Special for the Armenian Weekly
Public spending programs have the potential to level the playing field by broadening access to basic services for disadvantaged groups. The extent to which these programs succeed depends on the distribution of benefits across income groups. A fiscal program can be considered progressive if the benefits accrue disproportionately to poorer households; it is regressive if the benefits accrue disproportionately to the rich. Shifting the types of spending can magnify the inclusive impact of total spending at no additional cost by simply raising the share of benefits provided to the poor.
Government spending on education, health, and infrastructure can have an inclusive growth impact in developing countries. Public investment in infrastructure supports growth but does not appear to reduce income inequality. On the other hand, education and healthcare directly improve human welfare. Further, education and health are significant determinants of an individual’s earning potential. This is especially true for the poor, who have limited financial means. Better educated and healthier workers are more likely to find a job and earn higher wages. Educational attainment and health status can be major sources of income inequality when there is unequal access to these two social services. High-income groups can afford private education and healthcare, whereas low-income groups cannot.
Public spending on education
Government spending on education is rising as a percentage of GDP in many economies in developing Asia (see Figure 1). Asia’s rising educational investment is part of a broader trend among developing countries, which have embarked on reforms to expand the availability of education, achieve equity in access, and significantly raise the quality of education. Unfortunately, that has not been the case in Armenia, where spending as a percentage of GDP has not increased during the last 10 years even though the dollar amount of spending has increased.
Typically children in the lowest income group are more likely to be out of school than those in the highest income group. Similarly, there are wide gaps in access to secondary schooling. The percentage of out-of-school youth of secondary school age from families in the lowest income group is much higher than their counterparts in the richest group. Results of some studies indicate that an increase in public spending on primary education tends to benefit the poorest, but spending on secondary schooling mainly benefits the richest, as most of the time poor youth must work to support their family; therefore, they do not have an opportunity to even attend secondary schools.
One important caveat is that many jobs these days require at least a secondary education. Technical and vocational education that teaches students the practical skills and knowledge that employers demand is especially valuable.
Public spending on healthcare
Like education, healthcare services enhance welfare, and public spending on healthcare has a positive effect on the poor. Figure 2 shows government spending on healthcare services on the rise across developing Asia. Data indicate that Armenia had a slight decrease in government spending on healthcare services as a percentage of the GDP over the last 10 years. In comparison to other developing countries in Asia, the Armenian government’s spending on healthcare services is at the lower end of the spending range, percentage-wise.
A 1 percent increase in public spending on healthcare reduces the child mortality rate in society as a whole. The relationship between public health spending and health status of the poor tends to be stronger in low-income countries. This effect is compounded in terms of the absolute number of lives saved when taking into account low-income countries’ higher child mortality rates.
The poor in developing Asian countries live under health conditions that are inferior to those enjoyed by people with higher incomes. In Cambodia, Indonesia, Nepal, and the Philippines, mortality rates for children under the age of 5 in the poorest 20 percent of the population are more than twice those for the wealthiest 20 percent. However, as data in Figure 3 show, Armenia has a low mortality rate and the rate is not significantly different between poor and rich.
While more than 60 percent of women in the highest income groups in some countries such as Lao, Nepal, and Pakistan give birth attended by skilled health personnel, the corresponding share in the lowest quintile is less than 20 percent. However, in other countries such as Armenia, Uzbekistan, and Kazakhstan, there is no difference between poor and rich; almost all births are attended by skilled health personnel.
Public spending on healthcare also raises the effective income of the poor and protects them from financial risks. Improved health can enable them to lead more productive lives in school and work. By the same token, health deficiencies can make the poor more vulnerable, generating a vicious cycle of poor health and poor income. Household spending on a member’s health crisis can drive poor households deeper into poverty or tip the near-poor into poverty.
Public spending on infrastructure
Governments tend to be smaller in developing countries than in advanced economies and, consequently, spending on infrastructure as a ratio to GDP is lower in developing economies. Good infrastructure supports economic growth for several reasons. A good road network and a reliable electricity supply raise productivity across industries and firms, hence for the economy as a whole. In addition, infrastructure-dependent trade offers large potential gains both within an economy and across borders. Results of past projects support the view that infrastructure investment boosts growth, especially in developing countries with modest infrastructure.
