It will marshal a great amount of economic evidence, and combine economic research with examples from the real world that supports the age-old consensus about free trade. Its main conclusion is that the fast increase in global trade in the three decades before the financial crisis substantially improved Western economies and the living standards of their citizens.
Globalization was a great force of spreading new technologies and providing new economic opportunity to labour in both developed and developing economies. Contrary to much commentary, it helped to put a higher premium on human capital and giving firms new chances to employ the staff they need to compete successfully.
Since the crisis, however, globalization has stalled — and global trade has become a casualty of increasing protectionism around the world and the weak macro-economic performance of the West. Trade is not growing much anymore — and, for the West as well as the Rest, that should be a great cause of concern, not for jubilation. There are many different ways to examine how globalization has improved businesses, living standards and the performance of the entire economy.
Let us start, however, with a quick primer on trade and what economists mean when they are talking about globalization. The period of globalization, between and , is unique because global trade grew very fast. Obviously, international trade developed in the decades before , and there has also been some growth after , but none of these periods come close to the expansion of trade during the era of globalization. Chart 1 and 2 make these developments visible. Chart 1 is an index of global exports — or how global exports have grown — between and In rough terms, trade growth was low and flat for about years.
The first acceleration of trade started in the s, and all the trade in the world grew by about ten times between and However, the real boom came between and Remarkably, international trade grew by almost 35 times in that period. But the chart also shows, trade has not been growing much in the past years. The global financial crisis in led to a big collapse in trade.
It recovered in the following two years, but then trade dropped again, and since then, trade has basically flatlined. Chart 1: An Index of Global Trade between and Source: Federico, G. Chart 2, on the other hand, looks at the development of the global stock of FDI between and In that period, the global stock of FDI grew from 0. What also makes the three decades between and unique is that international trade gradually became global. In the first decades after the Second World War, trade had mostly been about exchange between developed economies or, in practical terms, between countries in Europe and North America.
Some countries like Japan joined the bandwagon of international trade in the late s, but the real geographical equalization of trade happened in the thirty years that defined the period of globalization. In those decades, many more countries opened themselves up to trade through reductions of trade barriers and domestic reforms that made it possible to exchange goods and services across borders for instance, allowing the exchange of foreign currencies and enter into contracts with foreign firms.
As a consequence, they attracted investment from companies in other parts of the world and their international trade grew very fast — indeed faster than at any time in history. Another way to look at the growing role of trade, is to compare the size of the trade sector over time. For the world as a whole, the trade sector grew from about 25 percent in to about 58 percent in Some countries have a much larger trade sector than the global average.
In Sweden, for example, the trade sector in was about 85 percent of GDP, and Germany had exactly the same size of its trade sector. Three factors explain the flatlining of international trade in recent years. First, there has been weaker growth of demand for goods — especially industrial goods e. While that development is partly a natural factor of changing demand patterns, the second factor is more noxious: protectionism. Governments across the world have used the period since the crisis to substantially increase the amount of policies that explicitly discriminate against foreign firms see Box 2.
Third, explicit protectionism follows on the heels of a somewhat longer period of increasing regulatory costs of trade e. Chart 3 shows that there has been a clear trend break in regulatory trade barriers in the s the higher the index score, the greater the trade freedom and the lower the regulatory restrictions. Up till then, the degree of freedom to trade increased. Since then, however, regulatory restrictions on trade have increased substantially. And it does not stop there. In addition to these regulatory costs to trade come, for the services sector, different forms of non-trade regulations that have made cross-border exchange more difficult.
For instance, the use of occupational standards that fracture the global services market has increased substantially.
The higher the index score, the greater the trade freedom. There are several explanations to the remarkable growth of trade over time, but one obvious factor behind it has been firms and their business development. In a way, the growth of exports is just another way of saying that firms have gradually sold more to foreign customers or that foreign customers have played an increasingly important role for the total sales by the corporate sector. When data is informing us that global trade between and grew 35 times, it means in practice that the corporate sector expanded their foreign sales by 35 times.
Or to take the example of a single country: Swedish firms expanded their foreign sale from just north of billion SEK in to more about billion SEK in In , that share had gone up to 25 percent. As a thought experiment, try to imagine how a company would have evolved without globalization. There is no way to fully understand a counterfactual scenario like that, but it helps us to understand some of the differences in business opportunity between alternative scenarios. If their potential customer base is small, it means that every unit of sales has to recoup a larger share of the investments the firm made in developing and producing a product.
The flip side of the coin, however, is that the growth of customers abroad help these firms to spread development and production expenditures over many more unit of sales. Economists call this the scale benefit of globalization — and it is based in basic economies of scale. It has also been one of the tangible benefits for the corporate sector: globalization has enabled them to develop businesses that depend on sales of many units and to many different customers.
