globalisation essay economics

Effects of Economic Globalization

Globalization has led to increases in standards of living around the world, but not all of its effects are positive for everyone.

Social Studies, Economics, World History

Bangladesh Garment Workers

The garment industry in Bangladesh makes clothes that are then shipped out across the world. It employs as many as four million people, but the average worker earns less in a month than a U.S. worker earns in a day.

Photograph by Mushfiqul Alam

Put simply, globalization is the connection of different parts of the world. In economics, globalization can be defined as the process in which businesses, organizations, and countries begin operating on an international scale. Globalization is most often used in an economic context, but it also affects and is affected by politics and culture. In general, globalization has been shown to increase the standard of living in developing countries, but some analysts warn that globalization can have a negative effect on local or emerging economies and individual workers. A Historical View Globalization is not new. Since the start of civilization, people have traded goods with their neighbors. As cultures advanced, they were able to travel farther afield to trade their own goods for desirable products found elsewhere. The Silk Road, an ancient network of trade routes used between Europe, North Africa, East Africa, Central Asia, South Asia, and the Far East, is an example of early globalization. For more than 1,500 years, Europeans traded glass and manufactured goods for Chinese silk and spices, contributing to a global economy in which both Europe and Asia became accustomed to goods from far away. Following the European exploration of the New World, globalization occurred on a grand scale; the widespread transfer of plants, animals, foods, cultures, and ideas became known as the Columbian Exchange. The Triangular Trade network in which ships carried manufactured goods from Europe to Africa, enslaved Africans to the Americas, and raw materials back to Europe is another example of globalization. The resulting spread of slavery demonstrates that globalization can hurt people just as easily as it can connect people. The rate of globalization has increased in recent years, a result of rapid advancements in communication and transportation. Advances in communication enable businesses to identify opportunities for investment. At the same time, innovations in information technology enable immediate communication and the rapid transfer of financial assets across national borders. Improved fiscal policies within countries and international trade agreements between them also facilitate globalization. Political and economic stability facilitate globalization as well. The relative instability of many African nations is cited by experts as one of the reasons why Africa has not benefited from globalization as much as countries in Asia and Latin America. Benefits of Globalization Globalization provides businesses with a competitive advantage by allowing them to source raw materials where they are inexpensive. Globalization also gives organizations the opportunity to take advantage of lower labor costs in developing countries, while leveraging the technical expertise and experience of more developed economies. With globalization, different parts of a product may be made in different regions of the world. Globalization has long been used by the automotive industry , for instance, where different parts of a car may be manufactured in different countries. Businesses in several different countries may be involved in producing even seemingly simple products such as cotton T-shirts. Globalization affects services, too. Many businesses located in the United States have outsourced their call centers or information technology services to companies in India. As part of the North American Free Trade Agreement (NAFTA), U.S. automobile companies relocated their operations to Mexico, where labor costs are lower. The result is more jobs in countries where jobs are needed, which can have a positive effect on the national economy and result in a higher standard of living. China is a prime example of a country that has benefited immensely from globalization. Another example is Vietnam, where globalization has contributed to an increase in the prices for rice, lifting many poor rice farmers out of poverty. As the standard of living increased, more children of poor families left work and attended school. Consumers benefit also. In general, globalization decreases the cost of manufacturing . This means that companies can offer goods at a lower price to consumers. The average cost of goods is a key aspect that contributes to increases in the standard of living. Consumers also have access to a wider variety of goods. In some cases, this may contribute to improved health by enabling a more varied and healthier diet; in others, it is blamed for increases in unhealthy food consumption and diabetes. Downsides Not everything about globalization is beneficial. Any change has winners and losers, and the people living in communities that had been dependent on jobs outsourced elsewhere often suffer. Effectively, this means that workers in the developed world must compete with lower-cost markets for jobs; unions and workers may be unable to defend against the threat of corporations that offer the alternative between lower pay or losing jobs to a supplier in a less expensive labor market. The situation is more complex in the developing world, where economies are undergoing rapid change. Indeed, the working conditions of people at some points in the supply chain are deplorable. The garment industry in Bangladesh, for instance, employs an estimated four million people, but the average worker earns less in a month than a U.S. worker earns in a day. In 2013, a textile factory building collapsed, killing more than 1,100 workers. Critics also suggest that employment opportunities for children in poor countries may increase negative impacts of child labor and lure children of poor families away from school. In general, critics blame the pressures of globalization for encouraging an environment that exploits workers in countries that do not offer sufficient protections. Studies also suggest that globalization may contribute to income disparity and inequality between the more educated and less educated members of a society. This means that unskilled workers may be affected by declining wages, which are under constant pressure from globalization. Into the Future Regardless of the downsides, globalization is here to stay. The result is a smaller, more connected world. Socially, globalization has facilitated the exchange of ideas and cultures, contributing to a world view in which people are more open and tolerant of one another.

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Globalisation and Inequality (Revision Essay Plan)

Last updated 1 May 2018

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Here is an answer to the following question: "Evaluate the extent to which globalisation inevitably leads to a rise in income inequality in one or more countries of your choice."

Essay On Globalisation And Inequality (Download a pdf version of this essay)

Globalisation is a process through which countries, businesses and people become more inter-connected and inter-dependent via an increase in trade in goods and services, cross-border investment and labour migration from one nation to another. Income and wealth inequality can be measured in various ways including the Gini coefficient and the Palma Ratio. The latter is a good indicator of the depth of inequality since it tracks incomes flowing to the top ten percent of households and divides by the incomes for the bottom forty percent. In South Africa, that figure is 7.1 whereas for Germany the Palma Ratio is just over 3.

One way globalisation can increase inequality is through the effects of increasing specialisation and trade. A rise in trade-to-GDP ratios signifies an increase in the volume and value of trade between countries and regions. Although trade based on comparative advantage has the potential to stimulate economic growth and lift per capita incomes, it can also lead to a rise in relative poverty. For example, if a country can now import cheaper steel from elsewhere, then there will be a contraction in domestic supply and a fall in employment and real incomes in that industry. This can lead to higher rates of structural unemployment and a decline in real living standards. Real wages come under downward pressure and inequality can increase. We see this in regions of the UK for example where de-industrialisation has taken place leading to much higher rates of long-term unemployment and a worsening of economic and social deprivation. In the United States, the share of national income claimed by the top 1% of the population climbed from 11% in 1980 to 20% in 2014, compared to just 13% for the entire bottom half of the population. 

However, one could argue that the benefits of globalisation can be used to offset this. If trade generates faster GDP growth, then the government will see an increase in tax revenues which might then be used to fund capital investment in public goods and merit goods and services including finance for re-training programmes and improvements to infrastructure in economically-depressed areas. Much depends on whether a government has sufficient resources and political will to implement an active regional and industrial policy to improve employment prospects for those negatively affected by globalisation.

Globalisation might also increase inequality because it usually leads to higher profits for multinational corporations such as Apple, Google and Facebook which feed into generous pay-outs for senior executives and increasing dividends for shareholders. Multinationals matter - they generate 10 percent of the world’s annual GDP and more than 50 percent of the value of world trade. One of the hot political and economic issues of the age has been the ability of businesses operating in more than one country (a transitional company) to use shadow pricing and other forms of legal tax avoidance to reduce their liability to pay tax and thereby increase the return to those with an equity stake. Because of tax avoidance, national governments do not generate the revenues needed to pay for public services and welfare systems - both of which can have a progressive effect on the final distribution of income. The UK government has estimated that, in 2017, multinational businesses managed to avoid paying nearly £6 billion in tax revenues. Oxfam estimates that tax avoidance costs developing countries $170 billion a year whereas $100 billion could provide an education for 124 million children and pay for healthcare services that could prevent the deaths of at least six million children annually.

In evaluation, there are steps that governments can take to increase their tax take. This can range from introducing country-by-country financial reporting so that it becomes clearer where the profits are being made, to introducing restrictions on interest rates charges from one subsidiary of a TNC to another. There are also moves to reduce the amount of intra-company loans made by TNCs which can shift profits to countries with lower corporation tax. In the US, they have introduced a one-off tax on the off-shore cash held by US businesses after it was found that US companies had built up almost $2.6tn in untaxed cash held offshore. Developing countries can also improve their governance so that multi-nationals investing pay a proper rent for the ownership of land and are less vulnerable to corruption from elected officials.

A third way in which globalisation can create increased inequality is by increasing the demand for and returns to higher-skilled work and lowering the expected earnings of people in relatively low-skill and low-knowledge occupations. One of the driving forces of foreign direct investment is that resources tend to flow where the unit cost of production is lowest. This is the case with light manufacturing for example where a lot of investment is flowing to countries such as Vietnam, Bangladesh, Ethiopia and Indonesia. FDI creates more formal employment and incomes for people employed in these sectors but perhaps at the expense of similar workers in higher-income countries whose skills are no longer in such demand. They are therefore at greater risk of unemployment and persistent relative poverty; many have been pushed into poorly paid jobs in services linked to the Gig Economy. People affected often feel that they have been left behind by the forces of globalisation and their votes may have been a factor behind the Brexit outcome and the election of Trump who has adopted a “protectionist approach” to trade policy since becoming President.

That said, it could be argued that it is technological progress – which has raised demand for skilled workers relative to unskilled workers – rather than trade and globalisation which has had most impact on these workers. Often the people who lose jobs as a result of technology are not the ones who get the new ones and the result can be hysteresis in the labour market with deep pockets of long-term unemployment and hit relative poverty. Automation threatens many jobs - ranging from fork-lift drivers to workers in farming and production lines. The onus is on government to implement and fund the right supply-side policies designed to improve the human capital of people affected including lifting investment in human capital and entrepreneurship.

Final reasoned comment

In conclusion, it is not inevitable that globalisation increases inequality of income and wealth. We have seen big changes in the workforce and in earnings between different groups but in my view, these are not solely the consequence of globalisation. One paradox of globalisation is that it has probably reduced inequality between countries but increased it within nations. What matters is how governments respond to the challenge of improving access to knowledge and skills and in making sure that the benefits from cross-border trade and investment provide enough tax revenues to pay for high quality and affordable public services. In this way, more of the positives from globalisation can be turned into a ‘public good’ rather than a ‘public bad’.

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Open Access

Peer-reviewed

Research Article

Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities

* E-mail: [email protected]

Affiliations Faculty of Management, Universiti Teknologi Malaysia (UTM), Johor, Malaysia, Department of Management, Mobarakeh Branch, Islamic Azad University, Isfahan, Iran

Affiliation Applied Statistics Department, Economics and Administration Faculty, University of Malaya, Kuala Lumpur, Malaysia

• Parisa Samimi, 
• Hashem Salarzadeh Jenatabadi

• Published: April 10, 2014
• https://doi.org/10.1371/journal.pone.0087824
• Reader Comments

This study was carried out to investigate the effect of economic globalization on economic growth in OIC countries. Furthermore, the study examined the effect of complementary policies on the growth effect of globalization. It also investigated whether the growth effect of globalization depends on the income level of countries. Utilizing the generalized method of moments (GMM) estimator within the framework of a dynamic panel data approach, we provide evidence which suggests that economic globalization has statistically significant impact on economic growth in OIC countries. The results indicate that this positive effect is increased in the countries with better-educated workers and well-developed financial systems. Our finding shows that the effect of economic globalization also depends on the country’s level of income. High and middle-income countries benefit from globalization whereas low-income countries do not gain from it. In fact, the countries should receive the appropriate income level to be benefited from globalization. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

Citation: Samimi P, Jenatabadi HS (2014) Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities. PLoS ONE 9(4): e87824. https://doi.org/10.1371/journal.pone.0087824

Editor: Rodrigo Huerta-Quintanilla, Cinvestav-Merida, Mexico

Received: November 5, 2013; Accepted: January 2, 2014; Published: April 10, 2014

Copyright: © 2014 Samimi, Jenatabadi. This is an open-access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Funding: The study is supported by the Ministry of Higher Education of Malaysia, Malaysian International Scholarship (MIS). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

Competing interests: The authors have declared that no competing interests exist.

Introduction

Globalization, as a complicated process, is not a new phenomenon and our world has experienced its effects on different aspects of lives such as economical, social, environmental and political from many years ago [1] – [4] . Economic globalization includes flows of goods and services across borders, international capital flows, reduction in tariffs and trade barriers, immigration, and the spread of technology, and knowledge beyond borders. It is source of much debate and conflict like any source of great power.

The broad effects of globalization on different aspects of life grab a great deal of attention over the past three decades. As countries, especially developing countries are speeding up their openness in recent years the concern about globalization and its different effects on economic growth, poverty, inequality, environment and cultural dominance are increased. As a significant subset of the developing world, Organization of Islamic Cooperation (OIC) countries are also faced by opportunities and costs of globalization. Figure 1 shows the upward trend of economic globalization among different income group of OIC countries.

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https://doi.org/10.1371/journal.pone.0087824.g001

Although OICs are rich in natural resources, these resources were not being used efficiently. It seems that finding new ways to use the OICs economic capacity more efficiently are important and necessary for them to improve their economic situation in the world. Among the areas where globalization is thought, the link between economic growth and globalization has been become focus of attention by many researchers. Improving economic growth is the aim of policy makers as it shows the success of nations. Due to the increasing trend of globalization, finding the effect of globalization on economic growth is prominent.

The net effect of globalization on economic growth remains puzzling since previous empirical analysis did not support the existent of a systematic positive or negative impact of globalization on growth. Most of these studies suffer from econometrics shortcoming, narrow definition of globalization and small number of countries. The effect of economic globalization on the economic growth in OICs is also ambiguous. Existing empirical studies have not indicated the positive or negative impact of globalization in OICs. The relationship between economic globalization and economic growth is important especially for economic policies.

Recently, researchers have claimed that the growth effects of globalization depend on the economic structure of the countries during the process of globalization. The impact of globalization on economic growth of countries also could be changed by the set of complementary policies such as improvement in human capital and financial system. In fact, globalization by itself does not increase or decrease economic growth. The effect of complementary policies is very important as it helps countries to be successful in globalization process.

In this paper, we examine the relationship between economic globalization and growth in panel of selected OIC countries over the period 1980–2008. Furthermore, we would explore whether the growth effects of economic globalization depend on the set of complementary policies and income level of OIC countries.

The paper is organized as follows. The next section consists of a review of relevant studies on the impact of globalization on growth. Afterward the model specification is described. It is followed by the methodology of this study as well as the data sets that are utilized in the estimation of the model and the empirical strategy. Then, the econometric results are reported and discussed. The last section summarizes and concludes the paper with important issues on policy implications.

