The relationship between government expenditures and economic growth in middle-income countries: Evidence from a panel data analysis

Economic growth is important in all countries; in particular, it is one of the main economic objectives of developing countries. In general, developed countries are expected to maintain a certain growth rate; it is desirable for developing countries to display growth above this rate. Generally, government expenditure are considered to have an important role in the economic growth of countries. Although there are many elements of economic growth; In this study, the relationship between economic growth and government expenditure is analyzed. A vast number of empirical studies is devoted to the analysis of the determinants of long run economic growth. Among these factors, government expenditure is one of the most frequently employed variables, since it can be directly influenced by government policies. In this study, re-estimated the two-sector growth model of Ram (1986), "Government Size and Economic Growth: A New Framework and Some Evidence from Cross-Section and Time-Series Data", by employing panel data techniques and using a more recent data set (1990-2017) for thirtysix developing and middle income countries. The main objective of the study is to determine the relationship between economic growth and government expenditure, also to indicate the effects of sample countries and time period. The panel data techniques we employ allow us to control for both the country and time-specific effects. For this purpose, the concept of economic growth and its variations, theories of economic growth were discussed primarily, in addition, informations were given about government expenditure, its classifications and effects. The estimation results confirm the cross-sectional findings of Ram. Government expenditure is positively associated with the economic growth and economic performance of developing countries. In addition, the marginal externality effect of government expenditure on non-government output is positive. Another finding of the study is that the country effects estimated for the models of Ram are positive for most of the Asian countries in the sample and negative for most of the Latin American and African countries.