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35 (3) 327-384 (2011)327Economic integration and

government size: a review of the empirical literatureFRANCESCA GASTALDI, Associate Professor of Public Finance*

Sapienza University of Rome, Romefrancesca.gastaldi@uniroma1.it

PAOLO LIBERATI, Associate Professor of Public Finance*

University of Roma Tre, Romepaolo.liberati@uniroma3.it

Review article**

JEL: H5, H11, H20, F15UDC: 339.923

* The authors would like to thank three anonymous referees for their useful comments and suggestions.** Received: October 8, 2010 Accepted: May 12, 2011

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328 AbstractThis paper reviews the empirical literature concerning the impact of economic integration on the size and the composition of the public budget. From a theoreti-cal perspective, a pessimistic view highlights the threat that economic integration constitutes to the action of the public sector. An optimistic view, instead, emphasi-zes the benefi cial effects of integration in stimulating effi ciency – enhancing pu-blic policies. Despite some well-established theoretical results, the empirical evi-dence on this topic is rather controversial. Some studies support the hypothesis that taxes and public spending may increase in order to compensate losers for the risks of a more open economic environment. Other studies support the opposite idea, that the public sector retrenches when having to face increasing mobility of the production factors. Yet, comparability of the wide empirical evidence on the topic is not straightforward and empirical regularities are hard to fi nd.

Keywords: tax revenue, public spending, government size, trade openness, capital openness, economic integration, globalisation

1 INTRODUCTIONThere is widespread evidence that the degree of economic integration has climbed in recent times. According to the data released by the World Trade Organization, the world ratio between the sum of imports and exports over GDP has more than doubled since the beginning of the seventies, moving from just above 21 per cent of GDP to more than 52 per cent in 2006. This growth – even though at different starting levels – has characterised almost all countries in the world, and it has been faster for smaller countries and in the most recent years.

This generalised upward trend of trade integration has an even more buoyant counterpart on the side of the foreign direct investments (FDI). Even though levels of FDI represent a smaller share of GDP – contrasted to trade – their changes have been extremely rapid since the nineties for a large number of countries in the wor-ld. On average, the world fl ows of FDI are now six times as great as they were at the beginning of the seventies. But in many countries, the fl ows originating between 1996 and 2006 represent more than 60 per cent of the total fl ows measu-red since 1970, mainly as the result of deliberate choices to liberalise capital mo-vements.1 These indicators would not only suggest that a growing portion of the economic activity is carried out across borders; they also provide two further insi-ghts. First, that a signifi cant part of this activity is associated to capital fl ows rather than to trade fl ows, an issue – we will see below – that is often overlooked by the existing empirical literature (Grunberg, 1998; Kimakova, 2009); second, that the impact of economic integration can be largely “concentrated” in most recent ti-mes.

1 As in the case of trade, capital markets flourished as early as the late 19th and early 20th century, even though, according to some observers, “beginning in the late 1950s, …, private international financial activity increased at a phenomenal rate” (Helleiner, 1994).

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35 (3) 327-384 (2011)329Following this mounting global foreign exposure of many countries, a large strand

of literature has started to focus on whether economic integration may affect the size and the composition of national tax and spending policies.2 A fi rst view claims that economic integration introduces an imbalance between national-sized public sectors and international-sized markets. Since nations are becoming smaller in size than the markets they try to tax and/or regulate, national public policies face serious implementation issues (Hülsemeyer, 2004). In this scenario, mobility makes tax bases disappear or forces governments to use fi scal resources effi cie-ntly, because, for example, the exploited tax bases might exit national borders when ineffi ciently taxed (a process known as the effi ciency hypothesis).3 In both cases, the pessimistic view prevails that economic integration represents a direct threat to the tax-raising ability of the states. In turn, this may have consequences to both the level and the composition of public spending, especially when gover-nments are tied to a budgetary balance or are constrained in the use of public debts. Those who oppose globalisation suggest that citizens would be harmed by national “welfare retrenchments” or by non-selective reductions of the supply of public spending, especially in those fi elds where either the private sector does not complement the absence of the public provision or alternatives are scarce or not affordable.4 In all cases, the most likely effect would be a shrinking of the size of the public sector, a reason to group these possible outcomes under the broad hea-ding of the “shrinking hypothesis” (SH).

A second view claims that globalisation may instead encourage an increase of tax revenues or public spending. This would occur in order to cope with fast econo-mic changes (Grunberg, 1998), to manage the increased risk that economic inte-gration entails (Rodrik, 1998) and to compensate the increased income volatility or insecurity associated to liberalisation of trade and capital fl ows (Rodrik, 1998; Katsimi, 1998 and 1999). These theories emphasize the role of the demand side, i.e. the possibility that the losers in the globalisation process may drive some compensatory public intervention. For this reason, these possibilities are often grouped under the heading of the “compensation hypothesis” (CH).5 Compensa-tory spending, however, may not be of the same homogenous nature. Individuals,

2 In what follows, “globalisation” will be sometimes used as synonymous with economic integration, disre-garding all other social, sociological and political dimensions of this term.3 As argued by Helleiner (1994:116), in the 70s American liberals supported the removal of capital controls on the ground that international financial markets would have disciplined government policy and forced states to adopt more sound fiscal and monetary programs. On the one hand, there was, at that time, the widespread opinion that abolishing capital controls would have forced public policies to take some distances from the Key-nesian paradigm so far arguing in favour of autonomous interventionist welfare policies. The implicit belief was that governments were overtaxing and/or overspending, at least above the level preferred by advocates of liberalisation of financial markets.4 Garrett and Mitchell (2001:151) argue that “if the policies and institutions of which the financial markets approve are not found in a country, money will haemorrhage unless and until they are. In turn, financial capi-tal is usually thought to disapprove of all government policies that distort markets, and welfare state programs are among the most prominent villains”.5 These theories are mainly developed by looking at the expenditure side of the public budget, but the case where the tax revenue increases in response to external pressures can be interpreted as a tax version of the compensation hypothesis.

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330 especially if their mobility is low, would be more oriented to demanding additio-nal income transfers and social welfare expenditures to cushion the adverse im-pacts of economic integration (lower wages, increased risk of unemployment, in-come volatility, uncertain future incomes, etc.). Firms, instead, would be more oriented to demanding privately productive public goods like infrastructures, trai-ning programmes, and human capital formation to persuade them to refrain from using the exit option (e.g. Taylor-Gooby, 1997; Heinemann, 1999). These two typologies of demands, however, impinge on different sectors of public expendi-tures, they are affected by different veto points in advanced economies (Haller-berg and Basinger, 1998) and are therefore likely to produce redistributive im-pacts.

Thus, according to some authors, public fi nances would be trapped into a fi scal squeeze (Grunberg, 1998). Additional public spending would compensate losers, while the ability to raise tax revenue would weaken the satisfaction of the winners. These two opposing forces may give rise to a general atmosphere of permanent austerity, as suggested by Pierson (2001). Also, public spending would be squee-zed between what is demanded by the most mobile players in the globalisation process (fi rms) and what is on the contrary required by the least mobile factors (individuals). If the former command a premium in shaping the composition of public spending, an increase of public spending will not necessarily occur in the direction prescribed by the standard compensation hypothesis.

This discussion suggests that the net effect of globalisation may be controversi ally defi ned from both a theoretical and an empirical perspective. As suggested by Genschel (2004), the contemporary presence of both upward and downward pres-sures on public fi nance variables might explain why many quantitative studies record only a small net effect of globalisation. It is to the analysis of empirical studies that we now turn, to understand whether a(n) (almost) conclusive answer can be drawn in favour of either CH or SH. To this purpose, the focus will be on those empirical studies having (mainly) the following characteristics: (a) the use of econometric methods that include at least one indicator of economic integration (either trade or capital integration or both); (b) a measure of government size as dependent variable (either on the tax or on the spending side); (c) a cross-country analysis in a time-series framework.

Studies will be distinguished according to whether they investigate the relation-ship between economic integration and the size and composition of tax revenues (section 2), or whether they study the relationship between economic integration and the size and composition of public spending (section 3). To best interpret and discuss the main results, a series of tables will show studies in chronological order describing, for each case, the number of countries involved, the coverage period, how the dependent variable has been measured, how trade and capital integration are approximated, the impact they are most likely to have on the chosen measure

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35 (3) 327-384 (2011)331of government size, and the econometric method used. The last column – for each

empirical exercise – will attempt to classify results according to which hypothesis (between CH and SH) is supported most.

2 ECONOMIC INTEGRATION AND THE SIZE AND COMPOSITION OF TAX REVENUES

The impact of economic integration on tax revenues has its main root in the lite-rature on tax competition. This theory has for many years pointed out that gover-nments may hardly increase the tax burden on mobile tax bases (Gordon, 1986; Bucovetsky and Wilson, 1991; Razin and Sadka, 1991; Tanzi, 1995), predicting a lower level of total tax revenues in more economically integrated countries. In an extreme version of this theory (harmful tax competition), mobility would reduce the ability of any country to raise tax revenue and to fi nance public spending (Lee and McKenzie, 1989; Kurzer, 1993; Steinmo, 1994; Tanzi, 1995);6 at the same time, autonomous fi scal policies would be undermined, giving the markets the option to be “beyond politics”.7 In a milder version of the same theory, ineffi cient taxation would be discouraged, as mobile tax bases will search for the most favou-rable (and effi cient) tax system.

This aggregate response of the tax revenue, however, may be the result of a va-riety of outcomes that also qualify the shrinking hypothesis. To some extent, a reduction of the total tax revenue – ceteris paribus – can be interpreted as a suffi -cient condition to support SH, yet not a necessary one. Since economic integration is expected to have a greater impact on the most mobile tax bases, consistent re-sults with SH should predict a negative relationship between economic integration and the level of corporate (or capital) taxation. At the same time, if this loss of tax revenues is recovered by increasing taxation on less mobile tax bases (e.g. labour, immovable properties, consumption, etc.), SH may also be consistent with a posi-tive co-variation of economic integration and taxes on labour, consumption, or on incomes from immovable properties. In turn, this implies that consistency with SH can also arise through a reduction of the ratio between corporate and capital taxes (on the one hand) and less mobile tax bases like labour and consumption (on the other hand). If different taxes move in opposite directions, the absence of a net effect on the level of total tax revenues may be concealed by composition effects

6 It is just worth recalling Adam Smith’s (1776 [1976:848-849]) quotation that “the … proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he is exposed to a vexatious inquisition, in order to be assessed a burdensome tax, and would remove his stock to some country where he could, either carry on his business, or enjoy his fortune at his ease … not only the profits of stock, but the rent of land and the wages of labour, would neces-sarily be more or less diminished by its removal”.7 This possibility, for example, was clearly recognised in the mid-seventies in Great Britain at the time of the speculation against the pound. The efforts made to protect policy autonomy from speculative flows by the Labour government eventually led to “the end of Keynesian society in Britain” (Krieger, 1986:57-58). But also the difficulties faced by the French government at the beginning of the 80s, in fighting speculation against the franc, were one of the main reasons of the failure of pursuing “Keynesianism in one country” (Helleiner, 1994). The definition of the Euromarket in the sixties, given by Wriston (1986), as a “stateless financial mar-ket” used to roundtrip capital controls is another example of what is meant by markets beyond politics.

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332 that are perfectly consistent with SH.8 Results with an opposite sign will instead support a taxation version of CH, under the hypothesis that additional spending should be at least partly fi nanced by additional taxes.

In what follows, we will focus on studies that consider both aggregated and disag-gregated measures of the tax burden, even though few studies use aggregate mea-sures (table 1). It is worth anticipating that of 63 empirical results, only 18 cases can be classifi ed as supporting the compensation hypothesis. Thus, the main les-son we will get from table 1 is that a downward pressure on tax revenues from the most mobile tax bases is more than a theoretical curiosity. In most cases, econo-mic integration has an impact on both the levels of corporate and capital taxation and on the composition of tax revenues, predicting a shifting of the tax burden towards labour and consumption that is consistent with the shrinking hypothesis.

2.1 TRADE AND CAPITAL OPENNESSThere is almost universal agreement on measuring trade openness as the sum of exports and imports over GDP (some exceptions are in Quinn, 1997; Stewart and Webb, 2003; Slemrod, 2004; Dreher, 2005). On the other hand, there is much more uncertainty about how to measure capital openness properly and whether to measure it by quantitative or qualitative indicators. This latter measure is most commonly approximated by capital infl ows and outfl ows; or by dummy variables for restrictions on capital mobility; or by indices of fi nancial restrictions on pay-ments and receipts of capital; or by the absolute covered interest rate parity. Even though both trade and capital openness are often used as interchangeable conce-pts, in our view capital openness more satisfactorily approximates the degree of mobility of production factors. Highly capital-integrated countries may potenti-ally experience large outward and inward fl ows of funds and signifi cant de-locali-zation of production factors, while it is not necessarily the same for highly trade-integrated countries where fl ows of merchandises can in principle be associated with a relative stability of production within national boundaries. While trade openness does not necessarily require production factors to move, capital open-ness, instead, might entail tax bases, moving quickly out of national borders.9

Nevertheless, the role of capital openness has been often underemphasized in em-pirical analysis. One reason can be traced back to Cameron (1978), who investi-gated the relationship between trade openness and the change of the overall tax revenues. In particular, he found that openness in 1960 was a strong predictor of

8 A negative relation between economic integration and the ratio between capital and labour taxes may also suggest that either capital taxes decrease more or that they increase less than labour taxes; both outcomes are still consistent with the theory of tax competition.9 As argued by Grunberg (1998), trade taxes in the protectionist era “have always been a privileged revenue-raising device for developing countries…and even for industrial countries at early stage of development such as the United States in the 19th century”. Ending protectionism in trade has therefore had costs in terms of for-gone revenue not because tax bases have disappeared from countries but because of a deliberate choice of not taxing merchandise flows. But Rodrik too (1998:1009) noted that “trade itself may be a convenient tax han-dle for governments in poor countries that have difficulty raising taxes from other sources”.

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35 (3) 327-384 (2011)333the increase of government tax revenues between 1960 and 1975 in 18 OECD

countries. But in Cameron (1978) almost all countries included in the analysis had capital controls in place, making it irrelevant to control for capital openness. It is somewhat surprising that this point has not been fully appreciated by the subse-quent literature on the topic, which is still focused mostly on trade openness as the main external determinant of government size. Slemrod (2004) is an important example in this direction; this paper provides intriguing evidence about the effect of economic integration on corporate taxation – a negative relationship with statu-tory corporate tax rates and a positive one with tax revenues as a fraction of GDP – but no measure of capital integration is included to control for this outcome. It is therefore not particularly surprising that the econometric specifi cation gives an outcome where more trade-intensive countries collect more corporate taxes (thus supporting CH), but the issue of whether more capital integrated countries may actually do the same is left unanswered.

But is CH a general outcome of studies using taxation as a measure of government size? On the side of trade openness, among the 24 studies and 66 cases surveyed in table 1, 61 include a measure of trade openness, but only in eight cases does the coeffi cient of trade openness strongly support CH (Cameron, 1978; Huber et al., 1993; Garrett, 1995; Quinn, 1997; Garrett and Mitchell, 2001; Swank, 2002; Slemrod, 2004; Dreher, 2005). Only four of the previous studies also include a measure of capital openness (Garrett, 1995; Quinn, 1997; Swank, 2002; Dreher, 2005), but only in two cases does the coeffi cient of capital openness also support CH (Quinn, 1997; Dreher, 2005). Even after including those studies giving overall uncertain results – but some evidence of a positive coeffi cient of trade openness (Krogstrup, 2003; Haufl er et al., 2006; Bullmann, 2008) – the total number of cases that supports CH on the trade side remains low. It is worth noting that in almost all cases the period analysed does not extend over 2000. As will be discus-sed below, this may limit the ability of data to capture the most recent (and to some extent the most important) characteristics of the integration process. Fur-thermore, both in Quinn (1997) and in Dreher (2005), the country coverage is wider than in other studies and this may suggest that the size of the sample can also be a relevant factor in shaping results. Yet, in Dreher (2005), the results chan-ge if the dependent variable used is the adjusted statutory tax rate on capital pro-posed by Devereux and Griffi th (2003) instead of the standard effective tax rate on capital, pointing to the dependent variable as another potential important factor of infl uence.

On the side of capital openness, 50 out of 66 cases include either a qualitative or a quantitative measure, but independent support for CH is found only in 10 cases, regardless of the specifi c sign of the coeffi cient of trade openness (Quinn, 1997; Rodrik, 1997; Swank, 1998; Garrett and Mitchell, 2001; Swank, 2002; Swank and Steinmo, 2002; Dreher, 2005). Under this perspective, it emerges that the compen-sation hypothesis is a far from general result even within its original “trade” envi-

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334 ronment. Paradoxically, there is a greater number of cases where the coeffi cients of both trade openness and capital openness independently support SH (18 cases both for trade and capital), as can be appreciated from table 1. This preliminary investigation casts some doubts on the power of the compensation hypothesis, at least with regard to the compensating role of taxation here explored.

