Too much or too little? Assessing the optimal size of government in inclusive development

Abstract

This article aims to contribute to the growing body of research on the optimal size of government when examining non-traditional economic development metrics, specifically by being the first to depict evidence of the Armey Curve for the Inequality-adjusted Human Development Index (IHDI). Furthermore, the evidence, or the variation of optimal government size according to metrics of development, is scarce, and as such this study attempts to test an undermining of the role of government present in the literature, a direct consequence of wrongly proxying welfare by normative economic indicators. The study also attempts to avoid the incorrectly ignored effects of governance by composing a variable of institutional quality through the use of world governance indicators. The results provide evidence of an optimal size of government ranging from 27.22% to 32.54% for Gross Domestic Product (GDP), 33.34% to 42.20% for Human Development Index (HDI), and lastly, 31.23% to 40.69% for IHDI. The results imply that the dependent variable used makes a considerable difference in the optimal size of government computed, nonetheless, it exhibits that while worldwide government size is not overgrown, the broad sentiment of overbearing government presence is factual, at least for the Western World. The results also imply a stronger connection between government size and economic prosperity for developing countries, which contradicts the current literature. Additionally, findings suggest that it is possible that the more disadvantaged a country is in terms of development, the more easily it can derive utility from development policies related to interventions in government size. A study of expenditure components was also conducted, in which public consumption was inferred to report higher evidence of the Armey Curve than public investment. Results also exhibited that for the Classification of the Function of Government (COFOG) components, expenditure in public order and safety emerged as the most fundamental element in the promotion of economic growth (GDP), development (HDI), and even inclusive development (IHDI).