Economic growth is a source of job creation and resource generation which, although not sufficient on its own to guarantee improvements in social well-being, is a necessary pillar for countries to expand opportunities for their populations. Within this framework, public spending, by allocating resources to infrastructure, education, health, and other strategic sectors, acts as a catalyst for economic growth, underscoring its enormous importance to national economies.
Global Outlook
The current outlook for economic growth is not encouraging. According to World Bank projections, global growth is expected to reach 2.6% in 2024 and 2025, with a notable slowdown forecasted in the coming years. It is estimated that nearly 60% of economies, representing more than 80% of the world’s population, will grow below the average of the past decade.
In Ecuador’s case, economic growth during the period from 2003 to 2023 experienced significant fluctuations, reflecting high vulnerability to external shocks. The 2015–2016 crises, driven by falling oil prices and a major earthquake, as well as the 2020 crisis caused by the COVID-19 pandemic, resulted in substantial GDP contractions. And despite an average growth rate of 3.5%, higher than the regional average, the country’s economy is once again showing signs of deceleration in 2024.
The region faces numerous challenges to achieving growth, among which fiscal policy management stands out as a key expansion tool. A recent International Monetary Fund (IMF) study reveals that since the 1960s, political discourse globally has shown a growing inclination toward more expansionary fiscal policies. The COVID-19 pandemic accelerated this trend, triggering a global package of fiscal and financial measures exceeding eight trillion dollars.
Public spending acts as a catalyst for economic growth. By channeling resources into various sectors, governments can encourage private investment, household consumption, and thus generate a multiplier effect in the economy. In other words, public spending not only drives growth through immediate expenditures but also boosts demand among other economic actors—this is known as the multiplier effect.
The Multiplier Effect
In Ecuador, the slowdown in growth has been accompanied by an unstable trajectory in public spending. This has been significantly influenced by factors such as legislative reforms, oil prices, and government initiatives. Between 2003 and 2006, moderate growth was observed. In subsequent years (2007–2014), spending expanded thanks to higher oil revenues and a focus on public services and social investment. However, starting in 2015, falling oil prices, high debt levels, and a public policy geared toward fiscal containment led to a contraction in public spending.
Despite high spending volatility, between 2013 and 2022 Ecuador remained above the regional average, with public spending representing between 27% and 33% of GDP. However, since 2022, a strong downward trend in the growth rate of public spending has been reported.
The dynamics of spending and its relationship to economic growth is a controversial topic, with contrasting viewpoints. Regardless of the stance, there are efforts to identify the extent to which public spending can drive the economy through the calculation of the fiscal multiplier—that is, estimating how many additional dollars are generated for each dollar the government spends. In Latin America, the results regarding the multiplier effect of public spending vary greatly.
Some countries exhibit a high multiplier effect. For instance, in Colombia, each peso invested by the government generates between 1.1 and 1.45 pesos. In other countries, spending does generate growth, but the effect is moderate. For example, Argentina, Ecuador, and Bolivia show spending multipliers of less than 0.18, 0.24, and 0.72, respectively. Finally, there are countries where, on the contrary, public spending hinders growth—as in the case of Chile, where spending has actually contributed to slowing economic growth.
How much and how to spend?
These varying results prompt an important discussion: how much and how to spend? Evidence shows that the capacity of public spending to multiply resources and serve as a growth driver depends on the characteristics of each economy and a deep understanding of the complex dynamics underpinning fiscal policy management. Therefore, there are no rules that guarantee specific outcomes, but some conditions can improve results. Countries with high multipliers tend to have low or sustainable debt levels, target spending toward strategic sectors, and implement sound public management.
As such, the discussion cannot focus merely on spending more or less, but rather on strengthening project evaluation mechanisms and promoting transparency in resource allocation, which allows for meaningful social and economic returns. Additionally, governments should invest in institutional capacity to design and execute public investment projects efficiently and sustainably.
*Machine translation proofread by Janaína da Silva.
Autor
Profesora e investigadora de la carrera de Economía de la Universidad de Las Américas – Ecuador. Maestría en Economía del Desarrollo por la Universidad Nacional de Costa Rica. Ha publicado artículos en revistas académicas nacionales e internacionales.
Professor at the University of Las Américas. PhD. in Development Economics from the FLACSO Doctoral Program. Worked for Ecuadorian public institutions and multilateral organizations.
Economist from the University of Las Américas, Ecuador.
