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Open Economy Forces and the Welfare State – Investigating the Links between Globalization and Social Spending

Two of the single largest political and economic developments over the 20th century have been the opening up of economies and the growth of the welfare state. Particularly the post WWII-period saw increased openness to trade and increased social spending occurring at the same time. It has been proposed that the former has affected the latter, for instance in small trade-dependent states where government-funded public social security and unemployment benefits were a way of compensating those most exposed in an open world market (Katzenstein, 1985). The actual impact of globalization and economic openness on social spending and the growth of the welfare state has however been contested and has up until now yielded conflicting empirical results (Rodrik, 1997; Brady et al, 2005; Epifani & Gancia, 2009; Espuelas, 2012).

Hitherto, the history of the welfare state has been one that is mostly told from a national point of view, where domestic political and economic factors and experiences have the lion’s share of the attention and explanatory power (Huberman, 2012). This session aims to analyze the welfare state from a more international perspective, and it will do so by looking at open economy forces such as international trade, the flow of capital, and migration. Such forces may create incentives and opportunities for increased social spending and a more efficient tax-system. The flow of goods, capital, and people, might also present threats and dangers to the systems of social assistance, health care, pensions, elder care, and education, and put them under increased pressure. The session will combine quantitative and qualitative approaches applied to cross-national studies as well as single-nation cases spanning various different political economies. We expect to find interesting differences in the responses from the national systems to forces of globalization, while at the same time being able to draw generalizable conclusions from a large and varied sample over a long period of time.

Organizer(s)

  • Henric Häggqvist Uppsala University, Department of Economic History henric.haggqvist@ekhist.uu.se Sweden

Session members

  • Peter H Lindert, University of California, Davis, Department of Economics
  • Jari Eloranta, Appalachian State University, Department of History
  • Jari Ojala, University of Jyväskylä, Department of History and Ethnology
  • Oriol Sabaté Domingo, Lund University, Department of Political Science
  • Peter Hedberg, Uppsala University, Department of Economic History
  • Lars Karlsson, Uppsala University, Department of Economic History
  • Henric Häggqvist, Uppsala University, Department of Economic History
  • Sara Torregrosa-Hetland, Lund University, Department of Economic History
  • Sergio Espuelas Barroso, Universitat de Barcelona, Department of Economic History, Institutions, Policy and World Economy
  • Matti Hannikainen, University of Tampere, The Finnish Centre of Excellence in Historical Research
  • Petri Roikonen, University of Helsinki

Discussant(s)

  • Lars Magnusson Uppsala University, Department of Economic History lars.magnusson@ekhist.uu.se

This panel has Call for Papers open.
If you are interested in participating, please contact the panel organizer(s) to submit a proposal.

  • Henric Häggqvist, Uppsala University, Department of Economic History, henric.haggqvist@ekhist.uu.se, Sweden

Papers

Panel abstract

Two of the single largest political and economic developments over the 20th century have been the opening up of economies and the growth of the welfare state. Particularly the post WWII-period saw increased openness to trade and increased social spending occurring at the same time. The actual impact of globalization and economic openness on social spending and the growth of the welfare state has however been contested and has up until now yielded conflicting empirical results. This session aims to analyze the welfare state from an international perspective, by looking at open economy forces such as international trade, the flow of capital, and migration. The session will combine approaches applied to cross-national studies as well as single-nation cases spanning various different political economies. We expect to find interesting differences in responses from national systems to forces of globalization, while also being able to draw generalizable conclusions from a varied sample.

1st half

Threats to the Welfare State

Peter Lindert

Smooth Sailing Towards Welfare State

Jari Eloranta, Jari Ojala, Oriol Sabate Domingo

Globalization and Welfare State in Spain, 1880-2000

Sergio Espuelas, Universitat de Barcelona

The impact of globalization on the welfare state has been studied extensively. However, there is no consensus yet on whether globalization’s impact is positive or negative. I argue in this paper that these conflicting theories can be reconciled. Focusing on the evolution of Spanish social spending between 1880 and 2000, I suggest that the impact of globalization on social spending growth is circumstantial. It depends on the economic context and more specifically on the development strategy (export-led growth vs import substitution). In time-periods where trade openness is increasing (and the future of economic growth is linked to a growing importance of the international market), globalization and social spending are positively correlated. In timeperiods where the degree of trade openness is decreasing and economic growth is linked to a decline in the international trade share and a growing importance of the domestic market, then globalization and social sending are negatively correlated....

The impact of globalization on the welfare state has been studied extensively. However, there is no consensus yet on whether globalization’s impact is positive or negative. I argue in this paper that these conflicting theories can be reconciled. Focusing on the evolution of Spanish social spending between 1880 and 2000, I suggest that the impact of globalization on social spending growth is circumstantial. It depends on the economic context and more specifically on the development strategy (export-led growth vs import substitution). In time-periods where trade openness is increasing (and the future of economic growth is linked to a growing importance of the international market), globalization and social spending are positively correlated. In timeperiods where the degree of trade openness is decreasing and economic growth is linked to a decline in the international trade share and a growing importance of the domestic market, then globalization and social sending are negatively correlated. My hypothesis is that the resulting domestic political alliances also differ depending on the development strategy (export-led growth vs import substitution). If trade openness is increasing (and this development strategy is successful) employers might be willing to accept higher taxes and growing social spending in exchange for population’s support to growing globalization (which generally involves higher economic instability). If trade openness is diminishing (and this development strategy is successful) workers may be willing to accept higher prices (as a result of trade protectionist policies) in exchange for employment stability.

Finnish Public Pension

Matti Hannikaninen

2nd half

Taxing for the Welfare State: Progressivity in the rise of social spending, 1910-1970

Sara Torregrosa Hetland, Lund University

This paper analyses the relation between the tax structure and early welfare state development in the period 1910 to 1970, when social security and modern direct taxation emerged in Western countries. While the literature agrees that current extensive welfare states have regressive tax bases, we still don’t know if this applies also to the past. Was the emergence of social spending based on regressive taxes? Or was it associated to progressive tax systems instead? What was the role of progressivity in establishing the unprecedented levels of fiscal capacity and redistribution of the mid-20th century? We will study the joint distributive effects of taxes and public transfers in five countries representing the different models of welfare states identified in the literature: ‘liberal’ (United Kingdom, United States), ‘conservative’ (France), and ‘social democratic’ (Sweden), along with an example from the ‘southern’ mixed group (Spain).

This paper analyses the relation between the tax structure and early welfare state development in the period 1910 to 1970, when social security and modern direct taxation emerged in Western countries. While the literature agrees that current extensive welfare states have regressive tax bases, we still don’t know if this applies also to the past. Was the emergence of social spending based on regressive taxes? Or was it associated to progressive tax systems instead? What was the role of progressivity in establishing the unprecedented levels of fiscal capacity and redistribution of the mid-20th century? We will study the joint distributive effects of taxes and public transfers in five countries representing the different models of welfare states identified in the literature: ‘liberal’ (United Kingdom, United States), ‘conservative’ (France), and ‘social democratic’ (Sweden), along with an example from the ‘southern’ mixed group (Spain).

From Famine and Civil War to the Welfare State: Income and Wealth Inequality in Finland, 1865-2016

Petri Roikonen, University of Helsinki

The evolution of income and wealth inequality on the long run has received growing attention in the recent years. Although a growing body of literature has investigated the impact of shocks on inequality in the 20th century, long run studies on the effects of shocks and the periods of recovery are still few. This paper contributes to this discussion by analysing the development of income and wealth inequality in Finland in 1865-2016, particularly focusing on the roles of globalization, shocks, and the welfare state. Finnish research on income inequality has mainly focused on development after the 1960s. The studies of Jäntti et al. (2006 and 2010), however, describe the development of Finnish income inequality from as early as the year 1920. In addition, Roine & Waldenström (2015) have made some rough estimates on Finnish wealth inequality in the early 20th century. In this paper, I analyse Finnish income and wealth...

The evolution of income and wealth inequality on the long run has received growing attention in the recent years. Although a growing body of literature has investigated the impact of shocks on inequality in the 20th century, long run studies on the effects of shocks and the periods of recovery are still few. This paper contributes to this discussion by analysing the development of income and wealth inequality in Finland in 1865-2016, particularly focusing on the roles of globalization, shocks, and the welfare state. Finnish research on income inequality has mainly focused on development after the 1960s. The studies of Jäntti et al. (2006 and 2010), however, describe the development of Finnish income inequality from as early as the year 1920. In addition, Roine & Waldenström (2015) have made some rough estimates on Finnish wealth inequality in the early 20th century. In this paper, I analyse Finnish income and wealth inequality from 1865 to 2016 using a novel dataset, and present cross-country comparisons. In addition, consistent series of relative inequality measures are calculated using factor, gross and disposable incomes. Furthermore, united matrixes or distributions for income and wealth are presented, which are so far rare in the literature. The period from 1865 to 2016 contains several shocks and periods of growth: famine (1867-68), the threshold of modern economic growth and industrialization (1870s-), WWI, independence and the civil war (1917-18), the Great Depression, WWII, “the golden years” of economic growth, as well as the crisis of the 1990s and its aftermath. Thus, this study provides an overview of the income and wealth inequality in this interesting context. The main sources utilized are national income taxes (1865-), municipal income taxes (1898-1904) and wealth taxes from the year 1920 onwards. The taxes were not collected every year, but the data is relatively uniform and has high coverage. In addition, Household surveys (1966-85) and Income distribution statistics (1987-2016) are exploited.

How does openness to trade really affect the welfare state? Evidence from social spending in 21 countries, 1920– 2000

Peter Hedberg, Lars Karlsson, Henric Häggqvist, Uppsala University

Openness to trade promotes economic growth and reduces poverty. In terms of its impact on welfare policies it has been said on the hand to have reduced social spending, and on the other hand it has been argued that small open economies in Europe have opted for redistributive economic policies. In this paper we aim to test the hypothesis of whether openness to trade has actually led to increased social spending. We do this with a sample of 21 countries from Europe, North America, and Asia-Oceania between 1920 and 2000 using annual data. It was during this time when social spending increased dramatically and openness rapidly rose following its collapse during WWII. We divide the countries into small and large economies, but we also suggest that important differences can be found between political economies. We find that countries in Southern Europe were both less open during this period and also...

Openness to trade promotes economic growth and reduces poverty. In terms of its impact on welfare policies it has been said on the hand to have reduced social spending, and on the other hand it has been argued that small open economies in Europe have opted for redistributive economic policies. In this paper we aim to test the hypothesis of whether openness to trade has actually led to increased social spending. We do this with a sample of 21 countries from Europe, North America, and Asia-Oceania between 1920 and 2000 using annual data. It was during this time when social spending increased dramatically and openness rapidly rose following its collapse during WWII. We divide the countries into small and large economies, but we also suggest that important differences can be found between political economies. We find that countries in Southern Europe were both less open during this period and also had a lower degree of social spending compared to Northern and Western Europe. Differences were smaller in unemployment, health, and pension, than in welfare, and education spending. Differences were often persistent – early leaders and laggards usually remained so over the century, even though certain laggards closed the gaps after 1975. We however find that openness to trade has had a substantial negative effect on the welfare state, decreasing in all types of related programs. Open economies may however have mitigated the negative effect of globalisation by adopting fiscally efficient tax systems not burdening activities related to trade and globalisation.

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