Literature Review

The relationship between globalization and growth is a heated and highly debated topic on the growth and development literature. Yet, this issue is far from being resolved. Theoretical growth studies report at best a contradictory and inconclusive discussion on the relationship between globalization and growth. Some of the studies found positive the effect of globalization on growth through effective allocation of domestic resources, diffusion of technology, improvement in factor productivity and augmentation of capital [5] , [6] . In contrast, others argued that globalization has harmful effect on growth in countries with weak institutions and political instability and in countries, which specialized in ineffective activities in the process of globalization [5] , [7] , [8] .

Given the conflicting theoretical views, many studies have been empirically examined the impact of the globalization on economic growth in developed and developing countries. Generally, the literature on the globalization-economic growth nexus provides at least three schools of thought. First, many studies support the idea that globalization accentuates economic growth [9] – [19] . Pioneering early studies include Dollar [9] , Sachs et al. [15] and Edwards [11] , who examined the impact of trade openness by using different index on economic growth. The findings of these studies implied that openness is associated with more rapid growth.

In 2006, Dreher introduced a new comprehensive index of globalization, KOF, to examine the impact of globalization on growth in an unbalanced dynamic panel of 123 countries between 1970 and 2000. The overall result showed that globalization promotes economic growth. The economic and social dimensions have positive impact on growth whereas political dimension has no effect on growth. The robustness of the results of Dreher [19] is approved by Rao and Vadlamannati [20] which use KOF and examine its impact on growth rate of 21 African countries during 1970–2005. The positive effect of globalization on economic growth is also confirmed by the extreme bounds analysis. The result indicated that the positive effect of globalization on growth is larger than the effect of investment on growth.

The second school of thought, which supported by some scholars such as Alesina et al. [21] , Rodrik [22] and Rodriguez and Rodrik [23] , has been more reserve in supporting the globalization-led growth nexus. Rodriguez and Rodrik [23] challenged the robustness of Dollar (1992), Sachs, Warner et al. (1995) and Edwards [11] studies. They believed that weak evidence support the idea of positive relationship between openness and growth. They mentioned the lack of control for some prominent growth indicators as well as using incomprehensive trade openness index as shortcomings of these works. Warner [24] refuted the results of Rodriguez and Rodrik (2000). He mentioned that Rodriguez and Rodrik (2000) used an uncommon index to measure trade restriction (tariffs revenues divided by imports). Warner (2003) explained that they ignored all other barriers on trade and suggested using only the tariffs and quotas of textbook trade policy to measure trade restriction in countries.

Krugman [25] strongly disagreed with the argument that international financial integration is a major engine of economic development. This is because capital is not an important factor to increase economic development and the large flows of capital from rich to poor countries have never occurred. Therefore, developing countries are unlikely to increase economic growth through financial openness. Levine [26] was more optimistic about the impact of financial liberalization than Krugman. He concluded, based on theory and empirical evidences, that the domestic financial system has a prominent effect on economic growth through boosting total factor productivity. The factors that improve the functioning of domestic financial markets and banks like financial integration can stimulate improvements in resource allocation and boost economic growth.

The third school of thoughts covers the studies that found nonlinear relationship between globalization and growth with emphasis on the effect of complementary policies. Borensztein, De Gregorio et al. (1998) investigated the impact of FDI on economic growth in a cross-country framework by developing a model of endogenous growth to examine the role of FDI in the economic growth in developing countries. They found that FDI, which is measured by the fraction of products produced by foreign firms in the total number of products, reduces the costs of introducing new varieties of capital goods, thus increasing the rate at which new capital goods are introduced. The results showed a strong complementary effect between stock of human capital and FDI to enhance economic growth. They interpreted this finding with the observation that the advanced technology, brought by FDI, increases the growth rate of host economy when the country has sufficient level of human capital. In this situation, the FDI is more productive than domestic investment.

Calderón and Poggio [27] examined the structural factors that may have impact on growth effect of trade openness. The growth benefits of rising trade openness are conditional on the level of progress in structural areas including education, innovation, infrastructure, institutions, the regulatory framework, and financial development. Indeed, they found that the lack of progress in these areas could restrict the potential benefits of trade openness. Chang et al. [28] found that the growth effects of openness may be significantly improved when the investment in human capital is stronger, financial markets are deeper, price inflation is lower, and public infrastructure is more readily available. Gu and Dong [29] emphasized that the harmful or useful growth effect of financial globalization heavily depends on the level of financial development of economies. In fact, if financial openness happens without any improvement in the financial system of countries, growth will replace by volatility.

However, the review of the empirical literature indicates that the impact of the economic globalization on economic growth is influenced by sample, econometric techniques, period specifications, observed and unobserved country-specific effects. Most of the literature in the field of globalization, concentrates on the effect of trade or foreign capital volume (de facto indices) on economic growth. The problem is that de facto indices do not proportionally capture trade and financial globalization policies. The rate of protections and tariff need to be accounted since they are policy based variables, capturing the severity of trade restrictions in a country. Therefore, globalization index should contain trade and capital restrictions as well as trade and capital volume. Thus, this paper avoids this problem by using a comprehensive index which called KOF [30] . The economic dimension of this index captures the volume and restriction of trade and capital flow of countries.

Despite the numerous studies, the effect of economic globalization on economic growth in OIC is still scarce. The results of recent studies on the effect of globalization in OICs are not significant, as they have not examined the impact of globalization by empirical model such as Zeinelabdin [31] and Dabour [32] . Those that used empirical model, investigated the effect of globalization for one country such as Ates [33] and Oyvat [34] , or did it for some OIC members in different groups such as East Asia by Guillaumin [35] or as group of developing countries by Haddad et al. [36] and Warner [24] . Therefore, the aim of this study is filling the gap in research devoted solely to investigate the effects of economic globalization on growth in selected OICs. In addition, the study will consider the impact of complimentary polices on the growth effects of globalization in selected OIC countries.

Model Specification

Methodology and Data

This paper applies the generalized method of moments (GMM) panel estimator first suggested by Anderson and Hsiao [38] and later developed further by Arellano and Bond [39] . This flexible method requires only weak assumption that makes it one of the most widely used econometric techniques especially in growth studies. The dynamic GMM procedure is as follow: first, to eliminate the individual effect form dynamic growth model, the method takes differences. Then, it instruments the right hand side variables by using their lagged values. The last step is to eliminate the inconsistency arising from the endogeneity of the explanatory variables.

The consistency of the GMM estimator depends on two specification tests. The first is a Sargan test of over-identifying restrictions, which tests the overall validity of the instruments. Failure to reject the null hypothesis gives support to the model. The second test examines the null hypothesis that the error term is not serially correlated.

The GMM can be applied in one- or two-step variants. The one-step estimators use weighting matrices that are independent of estimated parameters, whereas the two-step GMM estimator uses the so-called optimal weighting matrices in which the moment conditions are weighted by a consistent estimate of their covariance matrix. However, the use of the two-step estimator in small samples, as in our study, has problem derived from proliferation of instruments. Furthermore, the estimated standard errors of the two-step GMM estimator tend to be small. Consequently, this paper employs the one-step GMM estimator.

In the specification, year dummies are used as instrument variable because other regressors are not strictly exogenous. The maximum lags length of independent variable which used as instrument is 2 to select the optimal lag, the AR(1) and AR(2) statistics are employed. There is convincing evidence that too many moment conditions introduce bias while increasing efficiency. It is, therefore, suggested that a subset of these moment conditions can be used to take advantage of the trade-off between the reduction in bias and the loss in efficiency. We restrict the moment conditions to a maximum of two lags on the dependent variable.

Data and Empirical Strategy

We estimated Eq. (1) using the GMM estimator based on a panel of 33 OIC countries. Table S1 in File S1 lists the countries and their income groups in the sample. The choice of countries selected for this study is primarily dictated by availability of reliable data over the sample period among all OIC countries. The panel covers the period 1980–2008 and is unbalanced. Following [40] , we use annual data in order to maximize sample size and to identify the parameters of interest more precisely. In fact, averaging out data removes useful variation from the data, which could help to identify the parameters of interest with more precision.

The dependent variable in our sample is logged per capita real GDP, using the purchasing power parity (PPP) exchange rates and is obtained from the Penn World Table (PWT 7.0). The economic dimension of KOF index is derived from Dreher et al. [41] . We use some other variables, along with economic globalization to control other factors influenced economic growth. Table S2 in File S2 shows the variables, their proxies and source that they obtain.

We relied on the three main approaches to capture the effects of economic globalization on economic growth in OIC countries. The first one is the baseline specification (Eq. (1)) which estimates the effect of economic globalization on economic growth.

The second approach is to examine whether the effect of globalization on growth depends on the complementary policies in the form of level of human capital and financial development. To test, the interactions of economic globalization and financial development (KOF*FD) and economic globalization and human capital (KOF*HCS) are included as additional explanatory variables, apart from the standard variables used in the growth equation. The KOF, HCS and FD are included in the model individually as well for two reasons. First, the significance of the interaction term may be the result of the omission of these variables by themselves. Thus, in that way, it can be tested jointly whether these variables affect growth by themselves or through the interaction term. Second, to ensure that the interaction term did not proxy for KOF, HCS or FD, these variables were included in the regression independently.

In the third approach, in order to study the role of income level of countries on the growth effect of globalization, the countries are split based on income level. Accordingly, countries were classified into three groups: high-income countries (3), middle-income (21) and low-income (9) countries. Next, dummy variables were created for high-income (Dum 3), middle-income (Dum 2) and low-income (Dum 1) groups. Then interaction terms were created for dummy variables and KOF. These interactions will be added to the baseline specification.

Findings and Discussion

This section presents the empirical results of three approaches, based on the GMM -dynamic panel data; in Tables 1 – 3 . Table 1 presents a preliminary analysis on the effects of economic globalization on growth. Table 2 displays coefficient estimates obtained from the baseline specification, which used added two interaction terms of economic globalization and financial development and economic globalization and human capital. Table 3 reports the coefficients estimate from a specification that uses dummies to capture the impact of income level of OIC countries on the growth effect of globalization.

https://doi.org/10.1371/journal.pone.0087824.t001

https://doi.org/10.1371/journal.pone.0087824.t002

https://doi.org/10.1371/journal.pone.0087824.t003

The results in Table 1 indicate that economic globalization has positive impact on growth and the coefficient is significant at 1 percent level. The positive effect is consistent with the bulk of the existing empirical literature that support beneficial effect of globalization on economic growth [9] , [11] , [13] , [19] , [42] , [43] .

According to the theoretical literature, globalization enhances economic growth by allocating resources more efficiently as OIC countries that can be specialized in activities with comparative advantages. By increasing the size of markets through globalization, these countries can be benefited from economic of scale, lower cost of research and knowledge spillovers. It also augments capital in OICs as they provide a higher return to capital. It has raised productivity and innovation, supported the spread of knowledge and new technologies as the important factors in the process of development. The results also indicate that growth is enhanced by lower level of government expenditure, lower level of inflation, higher level of human capital, deeper financial development, more domestic investment and better institutions.

Table 2 represents that the coefficients on the interaction between the KOF, HCS and FD are statistically significant at 1% level and with the positive sign. The findings indicate that economic globalization not only directly promotes growth but also indirectly does via complementary reforms. On the other hand, the positive effect of economic globalization can be significantly enhanced if some complementary reforms in terms of human capital and financial development are undertaken.

In fact, the implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. However, countries with higher level of human capital can be better and faster to imitate and implement the transferred technologies. Besides, the financial openness brings along the knowledge and managerial for implementing the new technology. It can be helpful in improving the level of human capital in host countries. Moreover, the strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in developing countries. Overall, with higher level of human capital and stronger financial systems, the globalized countries benefit from the growth effect of globalization. The obtained results supported by previous studies in relative to financial and trade globalization such as [5] , [27] , [44] , [45] .

Table (3 ) shows that the estimated coefficients on KOF*dum3 and KOF*dum2 are statistically significant at the 5% level with positive sign. The KOF*dum1 is statistically significant with negative sign. It means that increase in economic globalization in high and middle-income countries boost economic growth but this effect is diverse for low-income countries. The reason might be related to economic structure of these countries that are not received to the initial condition necessary to be benefited from globalization. In fact, countries should be received to the appropriate income level to be benefited by globalization.

The diagnostic tests in tables 1 – 3 show that the estimated equation is free from simultaneity bias and second-order correlation. The results of Sargan test accept the null hypothesis that supports the validity of the instrument use in dynamic GMM.

Conclusions and Implications

Numerous researchers have investigated the impact of economic globalization on economic growth. Unfortunately, theoretical and the empirical literature have produced conflicting conclusions that need more investigation. The current study shed light on the growth effect of globalization by using a comprehensive index for globalization and applying a robust econometrics technique. Specifically, this paper assesses whether the growth effects of globalization depend on the complementary polices as well as income level of OIC countries.

Using a panel data of OIC countries over the 1980–2008 period, we draw three important conclusions from the empirical analysis. First, the coefficient measuring the effect of the economic globalization on growth was positive and significant, indicating that economic globalization affects economic growth of OIC countries in a positive way. Second, the positive effect of globalization on growth is increased in countries with higher level of human capital and deeper financial development. Finally, economic globalization does affect growth, whether the effect is beneficial depends on the level of income of each group. It means that economies should have some initial condition to be benefited from the positive effects of globalization. The results explain why some countries have been successful in globalizing world and others not.

The findings of our study suggest that public policies designed to integrate to the world might are not optimal for economic growth by itself. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

The policy implications of this study are relatively straightforward. Integrating to the global economy is only one part of the story. The other is how to benefits more from globalization. In this respect, the responsibility of policymakers is to improve the level of educated workers and strength of financial systems to get more opportunities from globalization. These economic policies are important not only in their own right, but also in helping developing countries to derive the benefits of globalization.

However, implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. In fact, countries with higher level of human capital can better and faster imitate and implement the transferred technologies. The higher level of human capital and certain skill of human capital determine whether technology is successfully absorbed across countries. This shows the importance of human capital in the success of countries in the globalizing world.

Financial openness in the form of FDI brings along the knowledge and managerial for implementing the new technology. It can be helpful in upgrading the level of human capital in host countries. Moreover, strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in OICs.

In addition, the results show that economic globalization does affect growth, whether the effect is beneficial depends on the level of income of countries. High and middle income countries benefit from globalization whereas low-income countries do not gain from it. As Birdsall [46] mentioned globalization is fundamentally asymmetric for poor countries, because their economic structure and markets are asymmetric. So, the risks of globalization hurt the poor more. The structure of the export of low-income countries heavily depends on primary commodity and natural resource which make them vulnerable to the global shocks.

