Research Seminar Series - Glenn Rayp

Professor of International Economics, Ghent University

Research Fellow, UNU-CRIS

Globalization, Regionalization and the Compensation Hypothesis

Rodrik (1998) pointed at the counter-intuitive positive correlation between trade openness and the government size, which he explained by the compensation hypothesis: increased exposure to external risk of trade liberalization for which citizens demand compensation by increased (redistributive) government intervention.

Using the unique features of the RIKS database, we extend the validation of the compensation hypothesis in two ways. First, we re-estimate the effect of trade openness on government size for an enlarged set of countries and time span. Second, we examine whether the structure of openness, in particular, regional integration versus multilateralism, affects the impact on government size. We find a rather striking time pattern in our results: for the pre-WTO (1972-1995) period, the evidence we find is in line with Rodrik’s compensation hypothesis. Yet for the more recent period, the impact of trade openness on government size becomes insignificant and even significantly negative, rejecting the compensation hypothesis and supporting the efficiency hypothesis. Distinguishing between intra- and interregional trade openness, we find that overall regional integration didn’t affect government size, though it had a significant negative effect in the pre-WTO era.

Monday 5 November 2018
12:00 - 13:30 
UNU-CRIS, Bruges

Registration is required!

Please register here before 1 November 23:59 CET.