Globalization And Self-Determination: Is The Nation-State Under Siege? (Rotledge Studies in the...

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Globalization and Self-Determination

Is the nation-state under siege? A common answer is that globalizationposes two fundamental threats to state sovereignty. The first threat con-cerns the unleashing of centrifugal and centripetal forces such as increas-ing market integration and the activities of institutions like the IMF,World Bank, and WTO that imperil state sovereignty from outside thenation-state. The second threat emanates from self-determination move-ments that jeopardize state sovereignty from inside the nation-state.

This book rigorously analyzes popular hypotheses regarding globaliza-tions effect on state sovereignty from a broad social scientific perspective.Using empirical evidence the authors suggest that globalizations multi-level threats to state sovereignty have been overestimated. In mostinstances globalization is likely to generate pressure for increased govern-ment spending while only one form of market integration foreign directinvestment by multinational enterprises appears to increase any feelingof economic insecurity.

Also contrary to popular perception, the net effect of IMF conditional-ity may be positive, limits on state sovereignty by multilateral developmentbanks are not inevitable, and the WTO is not necessarily a threat tostate sovereignty. Furthermore, globalization is likely to increase the riskof secessionism only in very specific conditions. And while some self-determination movements may find globalization useful, on the wholecountries with more open economies appear less likely to house self-determination movements and are more likely to implement policies offiscal centralization.

David R. Cameron is Professor of Political Science and Director of theYale Program in European Union Studies at Yale University. Gustav Ranisis the Frank Altschul Professor Emeritus of International Economics atYale University. Annalisa Zinn is a Ph.D. candidate in Political Science atYale University.

Routledge studies in the modern world economy

1 Interest Rates and BudgetDeficitsA study of the advancedeconomiesKanhaya L. Gupta and Bakhtiar Moazzami

2 World Trade after the UruguayRoundProspects and policy optionsfor the twenty-first centuryEdited by Harald Sander andAndrs Inotai

3 The Flow Analysis of LabourMarketsEdited by Ronald Schettkat

4 Inflation and UnemploymentContributions to a newmacroeconomic approachEdited by Alvaro Cencini andMauro Baranzini

5 Macroeconomic Dimensions ofPublic FinanceEssays in honour of Vito TanziEdited by Mario I. Blejer andTeresa M. Ter-Minassian

6 Fiscal Policy and EconomicReformsEssays in honour of Vito TanziEdited by Mario I. Blejer andTeresa M. Ter-Minassian

7 Competition Policy in theGlobal EconomyModalities for co-operationEdited by Leonard Waverman,William S. Comanor and Akira Goto

8 Working in the Macro EconomyA study of the US labor marketMartin F. J. Prachowny

9 How Does Privatization Work?Edited by Anthony Bennett

10 The Economics and Politics ofInternational TradeFreedom and trade: Volume IIEdited by Gary Cook

11 The Legal and Moral Aspectsof International TradeFreedom and trade: Volume IIIEdited by Asif Qureshi,Hillel Steiner and Geraint Parry

12 Capital Markets and CorporateGovernance in Japan, Germanyand the United StatesOrganizational response tomarket inefficienciesHelmut M. Dietl

13 Competition and TradePoliciesCoherence or conflictEdited by Einar Hope

14 RiceThe primary commodityA. J. H. Latham

15 Trade, Theory andEconometricsEssays in honour of John S.ChipmanEdited by James C. Moore,Raymond Riezman and James R. Melvin

16 Who benefits fromPrivatisation?Edited by Moazzem Hossain andJustin Malbon

17 Towards a Fair Global LabourMarketAvoiding the new slave tradeOzay Mehmet, Errol Mendes andRobert Sinding

18 Models of Futures MarketsEdited by Barry Goss

19 Venture Capital InvestmentAn agency analysis of UKpracticeGavin C. Reid

20 Macroeconomic ForecastingA sociological appraisalRobert Evans

21 Multimedia and RegionalEconomic RestructuringEdited by Hans-Joachim Braczyk,Gerhard Fuchs and Hans-Georg Wolf

22 The New Industrial GeographyRegions, regulation andinstitutionsEdited by Trevor J. Barnes andMeric S. Gertler

23 The Employment Impact ofInnovationEvidence and policyEdited by Marco Vivarelli andMario Pianta

24 International Health CareReformA legal, economic and politicalanalysisColleen Flood

25 Competition Policy AnalysisEdited by Einar Hope

26 Culture and EnterpriseThe development,representation and morality ofbusinessDon Lavoie and Emily Chamlee-Wright

27 Global Financial Crises andReformsCases and caveatsB. N. Ghosh

28 Geography of Production andEconomic IntegrationMiroslav N. Jovanovic

29 Technology, Trade and Growthin OECD CountriesDoes specialisation matter?Valentina Meliciani

30 Post-Industrial Labour MarketsProfiles of North America andScandinaviaEdited by Thomas P. Boje andBengt Furaker

31 Capital Flows without CrisisReconciling capital mobilityand economic stabilityEdited by Dipak Dasgupta, Marc Uzan and Dominic Wilson

32 International Trade andNational WelfareMurray C. Kemp

33 Global Trading Systems atCrossroadsA post-Seattle perspectiveDilip K. Das

34 The Economics andManagement of TechnologicalDiversificationEdited by John Cantwell, Alfonso Gambardella and Ove Granstrand

35 Before and Beyond EMUHistorical lessons and futureprospectsEdited by Patrick Crowley

36 Fiscal DecentralizationEhtisham Ahmad and Vito Tanzi

37 Regionalisation of GlobalisedInnovationLocations for advancedindustrial development anddisparities in participationEdited by Ulrich Hilpert

38 Gold and the Modern WorldEconomyEdited by MoonJoong Tcha

39 Global Economic InstitutionsWillem Molle

40 Global Governance andFinancial CrisesEdited by Meghnad Desai andYahia Said

41 Linking Local and GlobalEconomiesThe ties that bindEdited by Carlo Pietrobelli andArni Sverrisson

42 Tax Systems and Tax Reformsin EuropeEdited by Luigi Bernardi andPaola Profeta

43 Trade Liberalization and APECEdited by Jiro Okamoto

44 Fiscal Deficits in the PacificRegionEdited by Akira Kohsaka

45 Financial Globalization and theEmerging Market EconomiesDilip K. Das

46 International Labor MobilityUnemployment and increasingreturns to scaleBharati Basu

47 Good Governance in the Era ofGlobal NeoliberalismConflict and depolitization inLatin America, Eastern Europe,Asia and AfricaEdited by Jolle Demmers, Alex E. Fernndez Jilberto andBarbara Hogenboom

48 The International TradeSystemAlice Landau

49 International Perspectives onTemporary Work and WorkersEdited by John Burgess and Julia Connell

50 Working Time and WorkersPreferences in IndustrializedCountriesFinding the balanceEdited by Jon C. Messenger

51 Tax Systems and Tax Reformsin New EU MembersEdited by Luigi Bernardi, Mark Chandler and Luca Gandullia

52 Globalization and the NationStateThe impact of the IMF and theWorld BankEdited by Gustav Ranis, James Vreeland and Stephen Kosack

53 Macroeconomic Policies andPoverty ReductionEdited by Ashoka Mody andCatherine Pattillo

54 Regional Monetary PolicyCarlos J. Rodrguez-Fuentez

55 Trade and Migration in theModern WorldCarl Mosk

56 Globalisation and the LabourMarketTrade, technology and less-skilled workers in Europe andthe United StatesEdited by Robert Anderton, Paul Brenton and John Whalley

57 Financial CrisesSocio-economic causes andinstitutional contextBrenda Spotton Visano

58 Globalization and Self-DeterminationIs the nation-state under siege?Edited by David R. Cameron,Gustav Ranis and Annalisa Zinn

Globalization and Self-DeterminationIs the nation-state under siege?

