Relationships between government size and economic growth: Japan's government reforms and evidence from OECD

This paper examines the relationship between government size and economic growth of 21 industrialized countries. Government size is measured by government final consumption expenditures and transfer payments. The relationship between government consumption is expected to increase GDP growth for developing countries, and reduce it for industrialized countries. Government consumption can contribute to increased economic growth. However, government consumption is likely to expand beyond an efficient level in industrialized countries. In contrast, transfer payments, and social welfare programs are likely to reduce economic growth for most countries. These programs reduce work incentives and encourage tax avoidance activities. Work disincentives and tax avoidance reduce economic growth. These expected relationships are consistent with economic performance and government size for the countries considered here. Inefficiency and excessive government growth are checked by voter feedback as tax burdens exceed the associated benefits. Unfortunately, government program costs and benefits are asymmetrically distributed. The resulting tendency is to expand government programs, particularly programs that benefit a majority of voters at the expense of a minority. This tendency becomes even more acute as the tax system becomes more progressive (i.e., tax burdens become concentrated. Reductions in government size are more likely with stagnant or declining economic growth, and in government programs whose costs are widely shared, compared to programs with widely shared benefits and narrowly shared costs.     

Democratization and the size of government: evidence from the long 19th century

We study the consequences of franchise extension and ballot reform for the size of government in Western Europe between 1820 and 1913. We find that franchise extension exhibits a U-shaped association with revenue per capita and a positive association with spending per capita. Instrumental variables estimates, however, suggest that the U-shaped relationship may be non-causal and our fixed effects estimates point to substantial cross-country heterogeneity. Further, we find that the secret ballot did not matter for tax revenues per capita but might have expanded the size of government relative to GDP.     

The size of government

Most research on the causes of growth in government expenditure has focused on the demand for government services. In this paper, we argue that in fact this growth may have occurred because of changes in supply. Changes in technology leading to increased specialization and thus increased opportunity costs of self-production have led to increased market production and increased record keeping. Also, female labor force participation has increased. Both of these factors serve to reduce the (efficiency) cost of collecting taxes; if the demand for government spending has not changed, this increase in supply would lead to a larger public sector. We estimate a system of simultaneous equations for the period 1929–1970 incorporating this hypothesis, and the results are consistent with the theory. We are able to explain virtually all of the growth of government; increases in female labor force participation seems to be a very important variable in this explanation.     

Determinants of cabinet size

A large literature examines the composition of cabinets in parliamentary systems, but very little attention has been paid to the size of those cabinets. Yet not only is the size of the cabinet related to the division of portfolios that may take place, cabinet size is also related to policy outcomes. In this article, a theory of party size is considered which examines how coalition bargaining considerations, intra‐party politics and efficiency concerns affect the size of cabinets. Hypotheses derived from the theory are examined using an extensive cross‐national dataset on coalition governments which allows us to track changes in cabinet size and membership both across and within cabinets.     

The optimal size of government

In the economic analysis of the theory of government, two views of government are evident. The Pigovian view sees government as a benevolent actor striving to correct for the inadequacies and excesses of an unrestrained marketplace. The ‘Public Choice’ view of government portrays government as the tool of special interest groups as likely to generate distortions as to correct them. In this paper, a model of government that incorporates both views will be developed and then empirically tested. The model developed assumes that all expenditures by the government are inputs into the private sector production. Treating government expenditures as inputs into the production of private sector output, there is some optimal size of government that maximizes private sector output. The model incorporates a general production function for private sector output. Output is a function of private labor, private capital, and government expenditures. The Pigovian and Public Choice views of government are reflected in the assumed impact of G on the marginal productivities of L and K. The model is tested using United States data and a Cobb-Douglas production function. Estimates indicate that the 1983 level of government expenditures exceeds by 87 percent the level that would maximize private sector output. Reducing government from $ 491 billion to $ 263 billion and shifting the freed labor to the private sector would increase output from $ 1187 billion to $ 1451 billion.     

Local government in practice: evidence from two villages in northern Albania

This article examines how local government operated in two villages in northern Albania and describes how these two communities organized themselves to negotiate with the state. Post‐communist local government is examined by means of its functions as a provider and an organizer. The reluctance of central government to devolve power was reflected in the resources allocated to local government institutions and thus on their performance. While Albanian cultural traditions were a source of support and cohesion in the villages, they were no substitute for the development of the capacity to collectively negotiate with the state. There was a link between the way in which institutions were socially embedded and the capacity of the villages to form and support representative bodies. The article concludes that local government has been undervalued and argues for greater attention to be focused on the nexus composed of citizens and the institutions of government which are closest to them. Copyright © 2000 John Wiley & Sons, Ltd.     

