More on the effectiveness of public spending on health care and education: a Tcovariance structure model

Using data for a sample of developing countries and transition economies, this paper estimates the relationship between government spending on health care and education and selected social indicators. Unlike previous studies, where social indicators are used as proxies for the unobservable health and education status of the population, this paper estimates a latent variable model. The findings suggest that public spending is an important determinant of social outcomes, particularly in the education sector. Overall, the latent variable approach yields better estimates of a social production function than the traditional approach, with higher elasticities of social indicators with respect to income and spending, therefore providing stronger evidence that increases in public spending do have a positive impact on social outcomes.