Government, special interest groups, and economic growth

John McCallum and André Blais

Public Choice, 1987, vol. 54, issue 1, 3-18

Abstract: In descending order of robustness and strength, the four major conclusions are: (i) the experience of industrial countries in the postwar period indicates that a large welfare state has been associated with a high rate of economic growth; (ii) the Olson thesis that powerful special interest groups impede growth receives empirical support; (iii) the relation between growth and the welfare state is non-linear, with increases in the size of the welfare state beyond some critical level (one sixth of GDP according to our estimates) resulting in reductions rather than increases in the growth rates; and (iv) the strength of the growth-promoting properties of the welfare state is positively related to the strength of special interest groups as proxied by the proportion of the work force unionized. One possible interpretation of these results runs as follows. A large welfare state may retard economic growth by reducing the incentives to work, to save, to move, and to change. On the other hand, in a situation where special interest groups have aquired significant power to block change if they so desire, the welfare state, which offers assistance to those who are the victims of change, may play a growth-enhancing role in reducing the incentive to block change. The fourth conclusion just stated supports this view. The welfare state may also foster economic growth through favourable effects on social consensus, political stability, and labour-management relations. The results suggest that the growth-promoting forces predominate as long as the welfare state is not too large, but beyond a certain point, which corresponds more or less to the median situation among developed countries today, the growth-retarding elements come to the fore. Copyright Martinus Nijhoff Publishers 1987

Date: 1987
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DOI: 10.1007/BF00123801

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