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Dependency Revisited: International Markets, Business Cycles, and Social Spending in the Developing World

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  • Wibbels, Erik
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    Abstract

    While increased exposure to the global economy is associated with increased welfare effort in the Organization for Economic Cooperation and Development (OECD), the opposite holds in the developing world. These differences are typically explained with reference to domestic politics. Tradables, unions, and the like in the developing world are assumed to have less power or interests divergent to those in the OECD interests that militate against social spending. I claim that such arguments can be complemented with a recognition that developed and developing nations have distinct patterns of integration into global markets. While income shocks associated with international markets are quite modest in the OECD, they are profound in developing nations. In the OECD, governments can respond to those shocks by borrowing on capital markets and spending countercyclically on social programs. No such opportunity exists for most governments in the developing world, most of which have limited access to capital markets in tough times, more significant incentives to balance budgets, and as a result cut social spending at the times it is most needed. Thus, while internationally inspired volatility and income shocks seem not to threaten the underpinnings of the welfare state in rich nations, it undercuts the capacity of governments in the developing world to smooth consumption (and particularly consumption by the poor) across the business cycle.The author would like to thank Steph Haggard, Kristin Bakke, Wongi Choe, Tim Jones, and seminar participants at Duke University, Penn State University, Washington University, MIT, and the University of New Mexico for their helpful comments. Nancy Brune, Mark Hallerberg and Rolf Strauch, and Nita Rudra were very generous in providing their capital account, OECD fiscal, and potential labor power data, respectively.

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    Bibliographic Info

    Article provided by Cambridge University Press in its journal International Organization.

    Volume (Year): 60 (2006)
    Issue (Month): 02 (April)
    Pages: 433-468

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    Handle: RePEc:cup:intorg:v:60:y:2006:i:02:p:433-468_06

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    1. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
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    8. Rudra, Nita, 2002. "Globalization and the Decline of the Welfare State in Less-Developed Countries," International Organization, Cambridge University Press, vol. 56(02), pages 411-445, March.
    9. Eduardo Borensztein & Carmen Reinhart, 1994. "The Macroeconomic Determinants of Commodity Prices," IMF Working Papers 94/9, International Monetary Fund.
    10. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries - Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
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