An article from Pr. Krugman's blog leads me to an idea on the links between the welfare state and the economy's competitiveness. My assumption is, the more there is social redistribution the more there is an effect on exports. I'm thinking about two opposite main effects;
- Domestic markets partially fuelled by public transfers can absorb a part of the development costs of new products and allowing firms to offer relatively lower prices to exports.
- Firms turn mainly toward their domestic market because of higher average incomes (perhaps a price distortion effect) and mobilize fewer efforts to export (a kind of "export gap").
So to explore this hunch I've used the same OECD Factbook database than Pr. Krugman and tried to see what data can tell to me.
The two variables are expressed as a share of GDP in 30 OECD's countries in 2007, last available year (and before the economic financial and debt crises may have modified redistribution pattern and exports' demand).
Here are some points I've noticed:
- There are 12 points above the linear regression curve and four of them are very close to it.
- There is no country with less than 16% of Public Social Expenditures (PSE) which generate exports bigger than 50% of GDP.
Most of countries of this panel generate exports smaller than 40% of their GDP and spend between 15% to 25% of GDP in PSE (OECD's countries average is 19.5% ().
- Among the five bigger amounts of PSE spent, only one country (France) has exports lesser than 50% GDP. There are just 8 countries with more than 50% of country's GDP in exports; half of them have more than 25% of PSE.
I conclude to the presence of threshold effects in the PSE/Exports dynamic.
It seems that a country needs at least 15% of PSE to have good exports' performances(more than 40% of GDP, OECD weighted average exports share of GDP is 26.7% in 2007) . An upper limit of PSE is not so evident to define as the dispersed top 5 exporter's countries show it to us.
Of course there are more complex effects, for example, firms benefitting (directly or via individual customers) of an important share of PSE represent a creditworthy market (backed by public expenditures) for other firms that can sell them goods at a slightly more expensive price.
To better understand the PSE/X interactions, I've ranked OECD's countries according to the gap between GDP's s share of exports and the one of social expenditures (X-PSE). And then I colored in red countries with a current account deficit.
You can note the pretty clean distribution of the countries' panel in 2 groups. 3 exceptions remain which are Hungary, Canada and Japan. Each of them may have specificities which explain the particular result of the economy. For example Japan is an export oriented economy (confirmed by the trade surplus) but with very big issues on wages and prices stagnation, housing's prices still dissociated from the economic trend (in terms of households income which leads to more public redistribution incomes) and a pretty generous retirement system.
I can however conclude that countries with a small gap between exports and social expenses are less likely to generate a trade surplus.
Anyway, threshold's borders are not sharp. Trade performances seem to be mixed around a gap of 20 point between exports and PSE (Poland +20.97 and Finland +21.1). I was aware that the gap would not explain all trade performances. The encountered difficulties with various results in the threshold area are making obvious the fact that complex interactions influence the net trade of an economy. For example, USA and Ireland spend the same GDP's share of public social expenditures  and each of these countries is the extreme point of the graph, even in the cloud points' chart. Obviously this is just a first step which need further analysis but from my point of view, there are too many and too clean correlations to let the coincidence explain these results.
I will explore other potential impact of PSE in OECD's countries in further posts.
Please feel free to comment.
Except for South Korea and Chile. OECD's countries not weighted average is 41.3% of GDP.
OECD's weighted average is 19.2% of GDP.
 USA 16.2%, Ireland 16.3%