Page 36 - Azerbaijan State University of Economics

Mahmoud M. Sabra: International Capital Inflows and Government Size: Evidence from
Panel Data in Selected Mena Countries

All variables coefficients are significant at 1% except ODA and openness at 10% in
2
the first equation, and ODA that significant at 5% level in the third equation, and R
is 0.22, 0.08 and 0.35 for the three equations, respectively.

FDI is negatively associated with government size, this shows that FDI participates
in increasing local market and country size in term of increasing economic units. In
fact, increasing FDI, that serves the local markets and, reduces the need of more
openness, which reduces the government size, and explains the negative impact of
FDI on governments' size. Furthermore, this indicates the importance of FDI
attracted to the area in enhancing the economy size, productive sectors and
economic agent's actors, which reduces the relative size of government in economy.
Finally, as long as FDI reduces imports, Sabra, (2021) that reduces also the potential
of external shocks, which in turn, have to reduce the need of high government size.

ODA is associated positively with government size, that indicates aid is enhancing
government expenditure directly or through aid fungibility, in addition, it enhances
the public and private consumption, expands non-tradable sectors, shrink tradable
sectors, crowds out savings, increases imports and raises Dutch disease, Sabra,
(2016), Sabra, (2021), Sabra, & Eltalla, (2016). This enhances more and more public
and private imports, and increase openness that enlarges the government size.

Results show that more openness increases the government size, which comes in
accordance with the economic literature in the field. Government plays a stabilizer
role in the economy against the external shocks, facing income volatility, and
require more expenditure through social welfare system that causes higher
government size, (Rodrik, 1998), Sabra, (2016).

Country size and government size from one side, and with openness from the other
side are associated negatively, that agrees the previous theoretical and empirical
works. In fact, as large as population and economic agents in the economy, as larger
as the cost of various public goods will be reduced, and per capita costs of these
public goods declining as taxpayers increase, from one side, and the required per
capita government expenditure will be lower, from other side. On the other hand,
higher country size, including more employees and firms, which reduce the need of
more openness. Furthermore, higher country size decreases trade openness and
government size, that asserts the positive relationship between openness and
government size. Hence, controlling for the country side on openness and
government size allows for more robust results concerning the impact of
international inflows on the governments' size.

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