Political economy of the size of government: What shakes and what Shapes

Published : 20 Jun 2020 09:36 PM | Updated : 07 Sep 2020 01:23 AM

Jamaluddin Ahmed

(Continued from last day's section, Part:3)

Evidence from OECD nations with shrinking government:

The growth of government has been so pervasive in the last half of the twentieth century that there have been only a few instances where nations have substantially reduced its size. This is particularly true for the high-income industrial economies. There are three instances of a substantial decline in government expenditures as a share of the economy among OECD countries during the 1960-96 period. 

The first case is that of Ireland, which saw government expenditures as a share of GDP go from 28 percent in 1960 to 52.3 percent in 1986. This situation was reversed during the 1987-96 period. As a share of GDP, government expenditures declined from the 52.3 percent level of 1986 to 37.7 percent in 1996, a reduction of 14.6 percentage points. From 1960 to 1977 government expenditures increased from 28 percent to 43.7 percent, and Ireland's real GDP growth rate was 4.3 percent. 

It declined to 3.4 percent during 1977-86, as the government further expanded to 52.3 percent of GDP. During the recent decade of shrinking government, the annual growth rate in Ireland's real GDP rose to 5.4 percent. As government expenditures shrank in Ireland, Ireland's economic growth increased. The experience of New Zealand is also revealing. 

Between 1974 and 1992, New Zealand's government expenditures as a share of GDP rose from 34.1 percent to 48.4 percent. Its average growth rate during this period was 1.2 percent. Recently New Zealand began moving in the opposite direction. The percentage of GDP devoted to government expenditures was reduced from 48.4 percent in 1992 to 42.3 percent in 1996, a reduction of 6.1 percentage points. 

Compared to the earlier period, New Zealand's real GDP growth has increased by more than two percentage points to 3.9 percent. The United Kingdom provides additional evidence. Government's share of GDP rose from 32.2 percent in 1960 to 47.2 percent in 1982. 

During this period, UK's GDP growth rate was 2.2 percent and there was widespread reference to the “British disease.” Between 1982 and 1989, government's share of GDP declined by 6.5 percentage points to 40.7 percent. Responding, UK's rate of GDP growth increased from 2.2 percent to 3.7 percent. 

While shrinking government has been rare in the past few decades, evidence from places where government has shrunk is consistent with the hypothesis that larger government lowers economic growth. The evidence illustrates that if the size of government is reduced, higher rates of economic growth can be anticipated.

Size of government in high-Growth nations:

The data in Gwartney et al  (1998) study   for OECD countries suggests that smaller government is correlated with faster rates of economic growth. While in theory government could be too small to provide the necessary environment for economic growth, the data in Exhibit 4 give no indication that any OECD government was excessively small at any time during 1960-96. 

Within the size of government range of this period, smaller government was consistently associated with more rapid economic growth. Gwartney et al  (1998)  study probes this issue further by looking at government expenditures as a share of GDP for the 10 nations with the fastest rates of economic growth during 1980-95. 

The average annual per capita GDP growth of these countries ranged from 7.4 percent for South Korea to 4.2 percent for Malaysia. There are no OECD members in this group of fastest-growing economies. The numbers in the table show total government expenditures as a share of GDP at five-year intervals during the 1975-95 period. 

The numbers in South Korea, the world's fastest-growing economy during this period, had government expenditures that were relatively stable at between 20 and 21 percent of GDP. Non-investment government expenditures in South Korea showed a steady decline from just over 15 percent of GDP to just over 10 percent during the two decade period, indicating that South Korea has increasingly been devoting government expenditures toward investment. 

The total government expenditures of Thailand, the second fastest-growing economy, were generally less than 20 percent of GDP throughout most of the period, and they also showed a trend toward increased government investment. Taiwan, third on the list, showed a substantial increase in total government expenditures, from 21.5 percent of GDP to 30.1 percent, but still ended the period with government expenditures well below the world average. 

Taiwan's non-investment government expenditures were still less than 20 percent of GDP. Singapore and Hong Kong, the next two countries, saw substantial declines in government expenditures as a percentage of GDP, and both countries had 1995 government expenditures well below 20 percent of GDP.

