Sal AmirKhalkhali

Government size, factor accumulation, and economic growth: evidence from OECD countries

Abstract This study examines the role of government size in explaining the differences in economic growth rates of the 19 Organization for Economic Co-operation and Development (OECD) countries over the 1971–1999 period using a random coefficients model. Our results indicate that, on average, total factor productivity growth, as well as the productivity of capital, are weaker in countries where government size is larger. The advantage of a small government sector, in general, likely reflects the greater efficiencies resulting from fewer policy-induced distortions (such as the burden of taxation), the greater discipline of market forces which fosters efficiency of resource use, and the absence of crowding-out effects that weaken the incentives to create new capital which embodies new technologies. From a policy perspective, this does not mean that the optimal policy is one that minimizes the size of government. Rather, a small as opposed to a large government could potentially be as effective in providing the legal, administrative, and governance infrastructure critical for growth, as well as for offsetting market failures. At the same time, the country-specific results indicate that the nature of country-specific institutions as well as the mix of government activities are as important for growth performance as the aggregate size of government.

On the impact of trade openness on growth: further evidence from OECD countries

This study attempts to examine empirically the implications of the degree of openness for total and individual factor productivity growth in a group of 19 OECD countries over the last three decades. The study combines both time series and cross-sectional data. The model employed is a generalization of the commonly used, growth-accounting model based on the concept of an aggregate production function in which the rate of economic growth is a function of capital and labour accumulation and total factor productivity. It is explicitly assumed that total factor productivity depends, in turn, upon the rate of export expansion. The model is then estimated using the random coefficients approach. While results generally indicate that the relative importance of trade openness on economic growth varies significantly across countries, they also indicate that the role of capital and labour accumulation in fostering economic growth varies with the degree of openness, cross-sectionally as well as across time.