Government Size and Social Capital in Developing Countries; New Empirical Evidence

Abstract

Social capital is one of the most important subjects in development economics. It has a crucial role in development process in developing countries. To the best of our knowledge, there is no study about the importance of government size in social capital. Therefore, the purpose of this paper is considering the relationship between government size and social capital in 109 developing countries during the period of 2008-2014. To do so, we have used a panel data method based on the model of Knack and Keefer (1997). Estimated Results of a fixed effect panel model indicate that there is a non-linear relationship between government size and social capital. When the government size is small (the government size is less than 26.17%), increasing government size has a significant positive impact on social capital. However, when the government size is large (the government size is larger than 26.17%), government size has a significant negative impact on social capital. Before this threshold level of government size, due to preparing safe environment as well as social and economic institutions, ensuring property rights, providing public services as well as social security, building schools and universities, etc., expanding government leads to promoting social capital. But after this threshold level, because of inefficient expenditure, corruption and crowding out private investments in social capital, expanding government has a negative impact on social capital.