Globalisation and the Composition of Government Spending: An analysis for OECD countries

The ‘compensation’ and ‘efficiency’ hypotheses propose that globalisation affects both the total, and composition of public expenditures in quite different ways. Under the former economic insecurity leads to an expansion of the public sector and social expenditures, whereas under the efficiency hypothesis demands for lower taxes encourage a smaller public sector with greater emphasis on ‘privately productive’ spending. We test these hypotheses for a sample of OECD countries from 1980-1997. Using both the inward stock of FDI and openness as measures of globalisation we find no effect on the size of government, but that FDI significantly affects the composition of spending strongly supporting the compensation hypothesis.

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