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Stephanie J. Rickard School of Law and Government Dublin City University

Trade Openness and the Composition of Government Spending: Further Disentangling the Ties that Bind. Stephanie J. Rickard School of Law and Government Dublin City University. Motivation . How do governments’ budgets respond to globalization? Research on spending levels :

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Stephanie J. Rickard School of Law and Government Dublin City University

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  1. Trade Openness and the Composition of Government Spending: Further Disentangling the Ties that Bind Stephanie J. Rickard School of Law and Government Dublin City University

  2. Motivation • How do governments’ budgets respond to globalization? • Research on spending levels: • Aggregate spending (e.g. Cameron 1978; Rodrik 1997) • Social welfare spending (e.g. Burgoon 2003; Rudra 2002) • How might the formof spending change in response to globalization?

  3. Motivation • Openness affects how governments allocate resources across spending programs • Different spending programs serve different purposes • Social welfare spending compensates • Sector spending protects • Lowers production costs • Insures production levels • Insures rates of return

  4. Argument • Governments facing tight budget constraints prioritize sector spending • Sector spending and social welfare spending are not perfect substitutes for trade losers • Beneficiaries of sector programs are politically powerful • Especially when labor unions are weak, as in many developing countries (Kaufman and Segura-Ubiergo 2001; Rudra 2002)

  5. Empirical implication • In developing countries, the budget share of sector programs will increase with trade openness.

  6. Empirical tests: Quantitative • Sample: 44 developing countries from 1981-1997 • Primary estimation technique: Error correction model ∆(Yit) = β0 + β1∙(Yit-1) + γ∆Xt + λXt-1 + εit Y= social welfare spending (% total expenditures); sector spending (% total expenditures) X = vector of RHS variables: trade openness; democracy; dependency; ideology; GDP per capita

  7. Full

  8. Robustness checks • Geographic instruments for trade • Control for asset specificity

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  10. Robustness checks • Geographic instruments for trade • Control for asset specificity • Imports versus exports • SUR • Financial openness • IMF programs

  11. Conclusion & implications • Some part of the reduction in social welfare spending observed in developing countries may be due to the reallocation of resources across different spending programs. • Governments in developing countries can and do work to offset the costs of globalization but they do so using sector programs to protectrather than social welfare programs to compensate. • Openness influences not just the level of spending but also the form.

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