Edited by David R. Cameron, Gustav Ranis and Annalisa Zinn

First published 2006 by Routledge2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

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2006 selection and editorial matter, David R. Cameron, GustavRanis and Annalisa Zinn; individual chapters, the contributors

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Contents

List of illustrations xiList of contributors xivAcknowledgments xvi

Editors introduction 1D A V I D R . C A M E R O N , G U S T A V R A N I S A N D A N N A L I S A Z I N N

PART IThreats from the outside: market integration and nationalautonomy 13

1 Trade, political institutions and the size of government 15D A V I D R . C A M E R O N A N D S O O Y E O N K I M

2 Public opinion, international economic integration and the welfare state 51K E N N E T H S C H E V E A N D M A T T H E W J . S L A U G H T E R

3 Economic insecurity and the globalization of production 95K E N N E T H S C H E V E A N D M A T T H E W J . S L A U G H T E R

PART IIMore threats from the outside: international economic institutions and national autonomy 119

4 The International Monetary Fund and the global spread of privatization 121N A N C Y B R U N E , G E O F F R E Y G A R R E T T A N D B R U C E K O G U T

5 The MDBs and the nation-state 147G U S T A V R A N I S

6 The political impact of WTO membership in urban China 159M A R Y C . C O O P E R A N D P I E R R E F . L A N D R Y

7 Temptation versus coercion: trade agreements and the nation-state 183P H I L I P I . L E V Y

PART IIIThreats from the inside: globalization, autonomy movements and political organization 197

8 Globalization, decentralization and secession: a review of the literature and some conjectures 199N I C H O L A S S A M B A N I S

9 Economic integration and political separatism: parallel trends or causally linked processes? 233A N N A L I S A Z I N N

10 Globalization and ethnonationalist movements: evidence from Spain and India 247M E R E D I T H L . W E I S S

11 Globalization and fiscal decentralization 278G E O F F R E Y G A R R E T T A N D J O N A T H A N R O D D E N

12 Recentralizing while decentralizing: how national governments re-appropriate forest resources 301A R U N A G R A W A L A N D J E S S E C . R I B O T

Index of authors 332Subject index 339

x Contents

Illustrations

Figures

1.1 Trade as a percentage of GDP in 19 nations, 19702000 201.2 Total outlays and revenues of all government as a

percentage of GDP in 19 nations, 19702000 221.3 Total outlays of government as a percentage of GDP in

Spain, Portugal and Greece, 19702000 272.1 Marginal effect of skill on trade preferences versus

national endowment of human capital 772.2 Level of protectionist opinion versus unemployment 802.3 Level of protectionist opinion versus labor spending 812.4 Marginal effect of skill on trade preferences versus labor

spending 834.1 Privatization over time 1226.1 Preferences on globalization 1616.2 Expectations of Chinese preferences on globalization 1646.3 Hypothetical effect of self-interest and nationalism on

individual support for globalization 1656.4 Coding rule for support for the WTO 1706.5 Impact of age on respondents awareness of the WTO, by

city 1716.6 Political awareness and support for the WTO 1726.7 Level of education and support for the WTO 1736.8 Fitted impact of income and nationalism on the

probability of support for the WTO (eastern sample) 1756.9 Fitted impact of nationalism and age on the probability

of support for the WTO, by city 176

Tables

1.1 The relationship between trade openness and the totaloutlays and revenues of government across 19 countries, 19702000 24

1.2 The change between 1970 and 2000 in total outlays and total revenues of all government as a percentage of GDP 25

1.3 The relation between democratization and the level and increase in government spending across 19 countries 28

1.4 The effects of trade openness and other variables on the year-to-year change in total outlays of all government as apercentage of GDP in 19 countries, 19712000 33

1.5 The effects of trade openness and other variables on the year-to-year changes in total outlays, total revenues and the total budget deficit as a percentage of GDP in 19 nations, 19712000 37

1.6 The effects of political-institutional attributes on the year-to-year change in total outlays, total revenues and the total budget deficit as a percentage of GDP in 19 nations, 19712000 41

2.1 Determinants of respondent opinion in the US on international trade restrictions: 1992 factor-income models 73

2.2 Estimated effect of increasing skill levels on the probability of supporting immigration restrictions in the US: 1992 74

3.1 Summary statistics 1043.2 Panel analysis of economic insecurity, 19911999 1063.3 Panel analysis of economic insecurity with alternative

measures of FDI exposure, 19911999 1083.4 Dynamic panel analysis of economic insecurity, 19931999 1104.1 Privatization by region and per capita income, 19851999 1234.2 Developing countries and the IFIs, 19801999 1294.3 Ghana and Nigeria 1314.4 Total privatizations, 19851999 1344.5 Annual privatizations, 19851999 1364.6 Selection effects and dynamics 139Appendix 4.1 Country-level privatizations, 19851999 1413Appendix 4.2 Description of the variables 14346.1 Regional variation in wealth 1636.2 Openness of sampled cities 1666.3 Demographics of sampled cities 1676.4 Gender and awareness of the WTO 1716.5 Average political awareness score (09 scale), by city and

category of the dependent variable 1726.6 Average schooling, by city and category of the dependent

variable 1736.7 Probit estimation with sample selection of support for the

WTO 177Appendix 6.1 WTO accession, 1994 16 February 2005 178

xii Illustrations

Appendix 6.2 GDP by province, 1999 1799.1 Determinants of the number of active self-determination

movements, 19801999 24311.1 State and local share of total government expenditure 28011.2 Between-effects decentralization models, 19811989 28711.3 Between-effects decentralization models, 19901997 28811.4 Time-series cross-section decentralization models,

19811997 290

Illustrations xiii

Contributors

Arun Agrawal is an Associate Professor at the University of Michigan in theSchool of Natural Resources and Environment. His research concernsthe political economy of development and environment.

Nancy Brune is a Ph.D. candidate in Political Science from Yale Universityand is currently a Fellow at the Center for Globalization and Gover-nance at Princeton University.

David R. Cameron is a Professor of Political Science at Yale University. Hehas written extensively on trade openness and the European Union.

Mary C. Cooper is an Assistant Professor in the Department of PoliticalScience at the Ohio State University and is currently completing a bookmanuscript on the creation of stock exchanges in China.

Geoffrey Garrett is President of the Pacific Council on InternationalPolicy and a Professor of International Relations at the University ofSouthern California.

Soo Yeon Kim is an Assistant Professor in the Department of Governmentand Politics at the University of Maryland.

Bruce Kogut is the Eli Lilly Professor at INSEAD, Fontainebleau and haswritten about corporate governance, privatization and globalization.

Pierre F. Landry is an Assistant Professor of Political Science at Yale Uni-versity. His research interests focus on Chinese politics, comparativelocal government and quantitative comparative political analysis.

Philip I. Levy is a member of the Policy Planning Office of the U.S.Department of State. He served until recently on the PresidentsCouncil of Economic Advisers. His research focuses on internationaltrade, political economy and economic development.

Gustav Ranis is the Frank Altschul Professor Emeritus of InternationalEconomics at Yale University and is currently a Carnegie Scholar. Hisrecent publications include Globalization and the Nation-State (2005, co-editor with James Vreeland and Stephen Kosack).

Jesse C. Ribot is Senior Fellow at the World Resources Institute. Hisresearch focuses on African politics, the political economy of develop-ment and the institutional politics of decentralization reforms.

Jonathan Rodden is the Ford Career Development Associate Professor ofPolitical Science at MIT. His research and teaching focus on compara-tive political economy, with particular attention to federalism, distribu-tive politics and political geography.

Nicholas Sambanis is an Associate Professor of Political Science at YaleUniversity. His research interests are in the area of ethnic conflict, civilviolence and economic development.

Kenneth Scheve is a Professor of Political Science at Yale University.

Matthew J. Slaughter is an Associate Professor of Business Administrationat the Tuck School of Business at Dartmouth and is currently a memberof the Presidents Council of Economic Advisors.

Meredith L. Weiss is a research fellow at the East-West Center Washing-ton. Previously she was an Assistant Professor in International Studies atDePaul University. She specializes in Southeast Asian politics.

Annalisa Zinn is a Ph.D. candidate in Political Science at Yale University.Her research focuses on the prevention of violent conflict.

Contributors xv

Acknowledgments

This volume is one of the results of a broad three-year project entitledGlobalization and Self-Determination, supported by a grant from theCarnegie Corporation of New York, with supplementary assistance fromour host, the Yale Center for International and Area Studies, as well as theCoca Cola World Fund at Yale and the Edward J. and Dorothy ClarkeKempf Fund. The project was first conceived in 2000 by Arun Agrawal,Geoffrey Garrett and Gustav Ranis. David R. Cameron later joined GustavRanis as a co-principal investigator. The project came to involve many ofour colleagues working on related international issues at Yale Universityand we are indebted to these colleagues, too numerous to name individu-ally, for their input and involvement in the project. We are especiallygrateful to the Carnegie Corporation and to Stephen Del Rosso, seniorprogram officer, for his interest and support.

This volume incorporates the results of a coherent research programpresented at a conference on Globalization and Self-Determination: TheNation-State under Siege, held at Yale University on 1415 May 2004. Weare grateful to all those who presented papers, served as discussants of thevarious panels, as well as others who offered helpful suggestions andraised important questions from the floor. These included Keith Darden,Anna Grzymala-Busse, John Freeman, Oona Hathaway, Pauline Jones-Luong, Jack Knight, Guillermo Mondino, Mahmood Monshipouri, Victo-ria Murillo, Ibrahim Saif, Beth Simmons, Anand Swamy, Daniel Treisman,James Vreeland and John Williamson. For administrative support, wewould like to thank Richard Kane, Peg Limbacher, Marilyn Wilkes, LisaBrennan and Beverly Kimbro.

