Social Spending, Human Capital, and Growth in Developing Countries: Implications for Achieving the MDGs

IMF Working Papers, November 1, 2004

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Study uses panel data from 120 developing countries covering the period 1975 to 2000.
Objective: Explore direct and indirect channels linking social spending, human capital, and growth in a system of equations.
Main conclusion: Both education and health spending contribute to accumulation of human capital and can lead to higher economic growth, but higher spending alone is not sufficient to achieve the Millennium Development Goals (MDGs).

Sample: 120 developing countries.
Time span: 1975 to 2000.
Analytical approach: System of equations to capture direct and indirect channels among social spending, human capital accumulation, and growth.

Education and health spending:
- Have a positive and significant direct impact on the accumulation of education and health capital.
- Through human capital accumulation, can lead to higher economic growth.
Complementary policy interventions that matter:
- Improving governance.
- Reducing excessive budget deficits.
- Taming inflation.
Policy trade-off:
- Higher social spending by itself is not sufficient for achieving the MDGs; complementary policies are required.

Prioritize education and health spending to enhance education and health capital accumulation, supporting higher economic growth.
Implement broader policy reforms alongside increased social spending:
- Strengthen governance frameworks.
- Manage fiscal balances to reduce excessive budget deficits.
- Stabilize macroeconomic conditions by taming inflation.
Use integrated strategies combining spending and institutional/macro policy improvements to move countries toward the MDGs.

IMF Working Paper by Emanuele Baldacci, Larry Q Cui, Benedict J. Clements, Sanjeev Gupta (November 1, 2004).