TESTING THE VALIDITY OF THE COMPENSATION HYPOTHESIS BY USING PANEL DATA ANALYSIS

Abstract

The compensation hypothesis has been examined throughout the literature, but there is limited research testing whether the validity of this hypothesis varies between low- and high-classification countries. Thus, the present paper extends the analysis to examine whether or not the relationship between openness and government size fluctuates across low- and high-classification countries. The classifications are based on foreign direct investment, current account, portfolio investment and income. By using a panel of 145 countries over the period 1970-2017, this paper provides robust empirical evidence about the validity of the compensation hypothesis. Regardless of the countries’ classifications, the empirical results do not differ and they confirm the compensation hypothesis proposed by Rodrik (1998).

Keywords

• trade openness,government size,the compensation hypothesis

PANEL VERİ ANALİZİ İLE TELAFİ HİPOTEZİNİN GEÇERLİLİĞİNİN SINANMASI

Abstract

Öz Telafi hipotezi (compensation hypothesis) literatürde birçok çalışmada incelenmiştir, ancak bu hipotezin geçerliliğinin farklı ülke özelliklerine göre değişip değişmediğine dair sınırlı sayıda çalışma bulunmaktadır. Dolayısıyla, bu çalışmada dışa açıklık ve kamu harcamalarının büyüklüğü arasındaki ilişkinin nasıl farklılık gösterdiği analiz edilmiştir. Farklı ülke özellikleri için doğrudan yabancı sermaye yatırımları, cari açık, portföy yatırımları, kişi başı milli gelir temel alınmıştır. Çalışma 1970-2017 dönemine ait 145 ülkeden oluşan panel veri seti kullanarak telafi hipotezinin geçerliği hakkında güçlü ampirik kanıtlar sunmaktadır. Bulgular telafi hipotezinin geçerliğinin farklı ülke özelliklerine göre değişmediğini göstererek Rodrik (1998) tarafından geliştirilen telafi hipotezinin geçerliliğini doğrulamaktadır.

Keywords

• dışa açıklık,kamu harcamaları,telafi hipotezi

References

1. Abizadeh, S. (2005). An analysis of government expenditure and trade liberalization. Applied Economics, 37(16), 1881-1884.
2. Alesina, A., and Wacziarg, R. (1998). Openness, country size and government. Journal of public Economics, 69(3), 305-321.
3. Amin, S., and Murshed, M. (2016). Causal Relationship between Government Size and Trade Openness in Bangladesh: An Empirical Analysis. Journal of Business Studies, 1(1), 105-126.
4. Arawatari, R. (2015). Political economy of trade openness and government size. Economics and Politics, 27(1), 28-52.
5. Aydogus, I., and Topcu, M. (2013). An Investigation of Co-Integration and Causality between Trade Openness and Government Size in Turkey. International Journal of Economics and Financial Issues, 3(2), 319-323.
6. Aytaç, D. (2014). Analyzing the Financial Aspect of Globalization from the Point of Public Expenditures: The Case of Turkey. International Journal of Economics and Finance, 6(9), 38.
7. Balle, F., and Vaidya, A. (2002). A regional analysis of openness and government size. Applied Economics Letters, 9(5), 289-292.
8. Baltagi, B. H. (1995) Econometric Analysis of Panel Data, Wiley Chichester.

