global economic integration essay

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August 25, 2006

Global Economic Integration: What's New and What's Not?

Chairman Ben S. Bernanke

At the Federal Reserve Bank of Kansas City's Thirtieth Annual Economic Symposium, Jackson Hole, Wyoming

When geographers study the earth and its features, distance is one of the basic measures they use to describe the patterns they observe. Distance is an elastic concept, however. The physical distance along a great circle from Wausau, Wisconsin to Wuhan, China is fixed at 7,020 miles. But to an economist, the distance from Wausau to Wuhan can also be expressed in other metrics, such as the cost of shipping goods between the two cities, the time it takes for a message to travel those 7,020 miles, and the cost of sending and receiving the message. Economically relevant distances between Wausau and Wuhan may also depend on what trade economists refer to as the "width of the border," which reflects the extra costs of economic exchange imposed by factors such as tariff and nontariff barriers, as well as costs arising from differences in language, culture, legal traditions, and political systems.

One of the defining characteristics of the world in which we now live is that, by most economically relevant measures, distances are shrinking rapidly. The shrinking globe has been a major source of the powerful wave of worldwide economic integration and increased economic interdependence that we are currently experiencing. The causes and implications of declining economic distances and increased economic integration are, of course, the subject of this conference.

The pace of global economic change in recent decades has been breathtaking indeed, and the full implications of these developments for all aspects of our lives will not be known for many years. History may provide some guidance, however. The process of global economic integration has been going on for thousands of years, and the sources and consequences of this integration have often borne at least a qualitative resemblance to those associated with the current episode. In my remarks today I will briefly review some past episodes of global economic integration, identify some common themes, and then put forward some ways in which I see the current episode as similar to and different from the past. In doing so, I hope to provide some background and context for the important discussions that we will be having over the next few days.

A Short History of Global Economic Integration As I just noted, the economic integration of widely separated regions is hardly a new phenomenon. Two thousand years ago, the Romans unified their far-flung empire through an extensive transportation network and a common language, legal system, and currency. One historian recently observed that "a citizen of the empire traveling from Britain to the Euphrates in the mid-second century CE would have found in virtually every town along the journey foods, goods, landscapes, buildings, institutions, laws, entertainment, and sacred elements not dissimilar to those in his own community." (Hitchner, 2003, p. 398). This unification promoted trade and economic development.

A millennium and a half later, at the end of the fifteenth century, the voyages of Columbus, Vasco da Gama, and other explorers initiated a period of trade over even vaster distances. These voyages of discovery were made possible by advances in European ship technology and navigation, including improvements in the compass, in the rudder, and in sail design. The sea lanes opened by these voyages facilitated a thriving intercontinental trade--although the high costs of and the risks associated with long voyages tended to limit trade to a relatively small set of commodities of high value relative to their weight and bulk, such as sugar, tobacco, spices, tea, silk, and precious metals. Much of this trade ultimately came under the control of the trading companies created by the English and the Dutch. These state-sanctioned monopolies enjoyed--and aggressively protected--high markups and profits. Influenced by the prevailing mercantilist view of trade as a zero-sum game, European nation-states competed to dominate lucrative markets, a competition that sometimes spilled over into military conflict.

"But foreign trade, which brings from Calcutta and India and such places wares like costly silks, articles of gold, and spices--which minister only to ostentation but serve no useful purpose, and which drain away the money of the land and people--would not be permitted if we had proper government and princes... God has cast us Germans off to such an extent that we have to fling our gold and silver into foreign lands and make the whole world rich, while we ourselves remain beggars." (James, 2001, p. 8)

The structure of trade during the post-Napoleonic period followed a "core-periphery" pattern. Capital-rich Western European countries, particularly Britain, were the center, or core, of the trading system and the international monetary system. Countries in which natural resources and land were relatively abundant formed the periphery. Manufactured goods, financial capital, and labor tended to flow from the core to the periphery, with natural resources and agricultural products flowing from the periphery to the core. The composition of the core and the periphery remained fairly stable, with one important exception being the United States, which, over the course of the nineteenth century, made the transition from the periphery to the core. The share of manufactured goods in U.S. exports rose from less than 30 percent in 1840 to 60 percent in 1913, and the United States became a net exporter of financial capital beginning in the late 1890s. 1

For the most part, government policies during this era fostered openness to trade, capital mobility, and migration. Britain unilaterally repealed its tariffs on grains (the so-called corn laws) in 1846, and a series of bilateral treaties subsequently dismantled many barriers to trade in Europe. A growing appreciation for the principle of comparative advantage, as forcefully articulated by Adam Smith and David Ricardo, may have made governments more receptive to the view that international trade is not a zero-sum game but can be beneficial to all participants.

That said, domestic opposition to free trade eventually intensified, as cheap grain from the periphery put downward pressure on the incomes of landowners in the core. Beginning in the late 1870s, many European countries raised tariffs, with Britain being a prominent exception. Britain did respond to protectionist pressures by passing legislation that required that goods be stamped with their country of origin. This step provided additional grist for trade protesters, however, as the author of one British anti-free-trade pamphlet in the 1890s lamented that even the pencil he used to write his protest was marked "made in Germany" (James, 2001, p. 15). In the United States, tariffs on manufactures were raised in the 1860s to relatively high levels, where they remained until well into the twentieth century. Despite these increased barriers to the importation of goods, the United States was remarkably open to immigration throughout this period.

Unfortunately, the international economic integration achieved during the nineteenth century was largely unraveled in the twentieth by two world wars and the Great Depression. After World War II, the major powers undertook the difficult tasks of rebuilding both the physical infrastructure and the international trade and monetary systems. The industrial core--now including an emergent Japan as well as the United States and Western Europe--ultimately succeeded in restoring a substantial degree of economic integration, though decades passed before trade as a share of global output reached pre-World War I levels.

One manifestation of this re-integration was the rise of so-called intra-industry trade. Researchers in the late-1960s and the 1970s noted that an increasing share of global trade was taking place between countries with similar resource endowments, trading similar types of goods--mainly manufactured products traded among industrial countries. 2 Unlike international trade in the nineteenth century, these flows could not be readily explained by the perspectives of Ricardo or of the Swedish economists Eli Heckscher and Bertil Ohlin that emphasized national differences in endowments of natural resources or factors of production. In influential work, Paul Krugman and others have since argued that intra-industry trade can be attributed to firms' efforts to exploit economies of scale, coupled with a taste for variety by purchasers.

Postwar economic re-integration was supported by several factors, both technological and political. Technological advances further reduced the costs of transportation and communication, as the air freight fleet was converted from propeller to jet and intermodal shipping techniques (including containerization) became common. Telephone communication expanded, and digital electronic computing came into use. Taken together, these advances allowed an ever-broadening set of products to be traded internationally. In the policy sphere, tariff barriers--which had been dramatically increased during the Great Depression--were lowered, with many of these reductions negotiated within the multilateral framework provided by the General Agreement on Tariffs and Trade. Globalization was, to some extent, also supported by geopolitical considerations, as economic integration among the Western market economies became viewed as part of the strategy for waging the Cold War. However, although trade expanded significantly in the early post-World War II period, many countries--recalling the exchange-rate and financial crises of the 1930s--adopted regulations aimed at limiting the mobility of financial capital across national borders.

