According to the ‘compensation hypothesis’ (Garrett, 1998 Rodrik, 1998), governments respond to globalisation by increasing spending, either as a way of compensating the adversely affected (e.g., workers in import-competing sectors) or, more generally, as a means of offsetting the volatility and insecurity resulting from greater exposure to global markets. This has in turn threatened to undermine the benefits of globalisation, through a return to trade protectionism and economic nationalism.Ĭhanges in the level and composition of government spending are one key way in which governments can manage the process of globalisation. Nonetheless, the failure to manage some of the downsides of globalisation has, it is argued, contributed to a growing political backlash against globalisation since the early 2000s (e.g., Rodrik, 2018 Stiglitz, 2018). According to many observers, this had a number of benefits, not least much faster rates of convergence across the developing world, particularly from the late 1990s onwards (ibid see also Abiad et al., 2014 Bourguignon, 2015).
Further details on trends in trade and capital flows in this period are provided in Section 5 below. 1 s and 2000s have also been referred to as the period of ‘high globalisation’ (Milanovic 2016) and ‘New Globalisation’ (Baldwin 2016:79): roughly speaking, the period beginning with the fall of the Berlin Wall and ending with the start of the global financial crisis. The 1990s and 2000s were a period of ‘hyper-globalisation’ (Subramanian & Kessler, 2013), marked by particularly rapid rises in international trade and capital flows. These effects could have contributed to the growing political backlash witnessed against globalisation since the early 2000s. We also find evidence that the positive effect of de facto trade globalisation on spending weakened significantly during the 1990s and 2000s, in comparison with earlier decades. The results suggest that hyper-globalisation has had divergent and conflicting effects on consumption spending: while de jure trade globalisation has tended to raise spending, de jure financial globalisation has tended to reduce it. We also use a range of globalisation measures, including the most recent version of the KOF globalisation index, and a combination of econometric methods, including fixed-effects and instrumental variable (IV) estimation. We use data on government consumption spending and more disaggregated spending components (e.g., social welfare). In this paper, we provide an up-to-date empirical assessment of the relationship between economic globalisation and government spending for the ‘hyper-globalisation’ period of the 1990s and 2000s.
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