Abstract
The Keynesian theory states that economic growth is positively affected by government spending, while Classical theory states that economic growth is negatively affected by government spending, as is stated by neoclassical public choice theorists (Nyasha & Odhiambo, 2019). Based on these theories, many authors have carried out research on the impact of economic freedom on economic growth by analyzing various empirical cases. Bergh and Karlsson (2010) with the findings from his paper confirmed that the countries with the highest government size have an elevated growth in the globalization index of KOF and the Fraser Institute’s economic freedom index. The main aim of this paper is to analyze the government size impact on the growth of the economy in the Western Balkan in the time period 2000–2017 according to Fraser Institute’s data, incorporating the following econometric models: fixed and random effects, pooled ordinary least squares (OLS), and Hausman-Taylor IV. With these models, this paper analyzes a government size and its components: government enterprises and investment, government consumption, transfers, and subsidies. The results illustrate a relationship between the size of the government and the growth of the economy in the Western Balkans that is positive. 1% increase in government size affects 0.29% gross domestic product (GDP) growth per capita. According to the Hausman-Taylor instrumental variable, 1% growth of government consumption is affected by 0.69% the decline in GDP per capita. The growth rate of transfers and subsidies affects 0.17% of GDP growth per capita and 1% of government enterprises and investment affects 0.54% GDP growth per capita.
Highlights
There are many researchers who have tried to make the connection and impact between the size of the government and the growth of the economy by explaining the different indicators of measuring government size in relation to gross domestic product (GDP)
In this research, pooled ordinary least squares (OLS), fixed effect and random effect panel model were used to determine the determinants of economic growth
This study proves that government size affects economic growth in the Western Balkans for the period 2000–2017 according to the Fraser Institute’s data, incorporating the following econometric models: pooled OLS, fixed and random effects and Hausman-Taylor IV
Summary
There are many researchers who have tried to make the connection and impact between the size of the government and the growth of the economy by explaining the different indicators of measuring government size in relation to gross domestic product (GDP). In the context of this paper, indicators for measuring the size of government by Fraser Institute were taken. According to this institute, the size of the government is determined by government consumption, transfers and subsidies, government investment, and tax revenue. Countries with a greater amount of government expenditures had lower ratings and vice versa. The formula will generate lower ratings for countries with larger transfer sectors. Countries that received lower ratings were those countries with more government enterprises and government investment (Gwartney et al, 2020)
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