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Government Size and Growth: A Survey and Interpretation of the Evidence

Bergh, Andreas LU and Henrekson, Magnus (2011) In Journal of Economic Surveys 25(5). p.872-897
Abstract
The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach – of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time – reveals a more consistent picture: The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note... (More)
The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach – of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time – reveals a more consistent picture: The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: One hypothesis is that countries with higher social trust levels are able to develop larger government sectors without harming the economy. Another explanation is that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by ongoing research. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Government size, growth
in
Journal of Economic Surveys
volume
25
issue
5
pages
872 - 897
publisher
John Wiley & Sons
external identifiers
  • wos:000296909500003
  • scopus:80054686819
ISSN
0950-0804
DOI
10.1111/j.1467-6419.2011.00697.x
language
English
LU publication?
yes
id
222f73ad-e2c6-45d6-8515-8f3b8de8186e (old id 1939384)
date added to LUP
2011-05-04 09:28:07
date last changed
2017-11-19 03:51:53
@article{222f73ad-e2c6-45d6-8515-8f3b8de8186e,
  abstract     = {The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach – of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time – reveals a more consistent picture: The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: One hypothesis is that countries with higher social trust levels are able to develop larger government sectors without harming the economy. Another explanation is that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by ongoing research.},
  author       = {Bergh, Andreas and Henrekson, Magnus},
  issn         = {0950-0804},
  keyword      = {Government size,growth},
  language     = {eng},
  number       = {5},
  pages        = {872--897},
  publisher    = {John Wiley & Sons},
  series       = {Journal of Economic Surveys},
  title        = {Government Size and Growth: A Survey and Interpretation of the Evidence},
  url          = {http://dx.doi.org/10.1111/j.1467-6419.2011.00697.x},
  volume       = {25},
  year         = {2011},
}