Electronic copy available at: http://ssrn.com/abstract=1659375

Globalization and Welfare: Which Causes Which?

Eunyoung Ha

Claremont Graduate University

Eunyoung.Ha@cgu.edu

George Tsebelis

University of Michigan, Ann Arbor

tsebelis@umich.edu

Paper prepared for the Annual Meeting of the American Political Science Association,

Washington, D.C., September 2-5, 2010

Electronic copy available at: http://ssrn.com/abstract=1659375

Abstract:

The existing literature on the relationship between globalization and welfare programs

has been divided into neo-liberal (economics) and compensation (political science) theses, which

have produced theoretically contradictory expectations and mixed empirical results. This paper

not only combines the theoretical arguments of these two literatures, but also subsumes them,

explaining the contradictions in the literature by reversing the causal chain of the compensation

thesis and considering it alongside the arguments of neo-liberals: globalization pressures states to

cut welfare expenditures (economics thesis), while expansion of welfare programs allows states

to further pursue globalization at the same time (reverse causation of compensation thesis). This

study analyzes the trajectory of both globalization and welfare spending in18 advanced industrial

countries from 1970 to 2000 and finds support for our dynamic causal model that prior levels of

globalization are negatively associated with current levels of welfare spending, while prior

welfare policies are positively related to current levels of globalization. This paper is the first to

both theoretically and empirically evaluate a simultaneous relationship between globalization

and welfare spending and investigate their equilibria. This is also the first paper that calculates

the effect of independent variables (i.e. GDP, labor power, and ideological distance of

government parties) on these equilibria. The effects of independent variables on equilibrium

results are not the same as those in the partial regression equations (except for labor power).

GDP has a negative effect on the equilibrium value of welfare (while it has a positive effect in

the partial equation), and ideological distance negatively affects both welfare and globalization

(while it has no effect on globalization in the partial equation).

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Globalization and Welfare: Which Causes Which?

The dispute over globalization’s impact on welfare expenditures has been intense; but it

has not yielded constructive agreements in the international and comparative literature on how

these two phenomena are related to one another. Instead, the two main schools of the literature

continue to produce opposing theories and findings. Thus, the neo-liberal economics thesis

argues that globalization has forced states to retrench social welfare programs in order to achieve

a market friendly environment and attract increasingly mobile international capital (Allan &

Scruggs 2004; Aspinwall 1996; Blackmon 2006; Castells 2004; Drache 1996; Grieder 1997;

Korpi & Palme 2003; Pfaller et al. 1991; Rodrik 1997; Strange 1996), while the compensation

thesis insists that globalization has pressured states to expand welfare expenditures in order to

compensate for domestic “losers” from the globalization process (Brady et al. 2005; Cameron

1978; Garrett 1998; Katzenstein 1985; Quinn 1997; Rieger & Leibfried 2003; Rodrik 1998;

Swank 2002). These two arguments are both theoretically plausible: because states in this global

era seem to be pressured to cut taxes and public expenditures to create business friendly

environments, leaders may need to reduce the generosity of their welfare policies, while they

also seem to be simultaneously compelled to expand social welfare to compensate those who are

harmed by globalization. Because existing empirical studies have produced the same set of

mixed and even contradictory results, empirical studies on the topic have only added to one side

or the other of the two arguments. They have rarely attempted to bridge the gap either

theoretically or empirically. As a result, the globalization-welfare debate seems to be never-

ending.

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In this article, we combine the two theoretical arguments of the neo-liberal economics

and compensation literatures, and also explain what appeared to be contradictions between the

literatures by subsuming both of the traditional theories. We argue that globalization pressures

states to cut welfare expenditures (economics thesis), while welfare expansion allows states to

further globalization at the same time (reverse causal argument of the compensation thesis).

Our analysis is distinctive in at least two ways. First, and unique among the current

scholarship, this paper theoretically and empirically evaluates a dynamic causal relationship

between globalization and welfare spending. Although the current literature focuses on whether

globalization is positively or negatively associated with welfare expenditures, we suggest that

globalization and welfare are in fact both positively and negatively associated with each other.

Differing from the compensation argument, we propose that welfare expansion is not a result but

a condition of globalization. In order to continue with the process of globalization, politicians

must expand social safety nets when failing to do so would meet with strong political opposition;

as the country becomes more globalized, concerns about international competitiveness

incentivize leaders to retrench welfare. Therefore, a negative causal link from globalization to

welfare in the economics thesis is not contradictory but compatible with a positive causal chain

from welfare spending to globalization. This paper thus theoretically as well as empirically

explains why the existing empirical studies have often found inconsistent and mixed empirical

results. The empirical analysis on 18 advanced industrial countries from 1970 to 2000 supports

our dynamic model of causal relationships between globalization and welfare spending: prior

levels of globalization in (t-1) is negatively associated with current levels of welfare in (t), while

prior welfare in (t-1) are positively related to globalization in the current period (t).

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Second, this paper calculates the equilibria of globalization and welfare and the effect of

independent variables (GDP, labor union power, and ideological distance of government parties)

on equilibria. Interestingly, the equilibrium results for GDP and the ideological distance of

government are not the same as those in the partial regression equations that have been estimated

independently in the literature. Logged GDP per capita has a negative effect on the equilibrium

value of welfare spending while it has a positive effect in the partial equations. Increased

ideological distance of government parties negatively affects both welfare spending and

globalization, while it has no effect on globalization in the partial equation.

We have organized this paper into five parts. First, we review the debate on the

relationship between globalization and welfare spending. Second, we propose a dynamic model

where globalization and welfare are simultaneously but oppositely related with each other. Third,

we describe our data, two empirical models (seemingly unrelated regressions and a system of

equations using OLS with panel-corrected standard errors) and their results. Fourth, we present

equilibrium results for welfare and globalization and provide comparative statistics for the

independent variables (GDP, labor union power and the ideological distance of government

parties). Finally, we consider the implications of the results.

I. Globalization and Welfare: the Never-ending Debate

The Neo-liberal Argument

Numerous scholars exploring the effects of globalization on national welfare policies

argue that globalization has forced states to retrench welfare policies (Allan & Scruggs 2004;

Aspinwall 1996; Blackmon 2006; Castells 2004; Drache 1996; Grieder 1997; Korpi & Palme

2003; Pfaller et al. 1991; Rodrik 1997; Strange 1996). According to this strand of scholarship,

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globalization has constrained the policy-making choices available to individual governments by

compelling them to make international competitiveness the primary concern of their fiscal and

economic policies. When national markets integrate into the world market, investors and

producers in industrial countries have to compete against those in less developed countries

(LDCs). As market integration progresses, government welfare and tax-increase policies create

inefficiencies because welfare expenditures/contribution policies, regulations, and higher tax

burdens prevent manufacturers in welfare states from competing effectively with their

counterparts in LDCs by increasing operating costs. Since social costs add to total labor costs,

social welfare programs make products from countries with high labor costs “uncompetitive” by

increasing the marginal cost of each unit, making their products more expensive than similar

goods produced in countries that do not impose these costs on companies (Huber et al. 2001, p.

224). This loss of competitiveness results in capital flight from high cost countries, and

consequently, increased unemployment, unless payroll taxes on contributions are reduced to

bring down labor costs. Governments thus have to cut tax burdens and social programs to

facilitate the price competitiveness of domestic producers and maintain a business-friendly

environment.

