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Globalisation and the Future of the Welfare State

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  • Chen, Yu-Fu

    ()
    (University of Dundee)

  • Görg, Holger

    ()
    (Kiel Institute for the World Economy)

  • Görlich, Dennis

    ()
    (Kiel Institute for the World Economy)

  • Molana, Hassan

    ()
    (University of Dundee)

  • Montagna, Catia

    ()
    (University of Aberdeen)

  • Temouri, Yama

    ()
    (Aston University)

Abstract

This paper reconsiders the link between welfare state provision, globalisation and competitiveness empirically. We challenge the conventional wisdom that welfare states, large-scale public provision of social insurance and progressive systems of redistributive taxation are incompatible with economic globalisation. Our empirical analysis is motivated by recent theoretical work that looks at the effects of redistribution policies in open economies models that capture the interconnectedness of welfare states, production structures and international economic integration when goods and factor markets are imperfectly competitive and countries possess specific characteristics – e.g. demographic structure, institutional features of labour markets, and government’s preference structure. Hence, contrary to the conventional view, the efficiency gains stemming from increasing international openness strengthen the positive feed-back effects between redistribution policies and the exploitation of aggregate scale economies. We find some evidence in line with the theory, suggesting that there is indeed a positive interaction between vertical linkages and social expenditure in raising competitiveness. We also look at an important aspect of globalisation, namely the activities of multinational companies, and investigate whether social expenditure, which arguably contributes to a stable and more attractive social and economic environment for the operations of businesses, hinders or attracts inward investors. We find that social expenditure may be attractive to inward FDI and may also act to anchor firms in the home country.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Policy Papers with number 81.

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Length: 23 pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:iza:izapps:pp81

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Keywords: welfare state; globalisation; economies of scale;

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References

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  1. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Journal of Public Economics, Elsevier, vol. 66(2), pages 247-274, November.
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  4. Holger Görg, & Hassan Molana, & Catia Montagna, . "Foreign Direct Investment, Tax Competition and Social Expenditure," Discussion Papers 07/03, University of Nottingham, GEP.
  5. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-39, December.
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  13. Amable, Bruno, 2003. "The Diversity of Modern Capitalism," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199261147, October.
  14. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 997-1032, October.
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  16. Pennings, Enrico & Sleuwaegen, Leo, 2000. "International relocation: firm and industry determinants," Economics Letters, Elsevier, vol. 67(2), pages 179-186, May.
  17. Casarico Alessandra, 2001. "Pension systems in integrated capital markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-19, November.
  18. Daniel Kopasker & Holger Görg & Hassan Molana & Catia Montagna, 2013. "Negative Shocks, Job Creation, and Selection," WWWforEurope Working Papers series 11, WWWforEurope.
  19. Andersen, Torben M., 2002. "International Integration, Risk and the Welfare State," IZA Discussion Papers 456, Institute for the Study of Labor (IZA).
  20. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
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