EUSTACE DAVIE: The size and functions of government and economic growth

An April 1998 study by three US economics professors, James Gwartney, Robert Lawson and Randall Holcombe, for presentation to the Joint Economic Committee of the US Congress, found that excessively large government had reduced economic growth.

Their advice to Congress was that it should “develop a long-range strategy to reduce the size of government so that the US would be able to achieve a more rapid rate of economic growth in the future.”

The authors acknowledged that it had been 15 years since there had been a major recession in the US. However, the growth of real GDP had been half the rate achieved in the previous decade. The average GDP had fallen in each of the previous three decades.

The authors reported that, “In the US government expenditures as a share of GDP had grown during the last several decades. At the same time, the investment rate declined and the growth rates of both productivity and GDP had fallen. An empirical analysis of the data from 23 [Organisation for Economic Co-operation & Development] countries showed a strong negative relationship between both (a) the size of government and GDP growth and (b) increases in government expenditure and GDP growth. A 10-percentage point increase in government expenditure as a share of GDP was associated with approximately a one percentage point decline in the growth rate of real [gross private product]”. GPP is gross national product minus income originating in government and government enterprises.

They further reported that “The five fastest growing economies in the world from 1980 to 1995 had total government expenditures as a percentage of GDP averaging 20.1%, which was less than half the average of OECD countries”.

Economists Gwartney and Lawson are now teamed up with economists Joshua Hall and Ryan Murphy and together they produce the Economic Freedom of the World annual reports for Canada’s Fraser Institute and the Economic Freedom Network. Information from the latest annual report will be used to compare the economy of SA with the results of other economies analysed in the publication.

Size of government

The size of government ratings were taken at random from the 2020 Economic Freedom of the World publication and then listed from highest rating (least government spending, taxation, size of government-controlled enterprises and involvement in the economy) to the lowest rating (for the most government involvement). The ratings were then compared over a 20-year period against GDP per capita PPP (constant 2017 US international dollars) for changes in GDP per capita to determine what effect the size of government had on the growth of GDP over that period.

During the 20 years analysed in the table SA’s GDP per capita increased from R4,930 in 2000 to R5,659.20, or 15.6%. During the same period Botswana’s GDP per capita increased from R4,569.2o to R6,304.90, an improvement of 41.57%, while that of Mauritius increased by 63.68%. South Africans would benefit a great deal if government were to pursue policies that rapidly increase the GDP per capita of all South African citizens at a pace that equals or surpasses that of Botswana and Mauritius. It would mean uplifting the entire population and doing so by doing less rather than by doing more.

The following passage from the report to the US Congress in April 1998 referred to earlier could have been written especially for the SA parliament: “Government provision of both (a) a legal and physical infrastructure for the operation of a market economy and (b) provide a framework conducive for economic growth because of (a) the disincentive effects of higher taxes, (b) diminishing returns as governments undertake activities for which they are ill-suited, and (c) an interference with the wealth creation process, because governments are not as good as markets at adjusting to changing circumstances and finding innovative new ways of increasing the value of resources.”

Davie is a director of the Free Market Foundation and author of “Unchain the Child”. He writes in his personal capacity.