The Effects of International Openness on the Public Sector Growth

Abstract

Using Ordinary Least Squares (OLS) with panel corrected standard errors for OECD panel data this chapter, in contrast to Compensation hypothesis, finds a negative relationship between openness and the rate of public sector growth. In addition, this inverse relationship is found to be the strongest when electoral systems are more competitive. The empirical results presented here also suggests that openness constrains government growth more when the governments are run by either left-leaning parties or by left-leaning coalitions. This result holds for most measures of government spending and is robust to the inclusion of a wide range of controls. Unlike the existing empirical literature, which focuses on the ‘compensation effect' of openness on government growth, this study supports the ‘competition effect' of openness drawn from the literature on local public finance.