Globalization and Income Distribution: Determining the effects of
trade and domestic variables on income inequality
A research case on twenty countries over twenty years of increased economic
integration, open trade and unequal distribution of income
Matias Poirrier, s1937391
Supervisor: Olaf Van Vliet
Second Reader: Maarten Berg
Master Thesis ‘Globalization and Income Inequality’
Leiden University, Public Administration: Economics & Governance
2017/2018
Index
1. Introduction ... 4
2. Theory background ... 10
3. Research Theory ... 27
3.2 Model ... 30 3.3 Variables operationalization ... 32 3.4 Data Sources ... 354. Main results and Analysis ... 38
5. Conclusion ... 50
6. Data Sources ... 53
7. References ... 54
1. Introduction
Since the end of the Second World War, the economic boom experienced by most countries in the Western World saw in parallel a sharp decrease in income inequality. In part due to the extension of the Marshall Plan program soughed by the US for its allies, a whole series of construction and investment initiatives would contribute in rebuilding war-torn Europe and providing the starting point for rapid growth. The US on the other hand, would consolidate itself as the economic world power and commence a period of extraordinary economic growth (Herring, 2008: 596).
These years would also see the rise and consolidation of strong left and center-left government-sponsored welfare state programs aimed at protecting the social and economical well being of its general population, as well as providing safeguard for their most vulnerable social groups such as the elderly and the young.
Although in each case with different degrees of taxation and benefits, the welfare programs would prove successful in generating redistribution of welfare and reducing unemployment to its minimum, as well as in providing higher living standards for the general population in most of Western and Central Europe, as well as the US (Easterlin, 2000: 11).
Industrialization programs will also become a synonym for developed countries. Manufacturing would then be seen as one of the key components of a healthy economy, in addition to a series of consolidated welfare programs are then envisioned as the optimum development strategy, highlighted as the drivers of redistribution and genuine economic growth for most of the developed countries in the second postwar period (Herring, 2008: 620). Furthermore, the continuous recurrence of left-wing governments would also have its share of contribution in retaining and expanding crucial benefits for their constituents in trade unions and other working associations linked to the manufacturing and welfare regimes (Wallerstein, 1999).
This picture, however, had already started to become quite distorted since at least the 1980s, when partisan conflict over the provision of public and social protection schemes came into conflict with government budgeting enforcing retrenchment (Allan & Scruggs, 2004: 509). In recognizing the burdens of excessive government expenditure, the rise of conservative governments such as the Thatcher administration in the UK would charge into reducing state service provision and the dismantling of state companies via privatization (Starke, 2006: 105).
On the other hand, with the rapid increase in technological research and modernization, countries would witness a shift of workforce from the traditional industrialized nations of Europe towards the
growing manufacturing industry in Asia, particularly with the rise of China as a major hub for low-skilled demand industry production (Thewissen & Van Vliet, 2014: 18). The implications of these and other changes in terms of government revenue, taxation and market allocation have had a serious implication regarding the distribution of income. In many cases however, job shifts had only become an issue when it was directly involving the more low-skilled work compared to the more complex and more trained high skilled workers (as developing countries tend to further endowed on this kind of workforce in comparison to most developed economies1). Advanced economic countries such as the US, UK and most of Europe however, had grasped and increased the proportion of its workforce in high performance markets to a certain degree, as new technological innovation is seen to better complement the skills of the high-trained labor force (Thewissen, Van Vliet & Wang, 2017: 4).
This had in turn led to the increase in complexity on interaction across different economies in different stages of development. The consequences of globalization as a world phenomenon had started to have its share of impact in both the developed and developing world, generating the conditions that would lead developed nations to deindustrialize and displace less-skilled workers from their safe stable position within the economic relations of manufacturing industries and trade unions (Mahler, 2004; Swank, 2015). Increased trade volumes and financial mobility across countries, for instance, would place constraints on governments to balance their fiscal policies by constantly revising their tax regimes and expenditures in order to be able to aim at maintaining budget targets; in the meantime, global and regional integration would also sponsor a series of new waves of migration, further contributing to the irregularities of income distribution fueled by globalization (Kwon & Pontusson, 2010).
Nonetheless, several political economic researchers have challenged the idea that governments have simply retrenched the welfare state and the benefits that came with it. As forwarded by David Rueda, research on job security has identified a strong correlation between government “color” and their stability in retaining office in exchange for the support of certain associations such as trade unions by guarantying labor legislation favoring them (Rueda, 2005). In addition, bargaining power and the introduction of employment protection legislation (ELP) have, according to Lindbeck and Snower, played a major role in securing permanent contracts to discourage the “outsiders” (in certain cases referring to, thought not exclusively to immigrants) from having complete access to job markets in certain parts of Western Europe (Lindbeck & Snower 2001; Rueda 2007).
Other authors such as Swank and Steinmo have studied how the interaction between globalization factors such as internalization can influence the agenda for tax regimes; though they also
demonstrate how internal factors such as budget and domestic economic conditions can prime over the effects that globalization can have (Swank & Steinmo, 2002).
Yet in light of these investigations, it is hard to question the fact that globalization has started to challenge both the welfare state and the stability of policy arrangements that governments have tried to keep, thus also the previous more harmonic levels of income distribution. Although economic growth would remain strong in most cases, the consequences of global integration and trade in terms of income distribution were inevitable, and soon became noticed. Although income per capita measures would demonstrate an overall increase over time, its distribution has inevitably dropped in both developing and developed nations (Atkinson 2003; Iversen & Soskice 2013). The underlying causes and the nature of these circumstances have slowly become an issue to be taken into consideration by both scholars and government officials in order to better understand how to face this scenario, as the determinants of globalization and its potential constraints on government remain a topic that requires further analysis in the current literature.
Thus it is has been established that further research has to be carried out in order to solve the numerous hypothesis and conditions that have led scholars to believe that the alterations in income distribution could well be caused by multiple different factors that could influence its change in different ways. Therefore, the research question that this research will attempt to solve is, how does public spending influence the effects of globalization on income distribution? As so, the main goal of this research is to continue improving the existing literature on globalization and the effects it casts on inequality, as a product of the worlds continuous furthering integration: the increased interconnectivity of human society, and the elimination of its financial and physical barriers.
