The Effect of Government Size on Economic Growth and Technical Change

This paper examines the effects of government size on economic growth and technological change at country level using Penn World Table version 9.0 with a focus on Asian nations. Government size is measured by the share of government expenditure to gross domestic product, and technological change is measured by total factor productivity at national level. Using endogenous growth theory as major theoretical framework and employing country mixed-effect regression models, we find that the effects of government size on economic growth and technological change are complex and nonlinear. Indeed, the causal relationship between government size and both economic growth and technological change shows a multiple equilibrium function. As a consequence, variation of government size yields an unpredicted variation of economic growth and technological change. It implies that once policy makers decide a change in the size of government, they should be aware that the effects of the change on economic growth and technological change might not be as their expectations.