CHAPTER ONE INTRODUCTION 1.1 Background of the Study Many developing countries are currently undergoing substantial macroeconomic adjustment. It is not clear how such programmes are affecting government expenditures and hence longer-term economic growth and poverty reduction. Thus, it is important to monitor trends in the levels and composition of government expenditures, and to assess the causes of change over time. It is even more important to analyze the relative contribution of various expenditures to production growth and poverty reduction, as this will provide important information for more efficient targeting of these limited and often declining financial resources in the future. The link between public expenditure and economic growth has attracted considerable interests on the part of economic researchers both at the theoretical as well as empirical level. Roughly speaking, one may distinguish between two opposing views: On the one hand, there is the Keynesian approach according to which government spending is an important policy tool to be used to ensure a reasonable level of economic activity; correct short-term cyclical fluctuations in aggregate expenditure (Singh and Sahni, 1984); and secure an increase in productive investment, thus providing a socially optimal direction for growth and development (Ram, 1986). The opposite view is that excessive state intervention in economic life affects growth performance in a negative way for two reasons: first, because government operations are often conducted less efficiently, they reduce the overall productivity of the economic system, second, because excessive government expenditure (usually 18 accompanied by high taxation levels) distorts economic incentives and results in suboptimal economic decisions (Barro 1990; King and Rebelo 1990).