While increased exposure to the global economy is associated with
increased welfare effort in the Organization for Economic Cooperation and
Development (OECD), the opposite holds in the developing world. These
differences are typically explained with reference to domestic politics.
Tradables, unions, and the like in the developing world are assumed to
have less power or interests divergent to those in the
OECD—interests that militate against social spending. I claim that
such arguments can be complemented with a recognition that developed and
developing nations have distinct patterns of integration into global
markets. While income shocks associated with international markets are
quite modest in the OECD, they are profound in developing nations. In the
OECD, governments can respond to those shocks by borrowing on capital
markets and spending countercyclically on social programs. No such
opportunity exists for most governments in the developing world, most of
which have limited access to capital markets in tough times, more
significant incentives to balance budgets, and as a result cut social
spending at the times it is most needed. Thus, while internationally
inspired volatility and income shocks seem not to threaten the
underpinnings of the welfare state in rich nations, it undercuts the
capacity of governments in the developing world to smooth consumption (and
particularly consumption by the poor) across the business cycle.The author would like to thank Steph Haggard,
Kristin Bakke, Wongi Choe, Tim Jones, and seminar participants at Duke
University, Penn State University, Washington University, MIT, and the
University of New Mexico for their helpful comments. Nancy Brune, Mark
Hallerberg and Rolf Strauch, and Nita Rudra were very generous in
providing their capital account, OECD fiscal, and potential labor power
data, respectively.