The quality of the conference papers exceeded our high hopes, and itwas clear that they deserved wider dissemination. We therefore assembledand edited this volume during the 20042005 academic year and we aregrateful to our editor at Routledge, Robert Langham, for his support inthis endeavor. Any opinions, findings, conclusions or recommendationsexpressed in this publication are those of the authors and do not necessar-ily reflect the views of the supporting institutions.

Chapter 2 was first published in Bardhan, P., Bowles, S. and

Wallerstein, M. (eds) (2006), Globalization and Egalitarian Redistribution,Princeton University Press, reprinted by permission of Princeton Univer-sity Press. Chapter 3 was first published as Scheve, K. and Slaughter, M.(2004) Economic Insecurity and the Globalization of Production, Amer-ican Journal of Political Science, 48/4: 66274, published by, and reprintedby, permission of Blackwell Publishing. Chapter 4 was first published asBrune, N., Garrett, G. and Kogut, B. (2004) The IMF and the GlobalSpread of Privatization, IMF Staff Papers, 51/2: 195219. Copyright fromIMF Staff Papers. Chapter 11 was first published in Kahler, M. (2003) Gov-ernance in a Global Economy, 2003 Princeton University Press, reprintedby permission of Princeton University Press.

Acknowledgments xvii

Editors introduction

David R. Cameron, Gustav Ranis and Annalisa Zinn

State sovereignty has been the key institutional support for self-determination for more than three centuries. Wars, whether civil or inter-national, have redefined the relevant actors and their inter-relationshipsfrom time to time and more or less radically. The nature of sovereignty,whether it is understood territorially, judicially or economically, has alsoundergone redefinition. Nonetheless, the fundamental pillar of the West-phalian system of states the respect for national borders and the auto-nomy of domestic actors within them has endured, at least legally. Thekey question is whether it will continue to endure also in practice.1

A common answer is that globalization defined minimally as the inter-national integration of markets for goods, services, labor and capital poses two fundamental threats to state sovereignty. The first threat con-cerns the unleashing of powerful centrifugal and centripetal forces thatlimit state sovereignty from outside the nation-state. These forcesinclude the increasingly integrated nature of markets, the emergence ofregional institutions to govern these markets, and the activities of multilat-eral institutions such as the International Monetary Fund (IMF), theWorld Bank and the World Trade Organization (WTO). But althoughthese forces may limit the autonomy of nation-states for example byimposing certain economic reforms or reducing control over macroeco-nomic policy they do not change the form of national governments, andso are thought to represent de facto rather than de jure threats to state sov-ereignty.

By contrast, globalizations second threat to state sovereignty the facil-itation of attacks on existing political arrangements and boundaries frominside the nation-state has both de jure and de facto dimensions.Although movements for subnational autonomy, which demand either aredefinition of national political boundaries or strive for a greater share ofthe national political and economic pie, have been constant features ofthe political landscape for centuries (Tilly et al. 1975; Sewell 1990), manyassume that contemporary globalization processes have increased thenumber of such movements, as well as their bases of support and chancesof success (Dragadze 1996; Marks and McAdam 1996; Sorens 2004).

As such, it has become more likely that the demand for greater subna-tional autonomy, also known as the demand for ethnic or regional self-determination when the demanding group is defined on the basis of anethnic or regional identity, results in either the devolution of politicalpower within countries a de facto reduction of state sovereignty or thecreation of new states a de jure redistribution of state sovereignty.

Moreover, many assume that these outside and inside threats to thenation-state are likely to be mutually reinforcing, with several causalmechanisms operative. First, the integration of markets has made it pos-sible for subnational groups to pursue their own destinies as independentactors (Alesina and Spolaore 1997; Anderson and ODowd 1999). Second,globalization and the concomitant increases in communication networksand labor mobility have made it much easier for subnational groups tomobilize across national borders and also to involve diasporic populations,which may contribute to the success of these movements (McLellan andRichmond 1994; Waterman 1998; Kumar 2000). Third, globalization hasprovided subnational groups with additional resources, which may alsomake independence appear more feasible.2 Fourth, globalization canproduce popular backlash, which opportunistic political actors represent-ing interests threatened by globalization, may utilize to shape demands forgreater autonomy (Dragadze 1996).

These processes all suggest a larger causal relationship between global-ization and self-determination: linkages between supranational and subna-tional actors that actively fuel self-determination movements by reducingthe control of national government within their own borders. At the sametime, however, these processes also point to the proposed central tensionof globalization, namely that it increases the ability of groups to achievepolitical autonomy while simultaneously lessening their ability to exerciseeffective independence in the realm of policy choice, which calls intoquestion the value of winning de jure recognition of their autonomy.

It is in this setting of ideas, assumptions and uncertainty about the rela-tionship between globalization, self-determination and state sovereigntythat this volume appears. There exist multiple common notions abouthow globalization is threatening state sovereignty from both the insideand the outside, but we still do not know how many of these are consistentwith reality or myths that need to be debunked. The chapters in thisvolume help fill this significant gap in understanding by investigating theextent, over time and space, to which globalization is threatening thenation-state from both outside and inside. Their general consensus is thatsome of the common notions about globalization and state sovereignty arefallacious, others are only partially valid, while still others are applicableonly in a specific, circumscribed context.

The volumes first part Threats from the outside: market integrationand national autonomy presents three chapters that explore howgreater market integration is affecting state sovereignty. In particular, the

2 D. R. Cameron, G. Ranis and A. Zinn

contributors to this part take a critical look at two popular hypothesesabout globalizations threat to the nation-state from above: globalizationhas increased the power of finance and industry to put downward pressureon interventionist government and globalization increases economic inse-curity within nations.

A deep conviction among critics of globalization is that the politicalpower of finance and industry has increased dramatically with marketintegration. Quite simply, if capital does not approve of conditions in onecountry, it can credibly threaten to move its activities elsewhere. This, inturn, induces governments to seek the approval of foreign capitalists,which may create a problem for the acceptance of globalization if itenhances worker insecurity, because capital prefers that government playa smaller, not a larger, role in the economy.

The first two chapters investigate this common belief from differentangles, and while they demonstrate that the situation is more complexthan the simple hypothesis suggests, the overall conclusion is that global-ization puts downward pressure on government only in some circum-stances and for the most part encourages additional governmentspending.

In Chapter 1 Trade, political institutions and the size of govern-ment David R. Cameron and Soo Yeon Kim investigate the effects ofeconomic openness and political institutions on the relative size ofgovernment in 19 developed democracies in the last three decades of thetwentieth century. On the basis of pooled time-series data for the 19 coun-tries, Cameron and Kim find the extent of trade openness has no effect onchanges in government spending and revenues. Contrary to the hypothe-sis that increasing openness results in increased spending and revenues,large increases in openness were associated with small increases ordecreases in the relative size of public expenditures and revenues.However, they argue that the balance of trade reflects much better thanthe aggregate volume of trade the conventional measure of openness the extent to which a country is likely to experience trade-related disloca-tions that result in increased spending. Consistent with that argument,they find that large trade deficits and deterioration of the balance of tradehad significant expansionary effects on government spending across theadvanced capitalist world over the three decades.

In Public opinion, international economic integration and the welfarestate, Kenneth Scheve and Matthew J. Slaughter take Cameron and Kimsstudy a step further by investigating whether the mechanism linking glob-alization to higher levels of government spending is indeed increasedpolitical support for social insurance and redistributive policies as a resultof economic liberalizations cost to workers. To do so, they examineextensive data on individual policy preferences, macroeconomic con-ditions and individual-level characteristics such as educational attainment,occupation and industry of employment.

Editors introduction 3

Scheve and Slaughter find that labor market concerns are key inaccounting for both individual policy decisions and the variation in theseacross countries. Not only are individual opinions decidedly more liberalwhen liberalization is tied to support for workers, but countries with moregenerous labor market policies have publics with less protectionist opin-ions and less salient differences in opinion across more and less-skilledworkers. This evidence leads Scheve and Slaughter to conclude that sub-stantial social insurance and redistributive policies are not inconsistentwith economic globalization because political support for liberalizationitself depends in part on those very policies. Though approaching theissue from a different angle, this chapter also challenges the popular viewthat globalization necessarily puts downward pressure on interventionistgovernment.

It is also widely believed that globalization, by increasing the disparitiesbetween those who benefit from market allocations of wealth and risk andthose who do not (at least in the short term), has made many citizens feelmuch less secure about their economic futures. As a result, the demandson government to compensate market losers through income transferprograms, the public provision of social services, subsidies and the like(i.e. the hallmark of the postwar OECDs mixed economies) haveincreased as a result of globalization (Rodrik 1997).

