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Why Do More Open Economies Have Bigger Governments?

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  • Dani Rodrik

Abstract

This paper demonstrates that there is a robust empirical association between the extent to which an economy is exposed to trade and the size of its government sector. This association holds for a large cross-section of countries, in low- as well as high-income samples, and is robust to the inclusion of a wide range of controls. The explanation appears to be that government consumption plays a risk-reducing role in economies exposed to a significant amount of external risk. When openness is interacted with explicit measures of external risk, such as terms-of-trade uncertainty and product concentration of exports, it is the interaction terms that enter significantly, and the openness term that loses significance (or turns negative). The paper also demonstrates that government consumption is the ‘safe’ activity, in the empirically relevant sense, in the vast majority of countries.
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Suggested Citation

  • Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
  • Handle: RePEc:ucp:jpolec:v:106:y:1998:i:5:p:997-1032
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    References listed on IDEAS

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    1. repec:cup:apsrev:v:72:y:1978:i:04:p:1243-1261_15 is not listed on IDEAS
    2. Bates, Robert H. & Brock, Philip & Tiefenthaler, Jill, 1991. "Risk and trade regimes: another exploration," International Organization, Cambridge University Press, vol. 45(01), pages 1-18, December.
    3. Jeffrey A. Frankel & David Romer, 1996. "Trade and Growth: An Empirical Investigation," NBER Working Papers 5476, National Bureau of Economic Research, Inc.
    4. Joel Slemrod, 1995. "What Do Cross-Country Studies Teach about Government Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.
    5. Paul Cashin, 1995. "Government Spending, Taxes, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 237-269, June.
    6. J. P. Neary (ed.), 1995. "International Trade," Books, Edward Elgar Publishing, volume 0, number 575.
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F15 - International Economics - - Trade - - - Economic Integration
    • H1 - Public Economics - - Structure and Scope of Government

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