth impacts are positive and, in some cases, large and robust. While the22impact of infrastructure spending is small relative to that of non-infrastructure spending, thisis not surprising given the narrow definition of infrastructure used.
We then broadened our measure of public expenditure on infrastructure by including
health and education to allow for their potential for medium-term growth acceleration. Not
only are the growth effects larger but also the poverty reduction is greater. If accepted at facevalue, and conditional on the feasibility of a bold and coordinated fiscal stimulus, the direpredictions of more than 50 million getting trapped in poverty because of the global
slowdown appear exaggerated.

Besides, if mechanisms are evolved to direct the fiscal

stimulus to the rural areas where both physical and social infrastructure are far from adequate
to sustain the growth impulse-as illustrated by the case studies of rural infrastructure inselected Asian countries- the payoff in terms of poverty reduction may surpass seemingly
optimistic predictions.
In conclusion, the prospects of a strong recovery led by fiscal stimulus are real andachievable.

REFERENCES
ADB (Asian Development Bank) (2009), The Global Economic Crisis: Challenges forDeveloping Asia and ADB’s Response (Manila: ADB).
Chen, S. and M. Ravallion (2008), ‘The Developing World is Poorer than We Thought, But
No Less Successful in the Fight against Poverty’, World Bank Policy ResearchWorking Paper 4703 (Washington DC: World Bank).
Corden, M. (2009), ‘China’s Exchange Rate Policy, Its Current Account Surplus and the
Global Imbalances’, The Economic Journal, 119, November, 430–441.
Fan, S., P. Hazell, and S. Thorat (1999), ‘Linkages Between Government Spending, Growth,and Poverty in Rural India’, IFPRI Research Report 110 (Washington DC: IFPRI).

23

Feldstein, M. (2009), ‘Rethinking the Role of Fiscal Policy’, Working Paper 14684(Cambridge: MA, NBER).
Gaiha, R., K. Imai, G. Thapa and Woojin Kang (2009), ‘Fiscal Stimulus, Agricultural Growth,and Poverty in Asia and the Pacific Region: Evidence from Panel Data’, Economics
Discussion Paper Series EDP-0919 (Manchester: University of Manchester).
Gaiha, R., K. Imai, G. Thapa and Woojin Kang (2010), ‘Savings, Investment and Current
Account Surplus in Asia’, Economics Discussion Paper, EDP-1001 (Manchester:
University of Manchester).
Imai, K., R. Gaiha, and G. Thapa (2010), ‘Is the Millennium Development Goal of Poverty
Still Achievable? Role of Institutions, Finance and Openness’ Oxford Development

Studies, forthcoming.
Jha, S., E. Prasad and A. Terado-Hagiwara (2009), ‘Saving in Asia and Issues for
Rebalancing Growth’, ADB Economics Working Paper Series, no. 162, May (Manila:
ADB).
Jongwanich, J., and D. Park (2008), ‘Inflation in Developing Asia: Demand- Pull or CostPush?’, Manila: ERD Working Paper Series no. 121 (Manila: ADB).
Jongwanich, J., W. E. James, P. J. Minor, and A. Greenbaum (2009), ‘Trade Structure and theTransmission of Economic Distress in the High-income OECD Countries to Asia’,
Manila: ADB Working Paper Series no.161 (Manila: ADB).
Krugman, P. G. (2009a), ‘How Did Economists Get It So Wrong?’, The New York Times,
September 2.
Krugman, P. G. (2009b), ‘The True Fiscal Cost of Stimulus’, The New York Times,
September 29.
Lin, Justin Yifu (2008), ‘The Impact of the Financial Crisis on Developing Countries’, Textof a Lecture Delivered at Korea Development Institute, Seoul, October 31.

