Globalisation, International Competitiveness and Growth

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GLOBALISATION, INTERNATIONAL COMPETITIVENESS

AND GROWTH: ADVANCED AND EMERGING MARKETS,

LARGE AND SMALL COUNTRIES

DOMINICK SALVATORE

Department of Economics

Fordham University, New York, [email protected]

The past three decades have witnessed a rapid tendency toward globalisation in the world

economy. A great deal of controversy exists, however, as to whether and to what extent glo-

balisation has increased nations international competitiveness and growth. After discussing the

common characteristics of the rapidly growing economies and the meaning and importance of

globalisation, this paper examines the relationship among globalisation, international compe-

titiveness and growth during the most recent period of rapid globalisation for all the countries

for which data exists as a group, and then separately for advanced and emerging markets, and

for large and small countries.

Keywords: Globalisation; international competitiveness; growth; globalisers; non-globalisers.

JEL Classification: F43

1. Introduction

The past three decades have witnessed a rapid tendency toward globalisation in the world

economy. A great deal of controversy exists, however, as to whether and to what extentglobalisation has increased the international competitiveness and growth of nations

around the world. Joseph Stiglitz (2002) concludes that globalisation has benefited

mostly the rich or advanced countries at the expense of the less developed of poor

countries. Jagdish Bhagwati (2004), on the other hand, comes strongly in defense of

globalization. Paul Krugman (1994) states that nations need to consider only pro-

ductivity and that concern with competitiveness is a dangerous obsession. This paper

examines the relationship between globalisation, international competitiveness and

growth in advanced and emerging markets, and in large and small countries over the mostrecent period of rapid globalisation, which started in the early 1980s.

2. The Growth Report

In 2008, the high-powered Commission on Growth and Development published The

Growth Report (2008) which provided an in-depth analysis of the common

Journal of International Commerce, Economics and Policy

Vol. 1, No. 1 (2010) 2132

World Scientific Publishing Company

DOI: 10.1142/S179399331000007X

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http://dx.doi.org/10.1142/S179399331000007Xhttp://dx.doi.org/10.1142/S179399331000007X


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characteristics of the 13 high-growth economies of the post-war period. The high-

growth countries are defined as those that achieved an average growth rate of at least

7 per cent per year over a period of at least 25 years from 1950 to 2005. 1

Although the Commission could not find any unique blueprint for ensuring highgrowth, it found that the high-growth countries shared five common characteristics.

They:

(1) Fully exploited the world economy;

(2) Maintained macroeconomic stability;

(3) Mustered high rates of savings and investment;

(4) Let markets allocate resources;

(5) Had committed, credible and capable governments.

While not specifically mentioned by name, globalisation and international com-

petitiveness seem essential characteristics embedded in a high-growth strategy. The

first characteristic (fully exploited the world economy) means globalisation and the

fourth characteristic (let markets allocate resources) is an essential ingredient of

international competitiveness.

3. Globalisation of Production and Labour Markets

There is a strong trend toward globalisation in production and labour markets in the

world economy today. For those firms and nations that do take advantage of this trend,

the results are increased efficiency, competitiveness and growth.

Global corporations play a crucial role in the process of globalisation. These are

companies that are run by an international team of managers, have research and

production facilities in many countries, use parts and components from the cheapest

sources around the world, sell their products globally, and are financed and owned by

stockholders throughout the world. More and more corporations today operate on thebelief that their survival requires them to be one of a handful of global corporations in

their sector. This is true in the automobile, steel, telecommunications and aircraft

industries, and for companies that produce computers, consumer electronics, chemi-

cals, drugs and many other products and services.

One important form of globalisation in the area of production is outsourcing, or the

foreign sourcing of inputs. There is practically no major product today that does not

have some foreign inputs. Foreign sourcing is often not a choice made by corporations

in the hope of earning higher profits, but simply a requirement for those that wish toremain competitive. Firms that do not look abroad for cheaper inputs risk not being

able to compete in world and even domestic markets. Such low-cost, offshore

1The 13 high-growth countries and the period of their high growth are: Botswana (19602005), Brazil (19501980),

China (19612005), Hong Kong SAR (19601997), Indonesia (19661997), Japan (19501983), Korea (19602001),

Malaysia (19671977), Malta (19631994), Oman (19601999), Singapore (19672002), Taiwan (China) (1965

2002) and Thailand (19601997).

