Economics Schools Conference, June 27th 2006

What Are the Economic Benefits of Globalisation?

Professor David Greenaway,

Leverhulme Centre for Research on Globalisation and Economic Policy,

University of Nottingham

Some Questions

• What is Globalisation?

• What Drives Globalisation?

• What are the Benefits of Globalisation?

• Why is Globalisation Controversial?

What is Globalisation?

Economic Globalisation - a process whereby national markets become more integrated and more interdependent

Growth of World Trade and Output

100.0

1000.0

Merchandise Exports Manufactured exports Merchandise production Manufactured output

What’s in a Shirt?This morning I went out and bought a shirt…..the

shirt I bought represents a triumph of international cooperation. The cotton was grown in India from seeds developed in the United States; the artificial fibre in the thread comes from Portugal and the material in the dyes from at least six other countries; the collar linings come from Brazil, and the machinery for the weaving, cutting and sewing from Germany; the shirt itself was made up in Malaysia……..(and was bought in the UK).

From Paul Seabright The Company of Strangers: A Natural History of Economic Life. Princeton University Press (2004)

What Drives Globalisation?

• Key Indicators of Globalisation– International trade– Cross border investment and international

outsourcing– Cross border migration– Financial market integration

Recent Trends in Trade• Value of Trade (2004)

Merchandise $8,907 billion

Services $2,125 billion• Growth of Merchandise Trade

1950-73 7.0% per annum

1974-90 4.0% per annum

1990-04 7.6% per annum• Growth of Services Trade

1990-00 6.5% per annum

2001-04 10.8% per annum

Recent Trends in Foreign Direct Investment ($billion)

 

1982 1990 2004

FDI Inflows 

59 209 648

FDI Inward Stock 802 1,954 8,902

Foreign Affiliate Sales

2,737 5,675 18,677

Foreign Affiliate Assets

2,091 5,899 36,008

Global GDP 11,758 22,610 40,671

20th / 21st CENTURY DRIVERS OF GLOBALISATION

• Falling man-made barriers

• Falling natural barriers

• Increased capital mobility

• Increasing labour mobility

• Technological development

Falling Man-Made Barriers

AVERAGE TARIFF RATES

0

5

10

15

20

25

30

France Germany Italy UK EU US

1950 Pre-Uruguay Round Post-Uruguay Round

Falling Natural Barriers

0

20

40

60

80

100

120

1920 1930 1940 1950 1969 1970 1980 1990

Ocean freight Air Transatlantic phone Satellite

What are the Economic Benefits of Globalisation?

• Specialisation and exchange– more efficient use of scarce resources– lower prices for consumers

• Consumer choice– wider range of goods and services

What are the Economic Benefits of Globalisation?

• Stimulus to economic growth– access to capital and labour– access to new technology

• Poverty alleviation– employment creation– economic growth

Growth of Real Income Per Person (Per cent per year) Globalisers Non-globalisers 1960s 1.4 2.4 1970s 2.9 3.3 1980s 3.5 0.8 1990s 5.0 1.1 Rise in Trade/GDP (per cent)

104 -18

Source: Dollar and Kraay (2000)

Real Income per Person (1990 dollars) 1870 1913 1950 1998 Africa 444 585 852 1,368 China 530 552 439 3,117 India 533 673 619 1,746 Latin America

698 1,511 2,554 5,795

UK 3,191 4,921 6,907 18,714 USA 2,445 5,301 9,561 27,331 Source: Maddison (2001)

Extreme Poverty in the World

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

NU

MB

ER

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

SH

AR

E O

F W

OR

LD

PO

PU

LA

TIO

N

Number Rate

Why is Globalisation Controversial?

DISTRIBUTIONAL ISSUES• Uneven shares of gains from trade

> intra-national (capital vs. labour; skilled and unskilled labour)> international (developed and developing countries)

• Uneven shares of gains from FDI> intra-national (capital vs.labour; skilled and unskilled labour)> international (host and source countries)

Why is Globalisation Controversial?

INTERNATIONAL RULES• ‘One set of rules for them and one set for us’:

> Coverage (e.g. movement of capital vs. movement of people)> Application (e.g. intellectual property vs. anti-dumping)

• Ideologically Driven International Organisations> ‘Washington Concensus’> Marginalisation of Developing Countries

Why is Globalisation Controversial?

ADJUSTMENT FRICTIONS• We do not live in a world of perfect

competition• Some individuals and groups suffer short-run

and maybe long-run losses• Winners are widespread, losers are

concentrated• Adjustment policies do not always

compensate

Jobs in the United States have been perceived as moving abroad ……. to low wage Japan in the 1950s and 1960s, to low wage Mexico in the 1990’s and most recently to low wage China. We can usually identify in advance which jobs will be displaced by foreign or domestic competition. But in economies at the forefront of technology, most new jobs are the consequence of innovation, which by its nature is not easily predictable. We can thus be confident that new jobs will replace old ones as they always have, but not without a high degree of pain for those caught in the job-losing segment of America’s massive job-turnover process.

Alan Greenspan, Chair of US Federal Reserve Board

Conclusions• Globalisation is not a new phenomenon• The current wave of globalisation is the most

intense since the nineteenth century• The pace of change is accelerating• There are long run gains from globalisation• But, there may also be short run costs for some• And some adjustment and distributional aspects of

the process may need to be managed

For resources on globalisation:

www.gep.org.uk