What’s globalization all about?

Globalization has been a major topic of conversation for years. Recently, it became even more prevalent with the UK decision to exit the European Union (i.e. Brexit) and the election of Donald Trump as the president of the USA. Many countries are seeing a resurgence of populist politicians who embark on a discourse that clearly states that globalization is bad. We could examine the origins or the theoretical benefits of globalization but instead we will look at its global economic consequences.

Globalization has always existed, but its pervasiveness has drastically increased over the last 40 years with the development of new technologies. A simple way of quantifying the extent of economic globalization is to chart the historical evolution of Global Trade as a percentage to the World GDP (Gross Domestic Product) over the years. International trade is the calculation of the value of goods and services that transit between countries (i.e. the sum of exports and imports for each country). GDP is the calculation of the economic wealth generated in a country over a period of time, generally one year. If we add the GDP for each country, we obtain the World GDP. This graph presents the evolution over the years of this ratio (value of Global Trade / value of World GDP) since 1980.

global-trade-since-1980Economic globalization of the world. Source: BBC

This graph has three clear periods. The first between 1980 and 1993 sees a stable period. Between 1993 and 2008, we see rapid growth. Beyond 2008, there is a levelling. The change in the 1990’s is linked to the emergence of developing countries, particularly China, with the rapid increase of their role in becoming the production locations of the world. Since the 2008 recession, the world has seen a levelling of international trade, which is the result of a general economic slowdown, combined with protectionist efforts in some countries.

From 1993 to 2008, economic globalization increased by 50% (from 40 in 1993 to 60 in 2008). With substantially higher GDP growth rate in developing countries than in developed nations, many more jobs were created in developing countries than in the developed ones. This can be confirmed by analyzing the flow of Inward FDI (Foreign Direct Investments, i.e. productive investments entering a foreign countries), which is a source of new jobs in the countries that receive those investments from companies that are located outside that country.

fdi-inflows  Inward FDI, global and by categories of economies, 1995-2014 (Billions of US dollars). Source: http://www.worldinvestmentreport.org/wir2015/wir2015-ch1-global-investment-trends/

We first see that the flow of investments across nations has substantially increased over the years, confirming the on-going internationalization of economies. We also see that the percentage of Inward FDI allocated to developing economies has increased from roughly 38% to 55%. Let us see how this compares to the population by regions.

  Inward FDI by region Population
  1995 2014 Billion % of world
Developing Economies 38% 55% 5.9 81%
Developed Economies 62% 45% 1.4 19%
Total: 100% 100% 7.3 100%

Analysis by geographic areas. Sources: UNCTAD, CIA Factbook

It is interesting to note that in spite of the increase of Inward FDI into developing nations, from 38% to 55% (i.e. the creation of new jobs), it is not yet in proportion to their population. Developing countries want Inward FDI in proportion to their share of the world population, and at 55%, they are substantially short of the 81% that they want. This analysis explains why, generally, developing countries are avid supporters of economic globalization. A recent speech by China’s President (Xi Jinping) given at the World Economic Forum in Davos confirms China’s keenness to see the globalization process continue.

Two keys issues are often raised against globalization. The first issue is not that the absolute wealth of people living in developed countries has decreased but that their economic wealth has barely improved contrary to the substantial increase in developing nations. So, people in rich countries are dissatisfied to see their relative position weakened. This phenomenon has been identified in studies that indicate that individual happiness is often derived from the gap with our “neighbours”. People in rich countries see that individuals in poor countries are getting richer, but that their own economic position is not improving, and for a consumption based society, that is simply not acceptable.

The other issue is wealth distribution between individuals (i.e. the Gini Coefficient). On a world basis, the equality of wealth distribution between nations has substantially improved, but on a national basis, the equality has worsened. This is consistent across the world, affecting some countries more than others. For example, in China, in the 1980’s, everyone was equally poor, while in the last 10 years substantial economic inequality emerged. Gone is the equal society. The national government has acknowledged this situation and is working to correct it.

Overall, globalization has accelerated the realignment of the relative distribution of wealth. People in developing countries have benefitted from this realignment. People in developed nations have seen their economic position increase only marginally if at all. Therefore, relatively speaking, they are worse off. Welcome to the greatest economic realignment in the history of the world.

Pierre

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