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Why Do More Open Economies Have Bigger Governments?
Abstract
This paper demonstrates that there is a robust empirical association between the extent to which an economy is exposed to trade and the size of its government sector. This association holds for a large cross-section of countries, in low- as well as high-income samples, and is robust to the inclusion of a wide range of controls. The explanation appears to be that government consumption plays a risk-reducing role in economies exposed to a significant amount of external risk. When openness is interacted with explicit measures of external risk, such as terms-of-trade uncertainty and product concentration of exports, it is the interaction terms that enter significantly, and the openness term loses its significance (or turns negative). The paper also demonstrates that government consumption is the majority of countries.
... Concerning the determinants of fiscal countercyclicality, government size has typically been found to be the most important driver (Gali 1994;Debrun et al. 2008;Debrun and Kapoor 2011;Furceri 2010;Afonso and Jalles 2013). Another important determinant of fiscal countercyclicality is the degree of openness: Economies that are more open to trade tend to be more exposed to external shocks and may use more actively fiscal policies in order to provide increased stabilization (Rodrik 1998;Lane 2003). Similarly, capital account openness is found to affect fiscal stabilization as foreign capital tends to flow in (out) during expansions (recessions), therefore increasing the cost of financing countercyclical fiscal policies (Aghion and Marinescu 2008). ...
... Jalles (2018) looking at determinants of fiscal countercyclicality found that fiscal rules contribute to its reduction and that the result is especially strong for debt-based rules in advanced economies. Stronger automatic stabilizers are associated with larger government size (Gali 1994;Rodrik 1998;Fatas and Mihov 2001). For instance, Fatas and Mihov (2001) find that one percentage point increase in government size relative to GDP reduces output volatility by eight basis points. ...
... 10 • Financial development-a higher level of financial development positively could influence the ability of the government to borrow during downturns and therefore could increase the countercyclicality of fiscal policy (Aghion and Marinescu 2008). 11 • Trade openness-more open economies tend to be more exposed to external shocks and therefore may use more actively fiscal policy in order to provide stabilization (Rodrik 1998;Lane 2003). 12 • Capital account openness-foreign capital is likely to flow in (out) during economic expansions (recessions), therefore increasing the cost of financing countercyclical fiscal policies (Aghion and Marinescu 2008). ...
This paper provides a novel dataset of time-varying measures on the degree of countercyclicality of fiscal policies for advanced and developing economies between 1980 and 2021. The use of time-varying measures of fiscal stabilization, with special attention to potential endogeneity issues, overcomes the major limitation of previous studies and allows the analysis to account for both country-specific as well as global factors. The paper also examines the key determinants of countercyclicality of fiscal policy with a focus on factors as severe crises, informality, financial development and governance. Empirical results show that (i) fiscal policy tends to be more countercyclical during severe crises than typical recessions, especially for advanced economies; (ii) fiscal countercyclicality has increased over time for many economies over the last two decades; (iii) discretionary and automatic countercyclicality are both strong in advanced economies but acyclical (at times procyclical) in low-income countries; (iv) fiscal countercyclicality operates primarily through the expenditure channel, particularly for social benefits; and (v) better financial development, larger government size and stronger institutional quality are associated with larger countercyclical effects of fiscal policy. Our results are robust to various specifications and endogeneity checks.
... He postulated that more open economies would have higher rates of industrial concentration, leading to more unionised labour markets and through their collective bargaining efforts could influence public spending, leading to increasing demand for government transfers for social protection and social infrastructures and re-education. Citing study's scope was limited to analysing only 18 wealthy countries, Rodrik (1998) expanded to cover more than 100 countries. He demonstrated that trade openness was positively related to government size. ...
... Dreher (2006) and Dreher et al. (2008) found no conclusive empirical evidence supporting either efficiency or compensation hypothesis. Hicks and Swank (1992), Huber et al. (1993), Garret (1995Garret ( , 2001, Quinn (1997), Rodrik (1998), Bernauer and Achini (2000), Swank and Steinmo (2002), Balle and Vaidya (2002), Adserá and Boix (2002) and Bretschger and Hettich (2002) found globalisation has increased social welfare and/or aggregate government expenditure, while Cusack (1997), Rodrik (1998), Wacziarg (1998), Figlio andBlonigen (2000), Garret and Mitchel (2001) and Kittel and Winner (2005) demonstrated in favour of efficiency hypothesis, implying trade openness, capital liberalisation and/or FDI flows reduce public sector size. In contrast, on composition of government expenditure, Kaufman and Segura-Ubiergo (2001) and Garret and Mitchel (2001) found trade openness and capital liberalisation reduce GDP's share devoted to social welfare expenditure, while Wacziarg (1998), Figlio andBlonigen (2000) and Kaufman and Segura-Ubiergo (2001) found these globalisation measures increase productive government expenditures such as education, transportation, public safety and health. ...
... Dreher (2006) and Dreher et al. (2008) found no conclusive empirical evidence supporting either efficiency or compensation hypothesis. Hicks and Swank (1992), Huber et al. (1993), Garret (1995Garret ( , 2001, Quinn (1997), Rodrik (1998), Bernauer and Achini (2000), Swank and Steinmo (2002), Balle and Vaidya (2002), Adserá and Boix (2002) and Bretschger and Hettich (2002) found globalisation has increased social welfare and/or aggregate government expenditure, while Cusack (1997), Rodrik (1998), Wacziarg (1998), Figlio andBlonigen (2000), Garret and Mitchel (2001) and Kittel and Winner (2005) demonstrated in favour of efficiency hypothesis, implying trade openness, capital liberalisation and/or FDI flows reduce public sector size. In contrast, on composition of government expenditure, Kaufman and Segura-Ubiergo (2001) and Garret and Mitchel (2001) found trade openness and capital liberalisation reduce GDP's share devoted to social welfare expenditure, while Wacziarg (1998), Figlio andBlonigen (2000) and Kaufman and Segura-Ubiergo (2001) found these globalisation measures increase productive government expenditures such as education, transportation, public safety and health. ...
