Government size and economic growth:A review of international literature

Abstract

In this paper, we survey the existing literature on the causal relationship between government size and economic growth, highlighting the theoretical and empirical evidence from topical work. Although some previous studies have endeavoured to conduct a survey on the existing research on the causal relationship between government size and economic growth, the majority of these studies have focused on the impact of the two macroeconomic variables and failed to provide coverage on the causality aspect of their relationship. To our knowledge, this may well be the first study of its kind to survey, in detail, the existing literature on the causal relationship between government size and economic growth – in all the countries, whether developing or developed. By and large, our study shows that direction of causality between these two variables has four possible outcomes; and that all the outcomes have found empirical support, based on variations in the country or region under study, methodology, proxies, data set used and time frame considered. However, of the four, the most prominent is the second view, which validates unidirectional Granger-causality from economic growth to government size, followed by the bidirectional Granger-causality category. The study, therefore, concludes that the causal relationship between government size and economic growth is not clear-cut.