Change & Continuity in Contemporary

Business

 

 

ASSIGNMENT SUBBMITTED BY 

Priyank Mehta

 

Roll No: L0243KMKM1010

 

BA – 5

 

SUBMITTED TO

Dr.Rajendra Kumar

L0243KMKM1010 Page 1

Table of content

Title

1. Executive Summary

3

2. Introduction

4

3. Literature Review

5

4. Critical analysis

7

4.1 The Efficiency Theory of Welfare Spending

7

4.2 The Compensation Approach

8

4.3 Towards an Integrated Theory of the Welfare State

11

5. Conclusion

13

6. Referencing

14

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Executive Summary

Services and goods now move fort amongst the countries more freely as compared to in the

past. The continuous decline in the costs of long-distance transportation and communication

and in the nationwide limitations on international investment and trade have allowed the

economics all over the world to become gradually more incorporated, thus has enhanced the

growth of productivity and expanded the choices of the consumer. In some of the areas of the

developed world, especially East Asia, globalization is escorted by an enhancement in the

standards of living which was not even imagined a few generations before. Simultaneously, the

globalization has become the center point of a worldwide controversy. Particularly there have

been apprehensions regarding the unpleasant outcomes for the distribution of income. These

concerns have resulted in the initiatives of the polices that are a threat to turn back the clock.

However, in the centre of all this world wide recession, Denmark and their counterparts have

welcomed the advantages of the globalization in regards to the efficiency in productivity, low

process and an increase in the choices of the consumers.

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Introduction

Globalization refers to the changing nature of the world economy. The changes are associated

with the growth in economic interactions across state borders. The main changes are generally

thought to be increasing trade flows, greater mobility of finance capital, and the

internationalization of production chains. Many observers associate these changes with the

rapid development of information technology (Rosecrance, 2009).

Although globalization carries an aura of energy and excitement, critics argue that it has

negative consequences. From a sociological standpoint, globalization might imply greater

cultural conformity, perhaps even a type of cultural imperialism by the major western

economies. From a political standpoint, globalization is often seen as part of a neoliberal

program that forces governments to adopt a severely restricted and arguably unjust set of

public policies. Such criticisms illustrate how debates about globalization often relate economic

and technological issues to changing patterns of international and national governance

(Frieden, 2001).

The new governance is, indeed, often portrayed as a response to globalization. In this view,

globalization has eroded the importance of national barriers and even the state itself; it has

increased the economic interdependence of states, thereby undermining the ability of each

state to govern its own economy. However, despite the ubiquity of talk of globalization, notably

in the rhetoric of policy-makers, there remains a lack of general consensus on its extent and its

implications for governance. Globalization can refer, in narrow terms, to increased volumes of

transnational trade. Or it can refer to a broader pattern of global economic integration

(Burgoon, 2004). Or it can refer to the activities of those firms that have scattered their

production activities across a number of states, and those states that have promoted a liberal

world order (Spiro, 2004).

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Literature Review

The transnational flows associated with globalization appear to have risen in the 1970s. It was,

after all, in the 1970s, notably in the wake of the oil crisis, that some states, including the UK

and the USA, sought to liberalize their economies. A few social scientists even began to discuss

globalization at that time. Nonetheless, we can date the massive explosion of talk of

globalization, among both social scientists and policy actors, to the 1990s. This explosion

appears to have owed much to the end of the Cold War. Talk of globalization represented a way

of characterizing a new global order. It reflected the perception of a shift from superpowers

and their political conflicts to a broader range of actors concerned with economic exchanges.

Once we locate globalization in the wake of the Cold War, we are likely to become more

sensitive to the intellectual currents and political forces that have made it possible. Neoliberal

ideas became extremely prominent in the late 1970s, and they emphasized the supposed

benefits of rolling back the state and spreading free markets and free trade. The USA,

unchecked by a rival superpower, occupied an increasingly hegemonic role, which it used to

promote and guarantee globalizing initiatives. International economic institutions, such as the

International Monetary Fund, World Bank, and World Trade Organization, also promoted norms

and agreements that facilitated mercerization and free trade (Irwin, 2002).

