Does government size affect per-capita income growth? A Hierarchical meta-regression analysis

Awaworyi, Sefa and Ugur, Mehmet and Yew, Siew Ling (2015): Does government size affect per-capita income growth? A Hierarchical meta-regression analysis.

Abstract

We conduct a hierarchical meta-regression analysis to review 87 empirical studies that report 769 estimates for the effects of government size on economic growth. We follow best-practice recommendations for meta-analysis of economics research, and address issues of publication selection bias and heterogeneity. When size is measured as the ratio of total government expenditures to GDP, the partial correlation between government size and per-capita GDP growth is negative in developed countries, but insignificant in developing countries. When size is measured as the ratio of consumption expenditures to GDP, the partial correlation is negative in both developed and developing countries, but the effect in developing countries is less adverse. We also report that government size is associated with less adverse effects when primary studies control for endogeneity and are published in journals and more recently, but it is associated with more adverse effects when primary studies use cross-section data. Our findings indicate that the relationship between government size and per-capita GDP growth is context-specific and likely to be biased due to endogeneity between the level of per-capita income and government expenditures.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic growth, Government size, Government expenditure, Government consumption, Meta-analysis, Evidence synthesis
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H5 - National Government Expenditures and Related Policies; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

References

Abreu, M., de Groot, H., & Florax, R. (2005). A meta-analysis of beta convergence. Tinbergen Institute Discussion Papers, No. TI 2005-001/3.

Adam, C., & Bevan, D. (2005). Fiscal deficits and growth in developing countries. Journal of Public Economics 89 (89), 571– 597.

Afonso, A., & Furceri, D. (2010). Government Size, Composition, Volatility and Economic Growth. European Journal of Political Economy, 26(4), 517-532.

Afonso, A., & Jalles, J. T. (2013a). Fiscal composition and long-term growth. Applied Economics, 46(3), 349-358. doi: 10.1080/00036846.2013.848030

Afonso, A., & Jalles, J. T. J. T. (2013b). Do Fiscal Rules Matter for Growth? Applied Economics Letters, 20(1-3), 34-40.

Afonso, A. A., Gruner, H. P., Kolerus, C. E., & Grüner, H. P. (2010). Fiscal Policy and Growth: Do Financial Crises Make a Difference? European Central Bank, Working Paper Series: 1217. University of Mannheim - Department of Economics ; University of Mannheim - Center for Doctoral Studies in Economics and Management (CDSEM).

Agell, J. (1996). Why Sweden’s welfare state needed reform. Economic Journal, 106(439), 1760–1771.

Agell, J., Lindh, T., & Ohlsson, H. (1997). Growth and the public sector: A critical review essay. European Journal of Political Economy, 13(1), 33-52.

Alptekin, A., & Levine, P. (2012). Military expenditure and economic growth: A meta-analysis. European Journal of Political Economy, 28(4), 636-650.

Andrés, J., Doménech, R., & Molinas, C. (1996). Macroeconomic performance and convergence in OECD countries. European Economic Review, 40(9), 1683-1704.

Angelopoulos, K., Economides, G., & Kammas, P. (2007). Tax-spending policies and economic growth: theoretical predictions and evidence from the OECD. European Journal of Political Economy, 23(4), 885-902.

Angelopoulos, K., & Philippopoulos, A. (2007). The Growth Effects of Fiscal Policy in Greece 1960-2000. Public Choice, 131(1-2), 157-175.

Angelopoulos, K., Philippopoulos, A., & Tsionas, E. (2008). Does Public Sector Efficiency Matter? Revisiting the Relation between Fiscal Size and Economic Growth in a World Sample. Public Choice, 137(1-2), 245-278.

Arin, K. P. (2004). Fiscal Policy, Private Investment and Economic Growth: Evidence from G-7 Countries. Massey University - Department of Commerce.

Armey, D. (1995). The Freedom Revolution. Washington: Regnery Publishing.

Aschauer, D. (1989). Is government spending productive? Journal of Monetary Economics, 23, 177-200.

Atesoglu, H. S., & Mueller, M. J. (1990). Defence spending and economic growth. Defence Economics, 2, 19 - 27.

Barro, R. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(5), S103-S125.

Barro, R. J. (1989). A Cross-Country Study of Growth, Saving, and Government. NBER Working Paper No. 2855.

Barro, R. J. (1991). Economic Growth in a Cross Section of Countries. The Quarterly Journal of Economics, 106(2), 407-443.

