The Optimal Size of Government and the Armey Curve: A Review of Empirical Evidence
Abstract
The objective of this study is to examine the “inverted U” relationship between public spending and economic growth known as the Armey curve, and to review the empirical evidence on the optimal level of public spending required, by country, to maximize gross domestic product (GDP), based on regression methods and the Armey curve. The Armey curve denotes a positive relationship between public spending and GDP up to a maximum point thereafter the relationship becomes negative: that is, public spending is productive only to a certain extent, after which it becomes unproductive. The empirical findings show the inverted U-shape between public spending and growth, and therefore whether government spending is of an optimal size. World Bank data on public spending (as a percentage of GDP) and GDP per capita in US$ purchasing power parity (PPP) for 2017 identifies countries with low public spending and high GDP per capita, such as the Special Administrative Region of Macao, China. Moreover, the studies reviewed show that current public spending and/or average public spending across different countries is above or below the threshold public spending level. Among the policy implications, it is suggested that countries below the threshold inject public spending into investments that generate a greater impact on the economy. The management of public spending to achieve the optimal government size should ensure long-term sustainable economic growth for the countries of the world.
References
Altunc, O. F., & Adyin, C. (2013). The relationship between optimal size of government and Economic growth: Empirical evidence from Turkey, Romania and Bulgaria. Procedia – Social and Behavioral Sciences, 92, 66–75.
Anaduaka, U., Nnetu-Okolieuwa, V., Aguegboh, E., & Okorie, D. (2016). Relative maxima of the public sector: A comparative study of Nigeria and Ghana. International Journal of Academic Research in Business and Social Sciences, 6(12), 575-589.
Armendáriz, E. & Carrasco, H. (2019). Expenditure on public investment in Latin America (IDB Discussion Paper No. 697). Washington, DC: Inter-American Development Bank.
Armey, R. (1995). The freedom revolution. Washington, DC: Regnery Publishing.
Asimakopoulos, S., & Karavias, I. (2016). The impact of government size on economic growth: A threshold analysis. Economics Letters, 139, 65–68.
Aydin, C., & Esen, Ö. (2019). Does too much government spending depress the economic development of transition economies? Evidences from dynamic panel threshold analysis. Applied Economics, 51(15),1666–1678.
Barro, R. (1990). Government spending in a simple model of endogenous growth. Journal of Political Economy, 98(S5),103–125.
Bozma, G., Basar, S., & Eren, M. (2019). Investigating validation of Armey Curve hypothesis for G7 countries using ARDL model. Dogus Üniversitesi Dergisi, 20(1), 49–59.
Coayla, E. (2018). The Armey curve: Size of public spending and economic growth in Peru. Journal of Applied Economic Sciences, 5(59), 1365–1372.
Di Matteo, L. (2013). Measuring government in the twenty-first century. An international overview of the size and efficiency of public spending. Canada: Fraser Institute.
Di Matteo, L., & Summerfield, F. (2018). The shifting Scully Curve: International evidence from 1870 to 2013 (RCEA Working Paper No.01). Ontario: Rimini Centre for Economic Analysis.
El Husseiny, I. (2019). The optimal size of government in Egypt: An empirical investigation. The Journal of North African Studies, 24(2), 271–299.
Ferreira de Mendonça, H., & Cacicedo, T. (2015). Size of government and economic growth in the largest Latin American country. Applied Economics Letters, 22(11), 904–910.
Hina, K., Ghumro, I., Abidi, A., & Lashari A. (2019). Impact of government size threshold on economic growth of Pakistan (1980–2015). SALU-Commerce & Economics Review, 5(1), 1–12.
Kim, M., Han, Y., Tierney, H., & Vargas, E. (2020). The economic consequences of government spending in South Korea. Economics Bulletin, 40(1), 308–315.
Kleynhans, E., & Coetzee, C. (2019). Actual vs optimal size of the public sector in South Africa. Acta Universitatis Danubius, 11(1), 25–58.
Lazarus, W. Z., Khobai, H., & Le Rou, P. (2017). Government size and economic growth in Africa and the Organization for Economic Cooperation and Development Countries. International Journal of Economics and Financial Issues, 7(4), 628–637.