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purchase of inputs is likely to continue to expand rapidly in the future, and is being

fostered by joint ventures, licensing arrangements and other non-equity collaborative

arrangements.

Foreign sourcing can be regarded as manufacturings new internationaleconomiesof scale in todays global economy. Just as companies were forced to rationalise

operations within each country during the 1980s, they now face the challenge of

integrating their operations for their entire system of manufacturing around the world

in order to take advantage of the new international economies of scale. The most

successful multinational corporations are those that focus on their core competencies

which are indispensable to their competitive position over subsequent product

generations and outsource all the rest from outside suppliers (see Salvatore, 2010).

Even more dramatic than globalisation in production is the globalisation of labourmarkets. Work that was previously done in the United States and other industrial

countries is now often done much more cheaply in some emerging markets. This is the

case not only for low-skill, assembly-line jobs, but also for jobs requiring advanced

computer and engineering skills. In fact, a truly competitive global labour force has

been developing that is willing and able to do their jobs most efficiently at the lowest

possible cost. Even service industries, such as making airline reservations, processing

tickets and answering calls to toll-free numbers are not immune to global job com-

petition. Highly skilled and professional people are not spared from global compe-tition, either.

Workers in advanced countries are raising strong objections to the transfer of skilled

jobs abroad. Nevertheless, companies in all advanced countries are outsourcing more

and more of their work to emerging markets in order to bring or keep costs down and

remain internationally competitive. In the future, more and more work will simply be

done in those emerging markets best equipped to do a particular job most economi-

cally. If governments in advanced nations tried to restrict the flow of work abroad to

protect domestic jobs, their firms would risk losing international competitiveness andthey may end up having to move all of their operations abroad.

Globalisation in production and labour markets is thus important and inevitable

important because it increases efficiency, and inevitable because international

competition requires it. Besides the well-known static gains from specialisation in

production and trade, globalisation leads to even more important dynamic gains from

extending the scale of operation to the entire world and from leading to the more

efficient utilisation of capital and technology of domestic resources at home and

abroad.

4. The Degree of Globalisation

Does globalisation lead to greater international competitiveness and faster growth? To

begin answering this question we need a measure or index of globalization. The best

such measure is KOF Index of Globalization (2009). This provides a cardinal measure

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of the degree of globalisation of various countries based on each countrys (1) degree

of economic globalisation, which is measured by trade and financial flows, (2) social

globalisation, which is measured by the personal contacts (information and cultural

flows) between the nations residents and residents of other nations, and (3) politicalglobalisation measured by the nations participation in international organisations.

Table 1 gives the globalisation index of the 53 countries2 for which data are also

available on their international competitiveness and growth (to be used later to show

the relationship between a nations level of globalisation and the level of its inter-

national competitiveness and growth). From Table 1 we can see that 19 out of the

22 advanced countries (large and small marked by an asterisk) and 17 out of 23

small countries (advanced and emerging marked by a plus sign) appear in the top

half of the list, and so we can conclude that the more globalised countries are over-whelmingly advanced and small, as opposed to emerging and large. A country is

defined as large if its population exceeds 1112 million people. To be noted is that

although the most recent KOF Index of Globalization became available in 2009, it is

based on 2006 data and so it more appropriately refers to the year 2006.

Table 1. Globalization indices, 2006.

