Research project:
The relationship between: the annual growth rate of GDP per capita and the public expenditure in Latin America.

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My goal for this research project is to examine the relationships that exists in between the annual growth rate per capita and public expenditure in Latin America. What I wanted to see is if a higher growth rate of GDP meant that a higher percentage was spent in the public sector. Data was gathered from the ECLAC, The World Bank and also the International Monetary Fund.

Introduction The reason I was very attracted in this research is because as someone born in South America and lately Latin America has been doing better than before, and visiting South America the past year I have seen how infrastructure has improved lately so I was very interested in seeing how big of a role public expenditure plays in countries that are developing. Expenditure on welfare, health and education are an essential part of what governments do to enhance the quality of life of their citizens and the human capital base of their societies. My focus on public and social expenditure in Latin America is mainly guided by the concern of how Governments utilizes existing policies and seeing how these theories and policies have helped increase Latin America’s GDP. In Latin America we find a great variation in social policy regimes; ranging from Uruguay and Argentina, where a large majority of the population is covered by social policy and has decent education and health services, to El Salvador and Guatemala, where social policy and quality of education and health services does not have a big reach or covers the majority of the population.
Public expenditure is and has been very important for the economies of every country because, it has a big role in the determination of level of income and it’s distribution. Public expenditure can be used as a sort of lever to raise aggregate demand and also can be managed to check inflation. It also helps improve the income distribution; an issue that is very big in Latin America because after all, Latin America is the most unequal region in the world.
Social spending in Latin America is rising, but the region still needs to improve the quantity and quality of publicly provided goods and services. More money matters, but how that money is spent matters as much or even more.
Research
The data used in this project was relatively easy to find due to the fact that all this information is collected mostly every year by different organizations.
The data for both variables were from the year 2010, because that was the latest year that data was available for both variables, out of nineteen countries that correspond to or what is considered Latin America, I decided to use these eighteen countries: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, Uruguay and Venezuela with Cuba being left aside because there was a lack of data available for it.
For the variables I utilized the GDP growth rate for the year 2010 as my independent variable, GDP is all the finished goods and services produced within a country's borders in a specific time period, on an annual basis.
Even though a lot of economists say that GDP is not the best way to measure the growth and well being of a country, because it pretty much only measures good and services, it is the best option that was available for me to use.
For the dependent variable I used social/public spending for the year 2010, public spending is broken down into various sectors following the International Monetary Fund’s Government Finance Statistics (GFS) Yearbook sectors. The six sectors are: Six sectors: agriculture, defense, education, health, social security, transportation and communication.
The data for the GDP growth and social expenditure were both easily found at CEPAL’s: Statistical Yearbook for Latin America and the Caribbean.
Literature reviews Most of my research was focused on literature reviews that talked mostly about Public Spending because in all the literature papers I reviewed GDP was involved in association with public spending, besides the fact that GDP growth and the data and what do they mean and how a country grows is very basic. One of the first papers I found upon my research was: Latin America the social contract: Patterns of social spending and taxation. By Karla Breceda, Jamele Rigolini and Jaime Saavedra. In which they argue how before the left leaning governments entered Latin America there was this sort of pro-cyclical and very up to par with usually what a economy will run if they are either running a deficit or not. But after left leaning Governments all over Latin America have taken over we have started to see that public spending is not necessarily pro-cyclical but rather most of the time has been running counter cyclical, meaning that governments in Latin America are trying to help the economy grow most of the time and they try to pump money into the economy. And that’s why we have seen a growth in Latin America for the past 15 years. What I found very surprising in this study is that when they studied each sector by itself they found a negative correlation between spending in education and the youth population attending school in the rural areas. Meaning that while governments spent more money on education less kids where being registered in school. It is interesting because you would think otherwise if it were better for students to study and have better infrastructure and technology in school, why aren’t they attending school, because governments like the Brazilian one has implemented help and incentives to increase the probability of kids going to school instead of working on the streets i.e. the bolsa familia. Another, relevant literature paper that was related to my topic was written by the IMF. Which takes a look at the trends and public expenditure since 1990, this paper is also very relevant to my research because besides the fact that this paper also talks about the pro and counter cyclicality of public spending, but it also compares the region of Latin America to the rest of the developing countries, the comparison states that the region is “The share of countries where spending is pro-cyclical is higher in Latin America than for developing countries as a whole”. Which is also why we have seen a fast grow in comparison to other developing countries. We can also see for example in this literature review about public expenditure that countries such as Ecuador, Venezuela, Bolivia, etc. Which have left leaning governments have been allocating more and more of their budgets into public expenditure and also seeing a higher GDP growth in comparison to the rest of the countries in Latin America. I also looked on how the people benefited from this social spending, the following chart, with data from the ECLAC showed me how the richest and the poorest benefit from the public expenditure.

As you can see by the graph it shows what one of my other literature reviews was talking about, that governments are spending in education more for the poor people, at least for the primary education, what is not shown in this chart is that people that aren’t registering as much as they should be, it is a very low percentage of people that is at least primary education. And subsequently you can see how for secondary and tertiary education the benefits and also the allocation of resources from the government decrease in the poorest quintile in comparison to the richest quintile that will benefit from secondary and tertiary education more.

