From 'real' to 'virtual' states? Integration of the world economy and its effects on government activity

This analysis shows that claims about the coming of the 'virtual' state, a popular proposition in the globalization debate, have no empirical foundation. Our findings, based on more comprehensive testing than in most previous studies, support a proposition originally put forward by Cameron - countries more open to international trade have a larger public sector. We also show that economic globalization has not led to convergence of public sector size across countries. Nevertheless, sweeping claims that economic integration leads to bigger government are premature, and perhaps wrong. Rodrik, Garrett and others have argued that a risk-reduction logic causes the positive trade-public sector relationship. We did not find empirical evidence for this assertion. Ln contrast to Rodrik, Quinn and Garrett we show that growing capital mobility has no impact on the size of government. Also, capital mobility has not undermined the fact that bigger traders have larger public sectors. We outline some arguments for the different impact of trade and financial integration.