Social Welfare Expenditure, Human Capital, and Economic Growth: Evidence from Taiwan

Can extending social welfare expenditures promote economic growth? This issue has been discussed extensively, with some research pointing to net benefits while others find a net negative impact. Insight can be gained by careful analysis of several sub-questions. For example, for two countries with the same social welfare expenditures, will increased social welfare expenditures in one lead to different economic growth rates? What is the channel by which such expenditures impact economic growth? What is the function of social welfare expenditures? This paper adopts simultaneous equations with three-stage least squares to investigate the relationships among social welfare expenditures, human capital, and economic growth using data on Taiwan between 1952 and 2003. We find that accumulated human capital is a critical channel linking social welfare expenditures to economic growth. Consequently, we provide a new perspective on the value of social welfare policy when government resources are limited. This view is consistent with empirical evidence that shows two countries may have identical social welfare expenditures but exhibit different economic growth rates.