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Shield or substitute: financial development and the rise of government social protection

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  • Mina, Wasseem

Abstract

This study challenges prevailing theories of public spending by investigating the overlooked nexus between financial development and social protection. We test two competing hypotheses: first, that financial development acts as ashield, increasing social protection expenditures by enhancing state fiscal capacity and efficiency; second, that it serves as asubstitute, reducing the need for public spending by improving private risk management and human capital. Analyzing panel data from 65 countries (1996–2021) and employing FE and IV/FE estimators to address endogeneity, we find robust support for the catalyst hypothesis. Developed financial institutions significantly increase social protection expenditures. Results further indicate that old-age dependency, unemployment, and industrialization elevate spending, whereas globalization suppresses it. The findings affirm that financial development strengthens, rather than weakens, the state’s equity function, offering important implications for theories of the welfare state and development policy.

Suggested Citation

  • Mina, Wasseem, 2026. "Shield or substitute: financial development and the rise of government social protection," World Development Perspectives, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:wodepe:v:42:y:2026:i:c:s2452292926000172
    DOI: 10.1016/j.wdp.2026.100774
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