Globalization, Trade, Productivity and Development

Globalization is the integration of economies, industries, markets, cultures and policy-making around the world, as defined by the Financial Times. Initially, globalization referred to international trade - increased interconnectedness of product markets, but gradually expanded to include international capital flows, labor markets and migration, and recently broader areas such as culture, media, sports and entertainment. Economic globalization started to accelerate with trade liberalization and expansion after the World War II and picked up speed in the early 1990s which lasted until about 2007, then slowed down again after the 2008 global financial crisis. It also affected different geographical regions at varying degrees: countries in East Asia and Pacific experienced the most rapid pace while in the Europe and Central Asia the slowest and upper middle-income countries also experienced a rapid pace during the 1970-2015 in contrast to high income countries which had already a higher starting point. Some aspects of globalization evolved so rapidly: mobile telephone subscriptions increased at a stellar speed from 12 per 100 people in 2001 to 105 per 100 people in 2017, individuals using internet from 8 percent of population to 46 percent respectively. The rise of social media and instantaneous global communications have helped rapid expansion of globalization in culture and entertainment. Developments in information technology pushed envelope for financial globalization and developments in maritime transportation such as containerization made larger volumes of goods traded across in short time possible. Globalization and increased international trade are the major forces behind improved competitiveness and productivity, hence growth and development in the case of least developed economies. Although, the benefits of trade are conceptually very clear, and the world is full of positive anecdotes, there are still opposing views and myths regarding international trade. The political economy of trade is the key to understanding these opposing views. It is clear to everyone that it is not necessary for a company in New Jersey to produce the same goods which are produced at a lower cost in Pennsylvania. Once, borders and customs are introduced, as between countries, these very clear results are questioned. International relations and politics start to play a major role after this. Pressure groups find their ways of imposing restrictions on free trade. Results may not be beneficial for most of the people, but just a small number of economically powerful groups. The world has witnessed objections in developing countries to foreign direct investment before 1980s. A cursory look at academic journals or daily newspapers is enough to see the opposition in all circles. The argument was that multinationals from developed countries build factories in developing economies, make large profits, and repatriate these profits to their home countries, without helping much to host countries. On the other side, developed economies were pushing for free trade and free movement of capital. There are large markets with large demand in developing world, but not enough local production. These can be filled by large companies from developed countries. Developed economies slowly moved in that direction of a trade with a smaller number of restrictions. China, a socialist country initiated economic reforms in 1978 and finally become a member of the World Trade Organization in 1998. The collapse of the Soviet Union in 1991 also helped people to give support to marketbased economies and made any free trade argument sound more reasonable. These factors made movement towards a world free trade faster. A country has to be more competitive once its borders are opened to foreign goods. Producers in a closed economy can sell whatever they produce to domestic consumers who do not have much choice. With open borders, consumers have a choices and domestic producers should live up to expectations and deliver those goods. If borders are open to foreign companies, then those companies, which have the technology, can produce those goods at a lower cost because of lower wages. These goods are then exported to developed countries at a lower price, including the country that is the base for the company. All countries can benefit from this trade, but benefits may not be shared equally within a country. Protectionist trade policies were adopted by all the countries at various times. The reason may be to protect the domestic infant industry, or to generate additional government revenue, etc. In general, these policies lead to gains for domestic producers and losses for consumers. Since commodity prices are distorted as a result of these policies, the allocation of resources will ultimately be affected. Reduction in tariffs, especially after 1998, may have played a role in reduction in prices at a global level, and increases in world trade. If a tariff is imposed on a commodity, it may have the effect on the corresponding sector, and more. Higher prices will increase the cost of production in related products. Higher product prices will affect prices in other sectors. Higher prices and lower outputs are the outcomes in all the sectors. If this analysis is extended to other countries, the global economy may end up with higher prices and lower output. Global value chains (GVC) represent the changing nature of trade in the current wave of globalization. The fragmentation of production, vertical specialization and trade in tasks