Government size and economic growth over 140 years: Evidence from a historical dataset

Carsten Colombier

No 2026-112, MENDELU Working Papers in Business and Economics from Mendel University in Brno, Faculty of Business and Economics

Abstract: This paper contributes to the still unresolved issue of the growth impact of government size by analysing a historical panel data set of 17 developed countries, among them ten EU countries and the former EU member United Kingdom. The data ranges from 1880 to 2016. The unique feature of the long-time dimension allows for conducting a kind of natural experiment. Government size is closely related to economic-policy paradigms. The time span covers different economic policy paradigms, in particular, ‘laissez-faire’ before World War II and Keynesian economic policy after World War II. Before WW II government size is small, after WW II it big. Furthermore, this paper contributes to filling a gap in the literature by testing the non-linear hypothesis (Armey curve). We take particular attention to a key shortcoming of panel-data analysis – parameter or individual heterogeneity. Overall, this analysis suggests a systematic positive, albeit quite small, linear relationship of government size with economic growth. Rather than concentrating on government size, policy makers are advised to care for an efficiently run and high-quality government sector as a prerequisite for a steady growth path. This applies also to the reformed EU Stability and Growth Pact.

Keywords: government size; economic growth; Armey curve; historical data; robustness analysis (search for similar items in EconPapers)
JEL-codes: C23 E62 H50 (search for similar items in EconPapers)
Pages: 34
Date: 2026-07
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