Jalles, João To a ; Pa k, Donghyun; Qu eshi, I an A.
Wo king Pape
Public e sus p i a e in es men mul iplie s in eme ging
ma ke and de eloping economies: C oss-coun y analysis
wi h a ocus on Asia
ADB Economics Wo king Pape Se ies, No. 737
P o ided in Coope a ion wi h:
Asian De elopmen Bank (ADB), Manila
Sugges ed Ci a ion: Jalles, João To a ; Pa k, Donghyun; Qu eshi, I an A. (2024) : Public e sus p i a e
in es men mul iplie s in eme ging ma ke and de eloping economies: C oss-coun y analysis wi h
a ocus on Asia, ADB Economics Wo king Pape Se ies, No. 737, Asian De elopmen Bank (ADB),
Manila,
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ADB ECONOMICS
WORKING PAPER SERIES
NO. 737
Augus 2024
Public e sus P i a e In es men Mul iplie s in Eme ging Ma ke and De eloping Economies
C oss-Coun y Analysis wi h a Focus on Asia
This pape in oduces new measu es o in es men shocks based on cyclically adjus ed in es men da a
o examine he e ec o public and p i a e in es men shocks on g ow h. Resul s sugges ha public
in es men shocks play a much g ea e ole in boos ing economic g ow h in compa ison wi h p i a e
in es men shocks. In eme ging ma ke and de eloping economies including in Asia, he g ow h esponse
o in es men shocks is posi i e and much s onge du ing ecessions compa ed wi h economic expansions.
In es men shocks also s imula e p i a e in es men and p i a e consump ion.
Abou he Asian De elopmen Bank
ADB is commi ed o achie ing a p ospe ous, inclusi e, esilien , and sus ainable Asia and he Paci ic,
while sus aining i s e o s o e adica e ex eme po e y. Es ablished in 1966, i is owned by 68 membe s
—49 om he egion. I s main ins umen s o helping i s de eloping membe coun ies a e policy dialogue,
loans, equi y in es men s, gua an ees, g an s, and echnical assis ance.
PUBLIC VERSUS PRIVATE
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DEVELOPING ECONOMIES
CROSS-COUNTRY ANALYSIS WITH A FOCUS
ON ASIA
João To a Jalles, Donghyun Pa k, and I an Qu eshi
ASIAN DEVELOPMENT BANK
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ADB Economics Wo king Pape Se ies
João To a Jalles, Donghyun Pa k,
and I an Qu eshi
No. 737 | Augus 2024
João To a Jalles ([email p o ec ed]) is a senio
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Public e sus P i a e In es men Mul iplie s
in Eme ging Ma ke and De eloping Economies:
C oss-Coun y Analysis wi h a Focus on Asia
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ABSTRACT
This pape analyzes he g ow h impac o public and p i a e in es men shocks based on
a la ge sample o eme ging and de eloping coun ies o e he pe iod 1980–2021 wi h a
pa icula ocus on he Asian egion. We de elop new measu es o in es men shocks
based on cyclically adjus ed in es men da a. Es ima ions using local p ojec ions sugges
ha public in es men shocks play a much g ea e ole in boos ing economic g ow h in
compa ison wi h p i a e in es men shocks. In eme ging ma ke and de eloping
economies (EMDEs) (including in Asia), he g ow h esponse o in es men shocks is
posi i e and much s onge in ecessions ela i e o economic expansions. Finally, public
in es men shocks in EMDE and Asian samples c owd-in p i a e in es men and p i a e
consump ion.
Keywo ds: iscal mul iplie s, public in es men , p i a e in es men
JEL codes: C33, E22, H30, H50
1. In oduc ion
Public in es men is conside ed one o he key policy le e s o os e economic g ow h,
pa icula ly in eme ging ma ke and de eloping economies (EMDEs), as i plays a i al
ole in de eloping in as uc u e, such as oads and u ili ies, which is c i ical o educing
ansac ion cos s and imp o ing e iciency (Wo ld Bank 2017). I also add esses he
ma ke ailu e o unde -in es men in a eas whe e he p i a e sec o may hesi a e o
in es due o high isks o low p i a e e u ns. Mo eo e , go e nmen in es men in heal h,
educa ion, and social se ices is pi o al o building human capi al, a key ing edien o a
p oduc i e wo k o ce and sus ainable economic g ow h.
On he o he hand, p i a e in es men is d i en by p o i mo i e, wi h e iciency and
inno a ion leading o enhanced p oduc i i y and compe i i eness. P i a e in es men in
new en u es and expansion p ojec s c ea es jobs and inc eases incomes, which, in u n,
s imula e u he consump ion and in es men . Addi ionally, p i a e in es men plays a
signi ican ole in he de elopmen o inancial ma ke s, imp o ing access o inance and
os e ing mo e in es men s. De G ego io (1992) has shown i s posi i e impac on
economic g ow h h ough mechanisms like capi al accumula ion and e iciency gains.
Agains his backd op, i is no su p ising ha a la ge economic li e a u e has
eme ged o e alua e he mac oeconomic e ec s o in es men in gene al and public
in es men in pa icula . Fi s , public in es men in building and main aining key
in as uc u e such as oads, b idges, po s, ai po s, and ene gy acili ies is essen ial.