In Chapter 3 Economic insecurity and the globalization of produc-tion Kenneth Scheve and Matthew J. Slaughter investigate whether eco-nomic integration does indeed increase worker insecurity in advancedeconomies. While previous research failed to find any link between inter-national trade and worker insecurity, Scheve and Slaughter present evid-ence suggesting that foreign direct investment (FDI) by multinationalenterprises (MNEs) is the key aspect of integration generating percep-tions of risk, with the following causal mechanism operative. FDI by MNEsincreases firms elasticity of demand for labor; more elastic labordemands, in turn, raise the volatility of wages and employment, all ofwhich tend to make workers less secure. By showing that one form ofmarket integration increases the feeling of economic insecurity, theScheve-Slaughter chapter qualifies, to a limited extent, aforementionedpopular hypotheses on globalization and worker insecurity.

The volumes second part More threats from the outside: inter-national economic institutions and national autonomy presents fourchapters that explore how greater market integration and the increasingscope of activity by multilateral lending institutions are affecting state sover-eignty. In addition to investigating the popular conception that the benefitsof international financial institution (IFI) lending and policy may be out-weighed by the constraints imposed by the ways capital flows and condition-ality are negotiated, two of these chapters also shed light on new researchquestions: the domestic political impact of Chinas WTO membership andinternational economic institutions effects on state sovereignty.


A popular notion is that the benefits of IFI lending are outweighed bythe policy constraints imposed by conditionality. Not surprisingly, studiessupported by the IMF and World Bank on the effects of official develop-ment assistance on recipient countries have tended to show that such assis-tance increases growth, lowers inflation and stabilizes economies (Bird1996). Independent research, however, has been more skeptical and moresupportive of the view that once the reason countries go to the IMF istaken into account (i.e. that they are in crisis), loans cum conditionalityare bad for macroeconomic performance (see Przeworski and Vreeland2000).

In Chapter 4 The International Monetary Fund and the globalspread of privatization Nancy Brune, Geoffrey Garrett and BruceKogut, however, challenge the view that the policy constraints imposed byIMF conditionality render IFI loans on the whole more detrimental thanbeneficial to recipient countries. Using both cross-sectional analysis cover-ing the 19851999 period and panel data, the authors find that IMF con-ditionality has an important indirect economic benefit. For every dollar adeveloping country owed the IMF in the early 1980s, it subsequently priva-tized state-owned assets worth roughly 50 cents. And since the increasedrevenues from privatization, if of the one-shot variety, represent a largecapital flow to developing countries, the significance of this effect shouldnot be underestimated.

According to Brune, Garrett and Kogut, the reason why privateinvestors are willing to pay more for privatized assets in countries that owethe IMF money is that they view IMF conditionality as a de facto goodhousekeeping seal of approval, given that such countries are more likelyto pursue market-friendly policies, such as deregulation and balancedbudgets, into the future. This suggests that the primary value of the IMFmay be financial market enhancement rather than the provision ofcapital, in which case the net effect of conditionality, contrary to thepopular hypothesis, may turn out to be good. The authors are neverthe-less careful to argue that the additional capital drawn into developingcountries as a result of the IMFprivatization nexus does not necessarilyjustify the long list of policy conditions typically imposed by the IMF onrecipient countries.

The next chapter The MDBs and the nation-state by Gustav Ranis addresses a modified version of the popular hypothesis that IFI lendingis frequently more detrimental than beneficial to both state sovereigntyand economic development. As Ranis notes, critics on the left often com-plain that multilateral development banks (MDBs), using their condition-ality clout, have involved themselves in a neo-imperialist fashion in themost sensitive domestic policy arenas and threaten countries self-determination efforts, while critics on the right generally point to whatthey see as a lack of overall development success as an indication thatdevelopment should be left to private markets.


The response Ranis offers to these critics is that yes, there has beensome threat to state sovereignty by MDBs, but this threat has been achoice, not an inevitable consequence. MDBs intrusion on statesovereignty can be minimized if they adopt a more precise stance andencourage recipients to take the initiative in formulating reform packagesand seeking support for their implementation. In addition, Ranis pro-poses that the safeguarding of self-determination by recipients would befurthered if the MDBs agreed on and implemented a more effective divi-sion of labor. For example, given the World Banks superior analyticalcapability, it should focus on macro analysis and let the various regionaldevelopment banks focus on microeconomic, sectoral and institutionalmatters, which are likely to be country-specific and require much localknowledge.

In Chapter 6 The political impact of WTO membership in urbanChina Mary C. Cooper and Pierre F. Landry use mass survey data col-lected in several Chinese cities to examine the political implication of theChinese leaderships embrace of globalization. These surveys includedresidents of cities that expect large economic benefits from WTO mem-bership, cities that expect significant economic harm from WTO member-ship, and cities facing more uncertainty about their prospects under theWTO. Based on a detailed socioeconomic analysis of the respondents,Cooper and Landry find that there is not necessarily congruence betweencitizens cost/benefit analysis of accession and objective measures of theWTO challenge in their sector and region of employment. Rather, asignificant determinant of support for Chinas WTO membership wasnationalism stemming from the regimes policy of portraying WTO mem-bership as a foreign policy accomplishment, e.g. as an expression ofnational self-determination rather than a curtailment of state sovereignty.

The next chapter by Philip I. Levy also investigates international eco-nomic institutions effects on state sovereignty. As Levy notes, a popular alle-gation is that supranational organizations such as the WTO areundermining the sovereign rights of the nation-state by making decisionson agricultural and environmental policy that are the normal domain ofelected national or subnational legislatures. While this allegation may besuperficially appealing, Levy demonstrates that it does not stand up to closeanalysis for two main reasons. First, it is based on misunderstandings of thelegal status of trade agreements and dispute settlement mechanisms.Second, once the concept of sovereignty is properly understood as freedomfrom compulsion, it is clear that international trade agreements do not posea threat to the sovereign rights of nations. To amount to violations of statesovereignty, international trade agreements would have to prevent physi-cally a country from exercising the normal functions of government withinits borders or from engaging in voluntary commercial transactions withothers scenarios that simply do not arise in international trade negotia-tions or in the enforcement of the agreements that emerge.


In the volumes third part Threats from the inside: globalization,autonomy movements and political organization the authors turn tothe question of how globalization is affecting the emergence, goals andstrategies of self-determination movements, and shaping the institutionaland political responses of governments to these demands for politicalreorganization. Popular views have been that globalization increases thefrequency and intensity of culturally-based movements for regional auto-nomy or even independence and makes it more likely that nation-stateswill devolve considerable power to subnational units, thus increasing thecredibility of secessionist threats.

Several studies (Dragadze 1996; Marks and McAdam 1996; Sorens2004) have in fact found a causal link between globalization and demandsfor greater regional autonomy, with the international integration ofdomestic economies increasing both the attractiveness and economic via-bility of greater autonomy. Their evidence, however, is limited to a smallnumber of countries, almost exclusively in Europe, which points to theneed for research on whether globalization affects self-determinationmovements in other regions of the world. In addition, while these worksoffer explanations for their findings, they do not provide a theory of howand why globalization may affect demands for greater regional autonomyand such a theory would be the necessary starting point for further empir-ical research on the links between globalization and self-determinationmovements.

To fill in this theoretical gap, in Chapter 8 Globalization, decentral-ization and secession: a review of the literature and some conjectures Nicholas Sambanis addresses the three questions that a theory of global-ization and subnational self-determination would need to answer: why dogroups want to secede? In which regions are we most likely to observeviolent self-determination movements? How does globalization influencethe risk that some groups will want to secede? In doing so, he reviews therelevant theoretical and empirical literature, as well as several cases, andoutlines some conjectures on the conditions under which globalization islikely to increase the risk of secession. Sambaniss main argument is that,if globalization increases the risk of external economic shocks that areunevenly distributed within and across countries, and if it increases thelevel of fiscal centralization as has been shown in several studies, thenglobalization could increase the risk of secession in countries where thecentral government has a poor track record of providing social insuranceto peripheral regions.

In Chapter 9 Economic integration and political separatism: paralleltrends or causally linked processes? Annalisa Zinn empirically investi-gates whether globalization has increased the frequency and intensity ofdemands for self-determination by stimulating the formation of move-ments for greater regional autonomy or independence and encouragingthe persistence of existing movements. With the help of a multivariate


statistical analysis of 116 countries from 19801999, Zinn finds that coun-tries with open economies appear less likely to be places where ethnic, reli-gious or regional groups form political organizations to demandself-determination, compared to countries with more closed economies.This finding challenges the popular view that globalization amplifies theintensity of subnational threats to state sovereignty and suggests thatincreases in the number of active self-determination movements are actu-ally being curbed by the increasing level of trade between countries.

Chapter 10 Globalization and ethnonationalist movements: evidencefrom Spain and India by Meredith L. Weiss further investigates thelinks between globalization and demands for greater political autonomyby comparing and contrasting four ethnonationalist movements, two inSpain (Basque and Catalan movements) and two in India (Punjabi andKashmiri movements). In particular, Weiss examines when and why eth-nonationalist sentiments still carry weight, the significance of domesticand international support and sanctions to these movements, and whatsuch movements reveal about the relative potency of nation-states andglobal forces in managing or changing their course.

