Government Size and Openness: Insights Based on Country Classifications
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Published
Jun 21, 2021
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Abstract
This study investigates the nexus between government size and openness by paying special attention to country classification. The main results of our empirical investigations show that (i) there are two government size trends meaning two different country groups exist; (ii) there is a positive relationship between trade openness and government size for the first country group, which validates the compensation hypothesis; (iii) a negative relationship between financial openness and government size is found for the second country group, which confirms the efficiency hypothesis; (iv) the effect of financial openness is nearly ten times higher than trade openness; (v) an endogenous country classification process yields better results to understand the linkages between openness and government size. In this regard our study incorporates both hypotheses and provides a uniform explanation.
JEL classification: C33, F62, H50
Keywords: Government size, Trade openness, Financial openness, Club convergence
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Sarı, E. and Hotunluoğlu, H. (2021) “Government Size and Openness: Insights Based on Country Classifications”, World Journal of Applied Economics, 7(1), pp. 1-16. doi: 10.22440/wjae.7.1.1.
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References
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Andres, J., Domenech, R., & Fatas, A. (2008). The Stabilizing Role of Government Size. Journal of Economic Dynamics and Control , 32 (2), 571-93. doi:10.1016/j.jedc.2007.02.006
Arawatari, R. (2015). Political economy of trade openness and government size. Economics & Politics, 27 (1), 28-52. doi:10.1111/ecpo.12049
Aydogus, I., & Topcu, M. (2013). An Investigation of Co-integration and Causality between Trade Openness and Government Size in Turkey. International Journal of Economics and Financial Issues, 3 (2), 319-23.
Balcells Ventura, L. (2006). Trade Openness and Preferences for Redistribution: A Cross-National Assessment of the Compensation Hypothesis. Business and Politics, 8 (2), 1-50. doi:10.2202/1469-3569.1131
Bayat, T., Tasar, I., & Kayhan, S. (2017). The Validity of Efficiency and Compensation Hypothesis for G7 Countries. Ecoforum Journal, 6 (2), 1-7.
Bekaert, G., Harvey, C. R., & Lundblad, C. (2006). Growth Volatility and Financial Liberalization. Journal of International Money and Finances, 25 (3), 370-403. doi:10.1016/j.jimonfin.2006.01.003
Benarroch, M., & Pandey, M. (2008). Trade Openness and Government Size. Economics Letters, 101 (3), 157-59. doi:10.1016/j.econlet.2008.06.016
Benarroch, M., & Pandey, M. (2012). The Relationship between Trade Openness and Government Size: Does Disaggregating Government Expenditure Matter? Journal of Macroeconomics, 34 (1), 239-52. doi:10.1016/j.jmacro.2011.11.002
Cameron, D. R. (1978). The Expansion of the Public Economy: A Comparative Analysis. The American Political Science Review, 72 (4), 1243-61. doi:10.2307/1954537
Cavallo, E. A., de Gregorio, J., & Loayza, N. V. (2008). Output Volatility and Openness to Trade: A Reassessment [with comments]. Economia, 9 (1), 105-52.
Collard, F., Dellas, H., & Tavlas, G. (2017). Government Size and Macroeconomic Volatility. Economica, 84 (336), 797-819. doi:10.1111/ecca.12223
Debrun, X., Pisani-Ferry, J., & Sapir, A. (2008). Government Size and Output Volatility: Should we Foresake Automatic Stabilisation? (Working Papers No. 2008/01). Bruegel.
de Jongh, J. (2020). Economic Globalisation and Government Size: Testing the Compensation Hypothesis in South Africa's Public Sector. International Journal of Business and Management Studies, 12 (1), 66-83.
de Mendonca, H. F., & de Oliveira, A. J. (2019). Openness and Government Size: A New Empirical Assessment. Economics Bulletin, 39 (2), 982-95.
