Globalisation, Inequality and Economic
Performance in OECD countries
PA S Q UA L E T R I D I C O
UNIVERSITY ROMA TRE
[email protected]
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).
12000000
FDI in Developed countries and in the World
10000000
world FDI inward stock (millions US$)
world FDI outward stock (millions US$)
DevC FDI inward stock (millions US$)
DevC FDI outward stock (millions US$)
8000000
6000000
4000000
2000000
0
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999 2000 2001 2002 2003 2006
35
Global trade intensification
30
25
20
15
10
5
World Imports of goods and services (% of GDP)
World Exports of goods and services (% of GDP)
0
The six changes on the top of it
1.
2.
3.
4.
5.
6.
The political (and ideological) change in the 1980s 
Reagan and Thatcher  “Washington Consensus” by
WB and IMF.
The financial deregulation in the USA and in UK and
later in other countries
The fall of Berlin Wall in 1989 (and the following
dissolution of the Soviet Union in 1991)
The deepening of the process of integration of the
European Union  and the Maastricht Treaty
The tremendous challenges posed by the technological
progress that brought about the ICT revolution
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
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
CAPITAL MOBILITY THREATEN
Fdi in % of World GDP
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
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).
No
rw
ay
Po
rtu
ga
l
Sp
ai
n
Sw
ed
en
Sw
itz
er
ni
la
te
nd
d
Ki
ng
do
Un
m
ite
d
St
at
es
ds
1988
la
n
pa
n
Ita
ly
nd
la
Ja
Ire
th
er
Ne
lia
Ca
na
da
De
nm
ar
k
Fr
an
ce
G
er
m
an
y
G
re
ec
e
ra
Au
st
Market Finacialization: 1988-2006 (% of GDP)
2006
350
300
250
200
150
100
50
0
GDP performance 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
Labour flexibility during neoliberalism
2.5
2.3
2.1
Average level of EPL
OECD countries
1990-2013
1.9
1.7
1.5
1990
1995
2000
2005
2010
The decline of Trade Unions density
45
35
Average Trade Union density
(unionization rate)
25
34 OECD countries
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
15
Unionisation and share of income to the top 10%
(USA)
.4
Inequality and Labour Market indicators
.35
United States
Japan
United Kingdom
Australia
Portugal
Canada
Estonia
New Zealand
Ireland
Italy
.3
France
Netherlands
Germany
.25
Austria
Sweden
Belgium
Finland
Denmark
Norway
-2
-1
0
1
2
Scores for the principal component of labour market institutions
3
Expansion and retrenchment of Welfare State
(Public Social Expenditure, % of GDP)
25
23
21
19
17
15
13
11
9
7
5
1960
1965
1970
1975
1980
EU-21
1985
OECD-34
1990
1993
1997
2002
2007
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
Social spending by welfare models, 1970-2007
40
37
Social Spending, % GDP
34
31
28
Continental
Scandinavian
25
Liberal
Mediterranean
22
CEEC
19
16
13
10
1970
1975
1980
1985
1990
1995
2000
2003
2005
2007
65
Wage Share 1980-2010 by group of
countries (compensation/VA)
60
Wage Share % GDP
55
Continental Europe
Scandinavian countries
50
Anglo-Saxon countries
45
Mediterranean countries
CEEC
40
35
30
1980
1990
2000
2010
Inequality (Gini) 1985 and 2012
0.4
0.4
0.35
0.35
0.3
0.3
0.25
0.25
0.2
0.2
0.15
0.15
0.1
0.1
0.05
0.05
0
0
1985
2012
INEQUALITY BY WELFARE MODELS
Gini coefficients since 1980s
0.4
0.35
0.3
continental
scandinavian
0.25
liberal
mediterranean
0.2
0.15
1986 1990 1995 2000 2004 2005 2006 2007 2008 2009 2012
Financialisation vs labour flexibility
3
Portugal
Czech Republic
Germany
Slovenia
Italy
Austria
Sweden
France
Korea
Norway
Denmark
Greece
Finland
Spain Israel
2
Poland
Netherlands
Belgium
Australia
Ireland
Japan
1
United Kingdom
Canada
0
United States
0
50
100
financialisation_2012
150
.4
labour flexibility and inequality
.35
United States
United Kingdom
Japan
Australia
Ireland
New Zealand Estonia
.3
Canada
Spain
Greece
Italy
Korea
Poland
France
Netherlands
Germany
Hungary
.25
Austria Sweden
Belgium
Slovak Republic
Finland
Czech Repu
Denmark
Norway
Slovenia
0
1
2
epl_2013
3
.4
Financialisation and inequality
United States
.35
Israel
Portugal
United King
Australia
Spain
Japan
Greece
Ireland
Canada
Estonia
Italy
New Zealand
Korea
.3
Poland
France
Netherlands
Germany
Hungary
.25
Slovak Republic
Czech Republic
Slovenia
0
50
Sweden
Austria
Belgium
Finland
Denmark
Norway
100
financialisation_2012
150
.5
The role of welfare
Chile
.45
Mexico
.4
Turkey
.35
Israel
United States
.3
UnitedPortugal
Kingdom
Spain
Greece
Japan
Australia
Ireland
Canada
Estonia
Italy
New Zealand
Switzerland
Poland
France
Netherlands
.25
Luxembourg
Norway
10
15
20
25
Public social spending 2012
Germany
Sweden
Austria
Belgium
Finland
Denmark
30
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)
Public Social subsidies (% of GDP)
.0085532 (.0029786)
Education_Expend. (public), % of GDP
.1323674 (.0372624)
Import, % GDP
-.026967 (.0068556)
Export, % GDP
.0223626 (.0061447)
Investment (capital formation), % GDP
-.0041776 (.0034335)
FDI (out), % GDP
-.0008266 (.0005231)
FDI (in), % GDP
-.000998 (.0085615)
Constant
10.34326 (.7078016)
Time dummies (Years 2007, 2008, 2009, 2010, 2011, 2012): YES
R-sq (between) = 0.8097
sd(u_i + avg(e_i.))= .1875238
Number of obs = 240;
Number of groups = 42
P-values
0.008
0.001
0.001
0.001
0.234
0.126
0.908
0.000
Prob > F = 0.0000
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) =
Hausman Test (BE vs RE):
138.73
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
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
0
continental
scandinavian
liberal
-2
-4
-6
-8
-10
-12
-14
-16
Performance Index (g+n) - U
average 2007-2013
CEEC
mediterranean
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
.3
Liberal2010
Mediterranean2010
Liberal1990
.3
GINI
Continental2010
Mediterranean1990
Continental1990
Scandinavian2010
.25
Scandinavian1990
.2
20
25
30
SOCIAL_SPENDING
35
40
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)
Very high
Very high
Financialisation
(market
capitalisation middle
index, % GDP)
Very low
Middle
Very low
Liberal Model
Scandinavian Model
Continental 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.