If welfare states attempt to fulfill the welfare provisions they have promised, they face a

deteriorating fiscal situation and become plagued by ever-growing budget deficits and debt. The

loss of competitiveness also results in lower growth and reduced revenue. If governments

borrow to pay for social services, interest rates increase for all borrowers in the country and, in

turn, discourage investment and economic growth. Confronting acute balance of payments crises,

the governments find it hard to pursue a nationalist economic policy isolated from the broader

international environment (Fourcade-Gourinchas & Babb 2002). In order to avoid a fate of

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budget deficits and balance of payment crises, governments have no choice but to retreat from

progressive government policies and pursue market-friendly/liberal economic policies, which we

call the neo-liberal argument hereafter.

The curtailing of government welfare is particularly necessary from the neo-liberal

perspective because internationally mobile capital and the internationalization of production have

significantly limited the ability of governments to undertake redistributive taxation or implement

generous social programs. Confronting higher payroll taxes and taxes on corporate profits,

mobile asset holders can move their assets to other states where they are promised a lower cost

of production. As such, countries can keep high corporate taxes and social benefits only if they

are willing to tolerate the tradeoff: less investment, lower economic growth and higher

unemployment. Because internationally mobile capital and firms are also integral parts of the

tax base, governments that maintain existing levels of social protection have to risk consistent

tax revenue reductions. In order to keep these footloose international investments, states have to

reduce taxes on corporations. However, this concession to the forces of international

competition on payroll taxes and corporate taxes also results in tax revenue reduction which, in

turn, exerts a downward pressure on social welfare spending.

The integration into the world market has also reduced the political power of

constituencies most favorable to welfare policies by weakening the strength of labor unions and

social corporatist institutions (Kurzer 1993; Mishra 1993; Moses 1994; 2000). In the 1950s and

1960s, when demand for unskilled workers was generally increasing, there was a consensus to

reduce occupational wage differentials and keep greater wage equality within the country. As

national economies have been integrated into the world market and have had to compete with

LDCs for investment, the demand for low-skilled and semi-skilled labor has declined in all

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advanced industrial societies, while that of skilled labor has surged (Leamer 1993; McKeown

1999; Rodrik 1998; Wood 1994). In the face of declining demand for unskilled labor, if a

country wants to keep wages low enough to maintain full employment, the wages of low-skilled

workers in the country rise relative to that of high-skilled workers, whereas the wage restraints

on higher paid workers become more severe. Therefore, the interests of high-wage workers and

unskilled workers have diverged from the solidaristic bargaining traditional in advanced

corporatist countries. As a result, the heterogeneity and competitiveness of labor market

institutions has generally increased in industry-level jobs (Moene & Wallerstein 1995).

Moreover, the rapid increase of multinational corporations (MNCs) has strengthened “the

leverage of capital vis-à-vis labor unions by making ‘the threat of exit more credible’” (Huber et

al. 2001, 224). The mobility of capital has made the services of large numbers of workers easily

substitutable across national boundaries, significantly reducing the bargaining power of

immobile labor and shifting relative power in collective bargaining and other political forums

toward employers in labor markets (Rodrik 1997). If MNCs confront militant labor unions and

high labor costs, they can simply move to countries with fewer government regulations, docile

labor, and higher returns on their investments. Because no international labor union exists, labor

unions have lost significant power over employees in negotiations under the exit threat of firms

and found it difficult to expand their membership, protect income and retain domestic jobs.

In summary, the neoliberal argument says that globalization has limited the policy-

making options available to individual governments, since governments are increasingly

concerned with maintaining international competitiveness (Rodrik 1997). Due to the negative

social consequences of maintaining high labor costs, governments respond by slashing public

expenditures and social protection in the name of international competitiveness.

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The Compensation Argument

Challenging the neo-liberal economic argument, several scholars assert that economic

integration has increased the demand for social security and pressured states to expand welfare

expenditures (Brady et al. 2005; Cameron 1978; Garrett 1998; Hays 2009; Katzenstein 1985;

Rieger & Leibfried 2003; Rodrik 1998; Swank 2002). According to this argument, although

market integration may benefit all segments of society in the long-run, it increases social

dislocation, economic insecurity and inequality in the short-term by making “the distribution of

incomes and jobs across firms and industries unstable” (Garrett 1998). Because the increase in

economic insecurity strengthens citizen support for welfare expansion, electoral concerns result

in governments feeling pressure to enlarge welfare transfers to protect the exposed workers and

firms, smooth business cycles and lessen insecurities and risks (called the compensation

argument hereafter).

Market integration increases economic inequality and vulnerability. According to the

Stolper-Samuelson theorem, increased international trade raises the incomes of owners of

abundant factors and reduces the incomes of owners of scarce factors. Because advanced

industrial countries have proportionally more capital owners and skilled labor, trade is expected

to benefit capital and skilled labor relative to unskilled labor, increasing income inequality.

Similarly, increased capital flows are expected to raise income inequality in advanced industrial

economies because capital outflows from capital rich countries to LDCs reduce domestic

investment and lower the productive capability and demands for labor in these economies (Ha

2009). Because a reduction in total capital in the production process increases the marginal

productivity of capital relative to the marginal productivity of labor, capital outflows increase

the income of capital relative to labor, increasing income inequality. In particular, because

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foreign direct investment (FDI) outflows from advanced industrial countries tend to be

concentrated in industries with low-skilled labor in the home country (Lee 1996), rapidly rising

FDI outflows often reduce the demand for low-skilled labor and increase income gaps in

industrialized countries. In fact, several studies find that trade with less developed countries is

associated with expanded income inequality in industrialized countries (Leamer 1993; 1996;

McKeown 1999; Rodrik 1998; Wood 1994).

Market integration can also increase social dislocation and economic insecurity. Imports

from LDCs increase the elasticity of demand for labor and raise the volatility of wages and

employment. The more elastic demand for labor in international trade can decrease workers’ job

security in advanced industrial countries. In recent years, many scholars have found that labor

market volatility and insecurity have risen in industrial economies regardless of the existence of

the economic risks in the societies (Gottschalk and Moffitt 1994; Hays 2009; Scheve &

Slaughter 2004; Schmidt 1999). For example, Scheve and Slaughter (2004) find that individuals

felt more insecure as FDI increased in Great Britain from 1991 to 1999. This heightened degree

of inequality and insecurity in society enlarges public support for welfare protection and

strengthens the power of labor unions. Those who suffer the consequences of increased market

openness and international competition become new political constituencies for leftist parties

which have greater political incentive to enlarge social welfare than center/rightist parties

(Garrett 1998).

Indeed, the neo-liberal and compensation arguments rely on economic and political

rationalizations, respectively, to explain the relationship between globalization and welfare.

Neoliberal economists emphasize the fiscal side of the story: governments have a strong

incentive to cut welfare provisions in order to maintain economic prosperity. Political scientists

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stress the political side of the story: governments have a powerful motivation to expand welfare

expenditures in order to reduce the inequality and insecurity that result from market integration.

