Capital Mobility, Financial Risk, Institutions and Redistributive Spending

Abstract

As democracy spreads, the importance of redistribution policies is believed to increase, bringing with them the threat of weakening incentives and slowing growth. Yet, to date the determinants of redistribution policies have rarely been investigated outside a few OECD countries and outside the context of narrowly defined transfer payments. This paper examines the determinants of a broader class of redistribution policies, namely, the share of public spending on health, education and welfare in total government spending in a larger set of countries (a panel data set consisting of 105 countries) over the period 1988-2000. In particular, the paper views redistributive spending as emanating from two global trends: deregulation of international capital movements and the spread of democratic institutions. Our basic hypothesis is that because of the risks involved in international capital mobility and the fact that their use of standard macroeconomic policies is increasingly limited by international rules of the game, governments find redistributive spending policies convenient tools for dealing with the distributive effects inherent in these risks, especially when financial crises actually occur. The results, with both fixed and random effects models, support most of the hypotheses, several of them quite strongly.