2.2 CORPORATE AND CAPITAL TAXATIONAn important qualifi cation of the previous results is about what measure of the tax burden actually supports either CH or SH, and what regularity can we fi nd. Measu-res of the dependent variable have become increasingly sophisticated since the time of the pioneering contribution by Cameron (1978), where a “crude” ratio between the change of the overall tax revenues and GDP was used. Actually, among the 24 studies of table 1, only four other studies use a comprehensive measure of taxation, including total tax revenues usually normalised over GDP (Huber et al., 1993; Heinemann, 1999; Swank, 2002; Bullmann, 2008). In these cases, however, there is no regularity in the outcome (CH or SH). Interestingly, in the three cases where a measure of capital openness is introduced (all with the exception of Huber et al., 1993), the sign of the corresponding coeffi cient is in favour of SH.10

In the other cases, the measures of the tax burden range from statutory tax rates (Swank and Steinmo, 2002; Devereux et al., 2004; Slemrod, 2004) to forward-looking or backward-looking effective tax rates, to measures of tax burden based on tax ratios (Bretschger and Hettich, 2002; Krogstrup, 2003; Winner, 2005; Hau-fl er et al., 2006; Adam and Kammas, 2007; Schwartz, 2007).11 To highlight the most valuable results descending from the use of this variety of dependent varia-bles, it is worth starting from the most effective test of the compensation hypothe-sis on the tax side, by observing what happens to corporate and capital taxation.

With regard to corporate taxation (variously defi ned), the trade openness version of CH is hardly supported, with only 5 cases out of 24 (distributed among three studies: Quinn, 1997; Swank, 1998; Slemrod, 2004). The particular feature of the previous three studies is that in Quinn (1997) support to CH is found on both the trade and the capital side; in Swank (1998), instead, the same support comes only from the capital side; fi nally, Slemrod (2004) provides one case for a strong posi-tive impact of trade openness on the ratio between corporate taxes and GDP without including any measure of capital openness.12 This leaves some uncerta inty on what the proper measure of economic integration is. In most of the other cases, instead, the relation is negative, supporting SH on either the trade or the capital side (Swank, 1998; Heinemann, 1999; Bretschger and Hettich, 2002; Swank and Steinmo, 2002; Krogstrup, 2003; Slemrod, 2004; Adam and Kammas, 2007; Schwarz, 2007). This result is consistent with the view that, as corporate taxation

10 Note that Heinemann (1999) obtains this result by using a cluster analysis.11 For a detailed treatment of this issue, see Gastaldi (2008).12 Note however that if the dependent variable (statutory corporate tax rate) is changed, the results may sup-port SH.

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35 (3) 327-384 (2011)335is one of the most mobile tax bases, increasing taxes on corporations on an open

environment may lead them to move or to de-localize production and/or profi ts in places with more advantageous tax rules.

With regard to capital taxation, a warning is necessary before investigation of the results. Most of the empirical studies do not distinguish between capital taxes falling on immobile and mobile tax bases (Gastaldi, 2008 provides an exception). This means that the sign of the relationship could not fully capture the potential mobility of the tax base. Yet, among the 14 studies using measures of capital taxa-tion, only 5 fi ve cases support the compensation hypothesis, one on the side of trade openness (Garrett, 1995), the other on the side of capital openness (Rodrik, 1997; Garrett and Mitchell, 2001; Swank, 2002; Dreher, 2005). Explicit support to SH, instead, comes from Rodrik (1997) – for trade openness – Krogstrup (2003), Dreher (2005), Winner (2005). It is interesting to note that where taxes on mobile and immobile capital are disentangled (Gastaldi, 2008), support to SH is identifi ed only in the former case, while effective tax rates on immobile capital do not share any relationship with economic integration. Thus, it seems that the approximation of factor mobility provided by capital integration is the most promising route to the understanding of the impact of economic integration. This would imply that studies using capital taxes without introducing this distinction may not be suffi -ciently informative and must therefore be assessed with caution.

Further insights may come from those studies that contemporaneously show eco-nomic integration to have a negative (positive) relationship with corporate or ca-pital taxation and a positive (negative) relationship with either labour or consump-tion taxation. In the case of the negative-positive combination, downward pressu-res on taxes falling on mobile tax bases and upward pressures on taxes falling on immobile ones, may give rise to a composition effect consistent with the shrinking hypothesis. Negative-negative combinations would also be consistent with SH. Positive-negative combination would instead be consistent with the compensation hypothesis, as would positive-positive combinations. Unfortunately, there are few studies dealing at the same time with different effective tax rates on various tax bases, and – with the exception of Quinn (1997), and Garrett and Mitchell (2001) – they almost always support SH, suggesting again hard times for the compensa-tion hypothesis (Rodrik, 1997; Swank, 1998; Heinemann, 1999; Bretschger and Hettich, 2002; Swank and Steinmo, 2002; Krogstrup, 2003; Adam and Kammas, 2007; Gastaldi, 2008).

2.3 PERIOD AND COUNTRY COVERAGEAs a matter of further complication in searching for empirical regularities, the variety of outcomes so far discussed relies on contexts that are not strictly compa-rable. The complexity of table 1 reveals that results are in some cases period-de-pendent, country-dependent and method-dependent (for this latter case, see, in particular, Bretschger and Hettich, 2002; Winner, 2005), yet without any signifi -

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336 cant regularity. Two points are worth noting. First, studies differ widely with re-gard to the country coverage. While in almost all cases the analysis is based on a time-series cross-section context, countries included differ in number and, more important, by geographical areas. Most of the analyses involve OECD countries, one analysis is confi ned to European countries (Krogstrup, 2003), while others refer more generally to a set of developed or advanced democracies (Huber et al., 1993; Swank, 1998; Swank, 2002; Swank and Steinmo, 2002; Beauchamp and Montero, 2005). Very few studies extend over a large number of countries inclu-ding transitional and less developed ones (e.g. Quinn, 1997). When OECD coun-tries are stated to be used – 14 studies for a total of 55 cases – there are only 6 cases where the compensation hypothesis is supported, which makes CH a far from general case also for that group of countries.

Period coverage might also be conditioning, as the temporal evolution of trade and capital openness has been extremely differentiated in the last decades. The number of years covered is only rarely updated to very recent times, including in recent studies, mainly refl ecting the temporal lag in the availability of data. Most of the empirical evidence stops around the fi rst half of the nineties; another set of studies do not go beyond 2000. In both cases, capital liberalisation cannot have fully explained all its effects, as many countries have abolished capital controls in those periods, especially in Europe. This may especially affect the outcome of those studies using OECD countries, of which European countries are a large su-bset. In this regard, the chronological order of table 1 indeed suggests that the frequency of CH in the last two columns is lower when moving to more recent studies, where the datasets used extend to years potentially more characterised by a higher degree of mobility induced by economic integration.

2.4 ECONOMETRIC ISSUESThere are fi nally some econometric issues that merit consideration, even though regularities between econometric methods and outcomes do not easily emerge. This is also due to the fact that not all studies give full details of the econometric framework, especially with regard to the treatment of some specifi c issues like heteroskedasticity, autocorrelation within panels and cross-sectional correlation that are fundamental features of the panel data analysis. There are also few studies addressing the stationary (or non-stationary) nature of the variables. The impor-tance of stationarity cannot be overlooked, as using variables that are stationary only in fi rst differences may cause results to diverge when levels or changes of both government size and economic integration are used. Unfortunately, there are not many studies using the dependent variable in differences. Besides the pionee-ring contribution by Cameron (1978) – supporting CH – only Hallerberg and Ba-singer (1998) and Bullmann (2008) use changes of the dependent variable. Inci-dentally, the latter contribution adopts this strategy to replicate the analysis by Cameron (1978). But in both cases, support to CH is denied on both the trade and the capital side. Furthermore, control for co-integration of variables is almost ab-

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35 (3) 327-384 (2011)337sent. As far as we understand, the only case is Stewart and Webb (2003), where

only modest evidence is adduced that corporate tax burdens move together across countries in the long run in response to increased economic integration.13

3 ECONOMIC INTEGRATION AND THE SIZE AND COMPOSITION OF PUBLIC SPENDING

On the spending side, Cameron (1978) explicitly pointed out that more open coun-tries tend to be more unionised, with collective bargaining leading to greater de-mand for social protection accommodated by increasing tax revenues. Yet, public spending variables were not directly involved in the econometric investigation. But the lesson that most economists have learned from that contribution is that citizens will demand more public spending in response to higher levels of trade openness, especially after Rodrik (1998) reappraised the issue.

While challenging the collective bargaining explanation, Rodrik argued that go-vernment spending might serve as an indirect insurance against external (and un-diversifi ed) risk. His most infl uential result was the positive association between government consumption and trade integration in a large sample of countries that qualifi es openness both as a determinant and as a predictor of government con-sumption levels across countries (Rodrik, 1998:1004).14 This conclusion would suggest a strong complementarity between markets and governments, with a more powerful role for government consumption in those economies that are subject to larger external risks.

To what extent can this result be assumed to have general validity in the context of public spending? Critics of this position have often pointed out that additional public spending would necessitate additional tax resources. While this task could not be easy in a highly trade-integrated economy, it may become an even more diffi cult one in capital-integrated economies, especially when capital mobility lea-ds to higher tax base volatility. The results summarised in the previous section in the case of capital and corporate taxation suggest that conclusions about the pos-sibility of expanding tax levels cannot be taken for granted. The common para-digm is that higher taxes or higher debt promoted to accommodate additional pu-blic spending would encourage capital to fl ow across national borders, reducing available tax resources. Under these conditions, trade openness would tell only part of the story of economic integration, with capital openness becoming, in-stead, of mounting relevance. Thus, the common increasing trend to capital and fi nancial openness makes it less and less justifi ed to disregard the capital side of economic integration when moving to recent times. Diverging from some current interpretations (e.g. Shelton, 2007), we argue that capital openness associated with tax base volatility would facilitate an across-the-board reduction of public

13 Note that Stewart and Webb (2003) do not use an econometric strategy, but a bivariate and multivariate co-integration analysis.14 In Rodrik (1998), a measure of the risk involved in higher economic integration was approximated by the product between volatility of terms-of-trade and trade openness.

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338 spending, with country-specifi c exceptions depending on country-specifi c politi-cal attitudes.15

How has the existing empirical evidence dealt with this issue? In what follows, we will focus on those studies that consider aggregate measures of public spending (mainly total spending or government consumption) while leaving to a separate sub-paragraph the analysis of those studies that consider narrower categories of public spending and the corresponding composition effects. Following the struc-ture of the previous paragraph, it is worth anticipating that among the 29 studies considering aggregate measures of government spending, for a total of 60 empiri-cal cases, only 15 can actually support CH. Furthermore, while 12 of them support CH on the side of trade openness, only 3 cases can support CH on the side of ca-pital openness. Finally, within the studies that use categories of public spending, there is an impressive number of them showing no or an uncertain relationship. In the case of trade integration, they amount to 47 out of 85; in the case of capital integration, the ratio is 37 out of 59.

3.1 TRADE OR CAPITAL OPENNESS?As in the case of taxation, there is almost universal agreement on measuring trade openness as the sum of exports and imports over GDP. On the other hand, there is much more uncertainty about how to measure capital openness properly. Thus, in this particular set of studies (that use either total spending or government con-sumption as a dependent variable), it may not be fortuitous that the compensation hypothesis is most supported when a control for capital openness is omitted (table 2). This happens (in all or some cases) in Swank (1988), Alesina and Wacziarg (1998), Islam (2004), Hays et al. (2006), Rickard (2007), Garen and Trask (2005), Epifani and Garcia (2005), and Ram (2009). In our view, the fact that these studies do not include any measure of capital integration – and therefore leave unanswe-red the question of whether capital fl ows (or even stock) may have an impact on public policies – is crucial.

When this inclusion occurs, the conclusions drawn on the side of trade openness are much more controversial. One can distinguish three cases, according to the sign of the coeffi cient of capital openness. First, in almost all cases where capital openness bears no relation with government size, the sign of trade openness is either not signifi cant or negative (Rodrik, 1997; Iversen and Cusack, 2000; Gar-rett, 2001; Burgoon, 2001; Garrett and Mitchell, 2001; Hanson and Olofsdotter, 2005; Dreher, 2005; Kittel and Winer, 2005; Gemmell et al., 2008; Bertola and Lo Prete, 2008), with Garrett (2001), and Bertola and Lo Prete (2008) providing exceptions. Second, when the sign of the coeffi cient of capital openness is negati-ve, the coeffi cient of trade openness is either negative or not signifi cant (Garrett,

15 The alternative explanation is that trade openness increases the volatility of tax bases and the average size of governments as a result of hysteresis in public spending (Shelton, 2007:2254). However, even the pres-ence of hysteresis requires that additional spending must be financed by either taxes or public debt, an issue that may further exacerbate tax base volatility.

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35 (3) 327-384 (2011)3391995; Burgoon, 2001; Garrett and Mitchell, 2001; Krogstrup, 2003 – in some ca-

ses – and Liberati, 2007). Third, when the coeffi cient of capital openness supports CH (Quinn, 1997; Iversen, 2002; Sanz and Velàzquez, 2003; Kimakova, 2009), there are only two cases (Quinn, 1997 and Kimakova, 2009) in which the compen-sation hypothesis is contemporaneously supported also on the trade side. These facts strengthen our impression that controlling for capital openness is fundamen-tal when estimating the relationship between economic integration and govern-ment size, and that the validity of the compensation hypothesis on the trade side may to some extent depend on an incomplete empirical specifi cation of economic integration variables. To some extent, the conclusion by Gemmell et al. (2008) may be generalised to studies using aggregate spending, that FDI are more power-ful and robust than trade openness in explaining the characteristics of government size.

3.2 COUNTRY AND PERIOD COVERAGEAs Gemmell et al. (2008) explain, the sample of countries used to analyse the impact of economic integration on government spending may affect the balance of observed country-specifi c and global effects of capital openness. On the one hand, they show that the general trend towards globalisation works in the direction of supporting SH; while some country-specifi c effect in favour of CH may be found at individual country level. Since these two forces go in opposite directions, the size and the type of the sample used may strongly affect the outcome, a result, however, that plagues much of the work in applied economics.

Critics of the compensation hypothesis use the argument of country coverage to argue that the positive relation that emerges when including a large number of observations is affected by relatively poor countries whose economic conditions and institutional structures are deeply different from those of OECD countries. In general terms, this diversity of institutional and political organisations would make the pooling of data from developed and developing countries quite a deba-table practice. On this side, there are indeed some regularities. Quinn (1997), Ro-drik (1998), Garrett (2001), Garen and Trask (2005), Epifani and Garcia (2005), Bertola and Lo Prete (2008) and Ram (2009) are all cases where a strong positive relationship between government size and trade openness emerges. But they are also studies in which the number of countries is large, exceeding 50 or, in most cases, 100 countries. Curiously, this characteristic (wide country coverage) is ra-rely associated with the presence of capital openness among the explanatory va-riables. When it is (Quinn, 1997; Garrett, 2001; Bertola and Lo Prete, 2008), the outcome is consistent with CH only in one case (Quinn, 1997), but in this case data do not extend beyond 1989. More uncertain, as can be appreciated in table 2, is the outcome of studies limiting the analysis to a defi ned subset of OECD, advan-ced, affl uent or developing countries.

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340 Period coverage might also be relevant. In an infl uential work, Alesina and Wac-ziarg (1998) argued that country size might have a negative co-variation with trade openness and government consumption and that this negative co-variation may account for the positive relationship between trade openness and government size documented by Rodrik (1998). The two studies, however, refer to different periods: Rodrik used cross-section data for the late 1980s and early 1990s; while Alesina and Wacziarg (1998) used cross-sectional data for the 1980s. Furthermo-re, the conclusions by Alesina and Wacziarg (1998) have recently been challenged by Ram (2009), who shows the possibility of a direct link between openness and government consumption for 154 countries in the period 1960-2000, implicitly suggesting that a longer period of time may support Rodrik’s hypothesis. As in the case of taxation, this suggests that the most promising studies would be those that more satisfactorily cover the greatest part of the new century. Yet, with the excep-tion of Liberati (2007), and Bertola and Lo Prete (2008) – incidentally giving different results on the impact of both trade and capital openness – there are no studies extending the analysis beyond 2000.16 By disregarding the most buoyant period of economic integration, results might actually underestimate the impact of openness on public spending. But it is interesting to note that also in less recent periods (therefore potentially more favourable to CH), some authors have shown that the positive association has more the nature of a country-specifi c issue rather than of a general rule and that in most cases, government size has not changed to mitigate the increased risk of greater openness (Islam, 2004).

3.3 ECONOMETRIC ISSUESEconometric issues also deserve a brief discussion in the case of pubic spending. The main issue is that the core of Rodrik’s paper is denied general validity when addressed from a causality perspective. Molana et al. (2004), for most of the 23 countries used in the Rodrik paper for the period 1948-1998, show that the hypothesised causation process (from economic integration to government size) might also follow a reverse path. This outcome is particularly important, as the authors derive their conclusions after highlighting the need to explore the statio-nary (or non-stationary) nature of the variables. When stationarity is obtained in fi rst differences, results may thus diverge when using levels or changes. Garrett (2001), for example, has shown that regressions based on levels may support CH; but regressions based on changes may not. Changes in government consumption are also negatively related to trade integration in Skidmore et al. (2004), and in Hansson and Olofsdotter (2008), while in Rickard (2007) changes of central go-vernment spending bear no relation with trade openness for developed countries. More recently, Benarroch and Pandey (2009) test for whether trade openness may cause higher government expenditures. While fi nding some evidence in panel re-gressions, they fi nd no support for a causal relationship between openness and

16 Kimakova (2009), using lagged four-year averages of available data, has six data points for the dependent variable over the period 1980-2003, but six data points over 1976-1999 for the explanatory variables.