Linh, N.T.M., Nga, P.T.H., & Phan, T.T. (2019). The optimal public expenditure decision: A case of economic growth in Southeast Asian countries. Journal of Management Information and Decision Sciences, 22(2), 25–35.
Mahnaz, M. A., & Tasnim K. (2017). Armey curve analysis for the panel of selected South Asian Economies. International Journal of Social Sciences, Humanities and Education, 1(2), 1–8.
Malcolm, X. (2017). Investigating the optimal level of government spending to maximize economic growth in Jamaica (BJ Working Paper). Kingston: Bank of Jamaica.
Matute, J. (2019). Factores explicativos del crecimiento del sector público. El caso de Ecuador 1983–2016. Revista Economía y Política, XV (30), 176-195. (In Spanish)
Murshed, M., Mredula, F., & Tabassum, F. (2018). An empirical assessment of optimal government size and economic growth in light of the Armey Curve: A panel data investigation. World Review of Business Research, 8(1), 161–173.
Myeong, H.K., Yongseung, H., Heather, L.R., & Vargas, E.Y. (2020). The economic consequences of government spending in South Korea. Economics Bulletin, 40(1), 308–315.
Nouira, R., & Kouni, M. (2018). Optimal government size and economic growth in developing and MENA countries: A dynamic panel threshold analysis (ERF Working Papers No. 1256). Tunisia: Economic Research Forum.
Phan, T., & Phung, D. (2018). Government size and economic growth in Asia – Evidence from China and Japan. Asian Economic and Financial Review, 8(1), 71–89.
Pinilla, D., Jiménez, J., & Montero, R. (2013). Gasto público y crecimiento económico. Un estudio empírico para América Latina. Cuadernos de Economía, 32(59), 181–210.
Rajput, S., & Tariq, A. (2019). Government size and economic growth: A panel data study comparing OECD and non-OECD countries. Applied Economics Journal, 26(2), 22–37.
Stiglitz, J. (2003). La economía del sector público. Barcelona: Antoni Bosch.
Stiglitz, J. (2019, November 24). It's time to retire metrics like GDP. They don't measure everything that matters. The Guardian. Retrieved from https://www.theguardian.com/commentisfree/2019/nov/24/metrics-gdp-economic-performance-social-progress
Tabaghua, S. (2017). Optimal size of government and economic growth: The case of Georgia. Actual Problems of Economics, 7(193), 58–69.
Thanh, S., & Mai, B. (2015). The threshold of government size and economic growth for ASEAN countries: An analysis of the smooth transition regression model. Southeast Asian Journal of Economics, 3(1), 103–124.
Varol, P., & Turan, T. (2017). Government size and economic growth in Turkey: A threshold regression analysis. Prague Economic Papers, 26(2),142–154.
Vasilev, A. (2020). The "Armey Curve" in Bulgaria (2000–18): Theoretical considerations and empirical results. Theoretical and Practical Research in Economic Fields, 11(1), 21-26.
Vaziri, H., Nademi, Y., Paghe, A., & Nademi, A. (2011). Does Armey Curve exist in Pakistan and Iran economies? Journal of Applied Sciences Research, 7(5), 562–565.
Yüksel, C. (2019). The size of the public sector and the Armey Curve: The case of Turkey. In M. Tas & A. Gercek (Eds.), Critical debates in public finance (pp.137-154). Turkey: Peter Lang.
Copyright (c) 2021 Applied Economics Journal
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Submission of a manuscript to Applied Economics Journal will be taken to imply that the author(s) guarantee that the paper is an original work, has not been published, and is not being considered for publication elsewhere either in printed or electronic form. The author(s) have obtained permission from the copyright holder to reproduce in the article material not owned by them, that author(s) have acknowledged the source, and that this article contains no violation of any existing copyright or other third party right or any material of an obscene, indecent, libelous or otherwise unlawful nature and that the article does not infringe the rights of others. The author(s) will indemnify and keep indemnified the editors and Applied Economics Journal, Center for Applied Economics Research (CAER), Faculty of Economics, Kasetsart University against all claims and expenses. The author(s) agree that the publisher may arrange for the article to be published and sold or distributed on its own, or with other related materials, and could reproduce and/or distribute in printed, electronic or any other medium whether now known or hereafter devised, in all languages, and to authorize third parties to do the same.
