Government Expenditure, Governance and Economic Growth

This study investigates the role of the government in economic growth by extending the neoclassical production function to incorporate two dimensions of the government – the size and the quality dimensions. The government size- and quality-augmented model, where size is measured by government expenditure and quality by governance, is tested on a cross section of 71 economies. Estimation is also carried out on the sample by income distribution. The empirical results indicate that both the size and quality of the government are important for economic growth. It is argued that investing in the capacity for enhanced governance is a priority for the improved growth performance of the countries examined. Comparative Economic Studies (2009) 51, 401–418. doi:10.1057/ces.2009.7; published online 4 June 2009