The major research limitation of this study was the failure to collect data for all OIC countries. Therefore future research for all OIC countries would shed light on the relationship between economic globalization and economic growth.

Supporting Information

Sample of Countries.

https://doi.org/10.1371/journal.pone.0087824.s001

The Name and Definition of Indicators.

https://doi.org/10.1371/journal.pone.0087824.s002

Author Contributions

Conceived and designed the experiments: PS. Performed the experiments: PS. Analyzed the data: PS. Contributed reagents/materials/analysis tools: PS HSJ. Wrote the paper: PS HSJ.

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What is globalisation?

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Globalisation

Characteristics of globalisation.

In economics, __globalisation __means the increased interdependence between the economies of individual countries and different regions of the world. This means that economic events in one part of the world are likely to have effects everywhere else. For instance, the financial crisis in 2007-8 soon spread from the USA to Europe and many other regions. There are four principal characteristics of globalisation:

• Free trade in goods and services – In recent decades there has been a fall in trade barriers , especially __tariffs __(taxes on imports). This makes it much easier for goods to be bought and sold across national frontiers.
• Free movement of labour – It is generally easier for people to choose to live and work in other countries than in the past. This is particularly true of the European Union, where the freedom to live, work or study in another EU country is a fundamental right.
• Free movement of capital – This refers to the freedom of businesses in one country to invest in another country. It includes direct investment (buying a foreign company or setting up a new one abroad) and indirect investment (buying shares in foreign companies or lending abroad)
• Free transfer of technology and knowledge – Companies can license the use of their technology to companies abroad or employ their own technological expertise in factories they own abroad. Gradually this leads to the more widespread knowledge and use of technology around the globe. For instance, China is now a major player in telecoms and digital technologies, with its own successful companies; it is no longer just a place for companies like Apple to assemble their products.

Causes of Globalisation

International trade and movement of people across the world has been going on for thousands of years, but the trend towards a more integrated world economy has greatly accelerated in recent decades. The main causes of globalisation are:

Falling trade barriers - Since the end of World War II in 1945, bodies such as the World Trade Organisation (WTO), the International Monetary Fund (IMF) and the World Bank have sought to reduce tariffs and other forms of barriers to free trade (see notes on 4.1.5 and 4.1.6). These organisations have also worked to help reduce barriers to the free movement of capital, making it easier for firms to invest abroad.

Emerging market economies – Countries like China, Brazil and India have emerged as major economies in the last 30 years and are now important producer and consumer nations. China is now the second biggest economy in the world, and will soon overtake the USA, currently in first place. These countries are important markets for American, European and Japanese companies, and also as suppliers of manuactured goods and services. China is also now a major souce of investment funds for the USA and Europe. (For instance, Chinese banks are providing the funding for the construction of several new nuclear power stations in Britain).

Technological change – The huge progress in digital and communication technologies makes it far easier (and cheaper) to trade in financial services, and to share knowledge and information. Call centres can be located thousands of miles away. It is also easier for firms to outsource research and development abroad when information can be accessed via secure computer networks.

Improved transport – Investment in road, rail, air and sea transport has revolutionised the movement of goods and people around the world. Them most important single development is probably containerisation . This is the movement of goods in steel containers of a standardised size, which can be easily transferred from lorries to trains or ships, greatly reducing the storage and handling costs of moving goods.

Multinational (or transnational companies) – A multinational company is one that operates in more than one country. Many now have production facilities in different parts of the world. Some are also owned by shareholders in more than one country. Car manufacturers like VW sell all over the world, but also have factories in Europe, N and S America and China. Apple is based in California, where it does most of the design and marketing of its products, but manufacturing is outsourced to a partne firm in China. The growth of multinationals has resulted in very complex supply chains, so that very few products are made completely in just one country.

The Effect of Globalisation

Changing Prices – The prices of many goods has fallen as production has shifted to low cost countries. The manufacture of phones, computers and cameras for instance has shifted to countries like China, where wages are much lower than in Europe or America. Similarly, the production of clothes is now mainly in South east and South Asia. This has resulted in much lower prices of these goods.

Some goods, however have risen in price, due to the increased demand resulting from rising incomes in emerging market countries. Food is a good example. With higher incomes, people in China now consume much more meat, driving up prices all over the world.

More choice – Increased international trade means consumers have a wider choice of goods and services from suppliers all over the world. The range of foods in supermarkets is a good example; we can now get almost any kind of food at any time of the year and no longer have to eat what is seasonally available locally.

Lower costs – Firms can now source materials and components from all over the world, finding the cheapest sppliers. Multinationals are also able to relocate production to low wage countries. Alternatively they may outsource the manufacturing or other activities such as customer service calls to countries such as India.

Increased interdependence – Globalisation has produced increasingly complex supply chains. This carries risks as well as benefits; a strike, natural disaster or political instability in a country whose firms supply businesses overseas can cause serious disruption for its customers. Equally, firms that depend on overseas markets for their customers may be adversely affected by events abroad over which they have no control. For instance the german car industry was badly affected by the financial crisis in the USA and Europe in 2007/8.

Tax avoidance – Multinationals are very good at exploiting loopholes to minimise their tax liabilities. Transfer pricing is one example. Suppose a firm produces components in country A which it then ships to country B, where they are assembled into a inished product.

Suppose that in country A profits are taxed at 30%, but only at 15% in country B. The firm can minimise its overall tax bill by ‘selling’ the components from its plant in country A to the plant in country B at a very low price. This means the plant in country B makes little profit (where tax is high), but a big profit in country B (where tax is low).

A well known online retailer (beginning with ‘A’) routes all its sales in the U.K. to an office in Ireland, where profits are taxed at a lower rate. The U.K government loses a lot of tax revenue as a result.

Employment – Some manufacturing industries, such as textiles and electronics have largely moved out of Europe and north America, and are now mainly located in Asia. This has produced a problem of structural unemployment in the countries losing these jobs, but has created millions of jobs in developing countries.

__Wages __ – Low skilled workers in rich countries are more exposed to competition from low paid workers in developing countries. This is particularly true in manufacturing industries, where firms can shift production or outsource it overseas. This will tend to drive down wages of low skilled workers in rich countries, but raise wages in developing countries for workers who leave very low paid work in agriculture and migrate to the cities to work in factories. Highly skilled professionals and workers in service industries are less exposed to competion from workers abroad. For instance, very few people travel abroad for a haircut.

Migration __ – There has been a big increase in the numbers of __economic migrants , as barriers to movement have come down. Workers from developing countries may be able to earn much more in the rich world. The impact on workers in the host country is complicated. Where migrants compete directly with indigenous workers, it is likely to drive down wages. But in many cases they don’t. For instance, very few British people want to pick fruit for a living; this is largely done by migrants. Also, some migrants help to fill vacancies where there are skill shortages, and so raise overall productivity and wages. Others may start businesses and create employment.

The environment

Increased world trade – The greater movement of goods by sea and air has contributed to the increase in greenhouse gases and global warming

Relocation of polluting industries – Multinationals have tended to relocate or outsource their polluting activities to developing countries where there is less environmental regulation.

Governments

Tax revenues – Multinational companies are able to shift production from high tax to low tax countries and can also avoid taxes through transfer pricing. The shortfall in tax revenues means either less public spending or higher taxes from households and domestic companies that can’t avoid taxes in the same way. But where foreign investment and trade contribute to economic growth, a government will benefit from higher tax revenues.

__Corruption __ – This is particularly (but not uniquely) a problem in developing countries, where officials are prone to accepting bribes in return for awarding contracts or granting planning permission to multinationals. This can result in bad decisions which harm the economy. For instance a contract to build a power station may be awarded to the firm paying the biggest bribe rather than the one that can build the most reliable and efficient power station.

Individual Countries

Some countries, such as China have been transformed through globalisation. China is now the world’s biggest manufacturer and living standards have risen dramatically. Smaller and less powerful countries, particularly in Africa have not benefited to the same extent. They have attracted much less inward investment in manufacturing and instead continue to rely on minerals and agricultural products for their livelihoods. The ownership of these resources is increasingly in the hands of foreign owners. These primary products are then processed into high value added goods abroad.

Globalization and Economic Growth

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Definitions

Globalization, or the increased interconnectedness and interdependence of peoples, companies, institutions and countries. It is generally understood to include two inter-related elements: the opening of international borders to increasingly fast flows of goods, services, finance, investment, people, information, ideas and technology; and the changes in institutions and policies at national and international levels that facilitate or promote such flows (WHO 2020 ). Globalization process has impacts on economies, prosperity, development of societies, political systems, environment, and cultures around the world.

Economic globalization can be defined as the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, flow of international capital and wide and rapid spread of technologies. It reflects the continuing expansion and mutual...

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Demir, I., Canakci, M., Egri, T. (2021). Globalization and Economic Growth. In: Leal Filho, W., Azul, A.M., Brandli, L., Lange Salvia, A., Wall, T. (eds) Decent Work and Economic Growth. Encyclopedia of the UN Sustainable Development Goals. Springer, Cham. https://doi.org/10.1007/978-3-319-71058-7_90-1

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• Globalisation Essay

Essay on Globalisation

Globalization means the integration of economies and societies through the flow of information, ideas, technology, goods, services, capital, finance, and people. The true meaning of Globalization in a broad sense is connecting in all areas of human life. It is the process by which other companies or organizations enhance their international reputation or start operating internationally. 

Globalization began thousands of years ago when people and companies bought and sold in distant lands. In the Middle Ages, Central Asia was connected to China and Europe via the famous Silk Road. After World War II and the last two decades, governments of many countries have adopted free-market economies. They have greatly increased their own production potential and created countless new opportunities for international trade and investment. New routes and means to transport goods have been discovered, which has allowed the people to expand their business easily and efficiently. 

The government has reduced all trade barriers and concluded new international agreements to promote trade in goods, services and investment. This profitable action has created opportunities for international trade. In foreign markets, companies with these new opportunities set up new factories and establish production and marketing relationships with foreign partners. Hence, Globalization is defined as an international industrial and financial enterprise.

Overview of Globalization

Globalization means the assimilation of economics and societies through the flow of information, ideas, technologies, goods, services, capital, finance, and people. The real meaning of Globalization in a broad sense is connectivity in all aspects of human life. It is the process where the businesses or other organizations expand international authority or start operating on an international scale.

How the Existence of Globalization Came Into Being?

Globalization had started many thousands of years ago when people and corporations were buying and selling across lands at great distances. In the middle age, Central Asia connected with China and Europe through the famed Silk Road. After the Second World War II and during the last two decades, the governments of many countries have adopted free-market economic systems. They increased their own productive potential immensely and created innumerable new opportunities for international trade and investment.

The governments have reduced all barriers to commerce and established new international agreements to promote trade in goods, services and investments. These beneficial measures gave rise to opportunities for global trade. With these new opportunities in the foreign markets, corporations established new factories and started production and marketing alliances with foreign partners. Hence, Globalization is defined as an international industrial and financial business structure.

Advantages and Disadvantages

The frontiers of the state with increased confidence in the market economy and renewed policies in the private capital and resources, a process of structural adjustment spurred by the studies and with the support of the World Bank and other international organizations have started in many of the developing countries. Globalization has also brought in new opportunities to developing countries. Greater access to developed country markets and technology transfer has promised to improve their productivity and higher standards. 

At the same time, Globalization has also created challenges like growing inequality across and within nations, instability in the financial market and environmental deterioration. Globalization is a fascinating exhibition that can be understood as a global system of competition and connectivity. It has created tough competition among countries and global corporations.

Impact of Globalization in India

The British Colonial rule had destroyed the self-sufficient economy of India and left India to be the poorest Independent country. Our first Prime Minister gave preference to a mixed economy to boost the economic condition of the country. Public sectors were set up along with the private enterprises, but because of the socialistic model of the economy, the new strategy did not produce profitable results. Due to this, a number of public sectors became sick and the growth rates of production began to fall. 

During that time, the poverty of the people in India was increasing at an alarming rate and because of low domestic savings and acute balance of payment crisis, there was no adequate capital for investment. During that time of crisis, Prime Minister PV Narsimha Rao introduced the policy of liberalization, privatization to overcome the financial situation. 

India opened up to Globalization after the economic policy of 1991 came into force. Mounting debts and pressure from the International Monetary Fund drove the nation to go global. The process of Globalization has been an integral part of the recent economic growth of India. Globalization has played a very significant role in the growth of export, leading to the expansion of the job market in India. One of the major sectors of Globalization in India has been in the growth of outsourced IT and Business Process Outsourcing services. There has been an incredible increase in the number of skilled professionals in India employed by domestic and foreign companies to cater service to the customers globally, especially in the USA and Europe. 

There was not a doubt that Globalization in India brought a monumental change in the living standards of the people. People in India realized many benefits from Globalization. The establishment of multinational companies generating billions of jobs and access to umpteen numbers of brands and an increase in the forex reserves of the country took India to a higher platform globally. Despite this monumental change in the economy of the country, India also faced the challenges of severe competition from the foreign market and the domestic producers started fearing marginalization and pulverization because of the better quality products produced by the foreign producers.

Globalization had both desirable and undesirable consequences for India and the world. Even though it has accelerated progress in some countries, it has also widened the gap between the rich and the poor.

The impact of Globalization has been both positive and negative on the entire world, but we can surely hope for more advancement in the global economy due to this process.

FAQs on Globalisation Essay

1. How Did Globalization Help India to Improve the Economic Conditions?

Globalization generated umpteen employment opportunities for the people of India by establishing multinational companies. The policy of liberalization and privatization invited foreign traders to do business with India. This has increased the inflow of men, money, material, labor, technology, etc., from foreign countries to India. People have access to foreign brands and the living standards have improved drastically.

2. How is Globalization a Threat to Domestic Producers?

The domestic producers fear marginalization and pulverization because of the entry of foreign and better quality products.

3. What are the advantages and disadvantages of Globalization?

With increasing confidence in market economies and new policies on private capital and resources, many developing countries are beginning to adapt to developments with the support of the World Bank and other international institutions involved in research and development. Globalization also offers new opportunities for developing countries. Greater access to markets in developed countries and the transfer of technology will increase their productivity and demand.

At the same time, Globalization has created challenges such as increasing inequality between and within countries, instability of financial markets and environmental degradation. Globalization is an interesting exhibition that can also be seen as a system of competition and international relations. This has created intense competition between countries and international companies. 

