How Reliable is Pooled Analysis in Political Economy? The Globalization-Welfare State Nexus Revisited

Panel data analysis has become very popular in comparative political economy. However, in order to draw meaningful inferences from such data, one has to address specification and estimation issues carefully. This paper aims to demonstrate various pitfalls that typically occur in applied empirical work. To illustrate this, we refer to the debate on the globalization-welfare state nexus. We reexamine a model by Garrett and Mitchell (2001), a leading study in this regard. Utilizing a data set of 17 OECD countries and the time period 1961 to 1993, they find evidence that globalization and partisan composition have a significant im-pact on the extent of public activity. However, because they apply a dynamic specification in levels, they do not adequately take into account both the dynamic and spherical nature of the data. In contrast, we propose an autoregressive model in first differences that is shown to perform well in statistical terms. Further, we explicitly pay attention to the time pattern of the globalization-welfare state nexus. Substantively, we find evidence that government spending is primarily driven by the state of the domestic economy. Neither partisan effects nor the international economic environment have affected public expenditure considerably.

[1]  Jackman Robert,et al.  CROSS-NATIONAL STATISTICAL RESEARCH AND THE STUDY OF COMPARATIVE POLITICS , 1985 .

[2]  J. Hausman.  Specification tests in econometrics , 1978 .

[3]  David R. Cameron,et al.  The Expansion of the Public Economy: A Comparative Analysis , 1978, American Political Science Review.

[4]  D. Mueller.  Public choice II , 1989 .

[5]  Cheng Hsiao,et al.  To Pool or Not to Pool Panel Data , 2000 .

[6]  Bruce Western,et al.  Causal Heterogeneity in Comparative Research: A Bayesian Hierarchical Modeling Approach , 1998 .

[7]  P. A. V. B. Swamy,et al.  Statistical Inference in Random Coefficient Regression Models , 1971 .

[8]  D. Freedman.  Statistical models and shoe leather , 1989 .

[9]  D. Quinn.  The Correlates of Change in International Financial Regulation , 1997, American Political Science Review.

[10]  Deborah Mitchell,et al.  Globalization, government spending and taxation in the OECD , 2001 .

[11]  Jan Kmenta,et al.  Elements of econometrics , 1988 .

[12]  Dani Rodrik,et al.  Why do More Open Economies Have Bigger Governments? , 1996, Journal of Political Economy.

[13]  Peter Pedroni,et al.  Fully modified OLS for heterogeneous cointegrated panels , 2001 .

[14]  G. Tabellini,et al.  Unemployment, Growth and Taxation in Industrial Countries , 1998 .

[15]  G. Tabellini,et al.  Political Economics: Explaining Economic Policy , 2000 .

[16]  Steffen Ganghof.  Global Markets, National Tax Systems, and Domestic Politics: Rebalancing Efficiency and Equity in Open States’ Income Taxation , 2001 .

[17]  Duane H. Swank.  Funding the Welfare State: Globalization and the Taxation of Business in Advanced Market Economies , 1998 .

[18]  Cheng Hsiao,et al.  Analysis of Panel Data , 1987 .

[19]  D. Mueller,et al.  Why does government''s share of national income grow , 1996 .

[20]  Robert O. Keohane,et al.  Designing Social Inquiry: Scientific Inference in Qualitative Research. , 1995 .

[21]  G. Garrett,et al.  Capital mobility, trade, and the domestic politics of economic policy , 1995, International Organization.

[22]  G. Maddala,et al.  A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test , 1999 .

[23]  Nathaniel Beck,et al.  Throwing Out the Baby with the Bath Water: A Comment on Green, Kim, and Yoon , 2001, International Organization.

[24]  Jonathan N. Katz,et al.  What To Do (and Not to Do) with Time-Series Cross-Section Data , 1995, American Political Science Review.

[25]  M. Nerlove,et al.  Biases in dynamic models with fixed effects , 1988 .

[26]  G. Garrett,et al.  Partisan Politics in the Global Economy , 1998 .

[27]  L. Bretschger,et al.  Globalisation, capital mobility and tax competition: theory and evidence for OECD countries , 2002 .

[28]  D. Mueller.  Public Choice III: What have we learned? , 1979 .

[29]  Jerry A. Hausman,et al.  Panel Data and Unobservable Individual Effects , 1981 .

[30]  Nathaniel Beck,et al.  Nuisance vs. Substance: Specifying and Estimating Time-Series-Cross-Section Models , 1996, Political Analysis.

[31]  H. Ursprung,et al.  Globalisation of the Economy and the Nation State , 1999 .

[32]  Alexander Hicks,et al.  Development and Crisis of the Welfare State: Parties and Policies in Global Markets. By Evelyne Huber and John D. Stephens. Chicago: University of Chicago Press, 2001. 368p. $54.00 cloth, $18.00 paper. , 2002, American Political Science Review.

[33]  T. Vogelsang.  Unit Roots, Cointegration, and Structural Change , 2001 .

[34]  J. Hayward.  Small states in world markets: industrial policy in Europe , 1986 .

[35]  Dani Rodrik,et al.  Has Globalization Gone Too Far , 1997 .

[36]  P. Katzenstein,et al.  Small States in World Markets: Industrial Policy in Europe , 1985 .

[37]  Andrew T. Levin,et al.  Unit root tests in panel data: asymptotic and finite-sample properties , 2002 .

[38]  Thomas R. Cusack,et al.  The Causes of Welfare State Expansion: Deindustrialization or Globalization? , 2000, World Politics.

[39]  Gregory J. Wawro,et al.  Estimating Dynamic Panel Data Models in Political Science , 2002, Political Analysis.

[40]  M. Pesaran,et al.  Testing for unit roots in heterogeneous panels , 2003 .

[41]  Ann L. Owen,et al.  Estimating dynamic panel data models: a guide for , 1999 .

[42]  A. Zellner.  An Efficient Method of Estimating Seemingly Unrelated Regressions and Tests for Aggregation Bias , 1962 .

[43]  A. Buse,et al.  Elements of econometrics , 1972 .

[44]  Alexander Hicks,et al.  Politics, Institutions, and Welfare Spending in Industrialized Democracies, 1960–82 , 1992, American Political Science Review.

[45]  P. Pierson.  The New Politics of the Welfare State , 1996, World Politics.

[46]  Graham Elliott,et al.  Confidence Intervals for Autoregressive Coefficients Near One , 2000 .

[47]  Bernhard Kittel,et al.  Political parties, institutions, and the dynamics of social expenditure in times of austerity , 2003 .

[48]  M. Hashem Pesaran,et al.  Pooled Mean Group Estimation of Dynamic Heterogeneous Panels , 1999 .

[49]  C. Kao,et al.  On the Estimation and Inference of a Cointegrated Regression in Panel Data , 1997 .

[50]  Duane H. Swank,et al.  The New Political Economy of Taxation in Advanced Capitalist Democracies , 2002 .

[51]  Jan F. Kiviet,et al.  On bias, inconsistency and efficiency of various estimators in dynamic panel data models , 1995 .

[52]  Ronald Smith.  Estimation and inference with non-stationary panel time-series data. , 2001 .

[53]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[54]  F. Castles.  On the Political Economy of Recent Public Sector Development , 2001 .