Monday, June 25, 2007

Reconciling with Globalization

Dani Rodrik cites a new paper claiming that "big government (measured by share of government spending in GDP)" makes risk-averse individuals more comfortable with free trade and globalization. This finding is based on survey data, but the underlying hypothesis is that government spending provides insurance against the risks of openness and thus helps to reconcile nervous people to the free market. "Our results provide microeconomic evidence consistent with the long-standing argument that the state and the market are in fact complementary," the authors assert.

This finding is hard to square with the fact that, according to the European Commission (see here), France has the highest level of government spending in the EU (53.2 percent of GDP). Yet any number of indicators, beginning with the "no" vote on the European referendum, suggest that French anxiety about economic openness is high.

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