The study attempts to investigate the effects of globalisation on components of general government expenditures and domestic private investment in India during 1980–1981 to 2019–2020, by controlling their other crucial determinants. We observe a positive impact of FDI, per capita income and population growth on both government current and capital expenditures, while FRBM dummy has a strong favourable impact only on capital expenditure. This indicates significant influence of demand side factors on both components of government expenditure along with a favourable effect of fiscal discipline measures on capital expenditure. On exploring the effects of government capital spending and FDI on domestic private investment, we observe government capital spending has a negative effect, while FDI, revenue spending and fiscal discipline measures have positive effects. Thus, we conclude that in response to globalisation while general government in India is augmenting with both pro-efficient and welfare spending measures, its overall fiscal policy does not provide a strong stimulus to domestic private investment.
... That policy is questioned a lot in the economics literature; if such policies are efficient or not. Rodrik (1998) argues that trade openness makes economies weaker in terms of external shocks. In order to decrease the effects of such external shocks, governments tend to protect their residents, and to do so governments increase the government share in the economy. ...
... The optimum government size at the beginning considered by Cameron (1978) and lately Ruggie (1982) named it -Compensation Hypothesis‖. Alesina and Waxziarg, (1998) and also Rodrik (1998) empirically tested the theory. In Rodrik's (1998) ...
... Alesina and Waxziarg, (1998) and also Rodrik (1998) empirically tested the theory. In Rodrik's (1998) ...
National economies tend to protect individuals from external risks that depend mostly as a result of globalization of the trade. There is question that needs an answer at that point; the increase in the government expenditures is a result of the fact that increasing population or the compensation hypothesis? In order to answer that question, openness ration, government expenditures, gross domestic product per capita and population will be analyzed in order for G7 using panel data for the period 1980-2015. The empirical test will check the validity of the compensation and efficiency hypothesis. According to test results, only in Japan and Canada compensation hypothesis is valid for the selected period. On the other hand, the increase in the government expenses has no causality relation with the increase in the population.
... Open economies foster innovation and technology, which boosts entrepreneurship in competitive marketplaces and expands market access, which leads to sustainable growth (Eid, 2020;Jani et al., 2019;Karedla et al., 2021;Malefane, 2021;Ngepah and Udeagha, 2019;Ngepah, 2014;Takkar and Sharma, 2021). Rodrik (1998) proposed two hypotheses relating to economic openness and government size (GS). The 'compensation hypothesis', which is related to TO, states that in open economies, government spending is higher to mitigate against the jeopardy of being exposed to global markets and economic shocks. ...
... India is projected to be one of the most contributing to international trade, with a larger export-import-based commercial services industry (World Trade Organization, 2021). This study is motivated to check the impact of liberal trade policies of India on its GS which is measured in terms of government expenditure 1 (Benarroch and Pandey, 2012;Liberati, 2007;Nyasha and Odhiambo, 2021;Rodrik, 1998). In the 1990s with the objective of economic growth, India opened its economy by implementing a liberal exchange rate system (on March 1, 1992), the export-import policy (in the year 1992), and subsequent Foreign Trade policies (FTPs) (Hye and Lau, 2014). ...
... In this study, we look into Rodrik (1998) two hypotheses in the context of India and the magnitude of the impact of liberal approach on variables like government expenditure (GS) in presence of control variables like fiscal deficit and current account deficit (CAD) using auto-regressive distributed lag model. The paper is structured according to the following sections. ...
... Aged Population effects following Kenny and Winer (2006), trade openness (export and imports as percentage of GDP) to measure growth of government size following Rodrik (1998), unemployment rate to measure reverse causation between unemployment and tax rate following Daveri and Tabellini (2000), GDP growth per capita to control for variations in business cycle following Persson and Tabellini (2005); Razin et al. (2002), inflation, population to capture economics/diseconomies of scale, democracy following Pickering and Rajput (2018) and government expenditures as a share of GDP to measure government size following (Rodrik, 1998). ...
... Aged Population effects following Kenny and Winer (2006), trade openness (export and imports as percentage of GDP) to measure growth of government size following Rodrik (1998), unemployment rate to measure reverse causation between unemployment and tax rate following Daveri and Tabellini (2000), GDP growth per capita to control for variations in business cycle following Persson and Tabellini (2005); Razin et al. (2002), inflation, population to capture economics/diseconomies of scale, democracy following Pickering and Rajput (2018) and government expenditures as a share of GDP to measure government size following (Rodrik, 1998). ...
This paper investigates how aging societies lead to worsen distribution of income through tax composition measured by ratio of direct taxes to indirect taxes. The rationale follows: due to the political power of working age population emanating from majority of their share in the population, in a median voter model, they manage to shift the tax burden on aged population in an aging society through increasing direct taxes more than indirect taxes. This results in elevating income inequality in society. To estimate our hypothesis, we apply panel data using time and country fixed effects. Based on sample covering 110 countries from 1990-2020 and applying different inequality measures and robustness check, the empirical evidence considerably supports this hypothesis. The results hold firmly across the OECD and non-OECD countries together with strong and weak democracies.
... The reason why we focus on government size in this study is that societies put pressure on governments for strong action in times of high uncertainty and the measures taken often result in higher government size. The duty of protecting the economy against uncertainty has traditionally been assigned to governments (Rodrik, 1998). Governments tend to abandon orthodox policies and increase spending in times of crisis (Armingeon, 2012). ...