Barro, R. J. (1996). Determinants of Economic Growth: A Cross-Country Empirical Study. NBER Working Paper No. 5698.

Barro, R. J. (2001). Human Capital and Growth. American Economic Review, 91(2), 12-17.

Barro, R. J., & Sala-i-Martin, X. (1995). Economic Growth Cambridge, MA: MIT Press.

Bateman, I., & Jones, A. (2003). Contrasting conventional with multi-level modelling approaches to meta-analysis: expectation consistency in U.K. woodland recreation values. Land Economics 79(2), 235–258.

Bellettini, G., & Ceroni, C. B. (2000). Social Security Expenditure and Economic Growth: An Empirical Assessment. Research in Economics, 54(3), 249-275.

Benos, N., & Zotou, S. (2014). Education and Economic Growth: A Meta-Regression Analysis. World Development, 64(0), 669-689.

Bergh, A., & Henrekson, M. (2011). Government Size and Growth: A Survey and Interpretation of the Evidence. Journal of Economic Surveys, 25(5), 872-897.

Bergh, A., & Karlsson, M. (2010). Government size and growth: Accounting for economic freedom and globalization. Public Choice, 142(1-2), 195-213.

Bergh, A., & Öhrn, N. (2011). Growth Effects of Fiscal Policies: A Critical Appraisal of Colombier’s (2009) Study. IFN Working Paper No. 865.

Bernhard, H. (2001). The Scope of Government and its Impact on Economic Growth in OECD Countries. Kieler Arbeitspapiere, No. 1034.

Bojanic, A. N. (2013). The Composition of Government Expenditures and Economic Growth in Bolivia. Latin American Journal of Economics, 50(1), 83-105.

Bose, N., Haque, M. E., & Osborn, D. R. (2007). Public Expenditure and Economic Growth: A Disaggregated Analysis for Developing Countries. Manchester School, 75(5), 533-556.

Brumm, H. J. (1997). Military Spending, Government Disarray, and Economic Growth: A Cross-Country Empirical Analysis. Journal of Macroeconomics, 19(4), 827-838.

Butkiewicz, J. L., & Yanikkaya, H. (2011). Institutions and the Impact of Government Spending on Growth. Journal of Applied Economics, 14(2), 319-341.

Campos, J., Ericsson, N., & Hendry, D. (2005). General-to-specific modeling: an overview and selected bibliography. . FRB International Finance Discussion Paper, (838).

Castro, V. (2011). The Impact of the European Union Fiscal Rules on Economic Growth. Journal of Macroeconomics, 33(2), 313-326.

Chen, S.-T., & Lee, C.-C. (2005). Government size and economic growth in Taiwan: A threshold regression approach. Journal of Policy Modeling, 27(9), 1051-1066.

Cohen, J. (1988). Statistical Power Analysis for the Behavioural Sciences Hillsdale, NJ.

Colombier, C. (2009). Growth effects of fiscal policies: an application of robust modified M-estimator. Applied Economics, 41(7), 899-899.

Commander, S., Davoodi, H., & Lee, U. (1999). The Causes and Consequences of Government for Growth and Well-being. World Bank Policy Research Working Paper.

Cooray, A. (2009). Government Expenditure, Governance and Economic Growth. Comparative Economic Studies, 51(3), 401-418.

Costa-Font, J., McGuire, A., & Stanley, T. (2013). Publication selection in health policy research: The winner's curse hypothesis. Health policy, 109(1), 78-87.

Cronovich, R. (1998). Measuring the Human Capital Intensity of Government Spending and Its Impact on Economic Growth in a Cross Section of Countries. Scottish Journal of Political Economy, 45(1), 48-77.

d'Agostino, G., Dunne, J. P., & Pieroni, L. (2012). Corruption, Military Spending and Growth. Defence and Peace Economics, 23(6), 591-591.

d’Agostino, G., Dunne, J. P., & Pieroni, L. (2010). Assessing the Effects of Military Expenditure on Growth Oxford Handbook of the Economics of Peace and Conflict. Oxford University Press.

Dalic, M. (2013). Fiscal policy and growth in new member states of the EU: a panel data analysis. Financial Theory and Practice, 37(4), 335-360.

Dar, A. A., & AmirKhalkhali, S. (2002). Government size, factor accumulation, and economic growth: evidence from OECD countries. Journal of Policy Modeling, 24(7–8), 679-692.

De Dominicis, L., Florax , R., & Groot, H. (2008). A meta-analysis on the relationship between income inequality and economic growth. Scottish Journal of Political Economy, 55(5), 654-682.

