Debt Stabilization and the Impact of Government Size on Long-Run Economic Growth: the Case of Tunisia

In the aftermath of the debt crisis, the IMF-sponsored debt-stabilization programs urged many developing countries to reduce the size of their governments. More recently, the World Bank is publishing reports making the same recommendations based on conclusions from cross-country growth studies. This paper argues that in the absence of strong evidence from one country's reality, ad-hoc implementation based on conclusions from cross-country models which impose strong parametric restrictions across countries that differ greatly in terms of their economic structure, can be misleading. The paper investigates the issue in the case of Tunisia for which a 1996 World Bank published report recommended shrinking the size of its government on the basis of conclusions from cross-country growth studies. Analysis of the causal impact of government size on growth in this country proves that these recommendations are far from being realistic.