... Governments traditionally have a duty to protect the economic structure against risks and uncertainties. According to Rodrik (1998), as the degree of openness of countries increases, the share of the government in the economy also increases. This result stems from the fact that governments act as insurance against external risks. ...
This study investigates whether the response of stock returns to economic policy uncertainty depends on the level of government size in the economy. Although there is a consensus in the literature that stock markets react negatively to policy-related uncertainties, the factors that determine the magnitude of this effect have been ignored. This study is the first to demonstrate that the magnitude of this effect depends on the size of the government in the economy. In the study, data for the period 1997Q1–2021Q4 pertaining to 18 countries are used. According to results of fixed-effects estimations with Driscoll-Kraay robust standard errors, economic policy uncertainty affects stock returns negatively. In addition, the coefficient of interaction term formed by the variables of policy uncertainty and government size is also negative and significant. These results indicate that the negative response of stock returns to policy uncertainty grows as government size increases. The sensitivity analysis results show that the findings are not sensitive
to the estimations made by alternative approaches and are therefore robust. The findings of the study contain important implications for policymakers. Investors can also benefit from the results at the point of international asset allocation against future policy-related uncertainties.
... Localized import penetration increases economic and employment volatility, which in turn makes voters more likely to demand increased government spending to compensate for these economic dislocations (Rodrik 1998;Ruggie 1982). These demands for compensation make voters more likely to support left-leaning politicians and parties that advocate welfare state expansion and redistribution. ...
... Indeed, there is evidence that the economic insecurities created by import shocks have driven affected voters to favour compensatory policies associated with traditional parties on the left (Rommel and Walter 2018; Scheve and Serlin 2023) and left-wing parties and candidates that universally reject neoliberalism, consumerism, and globalized capitalism have become increasingly electorally successful (Bale and Dunphy 2011;Hopkin 2020). This, in turn, has led to greater government spending (Dreher, Sturm, and Ursprung 2008;Garrett 1998;Rodrik 1998) and an expansion of redistributive policies (Bergh and Nilsson 2010;Leibrecht, Klien, and Onaran 2011;Meinhard and Potrafke 2012). ...
Across advanced industrialized democracies, the political centre is collapsing as politicians on the far right and far left enjoy increasing electoral success. Recent research links import shocks to voter support for far-right parties. However, we know comparatively less about how these shocks impact individual legislator ideology, especially that of mainstream politicians. Do import shocks drive economic or cultural ideological shifts among mainstream legislators? If so, to what extent do local competitive contexts shape these shifts? Using a dataset of French Senate roll call votes, we find that localized increases in import exposure moves elite ideology to the left economically; this is magnified in departments with majoritarian electoral systems. We show that legislators shift their cultural positions in response to import shocks, but only when faced with extremist political competitors focused on cultural issues. Our results suggest the value of attending to how political and economic geography intersect to shape elite policy positions.
... According to Refs. [66,67], as the government size expands, the market is more willing to accept a larger risk of external shocks [67]. added that government expenditure appears to act as a social insurance for an economy that is subjected to external shocks. ...
... According to Refs. [66,67], as the government size expands, the market is more willing to accept a larger risk of external shocks [67]. added that government expenditure appears to act as a social insurance for an economy that is subjected to external shocks. ...
Inspired by the Look East Policy, Malaysia aims to learn from such a successful Asian country as South Korea in order to break through its upper-middle-income trap. Using the dynamic threshold nonlinear approach, this comparative study is therefore timely to compare and contrast the nonlinear correlation between economic growth and government spending between these two nations. When considering two different measures of government size as the threshold variable, namely government operating/real GDP (GS1) and government investment/real GDP (GS2), the practical findings of this research indicate the presence of a threshold effect between government size and economic growth in the contexts of Malaysia and South Korea. Specifically, the BARS curve exists in Malaysia and South Korea when GS1 is set as the threshold variable. However, a U-shaped curve of nonlinear relationship exists in both countries when GS2 serves as the threshold variable. Interestingly, the threshold two-regime regression results show that while government operating expenditures in both Malaysia and South Korea are not found to be overspent and are beneficial for economic growth, the Malaysian government's investment expenditure has not achieved the full potential of accelerating economic growth compared to South Korea.
... Wood 2018). This research tradition also finds a strong correlation between such openness and demand for social protection to try to compensate for job loss (Rodrik 1998). Regardless of whether openness via trade and offshoring still greatly threaten job security in advanced industrialized democracies, such issues remain politically salient, as the appeal of many populist parties is based on forms of economic protectionism or nationalism (Colantone and Stanig 2018;Milner 2021). ...
... Simplifying, a wealth of literature documents a strong correlation between aggregate trade openness and types of social spending (e.g. Rodrik 1998;Hays et al. 2005;Burgoon 2009). At the individual level, there is much evidence for the connection between individual-level openness risks and support for compensatory redistribution (generally in the form of greater social spending) in many advanced industrialized democracies. ...
Does the threat of automation of workers’ employment provoke distinct policy preferences from that of globalization? We present hypotheses about how these different threats affect support for policies to prevent such shocks as well as policies to compensate via redistribution. Using vignettes and conjoint experiments embedded in survey evidence from Spain, we find that the threat of automation does not provoke any greater demand for redistribution than does openness. Nor does job loss due to automation provoke beliefs of greater deservingness of compensatory transfers, compared to job loss from openness. While the threat of offshoring and hiring foreign workers increases support for policies to prevent this process from occurring, scenarios of robot substitution do not provoke a similar reaction. These results suggest policies to prioritize automation over openness may gain less political traction.