This in as uc u e educes anspo a ion cos s, imp o es connec i i y, and enhances he
o e all business en i onmen . Fo example, he ex ensi e high-speed ail ne wo k
2
expansion o he People’s Republic o China (PRC) has no only imp o ed connec i i y
bu also spu ed economic ac i i y ac oss he coun y (Liu, Niu, and Han 2019).
Second, public in es men in educa ion and heal hca e con ibu es g ea ly o
human capi al de elopmen . Such in es men s enhance he quali y and p oduc i i y o
he wo k o ce, con ibu ing o economic g ow h (Hanushek and Woessmann 2012). Public
in es men s in educa ion played a majo ole in os e ing a highly skilled labo o ce and
inno a ion in highly success ul Asian coun ies such as he Republic o Ko ea.
Thi d, public in es men bene i s echnology and inno a ion. Go e nmen s ac oss
Asia ha e ecognized he impo ance o suppo ing echnology-in ensi e indus ies
h ough esea ch g an s and subsidies (Asian De elopmen Bank [ADB] 2018). This
app oach helped coun ies such as Singapo e become global echnology hubs.
Fou h, public in es men can s a egically add ess egional dispa i ies. By
p omo ing he de elopmen o less-de eloped a eas, i can alle ia e po e y, s imula e
economic ac i i y, and educe u al– o–u ban mig a ion (Wo ld Bank 2016). Fo ins ance,
India's in es men in u al in as uc u e and employmen gene a ion p og ams aims o
add ess egional imbalances.
Fi h, in an e a o clima e change and disas e s, public in es men in disas e
p epa edness, en i onmen al sus ainabili y, and clean ene gy in as uc u e is essen ial
o long- e m sus ainable de elopmen . Asian economies inc easingly acknowledge he
impo ance o in es ing in enewable ene gy sou ces and clima e esilience measu es
(ADB 2017).
Six h, public in es men ac s as a ca alys o p i a e sec o de elopmen .
Go e nmen s can in es in i al in as uc u e o p o ide incen i es o p i a e i ms,
3
encou aging hem o in es , expand, and c ea e jobs (Woo and Kuma 2015). This
syne gy be ween public and p i a e in es men can be a powe ul d i e o economic
de elopmen .
Se en h, public in es men in social sa e y ne s, heal hca e, and educa ion di ec ly
impac s po e y educ ion by imp o ing li ing s anda ds and c ea ing oppo uni ies o
disad an aged g oups (Kose e al. 2017). P og ams like condi ional cash ans e s in
coun ies like Indonesia and he Philippines ha e demons a ed he po e y- educ ion
po en ial o public in es men .
Finally, as Asian economies hea ily ely on in e na ional ade, public in es men
in ade- ela ed in as uc u e, such as po s and logis ics acili ies, enhances a na ion's
abili y o engage in global ade and a ac o eign in es men (ADB 2018). Examples
include he de elopmen o expo -p ocessing zones in Bangladesh and he PRC.
The empi ical es ima es o public in es men mul iplie s epo ed o da e, howe e ,
di e signi ican ly, depending on he sample o coun ies and imeline in es iga ed,
es ima ion me hodology, inco po a ion o non-linea e ec s, and iscal shock iden i ica ion
s a egies (Sec ion 2). The main p oblem in pe o ming such esea ch es s in he di icul y
o iden i ying exogenous changes in public spending ha a e unco ela ed wi h
con empo aneous mac oeconomic shocks.
Conside ing hese ca ea s, we aim o con ibu e o his li e a u e in se e al ways.
Fi s , we use upda ed da a on public (and p i a e) in es men co e ing a la ge sample o
98 EMDEs, including 20 Asian economies, o e a long- ime span, om 1980 o 2021.
P e ious gene aliza ions o esea ch ha only looked a samples o eme ging ma ke
economies o “de eloping coun ies” we e misleading. Ou esul s a e hus based on a
4
b oade , mo e he e ogeneous sample o coun ies and o e a longe ime span compa ed
o p e ious s udies, which ei he ocused on speci ic geog aphical egions, single
coun ies, o o e sho e and less ecen ime ho izons. In e alia, ou b oade sample
allows us o explo e he e ogenei y ac oss EMDEs. Second, we in oduce a new app oach
o measu ing spending shocks o public (and p i a e) in es men . Unde his app oach,
we cons uc a measu e o cyclically adjus ed eal public in es men (CAPubI) and
cyclically adjus ed eal p i a e in es men (CAP iI). Spending shocks can hen be
measu ed as la ge de ia ions om he a ia ion in hese a iables.
A e iden i ica ion o he in es men shocks, we use he local p ojec ions app oach
o Jo dà (2005) o ace ou he sho - and medium- un esponses o eal g oss domes ic
p oduc (GDP). Analyses based on local p ojec ions indica e ha public in es men
shocks enhance economic g ow h signi ican ly mo e han p i a e in es men shocks. In
EMDEs, pa icula ly in Asia, he impac o in es men shocks on g ow h is mo e
p onounced and posi i e du ing down u ns han up u ns. Mo eo e , in EMDEs o e all and
especially Asian EMDEs, public in es men shocks end o s imula e bo h p i a e
in es men and consump ion.
