Page 31 - Azerbaijan State University of Economics

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

Finally, we aim mainly to investigate and detect the relationships between both
ODA and FDI from one side and the government size from other side. In addition, a
few existing studies investigate these relationships separately, meanwhile, none has
been found in MENA area. Furthermore, controlling for the well known
relationships between country size, from one side and both government size and
openness, from the other side, will be considered. Furthermore, dynamic analysis is
highly important as long as previous decisions and behaviors of government are
highly determine the future behavior, expenditure and size of government.

EMPIRICAL CONSIDERATION

The main target of our work is to investigate the impact of each FDI and ODA on
the government size, proxies by government expenditure as share to GDP.
Therefore, we include both variables in the estimated models. A limited empirical
work has been done to detect the relationship between FDI, ODA and government
size. In addition, no investigations have been found on these relationships in the
MENA area. Furthermore, no pioneer model is standing. We use two techniques, the
first, three equations estimated simultaneously using three stage least squares (3SLS)
regression, and the first equation regressed on government size, and includes the
main determinants, which are Official Development Assistance (ODA), Foreign
Direct Investment (FDI) and openness. These variables are much related and much
important to explain government size. The second and third equations include
country size on each openness and government size equations. The relationship
between government size, country size and openness has been discussed in theory,
Rodrik, (1998), and empirically, including MENA area, Sabra, (2016). The second
equation detects the impact of country size on openness that should be negative, as
long as larger local market needs fewer incentives to be open. Finally, the third
equation detects again the impact of both main variables ODA and FDI on
government size , including the country size, which should impact negatively on
government size, as long as larger economies have lower governments, Alesina and
Spolaore, (1997), as mentioned before. In fact, this model captures that how ODA
and FDI affect the government size considering the main determinants of
government size, which are openness and country size.

The second model uses the dynamic panel data techniques namely Allerano-Bover /
Blundell-Bond estimators. This estimates dynamically the impact of ODA, FDI, and
openness on government size.

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