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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
    DOI: 10.1086/250038
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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; Modern Monetary Theory
    • F15 - International Economics - - Trade - - - Economic Integration
    • H1 - Public Economics - - Structure and Scope of Government

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