To find out which explanation is the “real story,” many studies have examined the relationship

between globalization and welfare. However, the empirical findings in both sets of literature

reveal mixed results. Some scholars find that globalization is systematically associated with the

expansion of welfare expenditures (Brady et al. 2005; Ha 2008; Hicks 1999; Garrett 1998;

Plümper et al. 2005; Quinn 1997; Rieger & Leibfried 2003; Rodrik 1998; Swank 2002), while

others demonstrate that globalization is negatively associated with social welfare (Allan &

Scruggs 2004; Burgoon 2001; Garrett & Mitchell 2001; Huber & Stephens 2001; Korpi & Palme

2003; Rodrik 1997). Still, others find mixed (e.g., Hicks & Zorn 2005), curvilinear (Hicks

1999), or insignificant results (e.g., Iversen & Cusack 2000; Kittel & Winner 2005).

II. Rethinking the relationship between Globalization and Welfare.

It is clear from a review of the literature that there are many contradictions, both at the

theoretical and at the empirical level. At the theoretical level it seems that the economic literature

expects a negative coefficient of globalization in the regression of welfare spending. Figure 1

illustrates this expected relationship when welfare spending is a negative function of

globalization.

INSERT FIGURES 1 AND 2 HERE

On the other hand, the political science literature expects a positive coefficient for the

same regression. Figure 2 presents a visual summary of this argument. And the empirical

literature follows suit to the contradictory expectations of these two arguments, with some

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findings corroborating the expectations of a positive relationship, others of a negative one, while

others find a curvilinear relationship or none at all.

If, however, we pay close attention to the political science literature, there are those who

do not make the argument presented in Figure 2, but pose a different hypothesis that has been

widely cited in the compensation thesis literature. Let’s examine this alternative version of the

compensation argument:

“For the small European states, economic change is a fact of life. They have not chosen

it; it is thrust upon them. These states, because of their small size, are very dependent on

world markets, and protectionism is therefore not a viable option for them…Instead,

elites in the small European states, while letting international markets force economic

adjustments, choose a variety of economic and social policies that prevent the costs of

change from causing political eruptions. They live with change by compensating for it. In

doing so, the small European states have cultivated a strategy that both responds to and

reinforces their domestic structures (Katzenstein 1985, 24)…..The small European states

complement their pursuit of liberalism in the international economy with a strategy of

domestic compensation (Katzenstein 1985, 47).”

“[T]he postwar international economic order rested on a grand domestic bargain:

societies were asked to embrace the change and dislocation attending international

liberalization, but the state promised to cushion those effects by means of its newly

acquired domestic economic and social policy roles. Unlike the economic nationalism of

the thirties, then, the postwar international economic order was designed to be

multilateral in character. But unlike the laissez-faire liberalism of the gold standard and

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free trade, its multilateralism was predicated on the interventionist character of the

modern capitalist state (Ruggie 1996).”

“A more careful examination of the discourse on the theory and practice of free trade

reveals, however, the critical importance of the social – and thus nation-state based –

foundations of open foreign trade relations. There is considerable evidence to support the

contention – a primary thesis of this volume – that the universal transformation from

industrial society to the welfare state played a critical role in shaping the conditions of

the emergence of stable, sustained world market integration. (Rieger & Leibfried

2003,13).”

“I argue that the underlying factors that gave rise to the bargain of embedded liberalism

are still in place, even in the liberal market economies: governments remain committed to

free trade; workers in sectors of the economy exposed to foreign competition are still the

strongest opponents; insurance and compensation programs remain the most effective

means for governments to increase support for trade among those who are inclined to

oppose it (Hays 2009, 12)”

These statements imply a different relationship between welfare and globalization than

that illustrated in Figure 1, not in terms of the sign of the coefficient of the relationship between

globalization and welfare spending, but, more importantly, in terms of the direction of the

underlying causality. These authors do not consider welfare to be the result of globalization, but

to be a condition for it. Figure 3 gives a visual representation of the argument.

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INSERT FIGURE 3 HERE

As the quotations above indicate, the argument in Figure 3 is not new in the literature.

Several scholars have argued that the current liberal international political economy was founded

on the implicit bargain between governments and their citizens of “embedded liberalism”

(Katzenstein 1985; Cameron 1978; Ruggie 1982; 1996; Rieger & Leibfried 2003; Hays 2009).

According to this argument, citizens are asked to support market liberalization and accept the

social dislocation that results from it, while governments promise to protect their citizens from

the shocks of the liberalization process through domestic social policies and labor market

programs. This compromise has buffered governments from backlashes against market

liberalization and precipitated market integration after World War II.

However, not all of the political science literature has supported the “embedded

liberalism” arguments quoted here. Some authors do not distinguish welfare programs as a

condition of globalization in Figure 2 from welfare as a result of globalization in Figure 3,

instead they argue for the two at the same time. Even those who theoretically support the

embedded liberalism thesis empirically test only the argument illustrated by Figure 2 (e.g. Hays

2009). Although the underlying arguments in Figures 1 and 2 are contradictory, the arguments

in Figures 1 and 3 can be simultaneously compatible. The major goal of this paper is to

investigate this possibility empirically.

Additional examples may make the underlying distinction clearer. Consider the issue of

crime and punishment. There are well-known economic theories of crime arguing that crime is a

declining function of the severity of the penalty. Suppose now that an empirical researcher

collects data about one particular crime (say robbery) in different territorial units (say the states

of a federal country) and finds that there is a positive correlation between crime and punishment.

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Suppose also that this researcher has introduced all the relevant control variables to make her

analysis invulnerable to omitted variables arguments. Should Chicago economists abandon their

claims? Or, more to the point: would they abandon their claims? We want to argue that neither

would they, nor should they. An argument can be made that accounts for the positive correlation,

while accepting the underlying economic argument regarding crime and punishment: It can be

argued that the states that have higher penalties are the ones that had higher rates of crime, and

this is why they increased the levels of penalties, and sooner or later the states with higher

penalties will see crime rates going down. Note that here the wrong correlation was explained

by the reversal of causality: instead of considering crime as a function (result) of penalty the

explanation considers penalty as a function (result) of crime and the paradox disappears.

Let us use another example from evolutionary biology: consider a biologist who visits

some archipelago and finds hares and foxes in different islands and wants to understand whether

their populations will be directly or inversely related, given that one of them is the predator and

the other is the prey. Suppose that he collects the data and he finds a positive correlation, he can

then claim that the high number of hares, made the population of foxes propagate because of the

abundance of food. If he finds a negative correlation he can argue that the high population of

foxes exterminated most of the hairs. Note that in the first statement the hares are the

independent variable, while in the second the foxes, or to put it differently the same underlying

relationship (that foxes are a predator and hairs the prey) can be expressed with different causal

relationships, a positive one when hares are the cause of foxes, and a negative one when the

foxes are a cause of hares.

What happens between penalty and crime, or between hares and foxes, is exactly what

the economic and the political science literatures (more accurately Figures 1 and 3) are

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describing happens between globalization and welfare spending. When welfare is a function of

globalization the relationship is negative because of competition; when globalization is the effect

of welfare (more accurately when welfare is the condition for globalization) the relationship is

positive because the population is insured.

Translating these two statements into linear equations and omitting, for the time being,

other independent variables we have:

Wit = aW 1it− bG 1it− −

+ …. (1)

Git = cW + … (2) 1it− dG 1it+ −

The evolutionary biology literature (May 1974) proves that as long as the coefficients a, b,

c, d have the signs above (three (a, c, d) positive and one (b) negative) and are located in the (0, 1)

interval, the model exhibits “qualitative stability”; that is, welfare and globalization converge

over time to a point regardless of the specific values of a, b, c, and d.