Corruption and government size: A disaggregated analysis

Using annual state-level data over 1983–1987, this paper examines the effect of government size on corruption by public officials by including both demand and supply side incentives for engaging in corrupt practices. Our objectives are twofold. First, we assess the relationship between the incidence of corruption and overall measures of the size of the federal government and the state-local sector in each state. Second, we explore what kinds of government activities are more likely to be successful in deterring abuse of public office. Our results are generally supportive of Becker's “crime and punishment” model. Regarding the primary focus of the paper, our results show that government size, in particular spending by state governments, does indeed have a strong positive influence on corruption.     

Fiscal decentralization and government size: An extension

This paper analyzes one method governments employ to circumvent the discipline of a competitive system of fiscal federalism — intergovernmental collusion in the form of intergovernmental grants. Grants, it is argued, serve to encourage the expansion of the public sector by concentrating taxing powers in the hands of the central government and by weakening the fiscal discipline imposed on governments forced to self-finance their expenditures. The results reported suggest that intergovernmental grants do encourage growth in the public sector. The results offer further support for the use of monopoly government assumptions in public sector modeling.     

Fiscal decentralization and government size

Numerous studies have attempted to model the possible factors contributing to universal growth in public sectors. This paper analyzes one device that appears capable of controlling some of that growth: fiscal decentralization. The results reported here also support the use of monopoly government assumptions in models of public policy     

New evidence on government efficiency

Government is generally not considered an efficient producer. Yet, conceptually, it is relatively simple to construct a system of incentives and controls that should lead to efficiency. The outcomes of over 1700 recent competitions between government producers and the private sector, conducted under OMB's Commercial Activity (CA) Program, provide new evidence. Analysis of the Navy's CA program outcomes demonstrates that the government is as efficient as the private supplier at least 21% of the time. The local incentives and controls that induce this outcome are not widespread, however. Less than half of the government managers selected an efficient mix of inputs without a competitive stimulus and an additional seven percent of the managers did not do so even then.     

The impact of government form on resource allocation in local government,evidence from municipal court closures

Differences in managerial expertise and political incentives associated with local government form may affect local government spending levels as well as the allocation of resources. This paper explores the latter possibility by estimating how the distribution of resources in council-manager and mayor-council municipalities responds to a positive fiscal shock resulting from the abolition of a municipality's court. We find that court abolition has a distinct effect on the allocation of resources in council-manager and mayor-council governments. As expected, mayor-council municipalities allocate the marginal dollar to policing. However, council-manager municipalities react to court closure by reducing police expenditures over the long-term.     

Tax decentralization and local government size

This paper investigates the relationship between fiscal federalism and the sizes of local governments. While many empirical studies emphasized that grants encourage the growth of local public spending and local taxes constrain it, they are more silent regarding the effects of different types of tax autonomy. The paper addresses this issue by arguing that tax decentralization as organized on tax bases used only by local governments (tax-separation), rather than on tax-base sharing, would restrain local public expenditures. Using an unbalanced panel of OECD countries, the key finding is that only property taxes—mostly based on a “tax-separation” scheme—seem to favor smaller local governments. Thus, while tax decentralization is a necessary condition for limiting the growth of local governments, it does not appear sufficient, as tax-separation schemes among government levels would in fact be required.     

Does the median voter model explain the size of government?: Evidence from the states

Despite an attempt by its own authors, it is difficult to argue that the influential model of the size of government developed by Meltzer and Richard (1981) has had convincing empirical backing. In this paper, we adapt that model to a model of state government size. The main testable hypothesis is that as income inequality grows, government size (as measured by the percentage of income devoted to government redistribution) grows. We test the model using panel data from the US states from 1979–1991. In contrast to the results found by Meltzer and Richard (1983), we find little evidence to support the model. The results are robust to several model specifications and estimation techniques.     

Costs of taxation and the size of government

Existing theory on the form of government suggests that a parliamentary system promotes a larger size of government than does a presidential system. This paper extends the existing theory by allowing for distortionary taxation. A main result is that if taxation is sufficiently distortionary, the parliamentary system may promote a smaller size of government than the presidential system. The proposed mechanism appears consistent with several empirical patterns in the data that cannot be explained by other theories.     

Ideology and the size of US state government

This paper theorizes that the impact of ideology on the size of US state governments increases with state income. This idea is tested using state-level ideology data derived from the voting behavior of state congressional representatives. Empirically the interaction of ideology and mean income is a key determinant of state government size. At 1960s levels of income the impact of ideology is negligible. At 1997 levels of income a one standard-deviation move towards the left of the ideology spectrum increases state government size by about half a standard deviation. Estimated income elasticities differentiated by state and time are found to be increasing with ideology and diminishing with income, as predicted by the theory.