Openness and government size: The compensation and efficiency hypotheses considered for Nigeria

Abstract

This paper investigates the relationship among financial openness, trade openness and government size in Nigeria. The study employed the autoregressive distributed lag (ARDL) approach to cointegration to investigate the relationship among the variables. Empirical estimates revealed that financial openness is significantly and negatively related to government size in line with the conventional wisdom that capital mobility may undermine the ability of governments to tax and raise revenue to finance government expenditure which is termed as the efficiency hypothesis. In addition, a positive relationship was reported between trade openness and government size which implies that there is evidence to support compensation hypothesis. The findings of the study suggest that openness has made the country highly vulnerable to external risk and there is need for the government to increase government expenditure and most especially, devote more funds to social welfare expenditure. This will help cushion the negative effects openness and its associated risks has on the country’s citizens.