INSERT FIGURE 4 HERE

Figure 4 presents just such a generic model, in the two dimensional plane generated by

the axes of Globalization and Welfare. It is easy to verify the claim that, depending on the time

period one studies, the correlation between the two variables in relationship can be positive (if

one selects points in the southeast part or the northwest part of the graphic in Figure 4) or

negative (if one selects the northeast and southwest). The reader is referred to the literature

review to verify that many empirical studies find these positive or negative correlations. Figure 4

can also generate curvilinear relationships (of any kind) if one happens to investigate time frames

involving the north or south or east or west side of the graphic. Finally, for longer periods

involving a whole cycle the relationship will not provide any statistically meaningful coefficient,

just as other parts of the empirical literature claim.

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INSERT FIGURE 5 HERE

Figure 5 presents the same diagram with empirical data from one of the models that we

will present below. It produces similar results as the generic model. However, neither the

generic Figure 4 nor the model presented in Figure 5 take into account the over time variations of

the different independent variables included in the models. This is why we present Figures 6 and

7, which give the exact models for two countries: one liberal (Canada) and one corporatist

(Finland). The discussion of these categories of countries will come later in the paper. Here we

want to impress upon the reader that the models, besides bridging apparently theoretically

conflicting arguments in the literature, are extremely diversifiable and can map the exact

conditions of different countries quite well.

INSERT FIGURES 6 AND 7 HERE

The theoretical model we have developed by combining the theoretical arguments of the

economic and the political science literatures in a dynamic setting is able not only to

conceptually preserve the important insights generated by each one of these literatures, but also

to subsume and explain what appeared to be contradictions existing in the empirical literature.

H1: Globalization pressures states to cut welfare expenditures.

H2a: Globalization pressures states to expand welfare expenditures.

H2b: Welfare expansion allows states to further globalization.

The basic model combines the compatible hypotheses H1 and H2b instead of the

contradictory H1 and H2a. So, the paper argues that economic and political choices in

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globalization and welfare are jointly determined and that globalization and welfare are

simultaneously but oppositely related to each other.

III. Data and Models for Analysis

Data:

We use data on welfare expenditures and the degree of globalization between 1970 and

2000 for 18 industrial countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France,

Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland,

the United Kingdom, and the United States. Welfare expenditures are measured by social

security transfers as a share of GDP. Social security transfers include social assistance grants,

welfare benefits paid by the government, benefits for sickness, old age, family allowances, and

so on.1 Globalization is a KOF index of economic globalization which is defined as the “long

distance flows of goods, capital, and services, as well as information and perceptions that

accompany market exchanges” (Dreher 2006). The globalization index is calculated using actual

flows of trade and investments, as well as restrictions on trade and capital such as tariff rates. To

investigate different aspects of globalization, we also use two additional globalization indices:

(1) a globalization flow index composed of trade flows, foreign direct investments, portfolio

investment, and income payments to foreign nations (all calculated as a percentage GDP), and

(2) a globalization policy index composed of hidden import barriers, the mean tariff rate, taxes

on international trade (as a percentage of current revenue) and capital account restrictions (See

Dreher 2006 for the detailed description of the data). The globalization flow index measures

1 We use social security transfers as a measure of welfare spending for two reasons. First, it is the most popular measure for welfare effort. Second, social security transfers are the ones that neo-liberal economist and compensation arguments debate on most frequently. Even neo-liberal economists agree that civilian government consumptions such as education and health spending are beneficial to economic growth. See Ha (2008) for the detailed discussion on the measure.

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actual economic flows, while the globalization policy index measures market liberalization

policies (e.g. removal of trade and capital restrictions). Although the globalization policy index

directly reflects market liberalization policies, removing barriers on trade and capital is not

necessarily proportionally related to the amount of trade and capital in an economy. On the other

hand, while increased trade and capital flows reflect actual and perceived shocks to the domestic

economy, these measures are strongly affected by unknown/volatile international market

conditions, investment decisions and the size of economy (i.e. GDP). The three globalization

indices are highly correlated with one another (r>.6), however they are capturing slightly

different aspects of the complicated concept of globalization.

We also control for other state level attributes that are believed to affect both

globalization and welfare: labor union power (i.e. labor union density), logged GDP per capita,

and the ideological distance of government parties. Labor union power is expected to increase

welfare expenditures while it should decrease globalization because strong labor unions are

likely to pressure governments to expand social welfare and protect domestic manufacturers

from import competition. According to Wagner (1883)’s law, GDP per capita is expected to

expand welfare expenditures because economic affluence raises citizen’s demands for social

services and states’ ability to provide the public services. On the other hand, increased welfare

and recovery in domestic economy can reduce those who need social security benefits and

automatically decrease social welfare spending (Ha 2008). GDP per capita may also be

positively associated with globalization because countries with larger economies are less affected

by the shock of liberalizing their markets (e.g. the UK in the late 1800s or the U.S. today). Still,

GDP per capita can be negatively associated with globalization because countries with a smaller

economy may have little choice but to liberalize their markets to continue economic growth

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(Katzenstein 1985). Finally, the ideological distance of government parties is measured using

the ideological range between the most extreme two parties in the government (Ha 2008). The

larger the ideological distance the less the government is expected to modify welfare

expenditures; it is not expected, however, to have a direct relationship on the changes in

globalization, because this variable depends mainly on competition among countries. The

ideological distance of government parties is thus controlled for only in the regressions centered

on welfare spending because our globalization measures include trade and capital flows, which

are strongly influenced by international market conditions.2 To control unmeasured country

specific effects, we also include country dummies.

Models:

Our theoretical model highlights how governments expand welfare spending to prompt

further globalization, while globalization pressures states to cut welfare spending. From

equilibrium conditions we derive simultaneous equations that jointly estimate welfare

expenditures and globalization. Tests of this structural model with panel data comprising 18

industrialized countries between 1970 and 2000 confirm our hypotheses: welfare and

globalization are dynamically related.

We use our model to generate and test the validity of the dynamics between globalization

and welfare. Our estimation consists of the following system of equations:

spending Welfare it= b +b

1 spending Welfare 1−it 2 ionGlobalizat 1it−

+ b 3 partiesgovernmentofdistancelIdeologica 1−it

+ b4 powerLabor 1it−+b5 capitaper GDPLogged 1it−

+ (b ) +∑ k Countryki μ it

2 When the ideological distance is included for the globalization policy index, it also shows a strong and negative association with liberalization policies. Including ideological distance in the globalization equation does not change the equilibrium outcomes, either.

