Does public sector efficiency matter? Revisiting the relation between fiscal size and economic growth in a world sample

This paper revisits the relationship between fiscal size and economic growth. Our work differs from the empirical growth literature because this relationship depends explicitly on the efficiency of the public sector. We use a sample of 64 countries, both developed and developing, in four five-year time periods between 1980 and 2000. Building on the work of Afonso et al. (Public Choice 123:321–347, 2005), we construct a measure of public sector efficiency in each country and each time period by calculating an output-to-input ratio. In addition, we get an estimate of technical efficiency of public spending for 52 countries from 1995 to 2000 by employing a stochastic frontier analysis. Using these two measures, we find evidence of a non-monotonic relation between fiscal size and economic growth that depends critically on the size-efficiency mix.