Public Finance, Governance, and Growth in Transition Economies : Empirical Evidence from 1992-2004

31 Pages Posted: 20 Apr 2016

See all articles by Taras Pushak

Taras Pushak

World Bank

Erwin R. Tiongson

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS); Institute for the Study of Labor (IZA); University College London - CReAM - Centre for Research and Analysis of Migration; Asian Institute of Management

Aristomene Varoudakis

Organization for Economic Co-Operation and Development (OECD) - Development Centre (DEV)

Date Written: 06/01/2007

Abstract

This paper revisits the early empirical literature on economic growth in transition economies, with particular focus on fiscal policy variables-fiscal balance and the size of government. The baseline model uses a parsimonious specification, drawn from Fischer and Sahay (2000), of economic growth as a function of initial conditions, stabilization, liberalization, and structural reform. The paper expands the data used in previous analyses by up to 10 years and finds unambiguous evidence that fiscal balance matters for growth, while confirming other previous findings on the correlates of economic growth in transition economies. In addition, the paper extends the baseline model and explores potential sources of nonlinearities in the relationship between growth and public finance. A key finding is that determinants of growth may vary in relative importance, depending on the underlying institutional quality. The evidence indicates that there could be higher growth payoffs from macroeconomic stability and public expenditure in countries characterized by relatively better public sector governance as measured by relevant indicators. In addition, the size of government matters for growth in a nonlinear manner: Beyond indicative thresholds of expenditure levels, public spending has a negative impact, while at levels below the threshold, there is no measurable impact on economic growth.

Keywords: Public Sector Expenditure Analysis&Management, Governance Indicators, Pro-Poor Growth and Inequality, National Governance, Macroeconomic Management

Suggested Citation

Pushak, Taras and Tiongson, Erwin R. and Varoudakis, Aristomene, Public Finance, Governance, and Growth in Transition Economies : Empirical Evidence from 1992-2004 (06/01/2007). World Bank Policy Research Working Paper No. 4255, Available at SSRN: https://ssrn.com/abstract=995076

Taras Pushak

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Erwin R. Tiongson

Georgetown University - Edmund A. Walsh School of Foreign Service (SFS) ( email )

Washington, DC 20057
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University College London - CReAM - Centre for Research and Analysis of Migration ( email )

Drayton House
30 Gordon Street
London, WC1H 0AX
United Kingdom

Asian Institute of Management ( email )

123 Paseo de Roxas
Makati, 1260
Philippines

Aristomene Varoudakis (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Development Centre (DEV) ( email )

94, rue Chardon Lagache
Paris, 75775
France

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