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Government Size and Economic Growth in Vietnam: A Panel Analysis

This paper investigates the effect of provincial government size on economic growth using the panel data of 60 provinces over the period of 1997-2012. Empirical estimates are employed by conducting Difference Generalized Method of Moments (GMM) method proposed by Arellano and Bond (1991) and Pooled Mean-Group method of Pesaran, Shin et al. (1999). We use respectively various measures, defining the size of government, namely provincial government expenditure’s share to gross provincial product (GPP), provincial government revenue’s share to GPP, real provincial government expenditure per capita, and real provincial government revenue per capita. Our findings show that the increase in government expenditure’s share and government revenue’s share slow economic growth, while the real government expenditure per capita and real government revenue per capita have positive relationship with economic growth. The latter results indicate that provinces with high economic potential have advantages not only of raising budget revenue per capita but also providing their people with more and better public services. We also find that the long run and short run coefficient of government expenditure’s share are negative; the correction mechanism from the short run disequilibrium to the long run equilibrium is not convergent; and government employment has negative related to growth of per capita. From a policy perspective, our findings do not advocate a large government size, which is detrimental to economic growth. A small government size is the essential issue and could be effective in providing public services for economic growth as well as for preventing market failures.