Building on the ideas manifested by Dani Rodrik in his seminal work, “Why do More Open Economies Have Bigger Governments?” and on Vincent Mahler’s work “Economic Globalization, Domestic Politics and Income Inequality in the Developed Countries”, this research will seek to study the relations between the degree of economic openness and its consequences in terms of risk intake. By considering risk intake as the potential internal disruptions that could be caused by unstable trade expositions and the inevitable product concentration of exports for many less-developed nations on domestic income and consumption, the scholar Dani Rodrik argues that in order to procure a safety net against the potential damage that globalization can bring to any country, governments must inevitably increase their presence in some way or another so as to reduce the amount of risk intake. Thus, this presence enlargement can be seen in many cases as having larger governments so as to reduce the consequences posed by global integration and the risks intakes it demands (Rodrik, 1998: 998). In his work, the scholar further adds that this
globalization notion effect applies to both developed and developing countries, which complements his research on the overall disruptions that globalization can generate.
In accordance to his work, this study will initially contribute in the field of trade and government policymaking by applying Rodrik’s theoretical framework using more recent data and selecting a variety of cases from the 1990s and the mid-late 2000s, firstly to verify whether his hypothesis on trade and government size still applies in a more modern context (assuming globalization has continued to expand reinforced its consequences around the globe); and secondly to further expand the research within the literature on income distribution by analyzing the consequences that the supposed risks that accompany global integration have in income distribution, by linking the supposed effects of globalization on the actual government size, and how this in turn is related to the actual distribution of income for developed and developing countries as well. Regarding this last point and following Rodriks previous work, we should expect to observe some level of correlation between government spending and a more even distribution of income as the mechanism to alleviate the disruptive effects that globalization may have on less developed economies, just like it should also be expected for more welfare oriented states.
Regarding the structure of this research, it must be remarked that this thesis has further contributed in the field of income distribution and globalization interaction by combining and effectively using a wide array of contemporary data figures for income distribution, international trade as well as local political variables such as governing party ideology and trade union density. Moreover, it must also be remarked that this paper has elaborated the exceptional task of measuring the terms of trade risk figures for all the country cases considered; although it is common for investigators to study the correlations between openness and government size, with the exception of Epifani and Gancia’s 2008 work “Openness, Government Size and the Terms of Trade”, the task of calculating the levels of risk a country can have in its international trade conditions has indeed not been carried out by scholars in the field in more recent times. Thus, little or none attention has been given by most scholars into taking into consideration this variable when studying the effects of globalization (and more specifically trade terms) and its potential consequences in domestic circumstances. Thereby, this research manages to contribute in bringing up to date different methods of analyzing government size and globalization. By carrying out a series of statistical regressions, this research measures the parameters initially for government spending and later income distribution. It is worth noticing that this research has innovated in respect to previous research works by implementing fixed and random effect models for income and government spending. Finally, further innovations should be highlighted due to the inclusion of first-order autoregressive controls. Further
explanations on how the model of this research is carried out will be detailed in later sections of this thesis.
Likewise, this work also seeks to contribute in enlarging the work previously carried out by the scholar Vincent Mahler, who has carried out research and contributed in the fields of income inequality and globalization by tracing the relationship between economic globalization and domestic political factors. In his 2004 publication, Mahler finds scattered relationships between global integration and income distribution and redistribution, yet still finds strongly positive relationships between different domestic political factors and a certain factor of redistribution involving to some point, an extensive state. In this sense, Mahler’s findings serve to complement the findings by Rodrik in describing the role of the state as a crucial factor in determining the weight economic globalization can have on an economy overall.
This research’s hypothesis is that globalization imposes major conditioning factors on the general populations income distribution. To counter this, governments would be required to provide such a safety net that would not only reduce the consequences imposed by economic integration, but also provide a higher welfare for their general constituents. In such a manner, the assumed hypothesis is that government budget constraints will not be a restraining factor, as it is further considered that government administrations will always attempt to retain their electoral constituents in future national administrative elections in return for government spending expansion and income redistribution to counter the negative consequences of globalization; as such, they are entrusted with managing a safety net sufficiently big enough to cover the potential risks that are embedded within global integration of trade and international capital mobilization. Furthermore, it is initially expected that more domestic variables such as trade union density, government party ideology and the degree of national wage coordination by unions will also play an important role in shaping the distribution of income a country has. In this sense, globalization negative factors could be downplayed by their interaction with domestic political variables besides government spending. Scholars such as Cameron and Schmidt, whose studies have demonstrated a clear correlation between trade openness and the size of the public sector, had already pinpointed to a certain point the relation between economic openness and size of government for OECD member states by 1960s; Rodriks research on this same trace has further concluded that the correlation has indeed shown relevance by the 1990s by even further expanding its analysis scope for non-OECD members countries. This research itself however, although attempting to follow the same line of arguments, will undertake the challenge of selecting a variety of cases that will not necessarily follow the same logic of case selection previously employed by other scholars; the selection of cases will rather be as
dissimilar as possible, so as to be able to cover different measures on the consequences that openness and risk take can have on the distribution of income for all kinds of developing and developed economies. Further explanations on the case selection will follow on later.
This balanced panel data, time series research will be conducted using twenty countries, these being Australia, Belgium, Canada, China, Finland, France, Greece, India, Ireland, Israel, South Korea, Mexico, Netherlands, Poland, South Africa, Spain, Sweden, Switzerland, United Kingdom and United States. The study will be carried out in a lapse of twenty years, taking into account each country’s terms of trade and risk, in addition to the product concentration of exports, the size of government spending in terms of social insurance in their economies, bearing its consequences in terms of distribution of income, and finally for the local domestic political conditions. For the purpose of this research, the selection of countries includes both members and non-members of the OECD organization, so as to measure the effects of globalization on countries that are developed and developing. By measuring both kinds of development level countries, the research seeks to overcome the recurring practice of analyzing European Western countries and similar developed countries that have consistently demonstrated similar development levels and economic trends. The period to be analyzed encompasses 1990 to 2009, a crucial period of time for rapid globalization which implies a strong rise in trade agreements and lower trade barriers, as well as increased regional and global integration.
In the following section, I will establish the theoretical framework that has been explored on the association between domestic political and social factors, and the international factors that have accompanied them. Secondly, I will evaluate the findings respecting the distribution of income against international forces and the domestic political factors that run at the same time.
2. Theory background
As a global phenomenon, inequality in earnings and the way its trend has been studied over time has been consistently examined on national levels in mostly developed countries, as data collection is mostly available for these countries; however, the academic field has slowly expanded and griped this field of research in developing nations as well. Furthermore, income distribution itself has sharply reached the interest for scholars from distinct fields ranging from economists to political scientists and sociologists as well.