The same logic applies to many other sectors that require substantial development and production costs: automobiles, chemicals, computers, electronics, pharmaceuticals, and more. It is therefore unsurprising that the expansion in global trade during the age of globalization happened to a large extent in exactly these sectors. Another difference between the actual development and the imagined scenario of a non-globalized world is that globalization created opportunities for faster specialization of production and firms.
Some would perhaps see that a disadvantage, because gone are the days when an individual firm could build a corporate imperium that produced a huge variety of different products, often behind the protection of trade barriers. Look at Volvo. It is no longer a company that produces trucks, buses, cars, drugs, beverages, and frozen food. Even the automobile division is now split, with one part producing cars and the other trucks, buses and heavy vehicles. Thirty years ago, the Finnish champion Nokia was competing in many markets — television sets, household and paper products, rubber boots, and electricity — and was just about to break in the market for GSM handhelds.
Now it is a specialized producer of telecommunication equipment technology.
Specialization creates business opportunities because it is easier to step into new markets when it is not necessary to be a large entity with strong control over end customers. Markets that are specialized usually have greater space for new companies and they certainly make it possible to compete on the basis of new technology and a good offer. A company that is a skilled producer of automobile engine components does not need to produce an entire car and compete with larger firms such as Volkswagen and Toyota on the end customer market.
They can rather allocate all their resources to become even more competitive producers in engine components. That means, among other things, that their resources e. It is for this reason that the age of globalization experienced a growth in global trade that, functionally , reflected the breakup of large multinationals into fragmented supply and value chains.
The Economic Benefits of Globalization for Business and Consumers |
If companies had to rely on just domestic markets for their sales and inputs, they would not have been able to innovate and develop products in the way they actually have over the past 30 years. It would have been too costly, and — most likely — they would have to produce in ways that, compared with today, would have made the quality of products substantially lower. It is often forgotten how many markets in the pre-globalization era were dominated by expensive products with low quality.
And that did not happen by chance; it was rather the consequence of narrow opportunities for business in how they could compete and develop their offerings. Workers have benefitted substantially from the way that globalization increased the premium for scale and specialization. There is a general pattern in the world economy that open economies are much better for workers than less open economies see Box 4. And the improvements made in open economies partly comes from the fact that the new production they generate depends more on human capital. Workers that have more and better education, and that is better at delivering creative solutions to problems, have higher salaries and better employment conditions.
Equally important, if not more, is that the new business opportunities created by globalization ultimately have resulted in lower consumer prices.
About This Item
For most people, the effective reduction in the costs of consumer products — and, as a consequence, the radical increase in living standards — are likely the most visible effects of globalization. Households in Western economies have today a completely different welfare standard than in previous decades, and much of that is thanks to the benefits generated by freer and more trade in the world.
- Bobby Bowden On Leadership: Life Lessons from a Two-Time National Championship Coach.
- A Night at the Opera (MILF Diaries Book 4).
This is not a controversial observation: even opponents of globalization admit that consumer products generally cost less and are of better quality today than at any previous point in time. The way that economists express the same view is that globalization has been a significant contributor to disinflation over the past 30 years. Wages increased much faster during those decades than today, but most of that increase did not lead to higher living standards because inflation cancelled out the wage increase. Globalization and the new competition that it ushered into Western economies substantially helped to bring down inflation and to increase the real labour income.
Chart 4 sets out the development of real hourly earnings in the manufacturing sector in four countries in Europe France, Germany, Sweden and the United Kingdom between and , the start of the global financial crisis. Nominal earnings have been adjusted with the general consumer price index CPI for each country to provide an illustration of the earnings growth on top of the annual increase in prices of a given basket of usual consumer goods and services. There are differences between the sampled countries, but they have all had periods of weak real growth in wages because of inflation.
Whereas the British and French worker saw its real hourly earnings more than double over the period, the Swedish worker really started to be better off only in the mids — after two decades of high inflation and macroeconomic troubles. In fact, the Swedish worker did not experience any increase of its real wage between mids and mids. In France, there was a steep growth between the late s and early s, but then growth flattened.
Since the last s the pace of real earnings growth has increased again. Germany, a hawk in matters of inflation, has experienced a fairly constant rate of growth. In the mid s growth was higher than in the s and in recent years. The UK has had a rapid growth since the early s and is the country whose real earnings have grown fastest in this sample. For many typical products that a household purchase, it is not just that prices have grown slower during the age of globalization but that prices have declined despite obvious improvements in quality.
Take the case of the United States: in , a consumer in America could purchase a 1. Still, the price of the product — in pure nominal terms — has gone down by 85 percent. This means that the average U. In , it took 61 hours to get the income required in order to buy that microwave from Sears.
The average worker today only has to work three hours to afford a Microwave from Walmart. The same comparison can be made for several other products that have been subject to greater trade and competition. A person with an average U.