De Gregorio, J. (1992). Economic growth in Latin America. Journal of Development Economics, 39(1), 59-84.

De Witte, K., & Moesen, W. (2010). Sizing the government. Public Choice, 145, 39-55.

Devarajan, S., Swaroop, V., & Zou, H.-f. (1996). The Composition of Public Expenditure and Economic Growth. Journal of Monetary Economics, 37(2), 313-344.

Diamond, J. (1998). Fiscal indicators for economic growth: The Government own saving concept re-examined. Journal of Public Budgeting, Accounting & Financial Management, 9(4), 627-651.

Doucouliagos, H. (2011). How Large is Large? Preliminary and relative guidelines for interpreting partial correlations in economics. Deakin University, School of Accounting, Economics and Finance Working Paper Series (5).

Dowrick, S. (1996). Estimating the Impact of Government Consumption on Growth: Growth Accounting and Endogenous Growth Models. Empirical Economics, 21(1), 163-186.

Easterly, W., & Rebelo, S. (1993). Fiscal policy and economic growth: An empirical investigation. Journal of Monetary Economics, 32(3), 417-458.

Egger, M., Smith, D., Schneider, M., & Minder, C. (1997). Bias in meta-analysis detected by a simple, graphical test. BMJ, 315, 629 - 634.

Engen, E. M., & Skinner, J. S. (1992). Fiscal Policy and Economic Growth. NBER Working Paper No. w4223.

Evans, P., & Karras, G. (1994). Is government capital productive? Evidence from a panel of seven countries. Journal of Macroeconomics, 16(2), 271-279.

Feder, G. (1983). On exports and economic growth. Journal of Development Economics, 12(1–2), 59-73.

Fölster, S., & Henrekson, M. (1999). Growth and the public sector: a critique of the critics. European Journal of Political Economy, 15(2), 337-358.

Fölster, S., & Henrekson, M. (2001). Growth effects of government expenditure and taxation in rich countries. European Economic Review, 45(8), 1501-1520.

Garrison, C. B., & Lee, F.-Y. (1995). The effect of macroeconomic variables on economic growth rates: A cross-country study. Journal of Macroeconomics, 17(2), 303-317.

Ghali, K. (2003). Government Spending, Budget Financing, and Economic Growth: The Tunisian Experience. The Journal of Developing Areas, 36(2), 19-37.

Ghosh, S., & Gregoriou, A. (2008). The Composition of Government Spending and Growth: Is Current or Capital Spending Better? Oxford Economic Papers, 60(3), 484-516.

Ghura, D. (1995). Macro Policies, External Forces, and Economic Growth in Sub-Saharan Africa. Economic Development and Cultural Change, 43(4), 759-778.

Goldstein, H. (1995). Multilevel statistical models 2nd ed. . London: Edward Arnold.

Gould, D. J., & Amaro-Reyes, J. A. (1983). The Effects of Corruption on Administrative Performance. World Bank Staff Working Paper No. 580.

Grier, K. B., & Tullock, G. (1989). An empirical analysis of cross-national economic growth, 1951-1980. Journal of Monetary Economics, 24(2), 259-276.

Grimes, A. (2003). Economic growth and the size & structure of government: Implications for New Zealand. New Zealand Economic Papers, 37(1), 151-174.

Grossman, P. J. (1990). Government and Growth: Cross-Sectional Evidence. Public Choice, 65(3), 217-227.

Guseh, J. S. (1997). Government Size and Economic Growth in Developing Countries: A Political-Economy Framework. Journal of Macroeconomics, 19(1), 175-192.

Hamdi, H., & Sbia, R. (2013). Dynamic Relationships between Oil Revenues, Government Spending and Economic Growth in an Oil-Dependent Economy. Economic Modelling, 35, 118-125.

Hamilton, A. (2013). Small is Beautiful, at Least in High-Income Democracies: The Distribution of Policy-Making Responsibility, Electoral Accountability, and Incentives for Rent Extraction. The World Bank Institute. Policy Research Working Paper 6305.

Hansen, P. (1994). The government, exporters and economic growth in New Zealand. New Zealand Economic Papers, 28(2), 133-142.

Hansson, P., & Henrekson, M. (1994). A new framework for testing the effect of government spending on growth and productivity. Public Choice, 81(3-4), 381-401.

Henmi, M., & Copas, J. B. (2010). Confidence intervals for random effects meta-analysis and robustness to publication bias. Stat Med, 29(29), 2969-2983.