While Weiss four cases are not collectively exhaustive of possible sce-narios, they effectively highlight several significant findings, all of whichquestion a strong and direct link between globalization and the demandfor greater autonomy. First, economic considerations notwithstanding,ethnic, regional and religious sentiments remain powerful motivators forpolitical behavior, especially when local cultures, languages or religionsappear to be under siege. Second, while international sanction andsupport clearly inform the decisions of both states and movement activists,the domestic context how states respond when faced with ethnonational-ist demands remains more important to the course of those movements.Third, not all ethnonationalisms encounter globalization alike; move-ments that can call upon a large and engaged diasporic population or thatinvoke transnational identities may find forces of globalization moreuseful than movements that are truly local in scope. Fourth, the globalforces at play are mercurial. Shifts in global norms and priorities inparticular may (de)legitimate ethnonationalist movements, provide ordiminish inspiration, or shift political opportunity structures and availableresources in important ways, even if global economic forces appear relat-ively insignificant to activists calculations.

Globalization is also commonly believed to render national governmentsmore likely to devolve considerable power to subnational units. The ratio-nale behind this proposition is that international market integrationincreases the credibility of secessionist threats by increasing the economicviability of independence. This, in turn, renders nation-states that areexposed to globalization forces less likely to repress political movementsthat demand change, especially when such demands do not require massivepolitical transformations or the reconfiguration of state boundaries.


In Chapter 11 Globalization and fiscal decentralization GeoffreyGarrett and Jonathan Rodden tackle the above hypothesis head-on. Aspreviously mentioned, popular speculation is that globalization has causeda downward shift in the locus of governance by reducing the economiccosts of smallness and allowing localities and regions with distinct prefer-ences to pursue their own political and economic strategies (e.g. Alesinaand Spolaore 1997; Bolton and Roland 1997). Garrett and Rodden,however, find a striking relationship in the opposite direction. Using alarge cross-national dataset composed of expenditure and revenue decen-tralization data for the 1980s and 1990s, they find that internationalmarket integration has actually been associated with fiscal centralization.

Contrary to the popular hypothesis, Garrett and Roddens proposedexplanation for the positive association between globalization and fiscalintegration is that globalization actually undermines the credibility ofregional exit threats by increasing perceptions of aggregate and region-specific risk within countries. These perceptions, in turn, create powerfulnew demands for fiscal centralization because centralized fiscal arrange-ments permit more macroeconomic stabilization, interregional risksharing and redistribution, and are thus better equipped to deal withglobalizations uncertainties.

Further analysis of whether globalization promotes decentralization ispresented in Chapter 12 Recentralizing while decentralizing: hownational governments re-appropriate forest resources by Arun Agrawaland Jesse C. Ribot. In this chapter the authors investigate four countries(Senegal, Uganda, Nepal and Indonesia) decentralization initiatives in theforestry sector, and in particular, the pressures that led central govern-ments to yield reforms as policy concessions, and the political instrumentsthat the same governments used to reduce the exercise of meaningfullocal authority.

Several insights emerge from the detailed, comparative case studyanalysis regarding the relationship between globalization and decentral-ization. First, while the globalization of ideas and resources, as represen-ted in the common agenda of a number of international donors, playedan important role in the initiation of decentralization reforms in somecountries (e.g. Senegal and Nepal), in other countries (e.g. Indonesia andUganda) decentralization was forced onto the agenda by powerful provin-cial actors who sought a share in decision-making or revenues. Second,even though globalization may stimulate some initial attempts at decen-tralization in developing countries, such attempts have rarely led to mean-ingful reforms. Rather, these decentralizing central governments havetended to create policies that restrict the ability of local governments tomake meaningful decisions by limiting the kinds of powers that are trans-ferred and the domain in which such powers can be exercised and choos-ing local institutions that serve and answer to central interests.

In proceeding through the volume, the reader is encouraged to keep


in mind three questions of substantial importance. First, how are greatermarket integration and the increasing scope of activity by multilaterallending institutions affecting national sovereignty? Second, how is global-ization affecting movements for subnational autonomy? Third, how canrespect for the principle of self-determination be re-constituted within anew political reality that comprises overlapping jurisdictions? We offer thisvolume as a way to shed some light on these critical questions. Theanswers presented are not definitive but will hopefully stimulate furtherresearch.

Notes1 See Krasner (1999) for a penetrating analysis of the theory and practice of West-

phalian sovereignty.2 For example, the European Unions structural funds are given to regional units,

not national member governments and the World Bank and other internationaldevelopment agencies often fund projects in the subnational units and throughNGOs, rather than through central governments in developing countries.

References

Alesina, A. and Spolaore, E. (1997) On the Number and Size of Nations, Quar-terly Journal of Economics, 112/4: 102756.

Anderson, J. and ODowd, L. (1999) Borders, Border Regions and Territoriality:Contradictory Meanings, Changing Significance, Regional Studies, 33/7:593604.

Bird, G. (1996) The International Monetary Fund and Developing Countries: AReview of the Evidence and Policy Options, International Organization, 50:477511.

Bolton, P. and Roland, G. (1997) The Breakup of Nations: A Political EconomyAnalysis, Quarterly Journal of Economics, 112/4: 105790.

Dragadze, T. (1996) Self-Determination and the Politics of Exclusion, Ethnic andRacial Studies, 19/2: 34151.

Krasner, S. D. (1999) Sovereignty: Organized Hypocrisy, Princeton: Princeton Univer-sity Press.

Kumar, A. (2000) Passport Photos, Berkeley: University of California Press.Marks, G. and McAdam, D. (1996) Social Movements and the Changing Structure

of Political Opportunity in the European Union, Western European Politics, 19/2:24978.

McLellan, J. and Richmond, A. H. (1994) Multiculturalism in Crisis: A Postmod-ern Perspective on Canada, Ethnic and Racial Studies, 17/4: 66283.

Przeworski, A. and Vreeland, J. (2000) The Effect of IMF Programs on EconomicGrowth, Journal of Development Economics, 62/2: 385422.

Rodrik, D. (1997) Has Globalization Gone Too Far?, Washington: Institute for Inter-national Economics.

Sewell, W. (1990) Collective Violence and Collective Loyalties in France: Why theFrench Revolution Made a Difference, Politics and Society, 14: 52752.


Sorens, J. (2004) Globalization, Secessionism, and Autonomy, Electoral Studies,23: 72752.

Tilly, C., Tilly, L. and Tilly, R. (1975) The Rebellious Century, Cambridge: HarvardUniversity Press.

Waterman, P. (1998) Globalization, Social Movements, and the New Internationalisms,Washington, DC: Mansell.


Part I

Threats from the outsideMarket integration and nationalautonomy

1 Trade, political institutions andthe size of government

David R. Cameron and Soo Yeon Kim1

Over the past several decades, the developed economies of NorthAmerica, Europe and Asia have become increasingly open, increasinglydependent upon exports to international markets to sustain domestic pro-duction, employment and consumption, increasingly dependent uponimports to supply domestic consumption, and increasingly dependentupon direct and portfolio investment from abroad.2 In some of the coun-tries, citizens and governments have long been accustomed to dealingwith the vagaries and uncertainties created by a high degree of depen-dence upon international markets, producers and investors indeed, longbefore globalization became a part of everyday discourse. In others, thediscovery that the performance of the economy depends to a considerabledegree upon international actors is a more recent phenomenon. But in all even those which are least dependent on international markets, produc-ers and investors openness has become a fact of contemporary economiclife.

As the developed economies became increasingly open in recentdecades, most if not all of their polities experienced an equally conse-quential increase in the relative size of government, defined in terms ofspending and revenues. Six decades ago, Clark (1945) predicted thatgovernment spending as a proportion of Gross National Product wouldreach an upper limit at about 25 percent. Time soon rendered that visionobsolete, and year after year throughout the 1950s, 1960s and 1970sgovernment spending and revenues relative to GNP or GDP increased andin many countries reached levels that were more than twice Clarks imag-ined upper limit.3 And despite the rhetorical commitment of many polit-ical leaders to liberalization, deregulation and privatization, and efforts insome nations to roll back high levels of taxation and public expenditure,the fiscal role of government remains significant in all and continues toincrease in some.

The simultaneous increases throughout much of the advanced capital-ist world in recent decades in the extent of economic openness and therelative size of government in fiscal terms suggest the possible existence ofa causal relationship between the two. And indeed, after finding a strong

positive cross-sectional relationship between the extent of openness, meas-ured by the ratio of exports and imports to GDP in 1960, and the magni-tude of the change in the ratio of total government revenues to GDP from1960 to 1973, Cameron (1978) suggested that openness influences thestructure of an economy and, in turn, the organization of labor, partisan-ship of government and extent of social spending. Building on that argu-ment and evidence of a positive relationship between the extent ofopenness and extent of government spending, Garrett (1998, 2001) andRodrik (1998) suggested that openness generates pressures on govern-ment to increase spending on social programs in order to protect or com-pensate the individuals and economic actors who are exposed to, andadversely affected by, the competitive pressures emanating from the inter-national marketplace.

