Effect of Liberalization of Capital on Government Size (A Case-study of Developing Countries with Average Income)

Economic development and growth programs, especially in developing countries, is related to the national economic interaction and global economic. In today world, despite interdependencies, economic development and growth in national level, is facing serious challenges without active interaction with global economic. On one hand, development programs in developing countries are substantially influenced by the government size. Government size is of issues subjects to changes in order to interaction or lack of interaction of governments with globalization. In today`s globalization literature, one of the indicators of capital liberalization is direct foreign investment flows. Therefore, the present study is attempting to analyze manner and degree of capital liberalization effects on government size growth in a selection of developing countries with average income, including Iran, in the period of 2000 to 2011. To this end, ratio of total inbound and outbound of direct foreign investment to gross domestic production (GPD) as an index of capital liberalization and the ration of government current spending to GPD as an index of government size are used in this study. Results of estimated model based on Panel data regression shows that capital liberalization has a negative and meaningful effect on government size in this group of countries.