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Economics of Governance (2006) 7: 167193 DOI 10.1007/s10101-005-0002-8
ORIGINAL PAPER
Jos Pineda Francisco Rodrguez
Received: 2 September 2003 / Accepted: 12 December 2004 Published online: 5 April 2006 Springer-Verlag 2006
Abstract Investments in human capital accumulation, government consumption and total government expenditures present a striking negative correlation with capital shares. This correlation is robust to alternative specications, lists of controls, and exclusion of outliers. Causality tests strongly support the hypothesis that the direction of causation runs from capital shares to the government spending variables. We present a political economy model of interest groups that can account for these correlations. In contrast, a median voter model predicts positive correlations between capital shares and the government spending variables.
1. Introduction
Differences in rates of investment in human capital across countries are substantial. While Haiti, Guatemala and Indonesia all spend less than 3% of their GDP in education and health expenditures, most OECD countries as well as some developing countries such as Costa Rica and Panama devote more than a 10% of GDP to it. These differences have potentially vast implications for economic growth and welfare. 1 What are their sources? Can they be accounted for by variations in economic structure, or do differences in the political process across countries also matter?
This paper is an attempt to contribute to our understanding of why some societies devote more resources to investment in human capital than others. Our focus will be on the role that politics play in the determination of public investment in human capital. The strategy will
J. Pineda
Corporacin Andina de Fomento, Dynamic equity limited, 9296 st. vincent street, Port of Spain, Trinidad
F. Rodrguez(B)
Centro de Polticas Pblicas, Instituto de Estudios Superiores de Administracin, IESA POBA International #646, PO Box 025255, Miami, FL, 33102-5255, USAe-mail: [email protected]
1 Many cross-country regressions nd the effect of the stock of human capital on economic growth to be signicantly correlated with growth. For summaries of these results see Barro and Sala-i-Martin (1995), Barro (1997), and Aghion and Howitt (1998). This issue is, however, controversial; see in particular the views of Pritchett (1996) and Easterly (2001).
The political economy of investment in human capital
168 Economics of Governance (2006) 7: 167193
Fig. 1 Partial correlation between public spending on education...