PA S Q UA L E T R I D I C O

U N I V E R S I T Y R O M A T R E

T R I D I C O @ U N I R O M A 3 . I T

Globalisation, Inequality and Economic Performance in OECD countries

Pick two of them…but only the right two

Globalisation

Financialisation Welfare

The context:a Trilemma

1. Financialisation,

2.Globalisation,

3.Welfare

Only two of them can cohesist and work

(produce better economic performance)

The objective of the paper

Is “the efficiency thesis” functional for economic growth?

or,

“The compensation thesis” produces better results in terms of economic growth?

Hypothesis and method

The efficiency thesis does not cause economic growth.

The tests are conducted in a sample of 42 countries made up of OECD and EU members.

Our econometric exercises indicate that the “compensation thesis” (i.e., regulated globalisation and an expanded welfare state) is better able to produce higher economic growth.

Performance Index (PI) combines GDP growth and labour market performances

The results

A new classification: 1) Welfare Capitalism and 2) Financial Capitalism.

1. Welfare capitalism reduces inequality and foster economic growth.

2. Financial Capitalism higher inequality and during crisis worse economic performance (2007-13).

Welfare state is not a drain on economic performance and competitiveness or as a barrier to economic efficiency.

The most generous of Europe’s welfare states are also the most efficient and successful economies as far as they have globalisation without financialisation

Globalisation or Regionalisation (i.e. Europeanisation)?

Globalisation process intensification of trade, capital mobility, finance, labour, technology….

or

Globalisation process not only of the intensification of those flows but also of extensive increase at a planetary level of trade, capital etc. (Hay and Wincott, 2012; Held et al., 1999).

0

2000000

4000000

6000000

8000000

10000000

12000000

1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2006

FDI in Developed countries and in the World

world FDI inward stock (millions US$) world FDI outward stock (millions US$)

DevC FDI inward stock (millions US$) DevC FDI outward stock (millions US$)

0

5

10

15

20

25

30

35

Global trade intensification

World Imports of goods and services (% of GDP)

World Exports of goods and services (% of GDP)

The six changes on the top of it

1. The political (and ideological) change in the 1980s Reagan and Thatcher “Washington Consensus” by WB and IMF.

2. The financial deregulation in the USA and in UK and later in other countries

3. The fall of Berlin Wall in 1989 (and the following dissolution of the Soviet Union in 1991)

4. The deepening of the process of integration of the European Union and the Maastricht Treaty

5. The tremendous challenges posed by the technological progress that brought about the ICT revolution

6. The take-off (during the 1980s and 1990s) of emerging economies

Globalisation and growth

For Lucas (1993), international trade contributes to stimulate economic growth

Baghwati (2004) believed that trade is the engine of economic growth

Walsh and Whelan (2000): structural change, R&D growth

Globalisation and inequality

Market integration increases economic inequality and vulnerability (from Stolper-Samuelson on) gap increases between North and South

Capital outflows from capital-rich countries to LDCs increases inequality in DC (Ha, 2008; Tsebelis 2002).

Tax competition on capital reducing welfare outsourcing

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

197

0

197

1

197

2

197

3

197

4

197

5

197

6

197

7

197

8

197

9

198

0

198

1

198

2

198

3

198

4

198

5

198

6

198

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

CAPITAL MOBILITY THREATEN

Fdi in % of World GDP

FDI, net inflows (% of GDP)

Financialisation

Dominance of capital financial systems over bank-based financial systems (Krippner, 2005),

The increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies (Epstein 2005: 3-4).

In numbers: +2 trillion $ each day of volume of foreign exchange transactions in 2006 (-/+ GDP of France). In 1989, this volume was about 500 billion $ per day (-/+ the GDP of Greece).

