THE PARAMETERS OF CONTEMPORARY GLOBALIZATION
No matter how many different numbers are presented or how frequently one hears them, the growth of international economic activity in the past thirty years remains staggering. Figure 1 plots the growth of global flows in trade, foreign direct investment and international portfolio investment (equities and bonds). Although the scales for trade and capital are very different, the trend lines are similar and familiar. International economic activity grew at increasingly rapid rates over the period, and the rates of growth were faster in more liquid markets (foreign exchange > portfolio > FDI > trade).3 In 1970, exports plus imports constituted roughly one quarter of worldwide GDP. By 1997, the figure had almost doubled to over 45%. Global annual flows of international portfolio investments (in bonds and equities) and FDI both constituted around 0.5% of world GDP
in 1970. In 1997, the figures were approximately 5% for portfolio flows and 2.5% for FDI flows. In 1998, the global stock (i.e. accumulated flows) of FDI is estimated at $3.4 trillion – roughly 10% of global output [Mallampauly and Sauvant 1999: 34-5].
Figures 2 and 3 shows a strong correlation between the growth of international economic flows and the liberalization of foreign economic policies around the world. The correlation between global trade flows and (un-weighted) average taxes on trade (revenues from tariffs, duties, etc. as a percentage of total trade) between 1973 and 1995 was -0.89. The reduction in tariff-type barriers was to some measure offset by increasing use of non-tariff barriers – in the OECD at least [Garrett 1998a: 811]. Moreover, although
trade taxes more than halved over the period, they still averaged 8% of total trade revenues in 1995. Nonetheless, the global trend line is surely indicative of the fact that global trade flows and trade liberalization around the world have moved in lock step in
recent decades.
Figure 3 reveals a similar pattern with respect to international capital flows (combined portfolio and FDI) and the portion of countries in the world with open capital accounts (i.e. no significant restrictions on cross border capital movements according to the IMF).4 There is, however, one interesting divergence in these trends evident in the figure. International capital flows took off in mid 1980s (fueled largely by mushrooming portfolio flows), with a brief blip down during the international recession at the end of the
decade. But the trend to open capital accounts postdates the take off in capital flows by about five years – it was only in the 1990s that countries in large numbers opened their capital accounts.5 This suggests that flows preceded policy change – consistent with the
technological determinism thesis.6 As Dani Rodrik [2000] and Robert Wade [1996] have emphasized, one should not conclude from the steep growth curves on international economic flows and policy
liberalization that a truly seamless worldwide market is emerging. Table 1 summarizes flows and policy data for all the countries for which data are available in the 1990s (see Appendix 1 for the national level data).7 The first thing to note about this table is that the standard deviations for the different measures of globalization on the whole world sample (the bottom panel) were typically larger than the means on these variables – implying
considerable cross-national variation in market integration. The coefficient of variation (i.e. standard deviation/mean) was in fact only substantially less than one for trade flows.
The variations in trade taxes may seem surprising given the spate of regionally and multilaterally-coordinated efforts at trade liberalization in recent decades. But while customs unions like the EU impose common external trade barriers on non-members, the
GATT-WTO regime continues to allow for more flexibility. For example, data collected by Michael Finger and his World Bank colleagues [Finger et al. 1996: 67] show that the standard deviation of national average applied MFN tariff rates for a sample of 53
countries after the Uruguay Round was 9.2% (with a mean of 10.6%).
No matter how many different numbers are presented or how frequently one hears them, the growth of international economic activity in the past thirty years remains staggering. Figure 1 plots the growth of global flows in trade, foreign direct investment and international portfolio investment (equities and bonds). Although the scales for trade and capital are very different, the trend lines are similar and familiar. International economic activity grew at increasingly rapid rates over the period, and the rates of growth were faster in more liquid markets (foreign exchange > portfolio > FDI > trade).3 In 1970, exports plus imports constituted roughly one quarter of worldwide GDP. By 1997, the figure had almost doubled to over 45%. Global annual flows of international portfolio investments (in bonds and equities) and FDI both constituted around 0.5% of world GDP
in 1970. In 1997, the figures were approximately 5% for portfolio flows and 2.5% for FDI flows. In 1998, the global stock (i.e. accumulated flows) of FDI is estimated at $3.4 trillion – roughly 10% of global output [Mallampauly and Sauvant 1999: 34-5].
Figures 2 and 3 shows a strong correlation between the growth of international economic flows and the liberalization of foreign economic policies around the world. The correlation between global trade flows and (un-weighted) average taxes on trade (revenues from tariffs, duties, etc. as a percentage of total trade) between 1973 and 1995 was -0.89. The reduction in tariff-type barriers was to some measure offset by increasing use of non-tariff barriers – in the OECD at least [Garrett 1998a: 811]. Moreover, although
trade taxes more than halved over the period, they still averaged 8% of total trade revenues in 1995. Nonetheless, the global trend line is surely indicative of the fact that global trade flows and trade liberalization around the world have moved in lock step in
recent decades.
