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Globalisation and the Future of the Welfare State

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Author Info

  • 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)

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    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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    Related research

    Keywords: welfare state; globalisation; economies of scale;

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    References

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    1. Geishecker, Ingo & Görg, Holger & Munch, Jakob R., 2007. "Do Labour Market Institutions Matter? Micro-Level Wage Effects of International Outsourcing in Three European Countries," IZA Discussion Papers 3212, Institute for the Study of Labor (IZA).
    2. 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.
    3. Massimo Del Gatto & Giordano Mion & Gianmarco I.P. Ottaviano, 2006. "Trade Integration, Firm Selection and the Costs of Non-Europe," Development Working Papers 218, Centro Studi Luca d\'Agliano, University of Milano.
    4. Baldwin, Richard & Krugman, Paul, 2000. "Agglomeration, Integration and Tax Harmonization," CEPR Discussion Papers 2630, C.E.P.R. Discussion Papers.
    5. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
    6. 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.
    7. Pennings, Enrico & Sleuwaegen, Leo, 2000. "International relocation: firm and industry determinants," Economics Letters, Elsevier, vol. 67(2), pages 179-186, May.
    8. Holger Görg, & Hassan Molana, & Catia Montagna, . "Foreign Direct Investment, Tax Competition and Social Expenditure," Discussion Papers 07/03, University of Nottingham, GEP.
    9. Hassan Molana & Catia Montagna, 2005. "Aggregate Scale Economies, Market Integration and Optimal Welfare State Policy," International Trade 0509006, EconWPA.
    10. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
    11. Torben Andersen & Allan Sørensen, 2011. "Globalisation squeezes the public sector—is it so obvious?," International Tax and Public Finance, Springer, vol. 18(4), pages 369-382, August.
    12. Ruud A. de Mooij & Sjef Ederveen, 2001. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," CESifo Working Paper Series 588, CESifo Group Munich.
    13. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
    14. Andersen, Torben M, 2002. "International Integration, Risk and the Welfare State," IZA Discussion Papers 456, Institute for the Study of Labor (IZA).
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