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ionGlobalizat it = b +b

1 ionGlobalizat 1it− 2 spendingWelfare 1−it

+ b3 powerLabor 1it−+b4 capitaper GDPLogged 1it−

+ (b ) +∑ k Countryki η it

In the equations, the b’s are parameter estimates, and Welfare spending denotes social

security transfers as a share of GDP. The subscripts i and t denote, respectively, the country and

year of the observations. The k (eighteen) indicates country dummies. In order to identify the

equations, the intercept is suppressed. In the model, globalization is represented by the three

globalization indices: globalization index, globalization flow, and globalization policy. We use

the lagged values of all time varying independent variables to reflect a presumed lag of

substantive effect of welfare spending and globalization policies to reduce problems with

simultaneity bias. Given that our model also includes lagged dependent variables, there is a high

level of collinearity among the independent variables, making the inclusion of many control

variables impossible. For example, including unemployment in our equations results in the

production of a negative coefficient on this variable in the welfare equation (contrary to all the

results of the empirical literature and the intuition that high levels of unemployment should

increase welfare spending). Except the size of economy (i.e. GDP), we selected independent

variables that can be manipulated by political activity and affect the comparative statics of the

phenomena we are interested in. As such, we opted for the ideological distance of the parties in

government and the power of trade unions (variables that can be changed through political

action) as opposed to the age structure of the population (which even if affecting welfare cannot

be altered in the short run). Similarly, we avoided the use of interactive variables even if

warranted, because they would have aggravated collinearity issues.

21

Methods and findings:

As noted above, our model suggests that globalization and welfare are jointly determined

by each other. One of the most widely known simultaneous estimation of equations is two-stage

least squares (2SLS). However, the statistical assumptions of 2SLS are difficult to meet. 2SLS

requires the use of instrumental variables for each endogenous variable that only predict the

endogenous variable in question and not the other endogenous variables (Hanushek

& Jackson 1977). The instrumental variables identifying welfare and globalization have a

difficult time satisfying this important condition theoretically as well as empirically. Therefore,

we employ two estimation strategies that make more conservative assumptions than 2SLS:

seemingly unrelated regression (SUR) and simultaneous estimation using OLS with panel

corrected standard errors. We use SUR to jointly estimate equations for globalization and

welfare. SUR uses instrumental variables in the first stage to predict each endogenous variable.

The predicted values for each endogenous variable are then used as proxies in a second stage

analysis that uses a feasible generalized least squares (FGLS) algorithm to estimate the effects.

Likewise, SUR permits the joint estimation of globalization and welfare while allowing

disturbances from one equation to affect the other, as would be expected where dependent

variables are jointly determined. SUR also provides efficient estimates for simultaneous

equation models even when the residuals are correlated across equations and the data are

heteroskedastic (Greene 1997, ch. 15). We use Zellner’s (1962) seemingly unrelated regression

analysis (SUR) to produce consistent and efficient estimates for each of the simultaneous

equations and to help control for the heteroskedastic nature of the data (Greene 1997, ch. 15).3

3 While not reported, we tested the empirical results in this paper using 3SLS estimation. We detected no changes in the signs, magnitudes, or significances of our main results with the 3SLS estimations. We also tested the 3SLS with additional instrumental variables, where we include exchange rate volatility and/or credit ranking index as explanatory variables of globalization, but the results were still consistent with our main findings.

22

INSERT TABLE1 HERE

The empirical results from SUR are shown in Table 1. Each column reports a

simultaneous estimation of two equations: The upper and lower rows report results with Welfare

spending and Globalization as dependent variables, respectively. The results for globalization

index, globalization flow, and globalization policy are reported in columns (1), (2), and (3),

respectively. The results strongly support our theoretical expectation. As we anticipated,

globalization in the previous year is strongly associated with a welfare cut in the following year,

while welfare expansion in the previous year is significantly associated with further globalization

in the following year. The impacts are similar across the regressions using each of the three

different globalization measurements.

The ideological distance of government parties, labor union power and national income

level (GDP per capita) are also strongly associated with welfare and globalization. Governments

composed of ideologically divergent parties seem to prevent states from expanding welfare. Yet,

countries with stronger labor unions and higher national incomes appear to spend more on

welfare. Labor union power is also strongly and negatively associated only with globalization

policy, while it has little impact on globalization flow. This result is reasonable because trade

and capital flows are significantly influenced by international market conditions/volatility. The

policy index seems to directly reflect the influence of labor union power on liberalization policy

decisions. That is, strong labor union power prevents states from further pursuing market

liberalizations. Still, GDP per capita is strongly and positively correlated with both globalization

flow and policy. Higher national income seems to allow states to liberalize their markets and

23

attract more trade and capital flows. While not reported, we also tested and found that our main

empirical results are robust to the exclusion of country dummies.4

While SUR is widely accepted as an efficient estimate for simultaneous equation models,

Beck and Katz (1995) criticize the FGLS techniques used by SUR on the grounds that they

produce inflated t-statistics and deflated standard errors for time series-cross sectional data with

heteroskedasticity unless the number of time points (T) is considerably larger than the number of

cases (N). When the number of time periods is not large enough, they argue that panel corrected

standard errors methods (PCSE) or standard robustness techniques produce more reasonable

standard errors. While Jackson (2002) argues that this problem is less applicable to large, cross-

sectional designs, he finds that PCSE produces more conservative estimates compared to SUR

methods. Although we have time points almost twice as large as the number of cases (N=18,

T=31), we test our results with the more conservative estimates: OLS with error correction for

contemporaneous correlation (panel-corrected standard errors).5

In order to estimate the relationship between globalization and welfare spending

simultaneously, but also use the error correction, we draw on our system of equations estimated

by applying Ordinary Least Squares (OLS) with panel-corrected standard errors (Blackwell

2005). This model assumes that the coefficients of constant terms and quantitative independent

variables require restriction across the panels in their equations, while fixed-effect dummies vary

by panel (Judge et al. 1988, 456–459). Error structures of both equations are assumed to be

characterized by panel heteroskedasticity, panel autocorrelation, and contemporaneous 4 When country dummies are excluded, labor power shows a strong and positive relationship with globalization while the results of the other variables are robust. Because it is unlikely that countries with stronger labor union power open their market wider, we only report the regression results with country dummies which are unbiased for labor union. 5 Although equation-by-equation OLS allows tests of hypotheses within an equation, it does not permit adequate testing of cross-equation restrictions. Nevertheless, to ensure that our results hold in single-equation estimations, we re-estimate separate equations using OLS with panel-correct standard errors. The signs and significances of the coefficients are identical to results we obtained using SUR and a system of equations using OLS with PCSE.

24

correlation. For simplicity, fixed effects were estimated with the dummy variable regression

technique (Wooldridge 2002, 272–274) (See Blackwell 2005 for detailed description of the

method).

INSERT TABLE2 HERE

Table 2 reports the empirical results from a system of equations estimated using OLS

with panel-corrected standard errors. Again, columns (4), (5), and (6) report the results using the

globalization index, globalization flow, and globalization policy, respectively. In general, the

results are similar to the main results from SUR. Economic integration in the previous year is

strongly and negatively associated with welfare spending in the following year, while welfare

expansion in the previous year is strongly and positively associated with further trade and capital

openness in the following year. The ideological distance of government parties is strongly and

negatively associated with welfare spending, while labor power and national income level (i.e.

GDP per capita) are positively correlated with it. GDP per capita is also strongly and positively

associated with all measures of globalization and labor union powers continue to be strongly and

negatively associated only with the globalization policy index. The main results are also robust

to the exclusion of country dummies. For each equation, we also performed Wald tests to

determine the joint influences of all explanatory variables pertaining to the equation. The test

shows that the explanatory variables are jointly statistically significant in each equation

(p<0.0000). We also perform joint significance tests for the globalization and welfare variables

in the six regressions in Table 1 and Table 2. The results show that globalization and welfare

variables are highly and jointly significant in all of the regressions (P<0.0000).

