Openness, External Risk, and Volatility:
Implications for pensation Hypothesis
So Young Kim
Abstract A central assumption in the globalization literature is that economic
openness generates economic insecurity and volatility+ Based on this assumption, schol-
ars of international political economy have proposed pensation hypothesis,
which claims that globalization bolsters rather than undermines the welfare state by
increasing public demand for social protection against externally generated eco-
nomic instability+ The openness-volatility link is dubious, however, on both theoret-
ical 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 volatil-
ity+ 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+
The general growth of government in the post–World War II era is one of the most
important empirical regularities in political science+ Measured by general govern-
ment consumption or sectoral expenditures, government size grew dramatically
during most of the postwar period+ Intrigued by this phenomenal government
growth, political scientists offered numerous accounts, some viewing this growth
as a corollary of economic phenomena such as modernization, industrialization,
e distribution, or fiscal illusion, and others attributing government growth to
political causes such as bureaucratization, interest group politics, and electoral
competition+1
Earlier versions of this paper were presented at the 2002 Annual Meeting of the American Political
Science Association, Boston, and at the 2004 P
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