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Government Expenditure, Governance and Economic Growth

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Abstract

This study investigates the role of the government in economic growth by extending the neoclassical production function to incorporate two dimensions of the government – the size and the quality dimensions. The government size- and quality-augmented model, where size is measured by government expenditure and quality by governance, is tested on a cross section of 71 economies. Estimation is also carried out on the sample by income distribution. The empirical results indicate that both the size and quality of the government are important for economic growth. It is argued that investing in the capacity for enhanced governance is a priority for the improved growth performance of the countries examined.

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Notes

  1. This was suggested to me by the Editor of the journal, Paul Wachtel.

  2. This is different to the Hulton (1996), Pritchett (1996) and Aschauer (2000) studies that incorporate a government effectiveness variable as proxy for government quality. In the empirical estimation, governance is entered as a series of dummy variables ranging from very high to very low in this study that also distinguishes it from the studies by Hulton, Pritchett and Aschauer.

  3. The composite governance indicator does not take on a value of above 2 for any of the countries in the sample in 1996. Many of the developed countries have composite governance indicators in the range of 1.5 and 2. Hence, a composite governance index of over 1.5 is labelled as very high governance.

  4. The instruments are selected on the basis of the partial correlation coefficient of Shea (1997).

  5. Income groups are selected according to the World Bank classification.

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Acknowledgements

This is a revised version of a paper presented at the 120th Annual Meeting of the American Economic Association, New Orleans 2008, under the title ‘Economic Growth and the Size and Quality of the Government’. I thank the discussant of this paper Henry Thompson, and Martin Spechler for valuable comments. I also thank Glenn Otto, Ranjan Ray, Hugh Sibly and Graeme Wells for helpful comments on an earlier version of this paper. I am grateful to the Editor of this journal, Paul Wachtel, two anonymous referees and Amnon Levy for valuable suggestions, and Simon Ville for research support. The financial support to undertake this research by the School of Economics and Finance, University of Tasmania, is gratefully acknowledged.

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  1. Department of Economics, University of Wollongong, Northfields Avenue, Wollongong, 2522, NSW, Australia

    Arusha Cooray

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APPENDIX

APPENDIX

Countries used in the study:

Armenia, Australia, Austria, Bangladesh, Belarus, Botswana, Brazil, Burundi, Cameroon, Canada, Central African Republic, China, Colombia, Central African Republic, Denmark, Dominican Republic, Ecuador, El Salvador, Ethiopia, Fiji, Germany, Ghana, Guinea Bissau, Guyana, India, Indonesia, Iran, Jamaica, Kazakhstan, Kenya, Lesotho, Liberia, Lithuania, Latvia, Luxemburg, Madagascar, Malaysia, Maldives, Moldova, Mozambique, Myanmar, Nepal, Netherlands, New Zealand, Nicaragua, Niger, Pakistan, Papua New Guinea, Paraguay, Peru, Philippines, Romania, Russia, Senegal, Singapore, Slovakia, Slovania, Somalia, South Africa, Sri Lanka, Sudan, Sweden, Tajikistan, Thailand, Tunisia, Turkey, Uganda, Ukraine, the United Kingdom, the United States, Viet Nam, Zambia.

Country Groups by Income Level:

Low Income: Armenia, Bangladesh, Burundi, Cameroon, Central African Republic, Ethiopia, Ghana, Guinea-Bissau, India, Indonesia, Kenya, Lesotho, Liberia, Madagascar, Moldova, Mozambique, Myanmar, Nepal, Nicaragua, Niger, Pakistan, Papua New Guinea, Senegal, Somalia, Sudan, Tajikistan, Uganda, Ukraine, Viet Nam, Zambia.

Middle Income: Belarus, Botswana, Brazil, China, Columbia, Dominican Republic, Ecuador, El Salvador, Fiji, Guyana, Iran, Jamaica, Kazakhstan, Lithuania, Latvia, Malaysia, Maldives, Paraguay, Peru, Philippines, Romania, Russia, Slovakia, South Africa, Sri Lanka, Thailand, Tunisia, Turkey.

High Income: Australia, Austria, Canada, Denmark, Germany, Luxemburg, Netherlands, New Zealand, Singapore, Slovania, Sweden, the United Kingdom, the United States.

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Cooray, A. Government Expenditure, Governance and Economic Growth. Comp Econ Stud 51, 401–418 (2009). https://doi.org/10.1057/ces.2009.7

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