Can Fiscal Stimulus Drive Inclusive Growth? Evidence from Productive Capacity and Human Development across Developed and Developing Countries

Abstract

Fiscal stimulus is crucial during economic downturns as it helps to boost aggregate demand, support job creation, and stabilize financial markets. By injecting funds into the economy, governments can promote consumer spending and investment, which can lead to a quicker recovery. The purpose of this paper is to investigate the role of fiscal stimulus in inclusive growth in developed and developing countries. General Government Expenditure and tax revenue are taken as proxies for fiscal stimulus. The Human Development Index and productive capacity index are used as proxies for inclusive growth, whereas trade, per capita GDP, and inflation are taken as explanatory variables. Data are taken from the World Bank from 2000 to 2022 for developed and developing countries. Pedroni and Kao tests and the long-run cointegration test (FMOLS). The results show that final consumption expenditure and taxes increase inclusive growth in developed countries. While in developing countries, taxes have a positive and significant effect on the productive capacity index, whereas general government expenditures have a negative but insignificant effect on productive capacity. Besides, both taxes and general government expenditure have a positive and significant effect on human development.

Keywords; Fiscal Stimulus, Inclusive Growth, Human Development, Productive Capacity