Does the government size affect output growth in developing countries? Evidence from selected ASEAN countries.

Author:Kaushik, Neetu
Position::Report
 
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Abstract

This paper studies the effect of government size economic growth in selected AEAN countries. A standard growth model is developed in which the output growth is a function of the size of government, growth in labor supply and total stock of capital as percentage of GDP. The estimated results suggest that increase in the capital stock is the primary factor that helps to grow the economy. Government size did not have either positive or negative effect on output growth. Growth rate of labor does not affect the output growth in Thailand, Malaysia, and Indonesia. In case of the Philippines labor supply seems to have a negative effect on output growth probably because of excess labor supply in relation to other inputs.

JEL Category: E61, H50, O40

Key words: government size, economic growth, ASEAN countries, growth model

  1. INTRODUCTION

    The relationship between the size of government and economic growth has been a debatable issue for several decades. In early fifties and sixties there was some consensus among development economists as well the policy makers that an ideal system is a mixed economic system in which the government sector requires to play an important role in the economy. Particularly, in developing countries where there was not enough infrastructure development the government had to play an important role in developing modern modes of transportations as well as communications. In addition to developing the infrastructures some governments are also engaged in supplying the basic goods as well as services to the general public at some fair price to ensure that the people at the margin have access to the basic needs.

    By early eighties it was realized that mixed economic system with big government sector essentially distorts the production as well as consumption in the economy which eventually slows down the pace of growth. That is why the last two decades of twentieth century saw a massive privatization in developing countries. The industrialized countries, particularly the USA and the United Kingdom started to reduce the size of government arguing that the smaller government with less economic regulation is much better for growth of an economy. The recession that started in 2008 brought the issue of role of government again in the forefront. Many social scientists now have started arguing that we need a bigger government in order to sustain economic growth (Madrick, 2008; Sachs 2009). In view of this controversy in this paper we estimate and analyze the effect of government size on economic growth in selected ASEAN nations (Association of South East Asian Nations) namely, Indonesia, Malaysia, the Philippines, and Thailand. We hope that the findings of this paper will shed some light on the relationship between government size and economic growth in Southeast Asian countries.

  2. REVIEW OF LITERATURE

    As indicated above the issue relating to the government size and economic growth has been an issue of contention for a long time. Tomas Hobbes in 1651 described life without government was "nasty, brutish, and short" and argued that the law and order provided by government was a necessary component of civilized life (Gwartney et al. 1998). Obviously, Hobbes was indicating that the role of government in maintaining the law and order, protecting the property rights smooth functioning of the judicial system was important in a society not only in maintaining a civilized society...

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