Governmental interventionism degree in [629302]

Governmental interventionism degree in
economy – a case study in OECD countries
Arik Sadeh1, Claudia Florina Radu2, Cristina Feniser3, and Ken Brown4
1Holon Institute of Technology, Faculty of Technology Management Golomb St . 52, Holon, 5810201,
Israel
2„Vasile Goldiș” Western University, Department of Economic Science s, Informatic s and
Engineering, 86 Liviu Rebreanu St., Arad, Roma nia
3Technical University of Cluj Napoca , 28 Memorandumului St. Cluj -Napoca 400114, Romania
4Letterkeny Institute of Technology , Port Rd, Letterkenny, Co. Donegal, Ireland
Abstract. In this study , we talk about the economic role of the state , and
we analyze the degree of its intervention in the economy within the OECD
countries, for the period 2000 -2016. Thus, we seek to identify the countries
characterized by a n active intervention as well as a weaker level of state
intervention. Then, we show the types of public spending that the state
places more emphasis on. We analyze the distribution of state intervention
(given by budget rev enues) concernng to GDP, fiscal pressure, the period
before and after the 2008 crises and certain types of expenditure. We can
say that, generally, well -developed countries are characterized by a high
level of state interventionism, while less developed on es by lower
interventionism. The degree of interventionism level is smaller after the
2008 crises.
1 Introduction
The role of the state has changed over time, with many debates and controversies in this
regard. Thus, until the Great Depression of the 1930 s liberalism was the predominant
current , with Adam Smith's laisser -faire principle. Then the decades that followed, until the
1980s, were characterized by direct state intervention in the economy.
Keynesian ideas have forced the state to take measure s to stabilize the economy.
Keynesian theory was used to justify an increase in the role of the public sector, because it
was needed an economy that reduce s exposure to fluctuations (Tanzi, 1997) [1].
However, towards the end of the 1980s , and early 1990s there was a gradual decrease in
state intervention in the economy, that period being characterized by limited
interventionism.
Following the more neoliberal tendency of the last two decades of the last century, in the
last decade , the emphasis is increasingly o n the need and willingness of the State to
intervene in economic development. The main reason for this approach is the global
economic and financial crisis of recent years and the widespread conviction that it can only
be managed through the direct interve ntion of states (Inotai, 2015) [2].
Therefore , over time there have been opinions both in favor and against state intervention
in the economy . Those who sustain the interventionism are based on arguments such a:

market imperfections and shortcomings , the e xistence of common goods , harmful goods ,
adverse economic phenomena (unemployment , inflation), the existence of income
inequality between individuals. All these are enough reasons to justify a significant state
involvement in the economy. Those who are against state interventionism bring as
arguments : low efficiency of many actions , high costs of interventionist policies and the
fact that often state representatives follow their interests and not of the citizens (Radu, 201 3)
[3].
One of the reasons for stat e intervention is to protect individuals against economic risks ,
but as a result of its intervention, there are significat redistributions of income from high –
income individuals to those with lower incomes. The goal is to reduce income inequality
(especial ly through taxation). It is important for the state to focus its attention on making
redistributive policies efficient .
We propose to analyze the degree of state intervention in the OECD count ries, both in
terms of budget revenues and budget expenditures. This way we will identify the high er
interventionist countries, but also the weaker interventionist countries.
The paper is structured as follows: Section 2 presents the research literature about the role
the state should have in the economy . Section 3 describes the methodology and data used.
Section 4 presents the findings , and Section 5 presents the discussions . The paper ends with
conclusions .
2 Literature review
Collier (2009) argued that the primary role of government is to provide public goods such
as protection and justice in exchange of taxes levied, as they are not suitable to be provided
privately . Security can be purchased , but there are major limitations in its private provision
[5].
Today there are opinions on rethinking the role of the state i n the economy because of the
economic and financial crisis ( Tanzi, 2009) . Reform of public spending is therefore
necessary, but for this it is necessary to improve the functioning of the private market. The
state needs to be involved in reforming the marke t, so he has to play a regulatory role and to
become more involved in regulating and providing the necessary information to the public.
So the new role of the state involves lowe r public spending and better markets [6].
We consider that the state should re main involved in providing common goods, because
otherwise their existence would be seriously jeopardized. Then the social policy of the state
should play an important role in the activities of the state . For these reasons it is necessary
for the state to continue to engage actively in essential areas like education , health, pensions,
electricity, natural resources of the country – to provide free medical care , and free
education (Radu, 201 3) [3].
According to Bakala (2015), a good state is the one that gua rantees simple, solid,
understandable rules for everyone, who does not change these rules and its institutions very
often and guarantees the impersonal rule of law and a reliable judicial system. At the same
time, the state should provide a good education system and ensure equality not in income
but in opportunities [2]. On the other hand, Balcerowicz (2015) has the opinion that the
only rational approach about the state remains the analytical one. It really implies that the
state operates through political leaders and public clerk s, who do not differ from ordinary
people, being usually interested in themselves and having cognitive limitations [2].
In principle , there are many more things that governments could and should do: provide
public goods, correct m arket failures, reduce inequalities in income and opportunities,
stabilize excessive economic fluctuations. But t he real difference between success and
failure in economic development is made by the necessary institutional and legal