... Although the relationship between trade openness and government expenditure has generated a considerable amount of debate for many years, there is no consensus on the results. Rodrik (1998) conducted an empirical investigation on this relationship and argued that as a country becomes more open, there is greater exposure to external risk and it may lead to an increase in the size of the government to compensate for increasing external risk. The study concluded that there is a positive relationship between openness and the size of the government. ...
Research background
Numerous studies have been conducted on the relationship between trade openness and government expenditure in several developing countries including African countries, however, the studies are limited in South Africa. Therefore, South Africa does not have adequate empirical studies regarding the impact of trade openness on government expenditure, which could assist in developing their trade policies.
Purpose
The study examines the relationship between trade openness and government expenditure in South Africa for the period 1980 to 2021.
Research methodology
The study uses the autoregressive distributed lag (ARDL) bounds testing approach to cointegration for estimation of the three Models in the study.
Results
The estimation results of all of the three models found that in the short run trade openness has a positive and significant impact on government expenditure in South Africa. The results also suggest that the increase in government expenditure seems to be as a result of trade openness, urbanisation and dependency ratio in the short run while inflation also leads to an increase but only in the long run.
Novelty
The study uses three proxies of trade openness which are total trade, ratio of exports, and ratio of imports as a percentage of GDP. To the best of our knowledge, the study may be the first of its kind to empirically examine the impact of trade openness on government expenditure in South Africa using three proxies in a single study.
... However, we observe feedback on the Ghanaian economy concerning shocks from the rest of the world as expected. For instance, Cerra and Saxena (2008) show that global demand shocks have a significant effect on output and prices in low-income countries, while Rodrik (1998) posits that trade openness can make developing countries more vulnerable to external shocks. A positive world output shock increases domestic demand via increased demand for Ghana's export (figure 4). ...
... Longoni (2011) performed a cross-sectional analysis using a population of 83 developed nations during a ten-year period -1978 to 1988. He noted that GDP/capita and tax revenue are positively related and concluded that agriculture positively affects tax revenue; this opposed the work of Kelly and Baas (2010), who noted that agriculture had an adverse effect on tax revenue. Hamid and David (2011) conducted a study on 12 economically developed countries between 1994 and 2004, focusing on institutional, CPI , and per-capita incomes as independent variables of the tax ratio. ...
This study investigates the determinants of tax revenue performance in South Africa using time series data from 1990–2018. The study uses Augmented Dickey Fuller and the Kwiatkowski–Phillips–Schmidt–Shin (KPSS) tests to test stationarity in time series, while Johansen co-integration and error correction models identify long-run and short-run dynamics among variables. The results of the study revealed that Gross Domestic Product (GDP) per capita, foreign direct investment, and trade openness are statistically significant and positively related to tax revenue performance. Unemployment was found to be statistically significant but also negatively correlated with tax revenue performance, while inflation was found to be negative but not statistically significant. The research's diagnostic tests confirmed the validity of the study model, revealing no serial correlation, heteroscedasticity, and a stable and correctly specified model. This study assists policy makers in having a thorough understanding of the determinants of tax revenue performance, and as a result, policymakers may create tax laws that complement the nation's economic environment. Knowing which variables, like GDP per capita, foreign direct investment, and trade openness, have a favourable impact on tax collection allows for more focused policy interventions. Understanding the relationship between tax rates and revenue performance is helpful in determining the ideal tax rates. Based on empirical data, policymakers can modify tax rates to maximise revenue without inhibiting economic growth. The study recommends that the South African government should enhance GDP, encourage foreign direct investment, decrease unemployment, and promote trade openness to enhance tax revenue performance.
... Combine this insight with the common assumption that markets for private insurance often fail due to incomplete information and adverse selection, and much of the postwar welfare state can be attributed to popular demand for insurance, as has indeed been argued by some of the most prominent scholars of social policy history (Baldwin, 1990;Barr, 2001;Esping-Andersen, 1990;Heclo, 1974). In addition, social insurance may promote economic prosperity by allowing countries to benefit from trade while compensating losers (Katzenstein, 1985;Rodrik, 1998;Ruggie, 1982); by encouraging economic risk-taking (Sinn, 1998); by incentivizing workers to invest in specific skillsets (Estevez-Abe et al., 2001;Iversen & Soskice, 2019); and by promoting flexible labor markets by insuring against unemployment instead of protecting existing jobs, a policy approach known as flexicurity (de la Porte & Jacobsson, 2012). According to the OECD's measure of net social spending, publicly provided social insurance accounts for between one quarter and one third of GDP in advanced democracies (Elkjaer & Iversen, 2022). ...
The postwar welfare state provides social insurance against economic, health, and related risks in an uncertain world. Because everyone can envision themselves to be among the unfortunate, social insurance fuses self-interest and solidarism in a normative principle Friedman (2020) calls probabilistic justice. But there is a competing principle of status defense, where the aim is to erect boundaries between socioeconomic strata and discourage cross-class mobility. We argue that this principle dominates when inequality is high and uncertainty low. The current moment is one of high inequality and high uncertainty, which results in intense status anxiety, yet does not rule out solidaristic solutions. Our contributions are to diagnose the causes of our current malaise, and to theorize the normative bases for the political choice facing contemporary western democracies.
... The idea that being right-or left-wing decides attitudes toward and responses to real-world politics is hardly new in the previous scholarship. Partisan or ideological differentiations have been observed centring on macroeconomic policies and performances (e.g., Hibbs 1977;Cameron 1978;Roubini and Sachs 1989;Boix 1998;Rodrik 1998;Franzese 2002). Partisanship or ideology also matters for other policy fields, such as trade policies and immigration (Milner and Judkins 2004;Givens and Luedtke 2005). ...
