Economic growth, welfare models and inequality in the context of globalisation

Abstract

The recent economic crisis was a test case for many advanced countries to determine the capacity of their socio-economic model to cope with the challenges of globalisation and financial crash. From this perspective, the aim of this article is to explore whether the expansion of the welfare state should be seen as a barrier to economic growth and competitiveness, as ‘neoliberal’ economists often argue, or whether increasing public social provision might contribute to enhancing real income. After a comparative discussion of the evolution of different welfare models in developed countries, we advance our argument that public social spending is not a drain on competitiveness or an obstacle to economic efficiency. On the contrary, we explore the possibility that increasing welfare expenditure can stimulate economic growth along with lowering inequality, while the so-called ‘efficiency thesis’ (according to which globalisation needs to be accompanied by the retrenchment of welfare states in order to promote external competitiveness) produces worse economic performance and higher inequality. As a test of this hypothesis, we analyse empirical data on 34 Organisation for Economic Co-operation and Development countries from 1990 to 2013. We use econometric analysis to indicate that the so-called ‘compensation thesis’ (a process whereby globalisation is regulated through expansion of welfare states) may contribute to real income dynamics, while greater income inequality may inhibit per capita gross domestic product growth. JEL Codes: I380, P510, F600, G010.