one percentage point of GDP in the short term. Bose (2003) also finds that the share of government capital expenditure in GDP is positively and significantly correlated with economic growth, though current expenditure is insignificant. The study is based on a panel sample of 30 developing countries over the period between 1970 and 1990. At the sector level, government investment and total expenditures in education appeared to be the only outlays significantly associated with growth, once the budget constraint and omitted variables were taken into consideration. Analysis of both total expenditure in education and investment in education provide support to this conclusion.

However, a recent review (IMF 2004) suggests weak links between public investment growth that may be due to a number of factors, including the narrow scope of public investment as a measure of productivity-enhancing expenditure components (i.e., social spending may boost the stock and quality of human capital); the use of gross rather than net investment (i.e., gross public investment minus depreciation) imperfectly measures the net addition to the public capital stock; and physical indicators (e.g., share of paved roads) may be a better measure of productive investment, as they measure the output of public investment that may have a more direct, causal effect on growth.

_Are the key drivers of economic growth time-varying?_ In his review of the first decade of empirical research on growth in transition economies, Havrylyshyn (2001) suggests that larger samples may permit the further refinements to the general consensus, to show, for example, how some variables may be relatively important initially, but may decline in importance over time. Similarly, using larger samples, it may be possible to show how the impact of public finance may have evolved over time. A broad consensus emerged from the first decade of empirical research on growth in transition economies. Since then, some recent studies have updated the data used in the analysis through 2001 (e.g., Godoy and Stiglitz 2006) and questioned the relative importance of some of the key variables from the early literature (e.g., structural reform). Thus one possibility is the shifting relative importance of the main determinants of growth in transition economies. In particular, transition economies have made significant advances in macroeconomic stabilization and structural reform over time. This leads us to expect that the “firstgeneration” determinants of growth may have weaker impact in recent years. Where there remains an unfinished policy agenda, such as in fiscal consolidation, we would expect variables such as fiscal balances to have significantly more perceptible effects on economic growth.

_Does the size of government matter for growth?_ There appears to be no existing consensus on the appropriate size of government (see Gupta et al 2003 for a review of the literature). Nonetheless, assessing desirable levels of expenditure is critical because excessive levels of spending not aligned with available resources may lead to unsustainable deficits, which in turn may trigger macroeconomic instability (Devarajan et al 2001). In addition, some have speculated that disproportionate levels of expenditure may have adverse effects on economic growth. De la Fuente (1997) provides evidence in support of the view that government expenditures have a negative impact on income levels and growth rates. Based on the sample of selected OECD countries (two periods: 1960-1993 and 1970-1995), evidence suggests that a reduction of total government 5