Government size and efficiency as constraints to economic growth: comparing Croatia with other European countries

Abstract

The goal of this article is to discover binding constraints to economic growth in Croatia relating to government. Following a growth diagnostics framework, we limit our analysis to government size and efficiency as potential constraints to growth. We calculate the optimal size of government and estimate the efficiency of government spending by applying data envelopment analysis and Tobit regression models. Apart from Croatia, our results also relate to other European Union member states, Iceland and Norway. We find that a binding constraint to Croatia's economic growth is not a big government but rather a weak government plagued by corruption. The average optimal size of government in old EU member states is larger than that in new EU member states but the former need to cut their government expenditure more sharply in order to reach the optimal size. Their government spending on economic growth factors is however more efficient on average than that of the latter countries.

Acknowledgements

The authors would like to thank Professor Ivo Bićanić, Professor Vojmir Franičević, Željko Ivanković and an anonymous referee for their useful comments and suggestions. The views expressed in this article are the authors' own and do not necessarily represent the views of the institutions in which they are employed. This study was supported by the Croatian Employer's Association.

Notes

^1. Given the extensiveness of the research on economic growth, we mention only these three papers because their authors investigate the robustness of economic growth theories by applying the Bayesian averaging of classical estimates (BACE) method. Hence, they take into account a large number of independent variables.