Government Size and Economic Growth: An Empirical Examination of Selected Emerging Economies

Abstract

The current study attempts to examine the linkage between government (public) spending and economic growth in the broader framework of selected South Asian Nations (SANs), BRICS and other emerging nations by using two sets of empirical modelling over the period 2007–2016 by using inverted U-shaped hypothesis, propounded by Armey curve (1995). The first set has employed system GMM technique to explore the presence of the Armey curve hypothesis using the square term of government size, while the second set has used the threshold regression using system GMM panel modelling to investigate the subsequent reversals (tipping point). The key findings signify the existence of an inverted U-shaped relationship for the selected data set of emerging nations and, therefore, support the Armey curve hypothesis. The projected threshold (tipping) levels (as a percentage of GDP) are 24.31% for the government total expenditures (GTotExp), 12.92% for consumption spending (GConExp) and 7.11% for investment spending (GInvExp). It has been observed that a rise in the public spending (size) resulted in a substantial increase (decrease) in the growth rate when the public spending was before (after) the optimal threshold level, indicating a non-monotonic association. The findings of the study also suggest a policy implication that public spending could only be a short-term measure to deal with crises in any nation, but not a long-term solution. JEL Classification: C23, C33, E60, E62, H00, H50, O40, O50

Government size and economic growth in African emerging economies: does the BARS curve exist?

“…The findings further reveal that, during the phase where government expenditure reduces growth, the impact factor is high (8.03%), showing that once government surpasses the threshold it has a massive impact on growth. This finding is theoretically plausible and consistent with the BARS theory, and with a variety of literature on economics (Pevcin, 2004;Rana and Hasan, 2016;Kimaro et al, 2017;Zungu et al, 2020;Nouira and Kouni, 2021;Jain et al, 2021). The positive impact of government size on economic growth before the threshold might be due to the lack of a public sectorthen the output produced would be low.…”

“…Their finding further supports the BARS curve of an inverted U-shape relationship between government expenditure and economic growth. Their finding was supported by Jain et al (2021).…”

“…The study by Nuru and Gereziher (2020) supported conclusions drawn by Mitchell (2005) for 15 European Union countries and across United States across. However, it was contradicted by studies by Chen and Lee (2005) in Taiwan, Pelin and Taner (2017) in Turkey, Makhoba et al (2019) in South Africa, Zungu et al (2020) in the SADC region and Jain et al (2021) in BRICS and SANs. Nuru and Gereziher (2020) examined the effect of fiscal policy on economic growth in South Africa using nonlinear autoregressive distributive lag model over the period 2004Q2-2018Q1.…”

“…The empirical literature on the relationship between government spending and economic growth is diverse. Some authors found nonlinearity, claiming that the relationship between government expenditure and economic growth is explained by the BARS inverted U-shape (Pevcin, 2004;Chen and Lee, 2005;Rana and Hasan, 2016;Kimaro et al, 2017;Zungu et al, 2020;Nouira and Kouni, 2021;Jain et al, 2021), and others by the U-shape (Pelin and Taner, 2017;Phan, 2019). For some authors it was a positive relationship (Ghali, 1999;Haque and Osborn, 2007;Wu et al, 2010;Kimaro et al, 2017;Santos, 2018;Akaakohol et al, 2019), for others a negative relationship (Bader and Qarn, 2003;Afonso and Furceri, 2010;Makhoba et al, 2019;Nuru and Gereziher, 2020) and some even found it to be inconclusive (Barro, 1990).…”

Re-visiting the Armey Curve Hypothesis: An Empirical Evidence from India

“…The results of many empirical studies for developing economies are novel and interesting, but they also recommend for more empirical investigation to examine government size—growth nexus (Giavazzi et al, 2000; Khan et al, 2020). However, a limited number of empirical studies have been conducted to explore the non-linear relationship between the government size and economic growth (Chiou-Wei et al, 2010; Jain et al, 2021; Leshoro, 2017; Nouira & Kouni, 2021; Zungu et al, 2020). The optimum size of the government and economic growth nexus has not received much empirical attention, especially in India (Akram & Rath, 2020).…”