Global Economics, Domestic Politics, and Reforms of Social Insurance Programs in Advanced Capitalist Countries

Abstract

The effects of global market integration on the economies of advanced capitalist countries have revived a debate in the comparative literature over the relationship between income redistribution and economic growth. Despite the attention that the issue has received, disagreement persists within the literature. Those countries that integrate their economies should achieve greater efficiency in production and stronger economic growth than they would otherwise. The ‘compensation’ thesis claims that, as domestic labor markets adjust to market openness, dislocated workers will secure generous welfare benefits in exchange for their support of continued market integration. Conversely, the ‘efficiency’ thesis claims that competition in open markets will force policymakers to cut welfare benefits in order to reduce the tax burden on owners of capital. Thus far, evidence to support either thesis has been contradictory. This dissertation puts forth a third thesis. Lack of competitiveness in open markets – which leads to trade and investment deficits – should result in high unemployment rates and slow economic growth. Policymakers should increase benefits for dislocated workers to a point. However, as financial pressures on social insurance programs grow, policymakers should adopt reforms that reduce aggregate expenditures and forestall increases in employer payroll taxes that exacerbate waning competitiveness. Therefore, the relationship between these economic trends and the generosity of social insurance programs should be curvilinear. However, adopting such reforms should prove difficult for policymakers unless political institutions provide the right incentives to sacrifice short-term benefits for long-term gains. Political institutions that allow for ‘blame avoidance’ and encourage cooperative policymaking will increase the likelihood of adopting reforms. Further, government partisanship should influence the character of reforms, ensuring that policy outcomes preserve traditional party values. Using an index of adjusted replacement rates that incorporates benefits and eligibility criteria for social insurance programs in fourteen advanced capitalist countries through 1995, this dissertation produces evidence in support of these arguments.