Why do More Open Economies Have Bigger Governments?

There exists a positive correlation between an economy's exposure to international trade and the size of its government. The correlation holds for most measures of government spending, in low‐as well as high‐income samples, and is robust to the inclusion of a wide range of controls. One explanation is that government spending plays a risk‐reducing role in economies exposed to a significant amount of external risk. The Paper provides a range of evidence consistent with this hypothesis. In particular, the relationship between openness and government size is strongest when terms‐of‐trade risk is highest.