8. Inter-Sectoral Allocation Choices

This chapter addresses the impact of the composition of expenditures and the design of programs on the effectiveness of government expenditures. No clear empirical relationship has been found between growth and public expenditures. This may be due to differences in the efficacy of expenditure programs across countries, differences that are not reflected in expenditure data. If spending has not been implemented efficiently, or allocated optimally across spending categories, it may be possible to increase growth and welfare by redesigning spending programs, or shifting spending from one sector to another. This chapter also identifies specific problems and constraints that are likely to hinder the success of spending programs, so have implications for the choice and design of spending priorities. Although there are no universal rules, a review of the empirical evidence suggests that high priority should be assigned to develop an effective legal system to protect and enforce property rights, effective financial regulations, and maintenance of existing infrastructure. Spending priority should also be given to improvements in the quality and quantity of primary education and basic health care, water and sanitation, and well-targeted consumption subsidy programs for the very poor.