Country Index Country Index Country Index

1. Belgium* 91.5 19. Slovenia 82.4 37. Ukraine 69.3

2. Ireland* 91.0 20. Norway* 82.3 38. South Africa 67.1

3. Netherlands* 89.9 21. Germany* 81.8 39. Thailand 66.5

4. Switzerland* 89.9 22. Slovak Republic 81.2 40. Turkey 66.4

5. Austria* 89.1 23. Croatia 80.6 41. Korea 65.9

6. Sweden* 88.7 24. Australia* 80.4 42. Russia 65.2

7. Denmark* 87.4 25. United Kingdom* 79.3 43. Argentina 65.2

8. Canada* 86.3 26. Italy* 78.8 44. Mexico 64.1

9. Luxembourg* 86.3 27. Poland 78.0 45. Peru 63.6

10. Hungary 85.2 28. Lithuania 77.2 46. Japan* 63.5

11. Czech Republic 84.7 29. Greece* 77.0 47. Brazil 61.7

12. New Zealand* 84.6 30. Malaysia 76.2 48. Philippines 60.6

13. Finland* 84.2 31. Jordan 75.5 49. China 59.9

14. Singapore 84.1 32. Chile 75.0 50. Colombia 59.7

15. Portugal* 83.9 33. United States* 74.9 51. Venezuela 58.4

16. France* 83.7 34. Bulgaria 74.9 52. Indonesia 57.7

17. Estonia 83.5 35. Israel 74.7 53. India 51.4

18. Spain*

82.9 36. Romania 70.6

Source: KOF Index of Globalization (2009).

2 IMD calculated the competitiveness index for 57 economies but four of them (Hong Kong, Kazakhstan, Qatar and

Taiwan) had to be excluded because either the globalisation index or the growth data (that we need to use later in

conjunction with the globalisation and competitiveness indices) were not available.

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5. The World Competitiveness Index

There are several measures of the overall international competitiveness of nations. One

of the best is the one by the Institute for Management Development (IMD) in

Lausanne, Switzerland (IMD, 2008, 2009). Competitiveness is defined as the ability of

a country or company to generate more wealth for its people than its competitors in

world markets and is calculated as the weighted average of four competitive factors.

These are: (1) economic performance, which includes domestic economy, international

trade, international investment, employment and prices; (2) government efficiency,

which includes public finance, fiscal policy, institutional framework, business legis-

lation and societal framework; (3) business efficiency, which includes productivity,

labour market, finance, management practices, and attitudes and values; and

(4) infrastructure, which includes basic infrastructure, technological infrastructure,

scientific infrastructure, health infrastructure and education.

Table 2 gives the competitiveness index for 2009 for the same 53 countries listed in

Table 1. From the table we see that in 2009 the United States was ranked as the most

competitive economy with an index of 100. Japan is ranked 15th with an index of 78.2

while the United Kingdom is 19th with an index of 76.1. This means that on a systemic

or economy-wide level, Japan and the United Kingdom are about 2224 per cent less

internationally competitive than the United States.

Table 2. Competitiveness indices, 2009.

Rank/Country Score Rank/Country Score Rank/Country Score

1. United States 100.0 19. United Kingdom 76.1 37. Jordan 56.0

2. Singapore 95.7 20. Belgium 76.0 38. Indonesia 55.5

3. Switzerland 94.2 21. Israel 73.4 39. Philippines 54.5

4. Denmark 91.7 22. Chile 70.9 40. Poland 53.95. Sweden 90.5 23. Thailand 70.7 41. Hungary 53.9

6. Australia 88.9 24. Korea 68.4 42. Mexico 53.9

7. Canada 88.7 25. France 68.1 43. Turkey 53.4

8. Finland 88.4 26. Czech Republic 66.8 44. South Africa 52.9

9. Netherlands 87.8 27. India 66.5 45. Russia 52.8

10. Norway 86.6 28. Lithuania 64.9 46. Italy 52.1

11. Luxembourg 86.3 29. Slovenia 64.6 47. Colombia 51.5

12. Germany 83.5 30. Slovak Republic 63.9 48. Greece 50.8

13. New Zealand 79.6 31. Portugal 62.6 49. Croatia 48.6

14. Austria 79.3 32. Estonia 62.6 50. Romania 46.915. Japan 78.2 33. Peru 59.3 51. Argentina 43.1

16. Malaysia 77.2 34. Bulgaria 59.0 52. Ukraine 40.4

17. Ireland 77.0 35. Spain 57.8 53. Venezuela 39.1

18. China 76.6 36. Brazil 56.9

Source: IMD (2009).



