Globalisation and the Welfare State

Globalisation needs to be accompanied by a strong welfare state. A new GED focus paper suggests that the complementarity between openness to trade and a strong welfare state weakened over time. While trade – the key driver of globalisation – improves net welfare, it comes with increased vulnerability to external shocks, decline of certain sectors of the economy, etc. In order to insure against these side-effects, a strong welfare state is needed. However, while globalisation is accelerating, the welfare state stagnates. This is the result of some prima facie evidence presented in the newest GED focus paper. Looking at historical evidence, it shows that the once positive correlation between the welfare state and openness to trade has gradually declined and is presently almost flat. This finding might have some explanatory potential to understand the present dissatisfaction with globalisation.