Growth-maximizing level of government expenditures:

A persuasive argument can be made for designing government policies in order to maximize the economy's rate of growth. In the long run, a strong economy is the best way to benefit all citizens. One need only look at the progress of the 20th century to see how economic growth has helped even those least well-off in the economy or compare the well-being of those in poverty in the United States with the typical standard of living in less-developed economies, to see why policies that foster economic growth are the key to long-term prosperity of non-investment government expenditures in cases where these figures are available. 

If one wanted to design a government that maximized economic growth, how large would that government be? The data examined earlier give no indication because for every nation examined, none had governments so small that they impeded economic growth, even though there were several instances in which total government expenditures were less than 20 percent of GDP. 

Because there is no evidence that any existing government is smaller than the growth maximizing size of government, some other method must be used to surmise what size of government would maximize an economy's growth rate. One way to address the question would be to look at the size of the government within the framework of the theory discussed earlier in the literature. 

There are certain core functions of government that assist economic growth by protecting property rights and creating an environment conducive to growth. As economies expand beyond these core functions, larger government impedes growth because of: (a) the disincentive effects of taxes, (b) the tendency of government to expand into areas that are better suited for private sector production, (c) increased rent-seeking (rather than productive) activities, and (d) the crowding out of private investment.

Search for the right size of the government:

The term cabinet is the most easily recognized generic description of this body, but it might create some confusion between cabinets as a collective political body and cabinets. In particular, France, sense a group of advisers working for a minister, comprising friends, political allies, and politically sympathetic civil servants dealing with political aspects of the post. 

An understanding of the cabinet government is key to an understanding of policymaking within parliamentary democracy as Laver and Shapsls (1994) point out ‘’any discussion of governance in parliamentary democracies must incorporate a systematic account of cabinet decision making’’. 

Without such an account, it is impossible to model the making and breaking of governments because it is not possible to specify how legislators envisage the consequence of their actions. Wright (1998) in describing ‘ten paradoxes’ of the French Administration referred to four types of cabinets. 

First one is Cabinet as Spectator, with major decisions being taken elsewhere in ‘central executive territory’, either by the chief executive, the chief executive in bilateral negotiation with relevant ministers, cabinet committees, interdepartmental committees of high ranking civil servants, ad-hoc commissions, and so on. In Ireland, Belgium, Sweden, Austria, and the Netherlands the cabinet is rarely reduced to the role of spectator. 

The real debate takes place, even if they are sometimes framed ‘framed’ by the Prime Minister or Chancellor or by ‘pre-cooking’ of the party bosses. The second is, Cabinet as Clearing House for rubber-stamping decisions made elsewhere and for formal reporting. The American & Russian cabinets work mainly as spectators and or clearing house. 

Third, Cabinet as arena for reviewing, debating ministerial initiatives, and for legitimizing decision-making.  Fourth, Cabinet as actor, with power to initiate, filter, coordinate, and, as final court of appeal, to impose constraint or even vetoes. In Britain and  French cabinets are found carrying all four functions depending on the prevailing position of the chief executive.  Mackie and Hogwood (1985) offered a similar typology of the cabinet.

The form and membership of the cabinet largely vary in the developed and developing countries. In Belgium, Germany, the United Kingdom, and English speaking Commonwealth countries, a cabinet is an assembly of senior party managers or a group including technocrats (Austria,French, and Spain), or a combination. 

In some countries, following Wesminister model, parliamentarians are appointed as ministers while in other countries in particular, Spain and Austria, outside experts can be brought in the cabinet. In Frence, Norway, Gambia, and Mongolia, there is an incompatibility rule that one can not be both minister and Member of Parliament. 

The cabinet system in the USA is more alike to disparate collection of individuals who are beholden together only by loyalty to a particular individual, however, earlier to this century, this was not the practice. In Bangladesh a cabinet is being formed with Parliament members with a provision of having maximum 20% cabinet members from the professionals and technocrats.

(To be continued) 

Jamaluddin Ahmed is General Secretary, Bangladesh Economic Association and Chairman, Janata Bank