Several large-scale infrastructure projects are ongoing, just completed, or planned in Armenia. The largest one is the North–South Road Corridor construction project. The third phase of this project, which was recently approved, is $500 million for the reconstruction and widening of a 46 km 2-lane road between Talin and Gyumri. This project is financed by the Asian Development Bank and European Investment Bank. The first phase of this project was $60 million; the second phase $170 million. Developing an efficient, safe, and sustainable road network in the country will support economic growth and regional cooperation.
Approximately $50 million was spent on the second phase of an expansion project at Zvartnots Airport. Since the country is landlocked, Armenia depends significantly on air transport for its linkages to the outside world. The project has resulted in the airport registering 12 percent more passengers and aircraft movement and 9 percent more cargo tonnage per month, on average. Sixty-six million dollars will be spent to rehabilitate the Sevan–Hrazdan hydropower system.
Public spending and fiscal sustainability
Public spending can promote more inclusive growth, but increased spending could jeopardize fiscal sustainability and macroeconomic stability if not balanced by increased revenues. In comparison to few years ago, as in the developed world, the fiscal position of developing countries in Asia, including Armenia, has weakened since the global crisis forced governments to implement fiscal stimuli to prop up demand and encourage growth during the crisis. Figure 4 shows the ratio of debt to GDP for some countries in Asia. These ratios compare favorably with that of other regions and the world as a whole. Exceptions are some larger economies, such as India and Pakistan, that run large deficits. These countries need to make concerted efforts to improve their fiscal health and secure the finances required to invest in inclusive growth. The deficit in Armenia is about 40 percent of GDP, which could be considered average for a developing country; however, given the weak industrial base and lack of natural resources, 40 percent should be considered high for Armenia.
While it may seem that Armenia has sufficient fiscal space to expand government expenditure for inclusive growth, current fiscal space is no guarantee of future fiscal space. The size and mix of fiscal expenditures reflect income levels and economic structures that necessarily evolve over time. Armenia and many other developing centuries face potentially significant fiscal demands from a wide range of structural challenges. For one, as income rises, public spending and government size tend to rise, too. This is one of the reasons why governments are larger in advanced economies than in developing countries: Demand for many public services rises with income. Demand for a cleaner environment, for example, tends to intensify with higher average incomes; a better-off populace, therefore, may expect its government to invest more public resources to protect the environment.
Public spending in the future
The single biggest social and economic shift facing developing Asia as well as Armenia is the aging population. A low birthrate and longer life span is shifting Armenia toward an older population distribution. Demographic structures affect public spending because the beneficiaries are often children and the elderly.
As populations age from 2010-50, public spending on education in Armenia is expected to decline from 2.8 percent of the GDP to approximately 1.9 percent. The percentages for Azerbaijan are almost the same for both 2010 and 2050, but the absolute values spent on education are higher due to the higher GDP. Public spending on education in Georgia has been about 2.9 percent of the GDP, but it is projected that this level will be reduced to about 2.5 percent. The projected decline in education spending is driven by fertility decline and the consequent decline in the school-aged share of the population.
Projected health spending contrasts dramatically with projected education spending. Unlike for education, demographic change and economic growth both push healthcare spending higher. As populations age, the share of the older age groups increases, and they require higher healthcare spending. At the same time, higher per capita income should push per capita spending on healthcare higher. It is projected that public spending for healthcare in Armenia will have increased by 50 percent in 2050 relative to 2010. By comparison, the increase in Georgia will be only 20 percent; in Azerbaijan, it would almost double.
Aging causes the biggest fiscal impact on social security and welfare expenditures. Figure 5 shows that social security and welfare spending varies considerably from country to country, currently and in the future. Armenia has the highest public spending per GDP percentage among its neighbors, and is much higher than other similar developing countries.
Asian Development Outlook 2014 Fiscal Policy for Inclusive Growth, Philippines: Asian Development Bank (ADB), 2014.
Tiongson, E. 2005. Education Policy Reforms. In Paternostro, S. and A. Coudouel, Eds., Analyzing the Distributional Impact of Reforms: A Practitioner’s Guide to Trade, Monetary and Exchange Rate Policy, Utility Provision, Agricultural Markets, Land Policy, and Education. Washington, DC: World Bank.
World Health Organization. 2013. World Health Statistics. Geneva.
International Monetary Fund (IMF) 2013. Fiscal Monitor, October 2013, Washington, DC.