The Globalization-welfare State Nexus Reconsidered

Abstract

Two hypotheses relate to the globalization-welfare state nexus: The efficiency hypothesis predicts that globalization reduces government sector size and governments’ capacity to finance the welfare state. The compensation hypothesis, in contrast, predicts that globalization induces a higher demand for social insurance which results in an extended welfare state. Empirical evidence on the globalization-welfare state nexus is mixed. We re-examine the evidence by investigating a yearly panel dataset of 186 countries for the 1970-2004 period. We use data compiled by the Penn World Tables on government sector size and employ the KOF index of globalization. The results show that globalization increased government sectors around the world. Social globalization especially had a positive influence. Globalization-induced effects were stronger in OECD countries. Overall globalization and economic globalization reduced the relative price of government expenditures. These findings suggest that globalization does not jeopardize the welfare state at all.