Do Globalization and China’s WTO Accession Affect Social Spending in Its Eleven Neighboring Countries? An Empirical Study of the China Shock
This dissertation investigates whether globalization and China’s WTO accession in 2001 have any impact on government expenditure to social security transfers and human capital of its eleven neighboring countries--Bangladesh, India, Indonesia, Japan, Korea, Malaysia, Nepal, Pakistan, the Philippines, Singapore, and Thailand. These countries have enjoyed economic growth from intra-regional trade and foreign direct investment (FDI). Due to Chinese liberalization of trade and FDI-led growth policies, China became the favorite destination for foreign investors because of the large population providing enormous potential markets for consumption of goods and services as well as having a huge pool of low-wage workers for lower cost production. With the help of advance technology, an increase in factor productivity contributed to China rapid economic expansion, particularly after 2001. Studies conducted by trade and labor economists have indicated that China’s powerful comparative advantage produced a shock to labor markets in other economies. In the context of empirical research, this research examines the effects of the China shock on welfare policies in its neighboring countries. The Heckscher–Ohlin–Samuelson model (HOS) states that relatively abundant factor endowments enable a country to gain from trade while relatively scarce factor endowments cause an economy to lose, and that trade can entail income distributive issues. Motivated by the HOS theory and the ongoing debate over government’s policy choices, the compensation hypothesis versus the efficiency hypothesis, a pooled time-series error-correction model has been adopted in the study to analyze the time dynamics and to correct for serial correction. Following the methodology that previous studies have employed, the research constructs a dummy variable using the year of 2002 as a break point to see if China’s WTO entry has any impact on public spending in these countries; also, the study controls the volume of trade between China and each of these countries to see if the China shock have any effect on their welfare policies. Welfare expenditures are disaggregated into three specific aspects: health, education, and social security; and trade openness and capital mobility measure globalization. The findings that trade openness has a negative impact on social spending over the long term and capital openness has a negative short-term effect on welfare expenditures support the efficiency hypothesis. Also, an increase in trade with China is likely to curb spending on human capital in these countries. The impact of China’s accession into WTO on their social policies seems ambiguous as the event has a negative effect on budgeting education expenditure while having a positive impact on social security transfers, it showcases impacts that the China shock has on labor markets in these countries. Referring to policy implications, the short run policy would be that governments should learn the successful experience from their neighbors, engaging in regional free trade and attract FDI. The medium-goal should be focused on human capital development to increase productivity so that the countries can attract FDI in high-value-added industries. For the long run, policymakers need to take the incoming AI shock into consideration and be aware of China’s technological capability related AI. In addition, governments should initiate certain pilot education programs to unleash workers’ creativity for product innovation, and redistribution policies should be put into action to be supportive for a wider range of job dislocations. Also, policymakers should bridge the gap between formal and informal workers.
China Shock, globalization, Social Spending, Economics
Networked Digital Library of Theses and Dissertations