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35 (3) 327-384 (2011)341aggregate government expenditures after using a causality test for panel data. Ra-

ther, government size would cause greater openness in low income countries.

All these results point in the same direction, i.e. the potential relevance of estima-ting changes rather than levels and the need to control for causality and stationarity. Despite its potential relevance, however, the issue of stationarity (and cointegra-tion) of variables in panel data is hardly addressed in the available empirical stu-dies. Rodrik (1998) is the most notable exception; the issue of endogeneity is there addressed by experimenting with various measures aimed at extracting the exoge-nous component of trade shares, showing that the results are not much affected. Liberati (2007) is another exception, at least including a test of causality. In other cases, and less satisfactorily, endogeneity is implicitly addressed by using lagged values of the openness measure (for example in Krogstrup, 2003; Rickard, 2007; Gemmell et al., 2008; Kimakova, 2009), but no unique support to CH emerges.17

3.4 WHAT DO WE GAIN BY DISAGGREGATING PUBLIC SPENDING?Economic integration may not only affect levels but also the composition of public spending. In the attempt to make locations more attractive, governments may en-gage in spending competition. In particular, public spending in privately producti-ve public goods like infrastructures, training programmes, human capital is more likely to satisfy mobile production factors (Keen and Marchand, 1997; Taylor-Gooby, 1997). This possibility gives rise to a case in which public spending may increase but not necessarily in line with the basic tenet of the compensation hypothesis.

The standard hypothesis is that potential losers will ask for additional social spen-ding in the form of health care, education or social security (e.g. Rodrik, 1998); while the potential winners will ask for additional public productive spending in the attempt to reduce incentives to exit the country. Thus, a higher level of public spending may not necessarily signal that a classical compensation hypothesis is in place. An increase of productive public spending may in fact be more consistent with SH than with CH. As Shelton (2007:2254) pointed out, large and robust in-creases in total expenditures associated with greater trade openness are seen in very different categories in industrialized and less-developed countries, with the former mainly expanding social security, transportation expenditures and wages at sub-national levels; and the latter expanding transportation expenditures and education, and centralizing expenditures across the board.

Table 3 gives details of the empirical studies dealing with categories of public spending. Since all problems so far addressed (defi nition of trade and capital openness, period and country coverage, econometric issues, etc.) still hold, we do not describe them further; rather, we will concentrate on the additional insights

17 Regularities among studies using fixed effects, random effects or simply pooling data is harder, as not all studies provide full information about the methodology used.

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342 they can offer. It is worth starting from those studies showing empirical evidence on both a measure of total government size and the size of specifi c items of public spending. This helps us to understand whether support to CH is robust to the de-composition of public spending.

The set of studies that can be classifi ed in favour of CH in both the aggregate di-mension and for specifi c categories of public spending is however narrow (Quinn, 1997; Rodrik, 1998; Alesina and Wacziarg, 1998; Bertola and Lo Prete, 1998; Benarroch and Pandey, 2009 in some cases). More frequently, the empirical evi-dence shows support to CH on an aggregate level and not with reference to speci-fi c public spending (Iversen, 2002; Sanz and Velazquez, 2003; Epifani and Garcia, 2005; Benarroch and Pandey, 2009).18

To shed further light on this complex structure, it is worth considering one of the most comprehensive items of empirical evidence on this topic, i.e. Swank (2002). This study takes into account four groups of public spending (social welfare pro-grams, cash payments for social assistance, unemployment compensations and government spending on health programs) and three types of countries (with uni-versal, conservative and liberal welfare states), showing a strong and generalised evidence for CH only for the relationship between trade openness and social wel-fare programs. Capital openness (variously measured), instead, would bear more uncertain outcomes. The main lesson from Swank (2002) is that globalisation may well have differential effects depending on the institutional structure of any given country and on the initial level of welfare states.19 But the uncertainty of the res-ults prevents the design of an uncontroversial answer to whether social welfare is most at risk with economic integration.

The other studies described in table 3 only partially help disentangle the issue. The empirical evidence using the category of social welfare spending shows a positive relationship with trade openness only in a certain number of cases (Hicks and Swank, 1992; Quinn, 1997; Bretschger and Hettich, 2002; Gizelis, 2005; Hays et al., 2006; Adam and Kammas, 2007; Bertola and Lo Prete, 2008); the same occurs with such other categories as social security, education and health (Huber et al., 1993; Achini and Brem, 1998; Avelino et al., 2005; Rodrik, 1998; Dion, 2004; Shelton, 2007; Gemmell et al., 2008; Benarroch and Pandey, 2009).20 Furthermo-

18 It is worth noting that Sanz and Velazquez (2004) use σ-convergence rather than an econometric evidence. They are able to show that there has been an alignment of the structure of government spending among OECD countries, though this process has slowed down since 1980. It would mean that economic integration would make it harder to differentiate public policies, which is a result consistent with the logic of SH and already observed in the case of taxation. Since convergence is found towards the top level of social welfare spending, however, the results may to some extent be consistent also with the compensation hypothesis.19 This view, according to some authors, would disregard the possibility that political institutions may be endog-enous to the economic integration process, with this latter pushing towards fragmenting veto points (like trade unions, as in Dreher and Gaston, 2008), encouraging the creation of “disciplining” supranational entities and supporting the devolution of more power to sub-national entities (fiscal federalism).20 Note that among the previous list, seven studies do not include a measure of capital openness, and this still leaves open the question of whether the evidence in favour of the compensation hypothesis depends on an incomplete specification of economic integration.

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35 (3) 327-384 (2011)343re, when supporting CH on the trade side, capital openness (when included) does

not usually support it (examples are Quinn, 1997; and Achini and Brem, 1998). But the coeffi cient of capital openness also does not usually support CH when support to CH on the trade side fails (with some exceptions as in Burgoon, 2001; Kaufman and Segura-Ubiergo, 2001; Swank, 2002; Sanz and Velazquez, 2003; and Burgoon, 2006).

With regard to productive spending, a large part of the empirical literature does not fi nd any relation with either trade or capital openness. This is particularly true for those contributions using a measure of net or gross public investments (Heine-mann, 1999; Skidmore et al., 2004; Hanson and Olofsdotter, 2005; Dreher et al., 2005), public services (Sanz and Velazquez, 2003; Dreher et al. 2005), transport and communications (Sanz and Velazquez, 2003; Gemmell et al., 2008). Overall, within this restricted subset of public spending (including public services, defen-ce, culture, economic affairs, net investments, transport/communications and non-welfare spending and involving 22 empirical investigations) only eight cases can safely support higher productive spending for higher levels of economic integra-tion (Rodrik, 1998; Sanz and Velazquez, 2003; Shelton, 2007; Gemmell et al., 2008).

It therefore seems that the validity of the compensation hypothesis is rather weak and far from general when specifi c spending items are observed too. Within all studies surveyed in table 3, only 12 out of 59 cases can support CH on the side of capital openness and only 25 out of 87 cases can do it on the side of trade open-ness. This confi rms that also in this case CH seems to be more a country-specifi c expenditure-specifi c issue than a general trend of globalisation. On the other hand, a generalised convergence towards the retrenchment of the public sector and of the welfare state in particular, is also not strongly supported, even though there is a non-negligible number of cases favouring this hypothesis.

4 CONCLUSIONSHas economic integration deeply affected the ability of governments to tax and spend? According to the available empirical literature the most likely answer is: we do not know. Actually, there is a non-negligible number of cases reporting re-sults consistent with some version of CH (either on the tax or on the spending side of the public budget); at the same time, there is an even greater number of studies supporting SH. Not to speak of studies that do not achieve a defi nite conclusion. On the basis of the empirical evidence surveyed in this paper, it is therefore diffi -cult to take a clear-cut position on whether and how both trade openness and capi-tal openness have affected national public policies. It has been seen that the dri-ving factors of this uncertainty are many (the defi nition of the dependent variable, the period and country coverage, the measures of capital openness). The most general impression, however, is that CH is less common than is usually thought. On the tax side, CH is all but a general result even when measured only by trade

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344 openness, as originally suggested by Cameron (1978) and Rodrik (1998). Espe-cially low is the support to CH given by those studies using the most mobile tax bases, corporate and capital taxation. Limited support to CH also emerges when studies dealing with total spending or specifi c spending items are considered. Fur-thermore, these results hold also in some contexts where the period coverage is potentially more favourable to ascribing a prominent role to CH. It is indeed ex-pected that, in the near future after the present period of deep economic crisis, the size and the composition of the public budgets will more likely react according to SH. Even though this crisis does not originate in the public sector, public sectors will almost certainly pay a price in terms of austerity and budget cuts, possibly working against the compensation hypothesis. In our view, this might imply hard times for taxation of mobile tax bases and for social spending, unless a well coor-dinated supranational action is taken. In the absence of any such action, it will be easier for national public policies to conform to the outcome predicted by the ef-fi ciency hypothesis. But it will become crucial, for the future of this kind of empi-rical analysis, to consider a period of time expanding well beyond 2000, an issue that the available literature has until now hardly addressed.

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Posit

ive (a

ne

gativ

e sign

in

the re

gre-

ssion

but a

hig

h ARE

A-ER

mea

ns

highe

r rest

ric-

tions

)

FE

SHCH

Effec

tive t

ax ra

tes

on la

bour

Posit

ivePo

sitive

SHSH

6Ha

llerbe

rg an

d Basi

n-ge

r (19

98)

OECD

co

untri

es19

86-19

90

Chan

ges i

n top

ma

rgina

l tax r

ates

for co

rporat

e and

pe

rsona

l inco

me

taxes

Impo

rts pl

us ex

-po

rts ov

er GD

PNu

mber

of ca

pital

contr

ols

(ARE

AER)

No re

lation

(neit

her

for co

rporat

e nor

for

incom

e tax

rates

)

No re

lation

(ne

ither

for

corpo

rate n

or for

inco

me ta

x rat

es)

Cr

oss-s

ectio

nal

metho

dsNo

relat

ionNo

relat

ion

7Sw

ank

(1998

)17

adva

nced

co

untri

es19

66-19

93

Corpo

rate p

rofi t

taxati

on as

a %

of op

eratin

g inc

ome

Real

impo

rts pl

us

real e

xport

s ove

r rea

l GDP

(1) To

tal ca

pital

infl ow

and

outfl o

w as

a % of

GDP

; (2)

Natio

nal re

strict

ions o

n the

cro

ss-bo

rder m

ovem

ent o

f ca

pital

(0-4 s

cale)

; (3)

Natio

nal a

nd in

terna

tiona

l ag

reeme

nt res

tricti

ons o

n pa

ymen

ts an

d rec

eipts

of ca

pital

(0-14

scale

)

Nega

tive

Posit

ive

relati

on w

ith

capit

al me

asu-

res (1

) and

(3)

OL

S with

pane

l-co

rrecte

d stan

-da

rd err

ors

SHCH

Emplo

yer s

ocial

sec

urity

and p

ayrol

l tax

ation

as a

% of

opera

ting i

ncom

eNe

gativ

ePo

sitive

rel

ation

with

ca

pital

measu

-re

(3)SH

CH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)347

8He

inema

nn

(1999

)21

OEC

D co

untri

es19

70-19

97

Taxe

s on c

orpora

te inc

ome o

ver to

tal

taxati

on

Expo

rts pl

us im

-po

rts ov

er GD

PLe

gal re

strict

ions o

n int

ernati

onal

capit

al tra

n-sac

tions

Some

supp

ort to

the h

ypoth

esis t

hat

taxes

shift

away

from

mob

ile to

im

mobil

e tax

bases

.

Clus

ter an

alysis

SH

Ta

xes o

n goo

ds an

d ser

vices

over

total

taxati

onSH

Total

tax r

even

ues

over

GDP

Supp

ort to

the h

ypoth

esis t

hat g

lobali

-za

tion r

estric

ts the

size

of pu

blic

sector

SH

9Ga

rrett a

nd

Mitc

hell

(2001

) -

(1999

)

16 O

ECD

coun

tries

1961

-1992

wi

th ga

ps

Effec

tive t

ax ra

te on

capit

al(1)

Expo

rts +

Impo

rts ov

er GD

P; (2)

Share

of im

ports

fro

m low

-wag

e co

untri

es ov

er tot

al im

ports

(3) FD

I infl o

ws an

d ou

tfl ows

over

GDP;

(4)

Intern

ation

al fi n

ancia

l op

enne

ss ind

ex

No re

lation

Posit

ive

relati

on w

ith

(3)

GLS w

ith pa

nel

corre

cted s

tan-

dard

errors

No re

lation

CH

Effec

tive t

ax ra

te on

labo

urNo

relat

ionNe

gativ

e rel

ation

with

(3)

and (

4)No

relat

ionCH

Effec

tive t

ax ra

te on

cons

umpti

onNe

gativ

e rela

tion w

ith

(1) an

d (2)

(10%)

CH

10Br

etsch

ger

and H

ettich

(20

02)

14 O

ECD

coun

tries

1967

-1996

Effec

tive a

verag

e co

rporat

e tax

rates

Expo

rts pl

us Im

-po

rts di

vided

by

GDP

(1) R

estric

tions

on

paym

ents

and r

eceip

ts of

capit

al (in

dex r

angin

g 0-

14); (

2) Inv

estme

nt ab

road

as a s

hare

of GD

P

Nega

tive

Nega

tive

The n

egati

ve re

lation

with

ca

pital

disap

pears

whe

n us

ing FE

inste

ad of

PCSE

or

when

using

a pa

rtial

adjus

-tm

ent m

odel

(10%)

PCSE

, FE

SHSH

Ratio

betw

een

labou

r effe

ctive

tax

rate a

nd co

rporat

e eff

ectiv

e tax

rate

Posit

ivePo

sitive

The p

ositiv

e rela

tion w

ith

capit

al dis

appe

ars w

hen

using

FE in

stead

of PC

SESH

SH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

348

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

bleTr

ade o

penn

ess

meas

ure

Capit

al op

enne

ss me

asur

eSig

n of t

he

relati

on w

ith tr

ade

integ

ratio

n

Sign o

f the

rel

ation

with

ca

pital

inte-

grati

on

Addit

ional

issue

sM

ainest

imati

on

meth

ods

Trad

e int

egra

tion

mainl

y co

nsist

ent

with

…

Capit

alint

egra

tion

mainl

yco

nsist

ent

with

…

11Sw

ank

(2002

)15

deve

loped

de

mocra

cies

1965

-1993

(19

79-19

93

in so

me

cases

)

Effec

tive t

ax ra

tes

on la

bour

Real

impo

rts pl

us

real e

xport

s as a

%

of rea

l GDP

(1) Av

erage

(lagg

ed 1

to 3

years

) of to

tal ca

pital

infl ow

s and

outfl o

ws as

a %

of GD

P; (2)

Avera

ge

(lagg

ed 1

to 3 y

ears)

of

FDI in

fl ows

and o

utfl ow

s as

a % of

GDP

; (3) A

verag

e (la

gged

1 to

3 yea

rs) of

bo

rrowi

ng on

inter

natio

nal

capit

al ma

rkets

as a %

of

GDP;

(4) In

dex (

scale

0-4)

of the

absen

ce of

natio

nal

restri

ction

s on t

he cr

oss-

borde

r pay

ments

and

receip

ts of

capit

al; (5

) Ab

solut

e valu

e of c

overe

d int

erest

rate p

aritie

s

No re

lation

No re

lation

OLS w

ith pa

nel-

corre

cted s

tan-

dard

errors

No re

lation

No re

lation

Effec

tive t

ax ra

tes

on co

nsum

ption

Posit

iveNo

relat

ionSH

No re

lation

Effec

tive t

ax ra

tes

on ca

pital

No re

lation

Posit

ive w

ith

measu

re (4)

No re

lation

CH

Total

taxe

s (as

a %

of GD

P)Po

sitive

Nega

tive w

ith

measu

re (2)

CHSH

12Sw

ank a

nd

Steinm

o (20

02)

14 de

velop

ed

demo

cracie

s19

81-19

95

Statut

ory co

rporat

e tax

rate

Expo

rts pl

us im

-po

rts ov

er GD

P

0-14 i

ndex

of fi n

ancia

l op

enne

ss: (a

) inwa

rd an

d ou

tward

capit

al ac

coun

t tra

nsac

tions

on a

0-4 sc

ale;

(b) in

ward

and o

utward

cu

rrent

acco

unt tr

ansac

ti-on

s on a

0-8 s

cale;

(c)

intern

ation

al leg

al ag

ree-

ments

on a

0-2 sc

ale

Nega

tive (

disap

pears

wi

th FE

)Ne

gativ

e

OLS p

anel-

corre

cted f

or he

teros

keda

stici-

ty an

d corr

elati-

on; F

E

SHSH

Effec

tive t

ax ra

te on

ca

pital

No re

lation

No re

lation

No re

lation

No re

lation

Effec

tive t

ax ra

te on

lab

our

No re

lation

Nega

tive

No re

lation

CH

Effec

tive t

ax ra

te on

co

nsum

ption

Posit

ive (d

isapp

ears

with

FE)

No re

lation

SHNo

relat

ion

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)349

13Kr

ogstr

up

(2003

)14

Europ

ean

coun

tries

1970

-2001

Impli

cit ca

pital

tax

rate

Chan

ge of

expo

rts+

impo

rts ov

er GD

P (la

gged

one p

eriod

)

(1) In

dex o

f cap

ital re

stric-

tions

(Quin

n, 19

97); (

2) FD

I sotc

ks ov

er GD

P; (3)

co

vered

inter

est pa

rity

differ

entia

ls

Posit

ive (1

0%) w

hen

using

(1) a

nd (2

). Ne

gativ

e whe

n usin

g (3)

.