It has been well-documented that left-wing governments commit to more stringent environmental protection than their right-wing counterparts. This conventional wisdom is challenged by a recent increase in outsiders in labour markets among left-wing voters. Such voters are less likely to prefer environmental protection due to economic distress. By analysing a panel dataset covering 23 OECD member countries from 1999 to 2015, this paper explores how the size of the outsiders conditions the relationship between government partisanship and environmental policy stringency. I assess governments' environmental policies using the index proposed by Botta & Kozluk (2014) and measure the size of outsiders as the share of temporary workers. The empirical analysis does not uncover any partisan differences in environmental policies when the size of outsiders is small. The findings suggest that a larger share of temporary workers is associated with less stringent environmental policies under left-dominant governments.
... The selection of control variables, such as economic openness (DEO), government intervention (GIL) (38), and transfer payment income (TP) (39), is grounded in economic development and public policy literature (40,41). These variables, chosen to reflect the broader economic, governmental, and fiscal dimensions influencing public service provision, are critical for constructing a comprehensive analytical framework to investigate the research questions posed by this study. ...
Background
The rapid emergence of China’s digital economy has sparked profound interest in the complex interplay between digitalization and the provision of public services. This study aims to delve deeper into how the development of the digital economy impacts the level of equalization in public service delivery and evaluates whether institutional factors can moderate this transformation. Against the backdrop of pursuing “common prosperity,” this research provides valuable guidance for policymaking and strategic planning. It ensures that the ascent of the digital economy not only elevates the standards of public services but also fosters their equitable distribution, thereby advancing the cause of social equity.
Methodology
The study utilized the System Generalized Method of Moments (GMM) model along with longitudinal trend data spanning from 2009 to 2018. This approach facilitated an in-depth analysis of the relationship between the digital economy and the level of equalization in public service delivery. The application of this model provided deeper insights into the impact of the digital economy on public service equalization and the identification of underlying mechanisms.
Findings
This study reveals a complex paradox that the digital economy is exacerbating regional disparities in the provision of basic public services. Furthermore, the research underscores the pivotal role of institutional environments in mitigating the adverse effects of the digital economy on public service provision. By examining the interplay between digital economy growth and institutional frameworks, the study suggests that adaptable and robust institutions are essential for harnessing the digital economy’s benefits while minimizing its potential drawbacks.
Conclusion
In conclusion, the findings from this study offer substantial insights into the dual impact of the digital economy on public service provision, enriching the ongoing discourse on digital transformation and social equity. The research underscores the significance of strategic policy reforms and institutional adjustments to harness the transformative power of the digital economy, promoting equitable access to public services and advancing the goal of “common prosperity” in the digital age.
... On the other side, researchers following the compensation hypothesis argue that greater liberalization and globalization will be accompanied by greater job and economic insecurity for the population, who will demand greater investment from the state to cope with the external risks associated with economic integration and neoliberalism (Kaufman and Segura-Ubiergo, 2001;Rodrik, 1998). Welfare programs and institutions are developed as a response to the volatility caused by liberalization and globalization (Bergh, 2021). ...
This article examines four potential strategies of the Brazilian welfare system in the face of increasing liberalization and globalization since the 1970s. We test whether liberalization and economic globalization hurt the expansion of social expenditure (the efficiency hypothesis or race to the bottom hypothesis) or whether the welfare system expands as a response to the volatility caused by liberalization and globalization (compensation hypothesis). We employ time-series regression analysis to panel data from 1970 to 2015. We controlled for economic (wealth and GDP growth) and political factors (strength of the left and effective competition of parties in the lower house). We identify different strategies followed by the welfare system through the period analyzed. However, two strategies are dominant in the long run: A neoliberal strategy when the impact of globalization is considered (efficiency hypothesis) and an embedded neoliberal strategy when the effect of liberalization is pondered (compensation hypothesis).
... All these factors help to enhance an individual's everyday life and reinforce their happiness (Tsai, 2007). However, several studies contend, on the contrary, that countries with a high degree of globalization is facing serious problems such as smuggling and the economic fluctuation, a higher risk of unemployment, and causing social instability and a higher inflation rate (Dixit & Norman, 1986;Rodrik, 1998). Such social and economic risks would indeed, depreciate the overall happiness among citizens (Di Tella et al., 2001). ...
Nowadays globalization seems to be an irresistible phenomenon that affects all countries around the world, including developed and developing countries. In that context, the purpose of this paper is to check whether increasing globalization level spreads happiness in Africa. We employ a dynamic panel data model on 34 African countries over the period 2006–2019 to assess the effect of globalization on happiness. We used the two-step system generalized method of moments estimator to control for potential endogeneity of regressors and unobserved heterogeneity. We find that globalization is positively associated with happiness. Among the sub-indexes of globalization, economic and political globalization enhance happiness while social globalization worsens happiness. In addition, the effects of globalization on happiness are sensitive to the level of human development, democratization and natural resource wealth. Specifically, the positive effect of globalization turns out to be more robust in democratic and non-oil producing countries than in autocratic and oil-producing countries. Similarly, the effects of globalization are positive in high-human development countries while these effects remain negative in low-human development countries. Furthermore, the results also show that unemployment and inflation are the channels through which economic globalization positively affects happiness.
... The negative correlation between Consumer price index and government effectiveness decrease the efficiency of government expenditures against individuals' inflation expectations. The positive correlation among Trade Balance and Government Effectiveness can be accepted as a proof for Rodrik's (1998) compensation hypothesis; that is; where the Trade Balance increases, Government expenditures also increase in order to protect households. Another reference from economic theory is the Philips Curve. ...
