Democracy, development, and the public sector

This article develops a model that describes the growth of the public sector as a joint result of the process of economic development and the political institutions in place. The model is tested using panel data for about sixty five developing and developed nations for the period 1950-90. Economic modernization leads to the growth of the public sector through two mechanisms: first, the state intervenes to provide certain collective goods such as regulatory agencies and infrastructures; second, industrialization and an ageing population translate into higher demands for transfers in the form of unemployment benefits, health insurance, and pensions. Still, the impact of economic development is strongly conditional on the political regime in place as well as on the level of electoral participation. Whereas in a democratic regime, where politicians respond to voters' demands, the public sector grows parallel to the structural changes associated with economic development, in authoritarian countries the size of the public sector remains small.