An Analysis of the Impact of Government Size on Economic Growth of Pakistan: An Endogenous Growth

ZAREEN, SHUMAILA and Qayyum, Abdul (2014): An Analysis of the Impact of Government Size on Economic Growth of Pakistan: An Endogenous Growth. Published in: Research Journal Social Science , Vol. 4, No. 1 (2015): pp. 61-80.

Abstract

Keeping in view the importance of economic growth in a country’s development, this study intended to examine the relationship between the government size and other determinants on economic growth using a time series data over the period 1973-2012. To specify the growth equation, we have followed the Barro (1990) model of endogenous growth. The exogenous variables in the model consisted of the government size, employment, inflation, capital and trade openness. To examine the impact of the 9/11 incident, the earth quake in 2005 and financial crises, we have introduced three dummies in our growth equation. Keeping in view the nature of variables and possible endogenity in the model, we have used the VAR methodology which is believed to overcome the possible endogenity. The estimation strategy comprised of two steps. In the first step, we have estimated the long run growth equation using the Johansen co-integration technique. In the second step, we have estimated the ECM model to arrive at the short run growth elasticities with respect to the variables concerned. The long run results indicated that almost all the variables have found out to be significant with their expected signs except for trade openness which carried negative coefficient. The negative and significant coefficient of the government size suggested that large government size negatively affect economic growth of Pakistan. On the other hand, the positive and significant coefficient of capital indicated that increase in capital holdings enhances economic growth. The positive and significant long run coefficients of inflation and employment highlight that economic growth increase along with increase in inflation and employment. The trade openness variable was found to be significant with positive sign which is the only significant variable in the ECM model except the dummies. The ECM term in the error correction model has carried out significant coefficient with negative sign and plausible magnitude that highlights the stability of the model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Government Size, Economic Growth, Co-integration, Time Series Analysis
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Afonso, Antonio, and Davide Furceri (2007) Government Size, Composition, Volatility and Economic Growth. European Journal of Political Economy 26:4, 517–532.

Ahmed, N. and F. Ahmed (2005) Does Government Size Matter: A Case Study of D-8 Member Countries. Pakistan Economics and Social Review volume 43: 2, 199–212.

Alexiou, C. (2009) Government Spending and Economic Growth: Econometric Evidence from South Eastern Europe. Journal of Economic and Social Research 11:1, 1–16.

Bagdigen, M. and H. Cetintas (2003) Causality between Public Expenditure and Economic Growth: The Turkish Case. Journal of Economic and Social Research 6:1, 53–72.

Barro, Robert J. (1990) Government Spending in a Simple Model of Endogenous Growth. Journal of Political Economy 98: S(5),103–125.

Barro, Robert J. (1991) Economic Growth in a Cross Section of Countries. Quarterly Journal of Economics 106:2, 407–443.

Barro, Robert J. and Xavier Sala-I-Martin (1992) Public Finance in Models of Economic Growth. Review of Economic Studies 59, 645–661.

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

Cheung, Wong Yin and Kon S. Lai (1993) Finite-Sample Sizes of Johansen’s Likelihood Ratio Test for Cointegration. Oxford Bulletin of Economics and Statistics 55, 313–328.

Dar, Atul. A. and Sal Amir Khalkhali (2002) Government Size, Factor Accumulation, and Economic Growth: Evidence from OECD Countries. Journal of Policy Modeling 24, 679–692.

Ditimi, Amassoma (2011) Components of Government Spending and Economic Growth in Nigeria: An Error Correction Modeling. Journal of Economics and Sustainable Development 2:4.

E.Maku, Olukayode (2009) Does Government Spending Spur Economic Growth in Nigeria? (MPRA Paper No.17941).

Engen, M. Eric, and Janathan Skinner (1991) Fiscal Policy and Economic Growth. In Paper presented at NBER Conference on Taxation.

Facchini, Francois and Mikael Melki (2011) Growth and Political Ideology in a Democracy: The French Experience 1871–2009. EPCS, Rennes, France, 28th-1st May 2011.

