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PROTECTION FOR RENT:
NATIONAL SUBSIDIES AND
EUROPE’S ECONOMY
Nikolaos Zahariadis
Department of Government
University of Alabama at Birmingham
Birmingham AL 35294
[email protected]
Research Question
• Why is there still so much protectionism in
light of political rhetoric extolling the
virtues of free trade, favorable economic
theory, and legal pressure to dismantle
protectionist measures?
The Asset Influence Model of
Subsidy Protection
• The asset influence model expands Grossman
and Helpman’s (1994) political contribution
model.
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Four factors are important:
globalization
asset specificity
political power
institutional access
Equation
SUBSIDY i,t = a + b1ASSET i,t-1 + b2GLOBALIZATION i,t-1 +
b3INSTITUTION i,t + b4POLITICAL POWER i,t-1 +
b5GLOBALIZATION*ASSET + b6GLOBALIZATION*INSTITUTION + u
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where a is the constant term, i is country and t is year. SUBSIDY refers to
amount of subsidies. ASSET refers to asset specificity, measured as
coefficient of variation in wage costs and profits. GLOBALIZATION contains
three indicators: trade openness, measured percent trade in goods over
GDP; FDI openness is percent total FDI (incoming and outgoing) over GDP;
and portfolio openness is percent portfolio investment over GDP.
INSTITUTION refers to national institutions and includes four indicators
measured as index numbers: pluralism, competitive veto points, consensus
veto points, and electoral system. POLITICAL POWER refers to the affected
group’s power to get subsidies and is measured as the inverse of import
demand; u is the disturbance term.
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Table 1
The Determinants of Total Subsidies
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Capital Specificity (CS)
Labor Specificity (LS)
Political Power
Foreign Direct Investment (FDI) .0028
Portfolio Investment
Trade Openness
Pluralism
(1)
.018
(.004)***
.008
(.005)
32.53
(12.84)**
-.0028
(.010)
-.005
(.002)**
.014
(.009)
-.686
(.274)**
Electoral System
(2)
.018
(.005)***
.001
(.004)
30.97
(11.78)***
-.012
(.010)
.001
(.003)
.037
(.014)***
Competitive Veto Points
LS * Trade
LS * Portfolio
CS * FDI
CS * Trade
CS * Portfolio
Pluralism * Trade
Pluralism * FDI
Pluralism * Portfolio
Electoral System * Trade
Electoral System * FDI
Electoral System * Portfolio
Collective Veto Points * Trade
Collective Veto Points * FDI
Collective Veto Points * Portfolio
(.010)
.004
(.003)
.049
(.011)***
-.048
(.084)
Collective Veto Points
LS * FDI
(3)
.016
(.006)***
.008
(.006)
29.40
(12.01)**
.0000
(.0001)
-.0004
(.0000)***
.00009
(00002)***
.0000
(.000)
-.0003
(.0001)**
.0000
(0000)
.0154
(.006)**
-.004
(.003)
5.70e-07
(1.18e-06)
.0000
(.0001)
-.0005
(.0001)***
.0000
(.0000)
.0000
(.0000)
4.18-e06
(.0000)
-.0000
(.0000)
.520
(.222)**
.354
(.21)*
.000
(.000)
-.0005
(.0001)**
-.00004
(8.16e-06)***
.00009
(.00004)**
-.0001
(.0001)
.000
(000)
.000
(.002)
.000
(.000)
-.0002
(.0002)
.0099
(.0038)**
.002
(.002)
.0008
(.001)
Table continued
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Competitive Veto Points * Trade
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Competitive Veto Points * FDI
Constant
-.403
(.719)
-1.24
(.634)*
-.0098
(.005)*
.0007
(.0017)
.001
(.002)
-1.87
(.76)**
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Adjusted R-squared
Rho
.3248
.6452
.3103
.6799
.3483
.6265
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Prais-Winsten estimates with robust standard errors in parentheses
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N=173; * .05<p<.10, ** .01<p<.05, *** p< .01, two-tailed
Competitive Veto Points * Portfolio
Figure 1
Counterfactual Estimates
% of GDP
Pluralism
Less
Trade
More
0.595
-0.057
1.538
1.877
Low
High
Counterfactuals were estimated on the basis of equation 1. Low (high)
trade refers to the 20th (80th) percentile score in the sample. Less (more)
pluralism refers to the 20th (80th) percent in the index. All other variables
were set at their means.
Findings
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Political power affects the disbursement of subsidies
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Labor specificity is more important than capital specificity
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Pluralism and collective veto points matter
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Trade openness, more than FDI or portfolio investment, matters
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There are important interactive effects mostly between specificity and trade
and portfolio investment; less with pluralism and collective veto points
Implications
• If countries become more open over time, corporatism
rather than pluralism is the preferred institution of choice
in the long-term.
• Not all globalization is created equal. Trade is important,
but increasing exposure to capital movements qualifies
the dynamics of coalition formation in domestic
economies.
• The more globalization undermines democratic politics,
the more democratic politics will strive to tame
globalization.