Can Welfare State and Globalized Markets Co-exist Sustainably?

Отправлено 26 февр. 2015 г., 21:53 пользователем Vladislav Moiseev   [ обновлено 26 февр. 2015 г., 21:54 ]

Can Welfare State and Globalized Markets Co-exist Sustainably?

By Marina Chugunova
(M.Sc. Politics, Economics and Philosophy, University of Hamburg) 


Globalized markets put ever more pressure on the state and reshape it accordingly. The concept of the welfare state appeared as a response to the challenges of globalization. Due to the global crises ideas of the welfare state gain both new proponents and opponents. The question of sustainability of the process lies at the core. This article considers compensation and efficiency theories, as well as empirical evidences to shed a light on the issue.

Key words: markets, globalization, welfare state, sustainability, redistribution.


Глобализация становит перед государством новые вызовы. Концепция «социального государства» возникла как ответ на эти вызовы. В связи с экономическим кризисом идеи социального государства вызывают как поддержку, так и неодобрение. С целью понять, является ли социальное государство достаточно устойчивым, в данной статье рассматривается теория компенсации и теория эффективности, а также результаты некоторых эмпирических исследований.

Ключевые слова: рынки, глобализация, социальное государство, устойчивое развитие, перераспределение.

I. Introduction

The years 2005 to 2014 were proclaimed by the United Nations to be a Decade of Education for Sustainable Development, and UNESCO contributed to this commitment in all its different fields of competence. Although the term sustainable development is usually used with regard to environmental issues, its meaning is significantly broader, for instance, policy decisions may be sustainable or not. In this article I would like to elaborate on the question whether a welfare state and globalized markets can co-exist sustainably. Since the middle of the 20th century welfare state policies were adopted to a different extent throughout the world. However, due to the globalization of markets the situation seems to be likely to change. The welfare state model is an interesting case, since it can be regarded as a response to the process of globalization: social securities may undermine the incentives to be productive and thus to fail to grab the benefits. It can be regarded as a trade of between long term and short term benefits, which is always present in the questions of sustainability.

Global markets have emerged and we are witnessing how the relationship between states and markets are transforming. There were a number of speculations about it, since some scholars predicted the demise of the state in the face of increasingly global markets. Not going that extreme in this article I would like to touch upon the issue of how modern markets affect the state and vice versa.

There can be two hypotheses, regarding the co-existence of the globalized markets and states, which relate as “yes” and “no” to the question stated in the title respectively. Loosely formulated these are:

  • Globalization will promote efficiency and thus the size of the government will shrink. In other words, increasing levels of global economic integration are associated with a decrease in welfare expenditure.

  • Globalization brings about the preferences for more social security among the citizens; therefore in democratic countries governments will obtain a wider range of powers. Thus, globalization produces an expansionary effect on social spending.

    To answer the question the paper will follow the structure. Having introduced shortly the topic, concepts of globalization and welfare state, I will proceed to outlining and discussing shortly the line of arguments, which both of the hypotheses are based on taking into account both a theoretical approach and existent empirical evidences1.

    After the end of the World War II the system of the welfare state has been widely used in attempt to make capitalism and democracy compatible in the developed countries. Following the definition of H.L. Wilensky as stated in Caramani [3], the welfare state secures “government-protected minimum standards of income, nutrition, health, housing and education assured to every citizen as a political right not charity”. Keeping this definition in mind, it should be mentioned nevertheless that the state is not the only provider of welfare. Welfare states in their essence can be regarded as “politics against the market” [3] i.e. the welfare state makes up for the flaws of capitalism.

    In the welfare states voter tend to expect the government to:

        to systematically perform macroeconomic control over the economic developments, and

        to conduct certain redistributive social policy so as to guarantee, adequate living                    standards.

Macroeconomic control is usually implemented as an active

‘Keynesian’ policy that ensures continuous growth and full employment through ‘countercyclical’ monetary and fiscal policy. The public provision of social guarantees against individual risks such as poverty, sickness, and unemployment plus the redistribution of income and wealth from those doing well in the market to those at risk falls into the domain of the redistributive social policy.

The complexity of the globalization phenomenon can hardly be overestimated. Maybe that is the reason why the number of definitions of this term exceed every comprehensible limit and still it is not defined properly. Since it is not the aim of this paper I will simply draw a well renown definition of Giddens and will use it as a starting point.

