Size of Government and Economic Growth: A Non Linear Analysis

Abstract--The study analyzes the Armey’s idea of a quadratic curve; Armey (1995) asserted that low public expending boost economic growth as far as it arrives at certain a scope; however, exaggerated public expending reduced the economic growth. The present study seeks to determine the inverse U shape association between public activity and economic output and also estimates the optimal size of government for Pakistan’s Economy by using the annual data for the period of 1976 to 2013. The findings support the robustness of Armey curve; and the optimal size of government is observed to be around 19.3% of the GDP. However the actual size of government spending in contemporary year is 21.4%. The results highlight that the actual size of government spending is higher than the estimated optimal level of government size. Consequently the study suggests the diminution of total government expending to reach at the growth maximizing level. Moreover, this paper contributes to the literature that the Armey curve is a phenomenon not only for developed economies but also for developing economies.