As plausible as the trade-related compensation hypothesis may be,several studies have concluded that, rather than having an expansionaryeffect on year-to-year changes in spending, openness has had a negligibleor even contractionary effect on spending. In a pooled cross-sectional time-series analysis, Cameron and McDermott (1995) found that once a varietyof controls, including the level of spending in the previous year, wereintroduced, the extent of trade openness had a negligible relationshipwith the magnitude of year-to-year changes in spending between 1960 and1992. Likewise, Garrett (2001) reported that, while the extent of trade wasclosely related to several measures of public spending across a largenumber of countries, it had virtually no relation with the extent of changein spending once various controls were introduced. He found that ameasure of change in the extent of openness was negatively and signific-antly associated with various measures of spending. That inverse relation-ship suggested that, rather than causing governments to spend more inorder to compensate those adversely affected by globalization, increasingopenness forces governments to reduce spending and taxes in order tocompete with other governments for mobile capital. Similarly, Garrett andMitchell (2001) found, in a pooled cross-sectional time-series analysis ofannual fluctuations in spending in 18 countries between 1961 and 1993, aconsistently significant negative relationship between the extent of open-ness and the extent of increase in several measures of government spend-ing. And in an analysis of annual changes in spending in 18 countriesbetween 1961 and 1994, Burgoon (2001) found that the extent of open-ness had a consistently significant negative impact on a variety of measuresof spending, suggesting that high and increasing openness constrainspublic spending. Likewise, in an analysis of changes in spending in 14Latin American countries between 1973 and 1997, Kaufman and Segura-Ubiergo (2001) found that trade openness measured both in terms ofthe extent of openness and the yearly change in openness had a signific-ant negative impact on changes in spending, suggesting that high andincreasing exposure to the competitive pressures of the international

16 D. R. Cameron and S. Y. Kim

economy cause economic interests to put pressure on government toreduce spending.

Iversen and Cusack (2000) have presented the most forceful critique ofthe view that high and increasing levels of openness result in increases inthe relative size of government. In a pooled cross-sectional time-seriesanalysis of annual changes in transfer payments and public consumptionexpenditures in 15 countries between 1961 and 1993, they found that,whereas the extent of openness had a modest negative impact on spend-ing insignificant in the case of transfer payments and significant in thecase of consumption expenditures and the change in openness had asignificant positive impact on spending on transfers, the increases in bothtypes of expenditure were much more strongly associated with the extentand year-to-year change in deindustrialization.4 They concluded that themost powerful influence on the expansion of welfare spending in thepostwar era did not come from the international economy but, rather,from within the countries in particular, from dislocations in their labormarkets caused by technologically-driven changes in the sectoral occupa-tional structures of their economies.

How if at all does trade openness affect the size of the publiceconomy? In view of the significant negative relationships reported byGarrett, Garrett and Mitchell, Burgoon, Kaufman and Segura-Ubiergo,and Iversen and Cusack between the extent of openness or change inopenness and year-to-year changes in government spending, should thehypothesis that increasing openness results in increased trade-relatedcompensation be set aside in favor of one that sees high and increasinglevels of openness as forcing governments to reduce spending and taxes inorder to compete for mobile capital? Or, following Iversen and Cusack,should the hypothesis that openness influences the size of government beabandoned altogether in favor of one that locates the expansionaryimpulse for government spending in the transformations that take placewithin a countrys occupational structure? But if the trade-compensationhypothesis is set aside in favor of one that emphasizes the need for govern-ments to reduce spending and taxes in order to compete for capital asthey become increasingly exposed to the global economy, why is it that, ina period marked by a substantial increase in the extent of openness, therelative size of government has increased rather than decreased? And ifthe trade-compensation hypothesis is set aside in favor of one that locatesthe expansionary impulse for government spending in the sectoral andlabor market changes associated with deindustrialization, why is it thatsome countries that have experienced deindustrialization in recent yearshave experienced substantial decreases in the relative size of government?

This chapter seeks to answer these questions by examining the changein the relative size of government, defined in fiscal terms, in 19 countriesover the past three decades. In doing so, it addresses several analytic short-comings that characterize many of the studies that have examined the

Trade, political institutions and government 17

relationship between trade openness and the relative size of government.In most, the explanatory models are haphazardly specified, often withidiosyncratic and incomplete specifications of the variables that mayaccount for variations across time and space in government spending. Forexample, although Wagners Law (1877, 1893) is a staple of public eco-nomics, most studies do not consider whether spending (or taxing) varieswith the affluence of a country.5 Similarly, while most of the studies takeinto account the effects on spending and taxes associated with change inthe real or constant-price GDP and the size of the dependent popu-lation, several fail to include measures of the level of unemployment,changes in unemployment and changes in prices, all of which may influ-ence changes in the relative size of government.

Most of the studies that have examined the relationship between tradeopenness and the relative size of government also suffer from a failure toconsider many aspects and attributes of politics and political institutionsthat may affect the size of government. Reflecting a long tradition in theliterature, scholars routinely consider the impact of the partisan composi-tion of government on fiscal outcomes for example, by considering theeffects associated with control of government by left-of-center, or Chris-tian Democratic, or conservative parties.6 But little attention has beendevoted to assessing the impact on the relative size of government ofother political-institutional features and attributes.7 Thus, we know verylittle about the effects on the size of government of such fundamental dif-ferences as those involving federal versus unitary systems, presidentialversus parliamentary government, independent versus politically subordi-nate central banks, plurality versus proportional systems of representation,election years versus non-election years and even democratic versus non-democratic regimes.8

The most important omission from the analyses considering the impactof openness on the relative size of government, however, concerns thedefinition of trade openness itself.9 Surprisingly, when scholars haveexamined the effect of trade openness on the relative size of governmentthey have restricted their attention to the extent and/or change over timein the relative share of GDP represented by exports and imports. As aresult, they have failed to consider the effects of the difference betweenexports and imports that is, the Balance of Trade and changes overtime in the Balance of Trade. Yet it is more plausible to think that if open-ness does in fact affect the size of government for example, in inducinggovernment to protect or compensate those who might be or in fact havebeen adversely affected by trade it does so because of imbalances betweenexports and imports specifically, a large and/or deteriorating tradedeficit rather than because of the aggregate volume of trade or changein that volume. Indeed, it is not apparent why one would expect the com-bined volume of exports and imports to have any effect at all on the fiscalrole of government. That is especially true if one is concerned with identi-


fying the forces that cause the relative size of government to change fromone year to another.

This chapter examines the effects of economic openness and politicalinstitutions on the relative size of government in 19 developed demo-cracies in the last three decades of the twentieth century.10 Includedamong the 19 are three Greece, Spain and Portugal which are invari-ably omitted in pooled cross-sectional time-series analyses of the relation-ship between trade openness and the size of government, despite the factthat comparable data are available for the countries and the rationale forexcluding them the existence of non-democratic regimes prior to themid-1970s ceased to be relevant decades ago.11

In the first section of the chapter, some descriptive data pertaining totrade openness and the relative size of government in the 19 countries arepresented. These data indicate the magnitude of the increases that haveoccurred in the 19 countries over the past three decades in the extent oftrade openness and the relative fiscal role of government. They providesome preliminary support for the view that high and increasing levels oftrade openness are not positively associated with large increases in the rel-ative size of government.

In the second section, the results of regression analyses of various meas-ures of the relative size of government that make use of pooled cross-sectional time-series data for the 19 countries are presented.12 Theseanalyses provide the basis for inferences about the effects of trade open-ness defined both in terms of the level and change in the aggregatevolume of trade and in the Balance of Trade on the relative size ofgovernment. They suggest that, consistent with the trade competitionhypothesis, large increases in openness are associated with small increasesor decreases in the relative size of public expenditures and revenues. Butthey also suggest that governments experiencing large trade deficits and adeteriorating Balance of Trade provide trade-related compensation thatresults in large increases in public expenditures and budget deficits. Theresults suggest, contra Iversen and Cusack, that deindustrialization hasno significant effect on spending once the explanatory model is more fullyspecified to take into account other factors that may be associated withincreased spending. And they suggest that some political-institutionalattributes most notably, the nature of the political regime, the electoralcalendar and the electoral system (but not the partisan composition ofgovernment) have significant independent effects on spending and taxes.