Several conclusions emerge from this brief historical review. Perhaps the clearest conclusion is that new technologies that reduce the costs of transportation and communication have been a major factor supporting global economic integration. Of course, technological advance is itself affected by the economic incentives for inventive activity; these incentives increase with the size of the market, creating something of a virtuous circle. For example, in the nineteenth century, the high potential return to improving communications between Europe and the United States prompted intensive work to better understand electricity and to improve telegraph technology--efforts that together helped make the trans-Atlantic cable possible.

A second conclusion from history is that national policy choices may be critical determinants of the extent of international economic integration. Britain's embrace of free trade and free capital flows helped to catalyze international integration in the nineteenth century. Fifteenth-century China provides an opposing example. In the early decades of that century, the Chinese sailed great fleets to the ports of Asia and East Africa, including ships much larger than those that the Europeans were to use later in the voyages of discovery. These expeditions apparently had only limited economic impact, however. Ultimately, internal political struggles led to a curtailment of further Chinese exploration (Findlay, 1992). Evidently, in this case, different choices by political leaders might have led to very different historical outcomes.

A third observation is that social dislocation, and consequently often social resistance, may result when economies become more open. An important source of dislocation is that--as the principle of comparative advantage suggests--the expansion of trade opportunities tends to change the mix of goods that each country produces and the relative returns to capital and labor. The resulting shifts in the structure of production impose costs on workers and business owners in some industries and thus create a constituency that opposes the process of economic integration. More broadly, increased economic interdependence may also engender opposition by stimulating social or cultural change, or by being perceived as benefiting some groups much more than others.

The Current Episode of Global Economic Integration How does the current wave of global economic integration compare with previous episodes? In a number of ways, the remarkable economic changes that we observe today are being driven by the same basic forces and are having similar effects as in the past. Perhaps most important, technological advances continue to play an important role in facilitating global integration. For example, dramatic improvements in supply-chain management, made possible by advances in communication and computer technologies, have significantly reduced the costs of coordinating production among globally distributed suppliers.

Another common feature of the contemporary economic landscape and the experience of the past is the continued broadening of the range of products that are viewed as tradable. In part, this broadening simply reflects the wider range of goods available today--high-tech consumer goods, for example--as well as ongoing declines in transportation costs. Particularly striking, however, is the extent to which information and communication technologies now facilitate active international trade in a wide range of services, from call center operations to sophisticated financial, legal, medical, and engineering services.

The critical role of government policy in supporting, or at least permitting, global economic integration, is a third similarity between the past and the present. Progress in trade liberalization has continued in recent decades--though not always at a steady pace, as the recent Doha Round negotiations demonstrate. Moreover, the institutional framework supporting global trade, most importantly the World Trade Organization, has expanded and strengthened over time. Regional frameworks and agreements, such as the North American Free Trade Agreement and the European Union's "single market," have also promoted trade. Government restrictions on international capital flows have generally declined, and the "soft infrastructure" supporting those flows--for example, legal frameworks and accounting rules--have improved, in part through international cooperation.

In yet another parallel with the past, however, social and political opposition to rapid economic integration has also emerged. As in the past, much of this opposition is driven by the distributional impact of changes in the pattern of production, but other concerns have been expressed as well--for example, about the effects of global economic integration on the environment or on the poorest countries.

What, then, is new about the current episode? Each observer will have his or her own perspective, but, to me, four differences between the current wave of global economic integration and past episodes seem most important. First, the scale and pace of the current episode is unprecedented. For example, in recent years, global merchandise exports have been above 20 percent of world gross domestic product, compared with about 8 percent in 1913 and less than 15 percent as recently as 1990; and international financial flows have expanded even more quickly. 3 But these data understate the magnitude of the change that we are now experiencing. The emergence of China, India, and the former communist-bloc countries implies that the greater part of the earth's population is now engaged, at least potentially, in the global economy. There are no historical antecedents for this development. Columbus's voyage to the New World ultimately led to enormous economic change, of course, but the full integration of the New and the Old Worlds took centuries. In contrast, the economic opening of China, which began in earnest less than three decades ago, is proceeding rapidly and, if anything, seems to be accelerating.

Second, the traditional distinction between the core and the periphery is becoming increasingly less relevant, as the mature industrial economies and the emerging-market economies become more integrated and interdependent. Notably, the nineteenth-century pattern, in which the core exported manufactures to the periphery in exchange for commodities, no longer holds, as an increasing share of world manufacturing capacity is now found in emerging markets. An even more striking aspect of the breakdown of the core-periphery paradigm is the direction of capital flows: In the nineteenth century, the country at the center of the world's economy, Great Britain, ran current account surpluses and exported financial capital to the periphery. Today, the world's largest economy, that of the United States, runs a current-account deficit, financed to a substantial extent by capital exports from emerging-market nations.

Third, production processes are becoming geographically fragmented to an unprecedented degree. 4 Rather than producing goods in a single process in a single location, firms are increasingly breaking the production process into discrete steps and performing each step in whatever location allows them to minimize costs. For example, the U.S. chip producer AMD locates most of its research and development in California; produces in Texas, Germany, and Japan; does final processing and testing in Thailand, Singapore, Malaysia, and China; and then sells to markets around the globe. To be sure, international production chains are not entirely new: In 1911, Henry Ford opened his company's first overseas factory in Manchester, England, to be closer to a growing source of demand. The factory produced bodies for the Model A automobile, but imported the chassis and mechanical parts from the United States for assembly in Manchester. Although examples like this one illustrate the historical continuity of the process of economic integration, today the geographical extension of production processes is far more advanced and pervasive than ever before. As an aside, some interesting economic questions are raised by the fact that in some cases international production chains are managed almost entirely within a single multinational corporation (roughly 40 percent of U.S. merchandise trade is classified as intra-firm) and in others they are built through arm's-length transactions among unrelated firms. But the empirical evidence in both cases suggests that substantial productivity gains can often be achieved through the development of global supply chains. 5

The final item on my list of what is new about the current episode is that international capital markets have become substantially more mature. Although the net capital flows of a century ago, measured relative to global output, are comparable to those of the present, gross flows today are much larger. Moreover, capital flows now take many more forms than in the past: In the nineteenth century, international portfolio investments were concentrated in the finance of infrastructure projects (such as the American railroads) and in the purchase of government debt. Today, international investors hold an array of debt instruments, equities, and derivatives, including claims on a broad range of sectors. Flows of foreign direct investment are also much larger relative to output than they were fifty or a hundred years ago. 6 As I noted earlier, the increase in capital flows owes much to capital-market liberalization and factors such as the greater standardization of accounting practices as well as to technological advances.

Conclusion By almost any economically relevant metric, distances have shrunk considerably in recent decades. As a consequence, economically speaking, Wausau and Wuhan are today closer and more interdependent than ever before. Economic and technological changes are likely to shrink effective distances still further in coming years, creating the potential for continued improvements in productivity and living standards and for a reduction in global poverty.