In its beginnings, following a pure endogenous perspective, Simon Kuznets would pioneer in the fields of economic development and inequality of income in the 1950s by researching on the economic development of the United States and the distribution of income that accompanied it. The cornerstones of inequality of income theory were set by the scholar in his hypothesis, claiming that income inequality is intrinsically tied to the internal structural dynamics that derived naturally from the development of markets, particularly with the rise in industrialization and the consequent shift in labor markets from agriculture to industry (Kuznets, 1955). Resembling a bell shape, Kuznets’s curve model supported the idea that income distribution would inevitably be limited at the beginning of a developing economy, as the allocation of capital and resources is clearly uneven in an initial stage of economic growth for any rising economy, leaving little space for a more fair allocation of the benefits experienced. However, the economist further suggested that in the long term, growth and further development of the economy would bring greater distribution for a larger fraction of the population, as capital allocation would become available for a more general fraction of the society, which un turn would make them able to trickle down the benefits of these better economic conditions.
Widely accepted in its beginnings, it must be said that Kuznets’s theory for income distribution has not transitioned well to contemporary studies beyond the fields of finances and economics, as it is for the most considered to be an inadequate or simply an outdated framework for accounting income distribution for more modern standards. Although most international financial institutions such as the IMF and the World Bank still consider that economic growth is a sufficient mechanism per se to promote a rise in living standards in any country, scholars from within the fields of economics and political economy challenge this principal arguing that economic growth by itself cannot be the sole variable to be considered, much less be sufficient to solve the issues of inequality and poverty (Lyubimov, 2017: 43).
Furthermore, certain scholars argue that the Kuznets curve is not only outdated, but also rather inapplicable for a majority of country cases, which historically have not experienced the economic growth stages and assumptions, posed by Kuznets. In light of Acemoglu and Robison’s work, a complete theory application of the Kuznets curve thus should be able to not only explain the inverse-U shaped pattern for inequality in the developed experience of European economies, but also account for the lack of such a relationship in the histories of most Latin American and Asian countries (Acemoglu and Robinson, 2002: 183).
Nevertheless, most critics would agree on the fact that the limitations on the Kuznets curve theory do pose on the limited variables employed by the economist on his hypothesis; for instance, researchers such as Rodrik have asserted that in recent years, an economic growth policy is generally observed to be further promoted with redistributive mechanisms, which in turn results of genuine growth that can be evenly distributed within a given population. On the other hand, other scholars would counter argue the distributive effects that Kuznets would adduce to the rise in the manufacturing sector, claiming that the shift from primary to secondary industries on itself cannot be the sole explanation for a general increase of the distribution of income; rather, the shift of economic production itself could bring about a new set of group associations and interactions mechanisms involving for for instance consumer associations, trade unions and non-government organizations which could potentially influence not only the share of income that a worker could obtain, but also then could also influence the government agenda into taking in consideration more redistributive policies involving taxation on firms or decommodification of certain services and products. Bargaining power is thus incremented for social organizations, making these less frail; however, cooperation must remain strong to maintain such relations of power.
Furthermore, other scholars have addressed the issue of Kuznets theory’s limited explanatory power by either expanding or changing some layers of the theory. Piketty and Saez for instance attempted to complement and then strengthen Kuznets’s model by adding another layer to his development stage theory, taking into consideration the expansion of international financial markets in parallel to the internal economic dynamic. As proposed by the scholars, this “third wave” of economic of development involving globalization and financial integration for leading economies in the world could complement Kuznets’s shorthanded theory and leads to a more robust analysis on how not only the economic development would take place within internal dynamics, but also how these settings would perform under more internationalized factors coming from globalization. As such, the scholars demonstrate the limited capability of the theory on determining distribution of income, without taking in consideration the influences of globalization (Piketty & Saez, 2003).
As so, inequality of income distribution cannot be fully understood if not considering the political and institutional factors that accompany the economic models in which they exist, in addition to the type of state that is regulating and the international context in which all these variables are consistently interacting at the same time. As so, an overview will follow on the main theories that have been laid out by contemporary scholars, and how these have accounted for all the factors that can determine income distribution itself.
2.1 The Welfare State
“The duties of the state are…first…protecting the society from the violence and invasion of other independent societies…second…that of protecting, as far as possible, every member of society from the injustice or oppression of every other member of it…third…that of erecting and maintaining those public institutions and those public works which, though they may be in the highest degree advantageous to a great society, are of such a nature, that the profit could never repay the expense to any individual or small number of individuals” (Smith, 1776: 451,462, 470).
Till a certain degree and depending on how we define it, a welfare regime has always been in existence since the establishment of formal authorities. In principle, an initial step into studying income distribution involves studying the concept of government, and how it projects its role towards society as a whole. Although no government is exactly shaped in the same manner than others, in practice states act as agencies that is consistently monitoring and enhancing the welfare of its citizens (Barr, 2004: 8).
Social science has great difficulties explaining why the welfare regime emerged only in the last 100 or 50 years. Yet, it should be noted that the welfare state itself is only made possible by the rise of modern bureaucracy as a rational, Universalist, and efficient form of organization (Esping-Andersen, 1990: 13).
The term “welfare state” is strongly associated with the practice of enhancing prosperity in society, and has many different origins to its coining. An example of this principle of state involvement with prosperity enhancement is plastered out on “The Beveridge Report (1942)”, as it is considered to be the base document that would eventually set-up the strategy to be followed by post-war UK in establishing its welfare model. However, earlier manifestations of social programs were already being considered and implemented in Germany under Bismarckian rule such as pensions, health and
work legislation are treated as early attempts by a modern state to constitute a welfare system in Europe2.
The reason why society has relied on the state on handling these and further tasks has not been easily managed either; nevertheless, it is possible to argue that, in terms of handling risk, the state is more effective than any other organization for implementing redistribution (Barr, 1992).
The welfare approach is not limited to certain areas, and can encompass different activities such as education, health, housing and labor, among others. They will have different implications for increasing equality, for redressing severe types of poverty, and for handling social risks either for specific groups or for the whole, or very broad, segments of their populations. Thus, they are used for redistribution as well as for insurance against risks (Iversen, 2005: 21).
