IDEAS home Printed from https://ideas.repec.org/p/nip/nipewp/17-2013.html
   My bibliography  Save this paper

Government size, composition of public expenditure, and economic development

Author

Listed:

Abstract

This paper analyzes the effects of government size and of the composition of public expenditure on economic development. Using the system-GMM estimator for linear dynamic panel data models, on a sample covering up to 156 countries and 5-year periods from 1980 to 2010, we find that government size as a percentage of GDP has a quadratic (inverted U-shaped) effect on the growth rate of the Human Development Index (HDI). This effect is especially pronounced in developed and high income countries. We also find that the composition of public expenditure affects development, with the share of five subcomponents exhibiting non-linear relationships with HDI growth.

Suggested Citation

  • Susana Martins & Francisco José Veiga, 2013. "Government size, composition of public expenditure, and economic development," NIPE Working Papers 17/2013, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:17/2013
    as

    Download full text from publisher

    File URL: http://www.nipe.eeg.uminho.pt/Uploads/NIPE_WP_17_2013.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    3. 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.
    4. Vito Tanzi & Howell H. Zee, 1997. "Fiscal Policy and Long-Run Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 179-209, June.
    5. Philippe Aghion, 2005. "Growth and Institutions," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 32(1), pages 3-18, March.
    6. Davies, Antony, 2009. "Human development and the optimal size of government," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 38(2), pages 326-330, March.
    7. Folster, Stefan & Henrekson, Magnus, 1999. "Growth and the public sector: a critique of the critics," European Journal of Political Economy, Elsevier, vol. 15(2), pages 337-358, June.
    8. Nafziger,E. Wayne, 2012. "Economic Development," Cambridge Books, Cambridge University Press, number 9780521765480.
    9. Acemoglu, Daron & Johnson, Simon & Robinson, James A., 2005. "Institutions as a Fundamental Cause of Long-Run Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 6, pages 385-472, Elsevier.
    10. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    11. Stephen R. Bond, 2002. "Dynamic panel data models: a guide to micro data methods and practice," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 1(2), pages 141-162, August.
    12. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    13. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    14. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
    15. Afonso, António & Furceri, Davide, 2010. "Government size, composition, volatility and economic growth," European Journal of Political Economy, Elsevier, vol. 26(4), pages 517-532, December.
    16. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 126-150, October.
    17. Peltzman, Sam, 1980. "The Growth of Government," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 209-287, October.
    18. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
    19. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    20. Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
    21. Stephen Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    22. Tanzi,Vito & Schuknecht,Ludger, 2000. "Public Spending in the 20th Century," Cambridge Books, Cambridge University Press, number 9780521662918.
    23. Heitger, Bernhard, 2001. "The Scope of Government and its Impact on Economic Growth in OECD Countries," Kiel Working Papers 1034, Kiel Institute for the World Economy (IfW Kiel).
    24. Andrea Bassanini & Stefano Scarpetta & Philip Hemmings, 2001. "Economic Growth: The Role of Policies and Institutions: Panel Data. Evidence from OECD Countries," OECD Economics Department Working Papers 283, OECD Publishing.
    25. Mourmouras, Alexandros & Rangazas, Peter, 2009. "Fiscal Policy And Economic Development," Macroeconomic Dynamics, Cambridge University Press, vol. 13(4), pages 450-476, September.
    26. Hauner, David & Kyobe, Annette, 2010. "Determinants of Government Efficiency," World Development, Elsevier, vol. 38(11), pages 1527-1542, November.
    27. Peltzman, Sam, 1980. "The Growth of Government," Working Papers 1, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    28. Giancarlo Corsetti & Nouriel Roubini, 1996. "Optimal Government Spending and Taxation in Endgenous Growth Models," NBER Working Papers 5851, National Bureau of Economic Research, Inc.
    29. Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
    30. António Afonso & Ludger Schuknecht & Vito Tanzi, 2005. "Public sector efficiency: An international comparison," Public Choice, Springer, vol. 123(3), pages 321-347, June.
    31. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-927, October.
    32. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    33. Abdullah Yavas, 1998. "Does too much government investment retard economic development of a country?," Journal of Economic Studies, Emerald Group Publishing, vol. 25(4), pages 296-308, September.
    34. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. B. Venkatraja, 2017. "Addressing the paradox of public expenditure – economic growth nexus: an econometric approach," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 87-108,109-.
    2. Agasisti, Tommaso & Barra,Cristian & Zotti, Roberto, 2020. "Public Finance, Government Spending and Economic Growth: The Case of Local Governments in Italy," Department of Economics and Statistics Cognetti de Martiis. Working Papers 202022, University of Turin.
    3. Wing Yee Choi, 2021. "A Study on Assessing Government Size, the Composition of Public Spending on Education and Economic Growth in the USA," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 11(1), pages 1-8.
