Economic integration and public policies: a review of the empirical literature

This paper reviews the empirical literature on the impact of economic integration on the size and the composition of the public budget. From a theoretical perspective, a pessimistic view highlights that economic integration is a potential threat to the action of the public sector. An optimistic view, instead, emphasizes the beneficial effects of integration in stimulating efficiency-enhancing public policies. Despite some well established theoretical results, the empirical evidence on the topic is rather controversial. Some studies support the hypothesis that taxes and public spending may increase to compensate losers from a more open economic environment. Other studies support the opposite idea that the public sector retrenches in reaction to increasing difficulties to tax and spend with mobile tax bases. Finally, a large set of studies is simply inconclusive.