The Causes of Government and the Consequences for Growth and Well-Being

70 Pages Posted: 20 Apr 2016

See all articles by Simon John Commander

Simon John Commander

London Business School; IZA Institute of Labor Economics

Hamid R. Davoodi

International Monetary Fund (IMF) - Fiscal Affairs Department

Une J. Lee

World Bank

Date Written: June 1997

Abstract

A range of factors drive size of government: relative prices, the age-dependency ratio, how long a country has been independent, relative political freedom, and openness in trade. Larger governments tend to limit growth, but that tendency can be offset by well-functioning institutions and high-quality bureaucracy. Size of government is not the only issue that matters.

Using a large cross-country data set, Commander, Davoodi, and Lee examine the factors that cause governments to grow and analyze how the size of government affects growth, whether measured as income growth or other measures of well-being, such as infant mortality and life expectancy. They find no robust link between government size and per capita income. The factors they find to be important in explaining government size are relative prices, the age-dependency ratio, how long a country has been independent, relative political freedom, and openness in trade. Their results also partially support the view that governments use consumption to buffer external risk, especially in low-income countries.

As for how government size affects growth, they find a robust and significant negative relationship between growth and government size, as measured by consumption. Policy distortions, predictably, also have a negative effect on growth. But the positive effects of well-functioning institutions and high quality in government bureaucracies can offset the negative influence of large government size alone.

Finally, they find that social-sector spending can exert a positive influence by reducing infant mortality and raising life expectancy. Better income distribution, higher per capita income, higher per capita income growth, and more political freedom have the same positive effect on those two measures of well-being.

This paper - a joint product of the Office of the Senior Vice President, Development Economics and Chief Economist, and New Products and Outreach Division, Economic Development Institute - was prepared as a background paper for World Development Report 1997 on the role of the state in a changing world.

Suggested Citation

Commander, Simon John and Davoodi, Hamid R. and Lee, Une J., The Causes of Government and the Consequences for Growth and Well-Being (June 1997). World Bank Policy Research Working Paper No. 1785. Available at SSRN: https://ssrn.com/abstract=597205

Simon John Commander (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Hamid R. Davoodi

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Une J. Lee

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

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