Nega

tive

with

(3)

Using

an in

terac

tion w

ith

coun

try si

ze: n

egati

ve re

lati-

on w

ith (1

) and

(3) (

10%)

. Th

e inte

ractio

n term

is

posit

ively

relate

d to (

1) an

d ne

gativ

ely re

lated

to (2

). Us

ing an

inter

actio

n term

wi

th ag

glome

ration

: neg

ative

rel

ation

with

(1) o

nly. P

ositi-

ve re

lation

with

the i

nterac

ti-on

term

with

(1).

FGLS

with

FE

Unce

rtain

SH

Corpo

rate t

ax

reven

ues o

ver G

DPNe

gativ

e usin

g any

ca

pital

index

es.

Posit

ive

relati

on w

ith

(1). N

egati

ve

relati

on w

ith

(3).

Using

an in

terac

tion w

ith

coun

try si

ze: n

egati

ve re

lati-

on w

ith (2

) and

(3).

SHUn

certa

in

Impli

cit ca

pital

tax

rate o

ver im

plicit

lab

our ta

x rate

Nega

tive w

hen u

sing

(3) (1

0%). N

o rela

tion

when

using

(1) a

nd

(2).

Nega

tive

relati

on w

ith

(3)

Unce

rtain

SH

Corpo

rate t

ax

reven

ues o

ver to

tal

tax re

venu

e

Nega

tive w

hen u

sing

(3). N

o rela

tion w

hen

using

(1) a

nd (2

).

Posit

ive w

ith

(1). N

egati

ve

with

both

(2)

(10%)

and (

3).Un

certa

inUn

certa

in

14Ste

wart a

nd

Webb

(20

03)

19 O

ECD

coun

tries

1950

-1999

; 19

65-19

99

(with

some

ex

cepti

ons)

(A) C

orpora

te tax

ation

over

GDP

(CIT

/GDP

); (B)

Co

rporat

e tax

ation

ov

er tot

al tax

es (C

IT/G

TR); (

C)

Corpo

rate+

socia

l sec

urity+

payro

ll ov

er GD

P (AL

L/GD

P); (D

) Co

rporat

e+so

cial

securi

ty+pa

yroll

over

total

taxes

(ALL

/GTR

)

Conv

ergen

ce of

CIT

/GDP

; CIT

/GTR

; AL

L/GD

P; AL

L/GT

ROn

ly mo

dest

evide

nce t

hat c

orpora

te tax

burde

ns m

ove t

ogeth

er in

the lo

ng

run ac

ross c

ountr

ies

Biva

riate

and

multiv

ariate

co

integ

ration

an

alysis

No re

lation

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

350

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

bleTr

ade o

penn

ess

meas

ure

Capit

al op

enne

ss me

asur

eSig

n of t

he

relati

on w

ith tr

ade

integ

ratio

n

Sign o

f the

rel

ation

with

ca

pital

inte-

grati

on

Addit

ional

issue

sM

ainest

imati

on

meth

ods

Trad

e int

egra

tion

mainl

y co

nsist

ent

with

…

Capit

alint

egra

tion

mainl

yco

nsist

ent

with

…

15

Deve

reux,

Lock

wood

an

d Re

doan

o (20

04)

21 O

ECD

coun

tries

1982

-1999

Statut

ory co

rporat

e tax

rate

(a) Su

m of

inward

and

outw

ard FD

I ove

r GDP

, lag

ged o

ne ye

ar; (b

) ave

ra-ge

glob

al tax

rate

(statu

tory

or eff

ectiv

e)

No re

lation

wi

th (a)

. Po

sitive

rel

ation

with

(b)

Tax r

ates t

end t

o mov

e tog

et-he

r whe

re the

home

coun

try

and t

he ot

her c

ountr

ies ha

ve

no ca

pital

contr

ols. T

his

relati

on di

sappe

ars in

coun

-trie

s with

capit

al co

ntrols

.

Weigh

ted O

LS

corre

cted b

y he

teros

keda

stici-

ty an

d corr

ela-

tion

Unce

rtain

Effec

tive t

ax w

edge

(co

st of

capit

al mi

nus t

he re

al int

erest

rate)

Unce

rtain

16Sle

mrod

(20

04)

19

80-19

95

Statut

ory co

rporat

e tax

rate

(1) Ex

ports

plus

im

ports

over

GDP;

(2) Sa

chs-W

erner

measu

re of

open

ness

Nega

tive w

ith (2

) in

one o

ut of

two r

egre-

ssion

s

Poole

d cros

s-sec

tiona

l, FE

SH

Av

erage

corpo

rate

tax ra

tePo

sitive

with

(1) in

on

e out

of tw

o reg

re-ssi

ons

CH

17Be

auch

amp

and

Mon

tero

(2005

)

13 ad

vanc

ed

indus

trial

econ

omies

1981

-2004

(?)

Corpo

rate t

ax ra

te

Avera

ge gl

obal

tax ra

te lag

ged 5

years

(prox

y of

tax co

mpeti

tion)

Nega

tive

(more

tax

comp

etitio

n low

er co

rpo-

rate t

ax ra

tes)

OL

S (?)

SH

18Dr

eher

(2005

)

30 O

ECD

coun

tries

(unba

lance

d pa

nel)

1970

-2000

(va

riable

)

Avera

ge ef

fectiv

e tax

rate

on la

bour

Index

of gl

obali

zati-

on us

ing 23

varia

-ble

s or s

ub-in

dex o

f ec

onom

ic int

egrat

i-on

. On t

he tra

de

side (

a) tra

de in

%

of GD

P; (b)

hidd

en

impo

rt barr

iers;

(c)

mean

tarif

f rate

; (d)

taxes

on in

terna

tio-

nal tr

ade

Index

of gl

obali

zatio

n us

ing 23

varia

bles o

r sub

-ind

ex of

econ

omic

integ

ra-tio

n. On

the c

apita

l side

(a)

FDI in

% of

GDP

; (b) F

PI

in %

of GD

P; (c)

inco

me

paym

ents

to for

eign n

atio-

nals

in %

of GD

P; (d)

ca

pital

acco

unt re

strict

ions.

No re

lation

No re

lation

It hold

s with

both

OLS a

nd

GMM

OLS a

nd

GMM

No re

lation

No re

lation

Avera

ge ef

fectiv

e tax

rate

on co

n-su

mptio

nNo

relat

ionNo

relat

ionIt h

olds w

ith bo

th OL

S and

GM

MNo

relat

ionNo

relat

ion

Avera

ge ef

fectiv

e tax

rate

on ca

pital

Posit

ivePo

sitive

Posit

ive re

lation

with

econ

o-mi

c inte

gratio

n with

both

OLS (

10%)

and G

MM

. Po

sitive

relat

ion w

ith th

e me

asure

of ET

R de

velop

ed

by Vo

lkerin

k and

de H

aan

(2001

).

CHCH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)351

Adjus

ted st

atutor

y tax

rates

on ca

pital

(Dev

ereux

and G

rif-

fi th, 2

003)

Nega

tive

Nega

tive

The r

elatio

n disa

ppea

rs wh

en

introd

ucing

a lag

ged d

epen

-de

nt va

riable

SHSH

19W

inner

(2005

)23

OEC

D co

untri

es19

65-20

00

Avera

ge ef

fectiv

e tax

rate

on ca

pital

Ab

solut

e diff

erenc

e be

twee

n sav

ing an

d inv

estme

nt ov

er GD

P

Nega

tive a

nd

robus

t to

GMM

Sens

itivity

analy

sis: (a

) usin

g tra

de op

enne

ss giv

es ne

gativ

e rel

ation

at 10

%; (b

) usin

g the

Qu

inn-in

dex o

f cap

ital

mobil

ity gi

ves n

o rela

tion

FGLS

, GM

M

SH

Avera

ge ef

fectiv

e tax

rate

on la

bour

Posit

ive.

Disap

pears

us

ing G

MM

Sens

itivity

analy

sis: (a

) usin

g tra

de op

enne

ss giv

es po

sitive

rel

ation

; (b) u

sing t

he Q

uinn-

index

of ca

pital

mobil

ity

gives

no re

lation

SH

Avera

ge ef

fectiv

e tax

rate

on ex

tende

d lab

our (

labou

r +

cons

umpti

on)

Posit

ive.

Disap

pears

us

ing G

MM

Sens

itivity

analy

sis: (a

) usin

g tra

de op

enne

ss giv

es po

sitive

rel

ation

; (b) u

sing t

he Q

uinn-

index

of ca

pital

mobil

ity

gives

posit

ive re

lation

SH

Capit

al to

labou

r tax

ratio

Nega

tive

Disap

pears

us

ing G

MM

Sensi

tivity

analy

sis: (a

) usin

g tra

de op

enne

ss giv

es ne

gativ

e rel

ation

; (b) u

sing t

he Q

uinn-

index

of ca

pital

mobil

ity gi

ves

nega

tive r

elatio

n at 1

0%

SH

Capit

al to

exten

ded

labou

r tax r

atio

Nega

tive.

At

10%

using

GM

M

Sens

itivity

analy

sis: (a

) usin

g tra

de op

enne

ss giv

es ne

gativ

e rel

ation

at 10

%; (b

) usin

g the

Qu

inn-in

dex o

f cap

ital

mobil

ity gi

ves n

egati

ve

relati

on at

10%

SH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

352

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

bleTr

ade o

penn

ess

meas

ure

Capit

al op

enne

ss me

asur

eSig

n of t

he

relati

on w

ith tr

ade

integ

ratio

n

Sign o

f the

rel

ation

with

ca

pital

inte-

grati

on

Addit

ional

issue

sM

ainest

imati

on

meth

ods

Trad

e int

egra

tion

mainl

y co

nsist

ent

with

…

Capit

alint

egra

tion

mainl

yco

nsist

ent

with

…

20Ha

ufl er,

Kl

emm,

Sc

hjelde

rup

(2006

)

23 O

ECD

coun

tries

1980

-2001

Ratio

of st

atutor

y co

rporat

e tax

rate

and e

ffecti

ve w

age

tax ra

te (av

erage

OE

CD w

orker)

– Ta

x Mix

(1) Ex

ports

plus

im

ports

over

GDP;

(2) Sh

are of

value

ad

ded i

n the

servi

ce

sector

to va

lue

adde

d in m

anufa

c-tur

ing

(3) In

dex o

f cap

ital m

arket

restri

ction

s (Qu

inn, 1

997);

(4)

Outw

ard FD

I stoc

k ov

er GD

P

No re

lation

with

(1).

Posit

ive w

ith (2

)

Posit

ive w

ith

(3) w

hen

using

FE.

Nega

tive

when

remo

-vin

g FE.

No

relati

on w

ith

(4)

FE

Unce

rtain

Unce

rtain

21Ad

am an

d Ka

mmas

(2007

)17

OEC

D co

untri

es19

70-19

97

Effec

tive c

orpora

te (C

) inco

me ta

x rati

o

Expo

rts pl

us im

-po

rts ov

er GD

P, co

rrecte

d by c

oun-

try si

ze

Nega

tive

No re

lation

in co

rporat

ist

coun

tries.

Neg

ative

relat

ion

(10%)

in no

n-corp

oratis

t co

untri

es.

OLS w

ith pa

nel-

corre

cted s

tan-

dard

errors

SH

Effec

tive l

abou

r (L

1) inc

ome t

ax

ratio

Posit

ivePo

sitive

relat

ion in

both

corpo

ratist

and n

on-co

rpora-

tist c

ountr

iesSH

Effec

tive s

ocial

sec

urity

contr

ibuti-

ons (

SSC)

ratio

Posit

ivePo

sitive

relat

ion in

corpo

ra-tis

t cou

ntries

. No r

elatio

n in

non-c

orpora

tist c

ountr

iesSH

Effet

ive la

bour

incom

e tax

ratio

ex

cludin

g SSC

(L2)

No re

lation

No re

lation

in bo

th co

rpora-

tist a

nd no

n-corp

oratis

t co

untri

esNo

relat

ion

Ratio

C/L

1Ne

gativ

e (10

%)

SHRa

tio C

/L2

No re

lation

No re

lation

Ratio

C/SS

CNe

gativ

eSH

Ratio

SSC/

L2Po

sitive

No re

lation

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)353

22Sc

hwarz

(20

07)

20 O

ECD

coun

tries

1979

-2000

Corpo

rate t

o lab

our

tax ra

tio (E

ATR)

(K

ing-F

ullert

on,

1984

and D

evere

ux

and G

riffi th

, 200

3)

Ind

ex of

capit

al ac

coun

t res

tricti

ons (

Quinn

, 199

7)

Nega

tive i

n 3

of 4 r

egres

si-on

s

OL

S (?)

SH

Mac

ro-co

rporat

e tax

ratio

(Men

doza

et

al., 1

994;

Volke

-rin

k and

de H

aan,

2001

)

Nega

tive i

n 1

of 5 r

egres

si-on

sUn

certa

in

Micr

oeco

nomi

c tax

rat

io (us

es da

ta on

co

mpan

y acc

ounts

)No

relat

ionNo

relat

ion

23Bu

llman

n (20

08)

18 O

ECD

coun

tries

(as

in Ca

meron

)

1960

-1975

(re

plica

te Ca

meron

); 19

60-20

06

Gene

ral go

vt rec

eipts

as a s

hare

of GD

P (in

differ

en-

ces)

Expo

rts pl

us Im

-po

rts di

vided

by

GDP

FDI n

et ou

tfl ows

as

a sha

re of

GDP

Posit

ive w

ith le

vels.

Ne

gativ

e with

chan

-ge

s.Ne

gativ

e (10

%)

Leve

ls of

govt

receip

ts are

ne

gativ

ely re

lated

to tra

de

when

contr

olling

for ti

me

and e

ntity

effec

ts

Poole

d OLS

, FE

Unce

rtain

SH

24Ga

staldi

(20

08)

18 O

ECD

coun

tries

1970

-2005

(w

ith ga

ps)

Effec

tive t

ax ra

tes

on m

obile

capit

al (co

nverg

ence

)

Real

expo

rts pl

us

impo

rts di

vided

by

real G

DP

(a) O

utward

FDI fl

ows

over

GDP;

(b) ou

tward

FP

I fl ow

s ove

r GDP

(as

sets)

No re

lation

Nega

tive w

ith

(a) in

all

spec

ifi cati

ons

but o

ne

limitin

g the

tim

e peri

od to

be

fore 1

990.

