© Moritz Buschmann; November 2009

From myth to reality:

Globalisation and public spending in

OECD countries revisited

Reseaerch Note

by Marius R. Busemeyer

© Moritz Buschmann; November 2009

The research problem (1)

Research question:

How does globalisation affect public

spending in OECD countries?

© Moritz Buschmann; November 2009

The research problem (2)

Two hypothesis:

1. “Efficiency thesis”: Globalisation leads to lower taxes because decision makers fear the exodus of capital → lower public spending (“race to the bottom”)

2. “Compensation thesis”: Globalisation leads to problems in societies, these problems have to be compensated by governments → higher public spending

© Moritz Buschmann; November 2009

The research problem (3)

Literature:

• Trend: empirical evidence for “compensation thesis”

• Domestic institutions and parties matter

© Moritz Buschmann; November 2009

The research problem (4)

Criticism on results in the literature:

• old data (until mid. 90s)• static view (level of globalisation, not change)• “efficiency thesis” too simplistic• Narrow approaches (long run and broad effect)• No distinction between eras of globalisation

(data pooling)

© Moritz Buschmann; November 2009

Research design (1)

Dependent Variables:

• total public spending (% of GDP)• total public social spending (% of GDP)• total spending on social transfers (% of GDP)• Non social public spending (% of GDP)

© Moritz Buschmann; November 2009

Research design (2)

Independent Variables:

• trade openness (∅ imports/exports % of GDP)

• KOF index (realized trade, capital flows and domestic financial trade barriers)

• Net capital transfers (% of GDP)

© Moritz Buschmann; November 2009

Research design (3)

Control Variables:• Unemployment• Inflation• Well-being (national income per capita)• Age distribution (share of pop. <15 + >65)• De-industrialization index• Female labour force participation• Parties (Social Democrats in government)• EU-Membership in the 90s (Maastricht Criteria)• Country size

© Moritz Buschmann; November 2009

© Moritz Buschmann; November 2009

Research design (4)

The Model:

• No data pooling of years• Simple cross-sectional regression• Dynamic model investigating differences of the

variables within countries + Error Correction Model (ECM) to include long term effects (lagged variables)

© Moritz Buschmann; November 2009

© Moritz Buschmann; November 2009

© Moritz Buschmann; November 2009

© Moritz Buschmann; November 2009

© Moritz Buschmann; November 2009

© Moritz Buschmann; November 2009

© Moritz Buschmann; November 2009

© Moritz Buschmann; November 2009

Conclusion

What has to be discussed?

• “compensation thesis” outdated?

• what about “efficiency thesis”?

• problem of causation

• methodological lessons to learn?