Productive Contribution of Public Spending and Human Capital in Developing Countries Revisited: The Role of Trade Openness

Published date01 February 2022
DOI10.1177/00157325211045471
Date01 February 2022
Subject MatterOriginal Articles
Productive Contribution
of Public Spending
and Human Capital in
Developing Countries
Revisited: The Role of
Trade Openness
Thanh Dinh Su1 and Canh Phuc Nguyen1
Abstract
This study examines the catalytic role of trade openness in the relationships
between human capital and public spending and total factor productivity (TFP)
growth in 44 developing countries over the 1980–2014 period. Applying various
estimation techniques to deal with autocorrelation, heteroscedasticity and cross-
section dependence, the study finds that (a) the effect of human capital on TFP is
nonlinear, (b) government consumption positively affects TFP but military spend-
ing is a negative factor and (c) trade openness significantly improves the positive
influences of these factors on TFP. The results imply the important role of trade
liberalisation in productivity evolution in developing countries.
JEL Codes: F43, H52, O47
Keywords
Public spending, human capital, trade openness, total factor productivity,
developing countries
Original Article
1 School of Public Finance, University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam.
Corresponding author:
Canh Phuc Nguyen, School of Public Finance, University of Economics Ho Chi Minh City,
Ho Chi Minh City (700000), Vietnam.
E-mail: canhnguyen@ueh.edu.vn
Foreign Trade Review
57(1) 66–84, 2022
© 2021 Indian Institute of
Foreign Trade
Reprints and permissions:
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DOI: 10.1177/00157325211045471
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Dinh Su and Phuc Nguyen 67
Introduction
Total factor productivity (TFP) is a basic concept of the production function and
is considered a critical determinant for long-term growth (Mankiw et al., 1992).
The literature shows that the main drivers of TFP growth are often categorised into
groups: (a) technology and innovation (Baum et al., 2018), (b) financial develop-
ment and capital investment, including government spending (Zhang & Liu,
2017), (c) labour quality, human capital and knowledge spillovers (Männasoo et
al., 2018), (d) institutions and public governance (d’Agostino & Scarlato, 2019)
and (e) economic openness and knowledge absorption (Bresnahan et al. 2016).
However, little attention has been paid to the catalytic role of economic openness
through trade liberalisation on productivity growth.
According to trade theories, international trade relates positively to productivity
growth via enhancing technology progress, innovation and knowledge absorption
(Yanikkaya, 2003). It is clear that the concept of trade openness corresponds to trade
liberalisation. Therefore, trade openness involving changes in trade policy helps
measure the linkages between types of trade orientation and growth (Sheikh & Malik,
2021; Shuaibu, 2021). However, the links between public spending and human capital
with productivity under the evolution of trade activities are ignored in the literature.
Based on the foundation of technology progress, innovation and knowledge
absorption from trade activities, this study assumes that the positive gains from
trade openness in technology, innovation and knowledge would help to enhance
the contributions of public spending and human capital towards productivity
growth. Specifically, this study investigates the influences on productivity growth
of government expenditure on social welfare, the military and human capital, with
a focus on the catalyst role of trade openness, in 44 developing countries over the
period 1980–2014. Trade openness is used as a proxy for trade policy to investi-
gate its impact on productivity growth and to examine its role in shaping the
effects of human capital and public spending on productivity growth. This implies
that higher trade openness increases productivity growth as suggested by Miller
and Upadhyay (2000). We find that higher trade openness reduces the reverse
effect of public spending and human capital expenditure on productivity growth.
The structure of this study is organised as follows. Second section reviews the
literature on trade openness, public spending, enhancing human capital and
productivity growth. Third section presents a standard equation for productivity
growth and describes the data sources. Fourth section details the estimation
results and the discussion. Last section describes the conclusions reached from
our findings.
Literature Review
Our study is associated with research on trade openness, public spending, human
capital and productivity growth. Similar studies consist of Miller and Upadhyay
(2000) for developed and developing countries, and Rath and Parida (2014) for
the South Asian Region, based on the hypothesis that international trade improves

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