No re

lation

wi

th (b)

FGLS

and

PCSE

No re

lation

SH

Effec

tive t

ax ra

tes

on im

mobil

e cap

ital

(conv

ergen

ce)

No re

lation

No re

lation

wi

th eit

her (

a) or

(b)FG

LSNo

relat

ionNo

relat

ion

Effec

tive t

ax ra

tes

on la

bour

(conv

er-ge

nce)

Nega

tive a

t 10%

Posit

ive w

ith

(a). N

o rela

ti-on

with

(b)

FGLS

No re

lation

SH

Effec

tive t

ax ra

tes

on co

nsum

ption

(co

nverg

ence

)No

relat

ionNo

relat

ion

with

eithe

r (a)

or (b)

FGLS

No re

lation

No re

lation

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

354

TA

BL

E 2

Econ

omic

inte

grat

ion

and

the

size

of p

ublic

spen

ding

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

1Sw

ank

(198

8)18

affl u

ent

demo

cracie

s19

60-1

980

Chan

ges i

n non

-mi

litary

dome

stic

spen

ding o

ver

GDP (

in log

s)

Expo

rts pl

us

impo

rts ov

er GD

P

Nega

tive i

n 196

0-19

73; P

ositi

ve in

19

73-1

980

OLS

SH in

19

60-1

973;

CH in

19

73-1

980

2Ga

rrett

(199

5)15

OEC

D co

untri

es19

67-1

990

Govt

spen

ding

in %

of G

DP

Expo

rts pl

us

impo

rts ov

er GD

P

Mea

sure

of go

vt res

tricti

-on

s on c

ross-

bord

er fi n

ancia

l fl ow

s (hig

her

scor

e, mo

re ca

pital

mobil

ity)

No re

lation

Nega

tive

(10%

)

Posit

ive re

lation

of bo

th tra

de an

d cap

ital m

obili

ty int

eracte

d with

left-

labou

r po

wer

No

relat

ionSH

3Qu

inn

(199

7)58

-64

coun

tries

1960

-198

9; 19

74-1

989

Govt

cons

umpti

on

(exclu

ding d

efen-

ce an

d edu

catio

n)

over

GDP

Trad

e bala

nce

over

GDP

0-4 m

easu

re of

capit

al ac

coun

t reg

ulatio

nPo

sitive

Posit

iveCH

CH

4Ro

drik

(199

7)

22

coun

tries

Cros

s se

ction

/19

66-1

991

Govt

cons

umpti

on

over

GDP i

n OE

CD co

untri

es(1

) Exp

ort p

lus

impo

rts ov

er GD

P;

(2) T

erms o

f trad

e (v

olatil

ity)

Capit

al ac

coun

t res

tricti

ons (

AREA

ER)

No re

lation

with

(1

) and

(2)

No re

lation

Using

pane

l data

: Neg

ative

rel

ation

with

(1) (

10%

). Ro

bust

to the

intro

ducti

on

of in

terac

tion (

1) w

ith

AREA

ER. P

ositi

ve si

gn on

the

inter

actio

n term

.Cr

oss-s

ectio

n an

alysis

an

d FE

No re

lation

No re

lation

32

coun

tries

Cros

s-se

ction

Govt

cons

umpti

on

over

GDP i

n co

untri

es w

ith

1985

per c

apita

GD

P > $4

,500

Nega

tive (

10%

)No

relat

ionPo

sitive

relat

ion w

ith (1

) an

d (2)

inter

acted

SHNo

relat

ion

109

coun

tries

Govt

cons

umpti

on

over

GDP

Nega

tive (

10%

)No

relat

ionPo

sitive

relat

ion w

ith (1

) an

d (2)

inter

acted

SHNo

relat

ion

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)355

5Cu

sack

(1

997)

15/16

co

untri

es19

55-1

989

Chan

ge of

non-

milit

ary go

ver-

nmen

t spe

nding

in

% of

GDP

Annu

al av

erage

of th

e ab

solut

e valu

e of 1

minu

s the

ratio

of pr

ivate

inve-

stmen

ts to

priva

te sa

vings

Nega

tive

Po

oled c

ross-

secti

onal

time-

serie

s

SH

6Ro

drik

(199

8)10

3 or 1

25

coun

tries

1985

-198

9; 19

90-1

992

Three

- or fi

ve-y

ear

avera

ge of

real

govt

cons

umpti

on

as a

% of

GDP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

(ave

rage

over

the pr

eviou

s de

cade

)

Po

sitive

Resu

lts ar

e rob

ust to

the

inclus

ion of

term

s of t

rade.

A me

asur

e of e

xtern

al ris

k (th

e pro

duct

betw

een

open

ness

and t

erms o

f tra

de) i

s pos

itive

ly rel

ated

to go

vt co

nsum

ption

. So

cial s

ecur

ity an

d welf

are

are po

sitive

ly as

socia

ted to

ex

terna

l risk

CH

7

Ales

ina

and

Wac

ziarg

(199

8)

?19

85-1

989

Govt

cons

umpti

on

in %

of G

DP

Expo

rts pl

us

impo

rts di

vided

by

GDP (

1975

-198

4)

Varia

bles i

n log

s: Po

sitive

(with

and

witho

ut co

ntroll

ing

for c

ountr

y size

)

Varia

bles n

ot in

logs:

Posit

ive re

lation

with

out

contr

olling

for c

ountr

y siz

e. No

relat

ion co

ntro-

lling

for c

ountr

y size

CH

8

Ivers

en

and

Cusa

ck

(200

0)

15

coun

tries

1961

-199

3

Leve

l of a

nd

chan

ge of

gove

r-nm

ent c

onsu

mpti-

on (t

otal g

ovt

cons

umpti

on

of go

ods a

nd

serv

ices n

et of

mi

litary

spen

ding)

as

a %

of G

DP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

An in

dex m

easu

ring t

he

exten

t to w

hich c

apita

l ma

rkets

are l

iberal

ised

(Quin

n and

Incla

n, 19

97)

No re

lation

with

lev

els (1

0%).

No

relati

on w

ith ch

an-

ges

No re

lation

wi

th lev

els.

Nega

tive

relati

on w

ith

chan

ges

No re

lation

No re

lation

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

356

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

9Ga

rrett

(200

1)87

-116

coun

tries

1985

-199

5

Centr

al go

vt sp

endin

g as a

%

of G

DPPo

sitive

(in l

evels

)No

relat

ion

(in le

vels)

Estim

ation

in ch

ange

s giv

es no

relat

ion w

ith tr

ade

and c

apita

l. Inte

ractio

n be

twee

n trad

e and

capit

al no

t sign

ifi ca

nt

CHNo

relat

ion

Gene

ral go

vt co

nsum

ption

in

% of

GDP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

Inde

x of g

overn

ment

restri

ction

s on c

apita

l ac

coun

t tran

sacti

ons

(IMF)

Posit

ive (i

n lev

els)

No re

lation

(in

leve

ls)

Estim

ation

in ch

ange

s giv

es a

nega

tive a

ssocia

tion

of tr

ade w

ith go

vt co

n-su

mptio

n. No

effec

ts of

ca

pital

restri

ction

s. In

terac

-tio

n betw

een t

rade a

nd

capit

al no

t sign

ifi ca

nt

CH

No re

lation

10Bu

rgoon

(2

001)

18 O

ECD

coun

tries

1961

-199

4; 19

80-1

994

Total

govt

spen

-din

g ove

r GDP

(1) E

xpor

ts plu

s im

ports

over

GDP;

(2

) Low

-wag

e im

ports

(fro

m no

n-OE

CD co

un-

tries

) ove

r tota

l im

ports

(3) I

nward

and o

utward

FD

I ove

r GDP

; (4)

Po

rtfoli

o fl ow

s ove

r GDP

Nega

tive w

ith (1

). Po

sitive

with

(2)

No re

lation

Unce

rtain

No re

lation

Govt

cons

umpti

on

(inclu

ding h

ealth

an

d edu

catio

n)

over

GDP

Nega

tive w

ith (1

)Ne

gativ

e wi

th (3

) at

10%

SHSH

11Ga

rrett a

nd

Mitc

hell

(200

1)

16 O

ECD

coun

tries

1961

-199

3 wi

th ga

ps

Total

govt

spen

-din

g ove

r GDP

(1) E

xpor

ts +

Impo

rts ov

er GD

P; (2

) Sha

re of

im

ports

from

low-

wage

coun

tries

ov

er tot

al im

ports

(3) F

DI in

fl ows

and

outfl

ows o

ver G

DP; (

4)

Inter

natio

nal fi

nanc

ial

open

ness

index

Nega

tive w

ith (1

)Ne

gativ

e wi

th (4

) (1

0%)

XTGL

S with

pa

nel c

orrec

ted

stand

ard er

rors

SHSH

Govt

cons

umpti

on

over

GDP

Nega

tive w

ith (1

)No

relat

ionSH

No re

lation

12Iv

ersen

(2

002)

15 O

ECD

coun

tries

1961

-199

3To

tal go

vern

ment

spen

ding

Expo

rts pl

us

impo

rts ov

er GD

P

Capit

al ma

rket

libera

liza-

tion a

s in Q

uinn a

nd

Incla

n (19

97)

No re

lation

Posit

ive

relati

on

(10%

)

OLS

No re

lation

CH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)357

13Sa

nz an

d Ve

làzqu

ez

(200

3)

26 O

ECD

coun

tries

1970

-199

7Go

vt ex

pend

itures

in

% of

GDP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

Sum

of in

ward

and

outw

ard st

ock o

f FDI

as

a %

of G

DPNo

relat

ionPo

sitive

OL

SNo

relat

ionCH

14Kr

ogstr

up

(200

3)14

Eur

opea

n co

untri

es19

70-2

001

Prim

ary ex

pend

i-tur

es ov

er GD

P

Chan

ge of

ex-

ports

+ imp

orts

over

GDP (

lagge

d on

e peri

od)

(1) In

dex o

f cap

ital r

e-str

iction

s (Qu

inn, 1

997);

(2)

FDI s

tocks

over

GDP;

(3) co

vered

inter

est pa

rity

differ

entia

ls

Posit

ive w

hen u

sing

(1) a

nd (2

). Ne

gati-

ve w

hen u

sing (

3).

Nega

tive

with

(3) o

nly

FGLS

with

FECH

Unce

rtain

15Isl

am

(200

4)

6 OEC

D co

untri

es

(sepa

rate

time s

eries

an

alysis

)

Vario

us tim

e sp

ans f

or

indivi

dual

coun

tries

Govt

expe

nditu

res

in %

of G

DP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

(1) I

n USA

: neg

ati-

ve re

lation

with

tra

de; (

2) in

Aus

tra-

lia: p

ositi

ve re

lation

wi

th To

T; (3

) Can

a-da

: pos

itive

relat

ion

with

trade

; neg

ative

rel

ation

with

ToT;

(4

) Eng

land:

posit

i-ve

relat

ion w

ith

trade

; (we

ak) n

ega-

tive r

elatio

n with

To

T; (5

) Nor

way:

posit

ive re

lation

wi

th tra

de; n

egati

ve

relati

on w

ith To

T;

(6) S

wede

n: (w

eak)

po

sitive

relat

ion

with

trade

Un

certa

in

16

Mola

na,

Mon

tagna

, Vi

olato

(200

4)

23 O

ECD

coun

tries

1948

-199

8Go

vt co

nsum

ption

in

% of

GDP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

Refu

sal o

f the

un

iversa

l vali

dity o

f the

comp

ensa

tion

hypo

thesis

. Only

Ja

pan,

Norw

ay an

d UK

satis

fy th

e ca

usali

ty tes

t (fro

m tra

de op

enne

ss to

govt

size)

No

relat

ion

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

358

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

17

Brad

y, Be

ckfi e

ld an

d See

le-ib-

Kaise

r (2

004)

17 af

fl uen

t de

mocra

cies

1975

-199

8 (w

ith so

me

missi

ng

years

for

some

co

untri

es)

Govt

expe

nditu

res

as a

% of

GDP

16 m

easu

res of

glob

aliza

tion:

(1) i

nward

FDI;

(2) i

nward

PI; (

3) ne

t inve

stmen

t; (4)

expo

rts;

(5) n

et tra

de; (

6) ne

t glob

aliza

tion;

(7) F

DI

open

ness;

(8) i

nves

tmen

t ope

nnes

s; (9

) trad

e op

enne

ss; (1

0) to

tal gl

obali

zatio

n; (11

) cap

ital

acco

unt li

beral

izatio

n ind

ex; (

12) c

urren

t ac

coun

ts lib

eraliz

ation

inde

x; (1

3) ou

tward

FD

I; (1

4) ou

tward

PI; (

15) i

mpor

ts; (1

6) ne

t mi

grati

on

Nega

tive r

elatio

n with

the

meas

ures

(1),

(7) a

nd (1

3)

Failu

re to

verif

y the

curv

i-lin

ear h

ypoth

esis

(squa

red

terms

)

Unce

rtain

18

Skidm

ore,

Toya

and

Merr

iman

(2

004)

Max

208

coun

tries

1960

-200

0

Chan

ges i

n gov

t co

nsum

ption

(per

capit

a and

over

GDP)

Avera

ge ra

tio of

rea

l im

ports

+exp

orts

to rea

l GDP

(in 5

-ye

ar int

ervals

)

Ne

gativ

e (bo

th pe

r ca

pita a

nd ov

er GD

P)

FE

SH

19Ga

ren an

d Tr

ask

(200

5)

116

coun

tries

1990

Gove

rnme

nt ex

pend

itures

as

a %

of G

DPEx

ports

plus

Im

ports

divid

ed

by G

DP

Posit

ive

CH

Gove

rnme

nt co

nsum

ption

as

a %

of G

DPPo

sitive

CH

20

Hans

on

and

Olof

sdott

er (2

005)

20 O

ECD

coun

tries

(u

nbala

nced

pa

nel)

1970

-200

2An

nual

chan

ge in

go

vt co

nsum

ption

as

a %

of G

DP

Annu

al ch

ange

in

the su

m of

expo

rts

and i

mpor

ts as

a %

of

GDP

Annu

al ch

ange

in th

e su

m of

FDI i

nfl ow

s and

ou

tfl ow

s as %

of G

DP

Nega

tive (

only

with

FGLS

and 2

SLS)

No re

lation

SHNo

relat

ion

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)359

21Dr

eher

(200

5)

30 O

ECD

coun

tries

(u

nbala

nced

pa

nel)

1970

-200

0 (v

ariab

le)To

tal sp

endin

g ov

er GD

P

Inde

x of g

lobali

za-

tion u

sing 2

3 va

riable

s or s

ub-

index

of ec

onom

ic int

egrat

ion. O

n the

tra

de si

de (a

) trad

e in

% of

GDP

; (b)

hid

den i

mpor

t ba

rriers

; (c)

mean

tar

iff ra

te; (d

) tax

es on

inter

nati-

onal

trade

Inde

x of g

lobali

zatio

n us

ing 23

varia

bles o

r sub

-ind

ex of

econ

omic

inte-

grati

on. O

n the

capit

al sid

e (a)

FDI i

n % of

GD

P; (b

) FPI

in %

of

GDP;

(c) i

ncom

e pa

ymen

ts to

forei

gn

natio

nals

in %

of G

DP;

(d) c

apita

l acc

ount

re-str

iction

s

No re

lation

No re

lation

No

relat

ionNo

relat

ion

22Ki

ttel a

nd

Wine

r (2

005)

17 O

ECD

coun

tries

(u

se G

arrett

an

d Mitc

he-

ll, 20

01

datas

et)

1961

-199

3To

tal go

vt sp

en-

ding o

ver G

DP

(a) E

xpor

ts plu

s im

ports

over

GDP;

(b

) Sha

re of

im-

ports

from

low-

wage

coun

tries

ov

er tot

al im

ports

(c) FD

I fl ow

s ove

r GDP

Poole

d OLS

: Pos

iti-

ve w

ith (a

). Ne

gati-

ve w

ith (b

). FE

: No

relati

on w

ith (a

). Po

sitive

with

(b).

BE: N

o rela

tion.

Poole

d OLS

: No

relat

ion.

FE: N

o rel

ation

. BE:

No

relat

ion.

In LE

VELS

: FE_

PW, W

LS:

Posit

ive re

lation

with

(b).

FE, G

M, W

LS, P

CSE:

Ne

gativ

e rela

tion w

ith (a

).

No re

lation

with

(c).

In

FIRS

T DIF

FERE

NCES

: Ne

gativ

e rela

tion w

ith (c

) wh

en us

ing W

LS

Poole

d OLS

, FE

, BE,

PW,

WLS

, GM

, PC

SE (s

tatic

and d

ynam

ic sp

ecifi

catio

ns)

Unce

rtain

Unce

rtain

23Ep

ifani

and G

ancia

(2

005)

150

coun

tries

1950

-200

0; 19

75-2

000

Gene

ral go

vt co

nsum

ption

in

% of

GDP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

Posit

ive

FE

, RE

CH

subs

et of

co

untri

es19

72-1

999

Centr

al go

vt ex

pend

itures

in

% of

GDP

Posit

iveCH

24

Hays

, Eh

rlich

an

d Pein

-ha

rdt

(200

6?)

17 O

ECD

coun

tries

1960

-200

0Go

vt co

nsum

ption

ov

er GD

P

(1) I

mpor

ts; (2

) Im

ports

x De

indu-

strial

izatio

n (as

in

Ivers

en an

d Cu-

sack

); (3

) Exp

orts

Po

sitive

with

(1).

Nega

tive w

ith (2

). Ne

gativ

e with

(3).

LSDV

Unce

rtain

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

360

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

25Li

berat

i (2

007)

15-2

0 cou

n-tri

es de

pen-

ding o

n the

sp

ecifi

cati-

ons

Max

rang

e 19

67-2

003

(unb

alanc

ed

pane

l, with

mi

ssing

ye

ars)

Centr

al go

vt ex

pend

itures

in %

of

GDP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

(1) S

um of

outw

ard an

d inw

ard FD

I; (2

) Sum

of

outw

ard an

d inw

ard FP

I

No re

lation

Nega

tive

The s

ame h

olds f

or es

tima-

tions

in ch

ange

s rath

er tha

n in

levels

No re

lation

SH

Gene

ral go

vt ex

pend

itures

in %

of

GDP

No re

lation

Nega

tive

SHSH

26Ri

ckard

(2

007)

19 de

velo-

ping

coun

tries

1976

-199

6Ch

ange

s in t

otal

centr

al go

vt sp

en-

ding

Chan

ge of

impo

rts

x Lag

ged s

kill

ratio

(skill

ed to

un

skill

ed w

or-ke

rs). U

se bo

th va

riable

s also

in

isolat

ion.

Posit

ive w

ith th

e int

eracti

on te

rm

Nega

tive r

elatio

n with

ch

ange

in im

ports

. Neg

ati-

ve re

lation

with

lagg

ed

skill

ratio

(10%

).EC

M

Unce

rtain

24

deve

loped

co

untri

es19

76-1

997

No re

lation

No

relat

ion

27

Gemm

ell,

Knell

er an

d San

z (2

008)

25 O

ECD

coun

tries

1980

-199

7Ge

neral

govt

expe

nditu

res in

%

of G

DP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

Inwa

rd st

ock o

f FDI

as

a sh

are of

GDP

Posit

ive or

no

relati

on (d

epen

ding

on sp

ecifi

catio

ns)

Posit

ive or

no

relati

on

(dep

endin

g on

spec

ifi ca

-tio

ns)

Unce

rtain

Unce

rtain

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)361

28Be

rtola,

Lo

Prete

(2

008)

Max

137

coun

tries

1980

-200

3Go

vern

ment

share

of

GDP

(PW

T)

Expo

rts pl

us

Impo

rts di

vided

by

GDP

(in l

ogs).

