Testing the validity of compensation and efficiency hypotheses in the scope of ASEAN-5 countries

With globalisation, international trade has developed and countries have entered into competition with each other.The level of trade openness of countries has increased and the direction of the relationship between trade openness and public sector size has attracted the attention of researchers.The direction of the relationship between trade openness and public sector size is explained by the compensation and efficiency hypotheses.This study aims to determine the relationship between trade openness and public sector size in the Philippines, Singapore, Indonesia, Thailand and Malaysia, which are defined as ASEAN-5 countries.The data covering the period 1981-2021 for the ASEAN-5 countries are included in the analysis and public sector size (public expenditure to GDP ratio %) is used as the dependent variable and trade openness (exports+imports/GDP) is used as the independent variable. The long-run relationship between the variables was investigated by Westerlund panel cointegration test.Then, the long-run coefficients were obtained through the DOLS estimator.As a result of the research, it was found that the size of the public sector decreases as the level of trade openness increases in ASEAN-5 countries. It is concluded that the efficiency hypothesis is valid for ASEAN-5 countries.