Openness and the size of the public economy, 19702000

Figure 1.1 presents the average ratios of exports, imports, and exports plusimports, of goods and services to GDP for the 19 countries from 1970 to2000.13 The data in Figure 1.1 demonstrate that, taken together, the 19nations are highly dependent on international markets for the consumption


of a large portion of their domestically-produced goods and services andinternational producers for a large portion of the goods and services theyconsume, and that the extent of their dependence on international con-sumers and producers has increased dramatically over the past threedecades. Thus, whereas exports and imports represented on average anamount equivalent to slightly less than 50 percent of GDP in the early1970s, by the late 1990s they represented an amount equivalent to morethan 70 percent of GDP, and in 2000 reached an amount equivalent to 80percent of GDP.


80

2000199519901985198019751970

70

60

50

40

30

20

10

0

Per

cent

age

Year

Exports and imports

Exports

Imports

Figure 1.1 Trade as a percentage of GDP in 19 nations, 19702000.

While Figure 1.1 suggests a dramatic increase over the three decades inthe relative importance of trade in the most developed countries, it alsosuggests the extent of openness did not increase at a uniform ratethrough time. A sharp increase driven largely by imports, reflecting theincreased cost of imported oil in the wake of the Organization of Petro-leum Exporting Countries four-fold price increase after the Yom KippurWar, occurred in the early-to-mid 1970s. That was followed by a secondsharp increase after the second major OPEC price increase in the wake ofthe Iranian Revolution in 19781979. A third major increase occurred inthe mid-to-late 1990s. But, unlike the earlier increases, the latter increasewas driven as much by exports as by imports. Figure 1.1 also suggests asharp turnabout in the balance of trade between the 19 countries, takenas a group, and the rest of the world. In every year but one between 1970and 1982, their imports exceeded their exports. But in every year since1990, their exports exceeded their imports.14

Figure 1.2 presents the average for the 19 countries for each yearbetween 1970 and 2000 of the total outlays and total revenues of all levelsof government relative to GDP.15 The trend lines in Figure 1.2 indicatethat the relative size of government increased over the past three decadesin these 19 countries, both in terms of spending and revenue. While alllevels of government in the 19 countries spent, on average, an amountequivalent to about 35 percent of GDP in the early 1970s, by the early1980s they were spending an amount equivalent to almost 50 percent ofGDP. Even after having dropped for seven consecutive years after 1993,the outlays of all levels of government in the 19 countries were equivalent,on average, to about 45 percent of GDP in 2000.

The average for the 19 countries of the ratio of total outlays to GDPexhibits considerable variability over time, increasing most sharply in thethree synchronized recessions of 19741975, 19801983, and 19901993and increasing less rapidly, or even decreasing, in the several years of eco-nomic recovery that followed each recession. However, one observes aprogressively sharper contraction of spending relative to GDP in each suc-cessive recovery. Thus, while the rate of increase in the ratio of govern-ment spending to GDP slowed slightly in the recovery of the late 1970s, itstabilized and then dropped slightly after the recession of the early 1980sand then dropped sharply after the recession of the early 1990s. As aresult, while there has been a long upward trend in the average ratio ofoutlays to GDP, it is also the case that over the past two decades the rela-tive size of government, defined in terms of spending, has leveled off.Indeed, except for the sharp increase during the recession years of19901993, the average ratio of total spending to GDP in the 19 countrieshas dropped every year since 1985!

The trend over three decades in the average ratio of outlays to GDP hasat least two important implications for those seeking to understand whythe size of government has changed over time. It suggests that, in order to


be plausible, any explanation of the change in the size of governmentmust be able to explain not only the expansion of the public economy thatoccurred in the 1970s and early 1980s but also its subsequent contraction.In addition, the fact that the decrease in spending was greatest in preciselythe years 19942000 in which the extent of trade openness increasedmost dramatically suggests that, whatever the underlying causal mechan-ism in earlier decades, and even if governments do tend to compensate


Year

2000

60

Per

cent

age

50

40

30

20

10

0199519901985198019751970

Outlays

Revenues

Figure 1.2 Total outlays and revenues of all government as a percentage of GDP in19 nations, 19702000.

those adversely affected by increased trade openness, over the past decadeincreased trade openness did not contribute to a continued increase inthe relative size of the public economy.

The trend line for the ratio of total revenues to GDP exhibits much lessvariability than that for outlays as it moved upward from an average ofslightly more than 35 percent of GDP in the early 1970s to about 47percent of GDP in the late 1990s. That the trend line exhibits less variabil-ity over time no doubt reflects the fact that, in addition to being pushedupward during economic recessions because of the diminution of itsdenominator, the ratio of revenues to GDP also tended to increase inperiods of economic recovery as tax revenues increased. It should also benoted, however, that although the trend line of revenues to GDP exhibitsmuch less variability than that for outlays, it also appears to increase at aslower rate after the early-to-mid 1980s.

Figure 1.2 also demonstrates a marked change over the three decadesin the propensity of the governments in the 19 nations to incur budgetdeficits. Beginning with the economic recession of the mid-1970s andcontinuing through the late 1970s, 1980s and much of the 1990s, all levelsof government in the 19 countries incurred budget deficits that were, onaverage, equivalent to several percentage points of GDP. Not surprisingly,the peak years of deficit financing occurred during the recessions of theearly 1980s and early 1990s. But interestingly, the three decades ended asthey began, with several years in which the total revenues of all levels ofgovernment were, on average, equal to or greater than total outlays.16

The simultaneous increases over the last three decades of the twentiethcentury in the relative size of the public economy, defined in terms of thetotal spending and revenue of government, and the extent of economicopenness, defined in terms of the ratio of trade to GDP, suggest a causalrelationship between the two that would be consistent with, and perhapsexplained by, the trade-related compensation hypothesis. On the otherhand, as noted above, with the exception of four years in the early 1990s,the ratio of outlays to GDP leveled off in the last two decades and, indeed,dropped significantly over the past decade, just as the extent of tradeopenness was increasing sharply to its highest levels. This might suggestthat, regardless of any relationship between openness and the size ofgovernment in the past and notwithstanding the overall rising trends inboth, there is in fact an inverse relation between them. That would suggest,in turn, that, far from generating more compensation and spending, overthe past decade (if not longer) openness has contributed to a contractionin the relative size of the public economy, consistent with the hypothesisthat increased exposure to the international economy has forced govern-ments to reduce spending and taxes.

A first, and very preliminary, means of assessing the validity of thesecontending hypotheses is to compare the extent of covariation across the19 nations between the extent and degree of increase in economic


openness and the magnitude of increase in the relative size of govern-ment. If there is in fact a causal relationship between the two that exists inall of the countries, we should see evidence of it in the pattern of covaria-tion between openness and the change in the fiscal role of governmentacross the countries. That would not prove the existence of a causal rela-tionship, of course. But it would at least suggest which hypothesis onewhich attributes increased spending to the effort to compensate thoseadversely affected by openness or its alternative best fits the experienceof these 19 countries.

Table 1.1 presents several bivariate measures of the covariation acrossthe 19 countries between the extent and change in openness and the mag-nitude of change in public outlays and revenues relative to GDP. Whilethere is a fairly strong correlation between the extent of trade openness in1970 and the relative size of government in terms of spending and rev-enues in that year, the statistical relationship is much weaker in 2000. Thatweakened relationship reflects the fact that, contrary to Camerons (1978)finding of a strong positive relationship between the extent of openness in1960 and the first-order increase in government revenues relative to GDPfrom 1960 to 1973, there is a modest negative correlation between theextent of openness in 1970 and the first-order changes in total spendingrelative to GDP from 1970 to 2000 (r 0.33). There is a modest but


Table 1.1 The relationship between trade openness and the total outlays andrevenues of government across 19 countries, 19702000a

Total outlays/GDP

1970 2000 Increase, 19702000

Exports and imports/GDP, 1970 0.57 0.21 0.33Exports and imports/GDP, 2000 0.10 0.34Increase 19702000, exports and imports/GDP 0.27

Total revenues/GDP

1970 2000 Increase, 19702000

Exports and imports/GDP, 1970 0.49 0.41 0.09Exports and imports/GDP, 2000 0.22 0.13Increase 19702000, exports and imports/GDP 0.14

Notea Entries are Pearsonian product-moment correlations. N19. The trade ratios were calcu-

lated from data reported in OECD 2004b and earlier editions. The ratios of total outlays toGDP are reported in OECD 2004c and earlier editions. There are numerous discontinu-ities in the ratios of outlays to GDP reported by the OECD for various countries in variousyears. In order to make the series comparable across time and space, the reported data forearlier years have been recalculated. The ratios of revenues to GDP were calculated fromthe data on outlays and data reported in OECD 2004c and earlier editions on the aggre-gate budget surplus or deficit.

negative correlation as well between the extent to which the economiesbecame increasingly open between 1970 and 2000 and the extent ofincrease in the relative size of government over that period (r 0.27).

