The size of the state, economic growth and the efficient utilization of national resources

Abstract

The motives of the state in projecting a more than minimal presence in the economy may be conceived of as benevolent or malevolent. Whatever the characterization of the motivation, increases in the size of the government share of the economy adversely affect economic growth and the allocation of resources. Nations with relatively large government shares in 1960 on the whole grew more slowly than nations with relatively small state sectors. Interperiod increases in the size of government were associated with lower growth rates over the period. The size of the government share coefficients in the regressions were of sufficiently large magnitude to conclude that the rise in the size of the government has had a substantial depressing effect on economic growth. These results are consistent with those reported by Landau (1983) and Marlow (1986). Landau did not adjust economic growth for the growth in factor endowment. Consequently, his results overstate the adverse effect of government size. Government allocation of resources is thought to be less efficient than private allocation. For the first time in the literature, this hypothesis was tested directly by comparing efficiency measures with the measures of the size of the government sector. It was found that the size of the government share in the economy was negatively correlated with economic efficiency and with the inter-period change in economic efficiency. Nations with relatively large state sectors produced less output per head with the same input ratio than nations with relatively small government sectors. © 1989 Kluwer Academic Publishers.