Page 29 - Azerbaijan State University of Economics

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

These shocks can cause more volatility in income and consumption that could be
confronted by higher government size that comes through social welfare system,
Rodrik, (1998), furthermore, Sabra, (2016), provided an evidence for the positive
relationship between openness and government size the MENA area. In addition,
more open economies have a higher collective bargaining, such as labor unions and
federations, that requires more government transfers such as pensions, employment
insurance, social security and job training, which reduce the external shocks and
risks, this is a result of industrial concentration, Cameron, (1978). Fatás, and Mihov,
(2001) found a positive relationship between openness and government size through
the strong negative correlation between government size and output volatility for the
OECD countries and across US states, that confirms the stabilizer role of
government. Furthermore, literature suggests a negative relationship between
country size and government size from one side, and between country size and
openness, from another side. This indicates the existence of a positive relationship
between openness and government size. However, the positive relationship between
openness and government size is not affected by the inclusion of other control
variables, and prevails for both low and high income level countries, Rodrik, (1998).
Anyway, the inclusion of the country size, which proxies by population size, impact
on openness asserts for the impact of openness on government size. This, in
addition, asserts the impact of international capital inflows on government size.

Several motives stand behind the positive relationship between openness and ODA.
Alesina and Dollar (2000) provide evidence that donors allocate donation to
recipient countries according to the quality of their policies, including trade
liberalization policies, particularly. Sabra, (2013) provides an evidence of strong
positive relationship between Development Assistance Committee (DAC) countries'
exports and their donation to MENA recipient countries. On the other hand, donors
imports from recipient countries and their donation are negatively associated, both
as a percentage of donors GDP, Lundsgaarde et al. (2007). These evidences prove
that trade openness increases ODA flows to the recipient countries.

Country trade openness reduces barriers, liberalizes trade and indicates better
country macroeconomic policies. This indeed increases outward and inward flows of
goods and capital, including aid and FDI. More openness may increase FDI [The
vertical types of FDI enhanced by differences in the factor endowments between home and host
countries, Markusen, (2002), and low trade costs either transport or tariff barriers. In fact, such type
locates a part of value chain in the host country to benefit lower costs that requires increasing intra-
firm trade between headquarter and affiliates.

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