The assumptions of welfare states on income distribution are straightforward, as changes in the generosity of welfare state redistribution can influence the amount of disposable income families can have, or simply put, the access to certain goods and services. Measures such as levels of total public social expenditure, total transfer payments as a percentage of gross domestic production (GDP) and programmatic expenditure as a percentage of GDP are all indicators continuously used to measure “welfare effort” (Cameron, 1978; Garrett, 1998; Huber and Stephens, 2001; Korpi, 1983; Wilensky and Lebeaux, 1958). However, this attempt to measure welfare effects has led to what the scholars Green and Pedersen have coined as the “dependent variable problem” – how to operationalize the welfare state (Green-Pedersen, 2002) – and highlight weaknesses associated with the existing measures of welfare state generosity (Allan and Scruggs, 2004: 497).
Thus, several studies point out the difficulties in studying the use of expenditure, as such data cannot tell us how or on whom the money is spent or the indicators to be considered (Allan and Scruggs, 2004: 498). For instance, difference in tax treatment of transfers can distort the degree to which social spending, as measured in national accounts, translates into disposable income for program recipients. This does not imply that tax systems can inherently be used as transfer mechanisms without masking increases in social spending (Adema, 1998).
Because of this, certain scholars have opted to look at elements of welfare state programs that can provide with an indication of the impacts that these can provide on individual life chances, rather than to take aggregate spending indicators without any clear idea of what are the real impacts behind them.
As so, welfare regimes can indeed be fairly difficult to measure in terms of effective solidarity; as such, this can make it rather confusing for academics to even classify them in the first place, as each scholar is pressured into selecting a unique approach to analyze welfare enhancement. Nonetheless, several scholars have attempted to understand the logic and the development of welfare states, and by so have encountered large similarities in their conclusions (Arts and Gelissen, 2002). A crucial first step into the identification of welfare state regime types comes from the 1990 publication of “The Three Worlds of Welfare Capitalism” by Gøsta Esping-Andersen. In his work, Esping-Andersen identifies from a heuristic perspective three subtypes of welfare state models varying on the level of marketization of a product or service required by society (term coined as the “degree of de-commodification” by the author), the kind of social stratification and type of market for employment, as organized by the state. For his classification of welfare regimes, Esping-Andersen opts to “sociologize” the study of welfare states, arguing that the convention of conceptualizing welfare states in term of their expenditure cannot explain the lengthy differences between the different models.
The three types of welfare regimes as classified by Esping-Andersen are descriptive enough to demonstrate that welfare states are not all of one type (his typology gives details for most European countries, the US and other commonwealth member countries such as Australia as well under the social democratic, conservative and liberal umbrellas respectively); yet his classification can be considered to be insufficient to take into account further countries that could not be easily classified under any of the three proposed labels such as The Netherlands for Europe, or even other nations from around the globe that do not fit under any of the regime-ideal classes as identified by Esping-Andersen. His attempt however was crucial, and proved to have laid the initials step for further scholars to attempt to both complement his work and generating new typological mechanisms to classify, even an expanded range of countries, always involving different methods of analysis (Arts and Gelissen, 2002: 152).
Albeit welfare institutional expansion for over three decades following World War II, the two last decades since the late 1970s have seen growing changes in both the local and global economy, which without doubt has induced tighter fiscal constraints on the capacity of governments to cope with the prosperity of its citizens (Iversen and Wren, 1998: 507). As so, scholars have remained in debate as to how the relationship between economic globalization, domestic politics and income inequality actually works, and whether each conditions the other, and on what degree (Mahler, 2004).
Altogether, contemporary theory on income distribution has identified three main explanatory trends; these being the state of labor market institutions inside each country, and globalization factors such as technological change and international trade (Atkinson, 2003; Oliver, 2008, Brandolini and Smeeding, 2009).
2.2 Labor market Institutions
An essential component of welfare regimes is the strong relation between the state, employer associations and workers organizations cooperating/struggling actively on regulating the market forces and strengthening social welfare and working conditions. Respecting local labor institutions, alternative fields besides political economy and other contemporary economic scholars on inequality have emphasized on the presence of socially constructed institutions and the role these play when studying the trends that distribution of income can have. For instance, scholars such as Acemoglu & Robinson would advance in their articles and books the importance of institutional building and transformation as a key factor to study the patterns of development countries will experience over time; Other scholars such as Rothstein, Samanni and Teorell avoid explicitly referring to the mobilization of unionists, by arguing from a path dependency perspective, historically established and then inherited government institutions can have an important impact on the choice of both individual wages earners and their representatives over whether or not to give the state responsibility for extracting resources and implementing policies for social insurance and welfare state redistribution (Rothstein, Samanni and Teorell, 2012: 2).
A distinguished contribution on the perspective of how the establishment of market economic principles influenced the rise of social mobilization of the working class was established by Karl Polanyi in his 1944 work, “The great transformation”, in which he analyses the extent at which the market economy would clash with the norms and standards that pre-capitalist societies followed. As such, the establishment of the “market society” inevitably led to a great length of idiosyncratic clash that would spark society’s counter response to the extension of the self-regulating markets in terms of promoting new social institutions that could serve to withstand the expansion of capitalist institutions and the consequences it brought to the pre-existing systems of production and the increased economic change that led to disruptions; Polanyi’s work has led scholars to suggest that the expansion of capitalism and the rapid growth of markets will inevitably spark a rise in social risk, as capitalism’s drive to commodity labor power will inevitably sow the seeds of its destruction if let unattended; As Polanyi has states in his work, the modern market economy requires a strong
nation-state that can reciprocally support the expansion of the logic of the market economy; nevertheless, states will be consistently pressured by society into countering the negative consequences of the establishment of markets by expanding welfare and raising social insurance to improve general living conditions. His work is widely considered a key contribution on the analysis of how markets have pulled society into the establishment of social and labor institutions that can contribute in smoothing consumption and the distribution of benefits to counter the negative effects of market expansion.
The evolution of the market economy over time has led scholars to believe that Polanyi’s thoughts on the relations between the modern nation-state and the social and labor institutions would eventually mature into more robust organizations that could channel these social pressures emanating from the expansion of market principles. As such, this same type of relation can be identified clearly when considering the role trade unions have played in most developed nations regarding not only wage bargaining and the relation these share with political parties and government administrations pushing for labor market reforms3. For instance, Mancur Olson’s work, “The Logic of Collective Action”, accounts for the basic notion on why trade unions emerge and continue to exist, in addition to the mechanisms employed by them to expand their membership over time. As explained by the author, unions naturally emerge in small groups initially, as these seek to provide collective goods for their members (higher wages, better working conditions, among others). However, small unions face the possibility of losing competition and its gains, against other small unions or the market itself, if they are unable to survive the employer’s strikebreakers (Olson, 1965: 67). Thus, the variability of welfare-state evolution reflects competing responses to pressures for de-commodification (Esping-Andersen, 1990: 37)4.
