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The Size of the Government and Economic Growth: An Empirical Study of Sri Lanka

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  • Shanaka Herath

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Abstract

The new growth theory establishes, among other things, that government expenditure can manipulate economic growth of a country. This study attempts to explain whether government expenditure increases or decreases economic growth in the context of Sri Lanka. Results obtained applying an analytical framework based on time series and second degree polynomial regressions are generally consistent with previous findings: government expenditure and economic growth are positively correlated; excessive government expenditure is negatively correlated with economic growth; and an open economy promotes growth. In a separate section, the paper examines Armey’s (1995) idea of a quadratic curve that explains the level of government expenditure in an economy and the corresponding level of economic growth. The findings confirm the possibility of constructing the Armey curve for Sri Lanka, and it estimates the optimal level of government expenditure to be approximately 27 per cent. This paper adds to the literature indicating that the Armey curve is a reality not only for developed economies, but also for developing economies.

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Bibliographic Info

Paper provided by Institute for the Environment and Regional Development, Department of Socioeconomics, Vienna University of Economics and Business in its series SRE-Disc with number sre-disc-2009_08.

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Length: 26 pages
Date of creation: 2009
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Handle: RePEc:wiw:wiwsre:sre-disc-2009_08

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Cited by:
  1. 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.

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