Public Expenditures, Growth, and Poverty: Lessons from Developing Countries (review)

The introductory chapter begins by noting that "More than 1 billion people around the globe still live on less than US$1 a day as measured in purchasing power parity in 2001. Over the past 20 years, rapid economic growth in East Asia has reduced the total number of poor people from 800 million in 1981 to 270 million in 2001. In South Asia, during the same period the total number of poor people declined only marginally, from 480 million to 430 million." (p. 1). Furthermore, on both economic and moral grounds, currently practised policies and programmes aimed at poverty reduction are not sufficient to reduce human deprivation to more acceptable levels. "It is obvious, therefore, that a 'business as usual' approach is wholly inadequate. Instead, a more effective poverty alleviation strategy is urgently required in recognition of the fact that persistent poverty and malnutrition result in irreversible costs to human and economic development." (p. 1).

Coady and Fan make numerous key points about using public resources as a core to alleviation strategies. They point out that public resources must be used efficiently and "[t]his requires appropriate recognition of the existing administrative and institutional constrains in developing countries and the fact that capacity can be built up only gradually" (p. 9). They argue that more effective ways of delivering public resources must be constructed and this means improving the abilities of community, non-governmental and private entities (supported by the state), and making certain that public projects are operationally and financially feasible and sustainable.

They make the important point that micro resource allocations must be made within a strategy that takes a macro focus. Their point is that "[a]lthough government expenditures are allocated to different sectors to achieve specific social or economic development objectives, their impact often goes beyond the targeted sector through their general equilibrium and economy wide effects. While adopting an economy wide approach is very data intensive and requires complicated modeling, … it is important to understand how much bias will occur if general equilibrium effects are ignored." (p. 14).

The volume's introduction provides a carefully thought-out foundation upon which six additional scholars join Coady and Fan in collectively producing chapters that focus on trends in, and the impact of public spending in developing countries; public investment's impact on growth and rural poverty; human capital expenditures aimed at the poor; social safety nets; and a special look at public spending, growth and poverty in sub Saharan Africa (where the number of poor has almost doubled, from 160 million in 1981 to more than 300 million in 2001.

The chapter by Fan, Bingxin Yu, and Anuja Saurkar "highlight major trends in, and the composition of government expenditures … across developing regions of African, Asia, and Latin America" (p. 21). It analyses the determinants of the composition of government expenditures, the effects of such expenditures on gross domestic product, and how the expenditures impact agricultural growth and therefore rural poverty reduction. Their methodology requires a basic understanding of economic theory. However, those who wish to read the book while not having this background will nevertheless gain insights because the co-authors offer a readable narrative that captures the essence of the book's more technical work.

That essence is sixfold. First, returns from public investments vary widely across different types of investments and regions including within the same country. Second, agricultural research, education and rural infrastructure are the three types of public spending that are most likely to promote agricultural growth and reduce poverty. Third, often the lower quality or lower cost types of infrastructure projects yield the highest pay-off per unit. Fourth, trade-offs between agriculture growth and poverty reduction are generally small and they also have urban growth and poverty reduction spillovers (a reason to adhere to a macro focus). Fifth, direct public spending on anti-poverty programmes generally have limited success in reducing poverty because such programmes are inefficiently administered, faulty in...