Our overall conclusion therefore is that public spending can be a significant determinant of growth through its productive and “core” components, which are also likely to impact the production function of the private sector. Another outcome of the analysis is that inconsistent results in previous empirical analyses that linked public spending and economic growth may be explained by the selection of countries included.

These results have important implications for the current debate about the design of fiscal rules in a growth context. Many developing countries, under a “Golden Rule” approach, are trying to maintain a balance or surplus in their current spending budget while capital spending is being financed increasingly by borrowing.<sup>44</sup> In addition to the creative accounting, negative incentives and budget fragmentation distortions that this can trigger,<sup>45</sup> this rule does not take into account possible interactions among sectoral categories of public spending regardless of whether they correspond to capital or current items.

Our analysis indicates that, the bulk of public expenditures in productive and “core” sectors, which consist of a combination of current and capital spending on infrastructure, health, education, and other economic sectors that are critical for development, can have a significant joint impact on growth. For policy makers, this result implies that planning and executing public spending in those sectors in an integrated manner, taking into account inter-linkages among them and their current and capital components, should be conducive to growth.

It is important, however, to notice that, in order to be able to draw recommendations regarding the composition of public spending at the country level in connection with growth, the conclusions of this cross-country study should be followed by additional individual country empirical studies which should consider country specific characteristics affecting the public spending composition as well as other determinants of growth.

The definitions of productive and “core” spending suggested in this paper should be, therefore, tailored and adapted at the individual country level. For example, in a country where agriculture still represents a high percentage of total GDP, public spending in irrigation, rural infrastructure, and rural energy should be considered _a priori_ as “core”, while in other countries heavily dependent on exports of mineral products and energy, public funds allocated to that sector should be included _a priori_ in the “core” spending group.

> 44 More precisely, under the Blanchard-Giavazzi rule, governments should borrow in net terms on a continuous basis only to the extent that this net borrowing finances net public investment, that is, gross investment less capital depreciation (which counts as current spending). This rule therefore would allow gross borrowing for the purpose of refinancing maturing debt, thereby leaving net debt unaffected.

> 45 It is possible that some public investments, for example in hospitals or in schools, may be fully funded without the current expenses for staff, operations and maintenance. Given that these current expenses are essential to ensure the good functioning of capital goods, absence of such current expenditures complementing capital spending may result in a liability for the country in the end, with doubtful effects on growth.

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