Abstract

This paper examines the casual relationship between greater exposure to international trade and the size and composition of government expenditures, productive versus unproductive. To capture differential impacts on how government responds to greater international exposure three measures are used: the ratio of exports plus imports to GDP (openness), the ratio of exports to GDP, and the ratio imports to GDP. For all countries in aggregate, we find no causal relationship between openness and total government expenditures or productive and unproductive expenditures. For low-income countries however, there is a positive causal relationship between openness and productive government expenditures. Further, there is a positive causal relationship between the import ratio and productive expenditures for all countries as well as for low- and high-income countries separately. Exports, conversely, have no causal relationship with any measure of government expenditures. Our findings suggest that governments in economies with greater imports as a share of GDP increase productive expenditure to counteract the negative consequences from more exposure to foreign competition.

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