di Giovanni, J., & Levchenko, A. (2009). Trade Openness and Volatility. The Review of Economics and Statistics, 91 (3), 558-85. doi:10.1162/rest.91.3.558
Dixit, V. (2014). Relation between Trade Openness, Capital Openness and Government Size in India: An Application of Bounds Testing-ARDL Approach to Co-integration. Foreign Trade Review, 49 (1), 1-29. doi:10.1177/0015732513515987
Down, I. (2007). Trade Openness, Country Size and Economic Volatility: The Compensation Hypothesis Revisited. Business and Politics, 9 (2), 1-20. doi:10.2202/1469-3569.1201
Dreher, A., Sturm, J. E., & Ursprung, H. W. (2008). The Impact of Globalization on the Composition of Government Expenditures: Evidence from Panel Data. Public Choice, 134 (3-4), 263-92. doi:10.1007/s11127-007-9223-4
Du, K. (2017). Econometric Convergence Test and Club Clustering using Stata. The Stata Journal, 17 (4), 882-900. doi:10.1177/1536867X1801700407
Epifani, P., & Gancia, G. (2009). Openness, Government Size and the Terms of Trade. The Review of Economic Studies, 76 (2), 629-68. doi:10.1111/j.1467-937X.2009.00546.x
Erauskin, I. (2011). Financial Openness, Volatility, and the Size of Productive Government. SERIEs, 2 (2), 233-53. doi:10.1007/s13209-010-0029-0
Fujii, E. (2017). Government Size, Trade Openness, and Output Volatility: A Case of Fully Integrated Economies. Open Economies Review, 28 (4), 661-84. doi:10.1007/s11079-017-9433-4
Garrett, G. (2001). Globalization and Government Spending around the World. Studies in Comparative International Development, 35 (4), 3-29. doi:10.1007/BF02732706
Garrett, G., & Mitchell, D. (1999). Globalization and the Welfare State. Yale: Leitner Program.
Garrett, G., & Mitchell, D. (2001). Globalization, Government Spending and Taxation in the OECD. European Journal of Political Research, 39 (2), 145-77. doi:10.1023/A:1011043120145
Gemmell, N., Kneller, R., & Sanz, I. (2008). Foreign Investment, International Trade and the Size and Structure of Public Expenditures. European Journal of Political Economy, 24 (1), 151-71. doi:10.1016/j.ejpoleco.2007.06.004
Hardiman, N., Murphy, P., & Burke, O. (2008). The Politics of Economic Adjustment in a Liberal Market Economy: The Social Compensation Hypothesis Revisited. Irish Political Studies, 23 (4), 599-626. doi:10.1080/07907180802452838
Heimberger, P. (2020). Does Economic Globalization Aect Government Spending? A Meta-analysis. Public Choice, 1-26. doi:10.1007/s11127-020-00784-8
Islam, M. Q. (2004). The Long run Relationship between Openness and Government Size: Evidence from Bounds Test. Applied Economics, 36 (9), 995-1000. doi:10.1080/0003684042000233221
Jetter, M., & Parmeter, C. F. (2015). Trade Openness and Bigger Governments: The Role of Country Size Revisited. European Journal of Political Economy, 37 , 49-63. doi:10.1016/j.ejpoleco.2014.11.001
Karakaya, E., Sari, E., & Alatas, S. (2021). What Drives Material Use in the Eu? Evidence from Club Convergence and Decomposition Analysis on Domestic Material Consumption and Material Footprint. Resources Policy, 70 . doi:10.1016/j.resourpol.2020.101904
Kim, S. Y. (2007). Openness, External Risk, and Volatility: Implications for the Compensation Hypothesis. International Organization, 61 (1), 181-216. doi:10.1017/S0020818307070051
Kim, T. K. (2009). Globalization and State-supported Welfare: A Test of the Curve-linear Hypothesis in OECD Countries. International Social Work, 52 (2), 209-22. doi:10.1177/0020872808099731
Kimakova, A. (2009). Government Size and Openness Revisited: The Case of Financial Globalization. Kyklos, 62 (3), 394-406. doi:10.1111/j.1467-6435.2009.00442.x
Kittel, B., & Winner, H. (2005). How Reliable is Pooled Analysis in Political Economy? The Globalization-welfare State Nexus Revisited. European Journal of Political Research, 44 (2), 269-93. doi:10.1111/j.1475-6765.2005.00228.x
Leibrecht, M., Klien, M., & Onaran, O. (2011). Globalization, Welfare Regimes and Social Protection Expenditures in Western and Eastern European Countries. Public Choice, 148 (3-4), 569-94. doi:10.1007/s11127-010-9685-7
Liberati, P. (2007). Trade Openness, Capital Openness and Government Size. Journal of Public Policy, 27 (2), 215-47. doi:10.1017/S0143814X07000670
Liberati, P. (2013). Government Size and Trade Openness: Some Additional Insights (MPRA Paper No. 43561). University Library of Munich, Germany.
