Globalization, government spending and taxation in the OECD

Abstract

This article assesses the impact of globalization on welfare state effort in the OECD countries. Globalization is defined in terms of total trade, imports from low wage economies, foreign direct investment, and financial market integration. Welfare effort is analyzed in terms both of public spending (and separately on social service provision and income transfer programs) and taxation (effective rates of capital taxation and the ratio of capital to labor and consumption taxes). Year-to-year increases in total trade and international financial openness in the past three decades have been associated with less government spending. In contrast, integration into global markets has not been associated either with reductions in capital tax rates, or with shifts in the burden of taxation from capital to consumption and labor income. Moreover, countries with greater inflows and outflows of foreign direct investment tend to tax capital more heavily.

The impact of globalization on the composition of government expenditures: Evidence from panel data

“…In a reconsideration of their earlier unpublished study of 1997, Garrett and Mitchell (2001) arrive at conclusions that seem to contradict the received wisdom as summarized above. Kittel and Winner (2005) and Plümper, Manow and Troeger (2005) show, however, that the results obtained by Garrett and Mitchell (2001) cannot be reproduced if the econometric model is properly specified.…”

“…Kittel and Winner (2005) and Plümper, Manow and Troeger (2005) show, however, that the results obtained by Garrett and Mitchell (2001) cannot be reproduced if the econometric model is properly specified. Both follow-up studies rather come to the conclusion that government spending is primarily driven by the state of the domestic economy and thus independent of international economic openness, implying not only the absence of significant efficiency effects but also the absence of compensatory measures.…”

Globalization, welfare regimes and social protection expenditures in Western and Eastern European countries

“…Countries and time span considered, econometric approaches applied and measurement of the globalization phenomenon vary substantially between the available studies (also see Gemmel et al (2008) Garret and Mitchell (2001) (also see Table 1 in Gemmel et al (2008)). Based on panel data these authors inter alia also explore globalization effects on the share of social protection expenditures using the trade volume as proxy for globalization.…”

“…In contrast, the compensation hypothesis argues that governments expand the welfare state to insure citizens against increased economic risks due to globalization (Rodrik (1997 and; Garret and Mitchell (2001); Swank (2002)). It is in the interest of governments to expand social welfare expenditures as citizens (voters) seek to be compensated by the public sector (Rodrik (1998)).…”

Voters’ commitment problem and reforms in welfare programs

“…A first body of comparative literature on unpopular welfare programs' reforms argues that the main cause for pressure on the welfare state-and thereby for reform-is socioeconomic change and the ensuing rise in the number of eligible recipients (Garrett and Mitchell 2001;Huber and Stephens 2001;Pierson 2001;Iversen 2005). This argument makes sense theoretically.…”