Is the Compensation Hypothesis Valid for Turkey?
Increases of trade openness in an economy raise the external risks in globalization. The societies demand on increases of the government expenditure in order to compensate for their risks. Hence the more trade openness may cause the more government size. This relation is named as compensation hypothesis in the literature has been comprehensively discussed by Rodrik (1998) but started by Cameron (1978). This paper attempts to analyze the cointegration and causality relationships between trade openness and government size in Turkey, utilizing annual data for the period 1980–2013. The existence of the long run relationship between trade openness and government size is investigated by applying Engle and Granger (1987) cointegration test. The empirical findings of cointegration test stated that the series are cointegrated. On the other hand the results of error correction model indicate that there is a unidirectional causality from trade openness to government size. The significance of this results state that the compensation hypothesis is valid for Turkey.