Does government size affect per-capita income growth? A Hierarchical meta-regression analysis

We conduct a hierarchical meta-regression analysis to review 87 empirical studies that report 769 estimates for the effects of government size on economic growth. We follow best-practice recommendations for meta-analysis of economics research and address issues of publication selection bias and heterogeneity. When measured as the ratio of total government expenditures or government consumption expenditures to GDP, government size is associated negatively with per-capita income growth in developed countries. However, the partial correlation coefficient is insignificant when the evidence relates to developing countries. When the evidence for both country types is pooled together, the partial correlation is insignificant in the case of total government expenditures but negative and significant in the case of government consumption. We also report that government size is associated with less adverse effects when primary studies control for endogeneity and are published in journals and more recently, but it is associated with more adverse effects when primary studies use averaged cross-section data. These findings indicate that the relationship between government size and growth is context-specific and the existing evidence is insufficient to establish a negative causal effect due to: (i) potential biases induced by reverse causality between government size and per-capita income; (ii) lack of control for country fixed effects in cross-section studies; and (iii) absence of control for non-linear relationships between government size and per-capita GDP growth.