The Impact of Globalization on Government Size : Causality and Policy Implications for the Case of Greece

This study investigates the causal links between trade openness and government size for an EMU member country, Greece, during the period 1960-2009. For this purpose, cointegration test, error correction model and Granger-causality analysis are employed. Robust empirical findings on the long-term relationship between the tested variables support the validity of the “compensation hypothesis”, since for the case of Greece trade openness granger-causes government size. Interpreting these results under this hypothesis, calculations could imply an increasing openness of the Greek economy, as globalization process requires, due to the fact that the government of Greece is under heavy pressure to support entities and social groups which have prejudiced from opening-up the national economy leading to a continuous increase of government spending. On the other hand, the increasing government size in Greece, created numerous fiscal and social problems (i.e. bureaucratization, corruption, declining competitiveness, state interventionism) leading to a severe financial crisis since 2009. One of the core problems of the Greek economy is the ever increasing government consumption, and various measures are under application at present (i.e. dismissal of public officers, budget cuts, privatization programs etc.) in order for the country to maintain economic prosperity. These contradictory evidence for the case of Greece could imply that an increasing government size may have positive effects protecting social groups against the threats of globalization, but on the other hand a continuously increasing government consumption that lacks of close monitoring, results in multiple negative consequences for the society and the national economy as a whole