Just as globalization arose in part because of changes in global politics, so it has inspired new

accounts of global governance. Globalization is said to have undermined the state-based

system established in 1648 by the Treaty of Westphalia. We no longer have the old image of

largely autonomous states possessing territorial sovereignty, and interacting in terms set by

law, diplomacy, and even war. Instead we have a new picture of diverse actors, including firms

and non-profits as well as states, engaged in all kinds of transnational activities. We have a new

world order consisting of networks based on the negotiations and exchanges of interdependent

actors. Coordination and order arise less from states and more from markets and networks

(James, 2001).

In addition to the literature’s theoretical limitations, the empirical research of the existing

literature has produced evidence that cannot be generalized across a large sample of countries.

Some studies have largely analyzed the relationship between economic globalization and

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welfare spending among OECD (Organization for Economic Cooperation and Development)

countries, while others have based their analyses on developing countries. Studies whose

samples rely on OECD countries suggest that increasing levels of global economic integration

increase government welfare expenditures, consistent with the compensation thesis (Cortell,

2006).

Meanwhile, studies with samples taken from countries in Denmark suggest that increasing

levels of economic globalization significantly reduce government welfare spending as predicted

by efficiency theories. Given these limitations this study contributes to the existing literature in

the following ways. First, it draws upon efficiency and compensation approaches and develops

an integrated theoretical framework that explains globalization’s effects on social spending.

(Strange, 1996)

Second, the study’s theory is systemically tested within the context of a large-N cross-national

pooled time-series analysis of 122 countries during the years 1970-2002. To reinforce the

statistical analysis, the study also tests the theory via comparative case study analyses of South

Korea, Chile and Spain.. Third, relative to existing studies, a comprehensive measure of

economic globalization is utilized that adequately captures the theoretical definition of the

concept .

After discussing the theoretical limitations of the existing literature an alternative theoretical

framework is advanced that draws upon and integrates efficiency and compensation

approaches to explain social policies under conditions of global economic integration in

Denmark. The outcome variable – welfare spending – and the various explanatory variables are

discussed and operationalized. The chapter concludes with a discussion of the estimation

procedures, which feature various time-series regressions that are used to analyze the cross-

national data as well as a discussion of the methodology that informed the selection of

countries used in the case study analysis (Hay & Marsh, 2001).

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Critical Analysis

The Efficiency Theory of Welfare Spending

The fundamental proposition of the efficiency theory is that high levels of government social

spending undermine economic efficiency and the competitiveness of domestic firms in

Denmark. It is argued that since social spending is largely funded from corporate taxes, any

increase in social expenditures will be accompanied by an equivalent increase in the level of

taxes. Increased taxes undermine investor confidence and the competitiveness of domestic

companies in both domestic and international markets. Increased social spending can also

result in increased government debt as the state increases its borrowing to finance its welfare

policies in Denmark (Meyer & Francisco, 1997).

High levels of taxes brought about by increases in government welfare policies will ultimately

facilitate capital flight, as transnational corporations will begin re-locating their investments to

countries that have lower taxes and limited social protections, hence producing a ‘race to the

bottom’ effect on the welfare state of Denmark. Since economic globalization increases the

mobility of transnational capital, it is this threat that forces governments to significantly reduce

social expenditures in order to restore investor confidence. In sum, the efficiency theoretical

model posits that economic globalization and the level of international competition that

emerges from it constrain and limit government welfare spending in order to attract and retain

mobile capital of Denmark (Scholte, 2005).

Recent empirical research seems to confirm the logic of the efficiency theory of welfare

spending. One study assessed the impact of economic globalization on the growth of

government spending in Denmark and showed that trade and international financial openness

had a negative effect on government spending. Consistent with this finding, recent research

using a sample of European countries examined the relationship between economic

globalization and welfare spending and found that trade openness had a consistently negative

effect on aggregate social spending and social security transfers (Burgoon, 2004).

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The Compensation Approach

While recognizing the budgetary constraints of the state under conditions of increased global

economic integration, compensation approaches to welfare spending emphasize the social

demands for welfare allocation and the political incentives of policy makers to respond to such

demands. The welfare system, according to this approach, is a necessary mechanism for

offsetting the costs of global economic integration. Scholars in this tradition argue that

efficiency theories overlook the political incentive to increase public programs in response to

international economic integration (Spiro, 2004).

