There is growing uncertainty in industrialized countries as to whether globalization means more opportunity or more risk. Trump, Brexit and increasing populism are direct consequences of this development. However, our Globalization Report 2018 shows for the third time in a row, as in 2014 and 2016: when measured in terms of real gross domestic product (GDP) per capita, industrialized countries continue to be the biggest winners of increasing globalization, while developing and emerging economies lag behind.
How Do We Know?
The main question our report is: What impact did the increase in globalisation between 1990 and 2016 have on real – i.e. inflation-adjusted – GDP per capita in the 42 countries analyzed. This indicator was chosen because it is more meaningful for the prosperity of citizens than the GDP of the economy as a whole. The extent of a country’s interdependence with the rest of the world is measured by an index that is very closely aligned with the established “KOF Globalization Index” drawn up by the ETH Zurich.
In addition to indicators on economic interconnectedness, it also includes information on social interconnectedness, and also how politically integrated a country is with the world. The period under review is from 1990 to 2016. The data can be used to draw up a globalization index for every country and every year, with scores between 0 and 100. The higher the number of points on the index, the more interconnected that country is with others in the world. Figure 1 shows the globalization measured in this way for selected countries.
How to measure the growth effects induced by globalization?
The second step uses regression analyses to calculate the impact of an increase in globalisation on the growth of real GDP per capita. The calculations come to the following result in regard to the period from 1990 to 2016 in the 42 analyzed economies. If the globalization index score rises by one point, this will lead to an increase of around 0.3 percentage points in the growth rate for real GDP per capita. The final step is to compare the actual change in real GDP per capita between 1990 and 2016 with a hypothetical development. For this development, it is assumed that between 1990 and 2016 there was no intensification in the international interconnectedness of all the countries studied. This means that the globalization-induced growth gains are eliminated. The results of this process can be explained by taking Germany as an example (see Figure 2).
- In 1990, real GDP per capita in Germany was around €21,940. By 2016, it had risen to €30,910 (an increase of €8,970).
- Real GDP per capita in 2016 would have only reached around €29,640 without increasing globalisation as defined by the globalization index used here. As a result of increasing globalization, real GDP per capita in 2016 was therefore almost €1,270 higher than it would have been without this increase in globalization.
- Over the whole period, GDP per capita gains totaled €29,900. Spread out across the 26 years, it means that increasing globalization raised real GDP per capita in Germany on average by around €1,150 per year.
- This calculation was carried out for all 42 analyzed countries. Globalization-induced GDP gains were achieved in all countries.
Who profits most from increasing globalization?
The extent of the average annual gains in real GDP per capita due to increasing globalisation is very different for the 42 countries under review (see Figure 3): The largest average income gains are found in Switzerland and Japan where they rose by an average of €1,900 and €1,500 per capita and year, respectively. Bringing up in the rear, when globalization gains are measured in this way, are the large emerging countries, including the BRIC countries (Brazil, Russia, India, China). Accordingly, the average real GDP per capita gains in China due to globalisation are only around €80 per year, while in India they are as little as €20.
Fundamentally, there are three reasons that the gains in GDP per capita from increasing globalization vary so much:
- First, the absolute amount of growth gains brought about as a result of globalisation depends on how high GDP per capita was to begin with. If GDP started at a level of €1,000, then a ten percent increase in income would lead to a gain of €100 in GDP. If GDP started at a level of €10,000 and increases by only two percent, the increase of €200 is a larger gain in absolute terms.
- A second important influential factor is the change in globalization during the analyzed period: The greater the globalisation index rises during the period, the higher the growth gains due to globalization are. Countries which already had a high score on the index (for example Belgium) have only a little room for further globalization gains.
- Finally, the time of the gains in the globalization index also plays an important role. If a country increases its score on the index only in the last year of the period under review, then that country can only achieve globalization-induced growth gains in that single year. By contrast, if the country increases its level of globalisation in the first year of the period under review, then this places per capita GDP on a higher level, which can be maintained during all subsequent years, generating globalisation-induced income gains every year.
Implications for economic policy
We take these results to draw three main conclusions:
- The developments in recent years show that slowing or even a reversal of global interconnectedness between countries has a negative impact on economic growth. Economic isolationist efforts, expressed for example by protectionist measures, are made at the cost of citizens’ economic well-being.
- Developed industrialized countries continue to benefit most from globalisation because increasing globalization generates the largest GDP per capita gains for them in absolute terms. The income gap in absolute terms between industrialized countries on the one hand and emerging or developing countries on the other has actually increased. This growing income inequality poses a risk for the global economy because it could lead to louder calls for protectionist measures in the emerging and developing countries that are negatively affected. This would have a negative impact on all countries, in particular export countries such as Germany.
- The growing popularity of globalisation-critical parties and politicians in many Western industrialized countries is partly due to the fact that the benefits of globalisation are not enjoyed by all citizens of a country. This development can also lead to growing protectionism.
However, turning our backs on globalization would take us down the wrong path. On the contrary: it is precisely the emerging and developing countries which have achieved only below average levels in the globalization index thus far and therefore still have great potential to globalize. By doing so, they could generate correspondingly high globalization-induced growth effects. This is why it is essential that emerging countries become better integrated into the global economy. In industrialized countries, it is necessary to spread the benefits of globalization more widely so that social acceptance of an open society is not lost.
If you enjoyed reading this post you will also like to get insights on our post on globalization and the NAFTA Countries.