4. What do you mean by Globalization?

Globalization means the integration of economies and societies through the flow of information, ideas, technology, goods, services, capital, finance, and people. The true meaning of Globalization in a broad sense is a connectedness in all areas of human life. It is the process by which other companies or organizations enhance their international reputation or start operating internationally. Globalization has its own benefits and drawbacks. We can learn more about Globalization and how to write an essay on it in detail on the Vedantu website, which has all the necessary materials that students need in order to write an essay on Globalization. 

5. How can Globalization help India improve its economic situation?

In our present times, Globalization has been a boon to many people as it not only allows companies to expand their business but also makes things accessible for everyone. In a simple sense, we can say that it helps in connecting people with the world. Globalization has created many job opportunities in India through the creation of multinational companies. Policies of liberalization and privatization have encouraged foreign traders to trade with India. This has increased the number of people, money, materials, labor, technology and so on—inflows from abroad to India. People have access to foreign brands and the standard of living has improved significantly.

6. How does Globalization threaten domestic producers?

Domestic producers are afraid of marginalization and due to the entry of foreign and better quality products into the market. Globalization can be associated with increasing income and wealth inequality. Many of the world's poorest people lack access to basic technologies and public goods. They are excluded from treatment. Some critics of globalization point to the loss of economic and cultural diversity as international multinational giants and brands dominate domestic markets in many countries. Globalization can hinder competition if international companies with dominant brands and high technology gain a foothold in key markets, be it telecommunications, the automotive industry, and so on.

7. What are the main industries that have grown tremendously because of Globalization?

The integration of national economies into the global economy is one of the most important developments of the last century. This process of integration, often referred to as Globalization, has manifested itself in a tremendous increase in cross-border trade.

The outsourcing business has grown exponentially due to Globalization. The main industries resulting from Globalization are trade and commerce. Automobile companies, clothing manufacturers and transportation, are the three main industries taken over as a result of Globalization.

Trade and Globalization

How did international trade and globalization change over time? What is the structure today? And what is its impact?

By: Esteban Ortiz-Ospina , Diana Beltekian and Max Roser

This page was first published in 2014 and last revised in April 2024.

On this topic page, you can find data, visualizations, and research on historical and current patterns of international trade, as well as discussions of their origins and effects.

Other research and writing on trade and globalization on Our World in Data:

• Is globalization an engine of economic development?
• Is trade a major driver of income inequality?

Related topics

Economic Growth

See all our data, visualizations, and writing on economic growth.

Economic Inequality

See all our data, visualizations, and writing on economic inequality.

See all our data, visualizations, and writing on migration.

See all interactive charts on Trade and Globalization ↓

Trade has changed the world economy

Trade has grown remarkably over the last century.

One of the most important developments of the last century has been the integration of national economies into a global economic system. This process of integration, often called globalization, has resulted in a remarkable growth in trade between countries.

The chart here shows the growth of world exports over more than the last two centuries. These estimates are in constant prices (i.e. have been adjusted to account for inflation) and are indexed at 1913 values.

The chart shows an extraordinary growth in international trade over the last couple of centuries: Exports today are more than 40 times larger than in 1913.

You can switch to a logarithmic scale under ‘Settings’. This will help you see that, over the long run, growth has roughly followed an exponential path.

The increase in trade has even outpaced economic growth

The chart above shows how much more trade we have today relative to a century ago. But what about trade relative to total economic output?

Over the last couple of centuries the world economy has experienced sustained positive economic growth , so looking at changes in trade relative to GDP offers another interesting perspective.

The next chart plots the value of traded goods relative to GDP (i.e. the value of merchandise trade as a share of global economic output).

Up to 1870, the sum of worldwide exports accounted for less than 10% of global output. Today, the value of exported goods around the world is around 25%. This shows that over the last hundred years, the growth in trade has even outpaced rapid economic growth.

Trade expanded in two waves

The first "wave of globalization" started in the 19th century, the second one after ww2.

The following visualization presents a compilation of available trade estimates, showing the evolution of world exports and imports as a share of global economic output .

This metric (the ratio of total trade, exports plus imports, to global GDP) is known as the “openness index”. The higher the index, the higher the influence of trade transactions on global economic activity. 1

As we can see, until 1800 there was a long period characterized by persistently low international trade – globally the index never exceeded 10% before 1800. This then changed over the course of the 19th century, when technological advances triggered a period of marked growth in world trade – the so-called “first wave of globalization”.

This first wave came to an end with the beginning of World War I, when the decline of liberalism and the rise of nationalism led to a slump in international trade. In the chart we see a large drop in the interwar period.

After World War II trade started growing again. This new – and ongoing – wave of globalization has seen international trade grow faster than ever before. Today the sum of exports and imports across nations amounts to more than 50% of the value of total global output.

Before the first wave of globalization, trade was driven mostly by colonialism

Over the early modern period, transoceanic flows of goods between empires and colonies accounted for an important part of international trade. The following visualizations provide a comparison of intercontinental trade, in per capita terms, for different countries.

As we can see, intercontinental trade was very dynamic, with volumes varying considerably across time and from empire to empire.

Leonor Freire Costa, Nuno Palma, and Jaime Reis, who compiled and published the original data shown here, argue that trade, also in this period, had a substantial positive impact on the economy. 2

The first wave of globalization was marked by the rise and collapse of intra-European trade

The following visualization shows a detailed overview of Western European exports by destination. Figures correspond to export-to-GDP ratios (i.e. the sum of the value of exports from all Western European countries, divided by the total GDP in this region). You can use “Settings” to switch to a relative view and see the proportional contribution of each region to total Western European exports.

This chart shows that growth in Western European trade throughout the 19th century was largely driven by trade within the region: In the period 1830-1900 intra-European exports went from 1% of GDP to 10% of GDP, and this meant that the relative weight of intra-European exports doubled over the period. However, this process of European integration then collapsed sharply in the interwar period.

After the Second World War trade within Europe rebounded, and from the 1990s onwards exceeded the highest levels of the first wave of globalization. In addition, Western Europe then started to increasingly trade with Asia, the Americas, and to a smaller extent Africa and Oceania.

The next graph, using data from Broadberry and O'Rourke (2010) 3 , shows another perspective on the integration of the global economy and plots the evolution of three indicators measuring integration across different markets – specifically goods, labor, and capital markets.

The indicators in this chart are indexed, so they show changes relative to the levels of integration observed in 1900. This gives us another perspective on how quickly global integration collapsed with the two World Wars. 4

The second wave of globalization was enabled by technology

The worldwide expansion of trade after the Second World War was largely possible because of reductions in transaction costs stemming from technological advances, such as the development of commercial civil aviation, the improvement of productivity in the merchant marines, and the democratization of the telephone as the main mode of communication. The visualization shows how, at the global level, costs across these three variables have been going down since 1930.

Reductions in transaction costs impacted not only the volumes of trade but also the types of exchanges that were possible and profitable.

The first wave of globalization was characterized by inter-industry trade. This means that countries exported goods that were very different from what they imported – England exchanged machines for Australian wool and Indian tea. As transaction costs went down, this changed. In the second wave of globalization, we are seeing a rise in intra -industry trade (i.e. the exchange of broadly similar goods and services is becoming more and more common). France, for example, now both imports and exports machines to and from Germany.

The following visualization, from the UN World Development Report (2009) , plots the fraction of total world trade that is accounted for by intra-industry trade, by type of goods. As we can see, intra-industry trade has been going up for primary, intermediate, and final goods.

This pattern of trade is important because the scope for specialization increases if countries are able to exchange intermediate goods (e.g. auto parts) for related final goods (e.g. cars).

Trade and trade partners by country

Above, we examined the broad global trends over the last two centuries. Let's now examine country-level trends over this long and dynamic period.

This chart plots estimates of the value of trade in goods, relative to total economic activity (i.e. export-to-GDP ratios).

These historical estimates obviously come with a large margin of error (in the measurement section below we discuss the data limitations); yet they offer an interesting perspective.

You can edit the countries and regions selected. Each country tells a different story. 6

In the next chart we plot, country by country, the regional breakdown of exports. India is shown by default, but you can edit the countries and regions shown.

When switching to displaying relative values under ‘Settings’, we see the proportional contribution of purchases from each region. For example, we see that more than a third of Indian exports went to Asian countries in recent decades.

This gives us an interesting perspective on the changing nature of trade partnerships. In India, we see the rising importance of trade with Africa—a pattern that we discuss in more detail below .

Trade around the world today

How much do countries trade, trade openness around the world.

The metric trade as a share of GDP gives us an idea of global integration by capturing all incoming and outgoing transactions of a country.

The charts shows that countries differ a lot in the extent to which they engage in trade. Trade, for example, is much less important to the US economy than for other rich countries.

If you press the play button on the map, you can see changes over time. This reveals that, despite the great variation between countries, there is a common trend: over the last couple of decades trade openness has gone up in most countries.

Exports and imports in real dollars

Expressing the value of trade as a share of GDP tells us the importance of trade in relation to the size of economic activity. Let's now take a look at trade in monetary terms – this tells us the importance of trade in absolute, rather than relative terms.

The chart shows the value of exports (goods plus services) in dollars, country by country.

The main takeaway here is that the trend towards more trade is more pronounced than in the charts showing shares of GDP. This is not surprising: most countries today produce more than a couple of decades ago , and at the same time they trade more of what they produce. 7

What do countries trade?

Trade in goods vs. trade in services.

Trade transactions include goods (tangible products that are physically shipped across borders by road, rail, water, or air) and services (intangible commodities, such as tourism, financial services, and legal advice).

Many traded services make merchandise trade easier or cheaper—for example, shipping services, or insurance and financial services.

Trade in goods has been happening for millennia , while trade in services is a relatively recent phenomenon.

In some countries services are today an important driver of trade: in the UK services account for around half of all exports; and in the Bahamas, almost all exports are services.

In other countries, such as Nigeria and Venezuela, services account for a small share of total exports.

Globally, trade in goods accounts for the majority of trade transactions. But as this chart shows, the share of services in total global exports has slightly increased in recent decades. 8

How are trade partnerships changing?

Bilateral trade is becoming increasingly common.

If we consider all pairs of countries that engage in trade around the world, we find that in the majority of cases, there is a bilateral relationship today: most countries that export goods to a country also import goods from the same country.

The interactive visualization shows this. 9 In the chart, all possible country pairs are partitioned into three categories: the top portion represents the fraction of country pairs that do not trade with one another; the middle portion represents those that trade in both directions (they export to one another); and the bottom portion represents those that trade in one direction only (one country imports from, but does not export to, the other country).

As we can see, bilateral trade is becoming increasingly common (the middle portion has grown substantially). However, many countries still do not trade with each other at all.

South-South trade is becoming increasingly important

The next visualization here shows the share of world merchandise trade that corresponds to exchanges between today's rich countries and the rest of the world.

The 'rich countries' in this chart are: Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and the United States. 'Non-rich countries' are all the other countries in the world.

As we can see, up until the Second World War, the majority of trade transactions involved exchanges between this small group of rich countries. But this has changed quickly over the last couple of decades, and today, trade between non-rich countries is just as important as trade between rich countries.

In the past two decades, China has been a key driver of this dynamic: the UN Human Development Report (2013) estimates that between 1992 and 2011, China's trade with Sub-Saharan Africa rose from $1 billion to more than $140 billion. 10

The majority of preferential trade agreements are between emerging economies

The last few decades have not only seen an increase in the volume of international trade, but also an increase in the number of preferential trade agreements through which exchanges take place. A preferential trade agreement is a trade pact that reduces tariffs between the participating countries for certain products.

The visualization here shows the evolution of the cumulative number of preferential trade agreements in force worldwide, according to the World Trade Organization (WTO). These numbers include notified and non-notified preferential agreements (the source reports that only about two-thirds of the agreements currently in force have been notified to the WTO) and are disaggregated by country groups.

This figure shows the increasingly important role of trade between developing countries (South-South trade), vis-a-vis trade between developed and developing countries (North-South trade). In the late 1970s, North-South agreements accounted for more than half of all agreements – in 2010, they accounted for about one-quarter. Today, the majority of preferential trade agreements are between developing economies.

Trading patterns have been changing quickly in middle-income countries

An important change in the composition of exported goods in these countries has accompanied the increase in trade among emerging economies over the last half century.

The next visualization plots the share of food exports in each country's total exported merchandise. These figures, produced by the World Bank, correspond to the Standard International Trade Classification, in which 'food' includes, among other goods, live animals, beverages, tobacco, coffee, oils, and fats.

Two points stand out. First, the relative importance of food exports has substantially decreased in most countries since the 1960s (although globally, it has gone up slightly more recently). Second, this decrease has been largest in middle-income countries, particularly in Latin America.

Regarding levels, as one would expect, in high-income countries, food still accounts for a much smaller share of merchandise exports than in most low- and middle-income-countries.

Trade generates efficiency gains

The raw correlation between trade and growth.

Over the last couple of centuries, the world economy has experienced sustained positive economic growth , and over the same period, this process of economic growth has been accompanied by even faster growth in global trade .

In a similar way, if we look at country-level data from the last half century we find that there is also a correlation between economic growth and trade: countries with higher rates of GDP growth also tend to have higher rates of growth in trade as a share of output. This basic correlation is shown in the chart here, where we plot the average annual change in real GDP per capita, against growth in trade (average annual change in value of exports as a share of GDP). 11

Is this statistical association between economic output and trade causal?

Among the potential growth-enhancing factors that may come from greater global economic integration are: competition (firms that fail to adopt new technologies and cut costs are more likely to fail and be replaced by more dynamic firms); economies of scale (firms that can export to the world face larger demand, and under the right conditions, they can operate at larger scales where the price per unit of product is lower); learning and innovation (firms that trade gain more experience and exposure to develop and adopt technologies and industry standards from foreign competitors). 12

Are these mechanisms supported by the data? Let's take a look at the available empirical evidence.

Evidence from cross-country differences in trade, growth, and productivity

When it comes to academic studies estimating the impact of trade on GDP growth, the most cited paper is Frankel and Romer (1999). 13

In this study, Frankel and Romer used geography as a proxy for trade to estimate the impact of trade on growth. This is a classic example of the so-called instrumental variables approach . The idea is that a country's geography is fixed, and mainly affects national income through trade. So if we observe that a country's distance from other countries is a powerful predictor of economic growth (after accounting for other characteristics), then the conclusion is drawn that it must be because trade has an effect on economic growth. Following this logic, Frankel and Romer find evidence of a strong impact of trade on economic growth.

Other papers have applied the same approach to richer cross-country data, and they have found similar results. A key example is Alcalá and Ciccone (2004). 14

This body of evidence suggests trade is indeed one of the factors driving national average incomes (GDP per capita) and macroeconomic productivity (GDP per worker) over the long run. 15

Evidence from changes in labor productivity at the firm level

If trade is causally linked to economic growth, we would expect that trade liberalization episodes also lead to firms becoming more productive in the medium and even short run. There is evidence suggesting this is often the case.