25

IV. Comparative Statics and Dynamics.

First, let us underline the difference between our analysis and other theoretical and

empirical studies of globalization and welfare. In terms of theory, all the literature that we

discussed in the literature review belongs either to the group of (economic) models which expect

globalization (the independent variable) to reduce the level of welfare (dependent variable), or to

the group where globalization and welfare (regardless of which is independent or dependent)

have a positive correlation (political science theories). And all the empirical literature of these

two groups was devoted to finding out who is right and who is wrong. We argued that the

difference between the two types of theories was not in terms of the sign of the coefficient, but in

terms of the direction of causality. Instead of trying to determine who is wrong, we assumed that

both are (at least partially) right. The result is an equilibrium model: that is, a model that after

oscillations leads to the repetition of the same values of globalization and welfare. At the

empirical level this sets our model apart from all other empirical studies of the relationship

between globalization and welfare because they were generating a straight line or curvilinear

relationship which could not be considered as an equilibrium, since a slight extrapolation (on the

straight line or the parabola) would lead to impossible results. Our results produce qualitative

stability among the two variables. Not only are they replicated in each one of the 6 models in

Tables 1 and 2, they can also be replicated with simpler models (if the independent variable of

logged GDP per capita is dropped, or if all independent variables are dropped and the OLS with

panel-corrected standard errors methodology is followed (the SUR method is not applicable in

this case)).

Now let us calculate comparative statics with respect to our three control variables. That

is, in this section we describe the effect of each one (logged GDP per capita, labor strength, and

26

ideological distance of government parties) on the equilibrium values of globalization (G*) and

welfare spending (W*). In order to calculate the equilibrium values of one of the models (#3

which deals with globalization policies), we start from the estimated equations in Table 1.6

Wit .922W 1it= − .029G 1it− − ce.085Distan 1it− − Labor .014 1it+ − .186LGDP 1it+ − 1.213 +

Git G .925 1it= − .068W 1it+ − .024Labor 1it− − .605LGDP 1it+ − 1.102 + Model (3)

If we rewrite the model as difference equations (by subtracting the dependent variable at time t-1

form both sides) we have:

ΔWit .078W 1it−= − .029G 1it− − ce.085Distan 1it− − Labor .014 1it+ − .186LGDP 1it+ − 1.213 +

ΔGit .075G 1it−= − .068W 1it+ − .024Labor 1it− − .605LGDP 1it+ − 1.102 + Model (3′)

In equilibrium the values of Δ and Δ will be zero, so replacing 0 in the equations of Wit Git

Model (3’) we get:

*.078W 0 −= *.029G− ce.085Distan− .014Labor+ .186LGDP+ 1.213 +

*.075G 0 −= *.068W+ .024Labor− .605LGDP+ 1.102 + Model (3″)

Solving the liner system for W*, G* we get:

*W = ce6375Distan( 1/7822 − 1746Labor + LGDP3595 − 59017 + )

= *G ce5780Distan(1/7822 − Labor920 − LGDP59838 + 168420 + ) Model (3’”)

We will now analyze the model (3’”) to assess the impact of changes in the values of the

independent variables on the equilibrium values W* and G*. Let us start by a comparison of the

variables included in model (3), which we estimated empirically (and which we will call the

6 We compress a constant variable but put country dummies to control country specific effects that are not included in the models. Therefore, each country dummy works as a constant for each country. To calculate equilibria and create simulated graphs we put the dummy of Austria as a constant variable because it has closer coefficients to the median values of coefficients than others in all of SUR regressions. We also calculated the equilibria with the median values of coefficients of dummies but got similar results. Please note that the constant variables do not change comparative statistics (i.e. slopes) of ideological distance, labor power and logged GDP per capita but only change the level of welfare and globalization (i.e. intercepts).

27

“step-by-step” models), and their signs with the variables and the signs included in model (3’”),

which we derived through mathematical calculations from Model 3 (and which we will call the

“equilibrium models”). We make three observations.7

First, the values of the coefficients of the independent variables in the step-by-step

models are small, while the values of the same variables in the equilibrium models are

significantly larger. This is to be expected given that in order to arrive at the equilibrium model

one would have to repeat the step-by-step model an infinite number of times. However, this

repetition is not a simple mechanical operation (as the following comparisons will show).

Second, in the step-by-step model (3) the measure of ideological distance of government

parties was included only to calculate the expected level of welfare spending and was absent

from the equation estimating globalization. We explained the reasons in part III. In the

equilibrium model, ideological distance reemerges in the calculation of the equilibrium value of

globalization. In both equations the variable ideological distance has a negative effect on the

equilibrium values. We have to underline this effect, because it is the first time that it is

presented in the literature, not only on the empirical side, but also the theoretical.

According to the Veto Players theory (Tsebelis 2002) the presence of multiple veto

players, or of veto players with large ideological distances, leads to a reduction of the size of the

winset of the status quo. But this expectation is formed with respect to a step by step process

(which is what all the arguments in the book describe) and not with respect to the equilibrium

values. Nowhere in Tsebelis (2002) is an expectation formed about equilibrium values. For

example, it is not stated that countries with many veto players will have higher or lower taxation,

7 We also calculated equilibria for Model 2 with globalization flow. Comparative statistics were the same as those in Model 3 except the impact of labor on globalization flow which had a positive coefficient. However, our simulation result showed that it had a large 90% confidence interval (i.e. large standard errors) as it did in the SUR and OLS regressions.

28

or level of globalization, or welfare, or more or less labor legislation. What is argued is that

multiple veto players will lead to a slower pace (more accurately, not a faster pace) of step-by-

step adjustment to whatever the goal is. And this expectation is corroborated by model (3). The

equilibrium model leads to a new result for the literature on veto players and on globalization

and welfare spending: it is the equilibrium values of globalization and welfare that decline with

the ideological distance of government parties.

Third, the effect of the logarithm of GDP per capita was positive for both variables in the

step-by-step process, but in the equilibrium equations it is positive only for globalization, and

negative for welfare. Richer countries will proceed to higher levels of globalization than poorer

ones, but lower values of welfare. On the other hand, labor union power in the equilibrium

equations has the same outcomes as the step-by-step model.

INSERT FIGURE 8 HERE

Figure 8 shows how welfare and globalization equilibrium values change with changes in

ideological distance, labor union power and logged GDP per capita in model 3. Following King

et al. (2000) we use simulation to compute globalization and welfare equilibria and account for

uncertainty surrounding them (i.e. 90% confidence intervals).8 The figure illustrates our

expectations on comparative statistics quite sharply. The figure also reveals that the uncertainty

of welfare and globalization equilibria increases as the value of ideological distance increases: 90

-percent confidence intervals are slightly wider when government parties are more ideologically

dispersed. On the other hand, the uncertainty is greatest at the two extremes of labor union 8 To create the figures we left the reduced form equations expressed with the coefficients as b's, not numbers. Then, we drew b-hats from a multivariate normal distribution with means set to our estimates and variance-covariance of our estimated variance-covariance. We calculated our responses and repeated the process 300 times. The 5th and 95th percentiles of those observations generated the globalization and welfare equilibria and their 90-percent confidence intervals. We repeated this process across 300 segments of the entire range of a single control variable of interest (e.g. ideological distance), while holding the other two control variables (e.g. labor union power and logged GDP per capita) at their medians. In order for smoothing changes of the confidence intervals, we took the average of the equilibrium points calculated from 20 different sets of a 300 by 300 matrix.

