WHEN IS PUBLIC EXPENDITURE PRO-POOR?
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growth spells from 387 to 153. Nonetheless, our smaller sample still covers all the major developing regions. Included are 13 countries in Eastern Europe and Central Asia, 10 in Latin America, 5 in the Middle East and North Africa, 4 in East Asia, and 2 in South Asia. Lesotho is the only country in Sub-Saharan Africa remaining in the sample. Since the data maintain their breadth in coverage, we are confident that our results are not purely attributable to any regional effects. As with our results in table 1, we do not find effects of the level of spending on poverty reduction in columns (1)–(4). Indeed, the joint significance tests for the levels variables have very high p-values (0.62–0.90), indicating that these variables contribute almost nothing to the regressions. The interactions between spending levels and changes in income, however, are jointly highly significant in all specifications, regardless of whether we include the level of spending multiplied by the time difference of spending (columns 1–3) or the more appropriate time difference in the product of income and spending levels (columns 4–6). We also find that the changes in spending levels are jointly highly significant in all specifications in which they enter (columns 3–6). Let us consider our preferred specification. Somewhat surprisingly, the change in core social spending is not significantly related to poverty reduction or to the income elasticity. This is unexpected because the categories that make up this spending are often seen as highly pro-poor. The signs of the coefficients do indicate that an increase in core social spending reduces the poverty rate, while it diminishes the sensitivity of poverty to growth. Spending on security, by contrast, does appear to reduce poverty significantly while at the same time making poverty less responsive to income changes. (Both effects are significant at the 10 percent level.) This is a striking result even if it is only borderline significant, as it is often assumed that security expenditures are highly regressive; the finding surely merits greater exploration. But a great part of the action comes from the effects of noncore social spending and economic spending. Both of these increase the level of poverty but also increase the sensitivity of poverty to growth. (All effects for these two variables are significant at 1 percent.) Spending on general public services has an insignificant and numerically small effect on the change in poverty, both directly and through the multiplicative interaction. Also consistent with the results of table 1, we find no evidence of significant effects of spending on change in inequality, suggesting that we can treat the evolution of inequality as given.
Construction of Indicator To interpret these effects more carefully, recall that, as we showed in equations (5) and (8), our preferred specifications have a representation in levels, which can be expressed succinctly as: pt ⫽ c ⫹ ␣1t ⫹ ␣2yt ⫹ ␣3Gt ⫹ ␣41Et11 ⫹ . . . ⫹ ␣4nEtn ⫹ ␣11Et11yt ⫹ . . . ⫹ ␣5nEtnyt, (9) so that the effect of a particular category of spending on the level of poverty is given by: dpt ⫽ ␣4i ⫹ ␣5i yt ⬍ 0. dEti