Pavcnik (2002) examined the effects of liberalized trade on plant productivity in the case of Chile, during the late 1970s and early 1980s. She found a positive impact on firm productivity in the import-competing sector. She also found evidence of aggregate productivity improvements from the reshuffling of resources and output from less to more efficient producers. 16

Bloom, Draca, and Van Reenen (2016) examined the impact of rising Chinese import competition on European firms over the period 1996-2007 and obtained similar results. They found that innovation increased more in those firms most affected by Chinese imports. They also found evidence of efficiency gains through two related channels: innovation increased and new existing technologies were adopted within firms, and aggregate productivity also increased because employment was reallocated towards more technologically advanced firms. 17

Trade does not only increase efficiency gains

Overall, the available evidence suggests that trade liberalization does improve economic efficiency. This evidence comes from different political and economic contexts and includes both micro and macro measures of efficiency.

This result is important because it shows that there are gains from trade. But of course, efficiency is not the only relevant consideration here. As we discuss in a companion article , the efficiency gains from trade are not generally equally shared by everyone. The evidence from the impact of trade on firm productivity confirms this: "reshuffling workers from less to more efficient producers" means closing down some jobs in some places. Because distributional concerns are real it is important to promote public policies – such as unemployment benefits and other safety-net programs – that help redistribute the gains from trade.

Trade has distributional consequences

The conceptual link between trade and household welfare.

When a country opens up to trade, the demand and supply of goods and services in the economy shift. As a consequence, local markets respond, and prices change. This has an impact on households, both as consumers and as wage earners.

The implication is that trade has an impact on everyone. It's not the case that the effects are restricted to workers from industries in the trade sector; or to consumers who buy imported goods. The effects of trade extend to everyone because markets are interlinked, so imports and exports have knock-on effects on all prices in the economy, including those in non-traded sectors.

Economists usually distinguish between "general equilibrium consumption effects" (i.e. changes in consumption that arise from the fact that trade affects the prices of non-traded goods relative to traded goods) and "general equilibrium income effects" (i.e. changes in wages that arise from the fact that trade has an impact on the demand for specific types of workers, who could be employed in both the traded and non-traded sectors).

Considering all these complex interrelations, it's not surprising that economic theories predict that not everyone will benefit from international trade in the same way. The distribution of the gains from trade depends on what different groups of people consume, and which types of jobs they have, or could have. 18

The link between trade, jobs and wages

Evidence from chinese imports and their impact on factory workers in the us.

The most famous study looking at this question is Autor, Dorn and Hanson (2013): "The China syndrome: Local labor market effects of import competition in the United States". 19

In this paper, Autor and coauthors examined how local labor markets changed in the parts of the country most exposed to Chinese competition. They found that rising exposure increased unemployment, lowered labor force participation, and reduced wages. Additionally, they found that claims for unemployment and healthcare benefits also increased in more trade-exposed labor markets.

The visualization here is one of the key charts from their paper. It's a scatter plot of cross-regional exposure to rising imports, against changes in employment. Each dot is a small region (a 'commuting zone' to be precise). The vertical position of the dots represents the percent change in manufacturing employment for the working-age population, and the horizontal position represents the predicted exposure to rising imports (exposure varies across regions depending on the local weight of different industries).

The trend line in this chart shows a negative relationship: more exposure goes along with less employment. There are large deviations from the trend (there are some low-exposure regions with big negative changes in employment); but the paper provides more sophisticated regressions and robustness checks, and finds that this relationship is statistically significant.

This result is important because it shows that the labor market adjustments were large. Many workers and communities were affected over a long period of time. 20

But it's also important to keep in mind that Autor and colleagues are only giving us a partial perspective on the total effect of trade on employment. In particular, comparing changes in employment at the regional level misses the fact that firms operate in multiple regions and industries at the same time. Indeed, Ildikó Magyari found evidence suggesting the Chinese trade shock provided incentives for US firms to diversify and reorganize production. 21

So companies that outsourced jobs to China often ended up closing some lines of business, but at the same time expanded other lines elsewhere in the US. This means that job losses in some regions subsidized new jobs in other parts of the country.

On the whole, Magyari finds that although Chinese imports may have reduced employment within some establishments, these losses were more than offset by gains in employment within the same firms in other places. This is no consolation to people who lost their jobs. But it is necessary to add this perspective to the simplistic story of "trade with China is bad for US workers".

Evidence from the expansion of trade in India and the impact on poverty reductions

Another important paper in this field is Topalova (2010): "Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India". 22

In this paper, Topalova examines the impact of trade liberalization on poverty across different regions in India, using the sudden and extensive change in India's trade policy in 1991. She finds that rural regions that were more exposed to liberalization experienced a slower decline in poverty and lower consumption growth.

Analyzing the mechanisms underlying this effect, Topalova finds that liberalization had a stronger negative impact among the least geographically mobile at the bottom of the income distribution and in places where labor laws deterred workers from reallocating across sectors.

The evidence from India shows that (i) discussions that only look at "winners" in poor countries and "losers" in rich countries miss the point that the gains from trade are unequally distributed within both sets of countries; and (ii) context-specific factors, like worker mobility across sectors and geographic regions, are crucial to understand the impact of trade on incomes.

Evidence from other studies

• Donaldson (2018) uses archival data from colonial India to estimate the impact of India’s vast railroad network. He finds railroads increased trade, and in doing so they increased real incomes (and reduced income volatility). 23
• Porto (2006) looks at the distributional effects of Mercosur on Argentine families, and finds this regional trade agreement led to benefits across the entire income distribution. He finds the effect was progressive: poor households gained more than middle-income households because prior to the reform, trade protection benefitted the rich disproportionately. 24
• Trefler (2004) looks at the Canada-US Free Trade Agreement and finds there was a group who bore "adjustment costs" (displaced workers and struggling plants) and a group who enjoyed "long-run gains" (consumers and efficient plants). 25

The link between trade and the cost of living

The fact that trade negatively affects labor market opportunities for specific groups of people does not necessarily imply that trade has a negative aggregate effect on household welfare. This is because, while trade affects wages and employment, it also affects the prices of consumption goods. So households are affected both as consumers and as wage earners.

Most studies focus on the earnings channel and try to approximate the impact of trade on welfare by looking at how much wages can buy, using as a reference the changing prices of a fixed basket of goods.

This approach is problematic because it fails to consider welfare gains from increased product variety, and obscures complicated distributional issues such as the fact that poor and rich individuals consume different baskets so they benefit differently from changes in relative prices. 26

Ideally, studies looking at the impact of trade on household welfare should rely on fine-grained data on prices, consumption, and earnings. This is the approach followed in Atkin, Faber, and Gonzalez-Navarro (2018): "Retail globalization and household welfare: Evidence from Mexico". 27

Atkin and coauthors use a uniquely rich dataset from Mexico, and find that the arrival of global retail chains led to reductions in the incomes of traditional retail sector workers, but had little impact on average municipality-level incomes or employment; and led to lower costs of living for both rich and poor households.

The chart here shows the estimated distribution of total welfare gains across the household income distribution (the light-gray lines correspond to confidence intervals). These are proportional gains expressed as a percent of initial household income.

As we can see, there is a net positive welfare effect across all income groups; but these improvements in welfare are regressive, in the sense that richer households gain proportionally more (about 7.5 percent gain compared to 5 percent). 28

Evidence from other countries confirms this is not an isolated case – the expenditure channel really seems to be an important and understudied source of household welfare. Giuseppe Berlingieri, Holger Breinlich, Swati Dhingra, for example, investigated the consumer benefits from trade agreements implemented by the EU between 1993 and 2013; and they found that these trade agreements increased the quality of available products, which translated into a cumulative reduction in consumer prices equivalent to savings of €24 billion per year for EU consumers. 29

Implications of trade’s distributional effects

The available evidence shows that, for some groups of people, trade has a negative effect on wages and employment opportunities; at the same time, it has a large positive effect via lower consumer prices and increased product availability.

Two points are worth emphasizing.

For some households, the net effect is positive. But for some households that's not the case. In particular, workers who lose their jobs can be affected for extended periods of time, so the positive effect via lower prices is not enough to compensate them for the reduction in earnings.

On the whole, if we aggregate changes in welfare across households, the net effect is usually positive. But this is hardly a consolation for the worse off.

This highlights a complex reality: There are aggregate gains from trade , but there are also real distributional concerns. Even if trade is not a major driver of income inequalities , it's important to keep in mind that public policies, such as unemployment benefits and other safety-net programs, can and should help redistribute the gains from trade.

Explaining trade patterns: Theory and Evidence

Comparative advantage, theory: what is 'comparative advantage' and why does it matter to understand trade.

In economic theory, the 'economic cost' – or the 'opportunity cost' – of producing a good is the value of everything you need to give up in order to produce that good.

Economic costs include physical inputs (the value of the stuff you use to produce the good), plus forgone opportunities (when you allocate scarce resources to a task, you give up alternative uses of those resources).

A country or a person is said to have a 'comparative advantage' if it can produce something at a lower opportunity cost than its trade partners.

The forgone opportunities of production are key to understanding this concept. It is precisely this that distinguishes absolute advantage from comparative advantage.

To see the difference between comparative and absolute advantage, consider a commercial aviation pilot and a baker. Suppose the pilot is an excellent chef, and she can bake just as well, or even better than the baker. In this case, the pilot has an absolute advantage in both tasks. Yet the baker probably has a comparative advantage in baking, because the opportunity cost of baking is much higher for the pilot.

The freely available economics textbook The Economy: Economics for a Changing World explains this as follows: "A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods."

At the individual level, comparative advantage explains why you might want to delegate tasks to someone else, even if you can do those tasks better and faster than them. This may sound counterintuitive, but it is not: If you are good at many things, it means that investing time in one task has a high opportunity cost, because you are not doing the other amazing things you could be doing with your time and resources. So, at least from an efficiency point of view, you should specialize on what you are best at, and delegate the rest.

The same logic applies to countries. Broadly speaking, the principle of comparative advantage postulates that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, and imports the rest: “do what you do best, import the rest”. 30

In countries with a relative abundance of certain factors of production, the theory of comparative advantage predicts that they will export goods that rely heavily upon those factors: a country typically has a comparative advantage in those goods that use its abundant resources. Colombia exports bananas to Europe because it has comparatively abundant tropical weather.

Is there empirical support for comparative-advantage theories of trade?

The empirical evidence suggests that the principle of comparative advantage does help explain trade patterns. Bernhofen and Brown (2004) 31 , for instance, provide evidence using the experience of Japan. Specifically, they exploit Japan’s dramatic nineteenth-century move from a state of near complete isolation to wide trade openness.

The graph here shows the price changes of the key tradable goods after the opening up to trade. It presents a scatter diagram of the net exports in 1869 graphed in relation to the change in prices from 1851–53 to 1869. As we can see, this is consistent with the theory: after opening to trade, the relative prices of major exports such as silk increased (Japan exported what was cheap for them to produce and which was valuable abroad), while the relative price of imports such as sugar declined (they imported what was relatively more difficult for them to produce, but was cheap abroad).

Trade diminishes with distance

The resistance that geography imposes on trade has long been studied in the empirical economics literature – and the main conclusion is that trade intensity is strongly linked to geographic distance.

The visualization, from Eaton and Kortum (2002), graphs 'normalized import shares' against distance. 32 Each dot represents a country pair from a set of 19 OECD countries, and both the vertical and horizontal axes are expressed on logarithmic scales.

The 'normalized import shares' in the vertical axis provide a measure of how much each country imports from different partners (see the paper for details on how this is calculated and normalized), while the distance in the horizontal axis corresponds to the distance between central cities in each country (see the paper and references therein for details on the list of cities). As we can see, there is a strong negative relationship. Trade diminishes with distance. Through econometric modeling, the paper shows that this relationship is not just a correlation driven by other factors: their findings suggest that distance imposes a significant barrier to trade.

The fact that trade diminishes with distance is also corroborated by data on trade intensity within countries. The visualization here shows, through a series of maps, the geographic distribution of French firms that export to France's neighboring countries. The colors reflect the percentage of firms that export to each specific country.

As we can see, the share of firms exporting to each of the corresponding neighbors is the largest close to the border. The authors also show in the paper that this pattern holds for the value of individual-firm exports – trade value decreases with distance to the border.

Institutions

Conducting international trade requires both financial and non-financial institutions to support transactions. Some of these institutions are fairly obvious (e.g. law enforcement); but some are less obvious. For example, the evidence shows that producers in exporting countries often need credit in order to engage in trade.

The scatter plot, from Manova (2013), shows the correlation between levels in private credit (specifically exporters’ private credit as a share of GDP) and exports (average log bilateral exports across destinations and sectors). 34 As can be seen, financially developed economies – those with more dynamic private credit markets – typically outperform exporters with less evolved financial institutions.

Other studies have shown that country-specific institutions, like the knowledge of foreign languages, for instance, are also important to promote foreign relative to domestic trade. 35

Increasing returns to scale

The concept of comparative advantage predicts that if all countries had identical endowments and institutions, there would be little incentive for specialization because the opportunity cost of producing any good would be the same in every country.

So you may wonder: why is it then the case that in the last few years, we have seen such rapid growth in intra-industry trade between rich countries?

The increase in intra-industry between rich countries seems paradoxical under the light of comparative advantage because in recent decades we have seen convergence in key factors, such as human capital , across these countries.

The solution to the paradox is actually not very complicated: Comparative advantage is one, but not the only force driving incentives to specialization and trade.

Several economists, most notably Paul Krugman, have developed theories of trade in which trade is not due to differences between countries, but instead due to "increasing returns to scale" – an economic term used to denote a technology in which producing extra units of a good becomes cheaper if you operate at a larger scale.

The idea is that specialization allows countries to reap greater economies of scale (i.e. to reduce production costs by focusing on producing large quantities of specific products), so trade can be a good idea even if the countries do not differ in endowments, including culture and institutions.

These models of trade, often referred to as “New Trade Theory”, are helpful in explaining why in the last few years we have seen such rapid growth in two-way exchanges of goods within industries between developed nations.

In a much-cited paper, Evenett and Keller (2002) show that both factor endowments and increasing returns help explain production and trade patterns around the world. 36

You can learn more about New Trade Theory, and the empirical support behind it, in Paul Krugman's Nobel lecture .

Measurement and data quality

There are dozens of official sources of data on international trade, and if you compare these different sources, you will find that they do not agree with one another. Even if you focus on what seems to be the same indicator for the same year in the same country, discrepancies are large.

