Globalization, Redistribution, and the Size of Government

46 Pages Posted: 4 Dec 2019

See all articles by Raphael A. Espinoza

Raphael A. Espinoza

International Monetary Fund (IMF)

Jonathan D. Ostry

Georgetown University; International Monetary Fund (IMF)

Xiaoxiao Zhang

University of Cambridge

Date Written: November 2019

Abstract

This paper investigates how trade and financial globalization affect government decisions to redistribute via spending and taxation, using a large panel covering around 100 democratic countries over the period 1970-2015. We use a time-varying external instrument in regressions with fixed and time effects in order to overcome endogeneity concerns that have plagued the earlier literature. Our findings support the view that more open economies have bigger governments. The paper also examines the impact of globalization on different types of social spending and taxes. We find that trade openness increases the tax burden on labor income and reduces the tax burden on capital income and that financial openness reduces corporate income tax rates. In addition, exposure to trade pushes governments to spend more on labor programs and family benefits. Finally, the paper does not find that political institutions affect the sensitivity of public spending to globalization.

Keywords: Financial Liberalization, Government size, redistribution, Trade openness

JEL Classification: F68, H11, H53

Suggested Citation

Espinoza, Raphael A. and Ostry, Jonathan D. and Zhang, Xiaoxiao, Globalization, Redistribution, and the Size of Government (November 2019). CEPR Discussion Paper No. DP14137, Available at SSRN: https://ssrn.com/abstract=3496626

Raphael A. Espinoza (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://oxford.academia.edu/RaphaelEspinoza

Jonathan D. Ostry

Georgetown University ( email )

Washington, DC 20057
United States

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Xiaoxiao Zhang

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

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