Many researchers have attempted to examine the effect of government expenditure on economic growth. For instance, Donald N.B (1993) investigated the differential effects of various forms of expenditures on economic growth for a sample of 58 countries. Their findings indicated that government expenditures on education and defense have positive influence on economic growth, while expenditure on welfare has insignificant negative impact on economic growth.
Niloy B, (2003) used a disaggregated approach to investigate the impact of public expenditure on economic growth for 30 developing countries in 1970s and 1980s. The authors confirmed that government capital expenditure in GDP has a significant positive association with economic growth, but the share of government current expenditure in GDP was shown to be insignificant in explaining economic growth. At the sectoral level, government investment and expenditure on education are the only variables that had significant effect on economic growth, especially when budget constraint and omitted variables are included.
The causal relationship between educational expenditures and school enrolment continues to attract the attention of many. However, despite decades of intensive study, there is no general consensus regarding the effectiveness of monetary educational inputs for student outcomes (Anyanwu, 1998). In particular, papers that summarize the debate on the effects of public education expenditures often advocate conflicting views. For example, Card and Krueger (1996), Greenwald et al. (1996), and Krueger (2003) are in favour of the effectiveness of public education expenditures; Betts (1996), and Hanushek (1986, 1997, 2003), and Al-Samarrai (2003, 2006) cast doubt on the conclusion of these researchers, with the latter asserting that education expenditures negatively and significantly affect educational access and performance.
In the mid-1990s, a number of studies have investigated the effectiveness of public spending in education such as enrolment rates and other outcome indicators (Anand and Ravallion, 1993; Appleton et.al.1996; Filmer and Pritchett, 1997; Mingat and Tan, 1998; Gupta et.al., 2002; Baldacci et.al., 2004; among others). The results of these cross country regressions are mixed. Based on cross-sectional data for developing countries, Baldacci et al. (2003) and Gupta et al. (2002) find that social spending is an important determinant of education outcomes. These studies find that the effect of social spending on education outcomes is stronger in cross-sectional samples than when the time dimension is also added. They also find that education spending has a greater effect on social indicators than health outlays. The positive effect of social spending on social indicators is also supported by Anand and Ravallion (1993), Psacharopoulos (1994), Hojman (1996), Bidani and Ravallion (1997), Lopes 2002), and Psacharopoulos and Patrinos (2002).
However, after correcting for quality, Gallagher (1993) finds that public spending has a positive impact on educational attainment. A similar analysis at the state level in India has been carried out by Kaur and Misra (2003). For 15 non-special category states, their empirical findings from a panel data analysis of social sector expenditure and attainment indicates that public expenditure on education has been more productive as compared to health, and this relationship is stronger for relatively poorer states.
At the same time, a number of studies have found insignificant or very weak linkages between public education outlays and education indicators ((Noss (1991), Mingat and Tan (1992 and 1998), and Flug, Spilimbergo, and Wachtenheim (1998)). Other variables such as per capita income, urbanization, demographic profile as well as income inequality also turn out to be statistically significant in cross-country regressions. Anand and Ravallion’s (1993) empirical results indicated that there was no significant relationship between education outcomes and public spending on education.
McMahon (1999) finds a negative and significant relationship between per pupil expenditures and the primary gross enrolment rate, and a positive and significant impact of total education expenditure as a proportion of GNP. The results of the McMahon study suggest that increasing primary education expenditure while holding per pupil expenditures constant, has a positive and significant impact on the primary gross enrolment rate. However, this study does not include income per capita as a separate explanatory variable, and it may be the case that these resource variables are proxying for income per capita. The Colclough with Lewin (1993) study includes an income per capita variable, and finds that expenditure as a proportion of GNP is not significant when entered separately.
The relationship between educational outcomes and resources thus varies across studies, and where resources are statistically significant the direction of the relationship is often counter-intuitive. This cross-country evidence mirrors the micro-based evidence, particularly from the United States, which shows the lack of a systematic and consistent link between resources and achievement (Hanushek, 1996). It has been argued, however, that there may be a slightly stronger link between resources and achievement in developing countries, because education systems in developing countries tend to be so severely under-resourced compared to developed countries that marginal increases in resourcing are likely to have much larger impacts on education outcomes than in developed countries. Reviews of the micro-based literature do suggest that a greater proportion of studies in developing countries report a positive impact on education achievement than in developed countries (Hanushek, 1995, 1996).
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