Relationship Between Government Size and Trade Openness: Evidence from Pakistan

In this paper the effect of trade openness on government’s role in the economy is investigated in Pakistan using data for the period 1947–2009. The results demonstrate that there is a significant positive association between trade openness and government size. The explanation appears that as openness increases the size of government will inflate. This association is robust to the inclusion of a wide range of control variables and model specifications. The results support the compensation hypothesis and imply that government consumption plays a risk-reducing role in Pakistan. The empirical findings also highlight the role of other variables in determining the government size. Government size increases with income, democracy, foreign debt and investment, while it decreases with the increase in inflation and urbanization.