UNIVERSIDAD DE ESPECIALIDADES “ESPIRITU SANTO”

SCHOOL OF INTERNATIONAL STUDIES

TITLE: THE RELATIONSHIP BETWEEN PUBLIC SPENDING AND SOCIAL

APLICATION IN QUANTITATIVE METHODS OF RESEARCH

STUDENT’S NAME: DEMI NOBLECILLA

OCTOBER 2016
The relation between public spending and social inequality

Introduction

Between 2000 and 2010 it was established a common political trend in Latin

America, this is because 15 of 21 nations were led by progressive self-appointed

governments based their economic, social and trade policies in the doctrine of classical

Socialism, posteriori renamed “XXI Century Socialism”. In this sense, this doctrine has

reached a growing GDP index, exactly 5.4% per annum for the last decade (Arroyo &

Cossio, 2015).

Similarly, the policies implemented in the region also favored social statistics. As a

result the Gini index, which measures income inequality in a population, decreased to reach

the regional average of 0.56 (on average income inequality). Another indicator, the Human

Development Index, built with qualitative factors: quality of life, education and life

expectancy, also suffered a favorable trend, went from "low" to become a region with HDI

level "medium" thanks to a growth of 18% compared to the regional measurement made in

1999 (Banco Central del Ecuador, 2016).

The positive effects achieved by progressive governments were recognized at the

international level, so that the United Nations “UN” considered the “XXI Century

Socialism” as growth model for developing countries (Cepal, 2015). Whereas recognition

of the socialist growth model, is striking analyze why the political doctrine was and is

strongly criticized, even by international organizations such as the International Monetary

Fund IMF or the World Bank.

government, because the political and economical decisions are constructed based on the

theoretical framework of the “Twenty‐First Century Socialism”, that is a development

model sustained by the constant finding of the equality of the social classes.

Ecuador has been following the model for the last 10 years, generating politics

focused in social planes like: construction of infrastructure for less powerful social classes.

In this sense, the public spending has been the main mechanism to generate public works.

But, many sectors, opposed to the socialist ideology, consider that “a model sustained in

public spending is not efficient to create a equality society in the long term” (Cedillo,

2008).

There is skepticism when “the efficiency of public spending” is analyzed; however,

it is a proven and accepted theory, because it has demonstrated its positive impact on

society. Is important to study the theme in order to demonstrate, in a scientifically way, the

true impact of the variable public spending in the society.

The main objective of the present research paper is to demonstrate the relationship

between the public spending and social inequality, based on the Keynesian Theory, which

says: “in the time of recession, the government has the responsibility to increase the social

and economic indexes through the public spending”. For this, it will be used an quantitative

method to analyze the data from 2007 to 2015.

Keynesian theory

It was proposed by the economist John Maynard Keynes (1883-1946), who initially

focused on the determination of an equilibrium income level below full employment, and

later furthered his study in determining economic cycles (Sanchez & Bengoa, 2001). In the

first part of his research finds that in his view “a fluctuation in consumption due to

decreased savings and therefore investment”, is what determines business cycles,

explaining that these relate to changes (recession or bonanzas) in an economy.

According to Palley, (2014), one of the most important contributions to the

economy of Keynesian theory is that it explains that consumption is a key variable for the

sustainability of the economy. This variable is highly related to investment (higher

investment, greater supply) and savings (the higher the savings, higher demand), similarly,

consumption is also related to imports (by determining cash flows to abroad) and exports

(by determining cash flow into an economy) and finally, consumption is a determinant of

tax revenue (higher consumption, higher collection).

Thus, if consumption is falling, investment is reduced, saving decreases, taxes also

suffer from the same phenomenon, the monetary mass decreases and finally the the

monetary flow to the outside of the country increase. In the medium term the exports

increase by reducing local production (by falling investment). On the other hand, if

consumption increases, contrary phenomenon happens. Finally, in both cases, the variable

that is affected is the gross domestic product, an indicator that determines the level of

production that has a nation, and if this indicator divides them by the total economically
active population, you get the GDP per capita is a sample of the purchasing power of the

population (Galafassi, 2014)

Under the Keynesian theory, have been developed other studies that have attempted

to explain the various problems that have plagued the world throughout recent history, thus

they have been determined theories as IS-LM proposed by various authors. In these theories

themes as: recessions, balance of payments, monetary deficit, high inflation, social

inequality, are investigated (Matus & Rodriguez, 2012).

Keynesian theory of public expenditure

In the past it was believed that the State was not able to cover their own expenses,

including earning income from taxes or income. However, with the passing of the years, it

has proven cases of proper management of public revenues, which have not only served to

cover costs that cause public services, but also served to meet social needs, and included for

large investment projects which contribute to increased economic and living conditions

(Tadesco, 1991).

