Democracy, Development, and the Public Sector

Abstract

This article develops a model that describes the growth of the public sector as a joint result of the process of economic development and the political institutions in place. The model is tested using panel data for about sixty five developing and developed nations for the period 195090. Economic modernization leads to the growth of the public sector through two mechanisms: first, the state intervenes to provide certain collective goods such as regulatory agencies and infrastructures; second, industrialization and an ageing population translate into higher demands for transfers in the form of unemployment benefits, health insurance, and pensions. Still, the impact of e-conomic development is strongly conditional on the political regime in place as well as on the level of electoral participation. Whereas in a democratic regime, where politicians respond to voters' demands, the public sector grows parallel to the structural changes associated with economic development, in authoritarian countries the size of the public sector remains small. wo stylized facts describe the evolution of the public sector across the world during the last century: first, its steady growth; second, the presence of persistent cross-national differences in its size. Excluding war times, government expenditure remained constant around 10 percent of GDP during the nineteenth century. Yet after 1914 the size of the public sector expanded dramatically. In OECD nations, total current public revenue had risen to 24 percent of GDP in the early 1950s. Thirty years later it had stabilized at around 44 percent. Among developing countries, current public revenue grew from 14 percent of GDP in 1950 to around 27 percent from the late 1970s onward. Despite the steady growth of the public sector, differences across nations have remained substantial. In the mid-1980s, public revenue ranged from less than 10 percent of GDP in Sierra Leone and Paraguay to over 60 percent in Botswana, Kuwait, Reunion, and Sweden. Cross-national variation has become especially acute in the developing world over time. Whereas in the early 1950s the standard deviation of public revenue in non-OECD nations was 4 percent, by the mid1980s it had reached 15 percent of GDP. The growth of the public sector in the last century has spawned a vigorous literature on its causes.1 Three families of explanations stand out. Demand-side explanations, conceiving the government as a provider of public goods, attribute the growth of the public sector either to social progress and demographic transformations (Wagner 1883; Wilensky 1975) or to different rates of productivity growth in the public and private sectors (Baumol 1967). Political or redistributive theories model the government as an agency that, responding to social conflict, redistributes income among citizens (Meltzer and Richards 1981; Esping-Andersen 1990). Finally, institutional models have stressed the impact of different structures of government, such as bureaucracies (Niskanen 1971), the structure of the legislative branch (Shepsle and Weingast 1981) or federalism, on the size of the public sector.