The Comparison of Relationship between Government Size and Trade Openness in D8 and OECD

With the expansion of government intervention in the economy, the investigation of relationship between government size and macroeconomic variables attracts more attention of economists, policymakers, and researchers. In the present study, the size of government and its correlation with trade openness are examined across developing Muslim countries (D-8) and OECD using panel data model during 2000-2012. The trade intensity index is used as one of the subcategories of trade openness. According to the results of unit root tests, which imply non-stationery series, co-integration test is run in order to assure a long-term relationship among variables. The regression model is estimated in fixed effects format using weighted least squares (WLS). The results indicate a significant and positive impact of the government size on the openness ratio by 12% for D-8 countries, however the relationship is not significant for OECD at the 5% level of significance. The relationship between government size and country size (total population) is positive for two groups. The findings imply that making different policies to remove trade barriers may result in strengthening good governance indicators.