The effects of globalization on government expenditures: An econometric analysis to OECD countries

Globalization has effect in many areas such as economic, social, cultural, environmental and military. The economic aspect of globalization which defined as an increased integration in a world scale is at the forefront then the other aspects of globalization. Especially the effect of accelerating globalization after the 1980?s on public finance area is an important subject of discussion. Economic functions of state have changed and independent decision making power has reduced in the globalization process. This changing also has effected to the government expenditures level. As well as there are many approaches to explain the development of government expenditure approaches to examine the impact of globalization is quite new. In the literature, the impacts of globalization on the government expenditure are examined by efficiency and compensation hypothesis. Efficiency hypothesis claim that increasing tax competition decreases the tax revenue and so government expenditure will be reduced. On the other hand, the compensation hypothesis suggest that government expenditure will increase in order to eliminate the external risk are exposed in open countries. Both efficiency and compensation hypothesis developed by empirical research?s evidence. In this thesis, we investigate the validity of efficiency and compensation hypothesis using 18 OECD member countries annual data over the 1995-2009 periods. For this purpose we perform the several panel unit root test for determine the stationarity property of data. Then we analyze the relationship between globalization and government expenditure with the current method Panel VAR model both in terms of aggregate and decomposed government expenditure data by functional classification level. The result of analysis show that efficiency hypothesis is valid for total government, public order and safety services, education services expenditure and social security and social welfare expenditures. For other types of government expenditures there is evidence of neither efficiency nor compensation hypothesis in the analysis results. The effects of globalization on government expenditure present complex structure. There is no consensus in empirical research findings. Future research will be focus on the relationship between the two hypotheses rather than which hypotheses are valid. Keywords: Globalization, Government Expenditure, Efficiency Hypothesis, Compensation Hypothesis, Panel Unit Root Test, Panel VAR Model