Page 32 - Azerbaijan State University of Economics

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

However, the positive relationship between openness and government size is not
affected by the inclusion of other control variables, such as country size, and
prevails for both low and high income level countries, Rodrik, (1998). Furthermore,
government expenditure as a main component of calculating government size is
determined by government decision and highly influenced by previous decisions of
government, which presents the importance of dynamic analysis. The lagged
government size variable has to be strongly, significantly and positively influence
the current government decision of expenditure that determines the size of
government. In addition, openness is positively associated with the size of
government. Finally, ODA and FDI increasing may cause an increase in government
size. In fact, their impact on government size is based on their direct and indirect
finance to government budget. More productive resources such as FDI increases
production, employment and economic units, which increases country size that
decrease the government size, although these units finance the government budget.
On the other hand, ODA such an easy resources finance government budget directly
or through aid fungibility that increases the government size. Therefore, ODA
impacts positively on government size. Furthermore, aid may cause Dutch disease
and shrinks productive sectors that reduce financing government and leave the final
impact ambiguous to be detected empirically according the region and time.

EMPIRICAL MODEL

Two stage least squares estimation
Model One

We use panel data of seven MENA countries (Morocco, Algeria, Egypt, Palestine,
Jordan, Lebanon and Tunisia) for the period 2000 to 2019 basing on data availability
that collected from World Bank database. The three-equation model avoids the
simultaneity bias occurred in single-equation models. In addition, three-equation
model allows for jointly determination of both ODA and FDI impact on government
size, considering the openness and country size.

. = + + + + Equation 1

= + + Equation 2

. = + + + + Equation 3

Where: Gov.S is the government size, which is government expenditure as a
percentage of Gross Domestic Product (GDP). FDI is inward foreign direct
investment flows. ODA is Official Development Assistance.
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