The Effect of Financial Openness Measure on the Government Size in Selected Countries

Tehranchian, Amir Mansour; Abdi Seyyedkolaee, Mohammad; Imani, Nava; Zakeritabar, Seyedeh Zahra

doi:10.22059/ier.2020.77646

The Effect of Financial Openness Measure on the Government Size in Selected Countries

Authors

Amir Mansour Tehranchian ¹

Mohammad Abdi Seyyedkolaee ¹

Nava Imani ²

Seyedeh Zahra Zakeritabar ¹

¹ Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran.

² Department of Economics, Allameh Mohaddes Nouri University, Nour, Iran.

10.22059/ier.2020.77646

Abstract

A decline in private sector investment expenditures, crowding-out effect, lack of conditions for optimal allocation of resources, reduction inefficiency, and the possibility of increasing inequality in income distribution are considered as the effects of increasing the government size according to many theoretical studies and empirical evidence. Hence, it is essential to identify the government's size and position determinants. In this study, in addition to inflation and economic growth rate, the effect of financial openness measures on the government size in selected countries such as Iran has been tested experimentally. In the present paper, Chinn and Ito's indicators are used as variables of financial openness measure. Also, to analyze the sensitivity of the results to the statistical sample, the econometric model for the two groups of countries with high and low GDP per capita (2000-2016) was estimated by the Generalized Moment Method (GMM). The results showed an increase in the degree of financial openness in both groups of studied countries would reduce the size of the government. Still, this effect is more in countries with high GDP per capita and minimal in countries with low GDP per capita. In high GDP per capita countries, the relationship between inflation and government size is positive and significant, and the relationship between GDP per capita and government size is negative and significant. But the study of low GDP per capita countries shows a negative and significant relationship between inflation and government size and a positive and meaningful relationship between GDP per capita and government size. Besides, according to research findings, the economic growth rate has the most considerable impact on government size in both countries.

Keywords

Financial Openness Measure

Government Size

Generalized Moment Method

Abounoori, E., & Ghaderi, S. (2011). The Effect of Trade and Financial-Openness on Government Size: A Case Study for MENA. International Research Journal of Applied and Basic Sciences, 2(5), 170-174.

Bergh, A., & Henrekson, M. (2011). Government Size and Growth: A Survey and Interpretation of the Evidence. Journal of Economic Surveys, 25(5), 872-897.

Brady, D., & Lee, H. Y. (2014). The Rise and Fall of Government Spending in Affluent Democracies, 1971–2008. Journal of European Social Policy, 24(1), 56-79.

Cardoso, E. (1998). Virtual Deficits and the Patinkin Effect. IMF Staff Papers, 45(4), 619-646.

Chinn, M. D., & Ito, H. (2002). Capital Account Liberalization, Institutions, and Financial Development: Cross Country Evidence. National Bureau of Economic Research (NBER) Working Paper, 8967, Retrieved from https://www.nber.org/papers/w8967.pdf

---------- (2006). What Matters for Financial Development? Capital Controls, Institutions, and Interactions. Journal of Development Economics, 81(1), 163-192.

---------- (2008). A New Measure of Financial Openness. Journal of Comparative Policy Analysis: Research and Practice, 10(3), 309-322.

---------- (2016). Note on the Chinn-Ito Financial Openness Index.

Retrieved from web.pdx.edu/~ito/Readme_kaopen2014.pdf

---------- (2018). Note on the Chinn-Ito Financial Openness Index. Retrieved from web.pdx.edu/~ito/Readme_kaopen2016.pdf

Dadgar, Y., & Nazari, R. (2008). The Impact of Trade Globalization on the Size of Government in Iran. Iranian Journal of Trade Studies (IJTS), 12(3), 1-38.

---------- (2012). Testing Wagner's Law in Selected Countries and Iran (1980-2010). Quarterly Journal of Economic Growth and Development Research, 2(6), 149-172.

---------- (2018). Difficulties of Public Sector Structure as Main Obstacle for Economic Progress in Iran. OIDA International Journal of Sustainable Development, 11(1), 41-64.

Estrada, G., Donghyun, P., & Ramayandi, A. (2015). Financial Development, Financial Openness, and Economic Growth. ADB Economics Working Paper Series, 442, Retrieved from https://asianbondsonline.adb.org/documents/ewp_442_financial_development_financial_openness_and_economic_growth.pdf

Falahati, A., & Sepahban Gharehbaba, A. (2009). Effects of Trade and Financial Liberalizations on the Government Size: The Case of Iran. International Economics Studies, 2, 61-74.

Franco Chuaire, M., Scartascini, C., & Tommasi, M. (2014). State Capacity and the Quality of Policies: Revisiting the Relationship between Openness and the Size of Government. Inter-American Development Bank (IDB) Working Paper Series, Retrieved from https://econpapers.repec.org/

Garen, J., & Trask, K. (2005). Do More Open Economies Have Bigger Governments? Another Look. Journal of Development Economics, 77(2), 533-551.

