Public Expenditure Allocation and Rural Poverty : Rural Latin America, 1985-2004

This paper examines the effects of public provision of private goods (i.e., non-social government subsidies) to the detriment of government provision of public goods and social subsidies on two key measures of the quality of economic growth: poverty rates and income inequality. We use a new data set on public expenditure allocations in the rural sector of fifteen Latin American countries that permits us to separate government expenditures into public goods and social subsidies from expenditures in private goods. This paper tests two hypotheses. A higher private goods to public goods expenditure ratio tends to: (i) worsen poverty and (ii) increase income inequality. We develop a theoretical model which predicts that increasing the public provision of private goods, ceteris paribus, leads to more poverty and greater income inequality. The empirical analysis shows that decreasing the share of subsidies to private goods in the government's public expenditure budget has a significant positive effect on poverty reduction and lessens the income gap between rich and poor. In fact, reallocating public expenditure from subsidizing private goods to providing public goods given a fixed budget has a greater impact to alleviate poverty and reduce income inequality than simply increasing total public expenditure