Relationship between Economic Growth and Government Size in Selected OPEC Countries: A Multivariate Analysis Using Panel Data Techniques

This paper investigates the interaction effects and the causal relationship between government consumption expenditures on goods and services and non-oil gross domestic product for a panel of 9 selected OPEC countries over the period of 1970-2006. In the multivariate framework، three control variables; inflation، openness and oil revenues are used as control variables to avoid the problem of omitted variables bias. Using econometric techniques including panel cointegration، and panel generalized method of moment; three sets of results have been obtained: first، there is a strong evidence of positive bidirectional causality between non-oil economic growth and government size in the short-run; there is a positive unidirectional causality running from non-oil economic growth to government size in the long-run; the results of the strong causality confirm those of the short-run causality. Based on these findings، both Wagner’s law and Keynes view are supported. Second، inflation and oil revenues have negative and significant impacts non-oil economic growth; the impact of openness on non-oil economic growth is statistically insignificant. Third، inflation and openness have negative and significant impacts on government size، while a positive and significant impact is found for oil revenues.