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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 17, No. 3, pp.309-334
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2004
Received 04 Nov 2004 Revised 08 Nov 2004

Capital Mobility, Financial Risk, Institutions and Redistributive Spending

Junkyu Lee ; Jeffrey B. Nugent
Director of the Americas Team in Korea Institute for International Economic Policy (KIEP), 300-4, Yomgok-Dong, Seocho-Gu, Seoul 137-747, Korea, Tel: +82-2-3460-1128 junkyul@kiep.go.kr
Professor of Economics, USC Department of Economics, University Park Campus, Univetsity of Southern California, Los Angeles, CA 90089-0253, USA, Tel: +1-213-740-2107 nugent@rcf.usc.edu

JEL Classification: H1, O4

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.

Keywords:

Growth, Crisis, Redistribution, Capital Mobility, Reform

Acknowledgments

Paper to be presented at the 12th Seoul Journal of Economics International Symposium in Seoul on November 4, 2004.

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