Government Size and Growth: Accounting for Economic Freedom and Globalization

Posted: 21 Oct 2009

See all articles by Andreas Bergh

Andreas Bergh

Lund University - Department of Economics; Research Institute of Industrial Economics (IFN)

Martin Karlsson

University of Duisburg-Essen

Date Written: October 21, 2009

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

JEL Classification: H11, O43

Suggested Citation

Bergh, Andreas and Bergh, Andreas and Karlsson, Martin, Government Size and Growth: Accounting for Economic Freedom and Globalization (October 21, 2009). Available at SSRN: https://ssrn.com/abstract=1492326

Andreas Bergh (Contact Author)

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07
Lund
Sweden

HOME PAGE: http://www.nek.lu.se/

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34 2nd floor
Stockholm, SE-102 15
Sweden
0707790734 (Phone)

HOME PAGE: http://www.ifn.se/web/AndreasB

Martin Karlsson

University of Duisburg-Essen ( email )

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