The Effects of Capital Mobility, Trade Openness, and Democracy on Social Spending in Latin America, 1980–1999

Abstract

Empirical studies measuring the impact of globalization on social spending have appeared recently in leading journals. This study seeks to improve upon previous work by (1) employing a more sophisticated and comprehensive measure of financial openness; (2) using a more accurate measure of trade openness based on purchasing power parities; and (3) relying on social spending data that are more complete than those used by previous studies on Latin America. Our estimates suggest that several empirical patterns reported in previous work deserve a second look. We find that trade openness has a positive association with education and social security expenditures, that financial openness does not constrain government outlays for social programs, and that democracy has a strong positive association with social spending, particularly on items that bolster human capital formation.

Openness, External Risk, and Volatility: Implications for the Compensation Hypothesis

“…or that as countries develop they will become larger spenders~longitudinal interpretation!+ If more open economies are more developed~or grow faster! After all, they will face less need to provide social protection+ The answer is that while democracy suffers less income volatility, it is not volatility but democracy that leads more open economies to spend more on social programs+ That is, more open economies show greater government social spending not because they are more volatile but because they tend to be more democratic+ 49+ See Avelino, Brown, and Hunter 2005;Brown and Hunter 1999;Kaufman and Segura-Ubiergo 2001;Lake and Baum 2001;and Rudra 2001and 2005+ Adserá and Boix 2000 suggest another possibility, in which democracy mediates the openness-spending relationship, building a formal model endogenizing the degree of openness+ In this model, politicians choose the level of openness and the size of the public sector simultaneously considering a trade-off between the benefit of an open economy and the need to compensate the losers from openness+ The model results in three equilibrium outcomes: After all, they will face less need to provide social protection+ The answer is that while democracy suffers less income volatility, it is not volatility but democracy that leads more open economies to spend more on social programs+ That is, more open economies show greater government social spending not because they are more volatile but because they tend to be more democratic+ 49+ See Avelino, Brown, and Hunter 2005;Brown and Hunter 1999;Kaufman and Segura-Ubiergo 2001;Lake and Baum 2001;and Rudra 2001and 2005+ Adserá and Boix 2000 suggest another possibility, in which democracy mediates the openness-spending relationship, building a formal model endogenizing the degree of openness+ In this model, politicians choose the level of openness and the size of the public sector simultaneously considering a trade-off between the benefit of an open economy and the need to compensate the losers from openness+ The model results in three equilibrium outcomes:…”

Openness, Uncertainty, and Social Spending: Implications for the Globalization- Welfare State Debate

“…They also find that democracies do not cut welfare expenditures in the face of openness, and spend more on health and education than non‐democracies. Analyzing a similar set of countries, Avelino, Brown, and Hunter (2005, 626) report contrary results, however. They find that “trade openness has a strong positive impact on the resources devoted to education and social security while democracy’s impact on spending results from increased expenditures for education.”Rudra and Haggard (2005, 1015)utilize a global sample of developing countries to examine the effect of the interaction of trade openness and regime type on public service spending and conclude that “social spending in ‘hard’ authoritarian regimes is more sensitive to the pressures of globalization than in democratic or intermediate regimes.” Specifically, they find that autocracies cut spending in the face of openness, but that, contrary to the findings reported by Kaufman and Segura‐Ubiergo, and to a smaller degree, those of Avelino et al., “democracies do not show a consistent tendency to spend more in the face of increasing trade openness” but that “authoritarian governments clearly spend less” (Rudra and Haggard 2005, 1041).…”

“…Second, in this article we have argued that, in the developing world, public services such as education can be understood as a response to increased insecurity caused by openness (see Ansell 2008; Avelino, Brown, and Hunter 2005). Research on the globalization—welfare state nexus in the OECD and Latin American contexts has often concentrated on contractions in social security and pension provision.…”

Financing Education in Europe: The Globalization Perspective

“…On the other hand, the 1980s have seen a visibly negative impact of retrenchment across the OECD countries on core spending, an effect that has made it more difficult for open economies to maintain their previously generous spending patterns (Castles, 2007). Avelino et al (2005) analyze the effect of globalization on social 5 I thank an anonymous referee for pointing out this explanation. 6 Despite the conflicting hypotheses in the literature, Baskaran and Hessami (2012) develop a model that suggests benevolent governments to have greater expenditures for higher education, while basic education expenses decrease, and Leviathan governments to enforce more ambiguous expenditures following globalization.…”