Abstract
AbstractThe purpose of this paper is to investigate the impact of government consumption expenditure as a share of GDP on economic growth in developing countries. The paper uses threshold panel model to examine nonlinear relationship between the government consumption expenditure share and economic growth in 21 low-income countries and 11 low-middle income countries during 1981–2007. The results confirm nonlinear relationship, in which the threshold share of government consumption expenditure for the low and low-middle income countries is 16.2 and 16.9% with the confidence intervals of [13.7–17.3%] and [16.5–16.9%], respectively. The results indicate that, after passing the threshold, the effect of government consumption expenditure share on economic growth changes from insignificantly positive to significantly negative.
Highlights
Government size, which is defined here as the ratio of government consumption expenditure to GDP, has negative and positive impacts on economic growth
The findings indicate that the impact of government consumption expenditure share on economic growth is reversed around 16%
The purpose of this paper is to investigate the impact of government consumption expenditure share on economic growth, which is considered by Barro (1990), instead of the public expenditure share by Armey (1995)
Summary
Government size, which is defined here as the ratio of government consumption expenditure to GDP, has negative and positive impacts on economic growth. Empirical studies applied various quantitative methods to investigate the impact of government consumption expenditure on economic growth These methods are based on statistical models such as quadratic form, vector error correction, threshold autoregressive, and panel data or nonstatistical approaches such as DEA. Hansen (1999a, 1999b) suggests using the below bootstrap procedure for examining the significance of F1: (1) by minimizing the sum of squared residuals, the threshold value and the corresponding coefficients are estimated; (2) a new sample, with the residuals of first stage, is generated under supposition of the null hypothesis (the explanatory variables are supposed to be nonstochastic, so they do not change). F1 statistic is used to test the presence of the threshold, while the LR1 statistic is used for constructing the confidence interval of the present threshold
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