5-

year

avera

ges

Cred

it inf

orma

tion

index

Posit

ive re

lation

No re

lation

(o

ne in

fi ve

regres

sions

)

The p

ositi

ve re

lation

with

tra

de is

wea

ker w

hen

cons

iderin

g only

OEC

D co

untri

es.

Cros

s-sec

tiona

l an

alysis

CHNo

relat

ion

29Be

narro

ch,

Pand

ey

(200

8)

96

coun

tries

1970

-200

0

Gove

rnme

nt co

nsum

ption

as

a % of

GDP

(in

logs

)

Expo

rt plu

s im-

ports

divid

ed by

GD

P (in

logs a

nd

lagge

d)

No re

lation

. Neg

ati-

ve re

lation

whe

n an

intera

ction

term

be

twee

n ope

nnes

s an

d vola

tility

is

intro

duce

d

FE/A

BRe

verse

ca

usali

ty

30Ra

m (2

009)

154

coun

tries

1960

-200

0

Gove

rnme

nt co

nsum

ption

as a

% of

GDP

(in

logs)

Expo

rts pl

us

Impo

rts di

vided

by

GDP

(in l

ogs)

Po

sitive

relat

ion

Robu

st to

OLS a

nd fi x

ed

effec

ts. R

obus

t to an

nual

data

and t

o 5/10

year

avera

-ge

s.

OLS/

FECH

31Ki

mako

va

(200

9)

87

deve

loping

an

d de

velop

ed

coun

tries

1976

-199

9; 19

80-2

003

Gove

rnme

nt co

nsum

ption

as

a % of

GDP

(in

logs

)

Expo

rts pl

us

Impo

rts di

vided

by

GDP

(in l

ogs),

lag

ged f

our-y

ear

segm

ent

Gros

s priv

ate ca

pital

fl ows

in %

of G

DP (i

n log

s), la

gged

four-

year

segm

ent

Posit

ive re

lation

Posit

ive

relati

on

Sign

of tr

ade o

penn

ess n

ot ro

bust

witho

ut tim

e tren

d an

d dum

my va

riable

for

the 90

s

FE/R

E/AB

CHCH

32Be

narro

ch,

Pand

ey

(200

9)

120

coun

tries

1972

-200

0

Gove

rnme

nt co

nsum

ption

as

a % of

GDP

(in

logs

)Ex

ports

plus

Im

ports

divid

ed by

GD

P (in

logs a

nd

lagge

d)

Po

sitive

relat

ion

Posit

ive re

lation

holds

only

for l

ow in

come

coun

tries

wh

en an

inter

actio

n term

is

intro

duce

d

FE

CH

Gove

rnme

nt ex

pend

iture

as

a % of

GDP

CH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

362

TA

BL

E 3

Econ

omic

inte

grat

ion

and

the

com

posi

tion

of p

ublic

spen

ding

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the

relat

ion w

ith tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

1Pa

mpel

and

Will

iamso

n (1

988)

19

50-1

980

Socia

l welf

are

spen

ding o

ver

GDP

Expo

rts pl

us

impo

rts ov

er GD

P (w

ith on

e lag

)

No re

lation

Po

sitive

in on

e out

of fi v

e reg

ressio

nsGL

SNo

relat

ion

2Hi

cks a

nd

Swan

k (1

992)

18 ad

vanc

ed

demo

cracie

s19

60-1

982

Welf

are sp

endin

g ov

er GD

P

Expo

rts pl

us

impo

rts ov

er GD

P (w

ith on

e lag

)

Posti

ve

Robu

st to

welfa

re eff

ort

with

and w

ithou

t part

y int

eracti

ons

GLS +

jack

kni-

fe rep

licati

onCH

3

Hube

r, Ra

gin an

d St

ephe

ns

(199

3)

17 ad

vanc

ed

demo

cracie

s19

56-1

988

Socia

l sec

urity

tra

nsfer

s ove

r GD

PEx

ports

plus

im

ports

over

GDP

Posit

ive

Sign

ifi ca

nt in

two o

ut of

fo

ur re

gres

sions

(sign

ifi ca

nt us

ing G

LS ad

justin

g for

co

untry

-spec

ifi c e

rrors

and

for c

ountr

y-sp

ecifi

c and

tim

e-spe

cifi c

error

s sim

ultan

eous

ly)OL

S/GL

S

CH

Total

socia

l sec

u-rit

y ben

efi ts

over

GDP

No re

lation

No

relat

ion

4Ga

rrett

(199

5)15

OEC

D co

untri

es19

67-1

990

Budg

et de

fi cits

Expo

rts pl

us

impo

rts ov

er GD

P

Mea

sure

of go

vt res

tric-

tions

on cr

oss-b

orde

r fi n

ancia

l fl ow

s.Ne

gativ

eNe

gativ

e

Posit

ive re

lation

of bo

th tra

de an

d cap

ital m

obili

ty int

eracte

d with

left-

labou

r po

wer

SH

SH

5Qu

inn

(199

7)58

-64

coun

tries

1960

-198

9; 19

74-1

989

Govt

welfa

re an

d soc

ial se

curit

y sp

endin

g ove

r GD

P

Trad

e bala

nce

over

GDP

0-4 m

easu

re of

capit

al ac

coun

t reg

ulatio

nPo

sitive

Posit

iveCH

CH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)363

6Ro

drik

(199

7)

19 co

untri

esCr

oss-

secti

on/

1966

-199

1

Socia

l sec

urity

an

d welf

are ov

er GD

P in O

ECD

coun

tries

(1) E

xpor

t plus

im

ports

over

GDP;

(2

) Term

s of t

rade

(vola

tility

)

Capit

al ac

coun

t res

tricti

ons

(ARE

AER)

Nega

tive w

ith (1

) an

d (2)

. Pos

itive

wi

th (1

) and

(2)

intera

cted

No re

lation

Using

pane

l data

: Neg

ative

rel

ation

with

(1) (

10%

). Ro

bust

to the

intro

ducti

on

of in

terac

tion (

1) w

ith

AREA

ER. P

ositi

ve si

gn on

the

inter

actio

n term

Cros

s-sec

tion

analy

sis

and F

E

SHNo

relat

ion

25 co

untri

es

Cros

s-se

ction

Socia

l sec

urity

an

d welf

are ov

er GD

P in c

ountr

ies

with

1985

per

capit

a GDP

> $4

,500

Nega

tive w

ith (1

) an

d (2)

. Pos

itive

wi

th (1

) and

(2)

intera

cted

No re

lation

SHNo

relat

ion

68 co

untri

esSo

cial s

ecur

ity

and w

elfare

over

GDP

Nega

tive w

ith (1

) an

d (2)

. Pos

itive

wi

th (1

) and

(2)

intera

cted

No re

lation

SHNo

relat

ion

7Ro

drik

(199

8)10

3 or 1

25

coun

tries

1985

-198

9; 19

90-1

992

Vario

us ca

tegor

ies

of go

vt sp

endin

g

Expo

rts pl

us

Impo

rts di

vided

by

GDP

(ave

rage

over

the pr

eviou

s de

cade

)

Posit

ive w

ith: (

a) pu

blic s

ervice

s; (b

) de

fense

(10%

); (c)

ed

ucati

on; (

d)

healt

h; (e)

hous

ing;

(f) cu

lture;

(g)

econ

omic

affair

s an

d serv

ices

Resu

lts ar

e rob

ust to

the

inclus

ion of

term

s of t

rade.

A me

asur

e of e

xtern

al ris

k (th

e pro

duct

betw

een

open

ness

and t

erms o

f tra

de) i

s pos

itive

ly rel

ated

to go

vt co

nsum

ption

. So

cial s

ecur

ity an

d welf

are

are po

sitive

ly as

socia

ted to

ex

terna

l risk

CH

8Al

esina

an

d Wac

zi-arg

(199

8)

1980

-198

4Si

x cate

gorie

s of

publi

c spe

nding

ov

er GD

P

Expo

rts pl

us

impo

rts di

vided

by

GDP (

1980

-198

4)

Posit

ive w

ith to

tal

govt

curre

nt ex

pen-

ditur

es (i

nclud

ing

trans

fers a

nd in

te-res

t pay

ments

). All

regres

sions

contr

o-lle

d for

coun

try si

ze

Po

sitive

with

publi

c inv

es-

tmen

ts. A

ll reg

ressio

ns

contr

olled

for c

ountr

y size

.

CH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

364

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

9Ac

hini

and B

rem

(199

8)

22 O

ECD

coun

tries

1960

-199

5So

cial s

ecur

ity

trans

fers a

s a %

of G

DP

Expo

rts pl

us

impo

rts di

vided

by

GDP

Inwa

rd+O

utward

Cap

ital

Tran

sacti

on+I

ntern

ation

al L

egal

Agree

ments

of

Exch

ange

Res

tricti

ons

Leve

ls: Po

sitive

Le

vels:

Po

sitive

Annu

al ch

ange

s: Ne

gativ

e rel

ation

with

trad

e ope

nne-

ss. N

o rela

tion w

ith ca

pital

open

ness.

Sens

itivit

y an

alysis

for i

ndivi

dual

coun

tries

(8 co

untri

es w

ith

nega

tive r

elatio

n; 8 w

ith no

rel

ation

; 6 w

ith po

sitive

rel

ation

)

CH

CH

10He

inema

nn

(199

9)21

OEC

D co

untri

es19

70-1

997

Govt

spen

ding o

n so

cial s

ecur

ity

over

total

expe

ndi-

tures

Expo

rts pl

us

impo

rts ov

er GD

P

Lega

l res

tricti

ons o

n int

ernati

onal

capit

al tra

nsac

tions

No su

ppor

t to th

e hyp

othes

is tha

t ex

pend

itures

shift

away

from

socia

l se

curit

y tow

ards i

nves

tmen

ts fo

r mo

re glo

balis

ed co

untri

es

Clus

ter an

d dis

crimi

nant

analy

sis

No re

lation

Govt

net in

ves-

tmen

t ove

r tota

l ex

pend

itures

Publi

c deb

t ove

r GD

PNo

supp

ort to

the h

ypoth

esis

that

more

open

coun

tries

may

have

co

nstra

ints i

n usin

g pub

lic de

bt.No

relat

ionNo

relat

ionPr

imary

surp

lus

over

GDP

11Iv

ersen

and

Cusa

ck

(200

0)

15

coun

tries

1961

-199

3

Leve

l of a

nd

chan

ge in

gove

rn-

ment

trans

fers (

all

gove

rnme

nt pa

ymen

ts to

the

civili

an ho

useh

old

secto

r)

Expo

rts pl

us

Impo

rts di

vided

by

GDP

An in

dex m

easu

ring t

he

exten

t to w

hich c

apita

l ma

rkets

are l

iberal

ised

(Quin

n and

Incla

n, 19

97)

No re

lation

with

lev

els. P

ositi

ve w

ith

chan

ges

No re

lation

wi

th lev

els.

No re

lation

wi

th ch

ange

s

Unce

rtain

No re

lation

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)365

12Ga

ren

and T

rask

(200

1)

116

coun

tries

1990

Gove

rnme

nt tra

nsfer

s and

su

bsidi

es as

a %

of G

DPEx

ports

plus

Im

ports

divid

ed

by G

DP

?

Gove

rnme

nt ow

nersh

ip rat

ingNe

gativ

eSH

13Bu

rgoon

(2

001)

18 O

ECD

coun

tries

1961

-199

4; 19

80-1

994

Socia

l sec

urity

tra

nsfer

s ove

r GD

P

(1) E

xpor

ts plu

s im

ports

over

GDP;

(2

) Low

-wag

e im

ports

(fro

m no

n-OE

CD co

untri

es)

over

total

impo

rts

(3) I

nward

and o

utward

FD

I ove

r GDP

; (4)

Po

rtfoli

o fl ow

s ove

r GD

P

Nega

tive w

ith (1

)

SH

Socia

l exp

endit

u-res

over

GDP

Nega

tive w

ith (1

)Ch

ange

s: ne

gativ

e rela

tion

with

chan

ges a

nd le

vels

of

(1)

SH

Retir

emen

t cas

h an

d serv

ices o

ver

GDP

Nega

tive w

ith (1

)Ch

ange

s: Ne

gativ

e rela

tion

with

levels

of (1

)SH

Healt

h-ca

re ov

er GD

PNo

relat

ion w

ith (1

) or

(2)

Chan

ges:

No re

lation

No re

lation

Fami

ly ca

sh an

d se

rvice

s ove

r GDP

No re

lation

with

(1)

or (2

)

Chan

ges:

Nega

tive r

elatio

n wi

th lev

els of

(1) a

t 10%

. Po

sitive

relat

ion w

ith (4

) in

levels

No re

lation

Train

ing an

d rel

ocati

on be

nefi t

s ov

er GD

P

No re

lation

with

(1).

Posit

ive re

lation

wi

th (2

) at 1

0%.

Posit

ive

relati

on w

ith

(3) a

nd (4

)

Chan

ges:

No re

lation

with

lev

els an

d cha

nges

of (1

). Po

sitive

relat

ion w

ith

chan

ges a

nd le

vels

of (2

). Po

sitive

relat

ion w

ith (3

) in

levels

.

No re

lation

CH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

366

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

14

Kauf

man

and S

egu-

ra-Ub

iergo

(2

001)

14 L

atin

Ameri

can

coun

tries

1973

-199

7

Chan

ges o

f welf

a-re

spen

ding (

socia

l se

curit

y, he

alth

care,

educ

ation

): (a)

in pe

r cap

ita

1995

dolla

rs; (b

) ov

er GD

P; (c

) as a

sh

are of

centr

al go

vt sp

endin

g (ne

t of

inter

ests)

Expo

rts pl

us

impo

rts ov

erGD

P

Inde

x of c

apita

l acc

ount

libera

lizati

on (M

orley

, M

acha

do an

d Pett

inato,

19

99).

Nega

tive (

both

lagge

d lev

els an

d ch

ange

s) fo

r all d

efi -

nition

s of

welfa

re sp

endin

g.

Posit

ivewi

th we

lfare

spen

ding

defi n

ition

(c)

Using

an in

terac

tion t

erm

(trad

e x ca

pital)

with

one

lag, th

e neg

ative

relat

ion

with

trade

surv

ives f

or

defi n

ition

s (a)

and (

b). I

t em

erges

a po

sitive

relat

ion

of w

elfare

(defi

nition

(c)

with

lagge

d cap

ital. T

he

intera

ction

term

(lag

and

chan

ges)

is ne

gativ

ely

relate

d to w

elfare

(all

defi n

ition

s).PC

SE E

CM

SHUn

certa

in

Chan

ges o

f soc

ial

secu

rity s

pend

ing

(defi

nition

s as

abov

e)

Nega

tive (

both

lagge

d lev

els an

d ch

ange

s) fo

r all d

efi -

nition

s of w

elfare

sp

endin

g.

No re

lation

SHNo

relat

ion.

Chan

ges o

f he

alth+

educ

ation

ex

pend

itures

(d

efi nit

ions a

s ab

ove)

No re

lation

Posit

iveNo

relat

ionCH

15Ga

rrett a

nd

Mitc

hell

(200

1)

16 O

ECD

coun

tries

1961

-199

3 wi

th ga

ps

Socia

l sec

urity

tra

nsfer

s ove

r GD

P

(1) E

xpor

ts +

Impo

rts ov

er GD

P;

(2) S

hare

of im

-po

rts fr

om lo

w-wa

ge co

untri

es

over

total

impo

rts

(3) F

DI in

fl ows

and

outfl

ows o

ver G

DP; (

4)

Inter

natio

nal fi

nanc

ial

open

ness

index

Nega

tive w

ith (1

)No

relat

ion

XTGL

S with

pa

nel c

orrec

ted

stand

ard er

rors

SHNo

relat

ion

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)367

16Sw

ank

(200

2)

15

deve

loped

de

mocra

cies

1965

-199

3 (1

979-

1993

in

some

ca

ses)

Total

govt

expe

nditu

re fo

r soc

ial w

elfare

pr

ogram

s as

a % of

GDP

Real

impo

rts pl

us

real e

xpor

ts as

a %

of re

al GD

P

(1) A

verag

e (lag

ged 1

to

3 yea

rs) of

total

capit

al infl

ows a

nd ou

tfl ow

s as

a % of

GDP

Posit

ivePo

sitive

Posit

ive re

lation

with

ca

pital

mobil

ity in

terac

ted

with

socia

l cor

porat

ism.

Posit

ive re

lation

with

ca

pital

mobil

ity in

terac

ted

with

unive

rsalis

m. N

egati

-ve

relat

ion w

ith ca

pital

mobil

ity in

terac

ted w

ith

libera

lism.

