Welfare models, inequality and economic performance during globalisation

The objective of this paper is to explore whether “the efficiency thesis” concerning the relation between welfare states and globalisation is functional for economic growth or, alternatively, whether “the compensation thesis” produces better results in terms of economic growth. The current crisis (2007-12) was a test for many advanced economies to determine whether the socio-economic model that those countries built in the last several decades was able to cope with the challenges of globalisation. My hypothesis is that the efficiency thesis, according to which globalisation needs to be accompanied by the retrenchment of welfare states in order for firms to be competitive, does not causegrowth. The tests are conducted in a sample of 42 countries made up of OECD and EU members. On the contrary, our econometric exercises indicate that the “compensation thesis” (i.e.,regulated globalisation and an expanded welfare state) is better able to produce higher economic growth.