Trade Openness, Capital Openness and Government Size

This paper provides empirical evidence of the relation between trade openness, capital openness and government expenditures in a cross-sectional time-series context. It is shown that capital openness is significantly and negatively related to government expenditures in line with the conventional wisdom that capital mobility may undermine the ability of governments to maintain larger public sectors. More importantly, the compensation hypothesis originally proposed by Rodrik (1998) and traceable back to Cameron (1978) is not in general supported by the data.