Journal
EUROPEAN JOURNAL OF POLITICAL ECONOMY
Volume 24, Issue 1, Pages 151-171Publisher
ELSEVIER SCIENCE INC
DOI: 10.1016/j.ejpoleco.2007.06.004
Keywords
globalization; foreign direct investment; compensation hypothesis; efficiency hypothesis; size of public sector; composition of government expenditure
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The 'compensation' and 'efficiency' hypotheses propose that globalization affects both the total, and composition of, public expenditures in different ways. Under the former, economic insecurity leads to expanding public sectors and social expenditures, whereas under the efficiency hypothesis, demands for lower taxes encourage smaller public sectors, and especially 'privately productive' spending. We test these hypotheses for a sample of OECD countries from 1980-1997. Using both the inward stock of FDI and openness as measures of globalization we find no effect on the size of government, but FDI significantly shifts the expenditure composition towards social spending, favouring the compensation hypothesis. (C) 2007 Elsevier B.V. All rights reserved.
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