Do More Open Economies Have Bigger Governments? Another Look

In the Journal of Political Economy, Rodrik (1998) finds a positive association between the openness of an economy and its government size. He explains this paradox by arguing that government expenditures are used to provide social insurance against the risk of terms of trade shocks that open economies face. This paper examines the relationship of other measures of the size of government to openness of an economy and to risk of terms of trade shocks. We present evidence that less open economies are highly interventionist and their governments "large" based on different measures of government than those used by Rodrik. In particular, we find that less open economies tend to have a great deal more government in the form of more government ownership, more use of price controls, a higher likelihood of expropriation of property and repudiation of contracts, and more trade barriers. We also find higher levels of these forms of government in countries with greater exposure to trade shocks. The inter-relationships uncovered by Rodrik (1998), various authors in the literature, and in this paper are still not completely understood. It is clear, though, that focus on budgetary measures of government misses much of the picture regarding the role of government and its relationship to international trade