Abstract:

This paper estimates the productivity of government services and the optimal government size by employing the empirical methodolgy developed by Karras (1996, 1997) which is based on the theoretical framework of Barro (1989, 1990). The study uses annual data from 1985 to 2000 for 27 developing countries. Empirical results support the hypothesis that government consumption expenditures are significantly productive. However, it is also found that government services are, on average, underprovided. The optimal government size is estimated to be 23.8% for the average developing country. Since it is greater than the sample average of government size (13%), this result is consistent with the finding that government services are underprovided. The results further support that the marginal productivity of government services is negatively related to government size. This means that the smaller the public sector is, the higher its productivity.

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