The size and functions of government and economic growth

This article was first published by Business Day on 21 November 2022

The size and functions of government and economic growth

The title of this article is borrowed from an April 1998 study done by three U.S. Professors of Economics, James Gwartney, Robert Lawson, and Randall Holcombe, for presentation to the Joint Economic Committee of the US Congress. Their finding was that excessively large government had reduced economic growth. Their advice to Congress was that it should “develop a long-range strategy to reduce the size of government so that the U.S. would be able to achieve a more rapid rate of economic growth in the future.”
 
The authors acknowledged that it had been 15 years since there had been a major recession in the US. However, the growth of real GDP had been half the rate achieved in the previous decade. The average GDP had fallen in each of the previous three decades.
 
The authors reported that, “In the United States, government expenditures as a share of GDP had grown during the last several decades. At the same time, the investment rate declined and the growth rates of both productivity and GDP, had fallen. An empirical analysis of the data from 23 OECD countries showed a strong negative relationship between both (a) the size of government and GDP growth and (b) increases in government expenditure and GDP growth. A 10-percentage point increase in government expenditure as a share of GDP was associated with approximately a one percentage point decline in the growth rate of real GPP”. They further reported that: ‘The five fastest growing economies in the world from 1980 to 1995 had total government expenditures as a percentage of GDP averaging 20.1 percent, which was less than half the average of OECD countries.
 
Economists James Gwartney and Robert Lawson are now teamed up with economists Joshua Hall and Ryan Murphy and together they produce the Economic Freedom of the World Annual Reports for Canada’s Fraser Institute and the Economic Freedom Network. Information from the latest Annual Report will be used to compare the economy of South Africa with the results of other economies analysed in the publication.
 
Size of government
The Size of government ratings were taken at random from the 2020 Economic Freedom of the World publication and then listed from highest rating (least government spending, taxation, size of government-controlled enterprises and involvement in the economy) to the lowest rating for the (most government involvement). The ratings were then compared over a 20-year period against GDP per Capita PPP (constant 2017 US international $) for changes in GDP per capita to determine what effect the size of government has on the growth of GDP over that period.  
 

Country	Size of Government	GDP per Capita	GDP per Capita	Gains/Losses
EFW 2020 Countries	EFW 2020 Rating	2015 Constant US$ 2000	2015 Constant US$ 2020	GDP per Capita  20-year change
		2000	2020
1. Guatemala	9.51	3,195.4	4,371.6	+36.81%
2. Cambodia	9.07	1,377.1	1,485.5	+35.79%
3. Honduras	9.03	1,790.4	2,239.0	+25.06%
4. Bahamas	8.65	35,793.9	24,359.0	-31.95%
5. Haiti	8.59	1,315.9	1,311.7	0.00%
6. Ghana	8.46	1,040.6	2,020.6	+94.18%
7. Hong Kong	8.24	26,933.2	41,470.0	+53.97%
8. Lebanon	8.22	6,713.5	5,072.5	-24.44%
9. Bangladesh	8.21	6,530	1.619.8	+148.05%
10.Mexico	8.08	8,866.9	8,926.6	+0.01%
11.Indonesia	7.90	1,867.5	3,767.1	+101.72%
12. Mauritius	7.90	5,534.0	9,058.2	+63.68%
13. S. Africa	7.30	4.930.0	5,659.2	+15.6%
14. USA	6.79	48,746.0	58,060.3	+19.11%
15. Botswana	6.62	4,569.2	6,304.9	+41.57%
16. UK	5.93	39,229.3	43,166.2	+10.04%
17. Japan	5.65	31,430.6	34,556.4	+9.95%
18. Germany	5.64	35,011.1	41,315.3	+18.00%

 
During the 20 years analysed in the table, South, Africa’s GDP per capita increased from R4,930 in 2000 to R5,659.20, an increase of 15.6%. During the same period Botswana’s GDP per capita increased from R4,569.2 to R6,304.9, an improvement of 41.57% while that of Mauritius increased by 63.68%. South Africans would benefit a great deal if the government were to pursue policies that rapidly increase the GDP per capita of all South African citizens at a pace that equals or surpasses that of Botswana and Mauritius. It would mean uplifting the entire population and doing so by doing less rather than by doing more.
 
The following passage from the report to the US Congress in April 1998 referred to earlier could have been specially written for the South African Parliament: the advice was that “Government provision of both (a) a legal and physical infrastructure for the operation of a market economy and (b) provide a framework conducive for economic growth because of (a) the disincentive effects of higher taxes, (b) diminishing returns as governments undertake activities for which they are ill-suited, and (c) an interference with the wealth creation process, because governments are not as good as markets at adjusting to changing circumstances and finding innovative new ways of increasing the value of resources.”