A simultaneous-equation model is used to deal with the problem of bi-directional relationship between government size and economic growth. As nouns the difference between government and economy is that government is the body with the power to make and/or enforce laws to control a country, land. The relationship between the government and the economy of a country is directly related. The government assumes the role of policymaker that directly and.
In this paper, the following simultaneous-equation model is specified to estimate the effect of government size on economic growth, In addition to those variables introduced earlier, and are the relative prices of government investment to all other goods, government consumption to all other goods, and the share of export in GDP, respectively. Equation 4 is the first equation of the SEM.
The second and third equations of model 5which explain andrespectively, are inspired by Borcherding et al. The second equation specifies that government investment share depends on economic growth, the relative price of government investment to all other goods and openness while the third equation specifies that the share of government consumption depends on economic growth, the relative price of government consumption to all other goods, proportion of self-employed people in total population, proportion of elderly people in total population, and the growth rate of population.
Wagner views national income as one of the determinants of government size thus making government size an endogenous factor. Thus, the second equation in model 5 addresses the issue of the simultaneity between and while the third equation addresses the issue of the simultaneity between and.
What is the relationship between governance and economic growth?
The price of government and the price elasticity of demand for government goods and services both determine whether public sector expands or shrinks. If the demand for government good is price inelastic, then government spending will increase when the price of government goods or services increases. On the other hand, government size can expand when the demand for government is price elastic and the price of government is declining. However, in the literature there has been evidence in support of an increasing price and inelastic demand for government goods and services.
Kau and Rubin [ 37 ] shows in their paper that an increase in the proportion of self-employed people in the population increases tax avoidance as self-employment provides greater opportunity to hide income. Therefore, higher tax rates are expected to increase the likelihood of people becoming self-employed and evading taxes.
Therefore, the variable is included in the third equation to capture the effect of relative cost of tax avoidance on the share of government consumption. The growth of the proportion of population older than sixty five is expected to increase demand for social services and so is expected to be positively associated to the share of government consumption in GDP.
What is the relationship between governance and economic growth? | World Economic Forum
The fourth equation for the ratio of investment to output is developed following Sprout and Weaver [ 38 ] and Esfahani [ 39 ]. Data Model 5 is estimated using annual data covering the — span.
The Appendix provides a detailed description of variables and data sources. Some of the time-series variables in model 5 may be nonstationary. The standard method for detecting nonstationary behavior in a time-series is to test for the presence of a unit root. Testing can be extended to incorporate the prospect of a deterministic trend as well as the stochastic type of trend represented by a unit root.
A number of tests can be found in Said and Dickey [ 41 ], Kwiatkowski et al. The PP test is applied to detect the existence of unit roots in the variables in model 5. The test assumes the null hypothesis of a unit root. Should I play it safe and join a governance team or risk being a lone voice in a sea of economists and private sector staff?
A year in, I now think differently about the relationship between growth and governance.
Revisiting the Relationship between Economic Growth and Government Size
Eradicating poverty will not be possible without high and sustained growth that generates productive jobs and brings benefits across society. Historically, this has included boosting productivity within existing sectors as well as rebalancing economies towards more productive sectors e. Such structural change or economic transformation has lifted millions from poverty. Economic transformation can have a strong disruptive effect on political governance — giving rise, for example, to interest groups that push for accountable leaders and effective institutions.
As countries get richer, more effective institutions also become more affordable. Over time, economic transformation can therefore advance core governance objectives. But this is easier said than done.
Economic development is an inherently political process that challenges vested interests. Shrewd power politics can be bad economics. The resulting country studies powerfully illustrate the close relationship between growth and governance challenges — in everything from extractives, to infrastructure or energy. Consider the following excerpts with the countries anonymised: The fundamental obstacles to promoting inclusive economic growth are primarily political in nature and not due to a lack of technical expertise or knowledge about what needs to be done.
Dependence on primary commodities provides scope for elites to enrich themselves without needing to implement reforms that improve the long-term productive capacity of the economy. Patronage politics distorts the economy and diverts public investment away from more productive sectors. Inertia is politically safer than reform.