29

power and logged GDP per capita: 90-percent confidence intervals are longest when labor union

power is very strong or weak and national income is very low or high.

Obviously this analysis is assuming equilibrium outcomes. One may have the

question/objection that such results will never be achieved, because exogenous shocks will

disturb the process long before an equilibrium is reached, and even in the equations presented in

this model, the equilibrium values depend on a series of independent variables that change their

value in each time period. The calculations assumed ideological distance of government parties,

or labor power, or logged GDP per capita remaining stable. All these objections are reasonable

but beside the point—assuming correct estimation of model (3) (and we remind the reader that

the other 5 models in this paper have similar properties, and there are many more models that

present features of qualitative stability) the exogenous shocks will reset the initial values of the

two variables, and the equilibrium process will start all over again. We are not claiming that the

process will ever reach the equilibrium values calculated above, but that theoretical as well as

empirical evidence suggests that this is a very good approximation of what is happening.

Let us now move from comparative statics to comparative dynamics. We can apply our

model to another argument presented in the literature: Hays (2009) made a similar argument to

ours because he considers social welfare as a significant condition of economic globalization. In

particular, Hays (2009) argues that countries with liberal market economies and majoritarian

polities (e.g., the United States and the United Kingdom) are most susceptible to public

dissatisfaction and political backlash against globalization because they are less committed to

welfare compensation for market losers. Liberal market economies confront a “globalization

dilemma”: governments face political pressures to compensate market losers because market

openness is directly linked to unemployment and labor market risk in these countries, but they

30

are constrained by globalization at the same time because they are dependent on capital taxation

to finance this compensation. Therefore, Hays (2009) argues that these countries need to create a

“new embedded liberalism” to sustain economic globalization. In individual level data analyses

Hays (2009) finds that workers employed in economic sectors with higher import competition

tend to oppose free trade, but that their opposition is reduced with active labor market programs

such as spending on public employment and labor market training. In country-level empirical

analyses he also finds that social benefits and government consumption as a share of GDP are

increased by more imports.

While Hays’ (2009) individual level data analyses support that social welfare is an

important condition for free trade, his country level data analyses only test the impact of

globalization on welfare (not the impact of welfare on globalization that we suggested in this

paper). The analyses also do not directly test his arguments on globalization dilemma in liberal

market economies. Most importantly, his empirical results do not estimate equilibria. What if

we apply our models to his argument on liberal market economies? Table 3 shows seemingly

unrelated regressions with dummies of liberal market economies and corporate countries based

on Hays (2009) three country groups. The empirical results show that the impact of welfare

spending on globalization is much larger and stronger in corporate economies than those in

liberal market economies although the impact of globalization on welfare is not largely different

in the two groups. Figure 9 shows globalization and welfare equilibria for the liberal market

economies and corporate countries. The figure corroborates Hays’ (2009) argument: liberal

market economies reach lower levels of welfare and globalization than corporate economies.9

9 To calculate equilibria for liberal market economies we put the dummy of US as a constant variable because it has closer coefficients to the median values of the coefficients of the countries in the group in SUR regressions. For the same reason we put the dummy of Finland as a constant variable for corporatist economies. The comparative statistics in the two groups were similar to those for the whole group (i.e. same directions).

31

INSERT FIGURE 9 HERE

The comparative statics results are much more robust than the comparative dynamics.

For example, as long as the coefficient of ideological distance is negative in the estimation of the

welfare equation, the effect of ideological distance in both the equilibrium values of welfare and

globalization will be negative. We cannot make similar claims for the comparison of the time

paths of Figure 9. These time paths depend on a series of variables, and if the estimated

equations, or the average values for the different countries were different, the calculated

equilibria could differ. Still, it should be noted that corporate countries in fact have higher levels

of globalization and welfare spending than liberal economies. The average globalization index

and welfare spending in corporate countries are about 2 (of 100) and 5 (% GDP) higher than

those in liberal economies. The mean significant tests show that the three globalization variables

(i.e. globalization index, flow and policy) and welfare spending are significantly different in the

two groups: all of them are higher in corporate countries.

V. Discussion and Conclusions

This article argues that the neo-liberal economics argument, which emphasizes intense

international competition and the negative effect of globalization on welfare spending, and the

compensation (political science) argument, which underscores the political ramifications of

increased insecurity and inequality and the positive relationship between globalization and

welfare programs, do not differ in terms of expected signs but in terms of direction of causation.

Neo-liberal economists argue that globalization has a negative effect on welfare spending, while

compensation theorists argue that welfare programs are a condition for globalization. Once the

two approaches are combined instead of being pitted against each other, the results lead to a

32

qualitative equilibrium. Indeed, a series of models we presented lead to what in evolutionary

biology is called “qualitative stability.”

We estimated several models that produce qualitative stability and found a series of

interesting comparative statics. The ideological distance between parties in government does not

just slow down the process of adjustment in the step-by-step regressions, but also in the

equilibrium outcomes. We also found that the effect of logged GDP per capita is negative for

welfare in equilibrium while it is positively associated with both globalization and welfare in

step-by-step regressions. By showing that the equilibrium results are not the same as those in the

partial regression equations (except for labor power), our models contribute to the literature in

which most debates are based on disequilibrium results.

A specific demonstration of this last point was offered by the comparative dynamics

analysis of our model compared to Hays’s (2009) argument. He considers the situation in liberal

market economies as the result of a fast advancement of globalization that created overwhelming

challenges to the population of the different countries, so that a change in course may be

necessary. We extrapolate the results of the past, and come to the same conclusions: liberal

countries go to a lower level of globalization because they do not produce sufficient welfare

programs to support a higher equilibrium like the corporatist countries.

33

Figure 1

Figure 2.

Figure 3.

34

Figure 4.

Figure 5. Globalization Policy and Welfare

85

84.5

84

83.5

83 Globalization

82.5

82

81.5

81

80.5 12.6 12.4 12.8 13 13.2 13.4 13.6 13.8

Welfare

35

7075

8085

90

globalization

6 8 10 12 14 16welfare

actual expected

Figure 6. Canada

6570

7580

8590

9510

0

globalization

4 6 8 10 12 14 16 18 20 22 24 26

welfare

actual expected

Figure 7. Finland

36

Figure 8. Changes in Welfare Spending and Globalization Equilibria (Model 3)

37

Figure 9. Liberal vs. Corporatist Convergence 84

83.5

83

82.5

82Globlization

81.5 Liberal economies

Corporatist economies

81

80.5

80

79.5

79

13 13.5 12 12.5 14 14.5 15 15.5 16 16.5 17

Welfare

38

Table 1. The Results with Seemingly Unrelated Regressions, 1970-2000 Globalization index Globalization flow Globalization policy [1] [2] [3] Welfare Spending (t) Welfare (t-1) 0.920*** 0.915*** 0.922*** (0.022) (0.022) (0.022) Globalization index (t-1) -0.028*** (0.009) Globalization flow (t-1) -0.019*** (0.007) Globalization policy (t-1) -0.029*** (0.011) Ideological distance of -0.097** -0.107** -0.085* government parties (t-1) (0.060) (0.060) (0.061) Labor power (t-1) 0.019** 0.021** 0.014* (0.010) (0.010) (0.010) Logged GDP per capita (t-1) 0.234** 0.187** 0.186** (0.118) (0.110) (0.116) Number of observations 477 477 477 RMSE 0.912 0.913 0.914 R-squared 0.996 0.996 0.996 P> chi-squared 0.000 0.000 0.000 Globalization (t) Globalization index (t-1) 0.950*** (0.016) Globalization flow (t-1) 0.926*** (0.021) Globalization policy (t-1) 0.925*** (0.012) Welfare (t-1) 0.113*** 0.179*** 0.068*** (0.038) (0.067) (0.024) Labor union power(t-1) -0.003 0.009 -0.024** (0.018) (0.032) (0.012) Logged GDP per capita (t-1) 0.755*** 1.294*** 0.605*** (0.203) (0.338) (0.127) Number of observations 477 477 477 RMSE 1.614 2.891 1.024 R-squared 0.999 0.998 0.999 P> chi-squared 0.000 0.000 0.000

