Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time-Series Data: Comment

Abstract

In a recent paper, Rati Ram (1986a) derived an equation for economic growth from two separate production functions, one for the government sector and the other for the nongovernment sector.' Three different specifications of the growth equation were estimated using data for 115 countries covering the period 1960-80. International cross-section regressions for 1960-70 and 1970-80 as well as time-series regressions for individual countries were considered. The following were the main results (Ram, 1986a, pp. 191-92): (1) the overall impact of government size on growth is positive in almost all cases; (2) the (marginal) externality effect of government size is generally positive; (3) compared with the rest of the economy, factor productivity in the government sector appears to be higher, at least during the 1960s; and (4) there is a broad harmony between the estimates obtained from crosssection and time-series data. From a policy standpoint, Ram's results, if widely accepted, have important implications, especially in regard to the economic development of the lowand middle-income developing countries. For instance, the results can be interpreted to favor a relatively large role for governments in the economies of developing countries, especially if the factor productivity in the government sector is higher than in the nongovernntent sector. The results of Ram, however, are in contrast to the findings of Daniel Landau (1986). Landau used a regression model within the framework of a pooled cross-section (65 LDCs) and time-series (1960-80) to assess the impact of a wide variety of government expenditure variables on the rate of economic The regressors included not only measures of government expenditure but also the level of per capita product, indicators of international economic conditions, human and physical capital variables, the structure of production, historical-political factors, geo-climatic factors, and others. On the impact of government on economic growth, Landau's (1986, p. 68) conclusions are: consumption expenditure' excluding military and educational expenditure... appears to have noticeably reduced economic Military and transfer expenditures do not appear to have had much impact on economic Governmental educational expenditures seem to be inefficient at generating actual education.... Government capital development expenditure appears to do nothing to accelerate economic growth. The conclusions of Ram and Landau are in sharp contrast to each other largely due to significant differences in their models and in the specification of government-size variables. Ram's model has a better theoretical foundation compared to the multiple-regression approach of Landau. On the other hand, Landau used a variety of government expenditure components as against aggregate government consumption which Ram used. Their models and results, therefore, need to be carefully evaluated in further research on the subject. This paper is an attempt in that direction and is aimed at a critical review of Ram's model and reexamination of his results. *Department of Economics and Statistics, National University of Singapore, Kent Ridge, Singapore 0511. The author is grateful to Ganesha and Sai Gayathri for inspiration, to Koh Lin Ji for computing assistance, and to Basant Kapur, Tse Yiu Kuen, Dudley Luckett, and Mukul Asher for comments and advice. Special thanks are due to the four referees of the Review for substantial comments on the earlier versions of this paper. IRam adapted the two-sector growth model of Gershon Feder (1983). Feder examined the relationship between exports and economic

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