Globalization and its effects(some evidence)

Jože P. DamijanUniversity of Ljubljana

Globalization

• Trade routes and the shrinking Globe• What defines globalization?

• Trade liberalization, capital account deregulation, IT rev.• Why is it proceeding rapidly?

• Evidence• Global trade flows• Foreign direct investment (FDI) flows

• Globalization: good or bad?

Evolution of globalization

History of globalization

• Traits of globalization can be traced to as far back as the Roman Empire

• The Silk Road started in China, reached portions of the Parthian Empire and ended in Rome

• The trade route helped to integrate the three economies of the Han Dynasty, Persian and Roman Empires.

History of Globalization

• The word "globalization" has been used by economists since 1981.

• The concepts only became popular in the later half of the 1990s.

• The first era of globalization (in the fullest sense) during the 19th century:• rapid growth of trade between the European imperial

powers, the European colonies, and the United States. • After World War II, globalization was restarted

• driven by major advances in technology, which led to lower trading costs.

GlobalizationDefinitions

• World wide integration and deepening of economic activities

• Integrated production and consumption systems• Facilitated by IT revolution, liberalization and

deregulation

• Unprecedented mobility of goods, services, capital and people

• Events all over the world strongly interdependent • i.e. global financial and economic crisis

Drivers of Globalization

• open markets - it could not happen if import quotas or high tariffs prevented the sales.

• cheap air transport - the beat-up old Boeings that have become the tramp steamers of modern trade.

• modern telecommunications - the vegetables are delivered to order, i.e. messages must be sent to the farmers in a way that used to be possible only in advanced countries with good phone systems.

Evidence

Global trade flows 1948-2011

• 1970-1980: increase by 1.7 t$ (6.4x)• 1980-2000: increase by 4.2 t$ (3.2x)• 2000-2001: increase by 12 t$ (2.9x)

Source: UNCTADstat.

Global trade 1948-2011

• until 1972: advanced countries peaked at 77%• 1974-1985: oil boom• after 1986: devel.c. up from 21% to 43%, advanced down to 53%

Source: UNCTADstat.

Export boom in developing countries

• after 1970: export boom started in Asia, revival after 1985 (from 300 b$ to 4.2 t$• China export boom only after 1999 (from 200 b$ to 1.9 t$)

Source: UNCTADstat.

Export shares of developing countries

• Africa down to 8%, Latin Am. down to 14%• China up to 24%, other Asia stabilized at 54%• Oil exporters down from 30% to 19%

Source: UNCTADstat.

Another dimension of global trade - services

• goods’ exports up to 18 t$, services’ exports up to 4 t$• lower growth rates of services’ trade

Source: UNCTADstat.

Global trade openness: goods vs. services

• goods’ trade by far contributes more to GDP than services’ trade

Source: UNCTADstat.

Global trade openness

• In 1980-2011, trade openness increased by 10 ppt• Developing countries more open than advanced (by 10 ppt)

Source: UNCTADstat.

Global FDI stocks

• Similar trends of global FDI stocks as with global exports• 2/3 of global FDI stocks directed to advanced countries

Source: UNCTADstat.

Global FDI stocks

• Similar trends in exports and FDI between advanced and develp. countries,• …though faster growth in exports than FDI in develp. countries

Source: UNCTADstat.

Trade and FDI trends by decades

• Advanced: moderate export growth and decreasing trend of FDI growth• Developing: increasing trend of export growth along FDI growth

Source: UNCTADstat.

Share in global FDI stocks

• Developing c. gain shares after 2004 (from 21% to 32%)

Source: UNCTADstat.

Inward FDI stocks by regions

• Advanced: North Am. losing shares in attracting FDI against Europe (54% -->31%)• Developing: Asia losing shares against Lat. Am (67% -->60%)

Source: UNCTADstat.

Top-30 FDI locations by decades

• Gaining: CHN, BR, CH, SNG, RU, IND, PL• Losing: US, UK, HK, DE, CND, AU, IT

Source: UNCTADstat.

