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Expansionary effects of the welfare state in a small open economy

  • Molana, Hassan
  • Montagna, Catia

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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Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 18 (2007)
Issue (Month): 3 (December)
Pages: 231-246

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Handle: RePEc:eee:ecofin:v:18:y:2007:i:3:p:231-246
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620163

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  1. Kiminori Matsuyama, 1995. "Complementarities and Cumulative Processes in Models of Monopolistic Competition," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 701-729, June.
  2. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-39, December.
  3. Bartelsman, Eric J & Caballero, Ricardo J & Lyons, Richard K, 1994. "Customer- and Supplier-Driven Externalities," American Economic Review, American Economic Association, vol. 84(4), pages 1075-84, September.
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  5. Rodriguez-Clare, Andres, 1996. "The division of labor and economic development," Journal of Development Economics, Elsevier, vol. 49(1), pages 3-32, April.
  6. Caballero, Ricardo J. & Lyons, Richard K., 1992. "External effects in U.S. procyclical productivity," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 209-225, April.
  7. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
  8. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
  9. Rodrik, Dani, 1996. "Coordination failures and government policy: A model with applications to East Asia and Eastern Europe," Journal of International Economics, Elsevier, vol. 40(1-2), pages 1-22, February.
  10. Venables, Anthony J., 1996. "Trade policy, cumulative causation, and industrial development," Journal of Development Economics, Elsevier, vol. 49(1), pages 179-197, April.
  11. Molana, Hassan & Montagna, Catia, 2006. "Aggregate scale economies, market integration, and optimal welfare state policy," Journal of International Economics, Elsevier, vol. 69(2), pages 321-340, July.
  12. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 2000. " Government Spending and Welfare with Returns to Specialization," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 547-61, December.
  13. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
  14. Frederick Van der Ploeg, 2003. "Do Social Policies Harm Employment and Growth?," CESifo Working Paper Series 886, CESifo Group Munich.
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