Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time-Series Data

Abstract

A study of the impact of government size on economic performance and growth is important. Theoretically, one point of view suggests that a larger government size is likely to be detrimental to efficiency and economic growth because, for example, (i) government operations are often conducted inefficiently, (ii) the regulatory process imposes excessive burdens and costs on the economic system, and (iii) many of government's fiscal and monetary policies tend to distort economic incentives and lower the productivity of the system. At the other extreme, one can identify some points of view that assign to the government a critical role in the process of economic development, and could argue that a larger government size is likely to be a more powerful engine of economic development. There are several arguments on which the latter point of view is based. These include, besides others, (i) role of the government in harmonizing conflicts between private and social interests, (ii) prevention of exploitation of the country by foreigners, and (iii) securing an increase in productive investment and providing a socially optimal direction for growth and development.

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