The Effect of Government Size on Good Governance and Economic Performance of Selected Countries

Although it is generally agreed that there is a role for the government to redistribute income in favor of the poor and provide public goods and services, there is considerable disagreement over how far the government should go in these areas.On this issue, a variety of conflicting theoretical explanations has been advanced that can only be resolved through empiricalinvestigations. According to importance of this issue the important question arises that, what is the effect of government size on good governance and economic performance? This study examines the relationship between government size, good governance and economic performance by estimating dynamic models using panel data from 50 selected countries for the period 1996-2013.The results show that the government size, and inflation have a negative and statistically significant effect on good governance indicator. Also employment index has a positive and significant impact on good governance indicator.The growth model also indicates that the government size has a negative and good governance indicator has a positive effect on economic growth. The interactions effects of government size and good governance indicator show that the size of government through governance indicator has a negative impact on economic growth. Also human development index, foreign direct investment, export and ICT's share of the imported goods have positive and significant effect on economic growth. Shrinking the size of the government and reducing its involvement in the economy, are two key policy recommendations of this study.