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Can Globalization Cause the Fiscal Crisis? - An Empirical Investigation of the Compensation Hypothesis -

  • Crisisonomy
  • Abbr : KRCEM
  • 2016, 12(10), pp.159-170
  • Publisher : Crisis and Emergency Management: Theory and Praxis
  • Research Area : Social Science > Public Policy > Public Policy in general

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ABSTRACT

Among a number of studies on the effect of globalization on nation states and their domestic policies, the ‘compensation hypothesis’ posits a positive relationship between openness to world market and the size of government, thereby providing a link between globalization and fiscal crisis. It is based on the argument that the government tends to compensate people for their additional risks due to globalization such as rising inequality, but the empirical results of the existing literature are inconclusive. This paper investigates the validity of the ‘compensation hypothesis’ in a new empirical setting. It is found that economic globalization and trade openness variables have a positive and statistically significant effect on the debt-to-GDP ratio among the OECD countries, while social and political globalization variables show no significant effect. The results suggest that economic impact of globalization could have a profound impact on the fiscal soundness of a country, which may result in a fiscal crisis in the future.

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