Globalization can be defined as the intensification of worldwide social relations which link distant localities in such a way the local happenings are shaped by event occurring many miles away” [3].

In other words the different societies of the world have become more interconnected in economic, political, cultural etc. terms and the influence of others.

Most of the scholars even if they belong to the globalization sceptics agree that this intensification is indeed existent. Apart from noting that the rates of capital movement, for instance, have increased strongly over the past decades, they claim that the current state of economic integration is not without precedent (referring to the period of up to the First World War).

Within the framework of Westphalia system, the state is the dominant player on the international arena. They are sovereign in their own territory and thereby a non-intervention principle was established. However, as it was already mentioned above states become more interconnected and thus changes in, for example, fiscal policy may “intervene” with a policy of the country in another part of the globe. Thus, states have to adopt and this turn us back to the two options of how they can do so.

II. A. Globalization will negatively affect the level of social spending.

This stream of argument is usually referred as “an efficiency theory” [1]. Its fundamental idea is that high levels of government welfare expenditure undermine economic efficiency and the competitiveness of domestic firms in international markets.

Welfare policies should be funded from some source:

  • if social spending are funded from corporate taxes, any increase in social expenditures is followed by an increase in the level of taxes, which may negatively affect confidence of investors and the competitiveness in domestic and

    international markets[4].

  • They can be financed from the government debt. Growing

    government borrowing lead to higher interest rates and the devaluation of the currency. These factors affect production costs and spoil investment climate [4].

    All in all, higher corporate taxes will induce capital flow, since corporations will relocate and it will lead to the “race to the bottom” in terms of taxes and globalization is making this relocation easier and thus competition stronger.

    Another subtopic, which should be considered in the regard of efficiency theory, is an issue of minimal income and wage floor. If we treat international trade from the perspective of Heckscher-Ohlin model, it can be stated that developed countries have more skilled workers and capital, than developing countries and thus they would export goods andservices that require intensive use of these factors and import those that are relatively intensive in unskilled labor. Therefore the demand for skilled labor rises and the demand for unskilled labor falls, if markets get more integrated. Then, under no regulation, wages of skilled workers would rise and the wages of unskilled workers would fall. Generally it is assumed that potential gains overweight potential losses and thus the average standard of living. However, with the welfare state system in place some distortions can be observed. However, the welfare state introduces minimal income which distorts market clearing price. Minimal income tend to be relatively high and thus creates incentives for enjoying the support of the state, which is conditioned on the fact of being unemployed. If more people opt for social benefits, tax base shrinks and therefore to keep the wage floor constant the tax burden on the working population should rise, which in turn reduces their incentives for working. Moreover, in the welfare states the power of trade unions is relatively high in most of the cases. However, they represent their members, who are employed and thus stand for higher wages. Thus, wages turn out to be excessively high, causing unemployment, which shrinks the tax base and requires tax rates to be raised in order to provide the requisite unemployment benefits and welfare state entitlements.

    When a wage floor, the assumption that gains outweigh losses and thus globalization is beneficial does not hold, because workers with lower skills not only stop producing output , but also they demand state support and the skilled workers get higher taxes and therefore produce less. So if we follow this way of arguing a globalization process seem to boost the average living standard under free markets may lower this living standard under the welfare state [9].

    Wrapping it all up, the efficiency hypothesis suggests that under pressure of globalization states will have to lower the taxes to prevent mobile factors from moving. Consequently, the public spending will be pushed downwards as well due to the tightened budget constraint.

B. Globalization creates demand for more social security and thus with its advances welfare state will thrive.

This strain of thought is usually referred as “compensation theory”. Its proponents acknowledge that states find themselves in a tight position under the pressure of increased economic integration, but they stress that people’s preferences for more social security can not be overlooked and in order to be reelected politicians will put into practice policies, which secure their reelection.

According to this approach, the welfare system is needed to offset the costs of global economic integration. Efficiency theory focuses its attention on the economic consequences and thus almost ignores the political incentive to support welfare spending, which can be regarded as a response to globalization [4]. Performed policies to some extent correlate with the preferences of the citizens. Due to the increased competition voters are affected by uncertainty and therefore are willing to get an insurance against the risks. Therefore parties and candidates, who promise social benefits, are likely to be (re)elected.

Moreover, politicians will also provide welfare benefits to ensure smooth functioning of the national financial markets despite of the negative externalities of global economic integration [1].

