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Globalization Thematic Group. Globalization. What is globalization? Driving forces Measures Effects Response: Policies and Institutions. What is Globalization ?. The increased freedom and capacity of individuals and firms to:

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Thematic Group



  • What is globalization?
  • Driving forces
  • Measures
  • Effects
  • Response: Policies and Institutions

What is Globalization ?

  • The increased freedom and capacity of individuals and firms to:
    • undertake economic transactions with residents of other countries
    • operate on a global scale

Driving Forces of Globalization

  • A reduction in official obstacles/barriers for conducting business with foreigners
  • Fast reduction and convergence of transaction costs associated with doing this business

Examples of price decline in

transport and communication

  • Between the early 1980's and 1996 real sea freight costs fell 70%.
  • Real air freight costs have fallen 3-4% a year over a long period.
  • Real costs of international phone calls fell 4% a year in the developing countries in the 1990's and 2% a year in the industrial countries.

Cost of a 3-Minute Telephone Call,

New York to London

(Constant 1990, U.S. $)



Examples of Innovation Driving

Improved Quality/ Lower Cost


easier tracking

less pilferage/losses

faster port services

Electronic data

easier tracking

faster delivery


(better scheduling)

just-in-time inventory


Fiber optics

Lower costs


Average Air Transport Revenue

per Passengers Mile

(in 1990 US dollars)


Average Tariffs

in Industrial Countries


Measures of Globalization

  • Trade integration
  • Financial integration
  • Global production networks
Trade to GDP Ratios Rose Dramatically over the Last Decade(Export plus import as a percentage of GDP)



Developing countries

High-income OECD

developing countries and foreign direct investment filtering for low fdi to gdp ratios 1990 94
Developing Countries and Foreign Direct Investment:Filtering for low FDI to GDP ratios, 1990-94

Number of countries

of which

global production networks
Global Production Networks
  • Local Firms
  • Low Labor Cost
  • Local Knowledge
  • Domestic Distribution
  • MNEs
  • Proprietary Technology
  • Management Know-How
  • Global Brands
  • Global Distribution
  • Scale
  • Direct Ownership
  • Joint Venture
  • Licensing
  • Franchising
  • Supplier Agreement

Special Characteristics of GPNs

  • Many studies have shown that firms which engage in global production enjoy unique, difficult to replicate assets--usually technology or differentiation
  • Many studies have also shown that foreign firms usually pay higher wages, have higher productivity, and greater export orientation--their difficult to replicate assets enable that
  • Certain parts of the world have become magnets for GPN in recent years--the Mexico-US. border; Guandong, adjoining Hong Kong; parts of Poland; parts of Malaysia; the Bombay and Bangalore region in India--this is where growth rates are often hitting 10% a year--and where the upgrading to higher value-added activities is occurring most rapidly

Effects of Globalization

  • Growth
  • Adjustment costs and inequality

Openness and Growth

Adam Smith


Sachs & Warner


Ben David


Sebastian Edwards


  • Coastal regions grew faster--cheaper to transport by water and engage in division of labor
  • After adjusting for PCI and other factors, open economies grew 2-5% faster than slow economies
  • About 7-8 papers on the issue of convergence and its relation to growth
  • * In general, no convergence
  • * Shows that, over 1929-84: PCI in 48 US states converged systematically to that in NY state
  • * States that had half the average US income in 1929 grew 1% faster than the average. NY state (richest) grew about 1% slower than average, at 0.7%
  • * EU early years--little K&L flows--saw systematic convergence; half-life of the income gap to the average country fell from 75 years in 1900-1933 to 13 years in 1959-68
  • Using trade policy indicators in study of 93 countries finds that openness induces faster total factor productivity growth.
adjustment costs and inequality
Adjustment costs and inequality
  • Workers in protected sectors of the economy may lose their jobs as grade liberalization proceeds
  • Wage inequality may increase as a result of diffusion of more capital/science-based production that favor skilled over unskilled labor
financial misery index since july 2 1997 mean of changes in currency stock market interest rates
Financial Misery Index since July 2, 1997(mean of changes in currency, stock market, interest rates)

Response to Globalization:


  • Macroeconomic stability
  • Liberalisation of trade / prices / factor markets / FDI
  • Privatization
  • Orderly liberalization of capital flows
  • Better access to international markets / technology / infrastructure
  • Safety nets to ease adjustment costs

Response to Globalization:


  • Efficient public administration
  • Promote and enhance competition
  • Enforcement of rights / contracts
  • Regulatory framework for private provision of infrastructures
  • Institutions to facilitate the adoption of standards and norms
  • Sound financial systems