The Size Of Government, The Protection Functions Of The Government's Economic Growth

This paper will study the relationship between the components of economic freedom, subcomponents of economic freedom and economic growth further by using economic freedom index. Economic freedom index is a measurement of the level of economic freedom in a country, namely, the degree of an economy is a market economy. The economic freedom index used in this article was published by Fraser Institute in Economic Freedom of the World: 2007 Annual Report. In view of severe data missing problem in some countries, I choose 69 from 125 countries as sample countries, and the time period of economic freedom is 1970-2000, 1975-2004 for other macroeconomic variables. Economic freedom index can be divided into five components, this article focus on the first and the second components, which are: size of government, legal structure and security of property rights. Outliers is an important but sometimes always be neglected problem in growth regressions, so this article use not only ordinary least squares(OLS) to get the regression results, but also least trimmed squares(LTS) to get robust results, and compare the two kinds of results all the time. The result indicates the relationship between government size and economic growth is obscure: OLS result indicates a positive relationship, but LTS result indicates a negative relationship, both results are not significant. By decomposing this part of index into four sub-components, I found general government consumption spending as a percentage of total consumption; government enterprises and investment as a share of total investment are all significant, but they have different influence on economic growth. Thus, the different direction of influence may be the one reason for the obscure relationship between government size and economic growth, and government enterprises and investment as a share of total investment has a leading effect behind the relationship. Legal structure and security of property rights reflect the protective functions of government, and in most of the regression results, it put up a significant effect on economic growth, so I use the method suggested by Leamer(1983), Levine and Renelt(1992) to make a sensitivity analysis, and I also adopt the suggestion of Temple(2000) which conjoint EBA and LTS. Although, legal structure and security of property rights does not pass the EBA, but from the other point of view (effect size), it is evidently that legal structure and security of property rights can promote economic growth.As a result, size of government can promote economic growth when its increase was on government enterprise and investment as a share of total investment. Government establish enterprises, increase investment will decrease economic freedom first (so deduce economic growth), but in the long-run, it can promote economic growth. Establishing a more perfect legal structure and system will have a no doubt effect on economic growth. The following parts of this paper are: Chapter 1 introduces the concept of economic freedom and economic freedom index; Chapter 2 reviews some related literatures; Chapter 3 introduces the research methods and the data used in this paper; Chapter 4 reports the regression results: Chapter 5 concludes.