24

Lin, Justin Yifu (2009), ‘Weathering the Global Economic Crisis: Lessons for Emerging
Markets’, Mimeo. (Washington DC: World Bank).
Park, D. and K. Shin (2009), ‘Saving, Investment, and Current Account Surplus in
Developing Asia’, Manila: Working Paper No. 158 (Manila: ADB).
Petri, P. A. (2006), ‘Is East Asia Becoming More Interdependent?’, Journal of Asian

Economics, 17, 381-394.
Prasad, E. (2009), ‘Rebalancing Growth in Asia’, Mimeo. (New York: Cornell University).
Rodrik, D. (2007), ‘The Real Exchange Rate and Economic Growth: Theory and Evidence’,
Mimeo., (Cambridge MA: Harvard University).
Rodrik, D. (2009), ‘Growth after the Crisis’, Mimeo. (Cambridge MA: Harvard University).
Sachs, J. (2009), ‘Achieving Global Cooperation on Economic Recovery and Long-Term
Sustainable Development’, Asian Development Review, 26, 1, 3-15.
Shilpi, F. and D. Umali-Deininger (2007), ‘Where to Sell? Market Facilities and AgriculturalMarketing’, Policy Research Working Paper 4455 (Washington DC: World Bank).

The Economist (2009), ‘Much Ado about Multipliers”, September 24; ‘After the Storm: How
to Make the Best of the Recovery?’, October 3.

TABLE 1
Fiscal Stimulus Plans of Selected Developing Asian Countries
Fiscal stimulusCountries

25More than 5 per cent of GDP
Between 2 per cent and 5 per cent of GDP
Between 0.5 per cent and 2 per cent of GDP
Less than 0.5 per cent of GDP

China, Kazakhstan, Papua New Guinea,
VietnamIndia, Philippines, Vietnam
Bangladesh, Cambodia, Indonesia, Pakistan
Sri Lanka

Source: ADB (2009).

TABLE 2
Impacts of Stimulus Packages on Asian GDP Growth, 2009 and 2010 (Percent of Real GDP)Country/Region

China
Other Developing
Asia
East Asia
India
South Asia
South East Asia

Gap bProjected GDP
Impacts fromSlowdown in
OECD
2009
2010

Projected
FiscalStimulus
Impacts a
2009
2010

2009

2010

Cumulative
Gap in GDP
(%) c

-3.9
-2.8

1.4
0.9

6.0
0.2

5.5
1.5

2.1
-2.6

6.9
2.4

9.1
-0.3

-3.8
-4.1
-3.6
-3.4

1.4
1.3
1.2
1.2

3.5
3.2
2.3
1.6

3.0
2.4
2.2
2.1

-0.3
-0.9
-2.0
-1.2

4.4
3.7
3.3
3.4

4.1
2.8
1.2
2.2

Source: Jongwanich et al. (2009)a Projected GDP is the static impact on the Asian countries of fiscal stimulus packages where actual growth may
be greater or smaller depending on the policies of individual countries, such as fiscal stimulus or protectionism.
b The potential gap is the difference between the impacts from the economic slowdown and the impacts fromthe projected fiscal stimulus packages.
c Cumulative numbers are not the simple addition of the two years but are compound growth rates.

TABLE 3
3SLS Estimation on Public Expenditure Impact
Case A
Change of Log GDP Per Capita [D(GP)]Case B
Change of Log Agriculture

26

Case C
Change of Log GDP Per Capita [D(GP)] &VA& Log Agriculture VA Per Capita[D(AGP)]

Total Sample

D(TE)
D(AGP)D(GP)

D(AGP)

0.669

0.655

(3.01)***(3.00)***(0.31)--(2.32)**-0.055-0.073(1.63)(1.73)*

Working ratio(1.17)

Workingratio*Land p.c.

(0.32)(0.88)-0.0410.001(2.74)***(0.07)Lag D(TE)

D(GP)

D(AGP)

1.288

0.716
(3.90)***

-

-

-

-

-

(2.19)**-(2.47)**

-

-

-1.27

-

-

(2.84)***-(0.77)(0.14)-0.165--0.141-(0.96)--(1.82)*-0.156-0.097(1.48)(1.60)-0.04-(0.29)-(0.39)--(0.34)--(0.91)--(0.16)-0.078-0.008-(0.3)(2.16)**(0.34)

-

-

0.024

-0.01
-0.11

-

0.491

-0.046(0.18)

-

0.027

0.313

-

D(TE)

0.161

-0.023-0.152-D(TE)--0.158-Constant--0.116-

D(AGP)

Asia Region

1.254

0.216

Land p.c.