No s

uppo

rt fo

r the

curv

iline

ar hy

pothe

sis

(squa

red te

rm of

capit

al lib

eraliz

ation

)

CHCH

(2) A

verag

e (lag

ged 1

to

3 yea

rs) of

FDI i

nfl ow

s an

d outfl

ows a

s a %

of

GDP

Posit

iveNo

relat

ionCH

No re

lation

(3) A

verag

e (lag

ged 1

to

3 yea

rs) of

borro

wing

on

intern

ation

al ca

pital

mark

ets as

a %

of G

DP

Posit

iveNo

relat

ionCH

No re

lation

(4) I

ndex

(sca

le 0-

4) of

the

abse

nce o

f nati

onal

restri

ction

s on t

he cr

oss-

bord

er pa

ymen

ts an

d rec

eipts

of ca

pital

Posit

ivePo

sitive

CHCH

(5) A

bsolu

te va

lue of

co

vered

inter

est r

ate

parit

iesPo

sitive

No re

lation

CHNo

relat

ion

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

368

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

Swan

k (2

002)

15 de

velo-

ped d

emo-

cracie

s

1965

-199

3 (1

979-

1993

in

some

ca

ses)

Cash

paym

ents

for

old ag

e, dis

abili

ty,

injur

y, sic

knes

s, un

emplo

ymen

t an

d soc

ial as

si-sta

nce a

s a %

of

GDP

Real

impo

rts pl

us

real e

xpor

ts as

a %

of

real

GDP

(1) A

verag

e (lag

ged 1

to

3 yea

rs) of

total

capit

al infl

ows a

nd ou

tfl ow

s as

a % of

GDP

(A) U

niver

sal

welfa

re sta

tes:

No re

lation

(A) U

niver-

sal w

elfar

e sta

tes: p

ositi

-ve

No re

lation

CH

(2) A

verag

e (lag

ged 1

to

3 yea

rs) of

FDI i

nfl ow

s an

d outfl

ows a

s a %

of

GDP

(A) U

niver

sal

welfa

re sta

tes: N

o rel

ation

; B) L

ibera

l we

lfare

states

: No

relati

on.

(A) U

niver-

sal w

elfar

e sta

tes: p

ositi

-ve

; (B)

Li

bera

l we

lfare

states

: Ne

gativ

e

No re

lation

SH

(3) A

verag

e (lag

ged 1

to

3 yea

rs) of

borro

wing

on

intern

ation

al ca

pital

mark

ets as

a %

of G

DP

(A) A

ll nati

ons:

No

relati

on; B

) Con

ser-

vativ

e welf

are

states

: No r

elatio

n; (C

) Libe

ral w

elfar

e sta

tes: N

o rela

tion

(A) A

ll na

tions

: Po

sitive

; (B)

Co

nser

vativ

e we

lfare

states

: Po

sitive

; (C)

Li

bera

l we

lfare

states

: Ne

gativ

e.

No re

lation

SH

(4) I

ndex

(sca

le 0-

4) of

the

abse

nce o

f nati

onal

restri

ction

s on t

he cr

oss-

bord

er pa

ymen

ts an

d rec

eipts

of ca

pital

(A) A

ll nati

ons:

No re

lation

(A) A

ll na

tions

: Po

sitive

No re

lation

CH

(5) A

bsolu

te va

lue of

co

vered

inter

est r

ate

parit

ies

(A) A

ll nati

ons:

No re

lation

(A) A

ll na

tions

: Ne

gativ

eNo

relat

ionSH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)369

Swan

k (2

002)

15 de

velo-

ped d

emo-

cracie

s

1965

-199

3 (1

979-

1993

in

some

ca

ses)

% of

avera

ge

prod

uctio

n wo

rker’

s gro

ss inc

ome r

eplac

ed

by un

emplo

ymen

t co

mpen

satio

n, un

emplo

ymen

t as

sistan

ce an

d va

rious

entit

led

socia

l welf

are

durin

g fi rs

t yea

r of

unem

ploym

ent

Real

impo

rts pl

us

real e

xpor

ts as

a %

of

real

GDP

(1) A

verag

e (lag

ged 1

to

3 yea

rs) of

total

capit

al infl

ows a

nd ou

tfl ow

s as

a % of

GDP

No re

lation

No re

lation

Posit

ive re

lation

with

ca

pital

mobil

ity in

terac

ted

with

socia

l cor

porat

ism.

Posit

ive re

lation

with

ca

pital

mobil

ity in

terac

ted

with

unive

rsalis

m. N

egati

-ve

relat

ion w

ith ca

pital

mobil

ity in

terac

ted w

ith

libera

lism

No re

lation

No re

lation

(2) A

verag

e (lag

ged 1

to

3 yea

rs) of

FDI i

nfl ow

s an

d outfl

ows a

s a %

of

GDP

(A) L

ibera

l welf

are

states

: No r

elatio

n

(A) L

iberal

we

lfare

states

: Neg

a-tiv

e

No re

lation

SH

(3) A

verag

e (lag

ged 1

to

3 yea

rs) of

borro

wing

on

intern

ation

al ca

pital

mark

ets as

a %

of G

DP

(A) L

ibera

l welf

are

states

: No r

elatio

n

(A) L

ibera

l we

lfare

states

: Neg

a-tiv

e

No re

lation

SH

(4) I

ndex

(sca

le 0-

4) of

the

abse

nce o

f nati

onal

restri

ction

s on t

he cr

oss-

bord

er pa

ymen

ts an

d rec

eipts

of ca

pital

(A) L

ibera

l welf

are

states

: No r

elatio

n

(A) L

ibera

l we

lfare

states

: Neg

a-tiv

e

No re

lation

SH

(5) A

bsolu

te va

lue of

co

vered

inter

est r

ate

parit

ies

(A) A

ll nati

ons:

No re

lation

Nega

tive

with

capit

al mo

bility

int

eracte

d wi

th so

cial

corp

orati

sm.

Nega

tive

with

capit

al mo

bility

int

eracte

d wi

th un

iver-

salis

m.

Posit

ive w

ith

capit

al mo

bi-lit

y inte

racted

wi

th lib

erali-

sm

No re

lation

SH (C

H in

one c

ase)

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

370

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

Swan

k (2

002)

15 de

velo-

ped d

emo-

cracie

s

1965

-199

3 (1

979-

1993

in

some

ca

ses)

Govt

spen

ding o

n he

alth p

rogr

ams a

s a %

of G

DP

Real

impo

rts pl

us

real e

xpor

ts as

a %

of

real

GDP

(1) A

verag

e (lag

ged 1

to

3 yea

rs) of

total

capit

al infl

ows a

nd ou

tfl ow

s as

a % of

GDP

(A) C

onse

rvati

ve

welfa

re sta

tes:

No re

lation

(A) C

onse

r-va

tive w

elfa-

re sta

tes:

Posit

ive

No re

lation

CH

(2) A

verag

e (lag

ged 1

to

3 yea

rs) of

FDI i

nfl ow

s an

d outfl

ows a

s a %

of

GDP

(A) C

onse

rvati

ve

welfa

re sta

tes:

No re

lation

(A) C

onse

r-va

tive w

elfa-

re sta

tes:

Posit

ive

No re

lation

CH

(3) A

verag

e (lag

ged 1

to

3 yea

rs) of

borro

wing

on

intern

ation

al ca

pital

mark

ets as

a %

of G

DP

(A) L

ibera

l welf

are

states

: No r

elatio

n

(A) L

ibera

l we

lfare

states

: Neg

a-tiv

e

No re

lation

SH

(4) I

ndex

(sca

le 0-

4) of

the

abse

nce o

f nati

onal

restri

ction

s on t

he cr

oss-

bord

er pa

ymen

ts an

d rec

eipts

of ca

pital

(A) A

ll nati

ons:

Posit

ive

(A) A

ll na

tions

: No

relati

onCH

No re

lation

(5) A

bsolu

te va

lue of

co

vered

inter

est r

ate

parit

ies

(A) A

ll nati

ons:

Posit

ive

(A) A

ll na

tions

: Po

sitive

CHCH

17Br

etsch

ger

and H

ettich

(2

002)

13 O

ECD

coun

tries

1967

-199

6So

cial e

xpen

ditu-

res as

a %

of G

DP

Expo

rts pl

us

Impo

rts di

vided

by G

DP

Posit

ive

PCSE

, FE

CH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)371

18Iv

ersen

(2

002)

15 O

ECD

coun

tries

1961

-199

3

Gove

rnme

nt tra

nsfer

sEx

ports

plus

im

ports

over

GDP

Capit

al ma

rket

libera

lizati

on as

inQu

inn an

d Inc

lan(1

997)

No re

lation

No re

lation

OLS

No re

lation

No re

lation

Gove

rnme

nt co

nsum

ption

No re

lation

No re

lation

No re

lation

No re

lation

Unem

ploym

ent

replac

emen

t rate

sNe

gativ

e rela

tion

No re

lation

The n

egati

ve re

lation

with

tra

de ho

lds fo

r both

leve

ls an

d cha

nges

SHNo

relat

ion

19Hu

ber a

nd

Step

hens

(2

003)

29 L

atin

Ameri

can

and C

ari-

bbea

n co

untri

es

1970

-200

0

Healt

h+ed

ucati

on

expe

nditu

res ov

er GD

P

(1) N

et infl

ows o

ver

GDP;

(2) I

ndex

for

capit

al ac

coun

t libe

rali-

zatio

n

n.a.

n.a.

n.a.

n.a.

n.a.

Socia

l sec

urity

an

d welf

are ex

-pe

nditu

res ov

er GD

P

n.a.

n.a.

n.a.

n.a.

n.a.

20Sa

nz an

d Ve

làzqu

ez

(200

3)

26 O

ECD

coun

tries

1970

-199

7

Vario

us ca

tegor

ies

of ex

pend

itures

in

share

of to

tal go

vt ex

pend

itures

Expo

rts pl

us

Impo

rts di

vided

by

GDP

Sum

of in

ward

and

outw

ard st

ock o

f FDI

as

a %

of G

DPNo

relat

ion

Posit

ive w

ith:

(a) pu

blic

servic

es; (b

) he

alth.

Nega

-tiv

e rela

tion

with

FDI o

f: (a)

defen

ce;

(b) ed

ucati

on;

(c) ho

using

; (d)

trans

port

& co

mm.

Unce

rtain

Unce

rtain

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

372

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s mea

-su

reSi

gn of

the

relat

ion w

ith tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain es

timat

i-on

meth

ods

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

21Ko

rpi a

nd

Palm

e (2

003)

18

coun

tries

1975

-199

5

Cuts

in at

least

one o

f thr

ee

prog

rams:

sickn

e-ss,

wor

k acc

ident

and u

nem-

ploym

ent

insur

ance

Expo

rt/im

port

share

(1) C

apita

l acc

ount

dereg

ulatio

n; (2

) Cur

rent a

ccou

nt de

regula

tion

Posit

ive. T

he re

lati-

on di

sapp

ears

when

co

nside

ring o

nly

Euro

pean

coun

tries

No re

lation

The r

esult

is ro

bust

to the

inc

lusion

of th

e left

cabin

et va

riable

Expo

nenti

al mo

del w

ith

cons

tant h

azard

rat

e

CHNo

relat

ion

22Di

on

(200

4)

49

midd

le-inc

ome

coun

tries

1980

-199

9

Educ

ation

spen

-din

g ove

r GDP

Expo

rts pl

us

impo

rts ov

er GD

P

(1) G

ross

priva

te ca

pital

fl ows

over

GDP;

(2) N

et FD

I ove

rGD

P

Posit

ive. I

t disa

ppe-

ars w

hen u

sing

spen

ding c

hang

es

Weak

ly po

sitive

with

(1)

. No

relati

on w

ith

(2). T

he

relati

on w

ith

(1) tu

rns

nega

tive w

hen

using

spen

-din

g cha

nges

(still

weak

)

Prais

-Wins

ten,

FE

CHUn

certa

in

Healt

h spe

nding

ov

er GD

P

No re

lation

wi

th eit

her (

1) or

(2). W

eakly

po

sitive

whe

n us

ing sp

en-

ding c

hang

es

CHUn

certa

in

Socia

l sec

urity

an

d welf

are sp

en-

ding o

ver G

DP

No re

lation

. Wea

kly

nega

tive w

hen u

sing

spen

ding c

hang

es

Weak

ly po

siti-

ve w

ith (1

) and

(2)

. Disa

ppear

wh

en us

ing

spend

ing

chan

ges

Unce

rtain

Unce

rtain

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)373

23

Brad

y, Be

ckfi e

ld an

d See

le-ib-

Kaise

r (2

004)

17 af

fl uen

t de

mocra

cies

1975

-199

8 (w

ith so

me

missi

ng

years

for

some

coun

-tri

es)

Socia

l sec

urity

tra

nsfer

s as a

% of

GDP

16 m

easu

res of

glob

aliza

tion:

(1) i

nward

FDI;

(2) i

nward

PI; (

3) ne

t inve

stmen

t; (4)

expo

rts;

(5) n

et tra

de; (

6) ne

t glob

aliza

tion;

(7) F

DI

open

ness;

(8) i

nves

tmen

t ope

nnes

s; (9

) trad

e op

enne

ss; (1

0) to

tal gl

obali

zatio

n; (11

) cap

ital

acco

unt li

beral

izatio

n ind

ex; (

12) c

urren

t ac

coun

ts lib

eraliz

ation

inde

x; (1

3) ou

tward

FD

I; (1

4) ou

tward

PI; (

15) i

mpor

ts; 16

) net

migr

ation

No re

lation

Nega

tive

with

meas

u-res

(1),

(7)

and (

13).

Posit

ive w

ith

meas

ure (

11)

Curv

iline

ar hy

pothe

sis

verifi

ed on

ly wi

th res

pect

to me

asur

e (16

)

No re

lation

Unce

rtain

24

Skidm

ore,

Toya

and

Merr

iman

(2

004)

Max

208

coun

tries

1960

-200

0

Chan

ges i

n gov

t inv

estm

ents

(per

capit

a and

over

GDP)

Avera

ge ra

tio

of re

al im

ports

+exp

orts

to rea

l GDP

(in 5

-ye

ar int

ervals

)

No re

lation

FE

No re

lation

Ch

ange

s in g

ovt

educ

ation

expe

n-dit

ures

(per

capit

a an

d ove

r GDP

)

No re

lation

No re

lation

25

Hans

on

and O

lofs-

dotte

r (2

005)

20 O

ECD

coun

tries

(u

nbala

nced

pa

nel)

1970

-200

2

Annu

al ch

ange

in

govt

trans

fers a

s a

% of

GDP

Annu

al ch

ange

in

the su

m of

expo

rts

and i

mpor

ts as

a %

of

GDP

Annu

al ch

ange

in th

e su

m of

FDI i

nfl ow

s and

ou

tfl ow

s as %

of G

DP

No re

lation

No re

lation

No re

lation

No re

lation

Annu

al ch

ange

in

govt

fi xed

inve

st-me

nts as

a %

of

GDP

Nega

tive (

only

with

FGLS

)No

relat

ionSH

No re

lation

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

374

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s mea

-su

reSi

gn of

the

relat

ion w

ith tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain es

timat

i-on

meth

ods

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

26M

ares

(200

5)

Mor

e tha

n 10

0 co

untri

es?

Aggr

egate

socia

l po

licy p

rotec

tion

index

(old-

age,

sickn

ess,

disab

ili-

ty, un

emplo

ymen

t ins

uran

ce) o

n a 0-

10 sc

ale fo

r eac

h ite

m

(1) E

xpor

t plus

im

ports

over

GDP;

(2

) Vari

abili

ty in

terms

of tr

ade

(exter

nal r

isk)

No re

lation

with

(1).

Nega

tive w

ith (2

).

A po

sitive

relat

ion em

erges

wh

en (2

) is i

nterac

ted w

ith

expo

rt co

ncen

tratio

n. Th

e res

ult is

basic

ally r

obus

t to

the in

trodu

ction

of po

litica

l co

ntrol

varia

bles

?

Unce

rtain

Unem

ploym

ent

insur

ance

inde

x (0

-10 s

cale)

Wea

kly ne

gativ

e wi

th (2

)

Only

when

a ter

m int

erac-

ting e

xtern

al ris

k, ex

port

conc

entra

tion a

nd st

ate

capa

city i

s intr

oduc

ed

SH

27Dr

eher

(200

5)

30 O

ECD

coun

tries

(u

nbala

nced

pa

nel)

1970

-200

0 (v

ariab

le)So

cial s

pend

ing

over

GDP

Inde

x of g

lobali

za-

tion u

sing 2

3 va

riable

s or s

ub-

index

of ec

onom

ic int

egrat

ion. O

n the

tra

de si

de (a

) trad

e in

% of

GDP

; (b

) hidd

en im

port

barri

ers; (

c) me

an

tariff

rate;

d) ta

xes

on in

terna

tiona

l tra

de

Inde

x of g

lobali

zatio

n us

ing 23

varia

bles o

r su

b-ind

ex of

econ

omic

integ

ration

. On t

he

capit

al sid

e (a)

FDI i

n %

of G

DP; (

b) FP

I in %

of

GDP;

(c) i

ncom

e pa

ymen

tsto f

oreig

n na

tiona

ls in

% of

GDP

; (d

) cap

ital a

ccou

nt res

tricti

ons.

No re

lation

No re

lation

No re

lation

No re

lation

28Gi

zelis

(2

005)

14 E

urop

ean

coun

tries

1983

-198

8W

elfare

spen

ding

over

GDP

Expo

rts+I

mpor

ts ov

er GD

PFD

I (?)