    4. Jean-Louis Combes & Alexandru Minea & Pegdéwendé Nestor Sawadogo, 2019. "Does the composition of government expenditures matter for sovereign bond spreads' evolution in developing countries?," CERDI Working papers halshs-02019063, HAL.
    5. Dan Lupu & Mihai Bogdan Petrisor & Ana Bercu & Mihaela Tofan, 2018. "The Impact of Public Expenditures on Economic Growth: A Case Study of Central and Eastern European Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(3), pages 552-570, February.
    6. Luca Agnello & Vitor Castro & João Tovar Jalles & Ricardo M. Sousa, 2017. "Income inequality, fiscal stimuli and political (in)stability," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(3), pages 484-511, June.
    7. Megha Jain & Aishwarya Nagpal & Abhay Jain, 2021. "Government Size and Economic Growth: An Empirical Examination of Selected Emerging Economies," South Asian Journal of Macroeconomics and Public Finance, , vol. 10(1), pages 7-39, June.
    8. Alimi, R. Santos, 2020. "Public Spending and Economic Welfare in ECOWAS Countries: Does Level of Development Matter?," MPRA Paper 99425, University Library of Munich, Germany.
    9. Que, Wei & Zhang, Yabin & Schulze, Günther, 2019. "Is public spending behavior important for Chinese official promotion? Evidence from city-level," China Economic Review, Elsevier, vol. 54(C), pages 403-417.
    10. Ferris, J. Stephen & Voia, Marcel C., 2015. "The effect of federal government size on private economic performance in Canada: 1870–2011," Economic Modelling, Elsevier, vol. 49(C), pages 172-185.
    11. Vítor Castro & Rodrigo Martins, 2018. "The Electoral Dynamics of Human Development," Journal of Development Studies, Taylor & Francis Journals, vol. 54(1), pages 191-211, January.
    12. repec:jle:journl:165 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Capolupo, Rosa, 2009. "The New Growth Theories and Their Empirics after Twenty Years," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-72.
    2. Sefa Awaworyi Churchill & Mehmet Ugur & Siew Ling Yew, 2017. "Does Government Size Affect Per-Capita Income Growth? A Hierarchical Meta-Regression Analysis," The Economic Record, The Economic Society of Australia, vol. 93(300), pages 142-171, March.
    3. Benos, Nikos, 2009. "Fiscal policy and economic growth: empirical evidence from EU countries," MPRA Paper 19174, University Library of Munich, Germany.
    4. Saima Nawaz & M. Idrees Khawaja, 2016. "Fiscal Policy, Institutions And Growth: New Insights," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(05), pages 1251-1278, December.
    5. Daniel Oto Peralías & Daniel Oto-Peralías & Diego Romero-Ávila, 2012. "Tracing the Link between Government Size and Growth: The Role of Public Sector Quality," EcoMod2012 4015, EcoMod.
    6. 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.
    7. D Martinez-Lopez, 2005. "Fiscal Policy and Growth: The Case of the Spanish Regions," Economic Issues Journal Articles, Economic Issues, vol. 10(1), pages 9-24, March.
    8. Edinaldo Tebaldi, 2016. "The Dynamics of Total Factor Productivity and Institutions," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 41(4), pages 1-25, December.
    9. Margit Schratzenstaller, 2007. "WIFO-Weißbuch: Wachstumsimpulse durch die öffentliche Hand," WIFO Monatsberichte (monthly reports), WIFO, vol. 80(6), pages 509-526, June.
    10. Ho Thuy Ai & Ping, Lin, 2018. "Impacts of fiscal policy on economic growth: Another look from institutional perspective," Economics Discussion Papers 2018-45, Kiel Institute for the World Economy (IfW Kiel).
    11. Hammed Adetola Adefeso, 2016. "Productive Government Expenditure and Economic Performance in sub-Saharan Africa: An Empirical Investigation," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 19(2), pages 1-18, November.
    12. Smaoui, Houcem & Nechi, Salem, 2017. "Does sukuk market development spur economic growth?," Research in International Business and Finance, Elsevier, vol. 41(C), pages 136-147.
    13. Indunil De Silva & Sudarno Sumarto, 2015. "Dynamics Of Growth, Poverty And Human Capital: Evidence From Indonesian Sub-National Data," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 40(2), pages 1-33, June.
    14. Rafiou Raphaël Bétila, 2021. "The impact of Ease of Doing Business on economic growth: a dynamic panel analysis for African countries," SN Business & Economics, Springer, vol. 1(10), pages 1-34, October.
    15. James L. Butkiewicz & Halit Yanikkaya, 2011. "Institutions and the Impact of Government Spending on Growth," Journal of Applied Economics, Taylor & Francis Journals, vol. 14(2), pages 319-341, November.
    16. 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.
    17. Dimitrios Paparas & Christian Richter, 2015. "Fiscal policy and economic growth: Empirical evidence from the European Union," Working Papers 2015.06, International Network for Economic Research - INFER.
    18. Folster, Stefan & Henrekson, Magnus, 1999. "Growth and the public sector: a critique of the critics," European Journal of Political Economy, Elsevier, vol. 15(2), pages 337-358, June.
    19. Petroulas, Pavlos, 2004. "Short-Term Capital Flows and Growth in Developed and Emerging Markets Pavlos," Research Papers in Economics 2004:4, Stockholm University, Department of Economics.
    20. E. Tsanana & X. Chapsa & C. Katrakilidis, 2016. "Is growth corrupted or bureaucratic? Panel evidence from the enlarged EU," Applied Economics, Taylor & Francis Journals, vol. 48(33), pages 3131-3147, July.

    More about this item

    Keywords

    Economic Development; Government Size; Composition of public expenditure; Human Development Index;
    All these keywords.

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nip:nipewp:17/2013. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nipampt.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: NIPE (email available below). General contact details of provider: https://edirc.repec.org/data/nipampt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.