Size of government and economic growth in the largest Latin American country

Abstract

This article provides empirical evidence regarding the effect of the size of government on economic growth in the Brazilian economy for the period from January 2000 to March 2013. In particular, an analysis is conducted to see whether the Armey curve fits well for the Brazilian case and the optimal government size is also estimated. The findings indicate that an increase in the size of government contributes to economic growth and that the optimal size for the Brazilian government would be approximately 22% of GDP. Brazil crossed over this limit in 2005.

Keywords:

• size of government
• government expenditure
• Armey curve
• economic growth

JEL Classification:

• E62
• O40
• C22

Notes

¹ See Table A1 (Appendix) for sources of data and description of the variables.

² All variables are deflated by IPCA (official price index) and accumulated in the last 12 months.

³ Augmented Dickey–Fuller (ADF) and Phillips–Perron (PP) tests were performed and the results reveal that all series are I(0).

⁴ As a manner of guaranteeing the validity of the overriding restrictions, the J-test is performed and the lagged independent variables are used as instrumental variables.

⁵ For example, Herath (2012) found an optimal government size for Sri Lanka which corresponds to 28%, while Chen and Lee (2005) found 23% for Taiwan.

⁶ On the analysis of credibility in Brazil, see de Mendonça (2007).