Since policy makers in Denmark are primarily motivated by re-election, they are more likely to

increase welfare spending to offset negative economic externalities, such as job losses and

increased income inequality that emerge from the competitive nature of the global economy.

Hence, knowing that those who are displaced will blame political incumbents for the negative

externalities of economic globalization, policy makers are more likely to increase welfare

spending to pacify displaced workers. In addition, policy makers will also provide welfare

benefits to insure that the negative externalities of global economic integration do not disrupt

national financial markets (Mandle, 2007).

David Cameron’s (1978) seminal research provides the first empirical and historical analysis of

the growth of the welfare state among Northern European countries. The research was the first

quantitative analysis of welfare policy that showed that openness to trade was strongly

correlated with what he referred to as the “scope of the public economy,” which was measured

in terms of the change in total taxes as a percentage of GDP. The research showed that

openness to trade was the best predictor of the growth of government revenues. Large nations

that were economically less open experienced moderate increases in the scope of the public

economy compared to smaller nations with more open economies. While the scope of the

public economy among small Western European countries varied with the dominance of left

parties in Scandinavian countries or the dominance of centrist or conservative parties in

countries like Denmark, Belgium and Ireland, the best explanation for the expansion of

government expenditures is the degree to which national economies had been integrated into

the global economy.

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In pursuing an effective industrial policy, the mix of international liberalism and domestic

compensation varies widely among small Western European states. Moreover, the

development of an industrial policy is not dependent on size but what Katzenstein refers to as

democratic corporatism, which is the way in which conflicting economic interests are mediated

domestically. Democratic corporatism is characterized by an “ideology of social partnership

expressed at the national level; a relatively centralized and concentrated system of interest

groups; and voluntary and informal co-ordination of conflicting objectives through continuous

political bargaining between interest groups, state bureaucracies, and political parties”. It is,

therefore, the democratic corporatist nature of small European states that makes it possible to

develop an industrial policy that is based on effectively integrating national economies into the

global economy, while at the same time developing a robust system of domestic compensation

(Rosecrance, 2009).

Other scholars within this research tradition consider the effects of other aspects of economic

globalization on government welfare spending. Quinn’s (1997) cross-national study of 38

nations estimated the effects of capital mobility on government spending and found that

greater capital mobility is associated with higher levels of spending. Other research on the

effect of capital mobility on welfare spending has shown that the integration of capital markets

has been associated with increases in welfare spending as well as higher corporate taxes. A

recent empirical treatment of Latin American countries provided additional support for the

compensation thesis. Using a measure of financial openness as well as measures of trade

openness, Avelinon, Brown and Hunter’s research suggests that trade openness has a positive

relationship with education and social expenditures, and financial openness does not reduce

government expenditures for social programs as predicted by the efficiency theory.

On this note, empirical studies in the existing literature have largely overlooked the importance

of how economic globalization’s effect on Denmark welfare spending is conditional on the

nature of domestic political institutions. It is only in the past few years where a handful of

scholars have attempted to address this deficit. In their research, Boix (1998) and Garrette

(1998) demonstrate that the impact of global economic integration on governments’ welfare

expenditures is conditional on the nature of partisan politics. Domestic political variables in

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Denmark also feature prominently in the research of Asera and Boix (2002). They argue that the

relationship between the openness of national economies and the size of the public sector’s

welfare spending is heavily conditional on the nature of the political regime. They contend that

government strategically provide welfare compensation to build domestic political coalitions

that support free trade, and democratic governments relative to authoritarian regimes are

more likely to use welfare spending to compensate the losers of economic globalization.

While recent studies have attempted to bring greater theoretical precision by identifying the

mechanisms through which globalization operates in determining social policies in Denmark,

the mechanisms that are tested in such studies are limited to partisan politics and political

regimes. These studies do not provide a comprehensive analysis of how the interactions of

economic globalization and other domestic political variables affect states’ welfare spending.

These studies demonstrates that government welfare spending in Denmark is a functional way

through which the economic pressures of the globalization has been trained through the means

of domestic politics. The domestic politics is made up of the political institutional and affiliation

features which indicate respectively to the capacity and willingness of the systems of politics to

begin the changes in the public policies. The factors of the political institution inclides the

characteristics of political levels and regimes of electoral competition and political

participations, determining the environment of the politics which forms the incentives and

preferences of the officials of the government who are responsible for making the welfare

policies. Political affiliation factors in Denmark, which include organized labor and political

parties, determine how government resources - specifically welfare expenditures - are

distributed. This study, therefore, builds on the existing literature by examining the ways in

which economic globalization’s effect on welfare policy is conditional on the domestic political

environment that shapes welfare policy and the political affiliations of domestic political actors

who distribute social benefits.

