Understanding and quantifying those effects remains important from a policy perspective, particularly in view of the fact that fiscal adjustments in some countries have led, in practice, to large reductions in public spending, in order to achieve certain fiscal targets<sup>2</sup> (see Calderón, Easterly, and Servén, 2004, for the case of Latin America). In that respect, it is not clear whether such reductions have contributed to higher growth by promoting macroeconomic stability or, on the contrary, they have hampered it by leading to excessive cuts in some productive components of public spending. It is also plausible that both effects could have occurred simultaneously.

The goal of this paper is to understand better, at the empirical level, how public spending contributes to growth by focusing on both the level and composition of public spending, in connection to the dynamics of GDP per capita growth. It attempts to answer two specific questions: (a) What are the policy conditions under which public spending contributes positively to growth?, and (b) What are the public spending components that have a stronger and longer-lasting impact on growth?

The analysis is applied to a sample of seven fast-growing developing countries: Korea, Singapore, Malaysia, Thailand, Indonesia, Botswana, and Mauritius, which have been among the top performers in the world in terms of GDP per capita growth during the period (1960-2006)<sup>3</sup> .

The rationale for this country sample selection is twofold. The first hypothesis is that, given their positive growth achievements over a relatively long time period, perhaps it is more straightforward to establish a link to public spending in those countries. Second, it is expected that the findings of the analysis will provide lessons regarding the level and composition of public spending that can be useful for other countries where growth has been less rapid. Assessing what role public spending has played in a dynamic growth context may indeed be enlightening for other cases as well.

The paper is structured as follows. The first section is an introduction that provides relevant facts and information about the seven countries during the period of analysis, based on seven individual country case studies<sup>4</sup> . Section II presents the theoretical background behind the empirical analysis. Section III focuses on the empirical methodology, function specification, and variables selected. Section IV is dedicated to the results obtained with the cross-country analysis and some specific country results, as well as some comparisons with previous findings by other authors. Finally, Section V draws policy implications and concludes.

> 2 Although fiscal adjustment could have taken place by creating fiscal space through the revenue side of the government equation, for example by raising additional tax revenues, the fact of the matter is that in some countries particular spending categories have been actually reduced to meet the fiscal balance target.

> 3 All the countries selected in the sample have sustained GDP per capita growth rates of at least 3% (by decade average) during 1960-2006.

> 4 For the country case analysis and the comparative study conclusions see “How Public Spending Can Help you Grow.  Lessons from Seven Fast Growing Countries”, Moreno-Dodson, forthcoming 2008.

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