A panel of selected South Asian Developing countries is used for analysis. Data from to is used for empirical investigation. Panel cointegration is used for the analysis. The results indicated that there is a nonlinear relationship between the size of the government and economic growth.
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A panel of selected South Asian Developing countries is used for analysis. Data from to is used for empirical investigation. Panel cointegration is used for the analysis. The results indicated that there is a nonlinear relationship between the size of the government and economic growth. To date, policymakers are still divided as to whether government expansion helps or hinders economic growth or not.
Proponents of bigger governments are usually of the view that increase in government expenditure, especially on socio-economic and physical infrastructures, encourages economic growth.
For example, government expenditure on health and education are presumed to raise the productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as roads, communications, power, etc.
Thus, some scholars concluded that expansion of government expenditure contributes positively to economic growth.
On the other hand, advocates of smaller government argued that higher government spending could undermine economic growth Mitchell, Higher income tax discourages individual from working for long hours or even searching for jobs.
This in turn reduces income and 2 Mahnaz, Tasnim aggregate demand. In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as profitability of firms. Moreover, if government increases borrowing especially from the banks to finance its expenditure; this by extension could crowd out private sector and therefore reduce private investment by transferring resources from the productive sector of the economy to government. The actual effect of public spending on economic growth is both theoretically and empirically debated.
The empirical literature investigated the possibility of a non-linear relationship keeping in view the fact that government size has a positive effect on growth to a small extent. Similarly, to the Laffer curve, this literature emphasized the existence of an inverted U-shaped curve between government size and GDP growth, sometimes called the Armey Curve Armey et al.
Some of them are discussed as follows: 2. Theoretical Review Public expenditure represents one of the key fiscal policy instruments for governments. Theoretically, public expenditure is believed to generate wide range of short-term and long-run influences on economic growth. Economic theories have offered some explanations on how government expenditure may either spur or retard economic growth.
Prominent among such theories is the traditional Keynesian macroeconomic theorizing. Standard Keynesian analysis suggests that government spending could play a stabilizing role in the economy. It is argued that by increasing its spending, governments can offset a slower pace of economic activities. Proponents of this school of thought often anchored their argument on the presumed positive multiplier effect of government spending on aggregate demand.
In this connection, government spending is viewed as a powerful stabilizing policy instrument that can be used to mitigate short- run fluctuations in output and employments Zagler and Durnecker, Empirical Review Many empirical studies have been conducted to determine the relationship between government expenditure and economic growth in an economy. Landau explained the relationship between government expenditure in 96 developed countries using the Ordinary Least Square methods.
His result showed that negative relationship exists between government expenditure and economic growth. The results showed that a negative relationship exist between them.
Chobanov and Mladenova examined the optimal size of Government defined as the share of the total public expenditure on GDP able to maximize economic growth for a set of 28 Int.
Moreover, all the countries in the sample were situated in the right descending part of the curve. Hearth has concluded a nonlinear relationship between government expenditure and economic growth over the period for Sri Lanka. The Armey curve was used for the analysis which had shown that the government expenditure and economic growth are positively related up to the threshold level but negatively related beyond that level.
Barro has used panel data to highlight the impact of economic growth. The analysis was conducted using the average annual rate of growth of real GDP per capita and the ratio of real government consumption expenditure to real GDP as a measure of the government size.
The findings have concluded that government consumption expenditure affects negatively and significantly economic growth. Zareen and Qayyum analysed the impact of government size on economic growth in Pakistan as government size is the core factor which causes economic growth. This study is carried out for Pakistan to examine relationship between government size and economic growth using a time series data over the period The findings concluded that the government size has negatively significant impact on economic growth in the long run.
After we have studied a vast literature, it is revealed that a lot of studies have been conducted by different people both in developed as well as developing countries to examine the impact of government size on economic growth.
We have found differences in the findings of the researchers across the world. Some studies highlight that government size and economic growth are negatively related or equivalently large size of the governments reduces economic growth. In contrast, some other pinpoint that the said relationship is positive i-e a large size of the government is associated with high economic growth. As far as the panel studies are concerned, we have found no study which has relied on examining the relation between government size and economic growth using panel of Pakistan, India, Bangladesh and Bhutan.
Data The panel data is used for the analysis and selective South Asian countries like Pakistan, Bangladesh, India and Bhutan are included in the panel. Data covered the time-span from to All the series was procured from the world development indicator [WDI].
Per this estimator, the intercepts - short-run coefficients - and error variances differ across groups whereas the long-run coefficients remain the same. Now after replacing the in-bracket term by error term we get: Int. Now estimation of Eq. We will estimate above ARDL model for panel of three developing countries. Table 1. So, they become stationary at first difference. Table 2. ISSN 6 Mahnaz, Tasnim In ARDL approach, we apply bound test which confirms the presence of co-integration.
The probability less than 0. Table 3. Long run estimates show that there is nonlinear relationship between govt expenditures and economic growth. Govt expenditures are positively and significantly related with economic growth. While the square form of Govt expenditures has negative and statistically significant impact on economic growth. Results also indicate that the employment level, gross fixed capital formation and inflation have positive and statistically significant impact on economic growth while trade openness has negative but insignificant effect on growth.
The results of the present study are consistent with the finding of Zareen and Qayyum in which they analysed the impact of government size on economic growth for Pakistan economy. The findings concluded that the government size has negative and significant impact on economic growth in the long run. The ECM coefficient explained the adjustment speed from short run to long run span of time. Its coefficient should be less than one with negative sign and statistically significant Bannarjeeet al.
It provided the support to confirm earlier found co-integration between the variables. The Int. ISSN Armey Curve Analysis for The Panel of Selected South Asian Economies 7 existence of an error-correction term between the co-integrating variables implies that changes in dependent variables are a function of both the levels of disequilibrium in the co-integration relationship ECM and the deviations in independent variables.
This provides the evidence that if there is any type of deviation in the equilibrium from long run, how much force is needed to bring it back towards equilibrium in long run Masih and Mashi, Total govt expenditures were taken as the proxy of the size of the govt. The panel data for Pakistan, India, Bangladesh and Bhutan covering the period from to was used for the analysis. The results indicated that govt expenditures are positively related to economic growth but the square form of Govt expenditures shows negative and statistically significant relation with economics growth for the panel of selected South Asian developing countries.
In this section, we seek to provide an overview of the policy implications and recommendations based on our empirical findings. Based on these finding, the study advances the policy implication that the increasing size of Govt expenditures discourages the economic growth in the long run. So, Govt should promote private investment through monitoring and regulations for private sector investment rather than to act as investor by itself.
Armey, R. Based on New Data International journal of empirical and finance Vol. Barro, and Robert, J. Cosimo, M. Chen, and C. Chobanov, D. Eviews Statistical Package, 9th Edition 9. Folster, S. Growth Effects of Government Expenditure and Taxation in rich countries. Working paper published. ISSN 8 Mahnaz, Tasnim Landau, D. Government Expenditure and Economic Growth: a cross-country study. Lin, S. Mitchell, D. Impact of Government Spending on Economic Growth. Backgrounder: The Southern Economic Journal, 49 3 : Pesaran, DAE working papers amalgamated series.
University of Cambridge. Vedder, R. Yasin, and Mesghena,
ARMEY CURVE PDF
Tygoshakar As a result of this, the study only covers between and 30 yearscjrve there is a need for more comprehensive study in this regard. This result is in line with recent empirical literature about this issue. Log In Sign Up. They are on the wrong side of arey Armey Curve. That suggests most states and localities are larger than they ought to be.