Government Size and Openness: Insights Based on Country Classifications

Abstract

This study investigates the nexus between government size and openness by paying special attention to country classification. The main results of our empirical inves- tigations show that (i) there are two government size trends meaning two different country groups exist; (ii) there is a positive relationship between trade openness and government size for the first country group, which validates the compensation hypoth- esis; (iii) a negative relationship between financial openness and government size is found for the second country group, which confirms the efficiency hypothesis; (iv) the effect of financial openness is nearly ten times higher than trade openness; (v) an en- dogenous country classification process yields better results to understand the linkages between openness and government size. In this regard, our study incorporates both hypotheses and provides a uniform explanation.