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A key question that is frequently asked is whether such large public sectors in the new member states
hurt growth? Alternatively, it has also been asked whether the small public sectors in several of the
emerging markets are detrimental to development if basic services and safety nets are not provided. This
is an empirical question to which there is so far no clear answer, as illustrated in Figure 4. Per capita
growth has been relatively buoyant in recent years in the small government emerging markets, ranging
from two to nine percent per annum. This shows that low spending is no obstacle to high growth and the
prioritisation on productive spending may also contribute to this picture. Data for the new member states
also suggests that high spending is not necessarily detrimental to growth either. Annual growth averaged
between two and six percent for this country group in recent years. Productive public spending and other
factors such as the boost from impending EU accession may have contributed to this but large
governments have so far not proven to be a very harmful obstacle.

Figure 4 – Public expenditure and real GDP growth

LTV

CYP

EST

LTU

ROM

ZAF

MEX

CHL

MUS

THA SGP

KOR

IR L

PRT

CZE MLT BRA

POL

SLV GRC HUN

SVK

BGR

TUR

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

10.0 20.0 30.0 40.0 50.0

Public expenditure (% of GDP), avg 1999-2003

Real GDP growth (%), avg 1999-2003

Source: WEO. See country names in Figure 4.

The picture might change slightly when not looking at the best linear fit (which is a slightly downward
sloping line as indicated). The best overall fit would probably be an inverted U that has its maximum
somewhere in the low 30 percent of GDP expenditure range. Indeed, there is illustrative evidence of a
negative relation between rising public expenditure and economic growth from about this range, as we
get a correlation coefficient of -0.56 when we correlate public spending-to-GDP ratios against real GDP
growth for all countries with public spending above 30 percent of GDP. Though very tentative, this
would confirm earlier presumptions by the authors that optimum spending for growth might be much
lower in many new member and recent emerging market countries.

4.2. Public sector performance and efficiency via composite indicators

In measuring public sector performance and efficiency, we follow closely the methodology described
above (as developed by Afonso, Schuknecht and Tanzi (2005)). In summary, our analysis suggests that
new EU member countries show an average performance score that, due to relatively high expenditure,
does not suggest very efficient use of public resources. Asian emerging markets take most of the top
ranks.