Further progress in global economic integration should not be taken for granted, however. Geopolitical concerns, including international tensions and the risks of terrorism, already constrain the pace of worldwide economic integration and may do so even more in the future. And, as in the past, the social and political opposition to openness can be strong. Although this opposition has many sources, I have suggested that much of it arises because changes in the patterns of production are likely to threaten the livelihoods of some workers and the profits of some firms, even when these changes lead to greater productivity and output overall. The natural reaction of those so affected is to resist change, for example, by seeking the passage of protectionist measures. The challenge for policymakers is to ensure that the benefits of global economic integration are sufficiently widely shared--for example, by helping displaced workers get the necessary training to take advantage of new opportunities--that a consensus for welfare-enhancing change can be obtained. Building such a consensus may be far from easy, at both the national and the global levels. However, the effort is well worth making, as the potential benefits of increased global economic integration are large indeed.

Bloom, Nick, Raffaella Sadun, and John Van Reenen (2006). "It Ain't What You Do It's the Way That You Do I.T.--Investigating the Productivity Miracle Using the Overseas Activities of U.S. Multinationals," unpublished paper, Centre for Economic Performance, March.

Bordo, Michael, Barry Eichengreen, and Douglas Irwin (1999). "Is Globalization Today Really Different than Globalization a Hundred Years Ago?" NBER Working Paper No. 7195, June.

Corrado, Carol, Paul Lengermann, and Larry Slifman (2005). "The Contribution of MNCs to U.S. Productivity Growth, 1977-2000," unpublished paper, Board of Governors of the Federal Reserve System, July.

Criscuolo, Chiara, and Ralf Martin (2005). "Multinationals and U.S. Productivity Leadership: Evidence from Great Britain," Centre for Economic Performance, Discussion Paper No. 672, January.

Doms, Mark E. and J. Bradford Jensen (1998). "Comparing Wages, Skills, and Productivity between Domestically and Foreign-Owned Manufacturing Establishments in the United States," in R.E. Baldwin, R.E. Lipsey, and J. David Richardson, eds., Geography and Ownership as Bases for Economic Accounting , NBER Studies in Income and Wealth, vol. 59, Chicago, Ill.: University of Chicago Press, pp. 235-58.

Findlay, Ronald (1992). "The Roots of Divergence: Western Economic History in Comparative Perspective," AEA Papers and Proceedings , vol. 82:2, May, pp. 158-61.

Findlay, Ronald, and Kevin O'Rourke (2002). "Commodity Market Integration 1500-2000," Centre for Economic Policy Research, Discussion Paper No. 3125, January.

Grubel, Herbert, and P.J. Lloyd (1975). Intra-Industry Trade , New York, New York: John Wiley & Sons.

Hanson, Gordon, Raymond Mataloni, and Matthew Slaughter (2005). "Vertical Production Networks in Multinational Firms," Review of Economics and Statistics , vol. 87:4, November.

Historical Statistics of the United States: Earliest Times to Present (Millennial Edition) (2006). New York, New York: Cambridge University Press.

Hitchner, Bruce (2003). "Roman Empire," in Joel Mokyr ed., The Oxford Encyclopedia of Economic History , Oxford, England: Oxford University Press, vol. 4, pp. 397-400.

James, Harold (2001) The End of Globalization: Lessons from the Great Depression , Cambridge, Massachusetts: Harvard University Press.

Kurz, Christopher (2006). "Outstanding Outsourcers: A Firm- and Plant-Level Analysis of Production Sharing," Finance and Economics Discussion Series 2006-04, Federal Reserve Board, March.

Maddison, Angus (2001). The World Economy: A Millenial Perspective , Paris, France: OECD Development Centre.

Standage, Tom (1998). The Victorian Internet , New York, New York: Walker Publishing Company.

1.  Data are from Historical Statistics of the United States (2006).  Return to text

2.  See, for example, Grubel and Lloyd (1975).  Return to text

3.  Maddison (2001) and International Monetary Fund data.  Return to text

4.  See, for example, Hanson, Mataloni, and Slaughter (2005).  Return to text

5.  Some of the key empirical papers in this literature are Doms and Jensen (1998); Criscuolo and Martin (2005); Corrado, Lengermann, and Slifman (2005); Bloom, Sadun, and Van Reenen (2006), and Kurz (2006).  Return to text

6.  See, for example, Bordo, Eichengreen, and Irwin (1999).  Return to text

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RBA Annual Conference – 2002 Global Economic Integration and Global Inequality David Dollar [1]

Gaps between the poorest and the richest people and countries have continued to widen…This continues the trend of two centuries. Some have predicted convergence, but the past decade has shown increasing concentration of income among people, corporations, and countries . UN Human Development Report 1999

…globalization has dramatically increased inequality between and within nations . Jay Mazur, Foreign Affairs

… inequality is soaring through the globalization period, within countries and across countries. And that's expected to continue . Noam Chomsky

…all the main parties support nonstop expansion in world trade and services although we all know it…makes rich people richer and poor people poorer… Walter Schwarz, The Guardian

The evidence strongly suggests that global income inequality has risen in the last twenty years . Robert Wade

We are convinced that globalization is good and it's good when you do your homework…keep your fundamentals in line on the economy, build up high levels of education, respect rule of law…when you do your part, we are convinced that you get the benefit . President Vicente Fox of Mexico

There is no way you can sustain economic growth without accessing a big and sustained market . President Yoweri Museveni of Uganda

We take the challenge of international competition in a level playing field as an incentive to deepen the reform process for the overall sustained development of the economy. WTO membership works like a wrecking ball, smashing whatever is left in the old edifice of the former planned economy . Jin Liqun, Vice Minister of Finance of China

There is an odd disconnect between debates about globalisation in the North and the South. Among intellectuals in the North one often hears the claim that global economic integration is leading to rising global inequality – that is, that it benefits the rich proportionally more than the poor. In the extreme claims, the poor are actually made out to be worse-off absolutely (as in the quote from Walter Schwarz). In the South, on the other hand, intellectuals and policy-makers often view globalisation as providing good opportunities for their countries and their people. To be sure, they are not happy with the current state of globalisation. President Museveni's quote above, for example, comes in the midst of a speech in the US where he blasts the rich countries for their protectionism against poor countries and lobbies for better market access. But the point of such critiques is that integration – through foreign trade, foreign investment, and immigration – is basically a good thing for poor countries and that the rich countries could do a lot more to facilitate this integration – that is, make it freer. The claims from anti-globalisation intellectuals of the North, on the other hand, lead inescapably to the conclusion that integration is bad for poor countries and that therefore trade and other flows should be more restricted.

The main goal of this essay is to link growing economic integration (‘globalisation’) with trends in growth, poverty, and inequality in the developing world. The phrase ‘global inequality’ is used to mean different things in different discussions – distribution among all the citizens of the world, distribution within countries, distribution among countries, distribution among wage earners – and the paper takes up all the different meanings.

The first half of the essay looks at the link between heightened integration and economic growth of developing countries. The opening-up of big developing countries such as China and India is arguably the most distinctive feature of the wave of globalisation that started around 1980. Individual cases, cross-country statistical analysis, and micro evidence from firms all suggest that this opening-up to trade and direct investment has been a good strategy for such developing countries as China, India, Mexico and Uganda.

