The Impact of Trade Openness on Government Size: Testing the Compensation and Efficiency Hypotheses in Kyrgyzstan
ICOAEF-XV International Conference on Applied Economics and Finance, Bishkek, Kyrgyzstan, 11 - 12 May 2026, pp.247-254, (Full Text)
- Publication Type: Conference Paper / Full Text
- City: Bishkek
- Country: Kyrgyzstan
- Page Numbers: pp.247-254
- Open Archive Collection: AVESIS Open Access Collection
- Anadolu University Affiliated: Yes
Abstract
Globalization, with its economic, political, and social dimensions, makes the integration of countries into the international system inevitable. This process also gives rise to economic risks. Trade openness can make a country's economy vulnerable to external shocks. For developing countries, especially the smaller countries that broke away from the Soviet bloc, overcoming the obstacle is challenging. The tendency to increase public spending and the overall size of the public sector to limit the economic risks arising from trade openness is referred to in the literature as the compensation hypothesis. Conversely, the view that trade openness leads to a contraction of the public sector by increasing competitive pressure is referred to as the efficiency hypothesis. This study examines the influence of trade openness on government size in Kyrgyzstan from 1990 to 2024. The Fourier Autoregressive Distributive Lag cointegration test is applied by including economic growth as a control variable. The findings indicate that the variables are cointegrated. In the long run, increased trade openness is associated with a rise in government size, while economic growth tends to reduce it. An increase of 1% in trade openness leads to a 0.28% expansion in the public sector, whereas a 1% increase in growth results in a 0.21% contraction. In conclusion, the compensation hypothesis is found to be valid for the Kyrgyz economy, while the efficiency hypothesis is not supported.