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Government size and growth: Accounting for economic freedom and globalization

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  • Andreas Bergh

    ()

  • Martin Karlsson

    ()

Abstract

Several recent studies have found a negative relation between government size and economic growth in rich countries. Since countries with big government have experienced above average improvements in both the Economic freedom index and the KOF globalization index, we argue that existing studies suffer from an omitted variable problem. Using Bayesian Averaging over Classical Estimates (BACE) in a panel of OECD countries, we show that the negative effect from government size is very robust and may have been underestimated in previous studies. The dataset is an updated and extended version of the data used by Fölster and Henrekson (2001), covering the period 1970-1995. We find clear evidence that globalization has a positive effect on growth, but find no effect of economic freedom. Finally, we find that the negative effect of government size decreases substantially in size but remains significant when we add the period 1996-2005 to the sample. Our results support the idea that countries with big government can use institutional quality such as economic freedom and globalization to mitigate negative growth effects of taxes and public expenditure.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s11127-009-9484-1
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Bibliographic Info

Article provided by Springer in its journal Public Choice.

Volume (Year): 142 (2010)
Issue (Month): 1 (January)
Pages: 195-213

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Handle: RePEc:kap:pubcho:v:142:y:2010:i:1:p:195-213

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Web page: http://www.springerlink.com/link.asp?id=100332

Related research

Keywords: Government size; Growth; Economic freedom; Globalization; Taxes;

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References

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  1. Agell, Jonas & Ohlsson, Henry & Skogman Thoursie, Peter, 2003. "Growth Effects of Government Expenditure and Taxation in Rich Countries: A Comment," Research Papers in Economics 2003:14, Stockholm University, Department of Economics.
  2. Axel Dreher, 2003. "The Influence of globalization on taxes and social policy - an empirical enalysis for OECD countries," Discussion Papers 0301, Exeter University, Department of Economics.
  3. Lindert,Peter H., 2009. "Growing Public," Cambridge Books, Cambridge University Press, number 9780521529174, October.
  4. Folster, Stefan & Henrekson, Magnus, 2001. "Growth effects of government expenditure and taxation in rich countries," European Economic Review, Elsevier, vol. 45(8), pages 1501-1520, August.
  5. Jac C. Heckelman, 2000. "Economic Freedom and Economic Growth: A Short-run Causal Investigation," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 71-91, May.
  6. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
  7. Romero-Ávila, Diego & Strauch, Rolf, 2008. "Public finances and long-term growth in Europe: Evidence from a panel data analysis," European Journal of Political Economy, Elsevier, vol. 24(1), pages 172-191, March.
  8. Doucouliagos, Chris & Ulubasoglu, Mehmet Ali, 2006. "Economic freedom and economic growth: Does specification make a difference?," European Journal of Political Economy, Elsevier, vol. 22(1), pages 60-81, March.
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  14. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
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  18. Axel Dreher, 2002. "Does Globalization Affect Growth?," Development and Comp Systems 0210004, EconWPA, revised 04 Feb 2003.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Why This Isn’t A Time to Worry that Government Is Spending Too Little
    by Matt Mitchell in Neighborhood Effects on 2010-06-30 21:56:24
  2. Do Taxes Affect Economic Growth?
    by Matt Mitchell in Neighborhood Effects on 2012-09-21 20:59:33
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Durevall, Dick & Henrekson, Magnus, 2010. "The Futile Quest for a Grand Explanation of Long-Run Government Expenditure," Working Paper Series 818, Research Institute of Industrial Economics, revised 28 Oct 2010.
  2. 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.
  3. Halkos, George E. & Paizanos, Epameinondas Α., 2013. "The effect of government expenditure on the environment:An empirical investigation," Ecological Economics, Elsevier, vol. 91(C), pages 48-56.
  4. Andreas Bergh & Magnus Henrekson, 2011. "Government Size And Growth: A Survey And Interpretation Of The Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 25(5), pages 872-897, December.
  5. Niclas Berggren & Mikael Elinder, 2012. "Is tolerance good or bad for growth?," Public Choice, Springer, vol. 150(1), pages 283-308, January.
  6. Niklas Potrafke, 2014. "The Evidence on Globalization," CESifo Working Paper Series 4708, CESifo Group Munich.
  7. Halkos, George, 2012. "The impact of government expenditure on the environment: An empirical investigation," MPRA Paper 39957, University Library of Munich, Germany.
  8. Dackehag , Margareta & Hansson, Åsa, 2012. "Taxation of Income and Economic Growth: An Empirical Analysis of 25 Rich OECD Countries," Working Papers 2012:6, Lund University, Department of Economics.
  9. Mariusz Próchniak & Bartosz Witkowski, 2013. "Regulations and economic growth: some empirical evidence based on the Bayesian model pooling," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 30, pages 139-154.
  10. Peter Bernholz, 2013. "The Slow and Hidden Road to Serfdom," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 14(2), pages 61-74, 08.
  11. Berggren, Niclas & Nilsson, Therese, 2014. "Globalization and the Transmission of Social Values: The Case of Tolerance," Working Paper Series 1007, Research Institute of Industrial Economics.
  12. Falch, Torberg & Fischer, Justina AV, 2011. "Welfare state generosity and student performance: Evidence from international student tests," MPRA Paper 35269, University Library of Munich, Germany.
  13. 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.
  14. Halkos, George & Paizanos, Epameinondas, 2014. "Exploring the effect of economic growth and government expenditure on the environment," MPRA Paper 56084, University Library of Munich, Germany.

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