An analysis of government expenditure and trade liberalization

Abstract

The effect of trade liberalization on government's role in the economy is investigated. It is shown that, contrary to received expectations, as small open economies liberalize their trade, the size of government decreases.

Notes

 See Edwards (1993) for a comprehensive review of literature on trade and economic development. Also see Crafts (2000) for more recent discussions on this issue.

 A recent special issue of the Canadian Journal of Development Studies, edited by Ezeala-Harrison (1999) is devoted to the analysis of these macroeconomic variables and the role of globalization in economic development.

 This selection is based on the work by Abizadeh and Basilevsky (1986) which applies a multivariate technique (factor analysis) classifying a large number of countries based on their level of economic growth.

 The sources of data are different issues of the International Financial Statistics of the International Monetary Fund.

 For a clear exposition on these tests and their application to similar econometric analysis see Islam (2001, pp. 511–12).

 Results of these tests are available from the author.

 It is assumed that SDR and interest rates IR are uncorrelated to the error terms and are highly correlated with our independent variables OP and Y, respectively.

 Witness most recent duties imposed on steel and Canadian softwood lumber.