Welfare State vs. Market Forces in a Globalization Era

56 Pages Posted: 3 Sep 2019

See all articles by Assaf Razin

Assaf Razin

Tel Aviv University

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Alexander Horst Schwemmer

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Date Written: August 2019

Abstract

Globalization radically changes income distribution and triggers intense international tax competition. Therefore, globalization entails an extensive restructuring of the welfare state. We analyze a parsimonious model of an open economy, in its trade and finance transactions with the rest of the world, governed by voter-majority-controlled welfare state. We analyze the interactions between taxation, provision of social benefits, and globalization. We demonstrate how these interactions are grounded on trade-related and macro-related fundamentals, familiar from a standard open-economy model:(i) Degree of trade border frictions, (ii) Degree of international finance frictions, (iii) Relative factor abundance that determines the capital intensity of the country’s exports; and, (iv) Domestic savings and productivity of domestic investment, which determines whether the country is a financial capital exporter or importer. We address the issues of whether the welfare state enhances (or inhibits) the trade and financial openness driven by diminished border effects; whether globalization chips away at the generosity of the welfare state; and, whether the welfare state efficiently spreads out the gains from globalization from winners to losers.

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Suggested Citation

Razin, Assaf and Sadka, Efraim and Schwemmer, Alexander Horst, Welfare State vs. Market Forces in a Globalization Era (August 2019). NBER Working Paper No. w26201. Available at SSRN: https://ssrn.com/abstract=3446511

Assaf Razin (Contact Author)

Tel Aviv University ( email )

Efraim Sadka

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9712 (Phone)
+972 3 642 8074 (Fax)

National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

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IZA Institute of Labor Economics

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Bonn, D-53072
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Alexander Horst Schwemmer

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

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