Trade Openness And Government Size

The relationship between government and market is an important problem for economists to research.Trade openness will promote the marketization of domestic and the change of government's function,therefore it can provide a new perspective for us about the relationship between government and market.There are two theoretical views on the relationship between trade openness and government size.One view is that the government should play an economic segregation function.Therefore,it will increase government expenditures,leading to the expansion of government size,that is the compensation effect hypothesis.Another view is that the government should reduce the intervention,so that the size of the government will be reduced,that is the efficiency effect hypothesis.The converse theoretical views prompted economists to do lots of empirical tests.Some research focus on OECD countries,some focus on developing countries,and others include developed countries and developing countries,but these studies also failed to reach a consensus and even created greater disagreements.Some research findings support the compensation effect hypothesis,some support the effectiveness effect hypothesis.Some studies believe that compensation effects and efficiency effects both exist.Some studies even believe that compensation effects and efficiency effects both don't exist.This paper uses long panel data of trade openness and government size between 1978 and 2015 to do a empirical test.The results show that with the growth of openness and the level of economic development,the state capacity is growing and at the same time the demand for public service is growing,so the government size will be bigger,especially when the economy is facing risks from other countries.It shows that the government is playing a great role on dealing the risks from other countries.