Big governments and globalisation are complementary

Anna Maria Mayda, Kevin O’Rourke

12 November 2007

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While economists have preached the virtues of free trade for over two centuries, the majority of their fellow citizens remain stubbornly protectionist. When over 60,000 people in 47 countries were asked in 1995-1997 whether they favoured free trade or stricter limits on imports, approximately 60% of them chose the latter option.1 As China and India rise to economic prominence over the coming decades, it is predictable that such opinions will become even more prevalent in Europe and the United States than they are now. Faced with such fears, is there anything that governments can do to reassure their fellow citizens, or do they face a straightforward choice between facing down and giving into protectionist demands?

One of the main complaints against globalisation is that it heightens economic insecurity, making for a riskier, less predictable environment for individual workers. If globalisation does increase risk, then one response would seem to be for governments to provide workers with insurance, guaranteeing them appropriate safety nets in the event of unexpected dislocation. According to a famous paper by Dani Rodrik, this explains why more open economies have bigger governments; far from being substitutes for each other, governments and markets are in fact complementary, with appropriate government programmes being essential in shoring up political support for trade.2

Indeed, economic history provides considerable evidence in favour of this view, since it was precisely during the heyday of the first great globalisation, in the decades running up to the First World War, that the foundations of the modern welfare state were laid. Across Europe, socialist parties then supported liberal free trade policies, in return for the introduction of a range of social insurance programmes, such as old age pensions, accident insurance or unemployment insurance. These reforms tended to be most advanced in those countries which were most open to the world economy of the day. Far from globalisation leading to a race to the bottom, this was a period in which free trade and social progress went hand in hand in Europe, and recent historical research suggests that this is precisely why governments were able to maintain a consensus in favour of free trade.3 Similarly, the post-1945 political settlement, which combined a commitment to both open markets and domestic stability, can be seen as acknowledging that while the interwar move towards autarky had been disastrous, and that openness was essential to economic recovery, such openness would be unsustainable without active government intervention to reduce and insure against economic volatility.

In a recent paper co-authored with Richard Sinnott, a political scientist, we have uncovered suggestive microeconomic evidence in support of the view that government expenditure can boost support for free trade.4 Using survey data for 18 countries in Europe and Asia, we found that those who were more risk-averse were most opposed to trade. However, this effect was considerably weaker in countries where government expenditure accounted for a higher share of GDP.

In one econometric specification, an increase in our risk-aversion variable to its maximum value was associated with an increase in the probability of the respondent being extremely protectionist of approximately 6.5 percentage points in Sweden, which is certainly a large effect. However, the probability of the individual respondent being extremely protectionist increased by approximately 16 percentage points in Indonesia, or by more than twice as much. The crucial difference between the two countries, our results suggest, is that while in Sweden the government consumes 26.6% of GDP, the government consumption share in Indonesia is only 6.5%. It is not surprising that those who dislike risk should be less worried by free trade in Sweden, where the government does in fact provide such insurance, than in Indonesia, where workers and families are to a much greater extent left to their own devices.

Admittedly, individuals object to free trade for a variety of reasons. For example, survey evidence suggests that some oppose deeper economic links with the rest of the world on what are essentially non-economic, chauvinistic grounds. Within Europe, our results suggest a clear link between pro-European and pro-trade sentiment, which is hardly surprising given the way that European integration has advanced historically. Nonetheless, by providing complementary domestic policies, and by making it clear that individual families will not suffer unduly as economies open up to trade, rich-country governments can help maintain support for the liberal trade policies that will be essential if poorer countries are to continue to export their way to greater prosperity in the decades ahead.

Footnotes

1 World Values Survey, 1995-1997. See http://www.worldvaluessurvey.org/.

2 Rodrik, D., 1998. Why Do More Open Economies Have Bigger Governments? Journal of Political Economy 106, pp. 997-1032.

3 Huberman, M. and W. Lewchuk, 2003. European Economic Integration and the Labour Compact, 1850-1913. European Review of Economic History 7, pp. 3-41.

4 A.M. Mayda, K.H. O’Rourke and R. Sinnott, 2007. Risk, Government and Globalization: International Survey Evidence. CEPR Discussion Paper 6354 (June). Available at http://www.cepr.org/Pubs/new-dps/dplist.asp?dpno=6354

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Topics:  International trade

Tags:  globalization, free trade, government intervention

Associate Professor of Economics, Georgetown University; Research Affiliate, CEPR

Chichele Professor of Economic History, All Souls College, University of Oxford; and Programme Director, CEPR

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