The successful integration of the post-Soviet countries to European Union and to other market economies via economic and political transition has been a substantial issue for international economic and political relations. Amid all the structural changes it has been of significant importance for the policy makers to set forth the macroeconomic determinants of the political stability in transition economies moved from centrally planned economy through market economy. In this study the macroeconomic determinants of the political stability within the transition economies between 2002-2015 have been investigated by utilizing the panel data method. Depending on the empirical analysis, it has been concluded that GDP per capita and consumer price index are the most important macroeconomic factors affecting the political stability in the short-term.
... However, only in the DOLS estimation does it seem to exhibit a statistically significant (at the 5% level of significance) impact. These findings support the aforementioned insights in which debt is believed to be aggravated through the pressure and need for greater social assistance (Rodrik, 1998;Dreher et al., 2008) as the country has integrated, pointing to more unproductive spending objectives. The implications from this perspective, especially within the context of a globalised South African economy, are significant. ...
... This measure of trade openness features frequently in a plethora of cross-country studies that investigate a variety of questions concerning trade openness(Cermeño, Grier, and Grier 2010; Fatás and Mihov 2001; Goldfajn and Valdéz 1999; Levine and Renelt 1992;Rodrik 1998;Yeyati and Panizza 2011). ...
... Lastly, the unintended trade-off between competition and innovation brings attention to the gaps in our understanding of multilevel governance. Traditionally, competition has been associated with immediate outcomes, while innovation is focused on long-term goals [185]. However, this study reveals previously overlooked consequences, emphasizing the necessity for governance frameworks that can effectively address dynamic temporal inconsistencies. ...
The mobility of economic factors across jurisdictions has led to increased fiscal competition among decentralized subnational governments. This study examines the relationship between fiscal competition and long-term investment in innovation at the local government level. Panel data analysis, encompassing expenditures, taxes, and innovation inputs from 18 municipalities over a 10-year period, is employed using fixed effects regression. The results reveal a negative correlation between fiscal competition and expenditure on innovation, indicating that intensified competition for mobile capital diverts resources away from essential long-term investments crucial for knowledge-driven growth. Even after controlling for economic and institutional factors, a one standard deviation increase in competition corresponds to an average decline of 25% in per capita innovation investment. These findings highlight the unintended trade-off resulting from heightened competition and underscore the need for policy frameworks that promote localized flexibility while curbing uncoordinated competition that undermines innovation capacity. While fiscal decentralization aims to foster competitive governance, this study provides empirical evidence that short-term expenditure incentives often displace long-term innovation objectives without sufficient coordination. The insights contribute significant empirical evidence on the concealed costs of fiscal competition for regional development. Consequently, a re-evaluation of conventional perspectives on decentralization and competition is warranted, emphasizing the importance of developing cooperative policy solutions that strike a delicate balance between decentralized decision autonomy and strategic coordination. Adopting such an approach is essential to fully leverage the advantages of competitive governance while simultaneously nurturing innovation ecosystems.
... This multifaceted interaction complicates a straightforward assessment of welfare models, as countries have to negotiate between the external pressures for commodification-centric measures and the internal imperatives that may call for decommodification measures. The region's embeddedness in the global economy makes it susceptible to recurrent economic crises, thus increasing the vulnerability of its populace (Rodrik, 1998). To mitigate the impact of such external shocks, nations strive to design and implement protective policies that provide some form of economic insulation (Herwartz and Bernd, 2014;Schulze and Ursprung, 1999;Walter, 2010;Yay and Aksoy, 2018). ...
While existing scholarship predominantly focuses on the evolution of welfare regimes in advanced Western economies, there has been limited investigation into the trajectories of such systems in the Asia-Pacific region. This study presents a nuanced analysis of welfare regimes in 20 Asian countries, examining their transformation since the 2000s through principle component analysis and clustering algorithms. Contrary to the predictions of comparative political economy and international political economy theories, the findings reveal that these nations neither exhibit a strict divergence in welfare patterns nor converge strictly towards market-driven commodification. Instead, they adopt a balanced approach, harmonizing elements of both commodification and decommodification. This flexibility allows them to navigate complex challenges, including productivity competition, external shocks, and internal inequality. The study suggests that this balanced approach may act as a positive feedback mechanism, enabling these countries to adapt to both global economic pressures and domestic social imperatives.
... According to several scholars, such asymmetry is reinforced by internal factors such as incomplete markets, inefficient taxation, pro-cyclical fiscal policy, and especially, weak financial market institutions (Easterly et al., 2001;Denizer et al., 2002;Ferreira da Silva, 2002;Bekaert et al., 2005). Other factors include political insecurity, macroeconomic instability, and institutional weaknesses -all phenomena that largely affect developing countries (Alesina et al., 1999;Judson and Orphanides, 1999;Gavin and Hausmann, 1996;Raddatz 2006;Servén, 1997;Agénor et al., 2000;Acemoglu et al., 2003;Rodrik, 1998 and1999). Aurland-Bredesen (2021) examines the welfare costs of uncertainty using different groups of countries as examples and compares them with growth benefits. ...
... By using the error correction model, Kolluri et al. (2000) found that, in G7 industrialized countries, national income has an important influence on government expenditure in the short run. Beside s, Rodrik (1998) studied the relationship between trade openness and government expenditure for 23 OECD countries. The results indicated that income is a negative determinant of government spending, but trade openness has a positive and significant influen ce on government spending. ...