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Towards an Integrated Theory of the Welfare State

The theoretical limitations of the extant literature present an opportunity to construct a robust

theoretical framework that integrates efficiency and compensation approaches to Denmark.

While the existing literature treats these approaches as competing or mutually exclusive

‘theories’ of the welfare state, they are considered here to be mutually inclusive processes in

the development of social policy. Government welfare policy emerges from the tension of

globalization’s proclivity to retrench social spending and the proclivity of domestic political

actors and institutions to compensate. In essence, the construction of social policy, under

conditions of global economic integration, is a function of the dialectical pressures for greater

economic efficiency and domestic political preferences for greater compensation. It is

postulated that in a world absent of domestic political institutions and where transnational

corporations completely dominate countries’ political economy, by default, economic

globalization will exert a downward pressure on social spending. However, in the presence of

domestic politics, globalization’s natural proclivity for welfare retrenchment will be averted

since its effect on social spending is conditional on the nature of political institutions and the

political preferences of labor unions and political parties that set a floor against further

retrenchment. The dialectical tension between globalization’s tendency to retrench the welfare

state and the tendency of domestic political institutions to resist retrenchment is fully

developed and empirically tested.

However, since globalization’s effect on social policy in Denmark is conditional on the nature of

endogenous political forces,its proclivity to retrench welfare expendituresis avertedby the

preferences of domestic institutions, and political actors to compensate. In developing this

integrated theoretical explanation of welfare policy, we can ask the following questions: under

what structural conditions of corporate capitalism will economic globalization produce a ‘race

to the bottom’ effect on states’ social spending? And under what domestic political conditions

will institutions and political actors avert globalization’s ‘race to the bottom’ effect on social

spending? In answering these questions, the discussion that follows draws upon Marxist and

the welfare state’s political democratic theories.

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The authority characteristics of political regimes simultaneously influence both the pace at

which the economy of Denmark is integrated into the global economy and the scale of

government welfare spending. Comparatively to the authoritarian regimes, the democratic

governments that are faced by the pressures of the public have well-built incentives for

compensating economic dislocation which occur from the worldwide integrations. Numerous

scholars have scrutinized the reasons and factors through which the political regimes influence

the social spendings and state that the political regimes has a significant part in the decisions of

the governments regarding the policies regarding the social welfare under the condition of

growing economic globalization.

However, more researchers show concern about that the democracies have an equal impact on

every type of social spending. Segura-Ubiergo (2007) argue that the Latin Americans groups

belonging to the lower income are more likely to pressurize the government for increasing the

social spending merely to the degree in which they become the direct beneficiaries of those

spending. Results from his research have shown that democracies in Europe tend to be

negatively associated with social security expenditures but positively associated with health and

education expenditures. These results reflect the fact that social security beneficiaries in

Europe must be legally employed in the formal sector, and since lower incomes groups who are

mainly unemployed do no have admission to those benefits; they have no incentive to press

their governments to receive them. The expenditures of education and health reach a large

portion of the populations in Denmark as well as the individuals belonging to the lower income

sector are most probable to pressurize the government officials to amplify the expenditures.

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Conclusion

In conclusion, it can be said that the interactive effect of the globalization of economy and

institutional factors of domestic politics on Denmark’s welfare spending.Nevertheless, as the

system of domestic politics is more than the sum of its parts, it is vital as well to put into

consideration the communication amongst the globalization of economics and the aggregate

effects of the institutions of politics (which is an index that is comprised of indicators that

measure regime type, the level of electoral competition and political participation) on states’

welfare spending.

When regimes are democratic and the level of electoral competition and political participation

is high, then democratization defines the nature of political institutions. To fully account for the

cross-national variation in states’ welfare spending it is also necessary to estimate the

interactive effect of global economic integration and the aggregate and disaggregate political

environmental factors that shape states’ welfare spending. In estimating the aggregate effect of

institutions an index is constructed via principal components analysis.

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