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Figure 3 reveals a similar pattern with respect to international capital flows (combined portfolio and FDI) and the portion of countries in the world with open capital accounts (i.e. no significant restrictions on cross border capital movements according to the IMF).4 There is, however, one interesting divergence in these trends evident in the figure. International capital flows took off in mid 1980s (fueled largely by mushrooming portfolio flows), with a brief blip down during the international recession at the end of the
decade. But the trend to open capital accounts postdates the take off in capital flows by about five years – it was only in the 1990s that countries in large numbers opened their capital accounts.5 This suggests that flows preceded policy change – consistent with the
technological determinism thesis.6 As Dani Rodrik [2000] and Robert Wade [1996] have emphasized, one should not conclude from the steep growth curves on international economic flows and policy
liberalization that a truly seamless worldwide market is emerging. Table 1 summarizes flows and policy data for all the countries for which data are available in the 1990s (see Appendix 1 for the national level data).7 The first thing to note about this table is that the standard deviations for the different measures of globalization on the whole world sample (the bottom panel) were typically larger than the means on these variables – implying
considerable cross-national variation in market integration. The coefficient of variation (i.e. standard deviation/mean) was in fact only substantially less than one for trade flows.
The variations in trade taxes may seem surprising given the spate of regionally and multilaterally-coordinated efforts at trade liberalization in recent decades. But while customs unions like the EU impose common external trade barriers on non-members, the
GATT-WTO regime continues to allow for more flexibility. For example, data collected by Michael Finger and his World Bank colleagues [Finger et al. 1996: 67] show that the standard deviation of national average applied MFN tariff rates for a sample of 53
countries after the Uruguay Round was 9.2% (with a mean of 10.6%).
Table 1 also examines market integration in countries at different levels of development (and in the case of high income countries, distinguishing the stable industrial democracies of the OECD from other well developed nations). Comparing the means for the OECD countries with those for the lowest income nations (1997 GNP per
capita < $786, comprising almost all of Africa, as well as the world’s two most populous countries, China and India) provides simple and stark evidence that there are “in” and “outs” in the purportedly global economy. Mean trade flows in the two groups were
comparable (though the composition of these flows was clearly very different, with the poor category relying disproportionately on the export of natural resources). This probably reflects the fact that, as standard gravity models show, factors such as country size and proximity to neighbors (which have nothing to do with level of development)
have marked bearing on trade volumes.
The high and low-income groups differed dramatically, however, on every other dimension of market integration. FDI flows were more than twice as large in the OECD as in the low income group; international portfolio investment was almost 25 times as
large; trade taxes were less than 1/25 as large a portion of trade volumes; and capital accounts were more than ten times as likely to be open.
Even within the OECD category, however, considerable differences in market integration remain. At one end of the spectrum, Belgium and the Netherlands are the OECD’s most “globalized” economies. There are also numerous instances of relative non-integration. The US and Japan are very small traders (at least relative to the massive
sizes of their economies), and FDI flows are scant in Japan. Even after a decade of radical market opening in the 1980s, Australia, Canada and New Zealand remain considerably more protectionist than the OECD norm (based on trade taxes on manufactures); Greece
and Spain only liberalized their capital accounts at the end of the 1990s.
But soothsayers would probably want to highlight instances of high and growing market integration among the poorest countries as harbingers of the world of tomorrow.
China, for example was a major recipient of FDI inflows in the 1990s. Moreover, 1990s Indonesia resembled OECD norms on most of the basic indicators of globalization. But it would simply be inaccurate to portray these as more than isolated – though clearly
important – exceptions to the rule that the world’s poorest countries remain largely disconnected from the international economy. For example, while popular commentary might lead one to believe that software engineers working for Microsoft and Sun
Microsystems and telecommuting from Bangalore and Hyderabad to Seattle and Silicon Valley are the norm in the Indian economy, on most basic indicators the country remains an essentially closed economy.
At the other end of the spectrum, Table 1 also highlights the distinctiveness of the small wealthy non-OECD countries that are typically conduits for trade and international finance (Hong Kong and Singapore), small oil exporters (Kuwait and the United Arab
Emirates) or tax havens (the Bahamas and the Cayman Islands). Very high levels of trade and capital flows, higher indeed than even the most integrated OECD nations, characterize these countries.9 Ohmae and Rosecrance believe that these “region states” or “virtual states” are the wave of the future. But it is hard to see how Brazil or China could ever become Singapore or the Cayman Islands.
Table 2 asks a different question about developments at the national level in the 1990s: did different facets of market integration go together? There is some relatively weak evidence in the affirmative. As most modern economists believe, it does appear that trade and FDI are complements, rather than substitutes (the correlation between the two was a moderate 0.40). The correlation between FDI and international portfolio investment was weaker but still positive (0.27). Countries that imposed fewer trade taxes also were somewhat more likely to have open capital accounts (the correlation was 0.33).
Source New Life
