from government savings and borrowing (see Giavazzi and Blanchard (2004))<sup>83</sup> . A common criticism of this rule is that it is vulnerable to creative accounting.

Another important limitation, as implied by our results, is that a preferential treatment of physical investment could bias expenditure decisions against spending on other potentially productive components, such as current expenditures in education and health—with therefore a detrimental effect on growth. Moreover, some components of current spending, such as maintenance of roads, schools, and hospitals, may be equally important to maintain the quality of the services financed by public capital. Our results regarding the growth effects of total (capital and current) public spending on education and health support this view. The key question therefore is where to “draw the line” in the design of growth-enhancing fiscal rules.

Our analysis has been mainly “positive”, trying to explain what happened in the seven selected countries during the period of analysis. If we now attempt to modestly move to a rather “normative” mode, trying to explore the lessons that these seven fast growing countries could offer to other parts of the world, several conclusions can be drawn. Based on qualitative facts and the empirical results, it would be fair to say that public spending exerts a positive impact on GDP per capita growth in a policy context where:

- Macroeconomic stability is sustained.

- The size of the government budget remains relatively small<sup>84</sup> in order to avoid jeopardizing fiscal stability and government effectiveness<sup>85</sup> .

- The composition of public spending evolves as growth dynamics unfold to focus on those productive sectors/activities that are more conducive to growth.  In this respect, policy makers should plan and implement jointly social and economic spending, as part of an integrated strategy, and attempt to gradually reduce allocations to unproductive spending—despite the fact that distinguishing _a priori_ between productive and unproductive outlays may not always be easy.

- The government continues relying on the private domestic sector and foreign transactions (for example imports of capital goods), in order to leverage domestic human and physical capital, and to allow public spending to focus on sectors/activities where it is contributing to growth the most<sup>86</sup> .

> 83 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.

> 84 This result is consistent with Barro’s 1990 model and Tanzi’s 2008 conclusions (see page 9).

> 85 Although the empirical analysis does not demonstrate it, the qualitative country case studies indicate how essential it is that temporary increases in government spending (for countercyclical purposes, industrial policy interventionist episodes, crisis recovery, or others) do not undermine government effectiveness, transparency, and good governance.

> 86 This implication is derived from the significance found for the variables private sector investment and openness with respect to growth, in addition to the positive effect of productive public spending.

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