State capacity and the quality of policies : revisiting the relationship between openness and government size

Abstract

Countries with different levels of state capacity have access to different sets of policies. In particular, countries with strong state capabilities are able to draw from a broader menu of policies, and pick and successfully implement those policies that best suit the nature of their challenges. In the case of exposure to trade related risk, the literature has usually considered that only one type of policies –those increasing government size- can help to overcome the challenge. However, there are a number of policies that can mitigate trade-induced risks, many of which do not have the necessary implication of increasing public spending. Yet, many such policies require governmental capabilities not available to any country. For that reason, the relationship between openness and the size of government might be mediated by the capabilities of states. The empirical analysis in this paper shows exactly that.