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Since 18 out of the 22 advanced countries listed in Table 2 appear in the top half of

the list, we can conclude that the more internationally competitive countries are

overwhelmingly advanced. On the other hand, only slightly more than half (13 out of

the 23) of the small countries in the table are in the top half of the list of the mostcompetitive countries.

To be noted is that measuring international competitiveness is an ambitious

and difficult undertaking. One alleged shortcoming with the above competitiveness

measure is the sometimes low observed correlation between the competitive index and

the real per capita income of the nation in relation to other nations. For example,

Germany has a much higher competitiveness index than Italy, even though its real per

capita income is only slightly higher than Italys. But this is not a shortcoming of the

competitiveness index because it measures the nations ability and prospect for futuregrowth, while a high per capita income measures the nations past economic successes

and growth. Italys relatively high per capita income today is based on past accom-

plishments (between 1950 and 1970 Italy grew faster than any other advanced country

with the exception of Japan). Its very low international competitive index today reflects

Italys poor growth prospects for the future. Indeed, Italy has been growing more

slowly than most other advanced countries during the past two decades, exactly as

predicted by its past low international competitiveness index.

Furthermore, a nation that ranks low on its overall competitiveness score may behighly competitive in some sectors, and this is clearly shown by the more dis-

aggregated data that go into the calculation of the overall competitiveness index for the

entire economy. But even the overall index for the entire economy has significance and

importance. Entrepreneurs and managers around the world do rely on these overall

international competitiveness indices or measures in deciding whether to invest in one

nation rather than another. For example, all other things being equal, a multinational

corporation would prefer to invest in Germany rather than in Italy because of the much

higher competitiveness index for the former than for the latter.Even Krugmans (1994) criticism that competitiveness is a dangerous obsession

can be easily disposed of. According to him, a nation needs only to be concerned with

its productivity and forget about international competitiveness. The statement seems

profound but in fact it is not so because a higher productivity leads to greater inter-

national competitiveness. Indeed, the United States is more internationally competitive

than the United Kingdom, Japan, the euro area and the large, advanced, continental

European countries because of its greater efficiency (productivity) which is based on its

lower fiscal pressure, lower cost of starting a new business and less labour marketrigidity, but a greater ease of doing business (see Table 3).

6. Relationship between Globalisation and International Competitiveness

We are now ready to address the question of whether and to what extent the more

globalised nations are more internationally competitive than the less globalised

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nations also growing more rapidly than less internationally competitive nations? This

is the next question that we will try to answer.

7. International Competitiveness and Growth

Table 5 gives the average growth rate of real GDP for the 20002007 period for the

same 53 countries for which the globalisation and international competitiveness

indices were given in Tables 1 and 2. Table 5 shows that the emerging markets grew

much faster than advanced countries. China, of course, tops the growth rankings with a

spectacular average growth rate of 10.3 per cent. Among the other BRICs (Brazil,

Russia, India and China), India does very well (with an average growth rate of

7.8 per cent for the 2000

2007 period), Russia does well with an average growth rateof 6.6 per cent, but Brazil (with a growth rate of 3.3 per cent) does not. With a

population growth rate of 1.2 per cent and the need to bring its still significant sub-

sistence sector into the market, Brazil needs to double its growth rate in order to stop

being the nation of the future.

Have more internationally competitive nations grown more rapidly than less

internationally competitive nations? As the Commission on Growth and Development

pointed out in its Growth Report (2008), growth depends on many factors ranging

from being open and globalised, having macroeconomic stability and good govern-ments, as well as having flexible markets. This only confirmed what has been more or

Table 5. Average growth of real GDP, 20002007.