Market Finacialization: 1988-2006 (% of GDP)

0

50

100

150

200

250

300

350

Aus

tralia

Can

ada

Den

mar

k

Fran

ce

Ger

man

y

Gre

ece

Ireland

Italy

Japa

n

Nethe

rland

s

Nor

way

Por

tuga

l

Spa

in

Swed

en

Switz

erland

United Kingd

om

United States

1988 2006

Avg. Growth of GDP per capita in EU and US, 1961-2009

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

Germany France Spain Italy EU15 USA

1961-80 1981-91 1992-2009

Growth before and during financialisation

US average compensation

Average compensation in the financial sector

Average compensation in the rest of the economy

Ratio between average manager and average worker compensations

Source: ILO 2010

5

7

9

11

13

15

17

19

21

23

25

1960 1965 1970 1975 1980 1985 1990 1993 1997 2002 2007

Expansion and retrenchment of Welfare State (Public Social Expenditure, % of GDP)

EU-21 OECD-34

Welfare evolution

I used a revised and updated version of the approach used by Esping-Andersen (1990) who ranks welfare models mainly according to the level of social spending, to the level of (de)commodification of welfare and to degree of extension of welfare among citizens (3 groups: Liberal, Continental and Scandinavian models)

A new classification, five models: the three above + the Mediterranean group and the Central and East European Countries (CEEC)

Main features to identify the model

Public social spending

Financialisation

Gini

EPL

Wage share

The evolution of welfare and the break in 1990

10

13

16

19

22

25

28

31

34

37

40

1970 1975 1980 1985 1990 1995 2000 2003 2005 2007

So

cia

l S

pe

nd

ing

, %

GD

P

Social spending by welfare models, 1970-2007

Continental

Scandinavian

Liberal

Mediterranean

CEEC

30

35

40

45

50

55

60

65

1980 1990 2000 2010

Wa

ge

Sh

ar

e %

GD

P

Wage Share 1980-2010 by group of countries (compensation/VA)

Continental Europe

Scandinavian countries

Anglo-Saxon countries

Mediterranean countries

CEEC

0

0,05

0,1

0,15

0,2

0,25

0,3

0,35

0,4

Inequality (Gini coeffients) among OECD countries

1985 1995 2005 2012

INEQUALITY BY WELFARE MODELS

0,15

0,2

0,25

0,3

0,35

0,4

1986 1990 1995 2000 2004 2005 2006 2007 2008 2009 2012

Gini coefficients since 1980s

continental

scandinavian

liberal

mediterranean

Financialisation vs labour flexibility

Australia

Austria

Belgium

Canada

Czech Republic

Denmark Finland

France

Germany

Greece

Ireland

Israel

Italy

Japan

Korea

Netherlands

NorwayPoland

Portugal

Slovenia

Spain

Sweden

United Kingdom

United States

01

23

epl_

2013

0 50 100 150financialisation_2012

Australia

AustriaBelgium

Canada

Czech RepublicDenmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Japan

Korea

Netherlands

New Zealand

Norway

Poland

Slovak Republic

Slovenia

Spain

Sweden

United Kingdom

United States

.25

.3.3

5.4

gin

i_2012

0 1 2 3epl_2013

labour flexibility and inequality

Australia

AustriaBelgium

Canada

Czech RepublicDenmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland

Israel

Italy

Japan

Korea

Netherlands

New Zealand

Norway

Poland

Portugal

Slovak Republic

Slovenia

Spain

Sweden

United Kingdom

United States

.25

.3.3

5.4

gin

i_2012

0 50 100 150financialisation_2012

Financialisation and inequality

The role of welfare

Australia

AustriaBelgium

Canada

Chile

Denmark

Estonia

Finland

France

Germany

GreeceIreland

Israel

Italy

Japan

Luxembourg

Mexico

Netherlands

New Zealand

Norway

Poland

PortugalSpain

Sweden

Switzerland

Turkey

United Kingdom

United States

.25

.3.3

5.4

.45

.5

gin

i_2012

10 15 20 25 30Public social spending 2012

The empirical analysis

Given that a more sophisticated model was tested,

according to the following equation:

42 EU and OECD countries, on a panel between 2007 and 2013

Regression Model on a Longitudinal Panel

Dep Var.: GDP per capita (Log Natural)

Variable Coeff. (standard errors) P-values

Public Social subsidies (% of GDP) .0085532 (.0029786) 0.008

Education_Expend. (public), % of GDP .1323674 (.0372624) 0.001

Import, % GDP -.026967 (.0068556) 0.001

Export, % GDP .0223626 (.0061447) 0.001

Investment (capital formation), % GDP -.0041776 (.0034335) 0.234

FDI (out), % GDP -.0008266 (.0005231) 0.126

FDI (in), % GDP -.000998 (.0085615) 0.908

Constant 10.34326 (.7078016) 0.000

Time dummies (Years 2007, 2008, 2009, 2010, 2011, 2012): YES

R-sq (between) = 0.8097

sd(u_i + avg(e_i.))= .1875238 Prob > F = 0.0000

Number of obs = 240; Number of groups = 42 Panel (2007-2008-2009-2010-2011-2012)