Based on the importance of government expenditure in supporting economic growth in the country, the main objective of this study is to investigate the determinants of government expenditure in Cote d’Ivoire over the period 1980-2020. To achieve the objective, this study examines the effect of external debt, national income, inflation, and population on government expenditure, by using the ADF unit root test, Johansen cointegration test, Granger causality test, and CUSUM test. Results from the Johansen cointegration test indicated that there are long-run relationships among the variables. Government expenditure is positively related to external debt, national income, and population, but it is negatively related to inflation. The population has the biggest effect on government expenditure. The Granger causality test shows that there is a unidirectional short-run causality relationship running from external debt to government expenditure, but there is no evidence of any short-run causality relationship between national income, inflation, population, and government expenditure. On the other hand, there are bidirectional long-run causality relationships between inflation, population, and government expenditure, and unidirectional long-run causality relationships running from external debt and national income to government expenditure in Côte d’Ivoire. Lastly, the CUSUM test indicated that there are no structural changes in the model. The study recommends that the government should use government expenditure more efficiently in improving the infrastructure and creating an attractive investment climate, as well as upgrading the quality of human capital by improving the education system, health services, and the standard of living.
In Nigeria, there has been a decline in oil revenue. This has impacted negatively on infrastructural development. This paper seeks to examine the effect of non-oil revenue as an alternative source of revenue for infrastructural development. The research design of the study was the ex post facto research design. The source of data was the secondary source and a time series of data from 1981 to 2021 was used in carrying out the research. The Autoregressive Distributed Lagged (ARDL) bounds test was used to determine the long-run and short-run relationship between the dependent and independent variables. It was observed that the variables are co-integrated, and as such, a long-run and short-run relationship exists among the explanatory variables. Furthermore, the ARDL short-run estimation result shows that the non-oil tax variables (proxied by VAT, CUSTD, and CIT) have a positive and significant effect on infrastructural development (proxied by total electricity production measured in Gigawatt hours (GWh) in Nigeria. In tandem, the ARDL long-run estimation results reveal that value-added tax, customs duties, and company income tax have a positive and significant impact on infrastructural development in Nigeria. Hence, an increase in the non-oil tax revenue base will boost infrastructural development in Nigeria in the long run. This finding is in tandem with the ARDL short-run estimation result. Therefore, it is inferred that Nigeria can experience infrastructural development when genuine commitment is made to explore an increase in non-oil revenue generation instead of being over-dependent on oil revenue.
This chapter examines the political development of Trinidad and Tobago (TT) with a focus on the size of the executive and the quality of public institutions. The structural makeup of TT implies a substantial but sub-par public sector, marked by inefficiency and ineffectiveness. These expectations are mostly borne out in the data. Compared to similar country groups, TT boasts a notably larger public sector, evident in public spending, investment, and wages. TT lags in public institutional quality across various measures, including property rights, trust in politicians, and transparency in government decision-making. Notably, the country performs better in judicial independence but falls short in fostering public trust in politicians and curbing favouritism in official decisions. TT’s policies exhibit mixed performance, showcasing strengths in stability and resource allocation but weaknesses in enforcement and public regardedness.
Why do we see large-scale labor protests and strikes under some IMF programs such as in Greece in 2010 and not in others such as in Ireland in the same year? This Element argues that extensive labor market reform conditions in an immobile labor market generate strong opposition to programs. Labor market reform conditions that decentralize and open up an immobile labor market cause workers either to lose in terms of rights and benefits, while being stuck in the same job or to fall into a less protected sector with fewer benefits. Conversely, in more mobile labor markets, wage and benefit differentials are low, and movement across sectors is easier. In such markets, labor groups do not mobilize to the same extent to block programs. The author tests this theory in a global sample and explores the causal mechanism in four case studies on Greece, Ireland, Latvia, and Portugal.
There are many jokes about economists and most economics students will know at least a few. Economists often laugh at themselves as well and for a period of time the annual meeting of the American Economic Association set up a talk show to give economists the chance to let off steam and mock the profession. One of the jokes goes like this: a physicist, a chemist and an economist are adrift on an isolated island. While sitting at the shore, they find a can of food that floated in from the sea. On discussing how to open the can, the physicist suggests that they can use pressure exerted from rocks to break it open. The chemist chimes in and suggests that they can use heat from a wood fire to heat the can, so it expands and bursts. Finally, the economist gives a solution, “suppose we had a can opener…”.
Because foreign investment is critical to economic development, most developing countries, which suffer from a lack of investment savings, compete to attract investment. The article analyzes the main factors necessary for investment attraction, the relationship between foreign capital and the level of freedom of countries. Here, the influence of the level of economic freedom in Azerbaijan on the level of attracted investments is investigated.
How do capital controls and banking concentration affect economic development? This paper develops a general equilibrium model to study these important issues. To do so, we construct a framework with heterogeneous agents and imperfectly competitive financial intermediaries who help depositors manage liquidity risk. Importantly, higher levels of concentration raise the cost of domestic borrowing which increase the reliance on international capital markets. Finally, once the rate of money growth is sufficiently high, capital controls bind and the effects of monetary policy on capital formation are more pronounced.
See preview here: https://www.academia.edu/114685412/Post_Cold_War_Predictions_Politicism_in_Action
As discussed in Chaps. 8 and 9, there are several policies including ALMPs, forms of family benefit expenditures and parental leave policies that concurrently boost female labour force participation and fertility rates. Overall, policies that are positively associated with higher levels of female labour force participation and fertility rates involve state intervention in the labour market to ease women’s reconciliation of labour force participation and family roles. However, governments also play a role in directly employing women through the public sector. Given the more general nature of skills demanded in the public sector, as seen in ISCO-08 (I-Digit) occupational data and following from the arguments in Chap. 5 on skill specificity, the size and gender composition of the public sector may also assist in explaining the relationship between female labour force participation and fertility rates.