9. Benarroch, M., and Pandey, M. (2008). Trade openness and government size. Economics Letters, 101(3), 157-159.
10. Benarroch, M., and Pandey, M. (2012). The relationship between trade openness and government size: Does disaggregating government expenditure matter?. Journal of Macroeconomics, 34(1), 239-252.
11. Bretschger, L., and Hettich, F. (2002). Globalisation, capital mobility and tax competition: theory and evidence for OECD countries. European journal of political economy, 18(4), 695-716.
12. Bullmann, T. (2008). The Public Economy in the age of Globalization: Cameron revisited–Why again?. DOI: 10.11588/heidok.00013588
13. Busemeyer, M. R. (2009). From myth to reality: Globalisation and public spending in OECD countries revisited. European Journal of Political Research, 48(4), 455-482.
14. Cameron, D. R. (1978). The expansion of the public economy: A comparative analysis. American political science review, 72(4), 1243-1261. de Jong, Leon Tristan. 2017. “The Heterogeneous Effects of the Compensation Thesis: A Comparative Study on The Micro Level”. Ms diss. Ghent University.
15. Dixit, V. (2014). Relation between Trade Openness, Capital Openness and Government Size in India: An Application of Bounds Testing-ARDL Approach to Co-integration. Foreign Trade Review, 49(1), 1-29.
16. Epifani, P., and Gancia, G. (2009). Openness, government size and the terms of trade. The Review of Economic Studies, 76(2), 629-668.
17. Garen, J., and Trask, K. (2005). Do more open economies have bigger governments? Another look. Journal of development economics, 77(2), 533-551.
18. Garrett, G., and Mitchell, D. (2001). Globalization, government spending and taxation in the OECD. European Journal of Political Research, 39(2), 145-177.
19. Green, W. H. (2003). Econometric analysis. Noida, India: Pearson Education India.
20. Ibrahim, T. M. (2015). The causal link between trade openness and government size: Evidence from the five largest economies in Africa. International Journal of Business and Economic Sciences Applied Research (IJBESAR), 8(1), 121-135.
21. Islam, M. Q. (2004). The long run relationship between openness and government size: evidence from bounds test. Applied Economics, 36(9), 995-1000.
22. Jahn, D. (2006). Globalization as ‘Galton’s problem’: The missing link in the analysis of diffusion patterns in welfare state development. International Organization, 60(2), 401-431.
23. Jeanneney, S. G., and Hua, P. (2004). Why do more open Chinese provinces have bigger governments?. Review of International Economics, 12(3), 525-542.
24. Jetter, M., and Parmeter, C. F. (2015). Trade openness and bigger governments: The role of country size revisited. European Journal of Political Economy, 37, 49-63.
25. Jiranyakul, K., and Brahmasrene, T. (2007). The Relationship Between Government Expenditures And Economic Growth in Thailand. Journal of Economics and Economic Education Research, 8(1).
26. Kaufman, R. R., and Segura-Ubiergo, A. (2001). Globalization, domestic politics, and social spending in Latin America: a time-series cross-section analysis, 1973–97. World politics, 53(4), 553-587.
27. Kimakova, A. (2009). Government size and openness revisited: the case of financial globalization. Kyklos, 62(3), 394-406.
28. Liberati, P. (2007). Trade openness, capital openness and government size. Journal of Public Policy, 27(2), 215-247.
29. Liberati, P. (2013). Government Size and Trade Openness: Some Additional Insights. Research in World Economy, 4(2), 12.
30. Lin, S. A. (1994). Government spending and economic growth. Applied Economics, 26(1), 83-94.
31. Molana, H., Montagna, C., and Violato, M. (2011). On the causal relationship between trade-openness and government-size: evidence from OECD countries. International Journal of Public Policy, 7(4/5/6).
32. Nwaka, I. D., and Onifade, S. T. (2015). Government Size, Openness and Income Risk Nexus: New Evidence from Some African Countries (No. WP/15/056). AGDI Working Paper.
33. Olawole, K., and Adebayo, T. (2017). Openness and government size: The compensation and efficiency hypotheses considered for Nigeria.
34. Ram, R. (2009). Openness, country size, and government size: Additional evidence from a large cross-country panel. Journal of Public Economics, 93(1-2), 213-218.
35. Rodrik, D. (1998). Why do more open economies have bigger governments?. Journal of political economy, 106(5), 997-1032.
36. Ruggie, J. G. (1982). International regimes, transactions, and change: embedded liberalism in the postwar economic order. International organization, 36(02), 379-415.
37. Shelton, C. A. (2007). The size and composition of government expenditure. Journal of Public Economics, 91(11-12), 2230-2260.
38. Szarowská, I. (2014). Relationship between government spending and economic growth in the Czech Republic. Acta Universitatis Agriculturae Et Silviculturae Mendelianae Brunensis, 59(7), 415-422.
39. World Development Indicators, The World Bank.
40. Zakaria, M., and Shakoor, S. (2011). Relationship between government size and trade openness: Evidence from Pakistan. Transition Studies Review, 18(2), 328-341.