Government Size and Economic Growth: The Role of Country Diversity

Abstract

Does the size of the public sector affect economic growth? A large body of research has examined this question and documented inconclusive results. In this paper, I argue that the impact of a large public sector on economic performance turns negative in countries with a fragmented population. Using data on 183 countries for the period of 1950--2019, I find a significant negative relationship between a large public sector and subsequent income growth in countries with a high ethnic or linguistic fragmentation.

Keywords: Diversity, Economic Growth, Government, Public Sector

JEL Classification: D72, O10, P16