Openness, External Risk, and Volatility: Implications for the Compensation Hypothesis

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A central assumption in the globalization literature is that economic openness generates economic insecurity and volatility. Based on this assumption, scholars of international political economy have proposed the compensation hypothesis, which claims that globalization bolsters rather than undermines the welfare state by increasing public demand for social protection against externally generated economic instability. The openness-volatility link is dubious, however, on both theoretical and empirical grounds. In this study, I revisit the volatility assumption, focusing on a crucial difference between openness and external risk in their effect on volatility. My statistical analysis of a panel data set from 175 countries (1950-2002) finds a consistent effect of external risk on volatility of the major economic aggregates, but a largely insignificant effect of openness. These findings suggest that economic volatility may be a mistaken link in explaining the openness-spending nexus, calling for further research on the causal mechanisms linking the two.
Publisher
CAMBRIDGE UNIV PRESS
Issue Date
2007-01
Language
English
Article Type
Article; Proceedings Paper
Citation

INTERNATIONAL ORGANIZATION, v.61, no.1, pp.181 - 216

ISSN
0020-8183
DOI
10.1017/S0020818307070051
URI
http://hdl.handle.net/10203/92393
Appears in Collection
STP-Journal Papers(저널논문)
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