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Considering changes in economic conditions and global priorities in the last decade, development objectives such as poverty reduction and income distribution were typically cast in terms of economic growth. Therefore, poverty reduction through rural development was at the center of government development plan. The objective of this study is to analyze the impact of government spending on the rural economic development. The development indicators included in the model comprise agricultural production, non-farm employment and poverty reduction. To this end, the elasticity of the above indicators is estimated with respect to rural infrastructures such as education, transportation, telecommunication and electricity capacity and then linkage between rural infrastructures and government spending are identified. A system of simultaneous equations approach is used to model and estimate the equations using the data over the period 1981-2005. Results of estimate indicate that government spending have positive and significant impact on the poverty reduction and non-farm employment.

Keywords: O13, O13, I11, Government Spending, Rural Infrastructure, Rural Poverty, Non-Farm Employment JEL Classifications: I11, O18

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