From Myth to Reality: Globalization and Public Spending in OECD Countries Revisited

Abstract

The prevailing but not unchallenged 'conventional wisdom' in the literature dealing with the impact of globalization on public spending is that the effects of increased openness can be compensated through the welfare state. Repeatedly, studies have found little evidence for a 'race to the bottom' in taxation or spending. This research note shows that it is premature to conclude that globalization has no negative impact on public spending. By extending the period of observation well into the 2000s, by looking at changes in openness and spending instead of their levels, and by disentangling the effects of openness in the cross-sectional and over-time dimensions of variation, this paper shows that the association between increased openness and spending is clearly negative. Although the contribution of this research note is mainly empirical, some theoretical arguments are presented, emphasizing the long-term nature and complexity of policy-making in the politics of globalization.

Keywords: public spending, globalization, OECD countries, efficiency thesis

JEL Classification: F00, H53