Economic Growth and the Optimal Size of the Public sector in Jordan

Abstract

The relationship between the size of public sector and the rate of economic growth has been widely examined empirically in different countries. Most applied studies confirmed the validity of the inverse relationship between the increasing role of the state in the economy, measured by the ratio of public spending to gross domestic product and rates of economic growth. These studies estimated the optimum rate that would guarantee achieving the highest economic growth rates. This study aims to analyses this relationship for the case of the Jordanian economy. Using a theoretically justified econometric model, the researchers have utilized an ARDL econometric technique to quantitatively assess this relationship for the period (1970-2018). The study relied on official data related to the gross domestic product published by the Central Bank of Jordan and official data related to public spending and public revenues published by the Jordanian Ministry of Finance. The econometric results of the study confirm the existence of an inverse relationship between the size of public sector and the rate of economic growth in Jordan, which may lend support to the hypothesis of the Armey curve. The optimal size of the government (public sector) is estimated to be about 26 percent, which is much lower than the actual average government size in Jordan. The researchers recommend the need to gradually cutting down the size of public sector through adjusting the real spending structure and restructuring the independent public institutions. The restructuring of independent public institutions requires the abolition of institutions that are not economically feasible and constitute more financial burdens on society on the one hand, and the merging of a number of them into an independent public institution that provides its services to the community in an efficient and effective manner. Researchers also recommend the need to continue privatizing the public sector and activating the role of partnership between the public and private sectors. Keywords: size of public sector, government spending, economic growth, ARDL, privatization.