While previous research documents a negative relationship between government size and economic growth, suggesting an economic cost of big government, a given government size generally affects growth differently in different countries. As a possible explanation of this differential effect, we explore whether government legitimacy (measured by satisfaction with the way democracy works) influences how a certain government size affects growth. On the positive side, a government perceived as legitimate may “get away” with being big since legitimacy can affect behavioral response to, and therefore the economic growth cost of, taxation and government expenditures. On the negative side, perceived legitimacy may make voters less prone to acquire information, which in turn facilitates interest-group oriented or populist policies that harm growth. A panel-data analysis of up to 30 developed countries, in which two different measures of the size of government are interacted with government legitimacy, reveals that perceived legitimacy exacerbates a negative growth effect of government size in the long run. This could be interpreted as governments taking advantage of being regarded as legitimate in order to secure short-term support at a long-term cost to the economy.
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Note that we do not study how legitimacy affects government size or vice versa.
Nijkamp and Pot (2004) provide an earlier metaanalysis of 93 published studies and find indications of a positive but weak effect on growth of expenditures on education and infrastructure, as well as support for the hypothesis that higher taxes lower growth.
A similar understanding of legitimacy is developed by Beetham (1993), who lists three criteria of legitimacy: whether power is acquired and exercised according to established rules; whether the rules are justifiable by reference to shared beliefs; and whether people approve of the political system. This view is also expressed by Colombatto (2014), who is wary of consequentialist explanations of legitimacy and sees it as being a matter of subjective value judgment which originates from the individual’s assessment of the prevailing rules of the game in the light of his own criteria of fairness and justice.
As Bergh and Henrekson (2011, p. 873) note: “There are also strong theoretical reasons to expect different types of taxes and expenditures to have differential growth effects”.
Studies show that social trust is negatively related to the demand for and supply of regulations (Aghion et al. 2010; Bergh and Bjørnskov 2011; Pinotti 2012). However, Pitlik and Kouba (2014) show that people who trust government (relative to private sector companies) favor interventionism even if their social trust is strong.
See Clark and Lee (2001) for an analysis of how expressive voting can make voters prone, when trusting government, to support interest-group policies that are presented with public-interest arguments.
We have checked whether legitimacy as such directly affects government size, and we found only very weakly significant and quite small effects. Thus, there is no strong relationship between legitimacy and government size in our data, so this potential effect should not confound our other findings.
Bjørnskov and Sønderskov (2013) show that both in individual- and macro-level tests, confidence measures of political institutions tend to capture the same concept.
The imputation formula derives from a set of OLS regressions using the observations from the mid-1990s in which both questions about confidence in specific institutions and the question of satisfaction with democracy were asked. A specification with a constant term, confidence in parliament and confidence in parties yielded the clearly best fit. We then used the constant and coefficients from this regression reported in (1) to impute comparable scores for the period from the mid-1990s to 2011.
Similarly, short-run effects are calculated as γ1 + δ1 L and λ1 + δ1 G, respectively. Yet, since we do not focus on such effects, we refrain from showing the relatively limited short-run estimates.
More precisely, ECM can credibly separate short- and long-run effects if potential J-curve adaptions do not extend so long into the future that they dominate any true long-run effects. Given the speed with which countries adapt after most crises, we believe this to be unlikely.
The average negative effects can also be seen when not including an interaction term between government size and legitimacy (results available upon request). However, compared to the results in Tables 3 and 4, not including an interaction term clearly inflates the standard errors of central estimates, rendering government size statistically insignificant in its long-term effect on growth.
We have ensured that our main findings do not change when using a fixed effects estimator in levels or when aggregating our data into non-overlapping five-year periods (results available upon request). The main difference is that the choice of applying an ECM reduces the amount of noise due to short-term effects, rendering the long-run effects more precisely estimated.
We do not doubt that good legal institutions and strong protection of private property rights are positively associated with economic development in the long run. However, with our choice of estimation strategy across a group of relatively similar countries, we are technically unable to detect this influence.
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The authors wish to thank Andreas Bergh, Enrico Colombatto, Jerg Gutmann, Pelin Ayan Musil, Christoph Schenke, participants at the Institute for Research in Economic and Fiscal Issues (IREF) and Anglo-American University workshop in Prague and participants at the Public Choice Society Meetings in Charleston for useful comments and suggestions, and the Institute for Research in Economic and Fiscal Issues (IREF) (all), the Swedish Research Council (Berggren) and Johan & Jakob Söderberg’s Foundation (Berggren) for financial support. Rasmus Rødby Kristiansen and Aleš Rod provided excellent research assistance.
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Berggren, N., Bjørnskov, C. & Lipka, D. Legitimacy and the cost of government. Public Choice 162, 307–328 (2015). https://doi.org/10.1007/s11127-014-0224-9
- Economic growth
- Size of government