The es o he pape is s uc u ed as ollows. Sec ion 2 e iews he empi ical
li e a u e, wi h an emphasis on c oss-coun y s udies discussing he associa ion be ween
public and p i a e in es men shocks and mac oeconomic condi ions. Sec ion 3 p esen s
he amewo k o he iden i ica ion o public and p i a e in es men shocks, discusses
he da a and es ima ion me hodology, and compa es ou app oach o ha o p e ious
schola ly wo k. Sec ion 4 epo s he s ylized ac s while Sec ion 5 p esen s he empi ical
esul s. Sec ion 6 concludes.
11
a e discussed in mo e de ail in he nex sec ion, along wi h he new me hod de eloped in
his pape .
3. Me hodology and Da a
3.1. Cons uc ing Go e nmen Spending Shocks
A e iew o exis ing public spending shock iden i ica ion amewo ks. Se e al
s a egies ha e been de ised in he li e a u e o iden i y go e nmen spending shocks.
Among he mos widely applied me hods, an app oach based on (s uc u al) ec o
au o eg ession amewo ks elies on ecu si e iden i ica ion schemes and o he
pa ame e es ic ions wi h he assump ion ha go e nmen spending does no espond
o mac oeconomic shocks in he same pe iod (Blancha d and Pe o i 2002, Ilze zki e al.
2013). Besides he iming assump ions behind he unde lying Cholesky iden i ica ion
scheme, which a e less compelling o annual- equency da a, his app oach is agonis ic
abou an icipa ion e ec s o iscal spending.
A second app oach, by K aay (2012, 2014), is o ins umen go e nmen shocks
wi h p edic ed disbu semen s om app o ed loans om o icial c edi o s—such as he
Wo ld Bank and o he mul ila e al and bila e al aid agencies—as exogenous sou ces o
luc ua ions in go e nmen spending. This app oach is di icul o eplica e, as i equi es
a calcula ion o “p edic ed” disbu semen s o each loan, which can hen be conside ed
as exogenous spending shocks.
A hi d app oach is he “na u al expe imen ” app oach p oposed by Ba o (1981)
and u he de eloped by Ramey in subsequen pape s (Ramey and Shapi o 1998,
Ramey and Zubai y 2018). This amewo k uses luc ua ions in mili a y expendi u es o
iden i y go e nmen spending shocks. This app oach, howe e , would no wo k well o
12
EMDEs, as he mili a y spending a iable does no change much om one yea o he
nex .
Finally, in mo e ecen empi ical esea ch, Aue bach and Go odnichenko (2012a,
2012b) use o ecas e o s o examine how he iscal mul iplie a ies wi h he business
cycle in O ganisa ion o Economic Co-ope a ion and De elopmen (OECD) economies.
This measu e o go e nmen shocks is compu ed as he di e ence be ween he ac ual
public spending and he public spending expec ed p e iously by p o essional o ecas e s.
Using o ecas e o -based shocks, Abiad, Fu ce i, and Topalo a (2016) iden i y he
causal impac o highe public in es men on ou pu , p i a e in es men , unemploymen ,
and public deb a ios. The au ho s a gue ha his me hodology o e comes he obs acles
ha o en con ound he causal es ima ion o he e ec o iscal policy on economic
pe o mance. The Aue bach and Go odnichenko (AG) app oach was u ilized also in
Honda, Miyamo o, and Taniguchi (2020); Miyamo o e al. (2020); and Fu ce i e al. (2022).
This me hodology has he ad an age o o e coming he p oblem o “ iscal o esigh ”
(Fo ni and Gambe i 2010; Leepe , Rich e , and Walke 2012, Leepe , Walke , and Yang
2013; and Zee and Pappa 2017).
Public (and p i a e) spending shocks based on cyclically adjus ed public
a iables. In his pape we build on he wo k o Alesina and A dagna (2010) and o he s
ha assess he e ec s o changes in cyclically adjus ed ( iscal) a iables on g ow h. Wha
is new in ou app oach is he way in which we iden i y spending shocks o public (and
p i a e) in es men . The shock iden i ica ion amewo k in ol es se e al s eps.
Fi s , we es ima e ou pu elas ici ies o bo h public and p i a e in es men o each
coun y by eg essing he log o eal public and p i a e in es men on he log o eal GDP.
13
Es ima es a e done by o dina y leas squa es (OLS) o all coun ies wi h a leas 20
con inuous obse a ions o bo h a iables.3 Summa y s a is ics o he elas ici ies a e
shown in Appendix Table A1.
Second, we ob ain measu es o po en ial ou pu 𝐺𝐷𝑃 ia a Hod ick-P esco
(HP) il e as he baseline es ima e.4
Thi d, we compu e cyclically adjus ed eal public in es men (CAPI):
𝐶𝐴𝑃𝑢𝑏𝐼 = 𝑃𝑢𝑏𝐼
(1a)
𝐶𝐴𝑃𝑟𝑖𝐼 = 𝑃𝑟𝑖𝐼
(1b)
whe e 𝑃𝑢𝑏𝐼 is eal public in es men , 𝑃𝑟𝑖𝐼 is eal p i a e in es men , 𝜀 deno es he
ou pu elas ici ies o public in es men and 𝜀 deno e he ou pu elas ici ies o p i a e
in es men .
