Economics, Management, and Financial Markets 12(2), 2017 [622295]

149

Economics, Management, and Financial Markets 12(2), 2017
pp. 149–159, ISSN 1842 -3191, eISSN 1938 -212X

PUBLIC INVESTMENT EXPENDITURES – LEVER OF
BUDGETARY POLICY IN ECONOMIC DEVELOPMENT:
EMPIRICAL EVIDENCE FROM ROMANIA

ADINA VIOLETA TRANDA FIR
adina.tr [anonimizat]
Spiru Haret University
MIHAELA BEBEȘELEA
[anonimizat]
Spiru Haret University

ABSTRACT. Economic growth requires improving the quality of life indicators
through a more efficient use of economic resources. Economic growth involves
capital accumulation, allowing the ex tension of production and the incorporation of
new and more efficient technologies which are likely to increase aggregate production
and hence, living standards. But economic growth requires not only mechanical
accumulation of capital, but also its wise in vestment. That is why public investments
have most importance because they have special impact on economic development.
The empirical research that the authors achieve in this article aims to show how, in
the period 2005 –2014, public investment expenditure s, as part of fiscal policy,
influenced the economic development in Romania, both by gross capital formation,
and the quality of its investment. In order to achieve this objective we used an
econometric model based on simple regression function. The empiri cal results
indicate that 63.72% of the variation in gross capital formation is explained by the
changing investment expenditure, and its low efficiency investment.
JEL codes: H11; H23

Keywords: economic development; investment expenditure; public debt

1. Introduction

Budgetary policy is the policy of the economic relations, in cash, that arise in
the process of distribution of GDP, in connection with implementation of
state functions and tasks (Zai, 2014: 114).

150 Budgetary policy expresses budgetary choi ces of a political decision
center (governmental, local authorities, supranational authority), that targets
finalities of economic and social objectives (Mo șteanu, 2003: 30).
Budgetary policy has an important role in achieving economic and social
policies, and financially, in mobilizing and directing financial resources
necessary to carry out the functions and role of the state. At the same time it
is an impo rtant stabilizer of the economy contributing to economic and
social development of society in general. The objective of budgetary policy
is the use of public expenditures and revenues to change the overall macro –
economic balance to ensure economic develop ment in conditions of stability.
It should be noted that fiscal policy should be designed as a component of
financial policy, together with fiscal policy which is in a state of joinder and
strong mutual interactions.
Budgetary policy instruments are public expenditures. Public expenditures
refer to economic and social relations in cash, which occur between the state,
on the one hand, and natural and legal persons on the other hand, in the
division and use of state financial resources in order to fulfill its functions
(Zai, 2014 : 115).
If judged by their effect on social and economic life public expenditures
could be sorted into three groups: negative expenditure, positive expenditure
and neut ral expenditure (Tridimas, 2001: 301). Negative expenditures are
effectively and definitively consumption of national income and have no
further effect on future GDP. They are the living expenses of the state
apparatus, maintenance and army; interests paid on foreign borrowings of
the state etc., and are also called actu al expenses.
Positive expenditures are made both in the economic field (various
investment by state subsidizing certain activities of operators, etc.) and in the
social and cultural field (which, in one way or another, affect future growth,
even if their e ffects do not take material form in the immediate future:
education, health or investment expenses), with more remote or more distant
effects on economic growth.
Neutral expenditure is not an actual consumption of GDP, but it has no
influence on its furthe r growth, it includes different social spending, internal
public debt interest payment, etc.
Based on this classification of public expenditure, accepted by the modern
conception of public finances, in our research we ask whether public
investment expendit ures in Romania respect this theoretical classification of
positive expenditure, with effect on economic development.
The domain of public investments is of most importance because of the
impact they have on economic development.
Public investment is argue d to induce an increase in the rate of return to
private capital and, thereby, to stimulate private investment expenditure
(Aschauer, 1989: 190).

151 Investment is the “engine” of economic growth process, ensuring the
normal functioning of the national econom y (Diaconu & Ursache, 2015 : 43).
Although theoretically demonstrated, the positive effect of public investment
on growth does not always find its reflection in empirical results. The most
important failure of public investment decision, because of the seri ousness of
its effects, is corruption. Corruption manifests, in particular, when allocating
public funds for investments and it affects infrastructure investment (Seme –
nescu, 2008 : 101).
It manifests in the present economic growth through a poor use of th e
existing public investment, but also in the future one, due to inadequate
allocation of public resources for future investment (Mauro, 1995 : 695).
Public investment expenditures include, according to the budget classifi –
cation, capital expenditures (no n-financial assets), projects financed by
external funds post accession, expenditures programs with reimbursable
financing, capital transfers, and other transfers in the form of investment.
In our survey public investment expenditures are analyzed syntheti cally
and globally, but not analytically on every component category. The paper is
organized in three sections: Section 1 (Introduction) is a literature review,
Section 2 describes the research methodology and model. Section 3 presents
the empirical result s of estimating the theoretical relationship between public
investment expenditures and economic growth. In addition, the results of this
paper allow answering to our research question, whether public investment
expenditures in Romania respect the theoreti cal classification of positive
expenditure, with effect on economic development. Section 4 concludes the
paper and presents the research findings.