Lin, F., Li, B., & Sim, N. C. (2014). Trade Openness and Government Size of Small Developing Countries: An Instrumental Approach. Economics of Transition, 22 (4), 783-808. doi:10.1111/ecot.12053
Martin, C. W., & Steiner, N. D. (2013). Public Spending and Trade Liberalization: The Compensation Hypothesis Revisited (Working Paper No. 2245595). SSRN. doi:10.2139/ssrn.2245595
Meinhard, S., & Potrafke, N. (2012). The Globalization-Welfare State Nexus Reconsidered. Review of International Economics, 20 (2), 271-87. doi:10.1111/j.1467-9396.2012.01021.x
Molana, H., Montagna, C., & Violato, M. (2011). On the Causal Relationship Between Trade-Openness and Government-size: Evidence from OECD Countries. International Journal of Public Policy, 7 (4-6), 226-49. doi:10.1504/IJPP.2011.043562
Phillips, P. C., & Sul, D. (2007). Transition Modeling and Econometric Convergence Tests. Econometrica, 75 (6), 1771-1855. doi:10.1111/j.1468-0262.2007.00811.x
Phillips, P. C., & Sul, D. (2009). Economic Transition and Growth. Journal of Applied Econometrics, 24 (7), 1153-85. doi:10.1002/jae.1080
Ram, R. (2009). Openness, Country Size, and Government Size: Additional Evidence from a Large Cross-country Panel. Journal of Public Economics, 93 (1-2), 213-18. doi:10.1016/j.jpubeco.2008.04.009
Rodrik, D. (1998). Why Do More Open Economies Have Bigger Governments? Journal of Political Economy, 106 (5), 997-1032. doi:10.1086/250038
Ruggie, J. G. (1982). International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order. International Organization, 36 (2), 379-415. doi:10.1017/S0020818300018993
Sabra, M. M. (2016). Government Size, Country Size, Openness and Economic Growth in Selected MENA Countries. International Journal of Business and Economic Sciences Applied Research (IJBESAR), 9 (1), 39-45.
Turan, T., & Karakas, M. (2016). The Effect of Trade Openness and Income on the Size of a Government. Transylvanian Review of Administrative Sciences, 12 (47), 164-78.
Viren, M. (2005). Government size and output volatility: Is there a relationship? (Discussion Paper No. 8/2005). Bank of Finland. doi:10.2139/ssrn.782604
Walter, S. (2010). Globalization and the Welfare State: Testing the Microfoundations of the Compensation Hypothesis. International Studies Quarterly, 54 (2), 403-26. doi:10.1111/j.1468-2478.2010.00593.x
World Bank. (2020). World Development Indicators (WDI). https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators.
Alesina, A., & Wacziarg, R. (1998). Openness, Country Size and Government. Journal of Public Economics, 69 (3), 305-21. doi:10.1016/S0047-2727(98)00010-3
Andres, J., Domenech, R., & Fatas, A. (2008). The Stabilizing Role of Government Size. Journal of Economic Dynamics and Control , 32 (2), 571-93. doi:10.1016/j.jedc.2007.02.006
Arawatari, R. (2015). Political economy of trade openness and government size. Economics & Politics, 27 (1), 28-52. doi:10.1111/ecpo.12049
Aydogus, I., & Topcu, M. (2013). An Investigation of Co-integration and Causality between Trade Openness and Government Size in Turkey. International Journal of Economics and Financial Issues, 3 (2), 319-23.
Balcells Ventura, L. (2006). Trade Openness and Preferences for Redistribution: A Cross-National Assessment of the Compensation Hypothesis. Business and Politics, 8 (2), 1-50. doi:10.2202/1469-3569.1131
Bayat, T., Tasar, I., & Kayhan, S. (2017). The Validity of Efficiency and Compensation Hypothesis for G7 Countries. Ecoforum Journal, 6 (2), 1-7.
Bekaert, G., Harvey, C. R., & Lundblad, C. (2006). Growth Volatility and Financial Liberalization. Journal of International Money and Finances, 25 (3), 370-403. doi:10.1016/j.jimonfin.2006.01.003
Benarroch, M., & Pandey, M. (2008). Trade Openness and Government Size. Economics Letters, 101 (3), 157-59. doi:10.1016/j.econlet.2008.06.016
Benarroch, M., & Pandey, M. (2012). The Relationship between Trade Openness and Government Size: Does Disaggregating Government Expenditure Matter? Journal of Macroeconomics, 34 (1), 239-52. doi:10.1016/j.jmacro.2011.11.002
Cameron, D. R. (1978). The Expansion of the Public Economy: A Comparative Analysis. The American Political Science Review, 72 (4), 1243-61. doi:10.2307/1954537
Cavallo, E. A., de Gregorio, J., & Loayza, N. V. (2008). Output Volatility and Openness to Trade: A Reassessment [with comments]. Economia, 9 (1), 105-52.
