The Politics of Economic Adjustment in a Liberal Market Economy: The Social Compensation Hypothesis Revisited

Abstract

The ‘compensation hypothesis’ holds that increasing trade exposure gives rise to pressures for an expansion in public spending, especially on welfare items. We argue that the underlying relationship between economic openness and public spending and particularly on welfare effort in Ireland shows a surprising consistency that is at odds with this hypothesis. Our preliminary estimates show a persistently weak relationship between trade openness and ‘social compensation’, unlike the experience of other small open economies. We seek to explain these findings with reference to both structural economic constraints and domestic political preferences.

Acknowledgements

This paper is an output of the IRCHSS‐funded research project Mapping the Irish State, based in UCD Geary Institute. Any errors are the responsibility of the authors.

Notes

1. See, for example, http://www.foreignpolicy.com/users/login.php?story_id=2493&URL=http://www.foreignpolicy.com/story/cms.php?story_id=2493&page=7 [Accessed 2 August 2004].