Public Security Spending and Growth

This paper is about a dynamic macroeconomic model that links the composition of public expenditures, especially public security spending, to economic growth. Public expenditures are disaggregated into current spending and capital spending on education, health, infrastructure, and health. One of the public expenditure items under the current spending component is spending on security. The model considers the importance of improved economic and political stability and reduced violence. The quality and efficiency of public and private capital are tied to the level of security. The logic of this modeling approach is that advances in national and economic security can lead to the increase in private capital investment by securing property rights and limiting uncertainties on the returns to capital investment. Additionally, higher national and economic security may increase the efficiency of resource allocation and, as a result, growth. The model is for open economies. It is assumed that the economy has a flexible exchange rate regime, and the balance of payments is cleared through adjustments in the nominal exchange rate. The model also presents the possible impacts of chancing real exchange rates and the level of private and public foreign debt. The model is in the context of the Integrated Macroeconomic Model for policy analysis, developed by Agénor, Chen, and Grimm (2004) [Agénor, Pierre-Richard, Derek Hung Chen, and Michael Grimm, ”Linking Representative Household Models with Household Surveys: A Comparison of Alternative Methodologies,” PR Working Paper No. 3343, World Bank (June 2004)] and Agenor, Bayraktar, and El Aynaoui (2008) [Agenor, P.R., N. Bayraktar, and K. El Aynaoui, “Roads out of Poverty? Assessing the Links between Aid, Public Investment, Growth, and Poverty Reduction,” Journal of Development Economics, 86 (June 2008), 277-95]. In the paper, different sets of policy experiments are presented, including reallocation of public spending to support public capital investment and security spending, and implications of improved fiscal management and a more efficient tax collection process. The applications of the model can derive policy implications useful for policymakers.