Fou h, we de e mine whe he o no a change in public and p i a e in es men
s ipped o business cycle in luences is la ge enough o be included in he sample used
o he econome ic analysis, and o his end, de ine public and p i a e in es men shocks
(PubIS and P iIs, espec i ely) as a measu e aking he alue o one when a coun y´s
i s di e ence o 𝐶𝐴𝑃𝑢𝑏𝐼 o 𝐶𝐴𝑃𝑟𝑖𝐼 exceeds i s coun y-speci ic mean by one s anda d
de ia ion o each coun y i:
𝑃𝑢𝑏𝐼𝑆 = 1 𝑖𝑓 𝛥𝐶𝐴𝑃𝑢𝑏𝐼 > 𝛥𝐶𝐴𝑃𝑢𝑏𝐼
+𝑆𝐷𝐶𝐴𝑃𝑢𝑏𝐼 , 0 o he wise (2a)
𝑃𝑟𝑖𝐼𝑆 = 1 𝑖𝑓 𝛥𝐶𝐴𝑃𝑟𝑖𝐼 > 𝛥𝐶𝐴𝑃𝑟𝚤𝐼
+𝑆𝐷𝐶𝐴𝑃𝑟𝑖𝐼 , 0 o he wise (2b)
3 Coun ies wi h less han 20 con inuous obse a ions we e no included in he sample going o wa d.
4 We also use Bax e -King, Ch is iano-Fi zge ald Random Walk, and he Hamil on (2018) and o he
s a is ical il e s as a obus ness check.
14
The ocus on la ge shocks (g ea e han a s anda d de ia ion) is in he spi i o
Alesina and A dagna (2010), who a gue ha , looking speci ically o he iscal con ex a
ela i ely la ge iscal adjus men s helps iden i y changes in iscal a iables ha a e policy-
induced, a he in luenced by he business cycle. This app oach also makes ou esul s
mo e obus o any impe ec ions in measu ing he e ec o he cycle on iscal a iables,
as small changes in cyclically adjus ed public and p i a e in es men a e excluded om
he econome ic analysis. In addi ion o his bina y shock a iable, we use wo e sions
o con inuous shocks based on CAPubI and CAP iI as a obus ness check: shocks based
on he g ow h a e o he CAPubI and CAP iI and shocks based on he yea ly changes in
he CAPubI and CAP iI exp essed in pe cen o GDP (winso ized o accoun o ou lie s).
3.2. Me hodological amewo k
The main hypo hesis o be es ed is whe he public and p i a e in es men shocks lead
o highe eal GDP. To es ima e he esponse o eal GDP o majo public and p i a e
in es men shocks, we ollow he local p ojec ions me hod p oposed by Jo dà (2005) o
es ima e impulse- esponse unc ions. This app oach has been ad oca ed by Aue bach
and Go odnichenko (2013) and Rome and Rome (2019) as a lexible al e na i e o
ec o au o eg essions (VAR) o es ima ion pu poses while being on simila oo ing wi h
ega ds o iden i ica ion.5
Gi en he panel da a se ing, we adop he local p ojec ions me hod o e VAR
es ima ion o he ollowing easons. Fi s , he in es men shocks om bo h public and
p i a e sec o s we’ e employing ha e been adjus ed o be independen o cu en and
5 See Plagbo g-Mølle and Wol (2021) o a discussion on he ade-o s be ween VARs and local
p ojec ions.
15
expec ed u u e mac oeconomic condi ions. Consequen ly, he e’s no need o addi ional
iden i ica ion ia cons ain s ypical in VAR models. Second, ou analysis in ol es a la ge
panel da ase wi h a ious ixed e ec s, which makes he s aigh o wa d implemen a ion
o con en ional VAR models complex. 6 In addi ion, he local p ojec ions app oach
elimina es he necessi y o es ima e equa ions o any dependen a iables o he han he
a iable o in e es , subs an ially educing he amoun o pa ame e s equi ed. Holding
o he hings cons an , local p ojec ions usually o e mo e accu a e es ima es o impulse
esponses o e sho e ime ames, which sui s ou analysis. Thi d, he local p ojec ions
me hod is pa icula ly sui ed o es ima ing nonlinea i ies, as i s applica ion is much mo e
s aigh o wa d compa ed o non-linea s uc u al VAR models, such as Ma ko -swi ching
o h eshold-VAR models.7 In ac , local p ojec ions end o be easie o implemen ela i e
o VARs when a speci ied nonlinea i y would make he in e sion o he VAR o m in o he
VMA o m di icul (Plagbo g-Mølle and Wol 2021). Las ly, he e o e m in hese panel
es ima ions is likely o be co ela ed ac oss coun ies, which is easie o handle in he
local p ojec ions me hod by ei he clus e ing s anda d e o s o using he D iscoll-K aay
(1998) s anda d e o s ha ake accoun o a bi a y co ela ions o he e o s ac oss
coun ies and ime. Agains his backg ound, he baseline speci ica ion we es ima e akes
he ollowing o m:
𝑦, −𝑦, = 𝛼+𝜏+𝛽𝑠ℎ𝑜𝑐𝑘𝑠, +𝜽𝑿𝒊,𝒕 +ε, (3)
6 I one wishes o in oduce coun y ixed e ec s in a VAR in a panel en i onmen ha is also possible, o
ins ance, by demeaning each model a iable o e ime o each coun y be o e including hem in VAR.
