Government Size and Economic Growth in Asia - Evidence from China and Japan

Abstract

In this paper, we examined the relationship between government size, proxied as general government consumption expenditure in GDP and economic growth, measured as real per capita GDP growth under Smooth Transition Autoregressive (STAR) approach in China (a developing country) and Japan (a developed country) over 1971-2013 period. Results show that Exponential STAR (ESTAR) is better fitted for China. Meanwhile, there is no convergence for Japan, means that this relationship should be explained by an alternative non-linear model. The threshold value of government size for China is found at 14.23% (or 14.18%). However, BARS curve is not really supported. Economic growth still is marginally positive when government expenditure exceeds this value. In spite of that, this also implies inefficient use of resources and government should pay more attention on this issue to enhance economic growth.