Institutional Competition

Institutional Competition

New Thinking in Political Economy series

Edited by Andreas Bergh and Rolf Höijer

Why is competition between institutions usually viewed in a negative light, when competition is considered positive in most other economic contexts? The contributors to this volume introduce new perspectives on this issue, analytically and empirically exploring reasons for this perception.

Chapter 8: A Race to the Bottom for the Big Welfare States?

Andreas Bergh

Subjects: economics and finance, austrian economics, institutional economics


Andreas Bergh INTRODUCTION During the 1990s, economic integration in Western Europe was high paced: the introduction of the single European market 1993, stage two of the European Monetary Union 1994, and the launch of the euro in 1999. And in 1995, the big welfare states Finland and Sweden, with total tax revenues around 50 per cent of GDP, were accepted as members of the EU. This development has contributed to a debate around the central questions analysed in this chapter: how are big, high-tax welfare states affected by institutional competition and increased international mobility of labour and capital? Are there any signs that we will see a race to the bottom among European welfare states in the near future? What is likely to happen in the future with the high-tax European welfare states? This chapter focuses on institutional competition between big welfare states, in the sense that most EU countries have big welfare states: the average tax rate in the EU-15 is around 42 per cent, and in the Nordic welfare states the figure is around 50 per cent.1 By institutional competition, I mean the fact that these welfare states compete for attractive production factors (such as highly educated labour), and also the fact that they may wish to avoid bad risks that may strain the welfare state (such as labour with high risks for being unable to work).2 Recently, empirical evidence points against the view that a race to the bottom has occurred or is likely in...

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