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Does Optimal Government Size Exist for Developing Economies? The Case of Nigeria

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  • Alimi, R. Santos

Abstract

Government size, its roles and the efficiency of the public sector has becomes a more important issue recently especially when the financial crisis has covered severely almost all Economies worldwide. Using time-series techniques, this study empirically tests the validity of existing theory (Barro, 1990; and Armey, 1995) which stipulates there is a nonlinear relationship between government size and economic growth; such that government spending is growth-enhancing at low levels but growth-retarding at high levels, with the optimal size occurring somewhere in between. This study employed three estimation equations. First, for the size of government, two measures are considered as follows: (i) share of total expenditures to gross domestic product, (ii) share of recurrent expenditures to gross domestic product. Second, the study adopted real GDP (without government expenditure component), as a variant measure of economic growth other than the real total GDP, in estimating the optimal level of government expenditure. The study is based on annual Nigeria country-level data for the period 1970 to 2012. Estimation results show that the inverted U-shaped curve exists for the two measures of government size and the estimated optimum shares are 19.81% and 10.98% respectively. Finally, with the adoption of real GDP (without government expenditure component),the optimum government size was found to be 12.58% of GDP. Our analysis shows that the actual share of government spending on average (2000 - 2012) is about 13.4%. This study adds to the literature confirming that the optimal government size exists not only for developed economies, but also for developing economy like Nigeria. Thus a public intervention threshold level that fosters economic growth is a reality; beyond this point economic growth should be left in the hands of the private sector. This finding has a significant implication for the appraisal of government spending and budgetary policy design.

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  • Alimi, R. Santos, 2014. "Does Optimal Government Size Exist for Developing Economies? The Case of Nigeria," MPRA Paper 56073, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:56073
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    References listed on IDEAS

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    Cited by:

    1. Ayşegül Durucan, 2022. "Testing The Validity Of The Bars Curve For Turkey," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 67(232), pages 153-192, January –.
    2. Mroczek Teresa & Skica Tomasz & Rodzinka Jacek, 2019. "Optimal Size of the General Government Sector from the Point of View of its Impact on the EU Economies," South East European Journal of Economics and Business, Sciendo, vol. 14(2), pages 95-105, December.
    3. Pelin Varol Iyidogan & Taner Turan, . "Government Size and Economic Growth in Turkey: A Threshold Regression Analysis," Prague Economic Papers, University of Economics, Prague, vol. 0, pages 1-13.
    4. Pelin Varol Iyidogan & Taner Turan, 2017. "Government Size and Economic Growth in Turkey: A Threshold Regression Analysis," Prague Economic Papers, Prague University of Economics and Business, vol. 2017(2), pages 142-154.
    5. Ndanshau, Michael O.A. & Mdadila, Kenneth, 2023. "Government Expenditure and Economic Growth Nexus in Tanzania," African Journal of Economic Review, African Journal of Economic Review, vol. 11(3), June.

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    More about this item

    Keywords

    Public Expenditure; Economic Growth; Optimum Level; Fully Modified OLS;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H1 - Public Economics - - Structure and Scope of Government
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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