Regression and Analysis
The regression I ran consisted of the independent variable: GDP growth percentage and the independent variable social spending.

The R2 value is at a mid-low 0.0415, which indicates that there is some relation between the variables, but it isn’t strong enough. Given that my literature reviews and their findings I was expecting a somewhat high correlation of at least a 0.6 correlation. The t-statistic of 0.83 displays that the relationship is not statistically significant. As you can see in the graph below, there is a big outlier in this data, which is Brazil.

As I removed the big outlier from the data and ran the regression again the result was pretty much the same. R2 did go up a little to 0.0422 but it didn’t make as big of a difference as I thought it would have been, because as soon as I removed Brazil from the data, it was immediately replaced by the next biggest country which was Mexico and when I tried moving Mexico out of the data, Mexico was replaced by Chile. Therefore there was no big change when it came to removing outliers. Also the plot of residuals is more of a homoscedastic since we see them distributed evenly and not too widely spread. As you can see by the following graph:

GDP growth rate and public expenditure in Latin America do not have a very high correlation. They do show that it does have somewhat of an effect in the countries but is not significant enough. This may be due to the fact that not much of the budget is allocated for public expenditure even though it has been increasing for the past ten years, especially when left leaning governments have taken over.
Also you can see that sometimes there is no relationship whatsoever for example Paraguay, who is the second lowest when it comes to public spending, has the highest growth rate in the entire region, there are obviously other factors that are nit taken into account when it comes to this data so it may not have anything to do with public expenditure, also Paraguay is a fairly small country, therefore not having a big economy.
Also there is a very big gap when it comes to the countries , there are the bigger countries who have excelled and prioritize what they are really good at and produce it, such as Brazil, Mexico, Chile, Argentina, and then there are the countries in the lower spectrum like El Salvador and Nicaragua.
Overall I think if I had to choose another variable I would have chosen a very specific sector of public spending, such as education to have a better idea of what impact a very specific public expenditure would have had in the GDP.

Data appendix public expenditure | GDP | Countries | | | 90 499.8 | 8.2 | Argentina | | | 3 153.0 | 2.5 | Bolivia (Plurinational State of) | 32 804.0 | 4.8 | Chile | | | 45 444.7 | 2.5 | Colombia | | | 9 249.3 | 3.5 | Costa Rica | | | 15 391.4 | 1.8 | Ecuador | | | 3 381.6 | 0.8 | El Salvador | | | 8 928.9 | 0.4 | Guatemala | | | 3 382.3 | 1.7 | Honduras | | | 1 753.1 | 2.0 | Nicaragua | | | 3 753.5 | 4.1 | Panama | | | 2 749.8 | 11.2 | Paraguay | | | 27 030.0 | 7.3 | Peru | | | 9 984.4 | 6.9 | Dominican Republic | | 7 292.7 | 8.1 | Uruguay | | | 32 707.9 | - 3.0 | Venezuela (Bolivarian Republic of) | | | | | | | | | | |
Bibliography

Clements, Benedict. Faircloth, Christopher. Verhoeven, Marjin. “Public expenditure in Latin America: trends and key policy issues” IMF Working Paper WP 07/21: 36.

Karla Breceda, Jamele Rigolini and Jaime Saavedra “Latin America and the Social Contract: Patterns of Social Spending and Taxation” Population and Development Review Vol. 35, No. 4 (Dec., 2009) , pp. 721-748

Rodriguez, Diego. Aguilera, Juan. Granados R. “Gasto publico y crecimiento economico, un studio empirico para America Latina. Cuadernos de Economia 32(59), (2013).

Tsounta, Evridiki, and Anayochukwu Osueke. "What Is behind Latin America's Declining Income inequality." IMF Working Paper WP 14/24 (2014): 35.

Profeta, Paola, Riccardo Puglisi, and Simona Scabrosetti. 2013. "Does Democracy Affect Taxation and Government Spending? Evidence from Developing Countries." Journal Of Comparative Economics 41, no. 3: 684-718. EconLit, EBSCOhost (accessed March 10, 2015).

"Statistical Yearbook for Latin America and the Caribbean 2014." Statistical Yearbook for Latin America and the Caribbean 2014. Accessed March 10, 2015.

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[ 1 ]. Rodriguez, Diego. Aguilera, Juan. Granados R. “Gasto publico y crecimiento economico, un studio empirico para America Latina. Cuadernos de Economia 32(59), (2013).
[ 2 ]. Tsounta, Evridiki, and Anayochukwu Osueke. "What Is behind Latin America's Declining Income
[ 3 ]. Karla Breceda, Jamele Rigolini and Jaime Saavedra “Latin America and the Social Contract: Patterns of Social Spending and Taxation” Population and Development Review Vol. 35, No. 4 (Dec., 2009) , pp. 721-748
[ 4 ]. Clements, Benedict. Faircloth, Christopher. Verhoeven, Marjin. “Public expenditure in Latin America: trends and key 2policy issues” IMF Working Paper WP 07/21: 36.
[ 5 ]. Rodriguez, Diego. Aguilera, Juan. Granados R. “Gasto publico y crecimiento economico, un studio empirico para America Latina. Cuadernos de Economia 32(59), (2013).
[ 6 ]. As of December, 31st 2010
[ 7 ]. Both data tables were per capita to assure a better and fare comparison.