How have the economic benefits of globalisation been distributed and what has happened as a result to global poverty and inequality? These are the questions addressed in the second half of this essay. In particular, Section 2 presents evidence in support of five trends in inequality and poverty since 1980:

• Trend #1 – Poor country growth rates have accelerated.
• Trend #2 – The number of poor people in the world has declined significantly, the first such decline in history.
• Trend #3 – Global inequality (among citizens of the world) has declined – modestly – reversing a 200-year-old trend toward higher inequality.
• Trend #4 – There is no general trend toward higher inequality within countries; in particular, among developing countries inequality has decreased in about as many cases as it has increased.
• Trend #5 – Wage inequality is rising worldwide (which may seem to contradict Trend #4, but it does not because wages are a small part of household income in developing countries, which make up the bulk of the world in terms of countries and population).

The conclusions for policy from this review of globalisation and global inequality are very much in the spirit of the comments from Presidents Fox and Museveni. Developing countries have a lot of ‘homework’ to do in order to develop in general and to make effective use of integration as part of their development strategy. Rich countries could do a lot more with foreign aid to help with that homework. And, as Museveni indicates, access to rich country markets is important. There remains a lot of protection in OECD markets against the goods and people of the developing world, and globalisation would do more for developing country growth if developing countries and their people had freer access to those rich country markets.

1. Is there a Link from Integration to Growth?

To keep track of the wide range of explanations that are offered for persistent poverty in developing nations, it helps to keep two extreme views in mind. The first is based on an object gap: Nations are poor because they lack valuable objects like factories, roads, and raw materials. The second view invokes an idea gap: Nations are poor because their citizens do not have access to the ideas that are used in industrial nations to generate economic value…

Each gap imparts a distinctive thrust to the analysis of development policy. The notion of an object gap highlights saving and accumulation. The notion of an idea gap directs attention to the patterns of interaction and communication between a developing country and the rest of the world . (Romer 1993, p 544)

Many developing countries have become more integrated with the global economy in the past two decades, and at the same time their growth rates have accelerated (examples would be Bangladesh, China, India, Mexico, Uganda and Vietnam). A natural question to ask is whether there is a link. In other words, could countries such as Bangladesh, China, India, and Vietnam have grown as rapidly as they have, if they had remained as closed to foreign trade and investment as they were in 1980? This is not the kind of question that can be answered with scientific certainty, but there are several different types of evidence that we can bring to bear on it.

It is useful to begin with what one would expect from economic theory. As suggested by the quote from Paul Romer , traditional growth theory focused on accumulation and the ‘object gap’ between poor countries and rich ones. If the important thing is just to increase the number of factories and workplaces, then it does not matter if this is done in a closed environment or a state-dominated environment. That was the model followed in the extreme by China and the Soviet Union, and to a lesser extent by most developing countries, who followed import-substituting industrialisation strategies throughout the 1960s and 1970s. It was the disappointing results from that approach that led to new thinking both from policy-makers in developing countries as well as from economists studying growth. Romer was one of the pioneers of the new growth theory that put more emphasis on how innovation occurs and is spread and the role of technological advance in improving the standard of living. Different aspects of integration – sending students abroad to study, connecting to the internet, allowing foreign firms to open plants, purchasing the latest equipment and components – can help overcome the ‘idea gap’ that separates poor and rich nations.

What is the evidence on integration spurring growth? There are a large number of case studies that show how this process can work in particular countries. Among the countries that were very poor in 1980, China, India, Vietnam and Uganda provide an interesting range of examples.

China's initial reforms in the late 1970s focused on the agricultural sector and emphasised strengthening property rights, liberalising prices, and creating internal markets. As indicated in Figure 1, liberalising foreign trade and investment were also part of the initial reform program. In the 1980s China removed administrative barriers to trade, before turning to major tariff reductions in the 1990s. The role of international linkages is described in this excerpt from a case study by Richard Eckaus:

After the success of the Communist revolution and the founding of the People's Republic of China, the nation's international economic policies were dominated for at least thirty years by the goal of self-reliance. While this was never interpreted as complete autarky, the aspiration for self-reliance profoundly shaped trade policy, especially with the market economies. China's foreign trade began to expand rapidly as the turmoil created by the Cultural Revolution dissipated and new leaders came to power. Though it was not done without controversy, the argument that opening of the economy to foreign trade was necessary to obtain new capital equipment and new technology was made official policy. The creation of an ‘open door’ policy did not mean the end of foreign trade planning. Although Chinese policy became committed to the expansion of its international trade, the decision-making processes and international trade mechanisms of the pre-reform period continued in full force for several years, to a modified degree for several more years, and still continue to be evident in the licensing controls. At the same time, international transactions outside of the state planning system have been growing. Most obviously, enterprises created by foreign investors have been exempt from the foreign trade planning and control mechanisms. In addition, substantial amounts of other types of trade, particularly the trade of the township and village enterprises and private firms, have been relatively free. The expansion of China's participation in international trade since the beginning of the reform movement in 1978, has been one of the most remarkable features of its remarkable transformation. While GNP was growing at 9 percent from 1978 to 1994, exports grew at about 14 percent and imports at an average of 13 percent per year. The successes contradict several customary generalisations about transition economies and large developing countries – for example, that the transition from central planning to market orientation cannot be made without passing through a difficult period of economic disorganization and, perhaps decline; and that the share of international trade in very large economies cannot grow quickly due to the difficulties of penetrating foreign markets on a larger scale. (Eckaus 1997, p 415)

It is well-known that India pursued an inward-oriented strategy into the 1980s and got disappointing results in terms of growth and poverty reduction. Bhagwati crisply states the main problems and failures of the strategy:

I would divide them into three major groups: extensive bureaucratic controls over production, investment and trade; inward-looking trade and foreign investment policies; and a substantial public sector, going well beyond the conventional confines of public utilities and infrastructure. The former two adversely affected the private sector's efficiency. The last, with the inefficient functioning of public sector enterprises, impaired additionally the public sector enterprises' contribution to the economy. Together, the three sets of policy decisions broadly set strict limits to what India could get out of its investment. (Bhagwati 1992, p 48)

Under this policy regime India's growth in the 1960s (1.4 per cent per annum) and 1970s (−0.3 per cent) was disappointing. During the 1980s India's economic performance improved. However, this surge was fuelled by deficit spending and borrowing from abroad that was unsustainable. In fact, the spending spree led to a fiscal and balance of payments crisis that brought a new, reform government to power in 1991. Srinivasan describes the key reform measures and their results as follows:

In July 1991, the government announced a series of far reaching reforms. These included an initial devaluation of the rupee and subsequent market determination of its exchange rate, abolition of import licensing with the important exceptions that the restrictions on imports of manufactured consumer goods and on foreign trade in agriculture remained in place, convertibility (with some notable exceptions) of the rupee on the current account; reduction in the number of tariff lines as well as tariff rates; reduction in excise duties on a number of commodities; some limited reforms of direct taxes; abolition of industrial licensing except for investment in a few industries for locational reasons or for environmental considerations, relaxation of restrictions on large industrial houses under the Monopolies and Restrictive Trade Practices (MRTP) Act; easing of entry requirements (including equity participation) for direct foreign investment; and allowing private investment in some industries hitherto reserved for public sector investment. (Srinivasan 2001, p 245)

In general, India has gotten good results from its reform program, with per capita income growth above 4 per cent per annum in the 1990s. Growth and poverty reduction have been particularly strong in states that have made the most progress liberalising the regulatory framework and providing a good environment for delivery of infrastructure services (Goswami et al 2002).

