We examine the relationship between welfare state policies and economic performance in a small open economy with (i) free trade in final goods and international capital mobility, and (ii) aggregate increasing returns to scale. Contrary to the conventional wisdom, we find that a retrenchment of welfare programmes is not an inevitable consequence of economic integration. Instead, by improving the exploitation of aggregate scale economies, social expenditure policies and international openness complement each other in facilitating an improvement in economic performance that can sustain a more generous welfare protection.
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number
0505.
Find related papers by JEL classification: E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook F1 - International Economics - - Trade F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
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