Significance of economic openness for the origins of social insurance policies in the initial stage: a comparative study

Abstract

ABSTRACT This article proposes an original perspective on the origins and formation of the modern welfare state, arguing that the openness of national economies had a critical influence upon the kind of social insurance policies each country would adopt before World War I. If we classify Western national economies into two typical types, the free-trade open economy (FOE) and the protectionist closed economy (PCE), depending on their trade policy, we can make two hypotheses. FOE, which is under heavy pressure from international competition, is more sensitive than PCE to the increase in employers’ cost. Therefore, hypothesis (1) is: PCE would precede FOE in introducing social insurance which involves considerable cost increases for employers. Hypothesis (2) is: if FOE dares to undertake a social insurance scheme, they would likely create social insurance that relies on general tax revenues to mitigate cost increases for employers. On the contrary, PCE can undertake social insurance schemes that involve considerable cost increases for employers more easily than FOE, as protective tariffs countervail their cost increases to some extent. Through the comparative analysis of all major Western countries, this article demonstrates the validity of these hypotheses.