Abstract
This paper revisits the relationship between fiscal size and economic growth. Our work differs from the empirical growth literature because this relationship depends explicitly on the efficiency of the public sector. We use a sample of 64 countries, both developed and developing, in four five-year time periods between 1980 and 2000. Building on the work of Afonso et al. (Public Choice 123:321–347, 2005), we construct a measure of public sector efficiency in each country and each time period by calculating an output-to-input ratio. In addition, we get an estimate of technical efficiency of public spending for 52 countries from 1995 to 2000 by employing a stochastic frontier analysis. Using these two measures, we find evidence of a non-monotonic relation between fiscal size and economic growth that depends critically on the size-efficiency mix.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Afonso, A., Schuknecht, L., & Tanzi, V. (2005). Public sector efficiency: an international comparison. Public Choice, 123, 321–347.
Afonso, A., Schuknecht, L., & Tanzi, V. (2006). Public sector efficiency: evidence for new EU member states and emerging markets (ECB Working Paper No. 581).
Agell, J., Ohlsson, H., & Thoursie, P. S. (2006). Growth effects of government expenditure and taxation in rich countries: a comment. European Economic Review, 50, 211–218.
Anderson, T. W. (1984). Introduction to multivariate statistical analysis (2nd edn.). New York: Wiley.
Angelopoulos, K., Economides, G., & Kammas, P. (2007). Tax-spending policies and economic growth: theoretical predictions and evidence from the OECD. European Journal of Political Economy, 23, 885–902.
Angelopoulos, K., & Philippopoulos, A. (2007). The growth effects of fiscal policy in Greece 1960–2000. Public Choice, 131, 157–175.
Baum, C. F., Schaffer, M. E., & Stillman, S. (2006). Stata module to extended instrumental variables/2SLS, GMM and AC/HAC, LIML and k-class regression. http://ideas.repec.org/c/boc/bocode/s425401.html.
Barro, R. (1990). Government spending in a simple model of economic growth. Journal of Political Economy, 98, S103–S125.
Barro, R., & Sala-i-Martin, X. (2004). Economic growth (2nd edn.). Cambridge, MIT Press.
Cragg, J. G., & Donald, S. G. (1993). Testing identifiability and specification in instrumental variables models. Econometric Theory, 9, 222–240.
De Haan, J., Lundstrom, S., & Sturm, J. E. (2006). Market-oriented institutions and policies and economic growth: a critical survey. Journal of Economic Surveys, 20, 157–191.
Devarajan, S., Swaroop, V., & Zoo, H. (1996). The composition of public expenditure and economic growth. Journal of Monetary Economics, 37, 313–344.
Dutt, P., & Mitra, D. (2002). Endogenous trade policy through majority voting: an empirical investigation. Journal of International Economics, 58, 107–133.
Folster, S., & Henrekson, M. (2001). Growth effects of government expenditure and taxation in rich countries. European Economic Review, 45, 1501–1520.
Gemmel, N., & Kneller, R. (2001). The impact of fiscal policy on long-run growth. European Economy, 1, 98–129.
Greene, W. H. (2005). Efficiency of public spending in developing countries: a stochastic frontier approach. Mimeo, May 2005.
Gwartney, J., Holcombe, R., & Lawson, R. (1998). The scope of government and the wealth of nations. Cato Journal, 18, 163–190.
Gwartney, J., Easterly, W., & Lawson, R. (2006). Economic freedom of the world (2006 Annual Report). The Fraser Institute, Vancouver, BC.
Heston, A., Summers, R., & Aten, B. (2002). Penn world table, Version 6.1. Center for International Comparisons at the University of Pennsylvania (CICUP).
Hillman, A. (2003). Public finance and public policy: responsibilities and limitations of government. Cambridge: Cambridge University Press.
Kneller, R., Bleaney, M., & Gemmel, N. (1999). Public policy and the government budget constraint. Journal of Public Economics, 74, 171–190.
Kumbhakar, S. C., & Lovell, C. A. K. (2000). Stochastic frontier analysis. Cambridge: Cambridge University Press.
Levine, R., & Renelt, D. (1992). A sensitivity analysis of cross-country growth regressions. American Economic Review, 82, 942–963.
Miller, S., & Russek, F. (1997). Fiscal structures and economic growth: international evidence. Economic Inquiry, XXXV, 603–613.
Mueller, D. (2003). Public choice III. Cambridge: Cambridge University Press.
Persson, T., & Tabellini, G. (2003). The economic effects of constitutions. Cambridge: MIT Press.
Tanzi, V., & Davoodi, H. R. (1998). Corruption, public investment and growth. In H. Shibata, & T. Ihori (Eds.), The welfare state, public investment and growth. Berlin: Springer.
Tanzi, V., & Schuknecht, L. (2000). Public spending in the 20th century: a global perspective. Cambridge: Cambridge University Press.
Tanzi, V., & Zee, H. (1997). Fiscal policy and long-run growth. IMF Staff Papers, 44, 179–209.
Wooldridge, J. W. (2002). Econometric analysis of cross section and panel data. Cambridge: MIT Press.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Angelopoulos, K., Philippopoulos, A. & Tsionas, E. Does public sector efficiency matter? Revisiting the relation between fiscal size and economic growth in a world sample. Public Choice 137, 245–278 (2008). https://doi.org/10.1007/s11127-008-9324-8
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11127-008-9324-8