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Government Size And Growth: A Survey And Interpretation Of The Evidence

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  • Andreas Bergh
  • Magnus Henrekson

Abstract

The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach—of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time—reveals a more consistent picture. The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: (i) that countries with higher social trust levels are able to develop larger government sectors without harming the economy, and (ii) that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by current research.

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File URL: http://hdl.handle.net/10.1111/j.1467-6419.2011.00697.x
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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

Volume (Year): 25 (2011)
Issue (Month): 5 (December)
Pages: 872-897

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Handle: RePEc:bla:jecsur:v:25:y:2011:i:5:p:872-897

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References

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Citations

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Cited by:
  1. Escobari, Diego & Mollick, André Varella, 2013. "Output Growth and Unexpected Government Expenditures," MPRA Paper 48969, University Library of Munich, Germany.
  2. Abbi M Kedir & Nor Yasmin Mhd Bani, 2012. "Panel Data Evidence on the Role of Education in the Growth-Volatility Relationship," Discussion Papers in Economics 12/04, Department of Economics, University of Leicester.
  3. Hans-Werner Sinn & Niklas Potrafke, 2012. "Zur Debatte »Sparen oder Wachstum«," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65(10), pages 07-08, 05.
  4. Enrico Colombatto, 2012. "Fiscal Harmonization: Credible Goal or Trojan Horse?," Working papers 010, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
  5. António Afonso & João Tovar Jalles, 2012. "Do fiscal rules matter for growth?," Working Papers Department of Economics 2012/07, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  6. A. Minniti & F. Venturini, 2014. "R&D Policy and Schumpeterian Growth: Theory and Evidence," Working Papers wp945, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. Alexander Radygin & Revold Entov, 2014. "The Fundamental Privatization Theorem: Ideology, Evolution, Practice," Working Papers 0087, Gaidar Institute for Economic Policy, revised 2014.
  8. Daniel Oto-Peralías & Diego Romero-Ávila, 2013. "Tracing the Link between Government Size and Growth: The Role of Public Sector Quality," Kyklos, Wiley Blackwell, vol. 66(2), pages 229-255, 05.
  9. Brehm, Stefan, 2013. "Fiscal Incentives, Public Spending, and Productivity – County-Level Evidence from a Chinese Province," World Development, Elsevier, vol. 46(C), pages 92-103.
  10. Facchini, François & Melki, Mickaël, 2013. "Efficient government size: France in the 20th century," European Journal of Political Economy, Elsevier, vol. 31(C), pages 1-14.
  11. Projektgruppe Gemeinschaftsdiagnose, 2013. "Gemeinschaftsdiagnose Herbst 2013," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 80(43), pages 3-77.
  12. Martin Rode & Sebastian Coll, 2012. "Economic freedom and growth. Which policies matter the most?," Constitutional Political Economy, Springer, vol. 23(2), pages 95-133, June.

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