Notes: Seemingly unrelated regressions with panel-corrected standard errors. Country dummies are not reported for space. Statistical significance is based on one-tailed tests. *** P<.01; **P<.05; *P<.10.

39

Table 2. The Results with a System of Equations Estimated Using Ordinary Least Squares with Panel-Corrected Standard Errors, 1970-2000

Globalization index Globalization flow Globalization policy [4] [5] [6] Welfare Spending (t) Welfare (t-1) 0.921*** 0.916*** 0.922*** (0.019) (0.019) (0.021) Globalization index (t-1) -0.028*** (0.008) Globalization flow (t-1) -0.019*** (0.006) Globalization policy(t-1) -0.029*** (0.008) Ideological distance of -0.093*** -0.097*** -0.082** government parties (t-1) (0.042) (0.042) (0.043) Labor union power (t-1) 0.019*** 0.021*** 0.014** (0.008) (0.008) (0.009) Logged GDP per capita (t-1) 0.232** 0.182** 0.185** (0.120) (0.114) (0.109) Globalization (t) Globalization index (t-1) 0.954*** (0.017) Globalization flow (t-1) 0.931*** (0.020) Globalization policy (t-1) 0.933*** (0.012) Welfare (t-1) 0.112*** 0.179*** 0.066*** (0.017) (0.031) (0.014) Labor union power(t-1) -0.006 0.008 -0.028*** (0.011) (0.023) (0.008) Logged GDP per capita (t-1) 0.739*** 1.236*** 0.600*** (0.189) (0.313) (0.092) Number of observations 967 967 967 Number of countries 36 36 36

Notes: A system of equations estimated using OLS with panel-corrected standard errors. Country dummies are not reported for space. Statistical significance is based on one-tailed tests. *** P<.01; **P<.05; *P<.10.

40

Table 3. SUR Results with Hays (2009)’s Three Groups (Liberal and Corporate Dummies) Globalization index Globalization flow Globalization policy

Welfare Spending (t) [7] [8] [9]

Welfare 0.905*** 0.901*** 0.909*** (0.022) (0.022) (0.022) Globalization index -0.064*** (0.015) Globalization index 0.039** *Liberal (t-1) (0.017) Globalization index 0.040*** *Corporate (t-1) (0.014) Globalization flow -0.040*** (0.011) Globalization flow 0.026** *Liberal (t-1) (0.016) Globalization flow 0.025*** *Corporate (t-1) (0.011) Globalization policy -0.081*** (0.018) Globalization policy 0.058*** *Liberal (t-1) (0.018) Globalization policy 0.055*** *Corporate (t-1) (0.016) Ideological distance of -0.120** -0.133** -0.082* government parties (t-1) (0.060) (0.060) (0.060) Labor power (t-1) 0.009 0.015* 0.003 (0.011) (0.011) (0.011) Logged GDP per capita (t-1) 0.403*** 0.293*** 0.375*** (0.130) (0.119) (0.125) Number of observations 477 477 477 RMSE 0.902 0.907 0.901 R-squared 0.997 0.996 0.997 P> chi-squared 0.000 0.000 0.000 Globalization (t)

Globalization index 0.921*** (0.018) Globalization flow 0.886*** (0.023) Globalization policy 0.908*** (0.013) Welfare 0.048 0.062 0.025 (0.044) (0.079) (0.028) Welfare*Liberal(t-1) 0.048 0.009 0.118** (0.096) (0.170) (0.062) Welfare*Corporate (t-1) 0.247*** 0.454*** 0.131*** (0.073) (0.128) (0.045) Labor power (t-1) -0.033* -0.042 -0.039*** (0.020) (0.035) (0.013) Logged GDP per capita (t-1) 0.857*** 1.423*** 0.626*** (0.204) (0.340) (0.127) Number of observations 477 477 477 RMSE 1.596 2.855 1.015

41

R-squared 0.999 0.998 0.999 P> chi-squared 0.000 0.000 0.000

Notes: Seemingly unrelated regressions with panel-corrected standard errors. The regressions are based on the three groups in Hays (2009). Liberal dummy includes five “liberal market economies”: Australia, Canada, New Zealand, United Kingdom and United States. Corporate dummy includes five “corporate economies”: Austria, Denmark, Finland, Norway, and Sweden. The base group includes eight “other” countries: Belgium, France, Germany, Ireland, Italy, Japan, Netherlands, and Switzerland. Country dummies are not reported for space. Statistical significance is based on one-tailed tests. *** P<.01; **P<.05; *P<.10.

42

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Appendix

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Categories Variables Description Mean Std. Dev Sources Welfare Spending   Social

Security Transfer  

Social Security transfers as a share of GDP. The data consist of benefits for sickness, old age, family allowance, social assistant grants, welfare, and so on 

12.89 4.76 OECD historical statistics various years.  

Globalization

Index Economic globalization: defined as the long distance flows of goods, capital and services as well as information and perceptions that accompany market exchanges. It is measured by actual flows of trade and investments, and by restrictions on trade and capital such as tariff rates.

66.36 14.73 KOF Index of Globalization

Flow Actual economic flows: Trade (percent of GDP) + Foreign Direct Investment, flows (percent of GDP) + Foreign Direct Investment, stocks (percent of GDP) + Portfolio Investment (percent of GDP) + Income Payments to Foreign Nationals (percent of GDP)

54.21 21.38

Policy Economic restrictions: hidden import barriers + mean tariff rate + taxes on international trade (percent of current revenue) + capital account restrictions

79.86 10.05

Controls Ideological Distance of government parties

Ideological distance of partisan veto players in the government. Ideological distance is the range between the most extreme two parties in the government. Data are averaged standardized scores of three indices of the ideological position of parties in the government: Castles and Mair (1984), Laver and Hunt (1992), and Huber and Inglehart (1995).

0.07 0.95 Data are from Ha (2008) available at http://wfs.cgu.edu/hae /Research.html

Labor Union Power

Net union members (gloss minus retired and unemployed members) as a share of total labor force.

44.16 17.63 OECD, Labor Force Statistics, various years. OECD Health Data, ECOSANTE, 1995, 1998, 2003

Logged GDP per capita

Logged gross domestic product per capita (in US dollars) at current prices and exchange rates.

8.93 1.05 OECD, National Accounts 1960-1987, 1989, Vol. 1, Table 21. 1995-1998 OECD Health Data ECO-SANTE CD-ROM, 1998, 2003.