This paper considers the effects of size of government on economic growth. With
Japan’s aging society and low birth rates, the size of the Japanese government is
expanding. The size of government is often measured by the share of its expenditure
and debt versus GDP. There is much research indicating that expanded government
negatively impacts economic growth. Despite the empirical support for that notion, in
Japan—where the economy has long been stagnant since the 1990s—it would be a
daunting task to fiscally restructure such that size of government were drastically
reduced. It may not be realistic to shrink government in a society with low birth rates
and an increasing average age. There is a critical policy need to look at both the impact
of size of government on economic growth and the nature of governance reform.
This paper seeks to achieve the following. First, it will empirically analyze the
impact of size of government on economic growth. Much existing research focuses only
on size of government as a factor impacting economic growth, but this paper will also
take note of effects of governance reform. Second, it will use six indicators of
governance—voice and accountability, corruption, government effectiveness, political
stability, regulatory quality and legal compliance—in analyzing what sort of governance
reform contributes to economic growth.