III. Empirical evidences.

Many scholars have focused their attention on the interplay of the globalization process and welfare state and studied it empirically with the help of various measures for the size of government, the welfare state, and globalization. Approaching the issue from different angles they considered different indices as the most relevant. Size of government can be reflected, for instance, by tax rates, overall revenues including tax income and contributions to the social security system, overall government expenditures and social expenditures. As for globalization, its advances can be measured, for example, by trade openness, foreign direct investment, capital account restrictions or specialized globalization indices. The studies also differ in the data set and time spans under analysis. Therefore it comes as no surprise that empirical studies bring mixed results.

The comprehensive survey of this research field can be found in, for example, Gemmell et al. [5]. I will just mention some of the most prominent studies to show that both theories are not purely theoretical, but have some evidences behind it.

So, the paper of Garret [4] shows that the efficiency theory does in fact take place and confirms the logic described above. The study assessed the impact of economic globalization on the growth of government spending in OECD countries and showed that trade and international financial openness had a negative effect on government spending. Showing that the result holds for Latin American countries as well, Kaufman and Segura-Ubiergo [7] found it clearly that aggregate social spending and social security transfers are consistently negatively correlated with trade openness.

On the contrary, when David Cameron’s [2] conducted one of the first empirical studies of the field and looked on the welfare patterns among the Northern European countries, he showed that openness to trade was strongly correlated with what he called the “scope of the public economy,” and reflects the change in total taxes as a percentage of GDP. The result claimed that trade openness is the best predictor of the growth of government revenues. Large nations, which tend to have less open economies had moderate increases in the scope of the public economy compared to smaller nations with more open economies.

A more recent paper of Avelinon et al. [1] refutes the results of Kaufman and Segura-Ubiergo [7] mentioned above. They considered Latin American countries and their results prove the compensation theory. They applied financial openness and measured trade openness, and concluded that trade openness has a positive relationship with education and social expenditures, and financial openness does not reduce government expenditures for social programs as the efficiency theory predicts it.

IV . Conclusion

This paper restated shortly the line of arguments as well as empirical evidences of efficiency and compensation theories to study the relationship between the process of globalization and the welfare state. Reconsidering it all together, I would conclude that by default if citizens had no vote and no concern about the issue, the “race to the bottom” would occur and the welfare element of the state would be squeezed out. However, nationals can affect the system and thus, by design, welfare state will keep its positions. We can witness interplay of the two approaches: it is difficult to measure, how strong is the pressure of the international markets, since its effects are remedied by the welfare state.

I would also like to mention that this topic clearly reveals contradictions between the field of policy making and economy. From the point of view of economy, inefficiencies as such are to be avoided and fixed, politicians create inefficiencies for the outcome to be more sustainable. Since the decision to rely on the markets is in itself a political decision, I believe that welfare state and globalization can co-exist sustainably. Promoting awareness about the issue UNESCO contributes to the more sustainable future.


  1. Avelinon, G., Brown D.S., and Hunter W. (2005). The Effect of Capital Mobility, Trade Openness, and Democracy on Social Spending in Latin America, 1980-1999. American Journal of Political Science 49:625-41.

  2. Cameron, D.R. (1978). The expansion of the public economy: A comparative analysis. American Political Science Review 72, 1243- 1261.

  3. Caramani, D. (eds) (2008). Comparative politics, Oxford Univeristy Press.

  4. Garrett, G. (2001). Globalization and Government Spending around the World. Studies in Comparative International Development 35:3- 29.

  5. Gemmell, N., Kneller R., and Sanz I. (2008). Foreign investment, international trade andthe size and structure of public expenditures. European Journal of Political Economy 24, 151-171.

  6. Jeong, H. (2010). Globalization and the politics and the welfare state. University of Kentucky Doctoral Dissertations. Paper 27.

  7. Kaufman, R. R., Segura-Ubiergo A. (2001). Globalization, Domestic Politics, and Social Spending in Latin America: A Time Series Cross-Section Analysis,1973-97. World Politics 53:553-87.

  8. Meinhard S., Potrafke N. (2011).The globalization-welfare state nexus reconsidered, Working Paper Series 2011-27

    9. Sinn, H.-W. (2007). Can Germany Be Saved? The Malaise of the World's First Welfare State. Cambridge, Massachusetts: MIT Press