Economic Performance and Government Size

December 14, 2011

Researchers António Afonso and João Tovar Jalles of the European Central Bank construct a growth model with an explicit government role, where more government resources reduce the optimal level of private consumption and of output per worker.  In the empirical analysis, for a panel of 108 countries from 1970-2008, they use different proxies for government size and institutional quality.

  • Their results, consistent with the presented growth model, show a negative effect of the size of government on growth.
  • Similarly, institutional quality has a positive impact on real growth, and government consumption is consistently detrimental to growth.
  • Moreover, the negative effect of government size on growth is stronger the lower institutional quality, and the positive effect of institutional quality on growth increases with smaller governments.
  • The negative effect on growth of the government size variables is more mitigated for Scandinavian legal origins, and stronger at lower levels of civil liberties and political rights.
  • Finally, for the European Union, better overall fiscal and expenditure rules improve growth.

Source: António Afonso and João Tovar Jalles, "Economic Performance and Government Size," European Central Bank, November 2011.

For text:

http://www.ecb.int/pub/pdf/scpwps/ecbwp1399.pdf

 

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