Collard, F., Dellas, H., & Tavlas, G. (2017). Government Size and Macroeconomic Volatility. Economica, 84 (336), 797-819. doi:10.1111/ecca.12223
Debrun, X., Pisani-Ferry, J., & Sapir, A. (2008). Government Size and Output Volatility: Should we Foresake Automatic Stabilisation? (Working Papers No. 2008/01). Bruegel.
de Jongh, J. (2020). Economic Globalisation and Government Size: Testing the Compensation Hypothesis in South Africa's Public Sector. International Journal of Business and Management Studies, 12 (1), 66-83.
de Mendonca, H. F., & de Oliveira, A. J. (2019). Openness and Government Size: A New Empirical Assessment. Economics Bulletin, 39 (2), 982-95.
di Giovanni, J., & Levchenko, A. (2009). Trade Openness and Volatility. The Review of Economics and Statistics, 91 (3), 558-85. doi:10.1162/rest.91.3.558
Dixit, V. (2014). Relation between Trade Openness, Capital Openness and Government Size in India: An Application of Bounds Testing-ARDL Approach to Co-integration. Foreign Trade Review, 49 (1), 1-29. doi:10.1177/0015732513515987
Down, I. (2007). Trade Openness, Country Size and Economic Volatility: The Compensation Hypothesis Revisited. Business and Politics, 9 (2), 1-20. doi:10.2202/1469-3569.1201
Dreher, A., Sturm, J. E., & Ursprung, H. W. (2008). The Impact of Globalization on the Composition of Government Expenditures: Evidence from Panel Data. Public Choice, 134 (3-4), 263-92. doi:10.1007/s11127-007-9223-4
Du, K. (2017). Econometric Convergence Test and Club Clustering using Stata. The Stata Journal, 17 (4), 882-900. doi:10.1177/1536867X1801700407
Epifani, P., & Gancia, G. (2009). Openness, Government Size and the Terms of Trade. The Review of Economic Studies, 76 (2), 629-68. doi:10.1111/j.1467-937X.2009.00546.x
Erauskin, I. (2011). Financial Openness, Volatility, and the Size of Productive Government. SERIEs, 2 (2), 233-53. doi:10.1007/s13209-010-0029-0
Fujii, E. (2017). Government Size, Trade Openness, and Output Volatility: A Case of Fully Integrated Economies. Open Economies Review, 28 (4), 661-84. doi:10.1007/s11079-017-9433-4
Garrett, G. (2001). Globalization and Government Spending around the World. Studies in Comparative International Development, 35 (4), 3-29. doi:10.1007/BF02732706
Garrett, G., & Mitchell, D. (1999). Globalization and the Welfare State. Yale: Leitner Program.
