The Welfare State, Thresholds, and Economic Growth

Tatiana Fic and Chetan Ghate

No 424, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Can a growing welfare state induce a regime switch in the growth rate of an econ-omy? This paper constructs a dynamic political economy model of economic growth and the welfare state in which both variables are non-linearly related and jointly en-dogenous. Using a Markov switching framework over the period 1950-2001, we find that the structural decline in growth rates that several welfare state economies expe-rienced during 1970-1975 are preceded by movements to a high welfare state regime. This suggests that expanding welfare state regimes are associated with low economic growth regimes, while contracting welfare state regimes are associated with high growth regimes. However, we also find that the structural decline in growth rates leads to a downward structural break in the welfare state for many welfare state economies. This suggests that declining growth regimes are associated with contracting welfare state regimes, as lower growth forces politicians to cut the size of the welfare state. We also report strong evidence that both expansion and contractions in the welfare state affects growth non-linearly. These results are able to characterize a predictable and general pattern of welfare state-growth evolution.

Keywords: Welfare state; Structural change; Regime switching models; Positive political economy; Endogenous growth (search for similar items in EconPapers)
JEL-codes: C22 E62 O40 P16 (search for similar items in EconPapers)
Pages: 53 p.
Date: 2004
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp424

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