This study examines the impact of fiscal deficits on economic growth in developing
countries. Based on deduction from the relevant theoretical and empirical literature, the
study tests the following hypotheses regarding the impact of fiscal deficits on economic
growth. First, fiscal deficits have significant positive or negative impact on economic growth
in developing countries. Second, the impact of fiscal deficits on economic growth depends
on the size of deficits as a percentage of GDP – that is, there is a non-linear relationship
between fiscal deficits and economic growth. Third, the impact of fiscal deficits on
economic growth depends on the ways in which deficits are financed. Fourth, the impact of
fiscal deficits on economic growth depends on what deficit financing is used for. The study
also examines whether there are any significant regional differences in terms of the
relationship between fiscal deficits and economic growth in developing countries.
The study uses panel data for thirty-one developing countries covering the period 1972-
2001, which is analysed based on the econometric estimation of a dynamic growth model
using the Arellano and Bond (1991) generalised method of moments (GMM) technique.
Overall, the results suggest the following. First, fiscal deficits per se have no any significant
positive or negative impact on economic growth. Second, by contrast, when the deficit is
substituted by domestic and foreign financing, we find that both domestic and foreign
financing of fiscal deficits exerts a negative and statistically significant impact on economic
growth with a lag. Third, we find that both categories of economic classification of
government expenditure, namely, capital and current expenditure, have no significant
impact on economic growth. When government expenditure is disaggregated on the basis
of a functional classification, the results suggest that spending on education, defence and
economic services have positive but insignificant impact on growth, while spending on
health and general public services have positive and significant impact. Fourth, in terms of
regional differences with regard to the estimated relationships, the study finds that, while
there are some regional differences between the four different regions represented in our
sample of thirty-one developing countries - namely, Asia and the Pacific, Latin America and
the Caribbean, Middle East and North Africa, and Sub-Saharan Africa – these differences
are not statistically significant.
On the basis of these findings, the study concludes that fiscal deficits per se are not
necessarily good or bad for economic growth in developing countries; how the deficits are
financed and what they are used for matters. In addition, the study concludes that there
are no statistically significant regional differences in terms of the relationship between
fiscal deficits and economic growth in developing countries.
| Identifer | oai:union.ndltd.org:BRADFORD/oai:bradscholars.brad.ac.uk:10454/16282 |
| Date | January 2012 |
| Creators | Ruzibuka, John S. |
| Contributors | Potts, David J., Weiss, John A., Porojan, Anca, Wu, Zongmin |
| Publisher | University of Bradford, Bradford Centre for International Development. School of Social and International Studies |
| Source Sets | Bradford Scholars |
| Language | English |
| Detected Language | English |
| Type | Thesis, doctoral, PhD |
| Rights | <a rel="license" href="http://creativecommons.org/licenses/by-nc-nd/3.0/"><img alt="Creative Commons License" style="border-width:0" src="http://i.creativecommons.org/l/by-nc-nd/3.0/88x31.png" /></a><br />The University of Bradford theses are licenced under a <a rel="license" href="http://creativecommons.org/licenses/by-nc-nd/3.0/">Creative Commons Licence</a>. |
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