Free DP Download 28 November 2019 - Democratic governments mitigate the dangers of globalisation by increasing public spending to protect workers

Thursday, November 28, 2019

Raphael Espinoza, Jonathan D. Ostry, Xiaoxiao Zhang       
CEPR DP No. 14137 | 20 November 2019

Democratic governments attempt to protect their workers from the risks posed by globalisation by increasing public spending, particularly on labour market policies and family benefits. 

These are among the conclusions of a new CEPR study by Raphael Espinoza, Jonathon Ostry and Xiaoxiao, which investigates how trade and financial globalisation affect government decisions to redistribute via spending and taxation, using a large panel covering around 100 democratic countries over the period 1970-2015. Among the findings:  

  • Countries more exposed to globalisation have bigger governments and spend more on social expenditure, in particular for labour market and family programmes. 
  • Trade openness increases the tax burden on labour income and reduces the tax burden on capital income; financial openness reduces corporate income tax rates. 
  • Greater exposure to trade pushes governments to spend more on labour market programmes and family benefits. 
  • Education spending is not sensitive to trade openness.
  • Spending on programmes that benefit the general population is larger in countries with good democratic accountability and with proportional parliamentary systems.
  • Political institutions do not seem to affect the sensitivity of public spending to globalisation.

These findings highlight the challenges to governments willing to protect their populations from the economic risks that globalisation can create, but also constrained in their ability to do so by the mobility of tax bases.

Figure 7: Government expenditure in the OECD

Source: OECD Gvt Expenditure by Function (1970-2016)
Note: Wiskers show the 25-75 percentile range

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