ISSN:1473-236X Cumulative Causation, Capital Mobility and the Welfare State

Within a small open economy with vertical linkages, welfare state policies trigger a virtuous circle of cumulative causation that will lead to higher levels of economic activity by improving the exploitation of potential aggregate scale economies. Capital mobility is typically found to reinforce this mechanism and the use of capital taxation to finance redistribution policies is not found to alter these conclusions. These results, consistent with the evidence that welfare states and tax burden have not significantly reduced in OECD countries, challenge the conventional wisdom that globalisation undermines governments ’ ability to pursue income redistribution. (94 words