OPTIMAL SIZE OF GOVERNMENT SPENDING: EMPIRICAL EVIDENCE FROM 8 COUNTRIES IN SOUTHEAST ASIA

Abstract

This study explores an inverted U sharp between government spending and economic growth and the optimum size, which provides the highest possible growth, of public expenditure in eight ASEAN countries from 1995 to 2011. This study also determines the impact of labors, capitals, and total exports on economic growth. This study utilized Armey Curve to study this correlation. Different panel unit root tests including Levin-Lin-Chu test, Im-Pesara-Shin test, Fisher ADF test and Fisher-PP were carried out. The result showed that each variable was stationary at different order I(0) and I(1). Both mean group (MG) and pooled mean group (PMG) were suitable to test dynamics of variables, and the null hypothesis of Hausman test is that PMG is better estimator than MG. The result suggested that there was an inverted U relation between government spending and economic growth, and optimal size of government expenditure share of GDP was 28.5 percent for eight ASEAN countries. The other factors (i.e., labor force, capital, total export) strongly promoted the economic growth in eight ASEAN countries.