The relationship between trade openness and government size: Does disaggregating government expenditure matter?

Abstract

This paper is the first to examine the causal relationship between trade openness and government size using both aggregate and disaggregated government expenditure data, including data on social security. Our results indicate that examining the relationship separately for functional categories of government expenditures and based on differences in incomes across countries provide important details on the relationship between the two variables not found elsewhere in the literature. Our causality tests provide little or no support for a causal relationship between openness and aggregate or disaggregated government expenditure. Similar results are obtained when our sample is split into low income versus high income countries. The only evidence of a robust, statistically significant, positive causal relationship is found between openness and education expenditures in low income countries. In no case is there a positive causal relationship between social security and openness. This leads us to conclude that there is no evidence to support the relationship suggested by Rodrik (1998).