Globalization: fads, fictions and facts: fads are no substitute for clear thinking about facts

Business Economics, Jan, 2004 by Tim O'Neill

Globalization--the increased integration of national economies--has become a blanket term covering a number of facts and fictions. What are the facts? First, it can be argued that in important respects the world is no more globalized than in the 19th century. Second, economic integration is much more pervasive on a regional than global basis. Third, poor countries as well as rich ones beneift from globalization. Fourth, localization is more pervasive than standard measures would suggest.

In the public discussion of globalization--a term now so overused that eyes glaze over at its mere mention--we observe both fads and fictions. Hopefully, recourse to facts combined with analysis will counterbalance the most egregious instances of fiction.

Globalization has been seen by its detractors as a great evil in the world--the source of ills ranging from rising income inequality and poverty to environmental degradation and cultural imperialism. Its more exuberant proponents proclaim it to be a key source of economic and human development, low inflation, high productivity, and even democratization. What do the evidence and a reasonable analysis of its implications actually show?

First, let's clearly define our terms. For economists, globalization is, fundamentally, the increasing integration of the national economies of both advanced and developing countries. Economic integration is a process of increasing economic linkages or interdependencies between, or among, geographic areas. Such areas may be sub-national regions (e.g., provinces or states), countries, or groupings of countries. The economic linkages or interdependencies comprise flows of trade (exports and imports), capital (such as direct and portfolio investment), labour, and technology (including product and process innovations).

There may also be institutional and social manifestations of integration--particularly convergence of the regulatory and legislative structures governing commercial activity, of key components of social policy, of consumer "tastes," and even of language and culture. However, these are more likely to be outcomes of integration, not constituent elements. And, as I will argue, such manifestations tend to be very limited.

Some facts about Globalization

Deja Vu All Over Again

Apart from the term itself, which has emerged only in the last 20 years or so, (1) the patterns it described were initially observed in the latter half of the 19th century. They were reversed during the inter-war period in the 20th century, and then have re-emerged over the last 60 years.

In fact, when measured by the intensity of trade, investment, and labour flows, globalization was arguably more extensive before 1914 than after 1945. In the latter half of the 19th century, international trade grew by a factor of 25, while in the post-war period, global trade has grown by a factor of 21. Exports as a share of global GDP were higher in 1900 than in 2000. International capital flows relative to GDP were greater in the 1870-1914 period (averaging 3.3 percent) than at any period since then. Even with the rapid increase of capital movements over the last quarter century, capital flows relative to GDP averaged 2.2 percent in the 1990s.

Perhaps the most dramatic manifestation of earlier globalization is labour migration of the 19th century. In the absence of impediments to cross-border movements, over 60 million people emigrated from Europe to the Americas in the 1870-1913 period. The outflow amounted to 21 percent of Europe's population in 1870. Seen from the perspective of the New World, immigration contributed 40 percent of total labour force growth over that period.

Some have argued that, while the conventional indicators of globalization may suggest the current level of economic integration is not new, the pace is unprecedented. For example, Bosworth and Gordon (2001) contend that "driven by the technological advances .... and by policies and ideas.... global linkages ... far exceed those of earlier eras in degree, intensity, speed, volume and geographical reach" (pp. 2-3). However, in the nineteenth century, the invention and application of steam power, the use of metal in shipbuilding and railway construction, and the beginnings of mass production were transforming technological advances. The first two generated a sharp decline in transportation costs and helped spark a boom in international trade. The latter was a key source of rising productivity and living standards. They were every bit as profound in their impact on the economy of the 19th century as contemporary advances have been in the last 50 years. In addition, the telegraph and, later, the telephone radically changed communications within and between countries. As Watson (1998) has pointed out, the cost of cable communications was, within several years, only one percent of what it had been in 1851--"a decline in price that rivals the late-twentieth century decline in the price of computation" (p. 261).

What clearly is different about contemporary globalization is its geographic reach. Early in the 20th century, Western Europe and North America dominated trade and investment. Today, Asia has risen to prominence in the global economy. The decolonization in the immediate post-war period and the more recent (de facto) decolonization of the former Soviet Bloc countries have added a large number of independent countries to the global economy While they have added more instability to global financial markets, they have also contributed significantly to world growth and trade. While the financial crises of the past 30 years have been precipitated, in the main, in emerging market economies, it is also the case that the fastest economic growth and hence, contribution to world trade, has been in emerging market economies.