Economic Growth and the Optimal Size of Government in Guyana

Using an Autoregressive Distributed Lag econometric technique, data from 1990 to 2021, and control variables that relax and tighten the foreign currency constraint, this chapter tests the validity of the Armey curve hypothesis and estimates the optimal level of government spending in Guyana. The model was motivated by the theoretical work Armey (1995) and Bollers and Khemraj (2016). The Armey curve was proven to be valid in Guyana and the optimal level of government spending was estimated at 23.04% of GDP. All coefficients were significant at the 5% or 10% level. Exports were found to relax the foreign currency constraint. Contrarily, foreign direct investment and private investment were found to tighten the foreign currency constraint. This chapter finds that (1) the structure of private investment in Guyana is foreign exchange intensive and (2) foreign direct investment negatively affects economic growth as a consequence of worsening BOP capital account on account of large profits repatriated to foreign companies and transfers to the Natural Resources Fund.