Growth versus government management improvement during economic downturn

Abstract

In estimating how economic growth depends on various inputs, economists commonly use long periods of data encompassing both main extremes to fluctuations in the economy: recession and expansion. Here we focus on recession years because during expansion even countries with bad economic policies may experience large growth. Specifically, we study how growth depends on the proportion of public-sector workforce, p and competitiveness, quantified by the Global Competitiveness Index, GCI. For the 2008-2011 economic downturn and for 57 countries, we find that the growth rate of GDP per capita, g, decreases with p, and increases with ΔGCI. Further, more competitive countries attract more foreign direct investments per capita, I, than less competitive countries, where I ∝ GCIα. We propose a production function, divided into the private and public sectors, where GDP depends on market capitalization, the public (private)-sector workforce, and competitiveness level, used to quantify the public sector efficiency.