2. Research M ethodology and Model

The methodology used in research helps us to reach our aim, therefore it
depends on the object of research.
According to the purpose, in our researches we used a combination of
theoretical and empirical research methods, as follows:
 Exploratory research for identifying the investigated hypothesis,
respec tively testing the gener al connections existing among public
investment expenditures, as lever to budgetary policy and economic
development.
 Tool (Empirical) research .

Data
To inspect the effect of budgetary policy on economic development in
Romania throughout the period (2005 –2014) by utilizing the data of the

152 annual reports of the Romanian Ministry of Finance, General Budget Depart –
ment, Department of Statistics and National Institute of Statistics’ data.

Model Specification
To analyze the impact of budgetary policy (here we studied the dynamics
of investment expenditures) on macroeconomic development (represented by
gross capital formation) in our country, we used an econometric model based
on simple regression function.
Measuring the parameters of the linear model was made by least squares,
and the values resulting features can be estimated based on the relationship:
X Y

Where:
Y – is the dependent variable
X – is the independent variable
α, β – are the parameters of the equation.
To facilitate the determination of linear regression model Eviews infor –
mation package was used.
In the constructed model the variables considered are:
 The dependent variable: gr oss capital formation, denoted “ GFC” (Gross
Formation of Capital)
 The independent variable: i nvestment expenditure, denoted “ Invest –
ment_Expenditures”
The linear regression equation would be:

Where:
 GFC (Gross Formation of Capital) is the dependent variable
 Investment_Expenditures is th e independent variable
 c(1) and c(2) are the parameters of the equation
Descriptive research tracks the evolution in time of the public investment
expenditure in total government expenditures and of the gross capital
formation.
Explanatory research aimed a t studying the causes that explain the slow
economic growth. Confirmation or conclusive research aims at testing the
hypothesis authors.

3. Empirical E vidence

3.1. Descriptive analysis
Investment expenditures play a central role in macroeconomic activity affect –
ing both short -run business cycles and long -run economic growth. These ex –
penditures reflect the general act of investment involving foregoing current

153 satisfaction to produce capital goods and are officially measured by gross
private domestic inv estment. These are one of the four expenditures on gross
domestic product. The other three are consumption expenditures, government
purchases, and net exports.

Figure 1 Evolution of public investment expenditures in Romania

Source: Own p rocessing of the data from Romania ’s General Consolidated Budget

Figure 2 The evolution of the gross capital formation in Romania

Source: Own processing based on the National Institute of Statistics’ data

The analysis of statistics on capital accumula tion notice that Romania
recorded an upward trend in terms of gross capital formation. In 2008 we
accumulated capital with the highest rate.
Moreover, as is clear from the chart of the evolution of public investment
expenditures made by state, they were on an upward trend in recent years,
compared to the peak reached in 2008.
But why, if we draw the line, the general welfare increase so slowly?
Solving the paradox lies in the principles set out at the beginning. It is not

154 only the amount of capital, but als o the quality of investment. Public invest –
ments ought to play their lever anti -crisis program and give oxygen to the
economy.
Nevertheless, if we consider the average share of public investment in
GDP, investment figures for the last ten years, showed th at Romania was
ranked second place among EU (Eurostat, 2015), quality infrastructure puts
us on the penultimate position within the same group of countries (before
Bulgaria)1, which reflect the low efficiency of these expenditures (Annual
Report of Fiscal Council, 2014: 74 –75). Thus, according to the Glo bal
Competitiveness Report 2014 –2015 Romania ranks 882 (in 144 countries) in
terms of overall quality of infrastructure, and ranks 1213 (in 144 countries) in
quality of roads.

Figure 3 The Global Competitiv eness Index 2014 –2015: Infrastructure

Source: Own processing of the data from The Global Competitiveness Report 2014 –2015,
available at: [http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014 –
15.pdf]

1A better position compared with the assessment in previous report ( last place after Bulgaria ).
2A better position compared with the assessment in previous report (p lace106/148 ).
3An advance of position 145/148 from previous report .