infrastructures that pr otect property rights, enforce the rule of law and prevent abuse by
governments (Tabellini, 2005) [7].
3 Methodology and data
In our study , we used the data from the OECD database. Data was collected for all OECD
countries, from the year 2000 to the year 2 016, meaning 17 years. There is data about 34
countries and for the Euro Area. This data is used for the descriptive statistic al analysis and
analysis of selected variables. Some of the countries contain observations with missing
data, so twenty -five coun tries are included in statistical inference part of the study [20].
Mainly because data for them were available for all variables in the model all over the 17
years. Each variable in the survey has 425 values (17*25=425).
First, we make a descriptive anal ysis on the level of state intervention in OECD countries ,
both in terms of budget revenues and budget expenditures. Then we analyzed the
correlation between state intervention (given by budget revenues) and GDP, fiscal pressure
and certain types of expend iture that are most important in the OECD countries budget s.
4 Findings
4.1 Descriptive analysis
We propose to analyze the degree of state intervention in the OECD countries, given by the
share in GDP of both total budgetary revenues and total budget expen ditures. For the
beginning , we will refer to the share of total budget revenues in GDP. For this, Chart 1 is
relevant, showing total budget revenues as a percent of GDP in OECD countries over 2000 –
2016. This is the dependent variable of our study and the o bject of the study.
We see from Chart 1 that the share of total budgetary revenue in GDP of OECD countries
can be grouped on three intervals. Thus we have a minimum level between 20 -40%, then an
average of 40 -50% and the upper level of 50 -60%. The minimum level is registered in 16
countries: Mexico, Australia, Czech Republic, Estonia, Ireland, Japan, Korea, Latvia, New
Zealand, Poland, Slovakia, Spain, Switzerland, Turkey, UK , and USA. The average level
appears in 13 countries: Austria, Belgium, Canada, Ger many, Greece, Hungary, Iceland
(except in 2016), Israel, Italy, Luxembourg, Netherlands, Portugal, Slovenia. The maximum
level appears in: Denmark, Finland, France, Iceland (2016), Norway, Sweden. We notice
that Iceland in 2016 has the highest level of tot al budget revenues of all OECD countries,
close to 58% of GDP. Also, the euro area average is in the middle range, between 40 -50%.
Therefore, most OECD countries are situated in the minimum interval and only 5 of them
in the maximum range . In the minimum , one we find mainly non -EU countries, but also 8
EU countries, especially those from South -Eastern Europe (newer EU countries). Within
the average interval, mostly are EU countries (except Canada and Israel) – but this is
especially the case of well-develop ed EU countries. Then in the maximum range, as we
expected, we mainly find the Northern countries, only France is the exception.
Thus, EU well developed countries have a preference for a rather high level of total
budget revenues as a percentage of GDP, wh ich is found in the medium range (40 -50%),
but also in the upper (50 -60%) – where we mostly find the Northern countries, known for
their high level of taxation and, implicitly, of the budget revenues. Among the newer EU
countries, only Hungary and Slovenia are in the middle range, the others following the
trend from the non -EU countries such as Korea, New Zealand, the USA, and Mexico. Here,
as we mentioned before, the level of budget revenues is the lowest (mostly between 30 –
40%).

