THE IMPACT OF TRADE AND FINANCIAL OPENNESS ON GOVERNMENT SIZE: A CASE STUDY OF PAKISTAN

This study is an attempt to explore the impact of trade and financial openness on government size in the case of Pakistan. In doing so, we utilized FMOLS for cointegration and Ng-Perron for unit root estimation along with ECM for short run dynamics. Empirical results reveal that current government expenditures influence government size in future. Trade-openness is associated positively with the size of government in Pakistan. This shows that more openness of economy will increase government expenditures and proves the existence of Cameron (1978) and Roderick (1998) hypothesis. Financial openness and government size are allied inversely and insignificantly while supporting conventional wisdom hypothesis or domestic fiscal imbalance hypothesis in Pakistan. Increase in economic growth seems to raise government spending while high rates of unemployment lower the government expenditures.