Abstract
I revisit the relationship between trade and government expenditures in an attempt to extend the work of Rodrik (J Polit Econ 106(5):997–1032, 1998). Several different tests are conducted. The first is a simple replication of Rodrik’s benchmark model on an extended dataset. The results here are not conclusive but suggest that the causation may run from government spending to trade. I then use bilateral trade in observations and the augmented form of the classic gravity equation used by trade economists. This analysis uses time series changes in government spending and trade. Test for Granger style causality are performed. Again little evidence is found for Rodrik’s hypothesis that trade causes government spending. And some weak evidence exists for the alternative hypothesis. I then extend the analysis to trade tax revenues and I find little evidence over short run periods but over the long run there does seem to be an association between high trade tax revenues in one period and high government expenditures in the next period. Finally I look at a direct test of Rodrik’s hypothesis that trade creates volatility in income which then induces government to provide social insurance. I calculate a measure of trade volatility by looking at bilateral trading partners and find that trade volatility is associated with income volatility. The results of this test are ambiguous because changes in government expenditures are negative related to income volatility but at the same time positively related to trade volatility.
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Notes
- 1.
The possible counter-argument against using the trade observations on the pairs of countries may be that since government size is the same for the same country’s trade observations it may deflate the standard errors. While this may be true, it is essentially the same as including other dummies in the model, and the literature has not raised/addressed that question.
- 2.
The reason why chose the GATT is that until 1995 (the year when WTO was created) it was the world’s major agreement on reduced tariff barriers. I consider GATT and not WTO because my data set is covering the years 1962–2000, and the GATT was signed in 1948 and continued until the end of 1994. WTO was signed in 1995 and continues until today. So I chose GATT because it covers more of the period of time that I have the data available for.
- 3.
It is not clear which year if log of GDP Rodrik uses in his benchmark regression. I assume it is 1990, the same year that he uses for dependency and urbanization. Rodrik is also not clear in his definition of the dependency ratio in population. I calculate the dependency ratio as the ratio of population which is aged < 15 and over 64 divided by total population.
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Haislip, O. (2021). Trade and the Size of Government Revisited. In: Hall, J., Khoo, B. (eds) Essays on Government Growth. Studies in Public Choice, vol 40. Springer, Cham. https://doi.org/10.1007/978-3-030-55081-3_8
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