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Abstract
This dissertation assesses a common assumption in the debates on globalization, namely that increasing exposure to the global economy leads to greater economic risk. With this assumption, scholars of international political economy have advanced a counterintuitive argument: globalization bolsters rather than dismantles the welfare state, as higher economic vulnerability generated by globalization leads to greater demand for social insurance. Known as the compensation hypothesis, the argument has provided an explanation for the simultaneous growth of international trade and government size in the postwar period, one of the central puzzles in international political economy.
Based on the statistical analysis of cross-national economic and individual-level survey data, I demonstrate a significant bifurcation in the effect of international trade on macroeconomic volatility, perceptions of economic insecurity, and government social spending between developed and developing countries. In developed countries, greater economic openness is linked to lower economic volatility and perceptions of less economic insecurity, whereas in developing countries it is linked to higher economic volatility and greater perceived economic insecurity. However, government social spending rises with openness in developed countries but not in developing countries.
These findings cast doubt on the compensation hypothesis. The condition that openness increases economic insecurity, a key link of the compensation logic, is met in developing nations where the outcome—compensatory social spending—does not occur, whereas it is not met in developed countries where social spending increases with openness.
Consistent with an argument that the constraints of the global economy are more salient in developing nations, my findings demonstrate that the competitive pressure from the global economy to reduce social spending outweighs the demand for social insurance in the developing world. My dissertation study, thus, lends support to the growing concern among international development institutions that openness will not work without complementary political and economic institutions that cushion the risks of greater openness. With regard to advanced industrial nations, the findings expose the under-specified nature of the causal mechanism linking greater openness with higher levels of social insurance expenditures.
