SMALL IS BEST

LESSONS FROM ADVANCED ECONOMIES 
RYAN BOURNE AND THOMAS OECHSLE 
SUMMARY 
 
Colaboración de Pablo López Herrera
 
 
• This statistical paper analyses the performance of countries defined as ‘advanced’ by the International Monetary Fund (IMF). It investigates the claim made by advocates of supply-side theories that smaller government leads to higher economic growth. 
• In addition, it examines whether smaller governments are associated with worse outcomes in health and education. 
• Econometric analysis of advanced OECD countries for the period 1965-2010 finds that a higher tax to GDP ratio has a statistically significant, negative effect on growth. For example, an increase in the tax to GDP ratio of 10 percentage points is found to lower annual per capita GDP growth by 1.2 percentage points. A similarly statistically significant negative effect on growth is found with a higher spending to GDP ratio. 
• For the last 10 years, advanced small government countries have, on average, seen significantly higher growth rates than advanced big government countries. 
• Between 2003 and 2012, real GDP growth was 3.1% a year for small government countries (i.e. where both government outlays and receipts were on average below 40% of GDP for the years 1999 to 2009), compared to 2.0% for big government countries.  
• There is little evidence that small government countries have worse social outcomes: 
 
 Health outcomes are mixed: in the past 10 years, life expectancy in small government countries has been higher than in big government countries. Infant mortality has been lower in big government countries.  
 Statistical evidence from the last 10 years suggests that small government countries achieve higher academic outcomes. 
 
• Correlation does not mean causation for these social variables – but the evidence supports the view that economies with small governments tend to grow faster, and, at the very least, do not perform systematically worse than big government countries in terms of social outcomes
 
 
 
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