Do government arrangements matter for CEE countries’ growth? A two-piece puzzle perspective

ABSTRACT

Confronted with an economic decline or slower growth rates in crisis and post-crisis periods, CEE governments have searched for new means to re-launch growth. The aim of this work is to evaluate the extent to which government arrangements sustain economic growth in CEECs. The centralized economy legacy and crisis related pressures on public budgets make this objective to be challenging. Results indicate an idiosyncratic relationship between government arrangements and economic growth in CEE countries, compared to other countries. We found that government size is the key piece of government settings in CEE. It exerts a strong negative influence upon growth by reducing total factor productivity. On the other hand, government effectiveness, in spite of its positive evolution, does not represent a relevant CEE growth determinant when considered alone. Public sector quality induces growth only when it is accompanied by a small government size. The paper presents the implications of our research and provides some policy suggestions.

KEYWORDS:

• Government size
• government effectiveness
• economic growth
• CEE countries

JEL CLASSIFICATION:

• C23
• O49
• P35

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia.

² Some instrumental variables vary from one period to another, while others are constant over time. The last ones are used either because of data limitations, or for the particular reason that they serve as better instruments when considered constant.

³ E.g. globalization index, ethnicity, government employment, language, democracy, schooling.

Additional information

Funding

This work was supported by the Ministery of Research and Innovation, CNCS - UEFISCDI [PN-III-P1-1.1-TE-2016-1855, within PNCDI III].