Public spending is an instrument of great importance in the economic development

of a nation, especially those nations that are in developing way and have a primary

producing economy like Ecuador (Arretche & Draibe, 2005). In such economies, the

volatility of the domestic market is determinates by the level of international prices of raw

materials, variables that fluctuate constantly, thus internally nations suffering economic

cycles that do not allow to generate long-term policies (Badillo & Mastrini, 2015). In this

sense, public spending becomes an important strategy that governments dispose to

counteract negative effects of adverse economic cycles.

public spending must implement a climate that facilitates the availability of state funds,

since it is generally believed that state monetary resources come solely from tax collection,

however, based only on the source it affects productivity and the proper performance of the

economy and to increase tax burdens that could exacerbate the negative economic cycles

(Ariza & De Oliveira, 2007).

According to the Keynesian model of growth, business cycles are explained through

the following model:

GDP = C + I + G + X − M

Note: GDP is gross domestic product; I is investment, G is public spending, X refers to the
difference between imports and exports and M is monetary mass

Figure 1: Model of economical growth

Gini index

An inequality index is a measure that summarizes how a variable is distributed

between a group of individuals. This is the case of Gini Index, which ranks among the

statistical measures to analyze the income distribution, not used as a benchmark the average

income of the -a distribution unlike the mean deviation, variance and coefficient of

variation, since its construction derived from the Lorenz curve (Delgado , 2014). This

measure was proposed in 1905 with the purpose of illustrating the unequal distribution of

health and, since its inception, its use has become popular among scholars of economic

inequality.
Figure 2: Lorenz Curve
Font: (Cepal, 2014)

The Lorenz curve is constructed by plotting the cumulative percentages of income

received by different groups of the population (Yi), with the sole condition that they are

defined with the same amplitude, in order to avoid associated with the number of

observations grouped problems each interval (Cepal, 2008). In the field of analysis of the

distribution of household income, it is common that the Lorenz curve is constructed from

data grouped in the same subsets of size 10%, called deciles of households, and different

concepts of income used for upon ordering of observations.

This research paper is based in a quantitative and correlational study of the

variables. The main objective is to determine the relationship between public spending and

social inequality from 2007 to 2015. The public spending refers to the amount of money

used by the government in the development of infrastructure and social projects. In the

other hand, social inequality is represented by the Gini index, an indicator that measures the

rank of social inequality in a nation.

The theoretical mark is constructed with the economic theory of Keynes that says

that the independent variable Public spending has an indirect relation with the dependent

variable Gini Index. This relation explains that if the Public Spending increases then the

Gini Index decreases, that is to say, public spending contributes to the social inequality gap

decreases. This is considering the hypothesis of the study, so to confirm or deny it, a

quantitative method study is proposed Pearson correlation.

The data is cataloged as “cross-sectional”, because data have been cited from a

specific period of time. In this sense, the study considers data from 2007 to 2015; the data

will be made quarterly basis. The data that serve to construct the study was collected from

government sources, and database on the website of the university.

Dependent variable: Gini Index (Social inequality)

Independent variable: Public spending

Table 1

Results of Descriptive Statistics

Figure 3
Graphic with the relationship between variables

The relationship between Public Spending and Gini Index (Social Inequality) is
linear, both variables moves in a positive direction and very strong.
Table 2.
Results of Pearson Correlation analysis

The academic statistical theory says that is sing of strong relation between variables
when the correlation coefficient is higher than 0.6. in this sense, the correlation coefficient
in table 2 is equal to 0.89, which means evidence for a very strong strength.

𝐻0 : 𝜌 = 0 → 𝑇ℎ𝑒 𝑐𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑠 𝑛𝑜𝑡 𝑠𝑖𝑔𝑛𝑖𝑓𝑖𝑐𝑎𝑛𝑡

𝐻1 : 𝜌 ≠ 0 → 𝑇ℎ𝑒 𝑐𝑜𝑟𝑟𝑒𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑠 𝑠𝑖𝑔𝑛𝑖𝑓𝑖𝑐𝑎𝑛𝑡

The P-value is equal to 0.000, therefore reject Ho, there is enough statistical
evidence in favor and the correlation is significant at 5 percentage significance level.

Regression Model
̂ = 𝜷𝟎 + 𝜷𝟏 𝑿 + 𝜺
𝒀

Where: Y= Gini Index

X= Public spending
𝛽0 = 𝐼𝑛𝑡𝑒𝑟𝑐𝑒𝑝𝑡
𝛽1 = 𝑆𝑙𝑜𝑝𝑒
𝜀 = 𝑒𝑟𝑟𝑜𝑟 𝑡𝑒𝑟𝑚 (𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙)
Table 3.
Summary of Regression

Table 4.
Correlation analysis of Gini Index and Public Spending.

𝑦̂ = −5400.926 + 661.715𝑋

The efficient of fit of this model is 0.8, which means this model is 80% of
Gini Index (Inequality) variation only.

This explain the type of the relation, one variable decreases when the other
increases. In this sense, Bo is equal to -5400.926, Public Spending and B1 is equal to
661.715 Gini Index.
Conclusion

Considering the correlation analysis using the SPSS system, the results show that
Public Spending and Gini Index are strongly correlated, because the index is 0,895, almost
1. In this sense, this result is the same cited in the literature review.

On the other hand, the regression results show that the hypothesis should be
rejected. This is explained because if the independent variable (is this case the Public
Spending) increases the dependent (Gini Index) suffers the same effect.

The correlation analysis contributes to is significant at 5% significance level. In

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