Trade Openness and the Composition of Government Spending: Further Disentangling the Ties that Bind

Governments can compensate citizens for the costs of trade openness using social welfare spending. Alternatively, they could protect citizens via sector spending. Governments facing tight budget constrains will tend to prioritize sector-specific spending. Sector spending programs make the best use of government’s limited fiscal resources by protecting politically powerful constituents from the costs of openness. Spending data for 44 developing countries from 1981 to 1997 show that governments tend to reduce the share of expenditures devoted to social welfare programs following trade liberalization. Some of the monies cut from social welfare programs are used to fund more generous sector programs