In recent years there has been substantial empirical work on the relationship between government size and economic growth. However, apart from a few recent studies, this relationship is much less well researched for transition economies. This thesis analyses the relationship between government size and economic growth in 26 transition economies during 1990-2005 by estimating the two-sector growth model of Ram (1986) and panel regressions. The thesis finds a decreasing positive effect of government size on economic growth in these economies. The analysis also confirms that relative factor productivity was higher in the government sector than in the non-government sector during the early years of transition and vice versa over the late years of transition. Additionally, a positive externality effect of government sector on non-government sector may have been stronger during the later years of transition.