An Assessment of the Growth-Enhancing Size of Government in the Caribbean

Abstract

Between 1990 and 1994, the average size of the public sector in the Caribbean was just 16 percent of GDP, in the five years hence, the ratio has climbed and currently stands at 22 percent of GDP. While an expansion in the size of government usually results in the greater provision of services, it can also lead to slower rates of growth because of greater bureaucracy and the crowding-out of private sector driven initiatives. Using a simple production function approach, this study provides an assessment of the growth-enhancing size of government in the Caribbean using annual observations for the period 1975 to 2002. The econometric results in the paper suggest that government services do positively influence growth, but only if the size of government is, on average, between 10 percent and 16 percent of total real value-added.

Keywords: Government size, growth, Caribbean

JEL Classification: H1, C23, O54