Folster, Stefan and Magnus Henrekson (2001) Growth Effects of Government Expenditure and Taxation in Rich Countries. European Economic Review 45, 1501–1520.

Ghura, D. (1995) Macro Policies, External Forces, and Economic Growth in Sub-Saharan Africa. Economic Development and Cultural Change 43:4, 759–78.

Grier, K. B. and G. Tullock (1989) An Empirical Analysis of Cross National Economic Growth: 1951-80. Journal of Monetary Economics 24:2, 259–76.

Guseh, J. S. (1997) Government size and Economic Growth in Developing Countries: A Political-Economy Framework. Journal of Macroeconomics 19:1, 175–92.

Gwarteny J., R. Lawson, and R. Holcombe (1998) The Size and Functions of Government and Economic Growth. Joint Economic Committee.

Hakro, A. N. (2009) Size of Government and Growth Rate of Per Capita Income in Selected Asian Developing Economics. International Research Journal of Finance and Economics Issue 28, 53–65.

Hearth. S. (2010) The Size of the Government and Economic Growth: An Empirical Study of Sri Lanka. (Working Paper).

Heerden,Yolande, V. (2008) Finding the Optimal Level of Taxes in South Africa: A Balanced Budget Approach. Department of Economics. (Working Paper).

Hsieh, E. and K. Lai (1994) Government Spending and Economic Growth. The G-7 Experience. Applied Economics 26,535–542.

Hussain, M. Iftikhar (2011) Is the Size of Government Optimal in Pakistan: A Time Series Analysis, 1975-2008. Journal of Economics and Economic Education Research 12:2.

Jong-Wha, L. (1995) Capital Goods Imports and Long-Run Growth. Journal of Development Economics 48:1, 91–110.

Khalifa H. Ghali (1997) Government Spending and Economic Growth in Saudi Arabia. Journal of Economic Development. 22: 2.

Kormendi, R. C. and P. Meguire (1986) Government Debt, Government Spending, and Private Sector Behavior; Reply. American Economic Review 76:1, 191–203.

Landau, D. (1985) Government Expenditure and Economic Growth in the Developed Countries: 1952-76. Public Choice 47, 459–477.

Landau, D. (1986) Government and Economic Growth in the Less Developed Countries: An Empirical Study for 1960-1980. Economic Development and Cultural Changes 35, 35–37.

Lin, S. (1994) Government Spending and Economic Growth. Applied Economics 26:1, 83–94.

Mehdi, S., M. Shoorekchali (2012) The Impact of Government Size on Economic Growth: A Case Study in Italy. Australian journal of Basic & Applied Sciences 6:9, 616–621.

Pevcin, P. (2004) Does Optimal Size of Government Spending Exist? Faculty of Administration, Gosarjeva ulica, University of Ljubljana, Slovenia.

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

Romer, Paul M. (1986) Increasing Returns and Long-Run Growth. Journal of Political Economy 94, 1002–1037.

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

Scully, G. (1994) What is the Optimal Size of Government in the US? National Center for Policy Analysis. (Policy Report No. 188).

Scully, G. (2006) Taxes and Economic Growth. National Center for Policy Analysis. (Policy Report No. 292).

Scully, G. (2008) Optimal Taxation, Economic Growth and Income Inequality in the United States. National Center for Policy Analysis. (Policy Report No. 316).

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

Sheng Tung Chen, and Chien Chiang Lee (2005) Government Size andEconomic Growth in Taiwan: A threshold Regression Approach. Journal of Policy Modeling 27, 1051–1066.

Taiwo, M. and T. Abayomi (2011) Government Expenditure and Economic Development: Empirical Evidence from Nigeria. MPRA.

Vedder, R. K. and L. E. Gallaway (1998) Government Size and Economic Growth. Paper prepared for the Joint Economic Committee of the US Congress, pp.1–15.

Yasin, Mesghena (2011) Public Spending and Economic Growth: An Empirical Investigation of Sub Saharan Africa. The Southwestern Economic Review.

Yuk, W. (2005) Government Size and Economic Growth: Time-Series Evidence for the United Kingdom, 1830-1993. Department of Economics, University of Victoria, Victoria, B.C., Canada.