Husnain, M. I. u., & Ghani, E. (2010). Expenditure-Growth Nexus: Does the Source of Finance Matter? Empirical Evidence from Selected South Asian Countries [with Comments]. The Pakistan Development Review, 49(4), 631-640.

Kalaitzidakis, P., & Tzouvelekas, V. (2011). Military spending and the growth-maximizing allocation of public capital: a cross-country empirical analysis. Economic Inquiry, 49(4), 1029-1041.

Kelly, T. (1997). Public Expenditures and Growth. Journal of Development Studies, 34(1), 60-84.

Kneller, R., Bleaney, M. F., & Gemmell, N. (1999). Fiscal Policy and Growth: Evidence from OECD Countries. Journal of Public Economics, 74(2), 171-190.

Kormendi, R. C., & Meguire, P. G. (1985). Macroeconomic determinants of growth: Cross-country evidence. Journal of Monetary Economics, 16(2), 141-163.

Lamartina, S., & Zaghini, A. (2011). Increasing Public Expenditure: Wagner's Law in OECD Countries. German Economic Review, 12(2), 149-164.

Landau, D. (1983). Government Expenditure and Economic Growth: A Cross-Country Study. Southern Economic Journal, 49(3), 783-792.

Landau, D. (1986). Government and Economic Growth in the Less Developed Countries: An Empirical Study for 1960-1980. Economic Development and Cultural Change, 35(1), 35-75.

Landau, D. L. (1997). Government expenditure, human capital creation and economic growth. Journal of Public Budgeting, Accounting & Financial Management, 9(3), 467-467.

Lee, B. S., & Lin, S. (1994). Government Size, Demographic Changes, and Economic Growth. International Economic Journal, 8(1), 91-108.

Lee, J.-W. (1995). Capital goods imports and long-run growth. Journal of Development Economics, 48(1), 91-110.

Levine, R., & Renelt, D. (1992). A Sensitivity Analysis of Cross-Country Growth Regressions. The American Economic Review, 82(4), 942-963.

Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A Contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics, 107(2), 407-437.

Marlow, M. (1986). Private sector shrinkage and the growth of industrialized economies. Public Choice, 49(2), 143-154.

Martin, R., & Fardmanesh, M. (1990). Fiscal variables and growth: A cross-sectional analysis. Public Choice, 64(3), 239-251.

Mauro, P. (1995). Corruption and Growth. Quarterly Journal of Economics, 110(3), 681–712.

Mendoza, E. G., Milesi-Ferretti, G. M., & Asea, P. (1997). On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture. Journal of Public Economics, 66(1), 99-126.

Miller, S. M., & Russek, F. S. (1997). Fiscal Structures and Economic Growth: International Evidence. Economic Inquiry, 35(3), 603-613.

Mo, P. H. (2007). Government Expenditures and Economic Growth: The Supply and Demand Sides. Fiscal Studies, 28(4), 497-522.

Moreno, S.G., A. J. Sutton, A. Ades, T. D. Stanley, K. R. Abrams, J. L. Peters, and N. J. Cooper (2009). Assessment of regression-based methods to adjust for publication bias through a comprehensive simulation study, BMC Medical Research Methodology, 9(2), 1–17.

Munnell, A. (1990). Why Has Productivity Growth Declined? Productivity and Public Investment. . New England Economic Review, Federal Reserve Bank of Boston Jan, 1990 Issue, 3–22.

Murphy, K. M., Shleifer, A., & Vishny, R. W. (1991). The Allocation of Talent: Implications for Growth. The Quarterly Journal of Economics, 106(2), 503-530.

Neycheva, M. (2010). Does public expenditure on education matter for growth in Europe? A comparison between old EU member states and post-communist economies. Post - Communist Economies, 22(2), 141-141.

Nijkamp, P., & Poot, J. (2004). Meta-Analysis of the Effect of Fiscal Policies on Long-Run Growth. European Journal of Political Economy, 20(1), 91-124.

Nketiah-Amponsah, E. (2009). Public Spending and Economic Growth: Evidence from Ghana (1970-2004). Development Southern Africa, 26(3), 477-497.

Odedokun, M. O. (1997). Relative effects of public versus private investment spending on economic efficiency and growth in developing countries. Applied Economics, 29(10), 1325-1336.

Plümper, T., & Martin, C. W. (2003). Democracy, Government Spending, and Economic Growth: A Political-Economic Explanation of the Barro-Effect. Public Choice, 117(1/2), 27-50.