Posit

iveNo

relat

ion

3SLS

CHNo

relat

ion

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)375

29Hi

cks a

nd

Zorn

(2

005)

18 O

ECD

coun

tries

1978

-199

4

Retre

nchm

ent in

rea

l per

capit

a so

cial s

pend

ingEx

ports

+Imp

orts

over

GDP

(a) R

atio o

f outw

ard FD

I inv

estm

ents

over

GDP;

(b

) Quin

n-ind

ex of

fi n

ancia

l libe

raliza

tion

No re

lation

No re

lation

. Po

sitive

with

the

Quin

n ind

ex (m

eans

hig

her l

ibera-

lizati

on lo

wer

retren

-ch

ment)

Resu

lts do

not c

hang

e wh

en in

cludin

g con

trol

varia

bles o

f fi sc

al na

ture

Cox m

odel

No re

lation

No re

lation

Socia

l spe

nding

ov

er GD

PNo

relat

ion

No re

lation

wi

th FD

I. Po

sitive

with

the

Quin

n ind

ex

The p

ositi

ve re

lation

disa

-pp

ears

when

intro

ducin

g a

lagge

d dep

ende

nt va

riable

GLS w

ith

AR(1

)No

relat

ionUn

certa

in

30

Dreh

er,

Stur

m an

d Ur

spru

ng

(200

5) -

publi

shed

in

Publi

c Ch

oice

(200

8)

WDI

datas

et - 6

0 co

untri

es19

71-2

001

Four

expe

nditu

re ca

tegori

es in

% of

GDP:

(1) ca

pital

(CP)

; (2) g

oods

and

servic

es (G

S); (3

) Int

erest

paym

ents

(IP); (

4) Su

bsidi

es an

d curr

ent tr

an-

sfers

(ST)

Expo

rts pl

us

Impo

rts di

vided

by G

DP

Capit

al op

enne

ss: (1

) Su

m of

FDI i

nfl ow

s and

ou

tfl ow

s in %

of G

DP;

(2) A

0-1 i

ndex

of re

-str

iction

s on t

he ca

pital

acco

unt (

IMF)

No re

lation

No re

lation

No re

lation

No re

lation

WDI

datas

et - 1

8 OEC

D co

untri

es19

71-2

001

No re

lation

No re

lation

No re

lation

No re

lation

OECD

da

taset

- 10

coun

tries

1991

-200

1

Ten e

xpen

diture

cat

egori

es: pu

blic

servic

es; de

fence;

pu

blic o

rder; e

cono

-mi

c affa

irs; e

nvi-

ronme

nt; ho

using

; he

alth;

recrea

tion;

educ

ation

; soc

ial

No re

lation

No re

lation

No re

lation

No re

lation

31Ep

ifani

and

Ganc

ia (2

005)

subs

et of

co

untri

es19

72-1

999

Centr

al go

vt tra

nsfer

s for

socia

l se

curit

y and

we

lfare

in %

of

GDP

Expo

rts pl

us

Impo

rts di

vided

by

GDP

Ne

gativ

e

SH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

376

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

32

Aveli

no,

Brow

n and

Hu

nter

(200

5),

prev

ious

versi

on in

20

01

19 L

atin

Ameri

can

coun

tries

1980

-199

9

Socia

l spe

nding

ov

er GD

P

Expo

rts pl

us

impo

rts ov

er GD

P (al

so PP

P-ba

sed)

Inter

natio

nal fi

nanc

ial

open

ness

(qua

ntitat

ive

meas

ure o

f the

regu

lation

of

inter

natio

nal fi

nanc

ial

trans

actio

ns, b

oth in

cu

rrent

and c

apita

l ac

coun

ts)

Nega

tive (

robu

st to

the us

e of P

rais-

Wins

ten m

ethod

). Po

sitive

whe

n usin

g a P

PP-b

ased

mea

su-

re (th

e pos

itive

rel

ation

also

exten

ds

to ch

ange

s of s

ocial

sp

endin

g)

Nega

tive

with

an

intera

ction

ter

m fi n

anci-

al op

enne

ss an

d dem

o-cr

acy

Inter

actio

n term

trad

e and

de

mocr

acy n

ot sig

nifi ca

nt.

PCSE

Unce

rtain

SH

Educ

ation

expe

n-dit

ures

over

GDP

Posit

ive w

ith a

PPP-

base

d mea

sure

of tr

ade (

robu

st to

the us

e of P

rais-

Wins

ten m

ethod

)

No re

lation

CHNo

relat

ion

Healt

h exp

endit

u-res

over

GDP

No re

lation

No re

lation

No re

lation

No re

lation

Socia

l sec

urity

ex

pend

itures

over

GDP

Posit

iveNo

relat

ionCH

No re

lation

33Bu

rgoon

(2

006)

21 in

dustr

ia-liz

ed co

un-

tries

(C

ompa

rati-

ve M

anife

-sto

Proje

ct)

1960

-199

8Ne

t welf

are su

p-po

rt

Expo

rts pl

us

impo

rts ov

er GD

P

(1) S

um of

FDI i

nfl ow

s an

d outfl

ows o

ver G

DP;

(2) S

um of

inwa

rd an

d ou

tward

FDI s

tocks

over

GDP;

(3) I

ndex

of ca

pital

open

ness

(rang

e 1-1

4)

No re

lation

Posit

ive

relati

on w

ith

(1) a

nd (3

) (co

ntroll

ing

for t

heir

intera

ction

wi

th lef

t ma

nifes

tos)

Posit

ive (1

0%) w

ith tr

ade

intera

cted w

ith le

ft pa

rties

.

No re

lation

CH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)377

34

Hays

, Eh

rlich

and

Peinh

ardt

(200

6?)

17 O

ECD

coun

tries

1960

-200

0

Socia

l ben

efi ts

over

GDP

(1) I

mpor

ts; (2

) Im

ports

x De

indu-

strial

izatio

n (as

in

Ivers

en an

d Cu-

sack

); (3

) Exp

orts

Posit

ive re

lation

wi

th (1

). Ne

gativ

e rel

ation

with

(2).

Nega

tive r

elatio

n wi

th (3

)

LSDV

Unce

rtain

Ne

t rep

lacem

ent

rate (

spen

ding o

n un

emplo

ymen

t ins

uran

ce pe

r un

emplo

yed o

ver

the av

erage

leve

l of

comp

ensa

tion

per e

mploy

ee)

Posit

ive re

lation

wi

th (1

). Ne

gativ

e rel

ation

with

(2)

Unce

rtain

35Ad

am an

d Ka

mmas

(2

007)

17 O

ECD

coun

tries

1970

-199

7

Welf

are sp

endin

g ov

er GD

P

Expo

rts pl

us

impo

rts ov

er GD

P, co

rrecte

d by

coun

try si

ze

Posit

ive

No re

lation

(afte

r con

trol-

ling f

or te

rms-o

f-trad

e)

CH

Non-

welfa

re sp

endin

g ove

r GD

PNo

relat

ion

No re

lation

Tran

sfers

expe

ndi-

tures

over

GDP

Posit

iveNo

relat

ion (a

fter c

ontro

-lli

ng fo

r term

s-of-t

rade)

CH

Non-

trans

fers

expe

nditu

res ov

er GD

PNo

relat

ion

No re

lation

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

378

Auth

or(s)

Coun

tries

Perio

dDe

pend

ent

varia

ble

Trad

e ope

nnes

s m

easu

reCa

pita

l ope

nnes

s m

easu

reSi

gn of

the r

elatio

n wi

th tr

ade

integ

ratio

n

Sign

of th

e re

lation

with

ca

pita

l in

tegra

tion

Addi

tiona

l issu

esM

ain

estim

ation

m

ethod

s

Trad

e in

tegra

tion

main

ly co

nsist

ent

with

…

Capi

tal

integ

ratio

n m

ainly

cons

isten

t wi

th …

36

Gemm

ell,

Knell

er an

d San

z (2

008)

25 O

ECD

coun

tries

1980

-199

7

Nine

expe

nditu

res

categ

ories

(as a

sh

are o

f total

ex

pend

itures

): (1

) so

cial s

ecur

ity; (

2)

educ

ation

; (3)

he

alth;

(4) t

ran-

spor

t and

comm

u-nic

ation

s; (5

) de

fence

; (6)

publi

c se

rvice

s; (7

) ho

using

; (8)

ec

onom

ic se

rvi-

ces;

(9) c

ultur

al aff

airs

Expo

rts pl

us

Impo

rts di

vided

by

GDP

Inwa

rd st

ock o

f FDI

as

a sh

are of

GDP

No re

lation

Leve

ls:

Posit

ive w

ith

(1),

(3)

(10%

) an

d (6

). Ne

gativ

e wi

th (2

) (1

0%),

(4),

(7) a

nd (8

). Sh

ort-r

un:

posit

ive w

ith

(3) (

10%

) an

d (5

). Ne

gativ

e wi

th (4

) and

(8

).

Leve

ls (in

cludin

g tra

de

open

ness

and F

DI in

ward

sto

ck):

posit

ive w

ith (1

) (1

0%) a

nd (6

). Ne

gativ

e wi

th (4

), (7

) and

(8)

(10%

).

No

relat

ionUn

certa

in

37Jia

ng

(200

8)

23

trans

ition

al ec

onom

ies19

90-2

005

Govt

spen

ding o

n we

lfare

and s

ocial

pr

otecti

on ov

er tot

al ex

pend

itures

Value

of cr

oss-

bord

er fl o

w of

go

ods a

nd se

rvice

s ov

er GD

P

(1) F

DI (b

oth in

and o

ut)

over

GDP;

(2) n

et IM

F co

nces

siona

l fi na

ncial

fl o

ws ov

er GD

P; (3

) net

IMF n

on-co

nces

siona

l fi n

ancia

l fl ow

s ove

r GD

P; (4

) othe

r fi na

ncial

fl o

ws (n

ot rel

ated t

o IM

F); (

5) pe

r cap

ita

forei

gn ai

d; (6

) exte

rnal

debt

No re

lation

Nega

tive

with

(2).

Posit

ive w

ith

(3).

Nega

tive

with

(6).

No

relati

on w

ith

meas

ure (

1).

Ro

bust

regres

sion

No re

lation

Unce

rtain

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)379

38Be

rtola,

Lo

Prete

(2

008)

Max

137

coun

tries

1980

-200

3So

cial p

olicy

ex

pend

itures

over

GDP (

in log

s)

Expo

rts pl

us

Impo

rts di

vided

by

GDP (

in log

s). 5-

year

avera

ges

Loan

-to-v

alue r

atio

(LTV

)Po

sitive

relat

ionNo

relat

ion

(one

in fi v

e reg

ressio

ns)

The p

ositi

ve re

lation

with

tra

de is

wea

ker (

one i

n fi ve

reg

ressio

ns) w

hen i

nclu-

ding L

TV. A

posit

ive re

lati-

on w

ith tr

ade a

nd LT

V em

erges

in a

pane

l ana

lysis.

Ro

bust

to OL

S, FE

and R

E

Cros

s-sec

tiona

l an

alysis

. Pan

el an

alysis

with

OL

S, FE

and

RE

CHNo

relat

ion

39Be

narro

ch,

Pand

ey

(200

9)

120

coun

tries

1972

-200

0

Defen

ce

Expo

rts pl

us

Impo

rts di

vided

by

GDP (

in log

s and

lag

ged)

No re

lation

FE

No re

lation

Educ

ation

No re

lation

No re

lation

Healt

hNo

relat

ionNo

relat

ionSo

cial S

ecur

ityPo

sitive

relat

ionCH

Hous

ingNo

relat

ionNo

relat

ionEc

onom

ic se

rvice

sPo

sitive

relat

ionCH

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)

380Achini, C. and Brem, S., 1998. The Impact of Globalisation on the Welfare State

– A quantitative analysis of 22 OECD countries. Paper prepared for the ECPR Joint Sessions, University of Warwick.

Adam A. and Kammas, P., 2007. “Tax Policies in a Globalized World: Is It Poli-tics After All?”. Public Choice, 127, 321-341.

Alesina, A. and Wacziarg, R., 1998. “Openness, Country Size and Government”. Journal of Public Economics, 69, 305-321.

Avelino, G., Brown, D. S. and Hunter, W., 2005. “The Effects of Capital Mobi-lity, Trade Openness, and Democracy on Social Spending in Latin America, 1980-1999”. American Journal of Political Science, 49, 625-641.

Benarroch, M. and Pandey, M., 2008. “Trade Openness and Government Size”. Economics Letters, 101, 157-159.

Benarroch, M. and Pandey, M., 2009. On the Relationship Between Trade Open-ness and Government Size: Does Disaggregating Government Expenditure Matters? Paper prepared for the CEA Meetings in Toronto.

Bertola, G. and Lo Prete, A., 2008. “Openness, Financial Markets, and Policies: Cross-Country and Dynamic Patterns”. CEPR Discussion Paper, No. 7048.

Brady, D., Beckfi eld, J. and Seeleib-Kaiser, M., 2004. “Economic Globalization and the Welfare State in Affl uent Democracies, 1975-1998”. ZeS Arbeitspa-pier, No. 12/2004.

Bretschger, L. and Hettich, F., 2002. “Globalisation, Capital Mobility and Tax Competition: Theory and Evidence for OECD Countries”. European Journal of Political Economy, 18, 695-716.

Bucovetsky, S. and Wilson, J., 1991. “Tax Competition with Two Tax Instru-ments”. Regional Science and Urban Economics, 21, 333-350.

Burgoon, B., 2001. “Globalization and Welfare Compensation: Disentangling the Ties that Bind”. International Organization, 55, 509-551.

Burgoon, B., 2006. Globalization is What Parties Make of It: Welfare and Protec-tionism in Party Platforms. Paper presented at the annual meeting of the Ame-rican Political Science Association, Marriott, Loews Philadelphia, and the Pennsylvania Convention Center, Philadelphia, PA.

Cameron, D., 1978. “The Expansion of the Public Economy: a Comparative Analysis”. American Political Science Review, 72, 1243-1261.

Cusack, T., 2007. “Partisan Politics and Public Finance: Changes in Public Spen-ding in the Industrialized Democracies, 1955-1989”. Public Choice, 91, 375-395.

Dion, M., 2004. Globalization, Political Institutions, and Social Spending Chan-ge in Middle Income Countries, 1980-1999. Paper prepared for the 2004 An-nual American Political Science Association Meeting, Chicago.

Dreher, A. and Gaston, N., 2008. “Has Globalization Increased Inequality?”. Review of International Economics, 16, 516-536.

LITERATURE

FRAN

CESCA GA

STALD

I, PAO

LO LIBERATI:ECO

NO

MIC IN

TEGRATIO

N AN

D GO

VERN

MEN

T SIZE: A REVIEW O

F THE EM

PIRICAL LITERATU

REFIN

AN

CIA

L THEO

RY AN

D PR

AC

TICE

35 (3) 327-384 (2011)381Dreher, A., 2006. “The Infl uence of Globalization on Taxes and Social Policy –

An Empirical Analysis for OECD Countries”. European Journal of Political Economy, 22,179-201.

Dreher, A., Sturm, J. and Ursprung, H., 2008. “The Impact of Globalization on the Composition of Government Expenditures. Evidence from Panel Data”. Public Choice, 134, 263-292.

Epifani, P. and Garcia, G., 2007. “On Globalization and the Growth of Govern-ments”. CEPR Discussion Paper, No. 6065.

Garen, J. and Trask, K., 2005. “Do More Open Economies Have Bigger Gover-nments? Another Look”. Journal of Development Economics, 77, 533-551.

Garrett, G. and Mitchell, D., 1999. Globalization and the Welfare State. Yale University: Department of Political Science.

Garrett, G. and Mitchell, D., 2001. “Globalization, government spending and taxation in the OECD”. European Journal of Political Research, 39, 145-177.

Garrett, G., 1995. “Capital Mobility, Trade, and the Domestic Politics of Econo-mic Policy”. International Organization, 49, 657-687.

Garrett, G., 2001. “Globalization and Government Spending Around the World”. Studies in Comparative International Development, 35, 3-29.

Gastaldi, F., 2008. Globalisation, Capital Mobility and Convergence of Effective Tax Rates. Paper prepared for the EAEPE 2008 Conference.

Gemmell, N., Kneller, R. and Sanz, I., 2008. “Foreign investment, international trade and the size and structure of public expenditures”. European Journal of Political Economy, 24, 151-171.

Genschel, P., 2004. “Globalization and the welfare state: a retrospective”. Jour-nal of European Public Policy, 11, 613-636.

Gizelis, T., 2005. “Globalization, Integration, and the European Welfare State”. International Interactions, 31, 139-162.

Gordon, R. H., 1998. “Can Capital Income Taxes Survive in Open Economies?”. Journal of Finance, 47, 1159-1180.

Grunberg, I., 1998. “Double Jeopardy: Globalization, Liberalization and the Fi-scal Squeeze”. World Development, 26, 591-605.

Hallerberg, M. and Basinger, S., 1998. “Internationalization and Changes in Tax Policy in OECD Countries: the Importance of Domestic Veto Players”. Com-parative Political Studies, 31, 321-353.

Hansson, A. and Olofsdotter, K., 2008. Comparative Political Studies, 41: 1001-1027.

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