Government Expenditure, Economic Growth and Conditional Convergence : What Does the Penn World Table 7.0 Tell Us?

The Penn World Table 7.0 is a comprehensive database covering measures of GDP and its components for almost all countries over the period 1960-2009. We explore the relationship between the size of government expenditure, as a share of GDP, and its effect on conditional convergence for 150 countries over the period 1970-2009 within the framework of the Solow growth model. We utilize a battery of statistical tests to analyze the data including panel regression methods and associated tests. The complete panel results are compared to OLS cross sectional results as well as various regional subsets. The results indicate that there is an inverse relationship with government expenditure and economic growth and that there is a positive relationship with private investment and economic growth. We find that the speed of conditional convergence increases with the addition of the size of government and level of openness. However, this varies by region and indicates that within region convergence to a steady state level of GDP per capita is perhaps more likely to take place than between region convergence. Our results support the idea of convergence club, whereby the slower growing and/or poorer nations of a region are catching up with the faster growing, richer nations of that same region. Finally, much of government expenditure appears to either have been used inefficiently or not for the promotion economic growth, while private investment on the other hand does lead to increased economic growth