THE DETERMINANTS OF THE SIZE OF GOVERNMENT IN DEVELOPED MARKET ECONOMIES

This research aims at developing and extending the theoretical and empirical literature on the extent of government sector involvement in the economy. It is primarily concerned to analyse the causes of the generally increasing size of the government sector in developed market economies. Despite the importance of this topic in the field of political economy, the literature review suggests that there is no single core theory of the size of government in the economy, only various fragmented theoretical explanations. In an attempt to bridge this analytical gap in the existing knowledge, this research offers a simple integrative theoretical framework. Within that framework, this research gathers and empirically tests the most relevant theories in this field. To that end, it makes use of data for developed market economies in the period from 1970 to 2008. The obtained results indicate that national income, a country‟s degree of modernisation, trade and financial openness, relative prices of government and private goods and government sector employment play an important role in explaining the size of government in developed market economies. In addition, this research contributes to the existing empirical literature by examining the evolution of long, historical time-series of government expenditures for the four developed market economies for which this data is available (the US, the UK, Italy and Sweden). Contrary to conventional wisdom, statistical examination of the data suggests that the major change in the underlying growth rate of government expenditures occurred around the turn of the 20th century. By contributing to a better understanding of the long-run determinants of the size of government in the economy, this research offers a basis for relevant policy proposals and also informs debate on the appropriate size and role of the public sector in a mixed economy.