Globalisation and government spending: Evidence for the ‘hyper‐globalisation’ of the 1990s and 2000s

Edward Anderson,Samuel Obeng

doi:10.1111/twec.13035

Abstract

AbstractIn this paper, we provide an up‐to‐date empirical assessment of the relationship between economic globalisation and government spending for the ‘hyper‐globalisation’ period of the 1990s and 2000s. We use data on government consumption spending and more disaggregated spending components (e.g., social welfare). We also use a range of globalisation measures, including the most recent version of the KOF globalisation index, and a combination of econometric methods, including fixed‐effects and instrumental variable (IV) estimation. The results suggest that hyper‐globalisation has had divergent and conflicting effects on consumption spending: while de jure trade globalisation has tended to raise spending, de jure financial globalisation has tended to reduce it. We also find evidence that the positive effect of de facto trade globalisation on spending weakened significantly during the 1990s and 2000s, in comparison with earlier decades. These effects could have contributed to the growing political backlash witnessed against globalisation since the early 2000s.

Highlights

The 1990s and 2000s were a period of ‘hyper-globalisation’ (Subramanian & Kessler, 2013), marked by rapid rises in international trade and capital flows.1 According to many observers, this had a number of benefits, not least much faster rates of convergence across the developing world, from the late 1990s onwards
We show the sign and significance of the coefficients found to be statistically significant in Tables 2–4, namely those for the de jure trade globalisation index, the de facto trade globalisation index and its interaction with the dummy for the 1990s and 2000s, and the trade-GDP ratio and its interactions with the dummies for OECD countries and the 1990s and 2000s
We provide an up-to-date empirical assessment of the relationship between economic globalisation and government spending for the hyper-globalisation period of the 1990s and 2000s

Summary

Introduction

The 1990s and 2000s were a period of ‘hyper-globalisation’ (Subramanian & Kessler, 2013), marked by rapid rises in international trade and capital flows. According to many observers, this had a number of benefits, not least much faster rates of convergence across the developing world, from the late 1990s onwards (ibid; see Abiad et al, 2014; Bourguignon, 2015). The failure to manage some of the downsides of globalisation has, it is argued, contributed to a growing political backlash against globalisation since the early 2000s (e.g., Rodrik, 2018; Stiglitz, 2018). This has in turn threatened to undermine the benefits of globalisation, through a return to trade protectionism and economic nationalism. According to the ‘compensation hypothesis’ (Garrett, 1998; Rodrik, 1998), governments respond to globalisation by increasing spending, either as a way of compensating the adversely affected (e.g., workers in import-competing sectors) or, more generally, as a means of offsetting the volatility and insecurity resulting from greater exposure to global markets. According to the ‘compensation hypothesis’ (Garrett, 1998; Rodrik, 1998), governments respond to globalisation by increasing spending, either as a way of compensating the adversely affected (e.g., workers in import-competing sectors) or, more generally, as a means of offsetting the volatility and insecurity resulting from greater exposure to global markets. Rodrik (1998) found strong empirical support for this hypothesis, in the form of a robust positive relationship between

Methods

Results

Conclusion