Page 27 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.78, # 1, 2021, pp. 27-39

INTERNATIONAL CAPITAL INFLOWS AND GOVERNMENT
SIZE: EVIDENCE FROM PANEL DATA IN SELECTED MENA
COUNTRIES

Mahmoud M. Sabra

Associate Prof. of Economics, Economics Department, Faculty of Economics and
Administrative Sciences, Al Azhar University-Gaza, Palestine
E-mail: [email protected]

Received January 08; accepted May 2021; published online 18 June 2021

ABSTRACT
In the era of globalization, international capital inflows increase dramatically, in
specific, ODA and FDI. FDI and ODA would increase employment, GDP and
government finance. The impact on GDP and government finance is different, and
varies between ODA and FDI. The main purpose of this article is to examine the
impacts of ODA and FDI on the government size, considering the trade openness, in
specific, and country size. We use simultaneous equations and dynamic panel GMM
analysis for seven selected middle income MENA countries for the period 2000-2019.
Our results show that FDI reduces government size, meanwhile, ODA increases it.
Furthermore, openness and country size are associated positively and negatively with
the government size, respectively. We concluded that attracting more FDI and guiding
ODA for development purposes is highly recommended. In addition, package of
reforms and policies have been recommended to realize such purposes.

Keywords: FDI, ODA, Government Size, Dynamic Panel Models, MENA.

Jel classifications: C33, C36, F21, F35, H11.

INTRODUCTION
Globalization increases trade, FDI, ODA and countries openness dramatically, in the
last two decades. ODA may increase openness as long as it decreases the trade
barriers between countries, and this may increase FDI and increase the need for
facing potential external shocks. Size of government, which is government
expenditure as a percentage of GDP, plays a stabilizer role in the local economy, and
influenced positively with openness. Country size, proxies by population, associates
negatively with government size, as long as higher population realizes economies of
scales, i.e. more taxpayers, as a result of higher number of population and economic
units. The international capital inflows reflect in different aspects on the recipient
countries, such as production, employment and government size.

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