Country Growth Country Growth Country Growth

1. China 10.3 19. Colombia 4.9 37. Finland 3.0

2. Estonia 8.1 20. Croatia 4.8 38. Sweden 3.0

3. Lithuania 8.0 21. Korea 4.7 39. Canada 2.74. India 7.8 22. Argentina 4.7 40. United States 2.6

5. Ukraine 7.6 23. Czech Rep. 4.6 41. United Kingdom 2.6

6. Russia 6.6 24. Venezuela 4.6 42. Mexico 2.6

7. Jordan 6.3 25. Chile 4.5 43. Norway 2.4

8. Romania 6.1 26. South Africa 4.3 44. Austria 2.0

9. Slovak Rep. 6.0 27. Greece 4.3 45. Belgium 2.0

10. Turkey 5.9 28. Slovenia 4.3 46. Denmark 1.8

11. Singapore 5.8 29. Luxembourg 4.2 47. France 1.8

12. Bulgaria 5.7 30. Poland 4.1 48. Swtizerland 1.8

13. Ireland 5.5 31. Hungary 4.0 49. Japan 1.7

14. Malaysia 5.4 32. New Zealand 3.4 50. Netherlands 1.6

15. Peru 5.4 33. Spain 3.4 51. Germany 1.0

16. Thailand 5.3 34. Brazil 3.3 52. Italy 1.0

17. Indonesia 5.1 35. Australia 3.2 53. Portugal 0.9

18. Philippines 5.1 36. Israel 3.2

Source: World Bank (2009b).

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less generally known for a long time (see, for example, Salvatore, 1993; Grilli and

Salvatore, 1994; Stern, 2002; and Salvatore, 2004).

Table 6 shows the rank correlation between the international competitiveness and

the average growth rate for all 53 countries being studied together and then for varioussub-groups of nations. Of course, correlation does not show causality that is, that

greater international competitiveness possibly leads to higher growth but neither

does regression analysis. Table 6 shows that the correlation between the 2008 inter-

national competitiveness index and the average growth rate of real GDP over the

20002007 period is negative when calculated for all the 53 countries studied. But if

we break the sample down in sub-groups, we get some interesting results. The RCC for

the 22 advanced countries is 0.28, but for the 10 large advanced countries it is 0.33,

while it is 0.12 for the 12 small advanced countries. The result is similar foremerging markets: the RCC 0:25 for all 31 emerging market economies, 0.27 for the

20 large emerging markets, but only 0.02 for the 11 small, emerging market econ-

omies. Separating the transition economies from the large and small emerging market

economies (i.e., without double-counting) gives a RCC 0:01.

Thus, we can conclude that international competitiveness has some positive cor-

relation with growth in large countries (advanced and emerging) but not for small

countries (advanced or emerging). With a small domestic market, small countries

needed to be open or globalised from the very beginning of the development process ifthey wished to grow rapidly. That is, for small countries, openness or globalisation has

always been a necessary (if not a sufficient) condition for rapid growth. If globalisation

leads to faster growth in small countries, it may do so directly and through other

domestic factors not captured by our international competitiveness index. The lack of

correlation between international competitiveness and growth in small countries may

be due to the fact that their growth rate does not exhibit much difference or variation.

While not exactly addressing the question as to why there is practically a zero or even

negative correlation between small countries level of international competitiveness

Table 6. Rank correlations between international

competitiveness in 2008 and average growth or real

GDP in 20002007.

Groups of Countries Rank Correlation

All Countries (53) 0.35

All Advanced Economies (22) 0.28

Large advanced economies (10) 0.33

Small advanced economies (12) 0.12

All Emerging Markets (31) 0.25

Large emerging economies (20) 0.27

Small emerging economies (11) 0.02

Transition economies (12) 0.01



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and their growth rate, the data presented next show that globalised economies (large

and small) have been growing faster than non-globalised economies.

8. Globalisation and Growth

Figure 1 shows the weighted yearly average per capita income at purchasing power

parity (PPP) for advanced (rich) nations, globalised developing countries and non-

globalised developing countries for each decade since 1960. The data is from Dollar

and Kraay (2001), updated by the author to the 20002007 period. Dollar and Kraay

identified 24 globalised developing countries based on their trade opennness.4 The

non-globalised developing countries include the worlds poorest countries.