Such differences between sources can also be found in rich countries where statistical agencies tend to follow international reporting guidelines more closely.

There are also large bilateral discrepancies within sources: the value of goods that country A exports to country B can be more than the value of goods that country B imports from country A.

Here we explain how international trade data is collected and processed, and why there are such large discrepancies.

What data is available?

The data hubs from several large international organizations publish and maintain extensive cross-country datasets on international trade. Here's a list of the most important ones:

• World Bank Open Data
• WTO Statistics
• UN Comtrade
• UNCTAD World Integrated Trade Solutions

In addition to these sources, there are also many other academic projects that publish data on international trade. These projects tend to rely on data from one or more of the sources above, and they typically process and merge series in order to improve coverage and consistency. Three important sources are:

• The Correlates of War Project . 37
• The NBER-United Nations Trade Dataset Project .
• The CEPII Bilateral Trade and Gravity Data Project . 38

How large are the discrepancies between sources?

In the visualization here, we compare the data published by several of the sources listed above, country by country, from 1955 to today.

For each country, we exclude trade in services, and we focus only on estimates of the total value of exported goods, expressed as shares of GDP. 39

As this chart clearly shows, different data sources often tell very different stories. If you change the country or region shown you will see that this is true, to varying degrees, across all countries and years.

Constructing this chart was demanding. It required downloading trade data from many different sources, collecting the relevant series, and then standardizing them so that the units of measure and the geographical territories were consistent.

All series, except the two long-run series from CEPII and NBER-UN, were produced from data published by the sources in current US dollars and then converted to GDP shares using a unique source (World Bank).

So, if all series are in the same units (share of national GDP) and they measure the same thing (value of goods exported from one country to the rest of the world), what explains the differences?

Let's dig deeper to understand what's going on.

Why doesn't the data add up?

Differences in guidelines used by countries to record and report trade data.

Broadly speaking, there are two main approaches used to estimate international merchandise trade:

• The first approach relies on estimating trade from customs records , often complementing or correcting figures with data from enterprise surveys and administrative records associated with taxation. The main manual providing guidelines for this approach is the International Merchandise Trade Statistics Manual (IMTS).
• The second approach relies on estimating trade from macroeconomic data , typically National Accounts . The main manual providing guidelines for this approach is the Balance of Payments and International Investment Position Manual (BPM6), which was drafted in parallel with the 2008 System of National Accounts of the United Nations (SNA 2008). The idea behind this approach is to record changes in economic ownership. 40

Under these two approaches, it is common to distinguish between 'traded merchandise' and 'traded goods'. The distinction is often made because goods simply being transported through a country (i.e., goods in transit) are not considered to change a country's stock of material resources and are hence often excluded from the more narrow concept of 'merchandise trade'.

Also, adding to the complexity, countries often rely on measurement protocols developed alongside approaches and concepts that are not perfectly compatible to begin with. In Europe, for example, countries use the 'Compilers guide on European statistics on international trade in goods'.

Measurement error and other inconsistencies

Even when two sources rely on the same broad accounting approach, discrepancies arise because countries fail to adhere perfectly to the protocols.

In theory, for example, the exports of country A to country B should mirror the imports of country B from country A. But in practice this is rarely the case because of differences in valuation. According to the BPM6, imports, and exports should be recorded in the balance of payments accounts on a ' free on board (FOB) basis', which means using prices that include all charges up to placing the goods on board a ship at the port of departure. Yet many countries stick to FOB values only for exports, and use CIF values for imports (CIF stands for 'Cost, Insurance and Freight', and includes the costs of transportation). 41

The chart here gives you an idea of how large import-export asymmetries are. Shown are the differences between the value of goods that each country reports exporting to the US, and the value of goods that the US reports importing from the same countries. For example, for China, the figure in the chart corresponds to the “Value of merchandise imports in the US from China” minus the “Value of merchandise exports from China to the US”.

The differences in the chart here, which are both positive and negative, suggest that there is more going on than differences in FOB vs. CIF values. If all asymmetries were coming from FOB-CIF differences, then we should only see positive values in the chart (recall that, unlike FOB values, CIF values include the cost of transportation, so CIF values are larger).

What else may be going on here?

Another common source of measurement error relates to the inconsistent attribution of trade partners. An example is failure to follow the guidelines on how to treat goods passing through intermediary countries for processing or merchanting purposes. As global production chains become more complex, countries find it increasingly difficult to unambiguously establish the origin and final destination of merchandise, even when rules are established in the manuals. 42

And there are still more potential sources of discrepancies. For example differences in customs and tax regimes, and differences between "general" and "special" trade systems (i.e. differences between statistical territories and actual country borders, which do not often coincide because of things like 'custom free zones'). 43

Even when two sources have identical trade estimates, inconsistencies in published data can arise from differences in exchange rates. If a dataset reports cross-country trade data in US dollars, estimates will vary depending on the exchange rates used. Different exchange rates will lead to conflicting estimates, even if figures in local currency units are consistent.

A checklist for comparing sources

Asymmetries in international trade statistics are large and arise for a variety of reasons. These include conceptual inconsistencies across measurement standards and inconsistencies in the way countries apply agreed-upon protocols. Here's a checklist of issues to keep in mind when comparing sources.

• Differences in underlying records: is trade measured from National Accounts data rather than directly from custom or tax records?
• Differences in import and export valuations: are transactions valued at FOB or CIF prices?
• Inconsistent attribution of trade partners: how is the origin and final destination of merchandise established?
• Difference between 'goods' and 'merchandise': how are re-importing, re-exporting, and intermediary merchanting transactions recorded?
• Exchange rates: how are values converted from local currency units to the currency that allows international comparisons (most often the US-$)?
• Differences between 'general' and 'special' trade system: how is trade recorded for custom-free zones?
• Other issues: Time of recording, confidentiality policies, product classification, deliberate mis-invoicing for illicit purposes.

Many organizations producing trade data have long recognized these factors. Indeed, international organizations often incorporate corrections in an attempt to improve data quality.

The OECD's Balanced International Merchandise Trade Statistics , for example, uses its own approach to correct and reconcile international merchandise trade statistics. 44

The corrections applied in the OECD's 'balanced' series make this the best source for cross-country comparisons. However, this dataset has low coverage across countries, and it only goes back to 2011. This is an important obstacle since the complex adjustments introduced by the OECD imply we can't easily improve coverage by appending data from other sources. At Our World in Data we have chosen to rely on CEPII as the main source for exploring long-run changes in international trade, but we also rely on World Bank and OECD data for up-to-date cross-country comparisons.

There are two key lessons from all of this. The first lesson is that, for most users of trade data out there, there is no obvious way of choosing between sources. And the second lesson is that, because of statistical glitches, researchers and policymakers should always take analyses of trade data with a pinch of salt. For example, in a recent high-profile report , researchers attributed mismatches in bilateral trade data to illicit financial flows through trade mis-invoicing (or trade-based money laundering). As we show here, this interpretation of the data is not appropriate, since mismatches in the data can, and often do arise from measurement inconsistencies rather than malfeasance. 45

Hopefully, the discussion and checklist above can help researchers better interpret and choose between conflicting data sources.

Interactive charts on Trade and Globalization

The openness index, when calculated for the world as a whole, includes double-counting of transactions: When country A sells goods to country B, this shows up in the data both as an import (B imports from A) and as an export (A sells to B).

Indeed, if you compare the chart showing the global trade openness index and the chart showing global merchandise exports as a share of GDP , you find that the former is almost twice as large as the latter.

Why is the global openness index not exactly twice the value reported in the chart plotting global merchandise exports? There a three reasons.

First, the global openness index uses different sources. Second, the global openness index includes trade in goods and services, while merchandise exports include goods but not services. And third, the amount that country A reports exporting to country B does not usually match the amount that B reports importing from A.

We explore this in more detail in our measurement section .

Leonor Freire Costa, Nuno Palma, and Jaime Reis (2015) – The great escape? The contribution of the empire to Portugal's economic growth, 1500–1800 Leonor Freire Costa Nuno Palma Jaime Reis European Review of Economic History, Volume 19, Issue 1, 1 February 2015, Pages 1–22, https://doi.org/10.1093/ereh/heu019

Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe: Volume 2, 1870 to the Present. Cambridge University Press.

Integration in the goods markets is measured here through the 'trade openness index', which is defined by the sum of exports and imports as a share of GDP. In our interactive chart you can explore trends in trade openness over this period for a selection of European countries.

Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe: Volume 2, 1870 to the Present. Cambridge University Press. The graph depicts the “evolution of three indicators measuring integration in commodity, labor, and capital markets over the long run. Commodity market integration is measured by computing the ratio of exports to GDP. Labor market integration is measured by dividing the migratory turnover by population. Financial integration is measured using Feldstein–Horioka estimators of current account disconnectedness.”

We also have the same chart but showing imports .

We also have the same chart, but showing imports .

This interactive chart shows trade in services as a share of GDP across countries and regions.

This chart was inspired by a chart from Helpman, E., Melitz, M., & Rubinstein, Y. (2007). Estimating trade flows: Trading partners and trading volumes (No. w12927). National Bureau of Economic Research.

We also have the same data, but as a stacked-area chart .

There are different ways of capturing this correlation. I focus here on all countries with data over the period 1945-2014. You can find a similar chart using different data sources and time periods in Ventura, J. (2005). A global view of economic growth. Handbook of economic growth, 1, 1419-1497. Online here .

The textbook The Economy: Economics for a Changing World explains this in more detail.

Frankel, J. A., & Romer, D. H. (1999). Does trade cause growth? American Economic Review, 89(3), 379-399.

Alcalá, F., & Ciccone, A. (2004). Trade and productivity . The Quarterly Journal of Economics, 119(2), 613-646.

There are many papers that try to answer this specific question with macro data. For an overview of papers and methods see: Durlauf, S. N., Johnson, P. A., & Temple, J. R. (2005). Growth econometrics. Handbook of economic growth, 1, 555-677.

Pavcnik, N. (2002). Trade liberalization, exit, and productivity improvements: Evidence from Chilean plants . The Review of Economic Studies, 69(1), 245-276.

Bloom, N., Draca, M., & Van Reenen, J. (2016). Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity. The Review of Economic Studies, 83(1), 87-117. Available online here .

You can read more about these economic concepts, and the related predictions from economic theory, in Chapter 18 of the textbook The Economy: Economics for a Changing World .

David, H., Dorn, D., & Hanson, G. H. (2013). The China syndrome: Local labor market effects of import competition in the United States . American Economic Review, 103(6), 2121-68.

It's important to mention here that the economist Jonathan Rothwell wrote a paper suggesting these findings are the result of a statistical illusion. Rothwell's critique received some attention from the media , but Autor and coauthors provided a reply , which I think successfully refutes this claim.

Magyari, I. (2017). Firm Reorganization, Chinese Imports, and US Manufacturing Employment . US Census Bureau, Center for Economic Studies.

Topalova, P. (2010). Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India . American Economic Journal: Applied Economics, 2(4), 1-41.

Donaldson, D. (2018). Railroads of the Raj: Estimating the impact of transportation infrastructure . American Economic Review, 108(4-5), 899-934.

Porto, G (2006). Using Survey Data to Assess the Distributional Effects of Trade Policy. Journal of International Economics 70 (2006) 140–160.

Trefler, D. (2004). The long and short of the Canada-US free trade agreement . American Economic Review, 94(4), 870-895.

See: (i) Feenstra, R. C., & Weinstein, D. E. (2017). Globalization, markups, and US welfare . Journal of Political Economy, 125(4), 1040-1074. (ii) Fajgelbaum, P. D., & Khandelwal, A. K. (2016). Measuring the unequal gains from trade . The Quarterly Journal of Economics, 131(3), 1113-1180.

Atkin, David, Benjamin Faber, and Marco Gonzalez-Navarro. "Retail globalization and household welfare: Evidence from Mexico." Journal of Political Economy 126.1 (2018): 1-73.

In the paper, Atkin and coauthors explore the reasons for this and find that the regressive nature of the distribution is mainly due to richer households placing higher weight on the product variety and shopping amenities on offer at these new foreign stores.

Berlingieri, G., Breinlich, H., & Dhingra, S. (2018). The Impact of Trade Agreements on Consumer Welfare—Evidence from the EU Common External Trade Policy. Journal of the European Economic Association.

Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician Stanislaw Ulam: "Name me one proposition in all of the social sciences which is both true and non-trivial." It was several years later than he thought of the correct response: comparative advantage. "That it is logically true need not be argued before a mathematician; that is is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

(NB. This is an excerpt from https://www.wto.org/english/res_e/reser_e/cadv_e.htm)

Bernhofen, D., & Brown, J. (2004). A Direct Test of the Theory of Comparative Advantage: The Case of Japan. Journal of Political Economy, 112(1), 48-67. doi:1. Retrieved from http://www.jstor.org/stable/10.1086/379944 doi:1

Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5), 1741-1779.

Crozet, M., & Koenig, P. (2010). Structural Gravity Equations with Intensive and Extensive Margins. The Canadian Journal of Economics / Revue Canadienne D'Economique, 43(1), 41-62. Retrieved from http://www.jstor.org/stable/40389555

Manova, Kalina. "Credit constraints, heterogeneous firms, and international trade." The Review of Economic Studies 80.2 (2013): 711-744.

Melitz, J. (2008). Language and foreign trade. European Economic Review, 52(4), 667-699.

Evenett, S. J., & Keller, W. (2002). On theories explaining the success of the gravity equation . Journal of Political Economy, 110(2), 281-316.

For more information on how the COW trade datasets were constructed see: (i) Barbieri, Katherine, and Omar M. G. Omar Keshk. 2016. Correlates of War Project Trade Data Set Codebook, Version 4.0. Available at http://correlatesofwar.org and (ii) Barbieri, Katherine, Omar M. G. Keshk, and Brian Pollins. 2009. TRADING DATA: Evaluating our Assumptions and Coding Rules. Conflict Management and Peace Science, 26(5): 471–491.

Further information on CEPII's methodology can be found in their working paper .

The chart includes series labeled by the sources as 'merchandise trade' and 'goods trade'. As we explain below, part of the asymmetries in trade data comes from the fact that, although 'merchandise' and 'goods' are equivalent in the dictionary, these two terms often measure related but different things.

For example, if there is no change in ownership (e.g. a firm exports goods to its factory in another country for processing, and then re-imports the processed goods) the manual says that statistical agencies should only record the net difference in value. You can find more details about this in an OECD Statistics Briefing .