7 See Choi and Shin (2023) and Miyamo o e al. (2020) o he ecen applica ion o local p ojec ions o he
es ima ion o nonlinea i ies and in e ac ion e ec s o exogenous shocks using a la ge in e na ional panel
da ase —an app oach simila o ou s.
16
in which y is he dependen key economic a iable o in e es ; 𝛽 deno es he (cumula i e)
esponse o he a iable o in e es in each k yea a e he public and p i a e in es men
shocks; 𝛼, 𝜏 a e coun y and ime ixed e ec s, included o accoun o c oss-coun y
he e ogenei y and global ac o s (such as he wo ld business cycle o oil p ice
mo emen s)8; 𝑠ℎ𝑜𝑐𝑘𝑠, deno es he public o p i a e in es men shocks PubIS o P iIS ;
𝑿𝒊,𝒕 is a se a o con ol a iables including—as in Abiad, Fu ce i, and Topalo a (2016)
and Fu ce i e al. (2022)— wo lags o he shocks and wo lags o eal GDP g ow h. In he
obus ness sec ion, o add ess po en ial omi ed a iable bias, we add wo lags o CPI
in la ion and ade openness ( he sum o expo s and impo s as a sha e o GDP).9
Equa ion 3 is es ima ed using o dina y leas squa es (OLS).10 We calcula e Spa ial
Co ela ion Consis en (SCC) s anda d e o s as p oposed by D iscoll and K aay (1998).
Impulse esponse unc ions (IRFs) a e hen ob ained by plo ing he es ima ed 𝛽 o k=
0,1,...,5 wi h 90% con idence bands compu ed using he s anda d de ia ions associa ed
wi h he es ima ed coe icien s 𝛽 based on obus s anda d e o s clus e ed a he
8 The inclusion o 𝜏 con ols o c oss-sec ional dependence ha a ises om common sou ces o a ia ion
in he panel, i may also po en ially a ec he coe icien in e p e a ion by condi ioning ou he common ac o
componen o he shock se ies and i s e ec on GDP g ow h in equa ion 3. Wi h he inclusion o he 𝜏 e m,
he es ima ed impulse esponses can hus be in e p e ed as esponses o coun y-speci ic shocks ela i e
o he global.
9 The dynamics o GDP g ow h di e ac oss coun ies, so ha he lagged coe icien s di e ac oss
coun ies. We acknowledge ha he e hey a e being es ima ed as i hey we e homogeneous ac oss
coun ies. This could lead o he classic p oblem o la en he e ogenei y in lagged dependen a iables wi h
he implica ion ha he OLS consis ency condi ions a e iola ed (Pesa an and Smi h 1995). We wo k unde
he assump ion ha dynamics o he shock a iables a e indeed exogenous and in such a case, he
coe icien s will con e ge o he a e age alue among coun ies and he OLS condi ions o consis ency o
he es ima o s will be me .
10 The local p ojec ion app oach has an addi ional bene i o e au o eg essi e dis ibu ed lag models and
ec o au o eg essions in ha i does no equi e asymp o ic app oxima ions o Mon e Ca lo simula ions o
he es ima ion o con idence bands. Con idence bands, on he o he hand, a e o en bigge a longe
ho izons han hose es ima ed in ec o au o eg ession speci ica ions.
17
coun y le el. We also employ, as a obus ness check, a compa ison wi h he al e na i e
app oach o iden i ying iscal shocks using o ecas e o s.11
O he a iables used in he analysis come om he Wo ld Economic Ou look (WEO)
o he In e na ional Mone a y Fund (IMF) and he Wo ld Bank’s Wo ld De elopmen
Indica o s (WDI) da abases.
4. S ylized Fac s
In his sec ion, we e iew majo ends in public in es men . We obse e ha o EMDEs
and Asian economies, public in es men – o–GDP a io has been ela i ely s able o e
ime, wi h a median a ound 5% o GDP Figu e 1. The e a e, none heless, qui e a deg ee
o he e ogenei y as indica ed by he wide op and bo om qua iles o he dis ibu ion. This
is clea e in Figu e 2 whe e we zoom in o Asia and he Paci ic and obse e la ge public
in es men a ios in he PRC o Maldi es and low a ios in B unei Da ussalam o Pakis an.
While he e a e a ia ions ac oss coun ies and egions, some common ends can be
obse ed:
Pos -1980s decline and subsequen eco e y. Many EMDEs expe ienced a
decline in public in es men as a pe cen age o GDP du ing he 1980s and 1990s.
This end was pa ly due o s uc u al adjus men p og ams and iscal consolida ion
e o s encou aged by in e na ional inancial ins i u ions, which o en led o educed
public spending on in as uc u e. Howe e , since he ea ly 2000s, he e has been a
no iceable eco e y in public in es men le els, d i en by imp o ed iscal posi ions,
11 While he p esence o a lagged dependen a iable and coun y ixed e ec s may, in p inciple, bias he
es ima es in small samples (Nickell 1981), he leng h o he ime dimension mi iga es his conce n. The
ini e sample bias is in he o de o 1/T, whe e T in ou sample is 40. Fo obus ness, we also examine a
speci ica ion wi hou he lagged dependen a iables, which yields simila esul s.