The same collection that contains Eckaus's study of China also has a case study of Vietnam:

Vietnam has made a remarkable turnaround during the past decade. In the mid-1980s the country suffered from hyperinflation and economic stagnation; it was not able to feed its population; and hundreds of thousands of people were signaling their dissatisfaction by fleeing in unsafe boats. A decade later, the government had restored macroeconomic stability; growth had accelerated to the 8–9 per cent range; the country had become the second largest rice exporter in the world; and overseas Vietnamese were returning with their capital to take advantage of expanding investment opportunities. During this period there has also been a total transformation of Vietnam's foreign trade and investment, with the economy now far more open than ten years ago. That Vietnam was able to grow throughout its adjustment period can be attributed to the fact that the economy was being increasingly opened to the international market. As part of its overall effort to stabilize the economy, the government unified its various controlled exchange rates in 1989 and devalued the unified rate to the level prevailing in the parallel market. This was tantamount to a 73 per cent real devaluation; combined with relaxed administrative procedures for imports and exports, this sharply increased the profitability of exporting. This…policy produced strong incentives for export throughout most of the 1989–94 period. During these years real export growth averaged more than 25 per cent per annum, and exports were a leading sector spurring the expansion of the economy. Rice exports were a major part of this success in 1989; and in 1993–94 there was a wide range of exports on the rise, including processed primary products (e.g., rubber, cashews, and coffee), labour-intensive manufactures, and tourist services. The current account deficit declined from more than 10 per cent of GDP in 1988 to zero in 1992. Normally, the collapse of financing in this way would require a sharp cutback in imports. However, Vietnam's export growth was sufficient to ensure that imports could grow throughout this adjustment period. It is also remarkable that investment increased sharply between 1988 and 1992, while foreign aid [from the Soviet Union] was drying up. In response to stabilization, strengthened property rights, and greater openness to foreign trade, domestic savings increased by twenty percentage points of GDP, from negative levels in the mid 1980s to 16 per cent of GDP in 1992. (Dollar and Ljunggren 1997, p 455)

Uganda has been one of the most successful reformers in Africa during this recent wave of globalisation, and its experience has interesting parallels with Vietnam's. It too was a country that was quite isolated economically and politically in the early 1980s. The role of trade reform in its larger reform is described in Collier and Reinikka:

Trade liberalization has been central to Uganda's structural reform program. During the 1970s, export taxation and quantitative restrictions on imports characterized trade policy in Uganda. Exports were taxed, directly and implicitly at very high rates. All exports except for coffee collapsed under this taxation. For example, tea production fell from a peak of 20,000 tons in the early 1970s to around 2,000 tons by the early 1980s, and cotton production fell from a peak of 87,000 tons, to 2,000 tons. By contrast, coffee exports declined by around one-third. Part of the export taxation was achieved through overvaluation of the exchange rate, which was propelled by intense foreign exchange rationing, but mitigated by an active illegal market. Manufacturing based on import substitution collapsed along with the export sector as a result of shortages, volatility, and rationing of import licenses and foreign exchange. President Amin's policy toward foreign investment was dominated by confiscation without compensation, and he expelled more than 70,000 people from the Asian community. In 1986 the NRM government inherited a trade regime that included extensive nontariff barriers, biased government purchasing, and high export taxes, coupled with considerable smuggling. The nontariff barriers have gradually been removed since the introduction in 1991 of automatic licensing under an import certification scheme. Similarly, central government purchasing was reformed and is now subject to open tendering without a preference for domestic firms over imports. By the mid 1990s, the import tariff schedule had five ad valorem rates between 0 and 60 per cent. For more than 95 per cent of imported items the tariff was between 10 and 30 per cent. During the latter half of the 1990s, the government implemented a major tariff reduction program. As a result, by 1999 the tariff system had been substantially rationalized and liberalized, which gave Uganda one of the lowest tariff structures in Africa. The maximum tariff is now 15 per cent on consumer goods, and there are only two other tariff bands: zero for capital goods and 7 per cent for intermediate imports. The average real GDP growth rate was 6.3 per cent per year during the entire recovery period (1986–99) and 6.9 per cent in the 1990s. The liberalization of trade has had a marked effect on export performance. In the 1990s export volumes grew (at constant prices) at an annualized rate of 15 per cent , and import volumes grew at 13 per cent . The value of noncoffee exports increased fivefold between 1992 and 1999. (Collier and Reinikka 2001)

These cases provide persuasive evidence that openness to foreign trade and investment – coupled with complementary reforms – can lead to faster growth in developing countries. However, individual cases always beg the question, how general are these results? Does the typical developing country that liberalises foreign trade and investment get good results? Cross-country statistical analysis is useful for looking at the general patterns in the data. Cross-country studies generally find a correlation between trade and growth. Among developing countries, some have had large increases in trade integration (measured as the ratio of trade to national income), while others have had small increases or even declines over the past 20 years (Figure 2). In general, the countries that have had large increases in trade, have also had accelerations in growth. This relationship persists after controlling for reverse causality from growth to trade and for changes in other institutions and policies (Dollar and Kraay 2001b). All of the cross-country studies suffer from potential problems of omitted variables and mis-specification, but they are nonetheless useful for summarising patterns in the data.

A final piece of evidence about integration and growth comes from firm-level studies and links us back to the quote from Paul Romer. Developing countries often have large productivity dispersion across firms making similar things: high-productivity and low-productivity firms co-exist and in small markets there is often insufficient competition to spur innovation. A consistent finding of firm-level studies is that openness leads to lower productivity dispersion (Haddad 1993; Haddad and Harrison 1993; Harrison 1994). High-cost producers exit the market as prices fall; if these firms were less productive, or were experiencing falling productivity, then their exits represent productivity improvements for the industry. While the destruction and creation of new firms is a normal part of a well-functioning economy, too often attention is simply paid to the destruction of firms, missing half of the picture. The increase in exits is only part of the adjustment. Granted, it is the first and most painful part of the adjustment. However, if there are not significant barriers to factor mobility or other barriers to entry, the other side is that there are new entrants. The exits are often front-loaded, but the net gains over time can be substantial.

Wacziarg (1998) uses 11 episodes of trade liberalisation in the 1980s to look at the issue of competition and entry. Using data on the number of establishments in each sector, he calculates that entry rates were 20 per cent higher among countries that liberalised compared to ones that did not. This estimate may reflect other policies that accompanied trade liberalisation such as privatisation and deregulation, so this is likely to be an upper bound of the impact of trade liberalisation. However, it is a sizable effect and indicates that there is plenty of potential for new firms to respond to the new incentives. The evidence also indicates that while exit rates may be significant, net turnover rates are usually very low. Thus, entry rates are usually of a comparable magnitude to the exit rates. Using plant-level data from Morocco, Chile and Columbia spanning several years in the 1980s, when these countries initiated trade reforms, indicates that exit rates range from 6 to 11 per cent a year, and entry rates from 6 to 13 per cent. Over time, the cumulative turnover is quite impressive, with a quarter to a third of firms having turned over in four years (Roberts and Tybout 1996, p 6).