Han, S., & Mulligan, C. B. (2008). Inflation and the Size of Government. Federal Reserve Bank of St. Louis Review, 90(3 Part 2), 245-267.

Hansen, L. P. (1982). Large Sample Properties of Generalized Method of Moments Estimators. Econometrica, 50(4), 1029-1054.

Hansen, L. P., & Singleton, K. J. (1982). Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models. Econometrica, 50(5), 1269-1286.

Hasnul, A. G. (2015). The Effects of Government Expenditure on Economic Growth: The Case of Malaysia. Munich Personal RePEc Archive (MPRA) Paper, 71254, Retrieved from https://mpra.ub.uni-muenchen.de/71254/1/MPRA_paper_71254.pdf

Jelilov, G., & Musa, M. (2016). The Impact of Government Expenditure on Economic Growth in Nigeria. Sacha Journal of Policy and Strategic Studies, 5(1), 15-23.

Kimakova, A. (2009). Government Size and Openness Revisited: The Case of Financial Globalization. Kyklos, 62(3), 394-406.

Lane, P. R., & Milesi-Ferretti, G. M. (2007). The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004. Journal of International Economics, 73(2), 223-250.

Liberati, P. (2006). Trade Openness, Financial Openness, and Government Size. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.608.5997&rep=rep1&type=pdf

Maddah, M., Jeyhoontabar, F., & Najafi, Z. (2015). Six Interpretations of Wagner’s Law in Iran, as an Oil-Exporting Country, Based on Econometric Techniques. The Journal of Economic Policy, 7(13), 153-167.

Mehrara, M., Soufiani, M. B., & Rezaei, S. (2016). The Impact of Government Spending on Inflation through the Inflationary Environment, STR Approach. World Scientific News, 37, 153-167.

Mody, A., & Murshid, A. P. (2005). Growing up with Capital Flows. Journal of International Economics, 65(1), 249-266.

Olawole, K., & Adebayo, T. (2017). Openness and Government Size: The Compensation and Efficiency Hypotheses Considered for Nigeria. Munich Personal RePEc Archive (MPRA) Paper, 82022, Retrieved from https://mpra.ub.uni-muenchen.de/82022/1/MPRA_paper_82022.pdf

Quinn, D., Schindler, M., & Toyoda, A. M. (2011). Assessing Measures of Financial Openness and Integration. IMF Economic Review, 59(3), 488-522.

Rafat, B., Emadzadeh, M., & Ghandehary Alavijeh, Z. (2013). Evaluating the Effect of Trade and Financial Openness on the Government Size in Selected Countries of Organization of Islamic Cooperation (OIC). Journal of Management System, 2(1), 45-66.

Sanz, I., & Velázquez, F. J. (2003). Does Globalization Increase Government Size? An Analysis of the Effects of Foreign Direct Investment on Total Government Expenditures and its Components. Retrieved from https://previa.uclm.es/profesorado/obajo/imagenes2/VIII%20Jornadas/pdf/1%20Ismael%20Sanz.PDF

Scharmer, E. (2002). A Critical Appraisal of the Theories of Government Expenditure Growth. Seminar Paper, Retrieved from https://www.grin.com/document/16172

Shahbaz, M., Rehman, H. U., & Amir, N. (2010). The Impact of Trade and Financial-Openness on Government Size: A Case Study of Pakistan. Journal of Quality and Technology Management, 6(1), 105-118.

Stiglitz, J. E. (1994). The Role of the State in Financial Markets. The World Bank Economic Review, 7(1), 19-52.

Tanzi, V. (2002). Globalization and the Future of Social Protection. Scottish Journal of Political Economy, 49(1), 116-127.

Tohidi, A. H., Shahnoushi Foroushani, N., Mohammadi, H., & Alizadeh, P. (2015). An Empirical Evaluation of the Effects of Trade and Financial-Openness on Government Size: An Application of Simultaneous Equation System in Panel Data. Quarterly Journal of Quantitative Economics, 11(4), 1-19.

Wambui, T. V. (2013). Effects of Government Expenditure, Taxes, and Inflation on Economic Growth in Kenya: A Disaggregated Time Series Analysis (Unpublished Master's Thesis). University of Nairobi, Kenya.

Wang, E. C., & Alvi, E. (2011). Relative Efficiency of Government Spending and its Determinants: Evidence from East Asian Countries. Eurasian Economic Review, 1(1), 3-28.

Wu, A. M., & Lin, M. (2012). Determinants of Government Size: Evidence from China. Public Choice, 151(1-2), 255-270.

Zakaria, M., & Shakoor, S. (2011). Relationship between Government Size and Trade Openness: Evidence from Pakistan. Transition Studies Review, 18(2), 328-341.