Do More Open Economies Have Bigger Governments? Another Look

39 Pages Posted: 9 Oct 2001

See all articles by John E. Garen

John E. Garen

University of Kentucky - Gatton College of Business and Economics

Kathleen Trask

University of Kentucky - Gatton College of Business and Economics

Date Written: June 2001

Abstract

In the Journal of Political Economy, Rodrik (1998) finds a positive association between the openness of an economy and its government size. He explains this paradox by arguing that government expenditures are used to provide social insurance against the risk of terms of trade shocks that open economies face. This paper examines the relationship of other measures of the size of government to openness of an economy and to risk of terms of trade shocks. We present evidence that less open economies are highly interventionist and their governments "large" based on different measures of government than those used by Rodrik. In particular, we find that less open economies tend to have a great deal more government in the form of more government ownership, more use of price controls, a higher likelihood of expropriation of property and repudiation of contracts, and more trade barriers. We also find higher levels of these forms of government in countries with greater exposure to trade shocks. The inter-relationships uncovered by Rodrik (1998), various authors in the literature, and in this paper are still not completely understood. It is clear, though, that focus on budgetary measures of government misses much of the picture regarding the role of government and its relationship to international trade.

Keywords: trade and government, size of government, open economy, government intervention

JEL Classification: F1, H5

Suggested Citation

Garen, John E. and Trask, Kathleen, Do More Open Economies Have Bigger Governments? Another Look (June 2001). Available at SSRN: https://ssrn.com/abstract=286353 or http://dx.doi.org/10.2139/ssrn.286353

John E. Garen (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

Department of Economics
Lexington, KY 40506
United States
859-257-3581 (Phone)
859-323-1920 (Fax)

Kathleen Trask

University of Kentucky - Gatton College of Business and Economics ( email )

Dept. of Economics
Lexington, KY 40506
United States

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