Poot, J. (2000). A Synthesis of Empirical Research on the Impact of Government on Long-Run Growth. Growth and Change, 31(4), 516-546.

Ram, R. (1986). Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time-Series Data. The American Economic Review, 76(1), 191-203.

Romer, P. M. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, 94(5), 1002-1037. doi: 10.2307/1833190

Romer, P. M. (1989). Human Capital and Growth: Theory and Evidence. NBER Working Paper No. w3173.

Romero-Avila, D., & Strauch, R. (2008). Public Finances and Long-Term Growth in Europe: Evidence from a Panel Data Analysis. European Journal of Political Economy, 24(1), 172-191.

Roodman, D. (2008). Through the Looking Glass, and What OLS Found There: On Growth, Foreign Aid, and Reverse Causality. Center for Global Development Working Paper No. 137.

Roubini, N., & Sala-i-Martin, X. (1992). Financial repression and economic growth. Journal of Development Economics, 39(1), 5-30.

Rubinson, R. (1977). Dependency, Government Revenue, and Economic Growth 1955-70. Studies in Comparative International Development, 12, 3-28.

Sala-I-Martin, X. (1995). Transfers, Social Safety Nets, and Economic Growth. Universitat Pompeu Fabra Economics Working Paper 139.

Sala-i-Martin, X., Doppelhofer, G. and Miller, R. I. (2004). Determinants of Long-term Growth: A Bayesian Averaging of Classical Estimates (BACE) approach, American Economic Review, 94(4), 813-835.

Sattar, Z. (1993). Public Expenditure and Economic Performance: A Comparison of Developed and Low-Income Developing Economies. Journal of International Development, 5(1), 27-49.

Saunders, P. (1985). Public Expenditure and Economic Performance in OECD Countries. Journal of Public Policy, 5(1), 1-21.

Saunders, P. (1986). What can we learn from international comparisons of public sector size and economic performance? European Sociological Review, 2(1), 52-60.

Saunders, P. (1988). Private Sector Shrinkage and the Growth of Industrialized Economies: Comment. Public Choice, 58(3), 277-284.

Scully, G. W. (1989). The Size of the State, Economic Growth and the Efficient Utilization of National Resources. Public Choice, 63(2), 149-164.

Sheehey, E. (1993). The Effect of Government Size on Economic Growth. Eastern Economic Journal, 19(3), 321-328

Solow, R. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1), 65–94.

Stanley, T. (2008). Meta-regression methods for detecting and estimating empirical effects in the presence of publication selection. Oxford Bulletin of Economics and Statistics, 70(2), 103-127.

Stanley, T., & Doucouliagos, H. (2007). Identifying and correcting publication selection bias in the efficiency-wage literature: Heckman meta-regression Economics Series 2007, 11. Deakin University.

Stanley, T., & Doucouliagos, H. (2012). Meta-Regression Analysis in Economics and Business. New York: Routledge.

Stanley, T. D., & Doucouliagos, H. (2014). Meta-regression approximations to reduce publication selection bias. Research Synthesis Methods, 5(1), 60-78.

Stanley, T. D., Doucouliagos, H., Giles, M., Heckemeyer, J. H., Johnston, R. J., Laroche, P., . . . Rost, K. (2013). Meta-Analysis of Economics Research Reporting Guidelines. Journal of Economic Surveys, 27(2), 390-394.

Stroup, M., & Heckelman, J. (2001). Size Of The Military Sector And Economic Growth: A Panel Data Analysis Of Africa And Latin America. Journal of Applied Economics, 4(2), 329-360.

Swan, T. W. (1956). Economic Growth and Capital Accumulation. Economic Record, 32(2), 334-361.

Tanninen, H. (1999). Income inequality, government expenditures and growth. Applied Economics, 31(9), 1109-1117.

Ugur, M. (2014). Corruption's Direct Effects on Per‐Capita Income Growth: A Meta‐Analysis. Journal of Economic Surveys, 28(3), 472-490.

Yan, C., & Gong, L. (2009). Government expenditure, taxation and long-run growth. Frontiers of Economics in China, 4(4), 505-525.

Zhang, J., & Casagrande, R. (1998). Fertility, growth, and flat-rate taxation for education subsidies. Economics Letters, 60(2), 209-216.

Ziliak, S. T., & McCloskey, D. N. (2004). Size matters: the standard error of regressions in the American Economic Review. The Journal of Socio-Economics, 33(5), 527-546.