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Economic Integration and the Welfare State

Economic Integration and the Welfare State. Economic integration. Increasing mobility of people, goods and factors of production institutions and policies through different channels. Factor price equalization (e.g. Freeman) Policy experimentation (e.g. Mukand and Rodrik)

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Economic Integration and the Welfare State

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  1. Economic Integration and the Welfare State

  2. Economic integration • Increasing mobility of people, goods and factors of production institutions and policies through different channels. • Factor price equalization (e.g. Freeman) • Policy experimentation (e.g. Mukand and Rodrik) • System competition (e.g. Sinn)

  3. System competition • While competition among firms tends to be beneficial for the general public, this is not necessarily so for the case of competition among governments. • Sinn (1997): ”Since governments have stepped in where markets have failed, it can hardly be expected that a reintroduction of a market through the backdoor of systems competition will work. It is likely to bring about the same kind of market failure that justified government intervention in the first place.” • Ex1 Public goods financed by a mobile tax base • Ex2 Redistributive taxation

  4. System competition cont. • Tax competition model formalized by Zodrow and Mieszkowski (1986), but topic in public finance for a long time: • Break, 1967: “Active tax competition, in short, tends to produce either a generally low level of state-local tax effort or a state-local tax structure with strong regressive features”. • Oates, 1972: “The result of tax competition may well be a tendency toward less than efficient levels of output of local services”. • But welfare consequences of tax competition is not trivial… • Brennan and Buchanan, 1980: ”The primary purpose of federalism … is to create competition between jurisdictions” • Second best solution: Tax competition restrains a public sector that otherwise would have been too large.

  5. Can the welfare state survive? • The tendency to factorpriceequalization makes theincomedistribution in richcountries more unequal and increasestheneed for an activewelfarestate. • Butclosereconomicintegration makes it more difficult to maintainthewelfarestate. • Eachcountry has incentives to limit redistribution to avoidattractingnetrecipients and repellingnetcontributors. • In its most extreme form ’a race to thebottom’.

  6. Openness and government size • Rodrik (1998) empirically investigates the relationship between openness and government spending.

  7. Openness and governmentsizecont. • This cross countryrelationship is robust to: • Including a setofcontrol variables • Differentmeasuresof gov. Spending • Differentsubsamples (high and lowincomecountries). • Excludingoutliers • Rodrikconcludesthattheassociation is not driven by omitted variables. • The effect is strongeston transfer and socialsecurity spending.

  8. Openness and governmentsizecont. Table from Fiva (2006)

  9. Openness and governmentsizecont. Table from Fiva (2006)

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