The higher turnover of firms is an important source of the dynamic benefit of openness. In general, dying firms have falling productivity and new firms tend to increase their productivity over time (Liu and Tybout 1996; Roberts and Tybout 1996; Aw, Chung and Roberts 2000). In Taiwan, Aw et al (2000) find that within a five-year period, the replacement of low-productivity firms with new, higher-productivity entrants accounted for half or more of the technological advance in many Taiwanese industries.

While these studies shed some light on why open economies are more innovative and dynamic, they also remind of us why integration is controversial. There will be more dislocation in an open, dynamic economy – with some firms closing and others starting up. If workers have good social protection and opportunities for developing new skills, then everyone can benefit. But without such policies there can be some big losers.

I want to close this section with a nice point from the economic historians Peter Lindert and Jeffrey Williamson (2001) concerning the different pieces of evidence linking integration to growth: ‘The doubts that one can retain about each individual study threaten to block our view of the overall forest of evidence. Even though no one study can establish that openness to trade has unambiguously helped the representative Third World economy, the preponderance of evidence supports this conclusion’. They go on to note the ‘empty set’ of ‘countries that chose to be less open to trade and factor flows in the 1990s than in the 1960s and rose in the global living-standard ranks at the same time. As far as we can tell, there are no anti-global victories to report for the postwar Third World. We infer that this is because freer trade stimulates growth in Third World economies today, regardless of its effects before 1940.’ (pp 29–30)

2. Accelerated Growth and Poverty Reduction in the New Globalisers

Much of the debate about globalisation concerns its effects on poor countries and poor people. In the introduction I quoted a number of sweeping statements asserting that global economic integration is leading to growing poverty and inequality in the world. The reality of what is happening with poverty and inequality is far more complex, and to some extent runs exactly counter to what is being claimed by anti-globalists. Hence in this section I am going to focus on the trends in global poverty and inequality. Let's get the facts straight, and then we can have a more fruitful debate about what is causing the trends. The trends that I want to highlight in this section are that: (1) growth rates of the poorest countries have accelerated in the past 20 years and are higher than rich-country growth rates; (2) there was a large net decline in the number of poor in the world between 1980 and 2000, the first such decline in history; (3) measures of global inequality (such as the global Gini coefficient) have declined modestly since 1980, reversing a long historical trend toward greater inequality; (4) there is no pattern of rising inequality within countries, though there are some notable cases in which inequality has risen; and (5) there is a general pattern of rising wage inequality (larger wage increases for skilled workers relative to those of unskilled workers). It may seem that Trend #5 runs counter to Trend #4, but I will explain why it does not. Nevertheless, Trend #5 is important and helps explain some of the anxiety about globalisation in the industrial countries.

2.1 Trend #1: Poor country growth rates have accelerated

We have reasonably good data on economic growth going back to 1960 for about 125 countries, which make up the vast majority of world population. If you take the poorest one-fifth of countries in 1980 (that is, about 25 countries), the population-weighted growth rate of this group was 4 per cent per capita from 1980 to 1997, while the richest-fifth of countries grew at 1.7 per cent (Figure 3). This phenomenon of the fastest growth occurring in the poorest countries is new historically; the growth rates of these same countries for the prior two decades (1960–1980) were 1.8 per cent for the poor group and 3.3 per cent for the rich group. Data going back further in time are not as good, but there is evidence that richer locations have been growing faster than poorer locations for a long time.

Now, the adjective ‘population-weighted’ is very important. If you ignore differences in population and just take an average of poor-country growth rates, you will find average growth of about zero for poor countries. Among the poorest quintile of countries in 1980 you have both China and India, and you also have quite a few small countries, particularly in Africa. Ignoring population, the average growth of Chad and China is about zero, and the average growth of Togo and India is about zero. Taking account of differences in population, on the other hand, one would say that the average growth of poor countries has been very good in the past 20 years. China obviously carries a large weight in any such calculation about the growth of countries that were poor in 1980. But it is not the only poor country that did well. India, Bangladesh and Vietnam have also had accelerated growth and grown faster than rich countries in the recent period. A number of African economies, notably Uganda, have also had accelerated growth.

2.2 Trend #2: The number of poor people in the world has declined

The most important point that I want to get across in this section is that poverty reduction in low-income countries is very closely related to the growth rate in these countries. Hence, the accelerated growth of low-income countries has led to unprecedented poverty reduction. By poverty, we mean subsisting below some absolute threshold. Most poverty analysis is carried out with countries' own poverty lines, which are set in country context and naturally differ. In the 1990s we have more and more countries with reasonably good household surveys and their own poverty analysis. Figure 4 shows five poor countries that have benefited from increased integration, and in each case significant poverty reduction has gone hand-in-hand with faster growth. Poverty reduction here is the rate of decline of the poverty rate, based on the country's own poverty line and analysis.

China, for example, uses a poverty line defined in constant Chinese yuan . The poverty line is the amount of Chinese currency that you need to buy the basket of goods that the Chinese authorities deem the minimum necessary to subsist. In practice, estimates of the number of poor in a country such as China come from household surveys carried out by the statistical bureau, surveys that aim to measure households' real income or consumption. Most of the extreme poor in the world are peasants, and they subsist to a large extent on their own agricultural output. To look only at what money income they have would not be very relevant, since the extreme poor have only limited involvement in the money economy. Thus, what Chinese and other poverty analyses do is include imputed values for income in kind (such as own production of rice). So, a poverty line is meant to capture a certain real level of income or consumption.

Estimating the extent of poverty is obviously subject to error, but in many countries the measures are good enough to pick up large trends. In discussing poverty it is important to be clear what poverty line one is talking about. In global discussions one often sees reference to international poverty lines of either US$1 per day or US$2 per day, and I will explain how these relate to national poverty lines.

While Figure 4 shows the close relationship between growth and poverty reduction in five countries in the 1990s, it is not easy to extend the analysis to all countries in the world or back in time to 1980, because good household surveys are lacking for many developing countries. However, discussions of global poverty during this most recent era of globalisation are made easier by the fact that in 1980 a large majority of the world's poor lived in China and India, both of which have reasonably good national data on poverty. Bourguignon and Morrisson (2002) estimate that there were 1.4 billion people in the world subsisting on less than US$1 per day in 1980. Take this as a rough estimate around which there is a lot of uncertainty. Still, it is clear that at least 60 per cent of these poor were in China and India. So, what has happened to global poverty is going to depend to a very considerable extent on these two countries.

