Determinants of public capital spending in less-developed countries

In a great majority of countries throughout the world productive gov-ernment services have declined as percentage of GDP since the 1970s. In the macroeconomic literature this is often associated with the gen-eral productivity growth decline, suggesting an important role for in-frastructure investment in economic growth. However, this also raises the question as of why public capital spending declined in so many countries. Surprisingly, hardly any research on this exists. This paper is one of the first attempts to fill this gap by testing various hypotheses that may explain the development of government capital spending us-ing panel data for 123 non-OECD countries for the period 1970–1998. Politico-institutional variables, like ideology, political cohesion, po-litical stability and political business cycles do not seem to be impor-tant when explaining government capital formation in less-developed economies. On the other hand, variables like public deficits, private investment and foreign aid are significantly related to public capital spending.