Do Government Expenditures and Institutions Drive Growth? Evidence from Developed and Developing Economies

Zahirah Mohd Sidek, Noor; Asutay, Mehmet

Abstract

Purpose – Most empirical studies on the government expenditure-economic growth nexus suggest a negative relationship between the size of the government expenditures and economic growth especially government consumption expenditures. Given these findings, the government should focus on development expenditures and reduce non-development expenditures for higher economic growth. However, the authors argue that this may not be the case, as government consumption expenditures along with better institutional quality promote growth via reduced corruption, reduction of political risks and good governance. The purpose of this study is to provide empirical evidences that both government consumption and development expenditure promote growth in the presence of better institutional quality. Design/methodology/approach – This paper re-examines the impact of government expenditures on growth whilst controlling institutional factors for a sample of 30 developed and 91 developing countries from 1984 to 2017. Government expenditure is segregated into consumption and development expenditures. Findings – The results are consistent with existing findings where government consumption expenditures have a negative effect on growth and government development expenditures contribute positively towards growth. However, when the authors conditioned government consumption expenditures with institutional variables, results suggest that in the presence of good institutions, both government consumption and development expenditures promote growth. Practical implications – The findings in this paper suggest that in the presence of good institutions, government consumption expenditures will contribute positively towards growth. The results are relatively consistent for both developing and developed economies, which suggests the importance of institutional factors leading to a parallel movement towards long run growth path. In other words, long run economic growth is driven by a similar institutional environment. Originality/value – Both developed and developing countries show similar reactions towards consumption and development expenditures. This indicates that despite the level of development, government expenditure.

Citation

Zahirah Mohd Sidek, N., & Asutay, M. (2021). Do Government Expenditures and Institutions Drive Growth? Evidence from Developed and Developing Economies. Studies in Economics and Finance, 38(2), 400-440. https://doi.org/10.1108/sef-10-2019-0412

• Journal Article Type: Article
• Acceptance Date: Mar 15, 2020
• Online Publication Date: May 28, 2020
• Publication Date: Jun 7, 2021
• Deposit Date: Apr 21, 2020
• Publicly Available Date: Jun 17, 2020
• Journal: Studies in Economics and Finance
• Electronic ISSN: 1086-7376
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• Volume: 38
• Issue: 2
• Pages: 400-440
• DOI: https://doi.org/10.1108/sef-10-2019-0412
• Public URL: https://durham-repository.worktribe.com/output/1273021