Trade Openness and the Composition of Government Spending: Further Disentangling the Ties that Bind

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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

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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 form of spending change in response
  to globalization?

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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

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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)

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Empirical implication

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

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Empirical tests Quantitative

• Sample 44 developing countries from 1981-1997
• Primary estimation technique Error correction
  model
• ?(Yit) ß0 ß1(Yit-1) ??Xt ?Xt-1 eit
  
• Y social welfare spending ( total
  expenditures) sector spending ( total
  expenditures)
• X vector of RHS variables trade openness
  democracy dependency ideology GDP per capita

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Full
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Robustness checks

• Geographic instruments for trade
• Control for asset specificity

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?
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Robustness checks

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

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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 protect
  rather than social welfare programs to
  compensate.
• Openness influences not just the level of
  spending but also the form.