Garrett, G., & Mitchell, D. (2001). Globalization, Government Spending and Taxation in the OECD. European Journal of Political Research, 39 (2), 145-77. doi:10.1023/A:1011043120145
Gemmell, N., Kneller, R., & Sanz, I. (2008). Foreign Investment, International Trade and the Size and Structure of Public Expenditures. European Journal of Political Economy, 24 (1), 151-71. doi:10.1016/j.ejpoleco.2007.06.004
Hardiman, N., Murphy, P., & Burke, O. (2008). The Politics of Economic Adjustment in a Liberal Market Economy: The Social Compensation Hypothesis Revisited. Irish Political Studies, 23 (4), 599-626. doi:10.1080/07907180802452838
Heimberger, P. (2020). Does Economic Globalization Aect Government Spending? A Meta-analysis. Public Choice, 1-26. doi:10.1007/s11127-020-00784-8
Islam, M. Q. (2004). The Long run Relationship between Openness and Government Size: Evidence from Bounds Test. Applied Economics, 36 (9), 995-1000. doi:10.1080/0003684042000233221
Jetter, M., & Parmeter, C. F. (2015). Trade Openness and Bigger Governments: The Role of Country Size Revisited. European Journal of Political Economy, 37 , 49-63. doi:10.1016/j.ejpoleco.2014.11.001
Karakaya, E., Sari, E., & Alatas, S. (2021). What Drives Material Use in the Eu? Evidence from Club Convergence and Decomposition Analysis on Domestic Material Consumption and Material Footprint. Resources Policy, 70 . doi:10.1016/j.resourpol.2020.101904
Kim, S. Y. (2007). Openness, External Risk, and Volatility: Implications for the Compensation Hypothesis. International Organization, 61 (1), 181-216. doi:10.1017/S0020818307070051
Kim, T. K. (2009). Globalization and State-supported Welfare: A Test of the Curve-linear Hypothesis in OECD Countries. International Social Work, 52 (2), 209-22. doi:10.1177/0020872808099731
Kimakova, A. (2009). Government Size and Openness Revisited: The Case of Financial Globalization. Kyklos, 62 (3), 394-406. doi:10.1111/j.1467-6435.2009.00442.x
Kittel, B., & Winner, H. (2005). How Reliable is Pooled Analysis in Political Economy? The Globalization-welfare State Nexus Revisited. European Journal of Political Research, 44 (2), 269-93. doi:10.1111/j.1475-6765.2005.00228.x
Leibrecht, M., Klien, M., & Onaran, O. (2011). Globalization, Welfare Regimes and Social Protection Expenditures in Western and Eastern European Countries. Public Choice, 148 (3-4), 569-94. doi:10.1007/s11127-010-9685-7
Liberati, P. (2007). Trade Openness, Capital Openness and Government Size. Journal of Public Policy, 27 (2), 215-47. doi:10.1017/S0143814X07000670
Liberati, P. (2013). Government Size and Trade Openness: Some Additional Insights (MPRA Paper No. 43561). University Library of Munich, Germany.
Lin, F., Li, B., & Sim, N. C. (2014). Trade Openness and Government Size of Small Developing Countries: An Instrumental Approach. Economics of Transition, 22 (4), 783-808. doi:10.1111/ecot.12053
Martin, C. W., & Steiner, N. D. (2013). Public Spending and Trade Liberalization: The Compensation Hypothesis Revisited (Working Paper No. 2245595). SSRN. doi:10.2139/ssrn.2245595
Meinhard, S., & Potrafke, N. (2012). The Globalization-Welfare State Nexus Reconsidered. Review of International Economics, 20 (2), 271-87. doi:10.1111/j.1467-9396.2012.01021.x
Molana, H., Montagna, C., & Violato, M. (2011). On the Causal Relationship Between Trade-Openness and Government-size: Evidence from OECD Countries. International Journal of Public Policy, 7 (4-6), 226-49. doi:10.1504/IJPP.2011.043562
Phillips, P. C., & Sul, D. (2007). Transition Modeling and Econometric Convergence Tests. Econometrica, 75 (6), 1771-1855. doi:10.1111/j.1468-0262.2007.00811.x
Phillips, P. C., & Sul, D. (2009). Economic Transition and Growth. Journal of Applied Econometrics, 24 (7), 1153-85. doi:10.1002/jae.1080
Ram, R. (2009). Openness, Country Size, and Government Size: Additional Evidence from a Large Cross-country Panel. Journal of Public Economics, 93 (1-2), 213-18. doi:10.1016/j.jpubeco.2008.04.009
Rodrik, D. (1998). Why Do More Open Economies Have Bigger Governments? Journal of Political Economy, 106 (5), 997-1032. doi:10.1086/250038
Ruggie, J. G. (1982). International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order. International Organization, 36 (2), 379-415. doi:10.1017/S0020818300018993
Sabra, M. M. (2016). Government Size, Country Size, Openness and Economic Growth in Selected MENA Countries. International Journal of Business and Economic Sciences Applied Research (IJBESAR), 9 (1), 39-45.
Turan, T., & Karakas, M. (2016). The Effect of Trade Openness and Income on the Size of a Government. Transylvanian Review of Administrative Sciences, 12 (47), 164-78.
Viren, M. (2005). Government size and output volatility: Is there a relationship? (Discussion Paper No. 8/2005). Bank of Finland. doi:10.2139/ssrn.782604
Walter, S. (2010). Globalization and the Welfare State: Testing the Microfoundations of the Compensation Hypothesis. International Studies Quarterly, 54 (2), 403-26. doi:10.1111/j.1468-2478.2010.00593.x
World Bank. (2020). World Development Indicators (WDI). https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators.