Globalization and the welfare state
Gu¨lsu¨n Gu¨rkan Yay1
• Tolga Aksoy1
Published online: 31 March 2017
Springer Science+Business Media Dordrecht 2017
Abstract This paper analyzes the impact of globalization on the Welfare State (WS). Some
argue that globalization poses a serious threat to WS and therefore questions its sustainability.
On the other hand, some others suggest that WS has to expand more as economies
are integrating. After reviewing different hypothesis on the relationship between globalization
and WS, we empirically examine the relationship by using 32 countries covering
1980 through 2010. According to the estimation results, there is no direct linkage between
globalization and the WS. However the reaction of the WS against globalization is found to
vary dramatically depending on welfare regimes. We find evidence in favor of compensation
hypothesis in Social Democrat, Conservative and Mediterranean Welfare State
regimes, whereas efficiency effect is in place in liberal Welfare States.
Keywords Globalization Welfare state Social security expenditures
KOF index
JEL Classification F6 H5
1 Introduction
The purpose of this paper is to empirically investigate the relationship between globalization
and the Welfare State (WS). While WS is a concept to define developed capitalist
countries especially after the World War II, globalization represents a new order; transformation
of the capitalism since 1980s. The inability of liberal capitalism to eliminate
& Gu¨lsu¨n Gu¨rkan Yay
[email protected]
Tolga Aksoy
[email protected]
1 Department of Economics, Yıldız Technical University, Davutpasa Campus, Esenler,
34220 Istanbul, Turkey
123
Qual Quant (2018) 52:1015–1040
https://doi.org/10.1007/s11135-017-0501-z
business cycles/financial crises and solving income inequality and social injustice problems
led capitalism to enter a different phase after the World War II. The key features of this
model which is called as Interventionist Capitalism1 are the followings:
(1) Keynesian monetary, fiscal and protective foreign trade policies to prevent
economic crises and fluctuations.
(2) Fordist industrialization policy where states take an active role.
(3) WS which takes on a task that it provides economic and social well-being for their
citizens.
These three elements complement and interact with each other. The new model aimed
both mass production-mass consumption and accommodation between capital and labor so
that it achieves economic as well as social stability. In the beginning, WS was considered
to be a state model which assures a basic standard of income (job), nutrition, health,
housing and education to every citizen. WS, with this definition, includes the aspect of
universal social rights secured by the state and becomes only welfare provider (Holm
2010). The manifestation of the British Labor Party in 1945 election was a good reflection:
‘‘jobs for all’’ and ‘‘social insurance against the rainy day’’ (Korpi 2003). The scope of the
WS has expanded significantly through time. It has included extensive social security
rights, regulations in labor market and new worker rights. However, during the period of
expansion, WS has also been transformed into many different welfare states (and many
different varities of capitalism) in terms of the scope, purpose and generosity.
Various internal problems of the WS emerged from the mid-1970s. These problems
were primarily direct internal problems such as changes in demographic and social
structure, labor market rigidities, funding the WS/budget discipline and low economic
growth. Secondarily, there were indirect internal threats such as oil-related stagflation
arising from the world economic conditions and changes in business structure caused by
newly developed technologies. In addition to the internal problems, the WS has also been
exposed to increasing external threats since the 1980s, as a consequence of international
trade and competition that began to develop in the 1960–70s. The starting point of globalization
is the technological developments. Revolutionary innovations in communication
and transportation technologies led faster and cheaper way of communication and transportation.
The economic consequences of information/communication revolution brought
about more crucial changes. Concerning economic dimension, globalization means competitiveness
pressures in international goods and services markets, the multinationalization
of production regimes and the capital mobility thanks to the integration of financial
markets (Garrett 1998). In addition to these, a long-term indicator of globalization is the
expected convergence in wages and prices. Globalization has not remained static/unchanged.
In fact, economic globalization has been divided into different phases over time.
While trade and competitiveness across countries were dominant in the 1980s, in the 1990s
integration of capital, vertical specialization, slicing up the value-added chain, outsourcing
and offshoring came into prominence. These developments followed by the spread of
global competition into factories and offices (Baldwin 2006).
1 ‘‘Interventionist Capitalism’’ refers to the period of capitalism between 1950 and 1973, shaped by
changing world conditions after World War II and supported by Keynesian ideas, which Angus Maddison
(1982) describes as the ‘‘Golden Age’’. The definition amounts to the capitalism period of which WS
constituted an important lower segment. This period (described as ‘‘etatism, ‘‘embedded liberalism’’ by
some or ‘‘Affluent Society’’ by Kenneth Galbraith (Galbraith 1985) witnessed state-industrial sector solidarity
and heavy government interventions into the economy. However, the scope of the WS in this period
significantly differed across developed and developing economies (Porket 1998).
1016 G. G. Yay, T. Aksoy
123
However, globalization is political and socio-cultural phenomenon as well as it includes
economic and technological characteristics. Political and cultural globalizations are also
expected to take place in the long-term. According to the former, democratization and rule
of law will spread and the importance of nation-state will diminish. Regarding the latter,
lifestyles, consumption habits in different countries will resemble to each other through
time, but regional differences will still remain (Yay 2009).
Many studies argue that globalization poses a serious threat to WS by questioning its
sustainability.2 Thus, it is proposed that the transformed capitalist system will contradict
with the current structure of the WS, and eventually will alter it. Despite this claim, some
other studies find either neutral or positive effects of globalization on WS. Hence, although
there is sizeable number of studies on the globalization-WS nexus, there has not been
consensus in the literature. The contradicting results possibly arise from narrow measures
of globalization and very diverse measures of WS in addition to the different time and
country coverage. For this reason, we aim to examine globalization and the WS relationship
in a cross-country panel data context by focusing on all facets of globalization and
a better measure of the WS.
More specifically, in this paper we employ data compiled by Comparative Political Data
Set (CPDS) on social security transfers over GDP and the KOF indices of globalization.
The indices consist of overall, economic, political and social variables hence they measure
multifaceted nature of globalization. According to the estimation results, globalization is
not significantly associated with the WS. However, the baseline results mask considerable
heterogeneity related to a country’s own institutional structure. In particular, we find that
economic globalization spurs WS in Social Democrat, Conservative and Mediterranean
countries. However, it has statistically significant negative effect on the WS in Liberal
countries.
This paper is organized as follows. In Sect. 2, we discuss the hypotheses on the effects
of globalization on the WS. In Sect. 3, we describe the data and test the hypotheses
empirically. Section 4 concludes.
2 Globalization and the welfare state: related hypotheses
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