Public Choice

, Volume 134, Issue 3, pp 263-292

First online:

The impact of globalization on the composition of government expenditures: Evidence from panel data

  • Axel DreherAffiliated withKOF Swiss Economic Institute, ETH ZurichCESifo Email author 
  • , Jan-Egbert SturmAffiliated withKOF Swiss Economic Institute, ETH ZurichCESifo
  • , Heinrich W. UrsprungAffiliated withDepartment of Economics, University of Konstanz

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According to the disciplining hypothesis, globalization restrains governments by inducing increased budgetary pressure. As a consequence, governments may attempt to curtail the welfare state, which is often seen as a drag on international competitiveness, by reducing especially their expenditures on transfers and subsidies. This globalization-induced welfare state retrenchment is potentially mitigated by citizens’ preferences to be compensated for the risks of globalization (“compensation hypothesis”). Employing two different datasets and various measures of globalization, we analyze whether globalization has indeed influenced the composition of government expenditures. For a sample of 60 countries, we examine the development of four broad expenditure categories for the period 1971–2001: capital expenditures, expenditures for goods and services, interest payments, and subsidies and other current transfers. A second dataset provides a much more detailed classification: public expenditures, expenditures for defence, order, economic affairs, environment, housing, health, recreation, education, and social expenditures. However, this second data set is only available since 1990—and only for OECD countries. Our results show that globalization did not influence the composition of government expenditures in a notable way.


Globalization Economic policy Government expenditure composition Tax competition


H7 H87 C23