This issue is actually also a source of disagreement between National Accounts data and customs data. You can read more about it in this report: Harrison, Anne (2013) FOB/CIF Issue in Merchandise Trade/Transport of Goods in BPM6 and the 2008 SNA, Twenty-Fifth Meeting of the IMF Committee on Balance of Payments Statistics, Washington, D.C .

Precisely because of the difficulty that arises when trying to establish the origin and final destination of merchandise, some sources distinguish between national and dyadic (i.e. 'directed') trade estimates.

For more details about general and special trade see the Eurostat glossary .

The OECD approach consists of four steps, which they describe as follows: "First, data are collected and organized, and imports are converted to FOB prices to match the valuation of exports. Secondly, data are adjusted for several specific large problems known to drive asymmetries. Presently these include “modular” adjustments for unallocated and confidential trade; for exports by Hong Kong, China; for Swiss non-monetary gold; and for clear-cut cases of product misclassifications. The list of modules is expected to grow over time. In the third step, adjusted data are balanced using a “Symmetry Index” that weights exports and imports. As the final step, the data are also converted to Classification of Products by Activity (CPA) products to better align with National Accounts statistics, such as in national Supply-Use tables." You can read more about it here . In addition to the OECD, other sources also use corrections. The IMF's DOTS dataset, for example, uses a 6 percent rule for converting import valuations (in CIF) into export values (in FOB). More information can be found in the IMF's (2018) working paper on 'New Estimates for Direction of Trade Statistics'.

For more details on this see Forstater, M. (2018) Illicit Financial Flows, Trade Misinvoicing, and Multinational Tax Avoidance: The Same or Different? , CGD Policy Paper 123.

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Economic Globalization: Arguments For and Against Essay

• To find inspiration for your paper and overcome writer’s block
• As a source of information (ensure proper referencing)
• As a template for you assignment

Introduction

Benefits of globalization, the similarity between privatization and globalization, global operations by tncs, negative influence of globalization.

Bibliography

Many people associate economic globalization with the controversial issue of free trade. In some cases, economic globalization is associated with free trade and liberalization, improvements in economic conditions of less developed countries and enormous opportunities for multinational (MNEs) and transnational corporations (TNCs). Thus, there are many critics and economists who oppose economic globalization citing alleged benefits of globalization.

Wade criticizes economic benefits of globalization and states that rich and powerful states exploit less developed countries. One of the ways by which the rich get richer (and the poor are made poorer) is through increased economic globalization. Globalization has been defined as the collapse of time and space, but more detailed explanations distinguish between “interdependence of markets and production in different countries;” “(perception of) living and working in a world-wide context;” and a “process that affects every aspect in the life of a person, community or nation” (Brown & Lauder 2001, p. 43).

In return for supplying much-needed loans to developing countries, the IMF and the World Bank demand from their creditor nations the implementation of so-called ‘structural adjustment programs’. Unleashed on developing countries in the 1990s, this set of neo-liberal policies is often referred to as the ‘Washington Consensus’. The various sections of the program were mainly directed at countries with large foreign debts remaining from the 1970s and 1980s.

The official purpose of the document was to reform the internal economic mechanisms of debtor countries in the developing world so that they would be in a better position to repay the debts they had incurred. In practice, however, the terms of the program spelled out a new form of colonialism (Wade et al 2006). The ten points of the Washington Consensus, as defined by Williamson, required governments to implement the following structural adjustments in order to qualify for loans: It is no coincidence that this program is called the ‘Washington Consensus’ (Hirst & Thompson 1999), for, from the outset, the United States has been the dominant power in the IMF and the World Bank.

Unfortunately, however, large portions of the ‘development loans’ granted by these institutions have either been pocketed by authoritarian political leaders or have enriched local businesses and the Northern corporations they usually serve. Sometimes, exorbitant sums are spent on ill-considered construction projects (Hirst & Thompson 1999). Most importantly, however, structural adjustment programs rarely produce the desired result of ‘developing’ debtor societies, because mandated cuts in public spending translate into fewer social programs, reduced educational opportunities, more environmental pollution, and greater poverty for the vast majority of people. Typically, the largest share of the national budget is spent on servicing outstanding debts.

Economic globalization increases world poverty in less developed nations. An addition to all of the factors making for world poverty has cropped up during the last few decades, in the form of widespread privatization of former governmental and voluntary functions. The most common meaning of privatization is the shifting of governmental functions and services to non-governmental entities, either to voluntary not-for-profit organizations, or to for profit businesses (Hirst & Thompson 1999).

The net result of privatization is more profit for some and less well-being for a vastly greater number of others; and purported efficiency at the cost of effective distribution among the population as a whole, with widening gaps, both socially and economically. “Even though growth opens the doors, the traction in the legs of the poor may not be enough to carry them through these doors. For example, tribal areas in India where poverty is acute may not be connected sufficiently to the mainstream economy where growth occurs” (Bhagwati 2004, p. 57).

Such critics as Ohmae (1985) and Stiglitz (2002) underline that there is a symbiotic relationship between privatization and globalization. They go hand-in-hand because they both have the same ultimate goal: profits— profits at all costs and regardless of consequences. Corruption, ecological disaster, fraudulent practices, poverty, human degradation and a score of other ills stem from the oft-expressed (although usually cynical) ideology that in the long run, the market-driven society improves the lot of everyone. Stiglitz (2002) underlines that globalization is not simply a market-driven phenomenon; it has an ideological and political base.

That base holds that anything that increases profits is not only desirable and even moral, but absolutely imperative. This drive for profits enables and causes multinational corporations to exploit the cheapest labor, methods and materials they can find. Unfortunately, even the rise of such a person or persons would probably lead to minimal change in their own country or countries at best, since the very essence of globalization, as its name implies, is that it is supra-national. Consequently, even a towering figure with mobs of adherents in any one country would probably make little impact on events world-wide (Hirst & Thompson 1999).

Where privatization and globalization are concerned, there are very few organizations as such with the declared aim of opposing them, or even ameliorating their effects, although a few have come into being. Interestingly, the anti-capitalist movement— so far disparate, to judge by its many names—seems to be beginning once again to coalesce, and is taking on the nature of a movement formed through protests, rather than protests sponsored by movements. Its most significant activity so far has been the organization of demonstrations at international meetings of world-wide financial institutions, such as G-8, the World Bank, the International Monetary Fund and the World Trade Organization, as well as international conferences concerning social protest.

As concerns poverty as such, there is a dearth of anti-poverty organizations, movements against domestic poverty, or even protests specifically naming poverty as the enemy (Hirst & Thompson 1999). Israel, as one exception, has an anti-poverty lobby made up of representatives of organizations and individuals (including some of the poor), concentrating almost entirely on pressuring politicians. Most activities of anti-poverty organizations elsewhere are subsumed under general anti-capitalist activities, which may focus on ecology, empowerment, governmental changes, etc. It is difficult to conceive of a figure so popular and so powerful that he or she could halt the relentless growth of privatization and globalization. Kenichi Ohmae (1985) states:

“The global economy is becoming so powerful that it has swallowed most consumers and corporations, made traditional national borders almost disappear, and pushed bureaucrats, politicians, and the military toward the status of declining industries” (45).

Increase investments from rich to poor countries subordinate developing economies and prevent their unique economic growth. A distinction has been made between internationalization, in which a national unit engages in international trade; international agreements such as GATT; and globalization, in which the national unit ceases to exist and becomes a global enterprise A number of factors have led to the process called “globalization.”

As large corporations began diversifying their products and services by buying up smaller enterprises—usually for stock-market, income tax or other financial benefits—they became conglomerates.. The economic breakdown of the Soviet Union gave further impetus to globalization as many foreign firms hurried to establish units in so-called economies in transition. Free trade agreements of various kinds further supported this process. MNCs now account for between a quarter and a third of the world’s output, 70 percent of world trade and 80 percent of direct international investment (Yip 1995).

Contracting economies invariably react by cutting spending in the social sector, thereby exacerbating the condition of the poor. The paradox here is that when countries think they are doing well economically, they believe this is enough to lighten the burden on the lower-income classes; and when they are in a recession, they obviously don’t have the money to spend helping the same classes (Hirst & Thompson 1999).

On the one hand, globalization of financial trading allows for increased mobility among different segments of the financial industry, with fewer restrictions and greater investment opportunities. Dominated by highly sensitive stock markets that drive high-risk innovation, the world’s financial systems are characterized by high volatility, rampant competition, and general insecurity. Following Stiglitz (2002):

”Globalization can further be defined as the arrival of ‘self-generating capital’ at the global level: that is, capital as capital, capital in the form of the TNC, free of national loyalties, controls, and interests. This is different from the mere internationalization of capital, which assumes a world of national capitals and nation states; it is the supersession by capital of the nation state (10).

Global speculators often take advantage of weak financial and banking regulations to make astronomical profits in emerging markets of developing countries. However, since these international capital flows can be reversed swiftly, they are capable of creating artificial boom-and-bust cycles that endanger the social welfare of entire regions. Wade et al (2006) underline a negative impact of MNEs and TNCs on developing countries and their growth opportunities. This means that while MNCs may be sued or charged by the individual countries in which they operate, insofar as they operate in tens of countries, with immense resources, and the power to withdraw both personnel and assets at will, they are almost invulnerable to local laws. Following Friedman (2000):

“Globalization is the inexorable integration of markets, nation-states and technologies to a degree never witnessed before—in a way that is enabling individuals, corporations and nation-states to reach around the world far­ther, faster, deeper and cheaper than ever before” (p. 9).

The tobacco industry is one of the vivid examples of globalization and its impact on developing countries. Heavily fined for mendacity and creating health risks in the United States, they have blithely paid the fines (by raising their prices) and continued these practices in other parts of the world. For instance, in Papua-New Guinea, almost the only billboards on the roads—including narrow, unpaved country roads—are those of foreign cigarette companies (Brown & Lauder 2010).

Throughout Europe, the umbrellas that deck the much-vaunted sidewalk cafes are almost invariably decorated with ads for tobacco companies. Indeed, tobacco corporations have publicly declared that their next areas of exploitation are in Europe and in Africa where anti-tobacco legislation lags far behind (Yip 1995). Transnational corporations are the contemporary versions of the early modern commercial enterprises. Powerful firms with subsidiaries in several countries, their numbers skyrocketed from 7,000 in 1970 to about 50,000 in 2000 (Brown & Lauder 2001).

Enterprises like General Motors, Walmart, Exxon-Mobil, Mitsubishi, and Siemens belong to the 200 largest TNCs, which account for over half of the world’s industrial output. None of these corporations maintains headquarters outside of North America, Europe, Japan, and South Korea. This geographical concentration reflects existing asymmetrical power relations between the North and the South. Yet, clear power differentials can also be found within the global North. In 1999, 142 of the leading 200 TNCs were based in only three countries – the United States, Japan, and Germany (Brown & Lauder 2001).

Rivaling nation-states in their economic power, these corporations control much of the world’s investment capital, technology, and access to international markets. In order to maintain their prominent positions in the global marketplace, TNCs frequently merge with other corporations (Bhagwati 2004). Some of these recent mergers include the $160-billion marriage of the world’s largest Internet provider, AOL, with entertainment giant Time-Warner; the purchase of Chrysler Motors by Daimler-Benz for $43 billion; and the $115-billion merger between Sprint Corporation and MCI WorldCom.

A close look at corporate sales and country GDPs reveals that 51 of the world’s 100 largest economies are corporations; only 49 are countries. Hence, it is not surprising that some critics have characterized economic globalization as ‘corporate globalization’ or ‘globalization-from-above’ (Brown & Lauder 2004).

TNCs have consolidated their global operations in an increasingly deregulated global labor market. The availability of cheap labor, resources, and favorable production conditions in the global South has enhanced corporate mobility and profitability.

Accounting for over 70% of world trade, TNCs have boosted their foreign direct investments by approximately 15% annually during the 1990s. Their ability to disperse manufacturing processes into many discrete phases carried out in many different locations around the world reflects the changing nature of global production. Such transnational production networks allow TNCs like Nike, General Motors, and Volkswagen to produce, distribute, and market their products on a global scale. Nike, for example, subcontracts 100% of its goods production to 75,000 workers in China, South Korea, Malaysia, Taiwan, and Thailand (Yip 1995).

Transnational production networks augment the power of global capitalism by making it easier for TNCs to bypass nationally based trade unions and other workers’ organizations. Anti-sweatshop activists around the world have responded to these tactics by enlisting public participation in several successful consumer boycotts and other forms of nonviolent direct action. As a consequence, TNCs have become extremely important players that influence the economic, political, and social welfare of many nations.

High inflation and the frequent attempts of the government to deal with it created extremely turbulent and unpredictable business conditions. Economic stabilization plans caused turmoil all across industry as firms tried to understand the new rules of the game. Even minor interventions such as changes in price adjustment rules, foreign exchange regulations, or changes in interest rates and credit regulations caused problems. There was a strong incentive for firms to try to insulate themselves as much as possible from this environment, and vertical integration was one means of doing this (Yip 1995).

Thirdly, the regulatory regime used to be, and actually continues to be, complex, contradictory, and lack transparency. It is in fact almost impossible for an entrepreneur to be a law-abiding citizen, respecting all tax, safety, and other regulations that exist. Therefore, firms have various matters to hide at any given time. This creates a situation where firm owners and managers are suspicious of any contact that goes beyond arm’s-length business transactions. Firm owners repeatedly told me that this was one reason why they would neither let outsiders enter their premises, nor enter into any kind of information exchange with other business people (Wade et al 2006).

Following Hirst & Thompson (1999) there is evidence that some national economies have increased their productivity as a result of free trade. Moreover, there are some benefits that accrue to societies through specialization, competition, and the spread of technology. It is less clear whether the profits resulting from free trade have been distributed fairly within and among countries. Most studies show that the gap between rich and poor countries is widening at a fast pace. Free trade proponents have encountered severe criticism from labor unions and environmental groups who claim that the elimination of social control mechanisms has resulted in a lowering of global labor standards, severe forms of ecological degradation, and the growing indebtedness of the global South to the North. Following Bhagwati (2004):

The problem with this policy was that it often resulted in bad debts. A breakthrough, however, came with the invention of microcredit programs, which go down to the very poor. The problem was solved by lending very small sums to a number of poor clients for tiny investments that improved their ability to earn a livelihood, and by letting each borrower effectively monitor other borrowers” (p. 57).

The existing power structure and the compliance of the middle classes to date has militated against widespread success by this means in the more developed countries though it is difficult to foretell what direction middle class protest might take, were its own well-being to be threatened by the increasing tendency of the global economy to stream the world into rich and poor (Wade et al 2006).

