Government and Economic Growth in the Less Developed Countries: An Empirical Study for 1960-1980

Adam Smith founded modern economics with a powerful argument that free markets are the best route to prosperity and economic growth. His conclusion has been studied and debated by economists ever since, including Nobel Prize winners Friedman, Hayek, Kuznets, Lewis, Myrdal, and Schultz. Whatever economists have concluded, since World War II the majority of the less developed countries seem to have opted for extensive government regulation of the private sector and for a large public sector. Has the large government role slowed or accelerated the growth of LDCs? Obviously, this is an important issue. This study looks at government expenditure, revenue raising, and regulation. Greater emphasis is put on expenditure because (1) the revenue raised is presumably a function of the level of expenditure, and (2) there are few internationally comparable measures of regulation. There are virtually no empirical studies of the general impact of government on economic growth. An extensive literature search turned up only three papers. Gemmell analyzed the impact of nonmarket sector growth on various measures of macroeconomic performance for 27 LDCs and developed countries for 1960 and 1970. He drew no general conclusions about the relation between the size of the nonmarket sector and economic growth.' Marsden found a negative relation between tax/GDP ratios and economic growth for a cross section of 20 LDCs and developed countries for the 1970-79 period.2 I found a negative relationship between the share of government consumption expenditure in GDP and the growth of per capita GDP for a cross section of 96 LDCs and developed countries over various time periods between 1961 and 1976.3 This paper extends the approach used in my 1983 article.