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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) = 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

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Table 1: Estimated effect of total trade on spending shares

(1) (2) (3) (4) (5) (6) Welfare Welfare Welfare Sector Sector Sector ECM LRM 2SLS ECM LRM 2SLS Lags

L.Trade -0.031*** -0.339*** -0.046** 0.009* 0.050** 0.016** (0.012) (0.076) (0.019) (0.004) (0.025) (0.007)

Full

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Robustness checks

Geographic instruments for trade Control for asset specificity

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Table 3: Estimated effect of total trade on spending shares controlling for labor mobility (1) (2) (3) (4) (5) (6) (7) (8) Welfare Welfare Welfare Welfare Sector Sector Sector Sector ECM ECM LRM 2SLS ECM ECM LRM 2SLS

L.Trade -0.0225* -0.0227* -0.376** -0.0406** 0.0126*** 0.0137** 0.0919** 0.0203*** (0.013) (0.013) (0.15) (0.019) (0.0048) (0.0053) (0.037) (0.0068)

L.Mobility 6.209 6.814 103.5 11.96 7.103 5.815 51.85 4.481 (6.61) (6.57) (131) (7.88) (14.1) (11.5) (98.1) (13.6)

?Trade*L.Mobility 0.980 -3.323 (1.52) (3.00)

∆

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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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Table 4: Estimated effect of IMF Programs (1) (2) (3) (4) (5) (6) Welfare Welfare Welfare Sector Sector Sector ECM LRM 2SLS ECM LRM 2SLS Lags

L.Trade -0.031*** -0.323*** -0.046** 0.007* 0.051** 0.017** (0.012) (0.075) (0.019) (0.005) (0.026) (0.007)

L.IMF program 0.486 5.012 0.515 0.406 2.343 0.442 (0.53) (4.63) (0.52) (0.36) (2.19) (0.36)

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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.