As a characteristic feature of large welfare states, trade unions have historically played a rather important role within social democratic parties and the centrality of the social democratic parties in parliament for most Scandinavian parties, and for other nations in central Europe. As such, big governments, universalistic welfare state, active labor-market policies and subsidized work for the unemployed became a distinguished facet for these nations (Moene and Wallerstein, 1995: 186). Up to that point, it can’t be discussed that the social democratic strategy of reducing the inequality and insecurity of the most vulnerable sectors of the labor market, while more generally promoting growth and employment, had been very successful. In light of these and contributions, one of the most successful approaches currently used for explaining the success and expansion of the welfare
3 It must be added that Trade Unions have also contributed in the promotion of progressive agenda in many industrialized nations. These in turn have also led to more changes in application of market principles in the market society
4 De-commodification refers to the degree to which individuals, or families, can uphold a socially acceptable standard of living independently of market participation.
states has been the Power Resource Theory (Rothstein, Samanni and Teorell, 2012: 2), which takes into account the amount and type of distribution of social policy and benefits in accordance to the level of political mobilization experienced by the working class (Korpi, 1983; Huber and Stephens, 2001). In practice, the more political resources the working class can muster, such as a strong and united union movement providing electoral support to Labor or Social Democratic parties, the more extensive, comprehensive, universal and generous the welfare state will become (Esping-Andersen, 1990).
Nonetheless, this model of social democracy for Western Europe, as argued by David Rueda, became nonexistent by mid 1970s. The interplay between government partisanship and employment protection, strongly based on the formal alliance between the unions and left-wing political parties was shattered in light of the international volatility of the financial market due to the constraining effects of highly mobile capital for social democratic governments. Thus to describe it in the scholar’s own words, “With the first oil shock, there is a progressive decline in the political prominence of social democracy” (Rueda, 2006: 385).
Furthermore, literature on the importance of labor market regulation has thrown mixed results in terms of how trade unions, voters and politicians have interacted in the last three decades (Stephens, Huber, and Ray 1999; Green-Pedersen and Haverland 2002). For instance, Pierson emphasizes that retrenchment of the welfare state and its social policy programs has not occurred due to the fact that interest groups (such as voters) can become too attached to the provision of benefits, so as to become dependent and are mobilized whenever the message of retrenchment is straightforward (Pierson, 1996: 146). As affirmed by the author, “the maturation of the welfare state fundamentally transforms the nature of interest-group politics”, which in turn makes right-wing governments such as Reagan and Thatcher to be unsuccessful in rolling back welfare in the 1980s. Should this in turn imply the emergence of powerful groups that are not dependent on political parties, social movements and labor organizations that fight for the expansion of social programs in the first place?
Rueda suggests observing key labor policies such as ALMPs and employment protection measures prior to validating theories such as the insider-outsider model. As for his work “Social Democracy and Active Labor-Market Policies”, Rueda’s finds support for the insider-outsider approach, as lower employment protection measures can push insiders to align themselves to outsiders (that is, non affiliated trade unionists and other unemployed cases) and support a common agenda of employment promotion. Moreover, this move should also spark a reduction in trade union
membership, as benefit decreases for trade union membership will naturally spell members to abandon it.
Other authors such as Emmenegger discuss this even further, claiming that voters are not that easily influenced on favoring labor policies that could potentially improve/harm their working conditions; as so, Emmenegger discards potential explanatory theories such as the insider/outsider theory of employment and unemployment5 for explaining preferences in job security regulation (Emmenegger, 2009) by studying the relationship between labor market status and voting decision respecting social democratic parties and its contenders.
On the other hand, Allan and Scruggs analyze data for certain legislations such as unemployment insurance and sickness benefit replacement rates for 18 countries between 1975 and 1999. Among their conclusions, the scholars find that partisanship remains a strong explanatory variable for welfare state adjustment, as left-wing governments will favor its expansion while right-wing governments since the 1980s have shown tendency to result in greater retrenchment (Allan and Scruggs, 2004: 509).
2.3 Globalization
The previous expositions regarding the welfare state and labor market institutions all point out the limitations that are intrinsically associated to studying each variable on their own without measuring the ongoing effects that are being attributed from economic globalization. As so, it is inevitable to question: Till what extent can we address the state of the welfare state and the social institutions that accompany it without considering the effects of globalization? That is a central question this research seeks to focus in.
If we assume that global integration and the reduction in transactional costs can indeed generate winners and losers from the internationalization of production, then it remains true that the growing movement of goods and capital around the world generates a wedge on local economies, separating those whose are to be considered the winners of globalization from those who clearly remain undermined by it. In light of this context, does it remain true that the welfare state is still providing sufficient social protection? Moreover, how does globalization influence the welfare state in enhancing/limiting its scope to intervene in ameliorating social risk?
Firstly, it must be acknowledged that international trade as a sector has grown rapidly and has also swiftly gain relevance in government’s agenda since the establishment of the General Agreement on Tariffs and Trade (GATT) in 1948; and has continued to expand its preponderance to this day with the most recent event being the establishment of the World Trade Organization (WTO) in 1995. Yet by 1994 with the Marrakesh Agreement in 1994, it must be argued that already 123 nations would compromise on improving commerce by reaching the goal of reducing trade barriers and custom tariffs, as well as further regulating predatory acts such as dumping. The overall evolution of international trade policies since 1948 till 1994 has indeed demonstrated that trade has, and will continue to become, an easier and more conventional practice in the future; and as such, It is so that the rise in trade and the increase in capital mobility has been essentially associated with globalization as a characteristic of the latter (Garrett, 1995).
Thereby with the expansion of trade and capital mobility, the interaction between domestic and international market integration, domestic politics and economic policy-making becomes a complex trilema for governments to deal with. Indeed, contemporary scholars are ambivalent on how these three concepts relate to each other, and under what conditions these notions take place, and affect the rest (and till what point as well). New questions arise from these approaches: For instance, is it that globalization has created the conditions for the process of de-industrialization when taking into consideration the industrially advanced cases? Would it be the case that economic globalization has actually induced a new chain of effects, as a consequence of major connectivity that simply disrupts all forms of economic models based upon an increased form of competition derived upon competition on manufacturing, attraction of FDI and retention of domestic capital? Or to put it simply, is it that the case that the world is simply experiencing a new economic scenario, proper to these new times? In all these questions, the debate would without doubt involve governments analyzing how these scenarios could potentially impact their activity and vice versa.