The weakening correlation between the extent of trade openness andthe levels of public spending and revenue, relative to GDP, and the consis-tent, albeit modest, negative correlations between both the level of open-ness and increase in openness and increases in the relative importance ofpublic expenditures and revenues, suggest that the largest cumulativeincreases in the relative size of government tended to occur in the coun-tries that had relatively closed economies and that experienced relativelysmall increases in trade openness over the three decades. The data inTable 1.2 confirm this.

Table 1.2 lists the extent of trade openness in 1970, the increase intrade openness between 1970 and 2000, and the change from 1970 to2000 in the ratios of outlays and revenues to GDP for the 19 countries.The data indicate that the largest increases in public spending took placein Greece, Portugal, Japan and Spain, followed by Denmark, Finland andItaly. Some Denmark, Finland and Portugal were highly dependentupon trade in 1970. But others Japan, Greece and Spain had relatively


Table 1.2 The change between 1970 and 2000 in total outlays and total revenues ofall governments as a percentage of GDPa

Exports and imports/GDP Increase, 19702000

1970 Increase, 19702000

Outlays/GDP Revenues/GDP

Greece 24 36 25.1 23.2Portugal 50 24 23.9 20.0Japan 20 0 19.8 10.6Spain 27 36 16.2 15.3Denmark 60 23 16.1 15.4Finland 53 24 15.1 17.9Italy 33 23 13.8 17.1Sweden 48 38 13.2 14.7Belgium 100 68 13.0 15.2France 31 25 13.0 10.5Austria 60 41 10.4 7.5Australia 29 17 9.1 7.1Germany 40 27 7.9 9.0Canada 43 43 5.9 8.1Netherlands 89 41 2.2 5.5United States 11 15 0.7 3.4Norway 74 2 0.1 11.9United Kingdom 45 15 2.4 1.4Ireland 79 103 6.9 1.1

Notea See Table 1.1 for sources.

closed economies in 1970. Some most notably Greece and Spain experienced large increases in the extent of trade openness over the threedecades. But others most notably Japan, but also Portugal, Denmark,Finland and Italy experienced relatively small increases in trade open-ness over the three decades. Indeed, Japan, which experienced one of thelargest increases in public spending relative to GDP, experienced noincrease at all in the extent of trade openness and by 2000 its economywas the least open, as measured by the ratio of exports plus imports toGDP, of the 19. On the other hand, several of the countries that hadunusually high levels of trade openness in 1970 or experienced unusuallylarge increases in trade openness over the three decades experiencedmodest increases in the ratios of outlays and revenues to GDP. Indeed,representing the antithesis of the Japanese experience, Ireland, which wasthird after Belgium and the Netherlands in the extent of trade opennessin 1970 and which experienced by far the largest increase in trade open-ness over the three decades, experienced a substantial decrease in the ratioof outlays to GDP.

In addition to suggesting an inverse relation between the initialextent and increase in trade openness, on one hand, and the magnitudeof the increase in the relative size of government, on the other, the datain Table 1.2 contain an intriguing suggestion about the impact of demo-cratic politics on the size of government. Three of the four countriesthat experienced the largest increases over the past three decades in therelative size of government, defined in terms of spending, are the south-ern European countries Greece, Portugal and Spain that threw offthe shackles of authoritarian government in the mid-1970s. Consistentwith Boixs (2001) analysis, the data suggest that the change from anauthoritarian to a democratic regime introduced an expansionaryimpulse in fiscal policy in the three countries. As the data in Figure 1.3indicate, when the authoritarian regimes were in power in the threecountries in the early 1970s, all levels of government spent an amountequivalent to roughly 20 percent of GDP less than in all of the othercountries except Japan. But in the first decade after the demise of theauthoritarian regimes, all three experienced unusually large increases inthe relative size of government, compared with the other countries.Indeed, the relative size of government in the three countries increasedto such an extent that by the early 1990s they were indistinguishablefrom the other countries.

The importance of the installation of democratic regimes in southernEurope in the 1970s is suggested by the data in Table 1.3. Table 1.3 pre-sents the correlations across the 19 countries between a simple measure ofwhether the country did or did not have an authoritarian regime in theearly-mid 1970s and the relative size of the public economy, defined interms of spending, in 1970 and 2000 and the magnitude of change overthe three decades. One observes a strong correlation between the exist-


ence of a non-democratic regime and a low ratio of outlays to GDP in1970 (r 0.63) and an equally strong positive correlation (r 0.64)between the existence of a non-democratic regime in the 1970s and themagnitude of the increase in spending over the three decades.


Year

2000

60

Per

cent

age

50

40

30

20

10

0199519901985198019751970

Greece

Spain

Portugal

Figure 1.3 Total outlays of government as a percentage of GDP in Spain, Portugaland Greece, 19702000.

Openness and the size of the public economy: pooled cross-sectional time-series analysis

Clearly, if one were simply interested in accounting for the variationacross the 19 countries in the extent to which the relative size of govern-ment increased over the past three decades, the nature of the regimewould appear to provide a much better explanation than either the extentof trade openness or the increase in openness over the three decades.And if we were to rely only on the cross-sectional correlations, we wouldconclude that the extent of openness is only faintly associated with the rel-ative size of government and that both the extent of openness and changein openness are inversely related, albeit modestly, to the magnitude ofchange in the relative size of government. There would, in sum, be littlesupport for the trade-related compensation hypothesis and, instead, somemodest support for the alternative hypothesis that increased exposure tothe international economy generates competitive pressures on govern-ment to reduce the relative size of government.

But cross-sectional correlations are only that cross-sectional correla-tions. They do not control simultaneously for the effects of all the otherfactors that may influence the size of government. As a result, we can notbe sure that the modestly negative cross-sectional correlations betweentrade openness and the magnitude of increases in the relative size ofgovernment accurately depict the true relationship between the two. Inorder to better assess that relationship, it is necessary to expand thenumber of observations so that the effects of the many other factors thatinfluence the size of government can be taken into account. This can bedone by pooling and analyzing the time-series data for the three decadesfor the 19 countries under consideration.

In order to assess the impact of trade openness on the relative size ofgovernment, we have conducted a series of regression analyses based onthe pooled time-series data for the 19 nations for the 30 years from 1971through 2000. Pooling the data creates a much larger set of observations in this case, 570 and enables us to ascertain with much greater precision


Table 1.3 The relation between democratization and the level and increase ingovernment spending across 19 countriesa

Total outlays/GDP

1970 2000 Increase, 19702000

Non-democratic regime, early-mid 1970s 0.63 0.13 0.64

Notea Entries are Pearsonian product-moment correlations. N19. Greece, Portugal, and Spain

have a value of 1 on the regime variable, all others a value of 0.

and reliability than is afforded by cross-sectional analysis the extent towhich (if at all) variations in the relative size of the public economy aresystematically related to variations in the extent or change in openness,after taking into account the simultaneous impact of a variety of otherattributes.

The dependent variable

While the technique of pooling cross-sectional time-series data has beenwidely employed in comparative analysis, scholars have differed in their con-ceptualization of the objective of the analysis. Some for example, Boix(2001), Hicks and Swank (1992), Huber et al. (1993) and Rodrik (1998) have conceived of the objective as accounting for the variation in the level ofpublic spending. Others for example, Burgoon (2001), Cameron andMcDermott (1995), Garrett and Mitchell (2001), Iversen and Cusack (2000)and Kaufman and Segura-Ubiergo (2001) have conceived of the objectiveof the analysis as accounting for the variation in the annual change fromone year to the next in spending. While either conceptualization may beappropriate, depending on the scholars concerns, the latter provides themost appropriate basis for drawing causal inferences. Analyses that do nottake into account the prior level of the dependent variable may mistakewhat in fact are spurious relationships between the dependent variable andone or more independent variables for causal relationships, particularlywhen the variables under consideration are serially correlated. In contrast,analyses that seek to account for change in the dependent variable andcontrol for the previous level of the dependent variable not only eliminatethe potential problem of autocorrelation but apply a rigorous standard asthe basis of causal inference, by requiring that the variation over time andacross the countries in the magnitude of the change in the dependent vari-able be systematically associated with the variation across time and acrossthe countries in the independent variable after controlling for the covaria-tion that exists across time and space between the dependent variable andthe other independent variables.

In the analysis which follows, the dependent variable is defined in termsof the change from one year to the next in total government outlays (or rev-enues or the budget deficit) as a proportion of GDP. An obvious way tooperationalize this definition is to treat the ratio of outlays to GDP in eachcountry in each year as the dependent variable and include the laggeddependent variable as one of the independent variables. Another way is toemploy an error correction model, in which the dependent variable is thefirst-order difference between the outlays/GDP ratios in years t and t1 andthe measure of outlays to GDP in the prior year is included as an independ-ent variable. Analytically speaking, the choice of method makes no dif-ference; the regression coefficients and standard errors for all of the independent variables other

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