AustraliaAustriaBelgiumCanadaCzech RepublicDenmarkEstoniaFinlandFranceGermanyGreeceHungaryIcelandIrelandIsraelItalyJapanKoreaLatviaLuxembourgMexicoNetherlandsNew ZealandNorw ayPolandPortugalSlovak RepublicSloveniaSpainSw edenSw itzerlandTurkeyUnited KingdomUnited StatesEuro area
0,00 10,00 20,00 30,00 40,00 50,00 60,00 70,00 2000
2005
2010
2016

Fig. 1 . Total general government revenue (%GDP) – OECD countries
Source: authors’ construction
So, according to Fig. 1, we can say that, generally, well -developed countries are
characterized by a high level of state interventionism, while less developed ones by lower
interventionism. We also have some exceptions. In countries such as Japan, UK, USA,
Australia, the degree of state intervention is more moderate , although they are developed
countries. We are talking about their preference for a more liberal doctrine, wi th less
involvement of the state in the economy.
Fig. 2 below shows the tax to GDP ratio in OECD countries over the period 2000 -2016.
This indicator is known as fiscal pressure (or tax burden) and shows how heavy taxes are
for taxpayers in each state.

0 10 20 30 40 50OECD – AverageMexicoKoreaDenmarkSw eden2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000Fig. 2. Tax to GDP ratio (%), OECD countries, 2000 -2016
Source: authors’ construction
As expected, the level of the tax burden in OECD countries is slightly lower than the
share of total budget revenue in GDP, because here we only c onsider the tax revenues. The
lowest tax burden is recorded in Mexico (between 10 -20%) , and Korea (between 20 -30%),
and the highest level appears in Denmark and Sweden (40 -50%). The OECD average
oscillated between 32 -34%. The average range of tax burden (b etween 30 -40%) contains 17
countries, while 10 countries were in the minimum range (10 -30%) and 8 countries in the
maximum one (40 -50%) – especially among the Northern ones. In the minimum range , we
find, as in Fig. 1, especially in non-EU countries. Then, in the middle one, we mainly find
EU countries, with only three countries outside the EU (Israel, Canada , and New Zealand).
As we mentioned earlier, state interventionism can also be analyzed in terms of the share
of public expenditure in GDP. The level o f interventionism given by total public
expenditure in OECD countries is shown in Fig. 3.
Thus, the interventionism level given by total expenditure is between 20 -60%. As in the
case of revenues , we can delimit three intervals. The minimum range (20 -40%) i ncludes 8
countries such as Australia, Estonia, Ireland, Japan, Korea, Latvia, Switzerland , and USA.
In the middle range (40 -50%) we have 16 countries: Czech Republic, Germany, Greece,
Hungary, Iceland, Israel, Italy, Luxembourg, the Netherlands, Norway, P oland, Portugal,
Slovakia, Slovenia, Spain and UK. Then we have the countries: Austria, Belgium, Denmark,
Finland, France, Ireland (2010) and Sweden in the maximum range (over 50%). We
mention that Ireland (2010) has the largest share of total expenditure in GDP, of 65%. As
before, we find in the minimum range mostly the non -EU countries, in the middle range are
predominant the EU countries, and in the maximum one we have the Nordic countries and
other developed EU countries. A high level of total public ex penditure is justified as they
have to support total revenues. Generally, states with a high level of interventionism in
terms of tax revenues also have high interventionism through public expenditure and vice
versa.

Fig. 3. Total general government exp enditure (%GDP) – OECD countries
Source: authors’ construction
4.2 The Suggested model
We used the panel econometrics , and the model takes the following form: (the form of the
model and description of variables are according to Mașca et al., 2011) .
IDit = c0 + c1 × GDPit + c2 × FPit + c5 × EAit + c6 × SPit + c7 × EDit + c8 × HEit + c 9 ×
GPit + eit (1)
where:
ID – interventionism degree , GDP – gross domestic product , FP – fiscal pressure , EA –
economic affairs , SP – social protection , ED – education , HE – health , GP – general public
services
Description of variables:

ID is the degree of interventionism in the i country (i=1,…,2 5), at t moment
(t=2000,…,2016), calculated as a percentage ratio between the total government revenue
and GDP (budget re venues are those of the consolidated general budget).
GDP is the gross domestic product in i country, at t moment, representing
a percentage of the total GDP of OECD countries. We expressed the state intervention by a
relative measure which uses GDP and th is requires the expression of the exogenous
variable associated to GDP also in a relative form. We introduced this determinant in order
to surprise the effect of the level of country development (expressed in relative terms) upon
the degree of state interv ention.
The following variables represent a proxy for the structure of public spending:
expenditure with economic affairs, social protection, education, health and general public
services. These are the most important categories of spending in the OECD cou ntries
budgets.
EA represents the share of public expenditure with economic affairs in GDP in country i
at moment t.
SP represents the share of social protection expenditure in GDP in country i at time t.
ED is the share of public expenditure with educat ion in GDP in country i at time t.
HE is the share of public health expenditure in GDP in country i at time t.
GP is the share of general public services expenditure in GDP in country i at time t.
To these exogenous variables a set of dummy variables is ad ded. The dummy variables
capture the particular characteristics associated to each country in the sample that can
influence the degree of state intervention (for example – public policy or liberal orientations
of governance).
We split the data into two gro ups of time categories. The first group is from 2000 to 2008,
and from 2009 to 2016. It seems that the coefficient of the time split is significant. This
implies that there are two major sub periods.
The goodness of fit is R2=0.89