2.4 Trade openness
Although trade openness has been an important factor accounting for globalization and economic growth for many developed and developing countries, the benefits of it does not instantly translate into a spread of benefits for every country in every case (needless to say to all of its population); in fact, trade and competition that surges from it will naturally produce winners and losers when measuring increased commerce (Wood, 1994, Leamer, 1997 and Rodrik, 1997). Referring to this idea, the “embedded liberalism” thesis, as defined by Ruggie, asserts that a country’s commitment
to free trade requires political leaders to be aware of the consequences that accompany it, and to actively manage public support for economic openness. As so, governments are obliged to make a balance out of the exchange of higher participation in the world economy with welfare state policies that will serve as a cushion for their citizens from the negative notions produced by the international economy in return for their public support for economic openness (Hays, Ehrlich and Peinhardt, 2005: 474).
As previously mentioned, not all can be winners of trade. Yet, the actual winners of trade might not be easy to distinguish from case to case, or even by sector. For instance, can increased ratios of trade benefit the general workers, boosting employment and making them well off? Indeed, an important cornerstone for considering the potential winners and losers of trade can be deducted by looking into the Stolper-Samuelson theorem: take for instance a model of an economy in which there are only two factors of production, capital and labor, both used to produce two different goods, and this country suddenly opens to trade; under the context of international trade, the factor of production that is more scarce will become worse-off as a result of opening up commerce, therefore demonstrating that free trade does not necessarily generate a fair distribution of benefits. As such for instance, would a developed economy such as the UK gain from more open trade? In principle, scholars have mostly agreed on the effects that increased trade can bring upon a wide string of benefits, as well as consequences for the developing and developed world. Thus, different sectors will perceive the expansion of trade differently. On an overview, scholars might seem to be mixed in appreciations regarding which sectors is the welfare state actually supporting when considering the losers of globalization.
On an interesting publication referring to the relation between trade and the welfare regimes for the OECD countries, authors Garrett and Mitchell affirm that the relationship between trade and welfare is that for a long term, which is also historically contingent (Garrett and Mitchell, 2003). Thus, contrary to many of their peers, the scholars argue that for most Western European small countries, trade dependence boosted union enlargement (therefore challenging the cliché belief that the welfare regime was in a crisis in the first place). Therefore, in the authors would seem to sustain that the power-resource theorem could be taking place in such a way that stronger trade unions are able to influence their relevance in promoting stronger social democratic parties that would place reinforcing welfare enhancements in their government agenda. In this manner, the scholars find little or not correlation between trade openness and government spending (Hays, Ehrlich and Peinhardt, 2005: 476).
Other authors such as Iversen and Cusack further this line of argument and challenge the embedded liberalism proposal by stating that the growth of the welfare state might not be related to globalization itself when controlling for de-industrialization (Iversen and Cusack, 2000). In this sense, the authors seem to rely on the idea that industrialization and its downfall in most of the developed world bears a particular dynamic that is not associated to the dynamics of global markets or international capital flows. Nevertheless, it must be added that for this hypothesis the authors would also take globalization as a process that is completely unrelated to the transition of workers from the manufacturing to the service industry; the explanation on why compensation still takes place would rather refer to the process of de-industrialization itself. Thus government spending would be meant to alleviate and improve the conditions under which the transition for the tertiary sector takes place for workers who are obliged to cross labor boundaries due to the restrictions of the labor market.
Nevertheless, most researchers fail to judge commerce in terms of the effects that imports and exports have independently on government spending. Moreover, by considering trade openness as the summed value of each, authors miss the opportunity to analyze the dynamics of commerce for a particular country (as competition can stem different results across different industries, and even further for different sectors)6.
Hence, the importance of considering trade openness by splitting imports and exports is a key principle from the Heckscher-Olin Model for trade and commerce: take for instance a developing economy abundant in skilled workers and the exportable good is produced is intensive in low-skilled workers, while the imported from another developed economy is intensive in high-low-skilled workers; we should expect a reduction in the price for the high-skilled imported product, which should itself translate in less income for the high-skilled workers from the developed economy. On the other hand, demand for the low-skilled exportable product from the developing country increases due to the local depreciation of the country’s currency, which should itself lead to an increase in the price for the exportable good and an increase in the level of compensation for the low-skilled workers in the developing country.
As so, scholars who have addressed the relation between increased internationalization of production and the provision of social security have arrived to the conclusion that in someway, political leaders do acknowledge the difficulties of establishing open trade and commerce; this is especially true in cases where rising imports can create losers in domestic industries that remain uncompetitive. This distortion will inevitably generate losers such as displaced workers in low-skill
demand industrial competition, while falling exports in this same sector will certainly damage domestic employment. As so, governments must acknowledge their need to compensate the globalization losers for the risk associated with this increased international competition and the volatility in the terms of trade that go with it (Cameron 1978, Ruggie 1982, Katzenstein 1985; Rodrik 1998). An interesting approach on the association between welfare and globalization comes from Brian Burgoon in his 2001 work “Globalization and Welfare Compensation: Disentangling the Ties that Bind”. In his research, Burgoon attempts to distinguish general trade openness and low-wage trade, and among government programs that more or less directly and immediately aid vulnerable groups and that are more or less costly to exposed producers and investors (Burgoon, 2001: 518). Interestingly, Burgoon seems to appreciate the divisiveness of trade and compensation, pinpointing the strengths and weaknesses of different sectors and how these confront trade overall.
Thus, it is clear that a large portion of literature has been built relating globalization and the compensation theory. As previously mentioned, a strong perspective emphasizes on the “pessimistic” interpretation of globalization as being in tense relation with the goals of the welfare state, due to the fact that the expansion in trade and international investments increases the economic insecurity, volatility and increases the scope of dislocation for citizens in advanced economies. The pessimistic approach of globalization will normally emphasize on the changing dynamics of trade that have shifted traditional labor markets in the most industrially advanced countries of the globe. Thus, globalization is understood by many scholars as to account for the incorporation of new industrial competitor nations in the world trade; whose incorporation has translated in them having a larger share of industrial production output in the global economy whilst displacing domestic production of goods (Autor, Dorn and Hanson, 2013).
