An Empirical Assessment of Optimal Government Size and Economic Growth in Light of the Armey Curve : A Panel Data Investigation

The indispensable role of government expenditure in dictating the economic growth performances in any economy cannot be overlooked. The need of greater resource mobilization through enhancement of government expenditure has also been acknowledged in the United Nations 2030 Sustainable Development agenda. It has been specifically addressed as a key macroeconomic tool to ensure a couple of the crucial Sustainable Development Goals (SDGs). However, the relationship between the optimal size of government expenditure and economic growth has displayed ambiguity in the empirical literature which questions the effectiveness of rapidly increasing the volume of government expenditure across the globe, without putting much emphasis on the country or region-specific disparities. This paper aims to bridge this gap in the empirical literature investigating the non-linear nexus between government size and economic growth in light of the Armey curve. This paper employed annual data stemming from 1980 to 2016 for a panel of 9 selected countries from South and Southeast Asia. For robustness check, the authors also considered subpanel investigations with respect to region-specific and lower-middle-income economies. In the core regression model, the economic growth rate was expressed as a function of government expenditure and other control variables. The fixed effects panel estimation methodology was the chosen estimation tool. The results provide statistical evidence in favor of the validity of the Armey Curve in context of the full panel and the Southeast Asian subpanel data. This paper also sheds light on the threshold optimal levels of government expenditure. In light of the estimated statistical evidence, the optimal government sizes in the context of the full panel and the Southeast Asian subpanel are estimated to be 148,627.5 and 57,765.7 million US dollars