Impact of Trade and Capital Openness on the Government Size of Russia

Abstract

Relevance: With Russia's economy and trade growing significantly since 2014, there is a need to examine the impact of economic openness on government expenditure, given the country's fiscal and trade reforms. Research Objective: This study aims to measure the impact of economic openness on government expenditure (government size) by categorizing it into trade and capital openness. The Auto Regressive Distributed Lag (ARDL) model is used to measure the long-run and short-run impact of economic openness on government size. Data and Methods: Annual time series data from the World Bank Open Data on World Development Indicators (WDI) from 1997 to 2021 is used. The study examines the relationship between government expenditure, trade openness, and capital openness. Results: The findings show that higher trade openness leads to a significant increase in government size, while more capital openness results in a reduction in the size of the government. The study also highlights the impact of current account deficits and national income on government size, with liberal trade policies leading to a widening current account deficit. The positive correlation between national income and government size supports Wagner's Law of "Increasing State Activity." Conclusion: The study suggests that policymakers should adopt a careful approach to liberal policies that encourage trade and capital openness, as an overly liberalized approach could harm macroeconomic factors such as fiscal and current account balances. The study also underscores the challenges that nations like Russia face when entering the global markets for goods beyond oil exports.