Ratio Working Papers
Government Size and Growth: Accounting for Economic Freedom and Globalization
() and Martin Karlsson
Abstract: Several recent studies have found a negative relation
between government size and economic growth in rich countries. Since
countries with big government have experienced above average improvements
in both the Economic freedom index and the KOF globalization index, we
argue that existing studies suffer from an omitted variable problem. Using
Bayesian Averaging over Classical Estimates (BACE) in a panel of OECD
countries, we show that the negative effect from government size is very
robust and may have been underestimated in previous studies. The dataset is
an updated and extended version of the data used by Fölster and Henrekson
(2001), covering the period 1970-1995. We find clear evidence that
globalization has a positive effect on growth, but find no effect of
economic freedom. Finally, we find that the negative effect of government
size decreases substantially in size but remains significant when we add
the period 1996-2005 to the sample. Our results support the idea that
countries with big government can use institutional quality such as
economic freedom and globalization to mitigate negative growth effects of
taxes and public expenditure.
Keywords: Government size; growth; economic freedom; globalization; taxes; (follow links to similar papers)
JEL-Codes: H11; O43; (follow links to similar papers)
26 pages, February 16, 2009
An early version of this paper was presented at the World Meeting of the Public Choice Society, Amsterdam 2007.
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