Crisis*Asia

D(TE)

0.026

initial AGP
Trade share

Asia Region-0.32(1.72)*

initial GP

Log Agriculture VA Per Capita [D(AGP)] – Asia
Regionper Capita [D(AGP)]-0.107-0.195--(2.11)**-(1.02)

-

-

-0.11

-1.134

0.293

0.451

0.293

-0.8571.621(2.45)**
0.302(0.18)(1.43)(2.36)(0.35)(2.54)(0.52)(2.2)(2.62)

Observations
117
117
117
64
64
64
64
64
Note: Absolute value of z statistics in parentheses. * Significant at the10% , ** significant at the5%, and *** significant at
the 1% level. Year and country dummies are included in the regression but not shown in the table.

27

TABLE 4
3SLS Estimation of Impacts of Infrastructure and Non-Infrastructure Expenditure (Total Sample)
Case A
Change of Log GDP Per Capita[D(GP)]

Case B
Change of Log Agriculture VA Per
Capita

D(GP)

D(AGP)[D(AGP)]

D(INF)
D(NetINF)
D(AGP)
initial GP

0.047(2.99)***
0.31(1.87)*
0.134(1.68)*
0.034(0.32)

D(INF)

D(NetINF)

-

-

-

-

-

-

-

Debt

0.024
(0.63)-0.04(2.02)**

Land p.c.
Working ratio
Workingratio*Land p.c.
Crisis*Asia

Constant----0.032(1.72)*Lag D(INF)
Lag D(NetINF)

-

-

-

-0.346(3.06)***-

D(INF)

D(NetINF)

-

-

-

-

-

-

-

initial AGP
Trade share

0.081(1.65)*
1.107(2.56)**

-

-

-

0.219
(1.98)**-0.049(0.57)-0.117(0.93)-0.195(0.31)-0.065(0.32)
0.005(0.21)

-

-

-

-

-

-

-

-

-

-

Case C
Change of Log GDP Per Capita [D(GP)] &Log Agriculture VA Per Capita [D(AGP)] - Total
SampleD(GP)

D(AGP)

0.031(1.42)
0.033(0.18)
0.146(0.76)
0.057(0.99)

0.064(1.65)*
1.066(2.90)***-0.01(0.25)----0.131--0.253(2.93)***(1.11)--(1.44)-0.098D(INF)

D(NetINF)

-

-

-

-

-

-

-

0.222
(2.09)**-0.059(0.78)
-

-

-

-

-

-

-

-

-

-

-

-

-

-0.098(0.83)-0.151(0.25)-0.042(3.22)***--0.048(0.24)
0.005(0.22)----0.267(3.17)***--0.101(1.49)-0.381-0.8990.655-1.816

-0.96

0.632

-0.402-1.756-0.9720.633(0.47)(1.88)(4.67)(1.93)(2.24)(5.2)(0.94)(1.94)(2.27)(5.21)

Observations
106
106
106
106
106
106
106
106
106
106
Note: Absolute value of z statistics in parentheses. * Significant at the10% , ** significant at the5%, and *** significant at the 1% level. Yearand country dummies are included in the regression but not shown in the table.

TABLE 5
3SLS Estimation of Impacts of Infrastructure and Non-Infrastructure Expenditure (Asia Region)
Case A
Change of Log GDP Per Capita[D(GP)]D(GP)
D(INF)
D(NetINF)
D(AGP)
initial GP

0.087(1.87)*
0.465(2.75)***-0.003(0.02)
0.095(1.06)

initial AGP
Trade share

D(INF)

D(NetINF)

-

-

-

-

-

-

-

-

Land p.c.

--

Working ratio

-

-

-

Crisis*Sea-0.048(1.55)---0.237(2.16)**-0.819(1.21)Lag D(INF)

0.058(0.93)
0.846(4.87)***----0.049(0.35)-0.14(2.02)**
0.052(0.43)
1.001(1.41)
0.12(0.58)
0.011(0.29)

D(INF)

D(NetINF)

-

-

-

-

-

-

Case C
Change of Log GDP Per Capita [D(GP)] &Log Agriculture VA Per Capita [D(AGP)] - Total
SampleD(GP)

D(AGP)

0.074(1.98)**
0.511(3.39)***-0.427(1.57)
0.147(1.84)*

0.074(1.38)
0.627(4.86)***

D(INF)

D(NetINF)

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-0.058(1.19)

-

-

-

-

-

-

-0.18
(1.52)-0.097(1.69)*
0.028(0.27)
0.737(1.17)---0.054(2.10)**

0.042(0.23)-0.003(0.10)--0.807-0.129(1.57)
0.556-0.237(2.16)**

0.908(2.49)(4.9)(0.77)Lag D(NetINF)
Constant

D(AGP)--0.014(0.30)-

Working ratio*Land
p.c.

