In our Globalization Report 2014, we examined how far individual countries benefited from increasing globalization between 1990 and 2011. In the new Globalization Report 2016, we extend the period under review to cover 1990 to 2014. As was the case in 2014, industrialized countries are the biggest winners from globalization.
In order to answer the question of how far the progression of globalization increases economic growth, the first step was to draw up a globalization index, which measures how interconnected a country is with the rest of the world. This index is very closely based on the well-established “KOF Index of Globalization” produced by the Swiss Federal Institute of Technology (ETH) in Zurich. In addition to indicators on economic interconnectedness, it also includes information on the social aspects of globalization, and how politically integrated a country is in the world.
The period under review is from 1990 to 2014. The data enable a globalization index to be drawn up 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 results of globalization measured in this way for selected countries. We can see, that for many developed countries, their score on the globalization index has stagnated or even fallen since 2000/2001. Since 2007, following the Lehman collapse, the globalization index scores for some 35 countries have fallen. The financial and economic crisis thus caused a setback for globalization.
Measuring the growth effects induced by globalization
The second step involved using regression analysis to calculate what impact an increase in globalization has had on the growth of real (i.e. inflation-adjusted) GDP per capita. We see this measure as being the key indicator, because from the point of view of individual citizens it is not the GDP, but GDP per capita which serves best as a rough guide to average living standards. In relation to the period from 1990 to 2014 and to the 42 economies studied, the calculations produced the following results: if the globalization index rises by one point, this leads to an increase in the growth rate of real GDP per capita of around 0.3 percentage points.
The final step was to compare the actual change in real GDP per capita between 1990 and 2014 in the 42 countries with a hypothetical growth path. For this growth path, it was assumed that between 1990 and 2014 there was no intensification in the international interconnectedness of all the countries studied. This means that the globalization-induced growth gains that resulted from the actual evolution of globalization can be eliminated. The results of this process can be explained by taking Germany as an example (see Figure 2).
In Germany in 1990, real GDP per capita was around €22,000. By 2014, it had risen to €30,400. Without increasing globalization as defined by the globalization index used here, real GDP per capita would have only reached around €29,200. As a result of increasing globalization between 1991 and 2014, real GDP per capita in the year 2014 was therefore €1,160 more than it would have been without this advance in globalization. Over the whole period, GDP per capita growth totaled €27,000. Spread out across the 24 years, it means that increasing globalization had raised the average GDP per capita in Germany by around €1,130 per year. This calculation was carried out for all 42 countries; globalization-induced GDP growth was achieved in every country (see Figure 3).
Implications for economic policy
In our view, the results of Globalization Report 2016 lead to two main conclusions for economic policy.
- Firstly, developments over recent years show that slowing or even reversing global interconnectedness between countries have a negative impact on economic growth. Economic isolationist efforts, expressed for example by closing borders or protectionist measures, are made at the cost of citizens’ economic well-being.
- Secondly, it has been shown that it is the developed industrialized nations which continue to benefit most from globalization, because it is for them that increasing globalization generates the largest GDP per capita growth in absolute terms. After all, the industrialized countries started off with considerably higher GDP per capita. The income gap in absolute terms between industrialized countries and emerging or developing countries has actually increased due to globalization. This growing income inequality poses a risk for the global economy, because it could lead to louder calls for protectionist measures in those emerging and developing countries which are negatively affected. This would have a negative impact on all countries, in particular on export countries such as Germany.
However, to turn our backs on globalization would take us down the wrong path – for both the developed and the emerging economies. On the contrary, especially those emerging and developing countries which have reached only below average levels on the globalization index thus far still have the biggest potential to globalize – and thus to generate high globalization-induced growth effects. This is why it is essential that emerging countries become better integrated in the global economy.