Economic globalization has a negative impact on social security funds are invested, how they used by governments, and other such fiscal changes. Among the most widely bruited of these is the proposal to privatize social security by investing premiums in stock market shares, banks, insurance companies, and other financial institutions. In some of these proposals, the government would simply invest the sums received through the payroll tax, and make payments from the profits (Wade et al 2006).

In other cases, the investments would be made in the name of the individual beneficiaries. In still others, workers would be free to make their own investments with the funds they would previously have paid into the program; and in still others there would be a combination of investments and continuation of social security coverage (Stiglitz 2002).

In sum, economic globalization has a negative impact on developing countries and allows rich states and their corporations exploit poor countries and use their resources as the main source of profits. During the last decade, wealthy countries have increased their attempts to establish a single global market through regional and international agreements such NAFTA and GATT. Rich states assure the public that the elimination or reduction of existing trade barriers among nations will enhance consumer choice, increase global wealth, secure peaceful international relations, and spread new technologies around the world. Thus, these actions and liberalization of trade lead to poverty and slow economic development of less developed states around the globe.

• Bhagwati, J. 2004, In Defense of Globalization. Oxford: Oxford University Press.
• Brown, P. and Lauder, H. Capitalism and Social Progress: The Future of Society in a Global Economy, London: Palgrave, 2001.
• Friedman, Th. 2000, The Lexus and the Olive Tree: Understanding Globalization. Anchor; 1 Anchor edition.
• Hirst, P. and Thompson, K. 1999, Globalization in Question: The International Economy and the Possibility of Governance, Second Edition; Cambridge: Polity Press.
• Levitt, Theodore. 1983, “The Globalization of Markets.” Harvard Business Review , pp. 92-102.
• Ohmae, Kenichi. 1985, Triad Power – The Coming Shape of Global Competition . New York: Freepress.
• Stiglitz, J. 2002, Globalization and its Discontents , London: Allen Lane.
• Wade, R., Kambhampati, U. S., Guista, M. D. 2006, Critical Perspectives on Globalization . Edward Elgar Publishing.
• Yip, George S. 1995, Total Global Strategy – Managing for Wordwide Competitive Advantage . Prentice Hall, New Jersey.
• The Analysis of Tendencies of Evolution of Global Governance
• Thomas Friedman’s “The World Is Flat” Book
• International Organizations in Global Politics
• Listening as a Tool in the Crisis Intervention Sphere
• Emerging Economics: The Impact of Privatization
• Work Ethics & Goals: Organizational Behavior
• The Force of Globalization and Technology
• Influences of Globalization on Modern Society
• Globalization and Its Impact on the 21st Century Global Marketplace
• Advantages and Disadvantages of Globalization Essay
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IvyPanda. (2021, August 15). Economic Globalization: Arguments For and Against. https://ivypanda.com/essays/economic-globalization-arguments-for-and-against/

"Economic Globalization: Arguments For and Against." IvyPanda , 15 Aug. 2021, ivypanda.com/essays/economic-globalization-arguments-for-and-against/.

IvyPanda . (2021) 'Economic Globalization: Arguments For and Against'. 15 August.

IvyPanda . 2021. "Economic Globalization: Arguments For and Against." August 15, 2021. https://ivypanda.com/essays/economic-globalization-arguments-for-and-against/.

1. IvyPanda . "Economic Globalization: Arguments For and Against." August 15, 2021. https://ivypanda.com/essays/economic-globalization-arguments-for-and-against/.

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Digital Economy: A Leveller or A Source of Economic Inequality

• 26 Sep 2024

India will be a Global Player in The Digital Economy.

— Sunder Pichai

The digital economy , defined by the pervasive use of digital technologies to deliver goods and services, has revolutionised the global economic landscape. It offers transformative potential for innovation, productivity, and inclusivity. On one hand, it provides new opportunities for wealth creation and democratises access to information and markets. On the other hand, concerns have emerged about its role in exacerbating economic inequality. Whether the digital economy acts as a leveller or as a source of economic inequality depends on several factors, including access to technology, skills, policy interventions, and market dynamics.

The digital economy, in many ways, has the potential to act as a powerful equaliser. It reduces the significance of geographic location and physical infrastructure, allowing businesses and individuals to engage in the global marketplace from virtually anywhere. This democratisation of access to markets and information enables small businesses and entrepreneurs in developing regions to compete with larger, more established companies, thereby levelling the playing field. For example, e-commerce platforms such as Amazon, Alibaba, and Etsy have allowed small businesses to access global customers, bypassing traditional market barriers.

India’s digital identity program, Aadhaar , and the Unified Payments Interface (UPI) have revolutionised access to financial services. Aadhaar has enabled millions of Indians to open bank accounts and access government services, while UPI has made digital payments seamless and accessible, even in rural areas. Indian e-commerce giants like Flipkart and Snapdeal have empowered small businesses to reach a national audience. These platforms provide sellers with the tools and infrastructure needed to compete with larger companies.

Digital Education Platforms like digital websites and learning apps have transformed the education sector and made education affordable and accessible for the students who live in remote areas. Digital education industry has made quality education accessible to students across the country, regardless of their location.

Several companies are leveraging digital technologies to connect farmers directly with markets, reducing intermediaries and ensuring better prices for their produce . Open Network for Digital Commerce (ONDC) is the government initiative aimed to democratise digital commerce by providing an open network for all stakeholders, including small retailers, to participate in the digital economy.

Digital platforms also foster inclusivity in the labour market. Several freelancing platforms have made it easier for individuals with digital skills to find work, regardless of their location. This phenomenon has particularly benefited people in developing countries, where high unemployment rates and limited local opportunities exist. By enabling people to participate in the global economy from their own homes, the digital economy creates new opportunities for economic mobility.

Despite its potential as a leveller, the digital economy can also exacerbate economic inequality, especially when access to digital resources is unevenly distributed. The "digital divide" , the gap between those who have access to the internet and digital technologies and those who do not, is a significant driver of inequality in the digital economy. In many parts of the world, particularly in rural and low-income areas, access to high-speed internet remains limited. This lack of access prevents individuals and businesses from taking full advantage of digital opportunities , thus reinforcing existing economic disparities.

Furthermore, the digital economy has given rise to a winner-takes-all dynamic in certain industries. Tech giants like Google, Amazon, Facebook, and Apple dominate their respective markets, amassing vast amounts of wealth and power. This concentration of wealth among a few major players contributes to the widening gap between the rich and the poor. Smaller companies and startups find it challenging to compete with these digital giants, leading to reduced competition and fewer opportunities for smaller players to thrive.

Another factor exacerbating inequality is the polarisation of the labour market. While the digital economy creates high-paying jobs for highly skilled workers in technology and data science , it often leaves low-skilled workers behind. Automation and artificial intelligence (AI) are replacing many low- and medium-skilled jobs, particularly in manufacturing, retail, and transportation. Workers without the skills to transition into the digital economy face unemployment or underemployment, exacerbating economic inequality.

Moreover, the gig economy, a prominent feature of the digital economy, presents mixed outcomes for workers. While gig platforms like Uber, and DoorDash etc. offer flexible work opportunities, they often come with low wages, job insecurity, and a lack of benefits. Workers in these sectors, particularly in developing economies, are vulnerable to exploitation and economic instability, further entrenching inequality.

To ensure that the digital economy acts as a leveller rather than a source of inequality, governments and institutions must implement targeted policy interventions. Bridging the digital divide is essential. Investments in digital infrastructure , particularly in underserved regions, are crucial to ensuring that everyone can participate in the digital economy. This includes expanding access to affordable high-speed internet, providing digital literacy training , and ensuring that marginalised communities have the necessary tools to benefit from digital opportunities.

Moreover, policies aimed at regulating the dominance of tech giants are necessary to foster a competitive digital economy. Regulations that promote fair competition can help create a more level playing field for smaller businesses and startups . Additionally, labour laws that protect gig economy workers and ensure fair wages, job security , and access to benefits are crucial to preventing exploitation and reducing economic inequality.

Educational reforms are also needed to equip workers with the skills required to succeed in the digital economy. Governments should prioritise STEM education and v ocational training, particularly in areas related to technology and data science, to prepare the workforce for the jobs of the future. Lifelong learning programs and reskilling initiatives are also essential for helping workers adapt to the rapidly changing economic landscape.

The digital economy holds immense potential to act as a leveller by democratising access to information, markets, and opportunities. However, without proactive measures to address the digital divide, market concentration, and labour market polarisation, it risks exacerbating economic inequality. The challenge for policymakers, businesses, and societies is to ensure that the benefits of the digital economy are broadly shared, and that no one is left behind in this digital transformation. Through targeted interventions and inclusive policies, the digital economy can become a force for equality, rather than a source of division.

Digital Transformation is a Fundamental Reality for Businesses Today.

— Warren Buffett

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Navigating China’s Inflection

Photo: freshidea/Adobe Stock

Commentary by Jude Blanchette

Published September 26, 2024

This commentary is part of a report from the CSIS Geopolitics and Foreign Policy Department entitled The Global Impact of the 2024 U.S. Presidential Election . The report features a set of essays assessing the meaning of the election for Europe, Russia, Eurasia, the Indo-Pacific, the Americas, Africa, and the Middle East.

For all of Chinese leader Xi Jinping’s surface-level confidence about China’s domestic strengths and growing international influence, his policy agenda—both at home and abroad—is sputtering.

Domestically, China’s economy is grappling with a profound economic deceleration exemplified by unprecedented levels of youth unemployment and a pronounced erosion of consumer and business confidence. Foreign firms no longer see China’s vast domestic market as an imperative destination for investment. Indeed, as the head of the EU Chamber of Commerce in China put bluntly , “Companies are beginning to conclude that, considering supply chain risks, considering anticipated lower profits in China, considering the continued barriers . . . that maybe other markets are becoming more competitive, more attractive.” The property sector, once a pillar of domestic growth, is in disarray, with major property developers now in various stages of default and bankruptcy. This situation has sparked broader apprehension about systemic vulnerabilities within the financial sector. Moreover, local governments are contending with escalating debt burdens and constrained fiscal capacity, severely hampering their ability to address routine governance challenges, including the payment of civil servant salaries.

The Xi administration is increasingly grappling with public discontent. Stringent implementation of zero-Covid policies throughout much of the Covid-19 pandemic fueled widespread frustration, which eventually manifested in unprecedented public demonstrations in late 2022. Although China has eased these restrictions, public confidence in the government’s crisis management has waned. In private discussions, many Chinese interlocutors have expressed disillusionment with Xi’s policy agenda and even Xi himself, criticizing his inflexibility and reluctance to adapt. Entrepreneurs, in particular, bemoan the stifling political and regulatory climate, prompting many to explore business opportunities in more favorable international markets.

On the international front, Xi’s foreign policy has certainly yielded successes, yet it has also provoked considerable backlash. Beijing’s alignment with Russia throughout its war against Ukraine has exacerbated tensions with Europe, likely permanently. Its regional neighbors are increasingly apprehensive about China’s growing ambitions and military capabilities. India, with its more fractious and violent border disputes with China, has grown more vigilant of Beijing’s expanding influence and military presence. In Southeast Asia, nations such as Vietnam and the Philippines are particularly unsettled by China’s assertive territorial claims in the South China Sea. The rapid advancement of China’s military capabilities has catalyzed a closer partnership between Japan and South Korea. Beijing’s unprecedented show of force against Taiwan, including the firing of short-range ballistic missiles over the island in August 2022, has made the risk of a Chinese invasion all too plausible. This region-wide concern has catalyzed closer ties with the United States and other allies to counterbalance China’s influence and safeguard regional stability.

China Priorities in the First 100 Days and Beyond

In addition to the maturing strategic discussion in the United States about how to confront China’s aggression and growing military and technological capabilities, there should be a focus on how the United States and its allies can leverage Beijing’s growing setbacks and weaknesses.

First, growing discontent with Xi’s policy agenda offers a unique opportunity for the United States to leverage its open, pluralistic society as a magnet for Chinese scientists, academics, and entrepreneurs who no longer see China as an environment conducive to innovation and creativity. Research shows that AI researchers who attend graduate school in the United States overwhelmingly choose to stay in the country to work. Conversely, 90 percent of Chinese AI researchers who attend school in China remain in China. The United States thus faces a choice: Does it want the best and brightest Chinese thinkers to make breakthroughs on AI in China or in the United States? The United States can attract those disillusioned by China’s increasingly restrictive and unpredictable political climate with smart investments and policies. Legislative efforts, such as the Keep STEM Talent Act of 2023 , are a step in the right direction. But the United States also needs an aggressive push to address its antiquated immigration policy to ensure that it facilitates the brain drain that Xi has created. Similarly, Silicon Valley, Boston, and Austin should welcome with open arms Chinese technology entrepreneurs who no longer see China’s political and regulatory climate as allowing for the next Jack Ma.

Second, and perhaps more controversially, the political and public skepticism about Chinese firms investing in the United States and setting up operations there should be reevaluated. While concerns about national security and intellectual property theft are essential, the United States could adopt a more nuanced approach that balances these risks with the economic benefits that investment from private Chinese companies can bring. As it stands, flows of Chinese foreign direct investment (FDI) into the United States have cratered since 2016. According to research by the Rhodium Group, the number of Americans employed by Chinese firms decreased from 229,000 in 2017 to 140,000 in 2022. The next administration should make public comments welcoming Chinese greenfield investments that do not threaten U.S. national security.

Finally, as Xi’s aggressive foreign policy continues to sour relations with China’s neighbors, a Harris or Trump administration should increase the coalition-building efforts with U.S. allies and partners that have gained momentum over the past four years. One of the key areas demanding greater attention is building partnerships that can help keep the peace in the Taiwan Strait. While many countries in the region have greatly increased their engagement with Taiwan, they too often take a “bystander” approach to cross-Strait dynamics. Yet there is no avoiding the profound economic and military costs of a conflict between the People’s Republic of China (PRC) and Taiwan, should it break out. The next administration should expand engagement with regional allies, especially Japan, Australia, South Korea, and the Philippines, specifically focusing on scenarios of conflict in and around the Taiwan Strait, should the PRC launch a unilateral attack. The United States should also work more closely with Taiwan to bolster its economic resilience, as well as invite allies and partners to join these discussions. Supply chain resilience is one such priority area where all countries in the region have a stake in Taiwan’s security. More importantly, Taiwan should be brought into all of these discussions to the extent practical. Here, U.S. willingness to directly lean into these discussions can help create space for others to do the same.

Jude Blanchette holds the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2024 by the Center for Strategic and International Studies. All rights reserved.

Jude Blanchette

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