2.5 Capital mobility
On another hand, convergence on international trade and economic integration has been tightly pressured by the easiness and increased flow of investment and transnational capital mobility throughout the developed world. Starting from the Heckscher-Olin and Stolper-Samuelson theorems to frame this picture, capital inflow can influence trade unions and government economic policy in different ways (though not necessarily bringing contradiction with both at the same time).
First of all, firms and corporations require capital, as capital is a necessary good that naturally serves to complement production originating from manpower itself; thus it is taken for granted that in an
open market economy under competition, firms will competitively struggle to obtain more capital so as to gain advantage over its competitors. As so, competition for attracting international capital investments is not only well connected to the well being of workers and the stability of international companies, but it can also have a direct impact on the management of welfare states, as their taxation policy structure could potentially be affected by the reduced/increased amount of capital inflow/outflow (Ganghof, 2006; Garrett, 1998; Genschel, 2002; Swank and Steinmo, 2002).
Regarding the latter, a large bulk of literature has been dedicated to analyzing how government strategies are shaped for the attraction of international investments; other scholars on the other hand, have dedicated a large portion of their research on the dynamics of tax competition (as a mean for governments to compete in attracting foreign investments), and on how this affects the financial basis of the welfare regimes (Sinn, 1997).
The political and economical consequences for the stability of social policies and the overall solidity of welfare states is undeniable; it is so that the globalization theory suggests that the ability of mobile asset holders to exit national jurisdictions forces policy-makers to compete for investments by cutting taxes on these, while placing a heaver tax burden on labor income and consumption (Tanzi, 1995).
Yet still, scholarly view on capital mobility and taxation schemes is at most mixed; for instance, Swank and Steinmo’s work on taxation for advanced capital democracies even suggests that taxation policy changes are not so much determined by capital mobility itself, but it is rather a complex interaction between globalization forces, government constraints and domestic economic changes (Swank and Steinmo, 2002). Nevertheless, capital mobility has had, and will continue having an impact on domestic economies and government budgetary constraints, that will nonetheless contribute in either enhancing or deterring income distribution for both developing and developed economies (Mahler, 2004).
2.6 De/Industrialization
As previously mentioned, an important portion of economic globalization literature that has focused on the effects of globalization on income distribution has distinguished the importance of analyzing the incorporation of newly industrialized nations in the international economy. As so, certain economic theorems would suggest that increased international competition has in a certain way implied that low-skill workforce intensive nations are more competitive compared to the previously
advanced industrialized nations of Europe. Following this line of argumentation, Dreher & Gaston’s work has contributed in demonstrating how an increase in trade and capital mobility could have forced de-industrialization in most developed countries, projecting a reduction in employment for low-skilled workers (see fig. 4 in Annex). Thus the level of industrialization of a country should be completely correlated to the state in which domestic firms can effectively remain competitive. Interestingly, however, the authors finding no resemblance regarding labor markets and income disruption for high-skilled workers in both developing and developed industrial nations (Dreher and Gaston, 2008).
Furthermore, scholars have challenged and continue to support explanations other than globalization for the reduction of the welfare state, and its consequences on income distribution. For instance, certain authors would disagree in aligning variables such as deindustrialization with globalization, and would argue that the processes of globalization and the shrink of the manufacturing industry have very different distributions in time and space. For this line of literature, to which we can refer as the “revisionist perspective”, the risks generated in the most industrialized nations could simply be the product of technologically induced structural transformations that are taking place inside their own labor markets; that is, increased productivity, consistent consumption pattern changes and a saturation of demand for products from traditional sectors from the local economy could be fueling a new shift in the employment structure (Iversen and Cusack, 2000)7. Even further, scholars have raised the importance of emphasizing the salience of the non-tradable service industry as a generator of jobs. As such, deindustrialization (as implying a shift towards the service industry) could indeed be not correlated to globalization, trade or other international factors such as capital mobility, since services are supplied on a location, yet are not traded in the traditional way such as a commodity or physical good (Iversen and Wren, 1998).
Thus, important changes have been identified in the advanced world, which suggest that a transition has taken place from the traditionally exposed manufacturing production model towards one in which service production has emerged. Whether or not this factor can be associated to globalization or not, it remains an important factor to take into consideration when analyzing both domestic factors and the interaction with other international factors than can hinder the capacity of welfare regimes, and thus affecting the goal of achieving an even distribution of income.
Having presented an overview on the main literature and theories for globalization and the relation with income distribution and the welfare regimes, as well as the domestic and global factors that
accompany them, then comes a full layout of the research theory that will be employed for investigating income inequality as the main outcome variable of analysis in this research thesis. In brief, this thesis seeks to answer two hypothetical scenarios that, in light of the theories previously exposed, could potentially be more connected than what certain authors might expect. The first question alluding to Rodrik’s previous research: Do more open economies have larger governments? Secondly, the other hypothesis to be researched is whether globalization has any direct impact on income distribution, or is there any intercept effect caused by the supposed existence of big governments? As such the purpose of this research is the investigate whether there is not any linkage between the economic aspects of globalization with the social and political dimensions of governments and societal institutions (namely, the welfare regimes and the social institutions that are intrinsically linked to them), and how these in turn affect the distribution of income.
As such, the two main competitive theories regarding globalization and the interaction with governments stress that globalization poses constraints on welfare regimes, thus impacting negatively on income inequality (Blank and Freeman, 1994); while on the opposite, welfare regimes are seen as a composition of social policies that are meant to minimize the damages that globalization poses for society. Thus, for the purpose of this research, globalization is defined as a global phenomenon that encompasses (though not in strict terms) trade openness and capital flow in and out of any country case. As such, the openness of trade (including its variability) and the mobility of capital in and out of a country are two indicators of how deeply integrated any nation is in the world. On the other hand, the other main independent variables for the research include government size (measured as government spending and the amount of public administrative workers), as it is a practical approach to analyze the impact of government size best suited for developing countries8.
Social and political factors such as the existence and size of trade unions, their wage bargaining relevance and the “color” of governments analyzed from their partisan balance of national cabinets will be taken into account so as to consider the redistributive effects that could be occurring beyond government size itself. Furthermore, by measuring these factors, further explanations could arise regarding a potential correlation between government size and global integration (i.e. if an alliance between trade unions and left-wing national administrations is present, which could give us reasons to believe in the applications of the resource-power theorem). The inclusion of these key domestic
8 Developing countries tend to not have proper welfare regimes as in most developed countries, thus instead relying on spending as a safety net mechanism (see Rodrik 1997).
variables stems from Vincent Mahler’s work on measuring the impact of globalization against domestic political factors.
