IT’S NOT HOW MUCH, BUT HOW WELL: GOVERNMENT EFFECTIVENESS AND THE MACROECONOMIC IMPACT OF ALLOCATION, DISTRIBUTION, AND STABILIZATION FUNCTIONS IN OECD COUNTRIES
IT’S NOT HOW MUCH, BUT HOW WELL: GOVERNMENT EFFECTIVENESS AND THE MACROECONOMIC IMPACT OF ALLOCATION, DISTRIBUTION, AND STABILIZATION FUNCTIONS IN OECD COUNTRIES
Aya ZIREGUE, Levente NÁDASI
Institute of Economics, Faculty of Economics and Business, University of Debrecen, Hungary (student)
Institute of Economics, Faculty of Economics and Business, University of Debrecen, Hungary
ziregueaya@gmail.com
nadasi.levente@econ.unideb.hu
Abstract: This paper examines whether government effectiveness impacts macroeconomic effects of fiscal policies, using the three basic principles established by Musgrave (1959): allocation, distribution, and stabilization. The main question considered is why some states achieve good economic and social performance at modest rates of public expenditure while others fail to do so even with relatively higher expenses. The empirical part uses data from 15 OECD countries for the period 2010-2023 to classify states into three groups according to government effectiveness based on their Worldwide Governance Indicators WGI Government Effectiveness scores. The paper employs comparative descriptive approach combined with simple correlation analysis in order to find out the relationship between government effectiveness and macroeconomic variables such as income inequality (measured as Gini coefficient), GDP growth rate, and public expenditure allocations (using COFOG data). The main results show that there is a strong relationship between government effectiveness and income inequality. States with higher government effectiveness demonstrate a much smaller Gini coefficient at 0.277 compared to 0.324 in the case of low government effectiveness. Despite better short-term GDP growth rates observed for low government effectiveness countries, this seems to be a consequence of a catch-up effect and is characterized by increased volatility. By contrast, higher government effectiveness is linked to more stable economic performance and better resource allocation (especially in healthcare and education). The research adds to the literature by combining Musgrave’s fiscal principles with government effectiveness measures and suggests a new concept, called Fiscal Effectiveness Score, as a way to improve the existing framework that solely focuses on expenditures. This means that improvement in institutions might be more valuable than an increase in government expenditure when it comes to economic and social benefits.
Keywords: Government effectiveness; Musgrave functions; fiscal policy; OECD countries; institutional quality; WGI.
JEL Classification: H50; E62; O43.
