Empirical Evindence On The Compensation And Effıciency Hypothesis: The Fragile Fıve Countries Case

Abstract

Countries' economies may be exposed to external risks due to the economic and commercial effects of globalization, the economic cooperation and integration of countries, and the simultaneous effects of crises on the whole world. In this case, governments can protect the welfare of the country or minimize the damage with the policies they will implement. In this context, there are three hypotheses accepted in the literature and economic theory. These are the compensation hypothesis (Cameron: 1978; Rodrik: 1996), the efficiency hypothesis (Cusack: 1997) and the deindustrialization hypothesis (Clark: 1940; Iversen & Cusack: 2000), which are tested with openness and public expenditure variables. In this context, in this study, which of the three hypotheses will be valid for the economies of Indonesia, Brazil, South Africa, India and Turkey, which are known as the fragile five, is tested. Cross-section dependency test, one of the panel data analysis methods, Smith et al. (2004) Bootstrap unit root test, LM Bootstrap panel cointegration test, Canning and Pedroni (2008) causality test, CCE coefficient estimation test were applied.  The results of the analysis show that the efficiency hypothesis is valid in other countries, except for Brazil, while the deindustrialization hypothesis is valid only in Brazil.