Furthermore, controlling for deindustrialization is a key component that cannot be ignored to control in postindustrial economies (Iversen and Wren, 1998), as it places limitations both on the explanatory power of the resource-theory, but could also reduce the scope of measurement for both union movements and wage bargaining.
Finally, in view of the theories presented, the work that follows will hint at looking for measures on disposable income and primary income, as these will be used to analyze the difference of income distribution and redistribution by taking into consideration the global and domestic contexts that are either competing, complementing or substituting each other in their impact on the effective distribution of income that takes place for any country studied in this research. A suggested by Mahler, a more direct way of measuring state redistribution is to focus on the differences between pre and post tax and transfer income. Thus, measures for disposable and primary income are used for the purpose of understanding how income varies accordingly to the intervention of government redistribution, as well as through trade and the more domestic variables considered.
3. Research Theory
3.1 Research Design
As the goal for this research is to determine what are the underlying effects of experiencing globalization respecting income distribution, and whether greater openness as a consequence of globalization creates higher risk for countries (which in turn would involve an increase in government spending to provide for a safety net), case selection must follow a strict criteria in terms of representing a variety of samples, as well as having useful variations on the dimensions on which the theory of this thesis is being based on (Seawright and Gerring, 2008). Since the nature of this thesis research is exploratory and confirmatory of the previous research works carried out by Rodrik and Mahler on the interaction between domestic income distribution and globalization, the selection of countries is intended to include a diverse set of cases and populations so as to achieve a representative set of variations across countries and periods of time. Thus, large and low-income economies, former soviet-bloc members and countries that are not localized in any specific region around the globe were picked for this investigation.
3.1.1 Case selection
With the advent of the collapse of the USSR and the increased integration of nations towards different international organizations involving trade and political binding associations, it seemed that by the early 1990s no nation except the more hermitage nations of North Korea and other similar cases could resist participating in the global scenario. As such, no country in the world would stand in this new international trade and investment environment without experiencing any changes within its political system, or the way it participates in the international economic scenario. Thus, to carry out a proper research on the effects of globalization and global insertion, this research has attempted to provide a wide variety of random countries that are known to have different shares of income and stages of development. Thus the list includes countries that have significantly opened in the last 30 years such as China, Poland and South Africa.
It should be noted that data availability has been a limitation regarding case selection, especially when considering most developing countries to be studied. Nevertheless, cases were chosen as
randomly as possible under these conditions. Thus, the countries selected to be studied for this investigation are: Australia, Belgium, Canada, China, Finland, France, Greece, India, Ireland, Israel, Korea, Mexico, Netherlands, Poland, South Africa, Spain, Sweden, Switzerland, United Kingdom and the United States.
As would be expected for any research strategy, time framing can be seen as a tool and a limitation; this does not exclude this particular investigation. Nevertheless, the time framing selected for this specific research (1990 to 2009) has been chosen for distinct reasons:
First of all, it should be argued that the world has been experiencing a new wave of internationalization since at least the mid 80s. This new wave of international connection can be identified not only through the expansion of trade and finances, but is also reflected from a cultural aspect. This period is also characterized by the new global governance, direct consequence of the incorporation of the new former soviet states of Eastern Europe to the global scenario, together with the capitulation of the former USSR and the claim of the triumph of liberalist capitalist democracies9.
Secondly, the period selected for this study is generally considered to be a prosperous, characterized by an expansion in global figures for human development and economic growth in both the developing and the developed world (WTO, 2008; 19). Thus, the combination of both factors (increased international interaction and economic expansion) proves an ideal period of time to study the consequences these can have on the distribution on income right till the economic downturn caused by the global crisis experienced in 2007-2008.
Claims on whether this period should or not be considered a third wave it for globalization continues to remain a debate (Martell, 2007), of which this research seeks not solve at the moment. Certain authors however would support the claim that at least two episodes of globalization have taken place since the mid-19th century (Baldwin and Martin, 1999). Nevertheless, it cannot be denied that at least an economic globalization phenomenon has taken place involving the rapid increase of technological development, especially within the IT sector (WTO, 2008) and the expansion of competition through increased trade and FDI flows.
3.1.2 Research Operationalization
This research has been designed to be a panel data (cross-sectional time-series data) involving the twenty countries previously mentioned for a period of twenty years (1990-2009).
As previously mentioned, case selection was mostly based on the availability of complete and trustful data, specifically regarding income distribution and terms of trade. In many cases, information regarding gross and disposable income was unavailable, thus limiting the scope of countries that could be selected for this type of research. Nevertheless, the choices of countries to be studied have been made as random and as diverse as possible considering the limitations faced.
3.2 Model
The main research formula for this particular investigation is described as following:
𝒀𝒀
𝒊𝒊𝒕𝒕=
𝜶𝜶
𝑿𝑿
𝟏𝟏+ 𝜷𝜷𝑿𝑿
𝟐𝟐+
𝜸𝜸
𝑿𝑿
𝟑𝟑+
𝜺𝜺
Where
𝒀𝒀
𝒊𝒊𝒕𝒕 is the dependent variable income distribution where i=Country and t=Year𝜶𝜶
𝑿𝑿
𝟏𝟏 is the independent variable that accounts for globalization effect𝜷𝜷𝑿𝑿
𝟐𝟐 is an independent variable that accounts for the government intervention effect𝜸𝜸
𝑿𝑿
𝟑𝟑 is the combined interaction effect of globalization and government size𝜺𝜺
is the error termAs such, the model employed combines all the attributes previously exposed in the introduction section of this research. Further accounts the variable indicators will follow in the next section. In this manner, this research thesis will employ the model suggested by initially exploring the interactions between globalization effects such as economic openness, diversification of export portfolio and terms of trade risks with respect to the government size (spending). Tables 1-6 examine different government consumption and economic openness averages over several periods of 4-5 years from 1990 to 2009. The key in these Tables is to understand the significance of globalization factors on determining government expenditure itself. To this end, Tables 1-3 explore regressions between economic openness and government spending with the inclusion of certain indicators and dummy variables such as GDP Per Capita, Dependency Ratio and whether the country selected is a OECD-member. Afterwards, Table 4 includes the variables accounting for external trade risk and diversification of export products, alongside their interactive effects with economic openness.
From this, the model is then expanded to encompass the other potential explanatory variables (referring to the domestic political variables). Thus Table 7 introduces an array of domestic variables
