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Government Size and Growth: Accounting for Economic Freedom and Globalization

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  • Bergh, Andreas

    ()
    (Lund university & The Ratio Institute)

  • Karlsson, Martin

    ()
    (Institute of Ageing, University of Oxford)

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

Paper provided by The Ratio Institute in its series Ratio Working Papers with number 130.

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Length: 26 pages
Date of creation: 16 Feb 2009
Date of revision:
Handle: RePEc:hhs:ratioi:0130

Note: An early version of this paper was presented at the World Meeting of the Public Choice Society, Amsterdam 2007.
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Keywords: Government size; growth; economic freedom; globalization; taxes;

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References

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  1. Axel Dreher & Jan-Egbert Sturm & Heinrich Ursprung, 2006. "The Impact of Globalization on the Composition of Government Expenditures: Evidence from Panel Data," CESifo Working Paper Series 1755, CESifo Group Munich.
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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. 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.
  3. 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.
  4. Niklas Potrafke, 2014. "The Evidence on Globalization," CESifo Working Paper Series 4708, CESifo Group Munich.
  5. 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.
  6. Halkos, George, 2012. "The impact of government expenditure on the environment: An empirical investigation," MPRA Paper 39957, University Library of Munich, Germany.
  7. 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.
  8. François Facchini & Mickaël Melki, 2011. "Optimal Government Size and Economic Growth in France (1871-2008): An explanation by the State and Market Failures," Documents de travail du Centre d'Economie de la Sorbonne 11077, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
  13. Berggren, Niclas & Elinder, Mikael, 2010. "Is tolerance good or bad for growth?," Working Paper Series, Center for Fiscal Studies 2010:8, Uppsala University, Department of Economics.
  14. 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.

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