B Std. Error Beta t Sig.
(Constant) 1.719 1.437 1.197 0.232
Health 1.523 0.131 0.328 11.604 0.000
Education 1.275 0.162 0.178 7.872 0.000
GDP % of
OECD -0.234 0.028 -0.233 -8.302 0.000
public services 0.243 0.087 0.070 2.804 0.005
Social
Protection 0.677 0.058 0.407 11.595 0.000
Fiscal Pressure` 0.397 0.032 0.331 12.401 0.000
Economic
Affair -0.118 0.088 -0.031 -1.341 0.181
Period -1.792 0.319 -0.132 -5.616 0.000
It seems that all coefficients are significant .
The impact of time on interventionism degree is crucia l. It seems that after 2008, the
interventionism degree is smaller. The impact of Health (1.52), Education (1.275) Social
Protection (.677) and Public services (.243) are positive. This means that these are the
leading factors in governments' policies. The impact of the proportional GDP on the
interventionism degree is negative which implies that the greater (on the average) the GDP
the lower the interventionism degree is.

5. Discussion
As a result of analyzing the degree of state intervention in terms of budget revenues we
found that EU well developed countries have a preference for a rather high level of total
budget revenues as a percentage of GDP, which is found in the medium range (40 -50%),
but also in the upper (50 -60%) – where we mostly find the Nor thern countries, known for
their high level of taxation and, implicitly, of high budget revenues. Among the newer EU
countries, only Hungary and Slovenia are in the middle range, the others following the
trend from the non -EU countries such as Korea, New Z ealand, the USA, and Mexico . Here
the level of budget revenues is the lowest (mostly between 30 -40%).
So, we can say that, generally, well developed countries are characterized by a high level
of state interventionism, while less developed ones by a lower interventionism. We also
have some exceptions. In countries such as Japan, UK, USA, Australia, the degree of state
intervention is lower, although they are developed countries. We are talking about their
preference for a more liberal doctrine, with a less involvement of the state in economy.
Then we found that the interventionism level given by budget expenditure in OECD
countries is between 20 -60%. As in the case of revenues we can delimit three intervals. The
minimum range (20 -40%) includes 8 countries, i n the middle rang e (40 -50%) we have 16
countries and then another 6 countries in the maximum range (over 50%). As before, we
find in the minimum range mostly the non -EU countries, in the middle range predominate
the EU countries, and in the maximum one are the Nordic countries and other developed
EU countries. A high level of total public expenditure is justified as they have to support
total revenues. Generally, countries with a high level of interventionism in terms of tax
revenues also have a high interv entionism through public expenditure and vice versa.
We can also say that on average, OECD countries allocate about four times more money
to social protection than to economic affairs. However, in some OECD countries such as
Denmark, Finland, France, Germa ny, Greece, Italy, Israel, Portugal, Sweden and the UK,
this threshold is exceeded. Also high interventionist countries such as: Denmark, Finland,
France, Norway and Sweden invest heavily in social protection, well above the OECD
average. On the other hand , less interventionist countries, such as the Czech Republic,
Korea, Estonia, Slovakia, Slovenia, Hungary, Iceland and Luxembourg, support economic
affairs with public money to a greater extent than the average.
6. Conclusions
The role of state intervent ion is analyzed in OECD c ountries. By standardizing and scaling
economic variables such as GDP we could show wh ich are the factors that affect the role of
state on its own economy. It is shown that OECD countries can be classified by the extent
of their ta x burden, the state intervention and public expenditures policies. The study puts
the light on the allocation of governmental resources among their own citizens.
Further analyses are needed, among them analysis of the suggested model such as full
panel dat a amylases with respect to time and country. There is a room for dealing with
more exploratory variables .
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