The Chinese statistical bureau estimates that the number of people with incomes below their national poverty line has declined from 250 million in 1978 to 34 million in 1999 (Figure 5). [2] Now, this Chinese poverty line is defined in constant Chinese yuan and it is possible to translate this into US dollars for the purpose of comparison with other countries. This conversion is best done with a purchasing power parity (PPP) exchange rate. This is the exchange rate between the Chinese yuan and the US dollar that would lead to the same price in the US and China for a representative basket of consumer goods. It is the normal basis for making international comparisons of living standards. Evaluated at PPP in this way, the Chinese poverty line is equivalent to about 70 US cents per day – quite a low poverty line. Using information on the distribution of income in China, it is possible to make a rough estimate of the number of people with income under a higher poverty line – for example, US$1 per day at PPP. A rough estimate of the number of people in China in 1978 consuming less than US$1 per day would be in the ballpark of 600 million. [3] It may be surprising that the number is so much larger than the estimate of 250 million living on less than 70 US cents per day. But in 1978 a large mass of the population was concentrated in the range between 70 US cents and US$1.

India's official poverty data also show a marked drop in poverty over the past two decades. India's consumption-based poverty line translates to about 85 US cents per day at PPP. By that line, the Indian statistical bureau estimates that there were 330 million poor people in India in 1977, and the number declined to 259 million in 1999. We can make a similar rough estimate of the number of poor living under a higher poverty line of US$1 per day, using information on the distribution of income in Indian surveys.

In Figure 6, I combine rough estimates of US$1 per day poverty in China and India. In 1977–78 there were somewhere around 1 billion people in these two giant countries who were subsisting on less than US$1 per day at PPP; by 1997–98 the estimated number had fallen to about 650 million (according to the estimates of Chen and Ravallion (2001)). This poverty reduction is all the more remarkable, because their combined population increased by nearly 700 million people over this period.

It is easy to quibble about specific numbers, but no amount of quibbling can get around the fact that there has been massive poverty reduction in China and India. These countries' own data and poverty analysis show large poverty reduction, using lines that are below US$1 per day. The poverty reduction using a common international line of US$1 per day would be larger.

While there has clearly been poverty reduction in Asia, it is also clear that poverty has been rising in Africa, where most economies have been growing slowly or not at all for the past 20 years. Chen and Ravallion (2001) estimate that the number of poor (consuming less than US$1 per day) in Sub-Saharan Africa increased from 217 million in 1987 to 301 million in 1998. There is not comparably good data for 1980, but we know that the region was not doing well in the 1980–1987 period. If the rate of increase of poverty was about the same in the 1980–1987 period, as in 1987–1993, then the increased poverty in Africa during the 1980–1998 period would be about 170 million people.

Any careful estimate of worldwide poverty is going to depend primarily on trends in China, India, and Sub-Saharan Africa. Putting together these trends reveals a large net decline in the number of poor since 1980. This is an important historical shift. Bourguignon and Morrisson (2002) estimate that the number of very poor people in the world (US$1 per day line) increased up through 1980 (Figure 7). Between 1960 and 1980 the number of poor grew by about 100 million. Between 1980 and 1992, however, the number of poor fell by about 100 million in their estimate. Chen and Ravallion (2001) use a different methodology to estimate a further decline of about 100 million between 1993 and 1998. The same study found an increase in global poverty between 1987 and 1993, which may seem at odds with the Bourguignon-Morrisson results. However, a look back at Figures 5 and 6 reveals that the poor in China and India combined have done well over the past 20 years, except for the period from 1987 to 1993, when poverty in China and India temporarily rose . During that period India had a macroeconomic crisis and a sharp recession, and in China the growth of rural incomes slowed significantly.

Indian data for 1999/2000 show further declines that have not been incorporated in the global estimates for 1997/98. Based on the well-documented poverty reduction in China and India, and their weight in world poverty, we can be confident that 200 million is a conservative estimate of the poverty reduction since 1980. In many ways, however, adding up the good experiences and the bad experiences conceals more than it reveals. Certainly it is good news that large poor countries in Asia have done well (not just China and India, but Bangladesh and Vietnam as well). But that is no consolation to the growing number of poor in Africa, where economies continue to languish (with the occasional bright spot such as Uganda).

2.3 Trend #3: Global inequality has declined (modestly)

People use the phrase ‘global inequality’ casually to mean a number of different things. But the most sensible definition would be the same one we use for a country: line up all the people in the world from the poorest to the richest and calculate a measure of inequality among their incomes. There are a number of possible measures, of which the Gini coefficient is the best known. Xavier Sala-i-Martin (2002) finds in a new paper that any of the standard measures of inequality show a decline in global inequality since 1980. Subjectively, I would describe this as a modest decline, and one about which we do not have a lot of statistical confidence. But, even if global inequality is flat, it represents an important reverse of a long historical pattern of rising global inequality and contradicts the frequent claims that inequality is rising.

Bourguignon and Morrisson (2002) calculate the global Gini measure of inequality going back to 1820. Obviously we do not have a lot of confidence in these early estimates, but they illustrate a point that is not seriously questioned: global inequality has been on the rise throughout modern economic history. The Bourguignon-Morrisson estimates of the global Gini have it rising from 0.50 in 1820 to about 0.65 around 1980 (Figure 8). Sala-i-Martin estimates that the global Gini has since declined to 0.61. Other measures of inequality such as the Theil index or the mean log deviation show a similar decline. The latter measures have the advantage that they can be decomposed into inequality among countries (differences in per capita income across countries) and inequality within countries. What this decomposition shows is that most of the inequality in the world can be attributed to inequality among countries (Figure 9). Global inequality rose from 1820 to 1980 primarily because regions already relatively rich in 1820 (Europe, North America) subsequently grew faster than poor locations. As noted above (Trend #1), that pattern of growth was reversed starting around 1980, and the faster growth in poor locations such as China, India, Bangladesh and Vietnam accounts for the modest decline in global inequality since then. (Slow growth in Africa tended to increase inequality, faster growth in low-income Asia tended to reduce it, and the latter outweighed the former, modestly.) [4]

Thinking about the different experiences of Asia and Africa, as in the last section, helps give a clearer picture of what is likely to happen in the future. Rapid growth in Asia has been a force for greater global equality because that is where the majority of the world's extreme poor lived in 1980 and they benefited from the growth. However, if the same growth trends persist, they will not continue to be a force for equality. Sala-i-Martin projects future global inequality if the growth rates of 1980–1998 persist: global inequality will continue to decline until the year 2015 or 2020 (depending on the measure of inequality), after which global inequality will rise sharply (Figure 10). A large share of the world's poor still live in India and other Asian countries, so that continued rapid growth there will be equalising for another decade or so. But more and more, poverty will be concentrated in Africa, so that if its slow growth persists, global inequality will eventually rise again.

2.4 Trend #4: There is no general trend toward higher inequality within countries; in particular, among developing countries inequality has decreased in about as many cases as it has increased

The analysis immediately above shows that inequality within countries plays a relatively small role in measures of global income inequality. Nevertheless, people care about trends in inequality in their own societies (arguably more than they care about global inequality and poverty). So, a different issue is, what is happening to income inequality within countries? One of the common claims about globalisation (see the quotes in the introduction) is that it is leading to greater inequality within countries and hence fostering social and political polarisation.

