Private sector shrinkage and the growth of industrialized economies

Abstract

Industrialized nations have experienced growing public sectors over this century. Measured as a share of total product, growing absorptions of resources by governments have altered the private-public sector mixes of in­ dustrialized economies. As displayed in Table 1, the average level of the public sector's share of gross domestic product (GDP) has risen from .32 to .40 over 1960 to 1980, respectively. Much of public sector growth stems from a rapid acceleration in public outlays on social expenditure: The average ratio of social expenditure to GDP has risen from .14 to .24 over the same period. This paper examines the hypothesis that growing public sectors retard macroeconomic growth. Even though much has been hypothesized and asserted about the effect of growing public sectors on economic growth, there exist little empirical evidence supporting the hypotheses and asserta­ tions. From a sample of 19 industrialized countries, it is found that economic growth is inversely related to public sector size over the period 1960-1980. The results of this paper suggest that shrinking private sectors not only pose threats to future over-all economic growth but constrains the future ability of public sectors to consume private resources at accelerating rates.