Between-group effects (BE)

Hausman Test (BE vs FE):

b (BE) = consistent under Ho and Ha; obtained from xtreg

B (FE) = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(12) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 138.73 Prob>chi2 = 0.0000

Hausman Test (BE vs RE):

b (BE) = consistent under Ho and Ha; obtained from xtreg

B (RE) = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(11) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 97.00 Prob>chi2 = 0.0000

General results

Best performing countries are those that rely on a corporative socio-economic model rather than on a liberal competitive model.

This means that countries that managed to keep higher levels of public expenditure and higher levels of welfare state are better off today in the global economy. The empirical analysis focused on the period of the crisis that started in 2007.

Stronger welfare and “mercantilist” globalisation

As the regression table suggests, social subsidies and education expenditures, both with positive and significant coefficients, are functional to higher GDP.

Positive coefficients and significance are noted for the variable Export (as a percentage of GDP), while a negative significant coefficient is noted for the variable Import (as a percentage of GDP)

the corporative socio-economic model

The winner is…

the supremacy of the “compensation hypothesis” is confirmed: regulated globalisation and an expanded welfare state are better able to produce higher GDP per capita.

In other words, countries that perform the best during this period (2007-13), results suggest, invested more in welfare state (social subsidies and public education expenditures) and adopted mercantilist policies, importing less and exporting more without being as open towards FDIs.

These countries do not properly represent an orthodox model of liberal capitalist economy. On the contrary, they represent a corporative or social market economy model

best-performing countries are Continental and Scandinavian European economies

-16

-14

-12

-10

-8

-6

-4

-2

0

continental scandinavian liberal CEEC mediterranean

Performance Index (g+n) - U average 2007-2013

Lessons to be learned – 1: during the crisis

In the years of the crisis (2007-13): countries that had better performance are those that managed not to retrench the welfare state under the process of globalisation and therefore reached the eve of the crisis in 2007 better equipped in terms of the welfare state.

Lessons 2 – welfare evolution

Continental1990

Scandinavian1990

Liberal1990

Mediterranean1990

Continental2010

Scandinavian2010

Liberal2010 Mediterranean2010

.2

.25

.3

.3

GINI

20 25 30 35 40 SOCIAL_SPENDING

Lesson 3 - from the trilemma: globalisation and welfare

Winners in globalisation: did not embrace tout court financialisation and did not retrench welfare.

Investing in social dimensions is the best policy option not only because it reduces inequality but also because it produces better performance (GDP and labour market).

Hence, from the trilemma (globalisation, welfare and financialisation), it is better to adopt globalisation and welfare because any other solution would contribute to poorer socio-economic performance.

Lesson 4 : a new classification

evolution of welfare states leads us toward a new classification of only 2 socio-economic models among advanced economies quite polarised

1. Financial Capitalism regime

2. Welfare Capitalism regime

Welfare Spending (% GDP)

Financialisation

(market

capitalisation

index, % GDP)

Very high Middle Very low

Very high

middle

Very low

Scandinavian Model

Continental Model

Liberal Model

Mediterranean Model

Poles apart: Welfare Capitalism and Financial Capitalism (data 2010)

Conclusion 1

Countries that reacted to globalisation challenges by the implementation of the efficiency thesis, did not achieve better economic performance and during the crisis suffered the most (Liberal and Mediterranean models).

Their income distribution worsened and inequality ↑.

On the contrary, econometrics exercises show that the “compensation thesis” was better able to produce higher economic growth along with better labour market performance and better income distribution.

Conclusion 2

A new classification emerged on the basis of welfare spending, financialisation and inequality:

1. Welfare Capitalism (Continental /Scandinavian)

2. Financial Capitalism (Liberal/Mediterranean)

Welfare Capitalism shows a better Performance Index and lower inequality;

On the contrary, countries of the Financial Capitalism have lower Performance Index and higher inequality.