The Quality of Governance, Composition of Public Expenditures, and Economic Growth: An Empirical Analysis

This dissertation seeks to analyze, both theoretically and empirically, the impact of quality of governance on growth by looking at various dimensions of the concept of governance. We use a dynamic panel estimator and various indicators of governance to estimate the impact of governance on growth. Our empirical results suggest a positive and statistically significant impact of governance on growth. The second part of the analysis looks at a possible transmission mechanism of the effect of governance on growth through the composition of expenditures. As such, we estimate a seemingly unrelated regressions (SUR) model with shares of three functional categories of public expenditures – education, health, and defense – in total spending as the dependent variables. We find that high quality governance leads to a higher share of education and health expenditures and a lower share of defense expenditures in total expenditures. Further, we examine the impact of governance of public capital spending. Our empirical results from this analysis suggest that high quality governance is associated with a smaller share of capital expenditures in total expenditure