This study focuses on estimating the tax effort in 25 selected African countries and its implications for economic development. The findings aim to assess the level to which a country’s tax mobilisation is constrained by its inability to utilize available tax capacity for funding public spending. Additionally, comparing the tax effort among countries offers insight into appropriate tax mixes for addressing budgetary imbalances and debt management strategies. Analysing taxable capacity and tax capacity using panel data from the year 2000 to 2021, the paper employs stochastic frontier techniques (SF) for estimation. Due to data limitations and covariates challenges, it employs OLS, FE and dynamic GMM techniques for robust check. Key results show that per capita income trade openness, remittances, FDI, and manufacturing positively influence tax revenue, while agriculture, informal economy, population, corruption control and voice accountability have a negative and significant impact on tax effort. The findings highlight the significance of governance improvements and economic structural reforms for revenue mobilization in African countries. The study offers insights into fiscal behaviour patterns in African economies and recommends necessary reforms for fiscal responsibility.
Due the importance of diversifying production for the industrial sector, this study seeks to assess whether the level of diversification of a productive structure influences the adoption of industrial policies. For this, data for 5,570 Brazilian municipalities in 2015 and Hidalgo and Hausmann’s (2009HIDALGO, C. A.; HAUSMANN, R. The Building Blocks of Economic Complexity. Proceedings of the National Academy of Sciences, v. 106, n. 26, p. 10570-10575, 2009.) method of reflections are used. Descriptive statistics ordinary least squares are used to evaluate the tested hypotheses. Results show a positive and significant relation between the effective diversity of activities and the adoption of industrial policies in all analyzed scenarios. Therefore, results reinforce the argument that industrial policies are adopted in response to specific productive activities and are conditioned by the diversification structure of municipalities.
KEYWORDS:
Industrial policy; economic complexity; productive activities; Brazilian municipalities
We examine the effects of European integration on economic redistribution in Central and Eastern Europe. While accession to the European Union provided new economic opportunities, it also imposed considerable constraints. Using cross-sectional time-series analysis of 11 post-communist countries between 2004 and 2018, we focus on the impact of trade flows, cohesion policy funds, emigration, remittances, and Economic and Monetary Union membership. We find that emigration and commercial reorientation toward the European Union are associated with greater efforts to alleviate income inequality. In contrast, the adoption of the euro induces lower redistribution. Finally, the receipt of European Union cohesion funds does not affect income differentials. To our knowledge, this is one of the first systematic analyses of how the European Union shapes inequality dynamics in Central and Eastern Europe.
Governments implemented fiscal stimulus packages to alleviate the global financial crisis of 2007-2009. Using annual data from 1996 to 2019, we investigate economic growth in a large sample of countries for pre-and post-Global Financial Crisis years. Our approach analyzes the interaction between institutional quality and government size (government expenditures as share of GDP), reinforced by threshold estimations. We document that economies react to government size depending on the quality of the institutions in question. First, fixed effects models indicate higher institutional quality has positive effects on growth, while government size-and its interactions with institutional quality-has negative effects. Second, the coefficients of government size on economic growth are negative with higher institutional quality and become larger in the post-Global Financial Crisis years. These combined results indicate that higher-quality institutions make economies less tolerant of rising government expenditures than lower-quality institutions. Our main findings support institutional quality as the channel through which fiscal policy has real effects. The evidence herein is robust to measures of institutional quality from different databases.
The literature has yet to draw firm conclusions regarding the effect of economic globalization on government spending in developing countries in general and Pakistan in particular. This paper tries to overcome this gap on the literature and analyses the impact of globalization and democracy on the aggregate level of Pakistan's social spending from 1972 to 2018. The methods used include econometrics models. The results confirm that globalization is inversely related to social spending, while democracy positively affects social expenditures. Other results confirm that debt service and inflation rate harm social spending. In contrast, the more significant economic development and the increased unemployment rate have a positive and meaningful relationship with social expenditure in the long run. Public decision-makers should consider these conclusions to promote economic and social sustainability in Pakistan.
In spite of the traditional legitimacy accorded the market mechanism of the private sector in advanced capitalist nations, governments in those nations have become more influential as providers of social services and income supplements, producers of goods, managers of the economy, and investors of capital. And in order to finance these various activities the revenues of public authorities have increased dramatically–to a point where they are now equivalent to one-third to one-half of a nation's economic product.
This growth in governmental activity in advanced capitalist society is examined by considering the causes, and some of the consequences, of the expansion of the public economy–defined, following Schumpeter's discussion of the “tax state,” in terms of the extractive role of government. The primary concern of this article is to discover why some nations have experienced a far greater rate of increase in recent years and, as a result, have a much larger public economy than other nations. Five types of explanation are elaborated to account for the growth of the scope of governmental activity: (1) the level and rate of growth in the economic product; (2) the degree to which the fiscal structure of a nation relies on indirect, or “invisible,” taxes; (3) politics–in particular the partisan composition of government and the frequency of electoral competition; (4) the institutional structure of government; and (5) the degree of exposure of the economy to the international marketplace. The article evaluates the five explanations with data for 18 nations, and concludes by discussing some implications of the analysis.
Since unification, the debate about Germany's poor economic performance has focused on supply-side weaknesses, and the associated reform agenda sought to make low-skill labour markets more flexible. We question this diagnosis using three lines of argument. First, effective restructuring of the supply side in the core advanced industries was carried out by the private sector using institutions of the coordinated economy, including unions, works councils and blockholder owners. Second, the implementation of orthodox labour market and welfare state reforms created a flexible labour market at the lower end. Third, low growth and high unemployment are largely accounted for by the persistent weakness of domestic aggregate demand, rather than by the failure to reform the supply side. Strong growth in recent years reflects the successful restructuring of the core economy. To explain these developments, we identify the external pressures on companies in the context of increased global competition, the continuing value of the institutions of the coordinated market economy to the private sector and the constraints imposed on the use of stabilizing macroeconomic policy by these institutions. We also suggest how changes in political coalitions allowed orthodox labour market reforms to be implemented in a consensus political system.