Economic integration and government size: a review of the empirical literature

• Main Authors: Francesca Gastaldi, Paolo Liberati
• Format: Article
• Language: English
• Published: Institute of Public Finance 2011-09-01
• Series: Financial Theory and Practice
• Subjects: tax revenue; public spending; government size; trade openness; capital openness; economic integration; globalisation
• Online Access: http://www.ijf.hr/upload/files/file/FTP/2011/3/gastaldi-liberati.pdf

This paper reviews the empirical literature concerning the impact of economic integration on the size and the composition of the public budget. From a theoretical perspective, a pessimistic view highlights the threat that economic integration constitutes to the action of the public sector. An optimistic view, instead, emphasizes the beneficial effects of integration in stimulating efficiency – enhancing public policies. Despite some well-established theoretical results, the empirical evidence on this topic is rather controversial. Some studies support the hypothesis that taxes and public spending may increase in order to compensate losers for the risks of a more open economic environment. Other studies support the opposite idea, that the public sector retrenches when having to face increasing mobility of the production factors. Yet, comparability of the wide empirical evidence on the topic is not straightforward and empirical regularities are hard to find.