Case B
Change of Log Agriculture VA Per Capita[D(AGP)]---0.896-0.129(1.57)
0.612-0.262(2.41)**-1.0821.703-0.918-0.193(2.49)**
0.624(2.78)(5.48)(1.80)(1.71)(2.85)(5.59)

Observations
61
61
61
61
61
61
61
61
61
61
Note: Absolute value of z statistics in parentheses. * Significant at the10% , ** significant at the5%, and *** significant at the 1% level. Year and country
dummies are included in the regression but not shown in the table.

29

TABLE 6
Effect of Total Public Expenditure on Growth and Poverty
D(TE)Asian sub-sample(1) Reference Growth Rate (for the firstcolumn)(2) Percent decline in poverty ratio(3) Actual/Predicted Poverty ratio(4) Difference in the number of the poor (basein no change)

Overall growth

Agricultural
growth(1) Reference Growth Rate (for the firstcolumn)(2) Percent decline in poverty ratio(3) Actual/Predicted Poverty ratio(4)Difference in the number of the poor (basein no change)NochangeReference
rate *1
-6.79
31.95

Reference
rate *1
-1.10
33.90

10%

20%

20.85% *2
-8.26
31.45

41.14% *2
-9.70
30.96

10.30

20.44

53.81% *2
-1.71
33.69

107.14% *2
-2.31
33.49

4.25

8.50

Note: *1. The reference growth rate is computed by the coefficient estimates reported earlier and mean values of explanatory
variables.
*2.
Percentage increases in comparison with the reference growth rates (Gaiha et al. 2009).

TABLE 7
Effect of Disaggregated Public Expenditure on Growth and Poverty
Asian sub-sample
Overall growth

Agricultural
growthNo change(1) Growth rate(2) Percent decline in poverty ratio(3) Actual/Predicted Poverty ratio(4) Difference in the number ofthe poor (base in no change)

Reference rate
-6.72
31.98

(1) Growth rate(2) Percent decline in poverty ratio(3) Actual/Predicted Poverty ratio(4) Difference in the number ofthe poor (base in no change)

Reference rate
-1.21
33.87

D(INF)
10%
20%
5.39
5.42
-6.76
-6.79
31.96
31.95

D(NetINF)
10%
20%
5.89
6.41
-7.40
-8.08
31.74
31.51

0.27

4.81

9.56

3.18
-1.68
33.70

4.05
-2.15
33.54

3.31

6.61

0.54

TABLE 8
Effect of Physical and Social Expenditure on Growth and Poverty
Aggregate sample - Overall growth

No change(1) Reference Growth Rate (for the first column)(2) Percent decline in poverty ratio(3) Predicted Poverty ratio

Reference rate *1-10.1930.79(4) difference in the number ofthe poor (base in no change)(1) Reference Growth Rate (for the first column)(2) Percent decline in poverty ratio(3) Predicted Poverty ratio

Reference rate *1
-8.35
31.42

D(INF)
10%
20%
*2
3.37%
6.73% *2
-10.54-10.90
30.67
30.54
2.52

5.04

3.47% *2
-8.65
31.31

6.95% *2
-8.95
31.21

(4) difference in the number ofthe poor (base in no change)
2.11
4.23
Note: *1. The reference growth rate is computed by the coefficient estimates reported earlier and mean values of explanatory
variables. The difference in reference growth rates in the two cases is mainly due to the difference in coefficient estimatesand in means of explanatory variables, averaged in 2- year and 3- year spans.
*2.
Percentage increases in comparison with the reference growth rates (Gaiha et al. 2009).

30

Figure 1 Consumption Growth in Asia

Source: The Economist (June 25th, 2009)31