Figure 1 shows that advanced or rich nations experienced a declining growth ratefor every decade since 1960. The opposite is true for globalised developing countries.

Non-globalising developing countries grew fairly rapidly during the 1960s and 1970s,

but then their growth rate collapsed in the 1980s and has risen since then but remains

fairly low. If we consider the most recent period of rapid globalisation since the early

1980s, we find that globalised developing countries grew increasingly faster than

advanced countries and sharply reduced their inequalities in relation to the former.

Source: Dollar and Kraay (2001). Updated to 20002007 using data from the World Bank (2009b).

Figure 1. Weighted yearly average real (PPP) per capita income growth in rich nations,

globalisers and non-globalisers, 19602007.

4The 24 globalised developing countries identified by Dollar and Kraay are: Argentina, Bangladesh, Brazil, China,

Colombia, Costa Rica, Cte dIvoire, the Dominican Republic, Haiti, Hungary, India, Jamaica, Jordan, Malaysia, Mali,

Mexico, Nepal, Nicaragua, Paraguay, the Philippines, Rwanda, Thailand, Uruguay and Zimbabwe.

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On the other hand, the non-globalised developing countries grew less slowly than even

the advanced countries (except for the 20002007 period) and so their relative

inequalities increased vis--vis the other two groups of countries.

Thus, globalisation seems to be strongly associated with higher growth in globa-lized developing countries during the most recent period of rapid globalisation. Non-

globalised developed countries grew faster than the other two groups of countries

during the 1960s and 1970s because when starting from a very low level of income, a

nation can grow rapidly by mobilising resources (as in the case of Russia in the former

Soviet Union), but as development proceeds, efficiency, openness and a market

economy become more and more crucial to continued rapid growth. Non-market

economies did not globalise and grew very slowly during the 1980s and 1990s. They

only started growing faster when they opened up to the world economy and movedtoward a market economy.

If the nation did not open its economy and globalise and if it did not restructure its

economy to move toward a market allocation of resources, its efficiency and inter-

national competitiveness remained low, and so did its growth.

9. Conclusions

Globalisation is important because it increases productivity; it is inevitable becausenations and their firms cannot hide from it. The more globalised economies are usually

more internationally competitive than less globalised ones. More internationally

competitive countries also tend to grow faster than less internationally competitive

ones. But this seems to be true only for large countries. For small, highly globalised

economies, growth seems to depend mostly on other internal factors not directly

captured by the competitiveness index.

References

Bhagwati, J (2004). In Defense of Globalization. NY: Oxford University Press.

Commission on Growth and Development (2008). The Growth Report: Strategies for Sustained

Growth and Inclusive Development. World Bank, Washington, D.C.

Dollar, D and A Kraay (2001). Growth is good for the poor. Policy Research Working Paper

2587. World Bank, Washington, DC.

Grilli, E and D Salvatore (1994). Economic Development. Westport, Connecticut: Greenwood

Press.

IMD (2008). World Competitiveness Yearbook. IMD, Lausanne, Switzerland.IMD (2009). World Competitiveness Yearbook. IMD, Lausanne, Switzerland.

KOF Index of Globalization (2009). http://globalization.kof.ethz.ch.

Krugman, P (1994). Competitiveness: A dangerous obsession. Foreign Affairs 73(2), 2844.

OECD (2009). Economic Outlook 85.

Salvatore, D (1993). Protectionism and World Welfare. NY: Cambridge University Press.

Salvatore, D (2004). International trade and economic development. Institutions and Economic

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Salvatore, D (2010). Managerial Economics in a Global Economy, 7th ed. NY: Oxford

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Stiglitz, J (2002). Globalization and Its Discontents. New York: W.W. Norton.World Bank (2009a). Doing Business in 2009. NY: Oxford University Press.

World Bank (2009b). World Development Indicators. World Bank, Washington, DC.

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