18
inc eased access o in e na ional capi al ma ke s, and a enewed ocus on
in as uc u e de elopmen as a means o s imula ing economic g ow h.
Impac o global inancial condi ions. The global inancial en i onmen has had a
signi ican impac on public in es men ends in EMDEs. Pe iods o low global
in e es a es and high liquidi y ha e o en acili a ed inc eased public in es men
h ough easie access o in e na ional bo owing. Con e sely, inancial c ises and
igh ening condi ions ha e led o educed in es men due o capi al ou lows and
inc eased bo owing cos s.
Figu e 1: Public In es men Le el (pe cen o GDP) and G ow h (pe cen ),
1980–2019
Public in es men le el (pe cen o GDP)
A: EMDEs B: Asia
Real Public in es men g ow h (pe cen )
A: EMDEs B: Asia
2 4 6 8 10 12
1980 1990 2000 2010 2020
yea
0 5 10 15
1980 1990 2000 2010 2020
yea
-10 -5 0 5 10 15
1980 1990 2000 2010 2020
yea
-5 0 5 10 15
1980 1990 2000 2010 2020
yea
Con inued on he nex page
19
EMDEs = eme ging ma ke and de eloping economies, GDP = g oss domes ic p oduc .
No e: Solid con inuous lines deno e he median alue. Dashed lines indica e he in e qua ile anges.
Sou ces: In e na ional Mone a y Fund In es men and Capi al S ock Da ase ; Wo ld Bank’s Wo ld
De elopmen Indica o s.
Figu e 2: Public In es men in Asia and he Paci ic, by coun y, 2019
(pe cen o GDP)
AFG = A ghanis an, BAN = Bangladesh, BHU = Bhu an, BRU = B unei Da ussalam, CAM = Cambodia,
FIJ = Fiji, GDP = g oss domes ic p oduc , IND = India, INO = Indonesia, MAL = Malaysia, MLD =
Maldi es, MON = Mongolia, MYA = Myanma , NEP = Nepal, PAK = Pakis an, PHI = Philippines, PRC =
People’s Republic o China, SRI = S i Lanka, THA = Thailand, VIE = Vie Nam.
No e: The Asian De elopmen Bank’s egula ope a ions in Myanma and A ghanis an ha e been on hold
since Feb ua y and Augus 2021, espec i ely.
Sou ce: In e na ional Mone a y Fund In es men and Capi al S ock Da ase ; Wo ld Bank’s Wo ld
De elopmen Indica o s.
5. Empi ical Resul s
5.1. Baseline Es ima ion Resul s
The s a ing poin o he analysis is he es ima ion o he baseline equa ion 3 o he EMDE
sample spanning he pe iod 1980–2021 ha will unde pin he compu a ion o he impulse
esponse unc ions. Sub-samples o his g oup as well as egional b eakdowns a e also
examined. The es ima ed coe icien s o he bina y shocks o public and p i a e
in es men iden i ied in line wi h he me hodology ou lined in Sec ion 3 a e hen scaled
by he a e age a io o public (p i a e) in es men o GDP o he shock sample o p o ide
a scale in he IRFs and a mo e di ec in e p e a ion. The impulse esponses can hen be
BRU PAK INO FIJ CAM PHI VIE SRI NEP THA IND MAL AFG BAN MON MYA BHU PRC MLD
20
in e p e ed as he e ec o a one-pe cen -o -GDP unan icipa ed inc ease in public
(p i a e) in es men in yea 0 on eal GDP g ow h o e he ho izon o 5 yea s. In
in e p e ing hese esul s, i is impo an o no e ha as a as public in es men shocks
a e conce ned, hey co e shocks occu ing du ing bo h ecessions and expansions, and
hus canno be used o judge whe he coun e cyclical iscal policies a e e ec i e o no .
Figu e 3 indica es ha o he EMDE sample, public in es men shocks, on
a e age, lead o highe eal ou pu g ow h han p i a e in es men shocks. The esul s
also sugges ha bo h ypes o in es men shocks lead o g ow h esponses ha a e
highly s a is ically signi ican h oughou he IRF ho izon. A public in es men shock
(equi alen o 1% o GDP) inc eases eal GDP by abou 1.2% o e he ho izon o 5 yea s.
This is expec ed as public in es men aises ou pu h ough supply-side e ec s, he eby
boos ing po en ial ou pu , in addi ion o i s sho - un demand s imulus. In u n, a p i a e
in es men shock yields one- hi d o ha g ow h inc ease, eaching 0.4% o e he same
ho izon. A ange o obus ness checks wi h al e na i e shock de ini ions, sensi i i y
checks o model pa ame iza ion and sample composi ion, and possible bias associa ed
wi h he mu ual impac s o public and p i a e in es men , a e discussed in Sec ion 5.4,
and con i m he baseline esul s.
