An Empirical Evaluation of the Effects of Trade and Financial-Openness on Government Size: An Application of Simultaneous Equation System in Panel Data

During recent years, globalization has been a substantial growth in different countries, and this event has been effective on many macroeconomic variables. In many countries, by increasing trade and financial openness, the size of government has been changed. Therefore, in this study, we have investigated the effects of trade and financial openness on government size in member countries of the MENA during the period 2002-2013. Considering endogenous explanatory variables using instrumental variables and using the error components three-stage least-squares (EC3SLS) estimator are distinguishing features of this study relative to previous studies. In accordance with the efficiency hypothesis, the study findings indicated that financial openness has a negative effect on the government size. Also, based on the compensation hypothesis, the results showed that trade openness has a positive effect on the government size. Generally, the results showed that the positive effect of trade openness on government size is greater than the negative impact of financial openness. These findings indicate that the government size in member countries of the MENA will increase in the face of economic globalization. Therefore, it is recommended that perform the privatization of the economy be implemented more quickly, and the role of government be changed from outsourcing to regulatory and policy-making.