Page 28 - Azerbaijan State University of Economics

Mahmoud M. Sabra: International Capital Inflows and Government Size: Evidence from
Panel Data in Selected Mena Countries

Market-seeker FDI increases the employment, production and government revenues
and size, on one hand, and decreases the need for more openness and imports that
reduces the government revenues and size. On the other hand, vertical FDI type
should increase imports, and hence openness and government indirect taxes that
increase government size. Furthermore, ODA may participate in reaching the
development goals and increases production, employment and reduce openness and
government size. On the other hand, ODA may finance public budget and encourage
government to more inefficient current expenses and imports, which creates aid
dependency, and higher government size.

Therefore, we are looking forward to detect for the impact of these international
capital inflows on government size, capturing at the same time for openness, in
specific, and country size. So, we aim to detect for the FDI and ODA relationship
with the government size, controlling for the countries openness and countries size,
in seven selected middle income MENA countries for the period from 2000 to 2019,
using different econometric techniques.

We proceed as follows, we review the literature, and then derive the empirical model
considerations, then we introduce the econometric techniques and data, then we
estimate, conclude and recommend.

LITERATURE REVIEW
Globalization and trade liberalization increase international capital inflows, in
specific, ODA and FDI. In fact, more trade openness increases government size,
which plays stabilizer role facing potential and expected external shocks, and GDP
volatility. In addition, more openness increases international capital inflows. More
ODA increases donors' exports, trade and public budget finance, from one side, and
increases political, economic and military ties between donors and recipients'
countries, from other side. This reduces various barriers between these countries that
allow more donations and international investments, FDI in specific, to the host
countries. Therefore, it should influence the government size. Furthermore, more
FDI increases further FDI to the same area. These inflows have various impacts on
macroeconomic indicators including, finance the public budget, increase tax
revenues, increase employment, production and trade, which reflects on government
revenue. Therefore, such increase in openness and inflows should clearly influence
the government size.

It's well known in the economic literature that more openness increases the
government size, whereas government in this case plays a stabilizer factor in the
economy against the eternal shocks.

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