Wibbels: Dependency Revisited: International Markets, Business Cycles, and Social Spending in the Developing World

Wibbels, E. 2006. Dependency Revisited: International Markets, Business Cycles, and Social Spending in the Developing World. International Organization 60, no. 02: 433-468.

"While increased exposure to the global economy is associated with increased welfare effort in the OECD, the opposite holds in the developing world" (1). The author presents a case that this can be partially explained by the different patterns of engagement with the global economy that are taken by either developed or less developed countries. "Thus, while internationally-inspired volatility and income shocks seem not to threaten the underpinnings of the welfare state in rich nations, it undercuts the capacity of governments in the developing world to smooth consumption...across the business cycle" (1).

"In this paper, I complement the emphasis on domestic factors by placing them in international context. In discussing the incentives of governments and actors in tradable sectors, I emphasize the importance of fiscal constraints rooted in distinctly patterns of integration into global markets. While national income shocks associated with international markets are quite modest in the global north, they are profound in developing nations. In the global north, governments can respond to those shocks by borrowing on capital markets and spending counter-cyclically on social programs. No such opportunity exists for most governments in the developing world that have limited access to capital markets in tough times, more significant incentives to balance budgets, tradable sectors that are sensitive to currency fluctuations, and as a result cut social spending at exactly the times it is most needed. Thus, while internationally-inspired income shocks in no way threaten the underpinnings of the welfare state in rich nations, it undercuts the capacity of governments in the developing world to smooth consumption...across the business cycle" (3).

LDCs are in a tight bind because they are encouraged to cut spending when external financial shocks enter their borders. Also, these shocks are more pronounced as they have made themselves more vulnerable to business cycles and market dynamics through a deregulated capital market.

"I argue that he findings on the relationship between trade dependence and welfare effort result, in part, from a dependent position in the global economy and the ways in which that position shapes the interests of key domestic actors. More specifically, exposure to volatile international markets inspires sever internationally-inspired business cycles prevents governments from engaging in counter-cyclical spending to smooth consumption during recessions" (7).