Stephen K. Pollard1, Josh D. Shackman and Pedro V. Piffaut
The Penn World Table 7.0 is a comprehensive database covering measures of GDP and its components for almost all countries over the period 1960-2009. We explore the relationship between government expenditure, as a share of GDP, and economic growth, as annual change in real GDP per capita for 155 countries over the period 1970-2009 utilizing a Solow growth model. We utilize a battery of statistical tests to analyze the data including panel unit root tests and panel regression methods. The complete panel results are compared to various subsets. The results indicate that there is an inverse relationship with government expenditure and economic growth and that there is a positive relationship with private investment and economic growth. Thus, much of government expenditure appears to either have been used inefficiently or not for the promotion economic growth, while private investment on the other hand does lead to increased economic growth.
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