How Does Globalization Affect the Welfare State? Openness to Trade and Social Spending Patterns in 21 Countries, 1920-2000

Abstract

This paper investigates the link between globalization, operationalized as openness to trade, and the welfare state, defined as social spending, in a panel of 21 countries from 1920 to 2000. It argues for a clear definition of globalization with clearly defined and testable data, and that social spending should be analyzed on the aggregate as well as by type of welfare program since the effect of globalization is probably not uniform. The paper finds notable divergences in openness and social spending between countries and regional groups across the century, but it negates a clear connection between small, typically open, economies and large welfare states. Openness to trade had different effects on different welfare programs but was positive for the growth of total social spending. There is hence some confirmation for the welfare state as a cushion for those losing out due to globalization, but it is not a uniform mechanism across all types of social spending and effect sizes were overall small compared to other variables. This was most notable in the positive impact on spending on unemployment benefits but was less straightforward in the positive impact on pension expenditure.