Designing a growth-friendly welfare system: Implications from empirical analysis of OECD countries

Note: This article was developed from previous research (Korean version) ‘Harmonizing Social Welfare and Economic Growth: Case Studies of European Countries and Implications for Korea’.

Abstract

This article revisits arguments on relationship between welfare spending and economic growth and proposes a direction for welfare policy environment which can actually contribute to economic growth. Many studies have pointed out government size or welfare spending is negatively correlated to economic growth. Against this background, this article conducts empirical tests on welfare spending of 34 OECD countries for the period of 1996–2010. It shows that the impact of welfare spending on economic growth rate varies depending on its characteristics. Besides, countries with higher education and R&D spending and good governance display high economic growth rate despite large welfare spending. This finding suggests that welfare policy should be oriented in favor of investing in human capital and productivity and institutional reforms are important for the sustainability of welfare state.

Keywords:

• Government size
• welfare spending, economic growth
• population aging
• R&D

Notes

Note: This article was developed from previous research (Korean version) ‘Harmonizing Social Welfare and Economic Growth: Case Studies of European Countries and Implications for Korea’.

1. However, one may fall prey to over-simplification with this argument, because there are exceptions and level of welfare spending depends on sepcific situation of each country.

2. Most analysts used general government revenue or expenditure, not welfare spending as an explanatory variable in order to find out effect of government size on economic growth. It wouldn’t be wrong to identify government size and welfare spending in percentage of GDP, because there is a positive correlation between the two variables most of the time, as Figure 1 shows.

3. Esping-Anderson (1991) argues that European welfare models consists of Liberal (Anglo-Saxon), Conservative (Continental) and Social Democratic (Nordic or Scandinavian) models according to decommodification and social stratification. Ferrera (1996) and Sapir (2005) add Southern European model to Esping-Anderson’s tripartite-regimes.