27
Con olling o Addi ional G ow h Sho - e m D i e s
A po en ial issue wi h he analysis is ha he esul s may su e om omi ed
a iable bias, since public and p i a e in es men p og ams may be implemen ed in
esponse o his o ical economic condi ions o in conjunc ion wi h o he mac oeconomic
policy mo es impac ing eal GDP g ow h. To sol e his issue, we b oaden he ange o
con ols o include addi ional mac oeconomic a iables ha ha e been shown o in luence
g ow h. In pa icula , we include lagged changes o (i) eal exchange a es; (ii) e ms o
ade; (iii) sho - e m in e es a es— o cap u e mone a y policy ac ions; (i ) gene al
go e nmen p ima y budge balance— o cap u e iscal policy ac ions; ( ) he Chinn-I o
index o capi al con ols.13 The indings o his analysis a e compa able o, and no
s a is ically di e en om, hose ound in he baseline speci ica ion, sugges ing ha his
sou ce o omi ed a iable bias is likely o be minimal in ou scena io (a ailable upon
eques ).
Con olling o GDP G ow h Expec a ions
Ano he possible sou ce o endogenei y issue is ha public and p i a e in es men
p og ams may be implemen ed in esponse o he plans o u u e economic g ow h. To
o e come his, we con ol o he expec ed alues in -1 o u u e eal GDP g ow h a es
o e pe iods o +k— ha is, he ime ho izon o e which he impulse esponse unc ions
a e es ima ed. These a e aken om he all issue o he IMF Wo ld Economic Ou look o
he yea -1.
13 The se ies (i)-(i ) a e aken om he IMF Wo ld Economic Ou look da abase. The Chinn-I o index is aken
om h p://web.pdx.edu/~i o/Chinn-I o_websi e.h m.
28
6. Conclusion
This pape enhances he exis ing body o esea ch by inco po a ing a mo e ex ensi e and
di e se a ay o EMDEs han p e iously analyzed, and in oducing a me hodological
app oach ha u u e esea che s can eadily eplica e and adap . We also ake a close
look a Asia and La in Ame ica. Ou indings la gely co obo a e hose o p io s udies.
Ou expansion o he coun y sample allows o an examina ion o di e ences among
a ious coun y g oups and he ole o ini ial condi ions in shaping he g ow h ou comes
o public and p i a e in es men .
F om a me hodological pe spec i e, he wide ange o public spending mul iplie
es ima es ound in he exis ing li e a u e indica es po en ial sensi i i y o he chosen
sample o coun ies and he ime ame o analysis. Ou s udy sheds ligh on his
a iabili y, speci ically wi hin he con ex o EMDEs, and con ibu es o a deepe
unde s anding o he ac o s ha con ibu e o he di e ing g ow h impac s o public and
p i a e in es men . By del ing in o hese nuances, ou esea ch con ibu es o policy
discussions on he mac oeconomic implica ions o bo h ypes o in es men . Ou
e idence highligh s he c i ical ole o iscal heal h and he e iciency o public spending in
enhancing he g ow h impac o public in es men s.
Ou indings, de i ed om local p ojec ions ac oss a wo ldwide da ase spanning
om 1980 o 2021, indica e ha public in es men exe s a s onge in luence on
economic g ow h han p i a e in es men . Speci ically, in EMDEs, a public (p i a e)
in es men shock (equi alen o 1% o GDP) inc eases eal GDP by abou 1.2% (0.4%)
o e a ho izon o 5 yea s. The g ow h impac o public in es men is, on a e age, ze o in
Asia, in con as o La in Ame ica, which sees a posi i e impac . Tha said, wi hin Asia,
29
we do obse e a posi i e g ow h esponse o public in es men shocks Sou h Asia, in
con as wi h Eas Asia whe e he e is no g ow h e ec . One possible explana ion is ha
he e u ns o public in es men in in as uc u e is highe in Sou h Asia, which has an
unde -de eloped in as uc u e compa ed o Eas Asia.
In addi ion, we ind ha expansion o public and p i a e in es men yields g ea e
bene i s unde ce ain ci cums ances. In pa icula , he e ec o public in es men in Asia
in ecessions is posi i e and signi ican . This inding s eng hens he case o expanding
iscal space du ing up u ns o secu e policy lexibili y in esponding o down u ns. Wi hou
su icien iscal space, coun ies migh ind hemsel es cons ained in pu suing
coun e cyclical iscal policies du ing ecessions. The expansion o deb du ing he
co ona i us disease (COVID-19) pandemic (Wo ld Bank 2022) means ha iscal
sus ainabili y has become e en mo e impe a i e.
