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Globalisation and the Future of the Welfare State

  • 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)

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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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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  1. Torben M. Andersen & Allan Sørensen, 2008. "Globalisation squeezes the public sector - is it so obvious?," Economics Working Papers 2008-08, School of Economics and Management, University of Aarhus.
  2. Ingo Geishecker & Holger Görg & Jakob Roland Munch, . "Do Labour Market Institutions Matter? Micro-level Wage Effects of International Outsourcing in Three European Countries," Discussion Papers 07/42, University of Nottingham, GEP.
  3. Del Gatto, Massimo & Mion, Giordano & Ottaviano, Gianmarco, 2006. "Trade Integration, Firm Selection and the Costs of Non-Europe," CEPR Discussion Papers 5730, C.E.P.R. Discussion Papers.
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  9. de Mooij, Ruud A & Ederveen, Sjef, 2003. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," International Tax and Public Finance, Springer, vol. 10(6), pages 673-93, November.
  10. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-39, December.
  11. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  12. Holger Görg & Hassan Molana & Catia Montagna, 2007. "Foreign Direct Investment, Tax Competition and Social Expenditure," Dundee Discussion Papers in Economics 198, Economic Studies, University of Dundee.
  13. 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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  15. 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.
  16. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
  17. Pemberton, James, 1999. "Social Security: National Policies with International Implications," Economic Journal, Royal Economic Society, vol. 109(457), pages 492-508, July.
  18. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57, December.
  19. Amable, Bruno, 2003. "The Diversity of Modern Capitalism," OUP Catalogue, Oxford University Press, number 9780199261147, March.
  20. 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.
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