# **<u>I. COUNTRY COMPARATIVE ANALYSIS</u>**

The purpose of this section is to present some country facts and findings<sup>5</sup> that are relevant for the interpretation of the subsequent empirical results6.

First, a simple growth accounting exercise<sup>7</sup> focused on how capital, labor, and total factor productivity (TFP) have contributed to growth reveals that in the seven countries production factors, in particular capital and labor, have been the main growth drivers. However, as all of them have witnessed their economic transformation towards higher value added activities in the secondary and tertiary sectors, relying more on innovation, the contribution of TFP growth has been gradually increasing through the years<sup>8</sup> , to reach the highest levels in Korea and Singapore where it is around 25%<sup>9</sup> . These results are relevant for our analysis since, as discussed on page 6, according to growth theory, public spending could influence growth not only through labor and capital, but also through TFP.

In terms of government effectiveness<sup>10</sup> , all countries in the sample, with the exception of Indonesia, rank quite favorably when compared with the rest of the world. Many differences persist, however, notably in the functions attributed to the government, which reflect diverse economic strategies and degrees of intervention, as well as their approaches to successfully promote transparency and fight corruption. While Singapore is considered among the most effective governments in the world, with a 99.5 ranking position<sup>11</sup> and a leader fighting corruption which awards it a 98.1 ranking in 2006, Indonesia has the lowest ranking in our sample on both government effectiveness, at 43.4, and corruption control at 23.3 in 2006. All other countries are somehow in between, with Korea being the second most effective government in our sample at 82.9 and Thailand being at 64.9 in the ranking.

Regarding the size of the government budget, with the exception of Botswana, all countries in our sample have managed to keep a relatively small size of total public spending, which is below 30% of GDP<sup>12</sup> . Botswana’s ratios are not only the highest in the sample but also show an upward trend from 25.53% of GDP in the 1970s to 38.83%

> 5 See comparative tables at the end of the paper.

> 6 See individual country case studies for details.

> 7 The analysis is based on existing growth accounting data for all seven countries.

> 8 The only country where TFP growth does not appear to have increased through the years, but rather shows a downward trend, is Botswana.  Coincidentally, Botswana is the country where fewer synergies have been found with the private sector and the dependence on government spending is the strongest.

> 9 This is still lower than the average for OECD countries.

> 10 According to the KKM indicators, government effectiveness measures the quality of public services, the quality of the civil service, the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies. 11 Kray, Kauffman and Mastruzzi (KKM) indicators using a (0-100) percentile rank, World Bank.  No data exist before 1996.

> 12 The definition used here refers to the consolidated central government only, which includes the central government plus all government entities associated to it, and excludes all public spending at sub-national level, GFS IMF statistics. It was not feasible to construct a reliable database for the consolidated general government including all countries in the sample.

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