30
APPENDIX
Lis o economies in he sample
Eme ging ma ke and de eloping economies (EMDEs) (98): A ghanis an, Albania, Alge ia,
Angola, A gen ina, A menia, Bangladesh, Ba bados, Benin, Bosnia and He zego ina, Bo swana,
B azil, Bulga ia, Bu kina Faso, Bu undi, Cabo Ve de, Cambodia, Came oon, Cen al A ican
Republic, Chad, Chile, People’s Republic o China, Colombia, Como os, Congo, Cos a Rica,
C oa ia, Cô e d'I oi e, Democ a ic Republic o Congo, Djibou i, Dominican Republic, Egyp ,
Equa o ial Guinea, E hiopia, Gabon, Ghana, Gua emala, Guinea, Guinea-Bissau, Guyana, Hai i,
Hondu as, Hunga y, India, Indonesia, I an, I aq, Kazakhs an, Kenya, Lao People’s Democ a ic
Republic, Lebanon, Macedonia, Madagasca , Malawi, Malaysia, Mali, Mau i ania, Mau i ius,
Mexico, Mongolia, Mo occo, Mozambique, Myanma , Namibia, Nepal, Nica agua, Nige , Nige ia,
No h Macedonia, Pakis an, Pa aguay, Pe u, Philippines, Poland, Romania, Russian Fede a ion,
Rwanda, Saudi A abia, Senegal, Se bia, Seychelles, Sie a Leone, Sou h A ica, S i Lanka, São
Tomé and P íncipe, Tajikis an, Tanzania, Thailand, Togo, Tü kiye, Uganda, Uk aine, Uni ed A ab
Emi a es, U uguay, Uzbekis an, Venezuela, Vie Nam, Yemen, Zambia.
ADB membe coun ies (20): A ghanis an, A menia, Bangladesh, Cambodia, People’s Republic
o China, India, Indonesia, Kazakhs an, Lao People’s Democ a ic Republic, Malaysia, Mongolia,
Myanma , Nepal, Pakis an, Philippines, S i Lanka, Tajikis an, Thailand, Uzbekis an, Vie Nam.14
Table A1: Summa y S a is ics o Public and P i a e In es men Elas ici ies
Public in es men
elas ici ies
P i a e In es men
elas ici ies
EMDEs
Obs. 5160 5200
Mean 1.204 1.362
SD 0.939 0.835
Min -1.391 -1.035
Max 4.812 5.84
Asia
Obs. 800 760
Mean 0.875 1.325
SD 0.504 0.384
Min
-0.038 0.622
Max 2.192 2.345
La in Ame ica
Obs. 1120 1160
Mean
1.161 1.229
SD 0.856 0.568
Min -0.071 -0.128
Max 3.422 2.281
EMDEs = eme ging ma ke and de eloping economies.
Sou ces: In e na ional Mone a y Fund In es men and Capi al S ock Da ase ; Wo ld Bank’s Wo ld
De elopmen Indica o s.
14 The Asian De elopmen Bank’s egula ope a ions in Myanma and A ghanis an ha e been on hold
since Feb ua y and Augus 2021, espec i ely.
31
Table A2: Summa y S a is ics o Public In es men Shocks
Sample Numbe
o
coun ies
Numbe o
obse a ions
when
shock=1
Mean alue o
espec i e a iable
in pe cen o GDP
when shock=1
Mean alue o
eal GDP g ow h
in pe cen when
shock=1
Mean alue o
eal GDP
g ow h pe cen
when shock=0
Public in es men shocks, based on CAP
ub
I
EMDEs
128 557 8.108 4.475 3.793
Asia
20 106 8.634 6.002 5.474
La in Ame ica
28 138 6.535 4.112 2.951
P i a e in es men shocks, based on CAP iI
EMDEs
128 544 17.94 4.713 3.761
Asia
19 89 17.966 6.083 5.509
La in Ame ica
28 136 17.969 4.598 2.904
EMDEs = eme ging ma ke and de eloping economies, GDP = g oss domes ic p oduc .
Sou ces: In e na ional Mone a y Fund In es men and Capi al S ock Da ase ; Wo ld Bank’s Wo ld
De elopmen Indica o s.
Figu e A1: G ow h E ec s o Public and P i a e In es men Shocks wi hin Asia
Public In es men
P i a e In es men
No e: =0 is he yea o he go e nmen in es men shock; =1 is he i s yea o impac . Solid black lines
deno e he esponse o a go e nmen in es men shock. Shaded a eas deno e 90% con idence bands,
based on s anda d e o s clus e ed a he coun y le el.
Sou ce: Au ho s’ calcula ions.
-1.5 -1 -.5 0 .5
0 1 2 3 4 5
yea
CAPI-HP1sd,Eas Asia Paci ic
-1 0 1 2 3
0 1 2 3 4 5
yea
CAPI-HP1sd,Sou h Asia Region
-.4 -.2 0 .2 .4 .6
0 1 2 3 4 5
yea
CAP iI-HP1sd,Eas Asia Paci ic
-.5 0 .5 1
0 1 2 3 4 5
yea
CAP iI-HP1sd,Sou h Asia Region
32
Figu e A2: G ow h E ec s o Public In es men Shocks, by Type o Expo e
A. Ag icul u al expo e s B. Me al Expo e s
C. Oil expo e s D. Ene gy expo e s
No e: =0 is he yea o he go e nmen in es men shock; =1 is he i s yea o impac . Solid black lines
deno e he esponse o a go e nmen in es men shock. Shaded a eas deno e 90% con idence bands,
based on s anda d e o s clus e ed a he coun y le el.
Sou ce: Au ho s’ calcula ions.
0 .5 1 1.5 2
0 1 2 3 4 5
yea
CAPI-HP1sd,ag
0 1 2 3 4
0 1 2 3 4 5
yea
CAPI-HP1sd,me al
-.5 0 .5 1 1.5
0 1 2 3 4 5
yea
CAPI-HP1sd,oil
-.5 0 .5 1 1.5
0 1 2 3 4 5
yea
CAPI-HP1sd,ene gy
33
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