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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.

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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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  1. 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.
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  13. 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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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
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Cited by:
  1. 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.
  2. Durevall, Dick & Henrekson, Magnus, 2011. "The futile quest for a grand explanation of long-run government expenditure," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 708-722, August.
  3. Berggren, Niclas & Elinder, Mikael, 2010. "Is Tolerance Good or Bad for Growth?," Working Paper Series 846, Research Institute of Industrial Economics.
  4. 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.
  5. 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.
  6. 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.
  7. Halkos, George, 2012. "The impact of government expenditure on the environment: An empirical investigation," MPRA Paper 39957, University Library of Munich, Germany.
  8. 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.
  9. Bergh, Andreas & Henrekson, Magnus, 2011. "Government Size and Growth: A Survey and Interpretation of the Evidence," Working Paper Series 858, Research Institute of Industrial Economics.
  10. 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.
  11. 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.
  12. Jaroslaw Kantorowicz, 2014. "Judges as Fiscal Activists: Can Constitutional Review Shape Public Finance?," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 2, pages 79-104, June.
  13. Niklas Potrafke, 2014. "The Evidence on Globalization," CESifo Working Paper Series 4708, CESifo Group Munich.
  14. 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.
  15. 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.

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