Growth and the public sector: a critique of the critics

Abstract

In a recent review article Jonas Agell, Thomas Lindh and Henry Ohlsson (1997) claim that theoretical and empirical evidence does not allow any conclusion on whether there is a relationship between the rate of economic growth and the size of the public sector. They illustrate their conclusion with simple cross-country regressions where the relation between growth and public expenditure tilts from negative to positive when control variables are introduced. In our article we argue that Agell, Lindh and Ohlsson base their conclusion on empirical studies, and on their own regressions, without evaluating the econometric problems that arise. We extend Agell et al.´s review in order to highlight some of these problems. Furthermore, we present evidence showing that once a number of econometric issues are dealt with the relationship between growth and public expenditure may be more robustly negative than it first appears. JEL Classification: E62, H20, H50, O23, O40.

Fiscal Policy and Growth: An Empirical Evaluation in CFA Franc Zone

“…The rationale of the result is that in developing countries, most governments do not focus on more productive items of budget. This result is the same as Barro (1997) and Folster and Henrekson (1997) which find a significant negative relationship between government spending and growth. But the magnitude of this relationship is weak.…”

“…Due to the short sample period, we cannot follow the standard practice of taking 5 year averages to remove the effects of business cycle; but following Gupta et al (2005), business cycle may be weaker in low-income countries due to absence of automatic stabilizers. Moreover, Folster and Henrekson (1997) find that the pattern of the relationship is similar even though there is a change in the significativity level when annual data are used rather than three, five and ten years interval.…”

“…But the selection of instruments is a difficult task. Our choice follow Folster and Henrekson (1997) and Kneller et al (1999) papers and use the first difference of fiscal variables as instruments. Notes: * Significant at 10%; **Significant at 5%; ***Significant at 1%.…”

Fiscal policy and TFP in the OECD: measuring direct and indirect effects

“…Agell et al, 1997Agell et al, , 1999Folster andHenrekson, 1999, 2001) focus on the effect of government size. Depending on methods used and on countries studied, the obtained results are highly contradictory.…”

Competition Policy Trends and Economic Growth: Cross‐National Empirical Evidence

“…In that vein, Fölster and Henrekson (1999) growth. When adopting a yearly level-of-analysis, however, it becomes imperative to control for both the annual inflation rate -already noted above as a control variable -and the annual unemployment rate in the labour force (hereafter referred to as Unemployment).…”