The Threshold of Government Size and Economic Growth for ASEAN Countries: An Analysis of the Smooth Transition Regression Model

Abstract

The relationship between the size of government and economic growth is a contentious issue. The present study is undertaken to test the hypothesis that the relationship between government size and economic growth is nonlinear. This panel data study involves ASEAN countries over the period 1980-2011. We modify the empirical model of Chen and Lee (2005) and employ a smooth transition regression model for panel data (PSTR) to test the threshold effect of government size. Robustness checks of the model are conducted by GLS and GMM estimation. Empirical results show that there exists a nonlinear relationship between government size and economic growth for ASEAN countries. The threshold level of government consumption spending is 25.69 per cent of GDP. As government size exceeds this level, economic growth reduces by 0.2 per cent. Our findings suggest that governments in ASEAN countries consider optimal government size at average 25.69 per cent GDP for supporting sustainable economic growth.