Trade Openness and Sustainable Government Size: Evidence from Central and Eastern European Countries

Ahmet Tekin (), İbrahim Tuğrul Çınar, Ersin Nail Sağdıç and Fazlı Yıldız
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Ahmet Tekin: Department of Public Finance, Faculty of Economics and Administrative Sciences, Eskisehir Osmangazi University, Eskisehir 26040, Turkey
İbrahim Tuğrul Çınar: Department of Economics, Faculty of Economics, Anadolu University, Eskisehir 26470, Turkey
Ersin Nail Sağdıç: Department of Public Finance, Faculty of Economics and Administrative Sciences, Kutahya Dumlupinar University, Kutahya 43000, Turkey
Fazlı Yıldız: Department of Public Finance, Faculty of Economics and Administrative Sciences, Balikesir University, Balikesir 10000, Turkey

Sustainability, 2023, vol. 15, issue 15, 1-17

Abstract: The ongoing discussion regarding the role of the free market economy and the extent of state intervention is a critical subject in economics. This matter holds special significance for transition economies, as it presents both challenges and opportunities in such contexts. One may perceive the degree of trade openness as a path toward welfare societies. However, the dual impacts of trade openness on an economy, namely, the compensation and efficiency hypotheses, must be considered. The compensation hypothesis proposes that global trade can enhance the economic influence of the state, whereas the efficiency hypothesis advocates for a contraction in the state’s economic undertakings. This study focuses on interpreting this complex scenario, specifically in the context of the European Union’s transition economies. The aim of this research is to uncover how the economic magnitude of a nation influences trade liberalization, and consequently the free market economy, in Central and East European (CCE) countries, using public choice theory as a foundation. The research delves into the causal relationship between trade openness and government size in eleven CCE countries—Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic, and Slovenia. The period covered in this study ranges from 1996 to 2021. The methodological tool utilized for this investigation is the Kónya bootstrap Granger causality test, which accommodates cross-sectional dependence and country-specific variances. The novelty of this study lies in its application of both the compensation and efficiency hypotheses to the context of 11 transition economies in the Central and Eastern European (CCE) region. The results from the Granger causality test demonstrate a unidirectional positive correlation between trade openness and the size of the government for Bulgaria, Croatia, Czechia, and Estonia. On the contrary, Slovenia exhibited a unidirectional negative correlation. These findings confirm the applicability of the compensation hypothesis in Bulgaria, Croatia, Czechia, and Estonia, while supporting the efficiency hypothesis in Slovenia.

Keywords: government size; trade openness; compensation hypothesis; efficiency hypothesis; transition economies (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:15:y:2023:i:15:p:11836-:d:1208345

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