are the main features of this changing nature. The role of GVCs in trade and investment flows have been discussed a lot in academic and policy circles. The policy implications of GVCs are important. The proponents of GVC trade consider GVC as denationalizing comparative advantage, thus countries could industrialize by joining GVCs rather than by building their own. So integration into GVCs has been widely viewed as a strategic pillar for developing countries to become more competitive, to develop the skills and human capital of their labor force, and to acquire technology to industrialize and move into higher value-added production. This may result in escaping from middle-income trap for some countries. There is a lot of speculation and debate whether this is happening. The overall evidence is positive, but the benefits are not automatic. Another benefit of GVC framework is the revisiting trade statistics. Traditional statistics cover only the gross trade. Consequently, it is not possible to see the contribution of trade to national income. Within the GVC framework trade in value added can be estimated and better trade and industrial policies can be formulated. The last wave of globalization witnessed a dramatic increase in capital flows. Financial integration has become a key component of globalization which facilitated larger flows of portfolio investments and financial derivatives in addition to the foreign direct investment and inter-company loans across borders. The attitudes towards foreign direct investment (FDI) has undergone some changes. Outward investment was considered as the cause of job displacement, while the inward flow as replacing the domestic export industries. At certain periods these attitudes were justified and valid. The interaction between domestic governments and transnational corporations (TNCs) changed these attitudes and eliminated some of the concerns. At a different level the relationship between international trade and FDI is an issue of concern. Earlier studies implied that trade and FDI were substitutes. The recent theoretical and empirical studies on the other hand indicated that FDI and trade are complements. Indeed, there are number of factors involved in this process. However, the overall relation is beneficial to all parties. During the recent decades the income inequality has undergone some conflicting changes. Firstly, there has been some convergence between developed and developing countries. This is an unexpected development. This convergence is on average terms; some developing countries like China grew very fast, while some other developing countries lagged. Secondly, another unexpected development was the growing inequality in some developed countries. This happened in the last four decades. It was unexpected because trend after 1930s were more equal distribution of income. Finally, the global distribution of income shows a trend towards more equality. The combination of convergence and large number of people escaping from poverty led to more global equality. As extensive study in this report shows that economic reforms particularly liberalization of trade and capital, introduced in China and India and some other countries opened the formerly closed economies to global competition. These economies have grown uninterruptedly at high rates and hence the mean income increased considerably. The mean levels of income are still far below the average income levels of the middle classes in developed countries of income. However still billions of people escaped from poverty. The relationship between trade and inequality has been a controversial issue. The opponents of globalization blamed globalization and trade for job displacement and increasing inequality particularly in some developed countries. Theoretical and empirical studies indicate that trade in itself is not the cause increasing inequality. There are other political and social variables which determine the distribution of income. Furthermore, the increasing income equality is a serious problem for some countries but not for all. The between countries income equality has decreased and the convergence between advanced and developing economies became a possibility during this period. Global inequality of income as well as poverty decreased. These are the developments possibly outweighing the increasing inequality in some economies. Another important criticism of globalization is the increased risk of contagion of economic crises through interconnected financial and product markets as was seen in the 2008 crisis. As it occurred in the previous global economic crises the protectionist tendencies in the world have increased. With the great recession, flow of goods and services as well as capital decreased; then they tended to increase but not reached the pre-crisis levels. Another important development is the increasing possibility of trade wars and the dissolution of multilateral agreements on trade. As discussed in thisreport, globalization has had positive effects on the world economy whether one looks at increases in per capita incomes, growth, decreases in poverty, and decreases in inflation. The positive effects of globalization on productivity, competitiveness, economic complexity, and human developments are shown in detail in this report. On the other hand, this report demonstrates that, in general, economic equality has deteriorated with globalization. Further research is required to determine whether globalization or technological development is the major contributing factor to increasing inequality within countries.