Protectionism Lower in Countries With Larger Government Sectors

Dani Rodrik posted the findings of a paper by Anna Maria Mayda, Kevin O’Rourke, and Richard Sinnot that concludes that that public has less protectionist leanings in countries with a larger government sector (which presumably means more social services).

Rodrik was surprised by their conclusion. I am surprised that Rodrik is surprised. Martin Wolf, the Financial Times’ lead economics editor, has been saying for some time that for some time that to prevent a backlash against economic progress, America will need to provide more assistance to worker and their families. For example, in “Why America Will Need Some Elements of a Welfare State,” he argued:

[E]vidence suggests that inter-generational mobility is smaller in the US and in the UK than in the Nordic countries and even Germany…..[T[he more competitive the business environment and the smaller the identification between companies and domestic workers, the less able or willing will companies be to provide either health insurance or pensions.

In a country in which much social insurance has historically been supplied by employers, the loss of jobs and the closure of businesses is particularly traumatic. Protectionism then emerges as the politically correct form of resistance to the market.

For these two reasons, developments now under way threaten the survival of Mr Bernanke’s principles [economic opportunity should be as widely distributed as possible; results need not be equal but should reflect contribution; people should have some protection from the most adverse events, particularly if outside their control]. There are two possible responses. One is to insist that people are simply on their own. The present administration will, I predict, be the high water mark of this conservative tide. The other is to create a system of support that does not destroy incentives. That would have to contain at least two elements: greater funding of education for the disadvantaged (ideally, with private supply) and universal health insurance. The left will also want higher minimum wages and generous subsidisation of low earnings.

To Rodrik’s post:

Risk-averse individuals are more likely to prefer protectionism to free trade, and that is true wherever people live. But their protectionist leanings are moderated in countries where the government is bigger (measured by the share of government spending in GDP). This is the remarkable finding in a recent paper written by my student and co-author Anna Maria Mayda along with two other scholars, Kevin O’Rourke, and Richard Sinnott. The paper is based on responses by individuals to a survey carried out in 18 countries (drawn from Europe and Asia). The authors speculate that the reason is people feel better insured against the risks of globalization in economies where the public sector is larger. Hence in their sample the country where risk aversion translates to protectionist desire the least is Sweden.

Here is how they summarize their results:

Our results provide microeconomic evidence consistent with the long-standing argument that the state and the market are in fact complementary. Openness and globalization can introduce uncertainty into peoples’ lives, and this additional risk can lead some people to oppose trade. Government expenditure can help to reduce this risk, and thus shore up support for open markets. It would seem that the ‘grand bargain’ that was embedded liberalism is politically effective. Whether that grand bargain can survive the additional political pressures which the interaction of mass migration and the welfare state can give rise to will be one of the key issues determining the sustainability of this institutional compromise in the decades ahead.

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