Government Size and Trade Openness: Some Additional Insights

Abstract

This paper provides additional insights on the relationship between government size and trade openness using a panel of countries drawn from the World Development Indicators and the Penn World Tables 7.0 from 1962 to 2009. It is shown that the compensation hypothesis proposed by Rodrik (1998) and revisited by Alesina and Wacziarg (1998) and by Ram (2009) cannot be attributed general validity. On the one hand, it is shown that country size is not relevant to determine the sign of the relationship between government size and economic openness, contradicting previous results by Alesina and Wacziarg (1998). On the other hand, the relevance of the cross-country heterogeneity suggested by Ram (2009) to argue in favour of the compensation hypothesis only picks the characteristic of the African countries of being relatively more closed.