In addition, given the importance of good governance on the growth impact of total public spending, an index of governance is introduced. In order to assess these effects, a governance interactive variable is constructed by multiplying the selected country governance indicator by the ratio of public spending to GDP<sup>41</sup> . Finally, another innovation of this paper consists of adding a coefficient of technical efficiency<sup>42</sup> of spending, based on the notion that not all public expenditures that are executed contribute to increase the stock of human/physical capital and therefore the analysis of their potential impact on growth needs to take efficiency considerations into account<sup>43</sup> . For this purpose, an ICOR is calculated for total public investment and then multiplied by the different ratios of total public spending to GDP<sup>44</sup>

# _Expenditure Classifications_

Unlike other studies testing only the impact of public investment on growth while ignoring completely current spending, this analysis includes total public spending, capital and current, without specifically separating them. The rationale for this decision is based on the evidence that some categories of current spending items are indeed critical to ensure the profitability of investments.

For example, operations and maintenance expenditures, which are considered as current spending items, are critical to ensure the profitability of infrastructure investments since they can facilitate access and prevent accidents, permitting citizens to arrive safely to markets, schools, hospitals or any other destinations. Similarly, salaries of teachers, usually classified under the current spending rubric, are closely connected to the quality of education provided. In addition, it would not be realistic to try and isolate public investments completely since in many countries capital budgets include _de facto_ , explicitly or implicitly, salaries and current spending items.

In order to examine trade-offs across expenditure functions and categories, public expenditures are grouped according to three main different criteria. Criterion (1) corresponds to the GFS classification for functional expenditures which distinguishes among economic<sup>45</sup> and social<sup>46</sup> expenditures; the rest of the budget includes defense, general public services, and others.

> 41 Since the World Bank Kauffman-Kray-Mastruzzi indicators are not available before 1996, an index of government effectiveness, which is measured by the level of bureaucratic quality from the Political Risk Indicators database (PRS), is used since 1986.  No other governance indicators are available before that date.

> 42 This concept of efficiency is defined as an input-output concept which focuses strictly on the contribution of public spending flows to creating stocks of human/physical capital.

> 43 See Agénor, Nabli, and Yousef, 2007 for a more detailed description of this methodology.

> 44 The governance and efficiency variables are not included in the basic model of page 9.

> 45 Economic public spending includes: fuel and energy; agriculture, forestry, fishing, and hunting; mining, mineral resources, manufacturing, and construction; transportation and communication; and other economic affairs and services.  For the central government.

> 46 Social public spending includes: education; health; social security and welfare; housing and community amenities; and recreational, cultural, and religious affairs.  For the central government.

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