The Relation between Openness and Government Size

Based on the debates on the impacts of globalization on government size, efficiency hypothesis and compensation hypothesis are two measure of globalization. The compensation hypothesis predicts that governments perform a risk-mitigating role against internationally generated risk and economic dislocations. Under efficiency hypothesis, governments compete to attract capital, and this competition will result in decreasing government presence in economy. In this paper we try to investigate the reason of government enlargement in Iran. We use trade openness (as globalization index), real income per capita, inflation, population, oil income and government size (based on government expenditure) and consumption expenditure in the form of percentage of GDP. An Autoregressive Distributed Lags (ARDL) model) is developed for this study based on Bounds Testing (Pesaran, et.al, 2001). The result of this model shows that in the long run trade openness has no effect on government size but there is a significant relation between them in short run. Furthermore, the relation between globalization and social welfare and security shows that these expenditures didn’t compensate the effect of shock resulted from trade openness. In this way, the oil income has created a great income reserves for government which make government enlarge more.