Working Paper Series,
Uppsala University, Department of Economics

Abstract: Fölster and Henrekson (1998) claim that they, by addressing a number of econometric problems, can establish that it is likely that economies with a large public sector grow more slowly than economies with a small public sector. But their regressions are fundamentally flawed. Re-estimating their growth equation using theoretically valid instruments, we find that the growth effect of the public sector is statistically insignificant, and much smaller than the point-estimates reported by Fölster and Henrekson. This is consistent with the agnostic conclusion, drawn by us and many others, that cross-country growth regressions are unlikely to give a reliable answer to whether a large public sector is growth promoting or retarding.

Keywords: economic growth; public sector; taxation; government expenditure; cross-country regressons

JEL-codes: E62; H20; H50; O57

10 pages, December 19, 1998

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Published as

Jonas Agell, Thomas Lindh and Henry Ohlsson, (1999), 'Growth and the Public Sector: A reply', European Journal of Political Economy, vol 15, no 2, pages 359-366

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