155 Figure 4 The Global Competitiveness In dex 2014 –2015: Quality of roads

Source: Own processing of the data from The Glo bal Competitiveness Report 2014 –2015,
available at: [http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014 –
15.pdf]

3.2. Results
Descriptive statistics of the vari ables used in the econometric model is
presented in the table below :

Table 1 Descriptive statistics of the variables
Sample: 2005 2014
GFC INVESTMENT_EXPEN –
DITURES
Mean 126451.5 29163.30
Median 129930.3 33824.50
Maximum 161944 .4 39762.00
Minimum 67286.60 8561.000
Std. Dev. 29187.41 10991.76
Skewness -0.769103 -1.159992
Kurtosis 2.828847 2.745327

Jarque -Bera 0.998072 2.269662
Probability 0.607116 0.321476

Sum 1264515. 291633.0
Sum Sq. Dev. 7.67E+09 1.09E+09

Observations 10 10
Source: Own processing of data with Eviews

156 To highlight the association variables used in econometric calculation, we
determined the correlations matrix between two variables of the equation.

Table 2 The correlation matrix of variables
GFC INVESTMENT_
EXPENDITURES
GFC 1.000000 0.798254
INVESTMENT_
EXPENDITURES 0.798254 1.000000
Source: Own processing of data with Eviews

As it can be seen from the correlati on matrix (Table no. 2) there is a positive
relationship b etween the independent variable –investment expenditu res and
the dependent variable –gross capital formation.

3.3. The Research of Hypothesis Test
To identify the connection form of the variables was generated a graph of
pairs of p oints: investment expenditures –gross capital formation.

Figure 5 Diagram Investment expenditures vs. Gross capital formation
50001000015000200002500030000350004000045000
40000 80000 120000 160000 200000
GFCINVESTMENT_EXPENDITURESINVESTMENT_EXPENDITURES vs. GFC

Source: Own processing of data with Eviews

The pairs of points on the graph are located, as cloud of points, around a line ,
thus the analysis of researched phenomenon using simple linear regression
model being possible.
The coefficient of determination for the regression denotes that 63.72%
of the variation of gross c apital formation is explained by the changing
investment expenditure.
After econometric calculations, the following results were obtained, using
Eviews:

157 Table 3 The characteristics of the regression model
Dependent Variable: GFC
Method: Lea st Squares
Sample: 2005 2014
Included observations: 10
GFC=C(1)+C(2)*INVESTMENT_EXPENDITURES
Coefficient Std. Error t-Statistic Prob.
C(1) 64634.76 17513.55 3.690557 0.0061
C(2) 2.119676 0.565473 3.748502 0.0056
R-squared 0.637209 Mean depend ent var 126451.5
Adjusted R –
squared 0.591860 S.D. dependent var 29187.41
S.E. of
regression 18646.62 Akaike info criterion 22.68157
Sum squared
resid 2.78E+09 Schwarz criterion 22.74209
Log
likelihood -111.4079 Durbin -Watson stat 1.4524 59
Source: Own processing of data with Eviews

It results that a simple linear regression model reflecting the relationship
between investment expenditures values and gross capital formation is as
follows:

Investment expenditures are an e xtremely important factor for the evolution
of gross capital formation. That because an increase with 1 million of invest –
ment expenditures will get an increase with 2.12 million of gross capital
formation.

7. Conclusion, Limitations and Future Research

Economically speaking, the correlation between investment expenditures and
gross capital formation is positive, as indicated previously by econometric
calculations. It means that investment expenditures have a major impact on
the economic environment, in general and on the business sector in particular ,
with significant impact on attracting foreign capital, which is reflected by the
level of foreign direct investment in the economy.
But in Romania, although the figures for the share of investment expen –
ditures in GDP are above the EU average (Eurostat, 2015), the slow growth
of general welfare, reflected in the overall quality of infrastructure and roads,
highlights the low efficiency of this expenditure. Why? Because of the cor-
ruption of the political c lass that (1) cultivated speculation in the detriment

158 of judicious investment, (2) favored a bankrupt entrepreneurial class, (3)
maintained irrational public investment (including EU funds).
We definitely need increased investment, not the growth of a stat istical
aggregate, but truly productive investment.
The results of this research allowed us to answer to our research question,
respectively whether public investment expenditures in Romania respect or
not the theoretical classification of positive expendi ture, with effect on
economic development. They come from positive expenditure and negative
expenditure, in other words they represent e ffectively and definitively an
“expense” (consumption) of the national income which does have not a
subsequent and posit ive effect on economic development.
Mismanagement of public investment and lack of a transparent system
for prioritizing investments were all characteristics indicated in reports by
experts of the International Monetary Fund and World Bank.
Once the necess ary legal framework was created (OUG no. 88/2013 and
Government Decision no. 225/2014), the public investment management
reform began by substantially increasing the funds allocated for financing
European projects and significant public investment prioriti zation was
introduced as well.
In order to prioritize public investment it was proposed to establish quan –
tifiable assessment criteria and to analyze sustainability and affordability of
new investment projects.
Thus, by creating the legal framework in 201 3 progress in line of public
investment management reform was made, but achieving the intended benefits
still remains a desideratum.
The evaluation of results should consider a longer period since the effects
of the new legal framework have not materialize d, Romania being at the
beginning of the implementation of public investment management reform
and the adoption of the best practices at European level.

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