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Healthy Investment: Social Stability Risk and Public Health Expenditures in Autocracies
Unformatted Document Text:  Economic Globalization Recent research shows that economic globalization can either lead to a race to the bottom that cripples the states of their policy making autonomy, as the efficiency hypothesis states, or a renewed commitment by the state to offer social welfare to the citizenry, as the compensation hypothesis predicts. These two hypotheses reflect two very contradictory sets of arguments that cannot be resolved without empirical research (Burgoon 2001; Garrett 2001, Rudra 2002; and Swank 2002). In order to know which one of the two theoretical expectations is closer to the truth, it is helpful to disaggregate the conceptual monolith of economic globalization into its sub-components in order to obtain a better understanding of the separate effect of each of its three dimensions: trade openness, which is measured by the flow of international trade, and financial openness, which is measured by the flow of foreign direct investment (FDI) and portfolio investment. The efficiency hypothesis contends that integration into a globalized market threatens spending on the welfare state. It further predicts a convergence of the size of welfare state as states compete in a race to the bottom and become less willingly to intervene in the economy in an effort to improve international competitiveness (Friedman 1996). In terms of trade openness, the efficiency hypothesis posits that high levels of welfare state undermine an economy’s competitiveness in global markets primarily by imposing higher taxes, which consequently increase the cost of labor and thus the price of exports and of domestic products in international competition. Considering from the dimension of financial openness, increased capital mobility also induces the state to cut back social spending. Open capital markets provide governments with the option of incurring debt to pay for social services. Yet increased government borrowing may eventually lead to higher real interest rates, which crowd out private investment and ultimately threaten international competitiveness. As a result, the increasing international competition that business groups face drives them to press governments for a reduction in social spending that sets in motion a shrinking welfare state (Kaufman and Segura-Ubiergo 2001). In addition, with increased capital mobility, government officials are also subject to judgments made by individual international investors, who normally do not risk investing in countries that spend beyond their means. In particular, in developing countries, 6

Authors: Yu, Bin.
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Economic Globalization
Recent research shows that economic globalization can either lead to a race to the
bottom that cripples the states of their policy making autonomy, as the efficiency
hypothesis states, or a renewed commitment by the state to offer social welfare to the
citizenry, as the compensation hypothesis predicts. These two hypotheses reflect two very
contradictory sets of arguments that cannot be resolved without empirical research
(Burgoon 2001; Garrett 2001, Rudra 2002; and Swank 2002). In order to know which one
of the two theoretical expectations is closer to the truth, it is helpful to disaggregate the
conceptual monolith of economic globalization into its sub-components in order to obtain
a better understanding of the separate effect of each of its three dimensions: trade
openness, which is measured by the flow of international trade, and financial openness,
which is measured by the flow of foreign direct investment (FDI) and portfolio
investment.
The efficiency hypothesis contends that integration into a globalized market threatens
spending on the welfare state. It further predicts a convergence of the size of welfare state
as states compete in a race to the bottom and become less willingly to intervene in the
economy in an effort to improve international competitiveness (Friedman 1996). In terms
of trade openness, the efficiency hypothesis posits that high levels of welfare state
undermine an economy’s competitiveness in global markets primarily by imposing higher
taxes, which consequently increase the cost of labor and thus the price of exports and of
domestic products in international competition. Considering from the dimension of
financial openness, increased capital mobility also induces the state to cut back social
spending. Open capital markets provide governments with the option of incurring debt to
pay for social services. Yet increased government borrowing may eventually lead to
higher real interest rates, which crowd out private investment and ultimately threaten
international competitiveness. As a result, the increasing international competition that
business groups face drives them to press governments for a reduction in social spending
that sets in motion a shrinking welfare state (Kaufman and Segura-Ubiergo 2001).
In addition, with increased capital mobility, government officials are also subject to
judgments made by individual international investors, who normally do not risk investing
in countries that spend beyond their means. In particular, in developing countries,
6


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