FDI trends in EU-NMS

• Top locations: HU, CZ, PL• Latecomers: SK, BG, RO

Source: UNCTADstat.

Summary of evidence

• Increased global openness for trade and FDI• Three waves of export boom

• second one in Asia after 1985 • China export boom only after 1999

• FDI boom• but a real boom only after 1998

• Exports and FDI trends highly correlated• Services trade increasing, but slower than goods

EffectsGood or bad?

Effects of globalization

• Open economies grow faster• clear evidence

• What about the effects on manufacturing and employment?• Advanced vs. developing countries

• Other effects• Poverty, unequality• labor standards, child & women labor

Open economies grow faster

• Average growth rate in open econ. bigger by 3.3 ppt

Source: UNIDO

Clear differences between regions

• Fastest avg. growth in OECD, followed by Asia and Lat. Am, Africa slow

Source: UNIDO

Fastest growing open economies

• Asian countries on top

Source: UNIDO

Benefits of globalization

• Increased choice, lower prices • Greater potential for growth • Increase international economies of scale • Greater employment opportunities • Led to massive increases in wealth for many

countries• World poverty decreased

World poverty decreased

Source: Worldbank/Poverty gap.

… however, mostly effect of China

Source: Worldbank/Poverty gap.

Other benefits (1)

• Income inequality for the world as a whole is diminishing

• Infant mortality has decreased in every developing region of the world

• Life expectancy has almost doubled in the developing world since World War II

• Hans Rosling: “200 years that changed the world”

Other benefits (2)

• Between 1950 and 1999, global literacy increased from 52% to 81% of the world. • female literacy as a percentage of male literacy has

increased from 59% in 1970 to 80% in 2000.

• The percentage of children in the labor force has fallen from 24% in 1960 to 10% in 2000.

• Similar increasing trends toward electric power, cars, radios, and telephones per capita, as well as a growing proportion of the population with access to clean water.

The flip sideDeveloping countries

• Unregulated power of large, multi-national corporations, which damage • the democratic rights of citizens, • the environment, particularly air quality index and

rain forests, • as well as national governments sovereignty to

determine labor rights • right to unionize for better pay, and better working

conditions• women and child labor

The flip sideAdvanced countries (1)

• De-industrialization trends• The shift to service work: the low cost of offshore workers

enabled corporations to move production abroad. • the laid off unskilled workers are forced into the service sector

where wages and benefits are low, but turnover is high. • widening economic gap between skilled and unskilled workers.

• The loss of these jobs has also contributed greatly to the decline of the middle class which is a major factor in the increasing economic inequality

• Economic instability

The flip sideAdvanced countries (2)

• Effects of globalization on wages in US (BLS study, 2001)• in the period 1979-1999, 31% of those who lost a job due to trade

were not fully re-employed. • only 36% of the displaced workers were able to find a new job with

matching or higher wages, • 55% were at best working for 85% of their former wages, • and 25% were working for 70% or less of their former wage

• Effects on employment in US (BLS study, 2011)• 6 million jobs lost in U.S. manufacturing between 1979 and 2007

(from 19.6 to 13.7 million),• more than half of it after 2001 (trade liberalization with China)

The flip sideAdvanced countries (3)

• Global imbalances in trade and capital flows starting in the latter half of the 1990s

• These imbalances reflected a chronic lack of saving relative to investment in the US and other industrial countries,• combined with an extraordinary increase in saving relative to

investment in many emerging market nations. • In turn,

• the increase in excess saving in the emerging countries (resulted from rapid economic growth reduced investment rates, large buildups in foreign exchange reserves, and substantial increases in revenues by exporters of oil and other commodities) …

• resulting in large capital inflows for more than a decade in the US and some other advanced

• … made the foundations of the current global financial crisis

Ben Bernanke (2009)

Global shift

• Has globalization shifted global political powers?• From US to China?

• Chinese Professor Ad: "Now They Work for Us"