To assess this claim Aart Kraay and I (Dollar and Kraay 2001a) collected income distribution data from over 100 countries, in some cases going back decades. We found first of all that there is no general trend toward higher or lower inequality within countries. One way to show this is to look at the growth rate of income of the poorest 20 per cent of the population, relative to the growth rate of the whole economy. In general, growth rate of income of the poorest quintile is the same as the per capita growth rate (Figure 11). This is equivalent to showing that the bottom quintile share (another common measure of inequality) does not vary with per capita income. We found that this relationship has not changed over time (it is the same for the 1990s as for earlier decades). In other words, some countries in the 1990s had increases in inequality (China and the US are two important examples), while other countries had decreases. We also divided the sample between rich and poor countries to explore a Kuznets-type relationship (or, equivalently, included a quadratic term) and found that income of the poor tends to rise proportionately to per capita income in developing countries, as well as in rich ones.

Most important for the debate about globalisation, we tried to use measures of integration to explain the changes in inequality that have occurred. But changes in inequality are not related to any of these measures of integration. For example, countries in which trade integration has increased show rises in inequality in some cases and declines in inequality in others (Figure 12). So too for other measures such as tariff rates or capital controls. Figure 4 showed five good examples of poor countries that have integrated actively with the world economy: in two of these (Uganda and Vietnam) income distribution has shifted in favour of the poor during integration, which is why poverty reduction has been so strong in these cases. In low-income countries in particular much of the import protection was benefiting relatively rich and powerful groups, so that integration with the global market can go hand-in-hand with declines in income inequality.

While it is true that there is no general trend toward higher inequality within countries when looking at all the countries of the world, the picture is not so favourable if one looks only at rich countries and only at the last decade. The Luxembourg Income Study (LIS) has produced comparable, high-quality income distribution data for most of the rich countries. This work finds no obvious trends in inequality up through the mid to late 1980s. Over the past decade, on the other hand, there have been increases in inequality in most of the rich countries. Because low-skilled workers in these countries are now competing more with workers in the developing world, it is certainly plausible that global economic integration creates pressures for higher inequality in rich countries, while having effects in poor countries that often go the other way. The good news from the LIS studies is that ‘[g]lobalisation does not force any single outcome on any country. Domestic policies and institutions still have large effects on the level and trend of inequality within rich and middle-income nations, even in a globalising world…’ (Smeeding, this volume, p 179). In other words, among rich countries some have managed to maintain stable income distributions in this era of globalisation through their social and economic policies (on taxes, education, welfare).

2.5 Trend #5: Wage inequality is rising worldwide

Much of the concern about globalisation in rich countries relates to workers and what is happening to wages and other labour issues. The most comprehensive examination of globalisation and wages used International Labour Organisation data on very detailed occupational wages going back two decades (Freeman, Oostendorp and Rama 2001). These data look across countries at what is happening to wages for very specific occupations (bricklayer, primary school teacher, nurse, auto worker). What the study found is that wages have generally been rising faster in globalising developing countries than in rich ones, and faster in rich ones than in non-globalising developing countries (Figure 13). [5] However, their detailed findings are far more complex. First, there is a timing issue. Trade liberalisation is often associated with reduced wages initially, followed by increases past the initial level. Second, foreign direct investment (FDI) is very strongly related to wage increases, while trade has a weaker relationship. Locations that are able to attract FDI are the ones that have had the clearest gains for workers (examples would be northern Mexico, China, Vietnam), whereas countries that liberalise trade and get little foreign investment see weaker benefits. Finally, the gains are relatively larger for skilled workers. This finding is consistent with other work showing that there has been a worldwide trend toward greater wage inequality – that is, a larger gap between pay for educated workers and pay for less educated/skilled workers.

If wage inequality is going up worldwide, how can it be that income inequality is not rising in most countries? There are several reasons why these two trends are not inconsistent. Most important, in the typical developing country wage earners are a tiny fraction of the population. Even unskilled wage workers are a relatively elite group. Take Vietnam as an example, a low-income country where we have a survey of the same representative sample of households early in liberalisation (1993) and five years later. The majority of households in the sample and in the country are peasants. What we see in the household data is that the price of the main agricultural output (rice) went up dramatically while the price of the main purchased input (fertiliser) actually went down. These price movements are directly related to globalisation, because over this period Vietnam became a major exporter of rice (supporting its price) and a major importer of fertiliser from cheaper producers (lowering its price). The typical poor family got a much bigger ‘wedge’ between its input price and output price, and their real income went up dramatically (Benjamin and Brandt 2002). So, one of the most important forces acting on income distribution in this low-income country has nothing to do with wages.

Quite a few rural households also sent a family member to a nearby city to work in a factory for the first time. I worked on Vietnam for the World Bank from 1989 to 1995, and one of the issues that I covered was the manufacturing sector. When I first started visiting factories in the summer of 1989, the typical wage in local currency was the equivalent of US$9 per month. Now, factory workers making contract shoes for US brands often make US$50 per month or more. So, the wage for a relatively unskilled worker has gone up something like five-fold. But wages for some of the skilled occupations – say, computer programmer or English interpreter – may have gone up 10 times or even more. Thus, a careful study of wage inequality is likely to show rising inequality. However, how wage inequality translates into household inequality is very complex. For a surplus worker from a large rural household who gets one of the newly created jobs in a shoe factory, earnings go from zero to US$50 per month. Thus, if a large number of new wage jobs are created and if these typically pay a lot more than people earn in the rural or informal sector, then a country can have rising wage inequality but stable or even declining income inequality (in Vietnam the Gini coefficient for household income inequality actually declined between 1993 and 1998). In rich countries, on the other hand, where most people are wage earners, the higher wage inequality is likely to translate into higher household income inequality, which is what we have seen over the past decade.

A third point about wage inequality and household income inequality that is relevant for rich countries is that measures of wage inequality are often made pre-tax. If the country has a strongly progressive income tax, then inequality measures from household data (which are often post-tax) do not have to follow wage inequality, pre-tax. Tax policy can offset some of the trends in the labour market.

Finally, there is the important issue that households can respond to increased wage inequality by investing more in the education of their children. A higher economic return to education is not a bad thing, provided that there is fair access to education for all. In Vietnam, there has been a tremendous increase in the secondary school enrolment rate in the 1990s (from 32 to 56 per cent). This increase partly reflects the society's and the government's investment in schools (supported by aid donors), but more children going to school also reflects households' decisions. If there is little or no perceived return to education, it is much harder to get families in poor countries to send their children to school. Where children have decent access to education, a higher skill premium stimulates a shift of the labour force from low-skill to higher-skill occupations.

From this discussion it is easy to see why some labour unions in rich countries are concerned about integration with the developing world. It is difficult to prove that the integration is leading to this greater wage inequality, but it seems likely that integration is one factor. Concerning the immigration side of integration, Borjas, Freeman and Katz (1997) estimate that flows of unskilled labour into the US have reduced wages for such labour by 5 per cent from where they would be otherwise. The immigrants who find new jobs earn a lot more than they did before (10 times as much in one study), but their competition reduces wages of the US workers who were already doing such jobs. Similarly, imports of garments and footwear from countries such as Vietnam and Bangladesh create jobs for workers there that pay far more than other opportunities in those countries, but put pressure on unskilled wages in the rich countries.

Thus, overall the era of globalisation has seen unprecedented poverty reduction and probably a modest decline in global inequality. However, it has put real pressure on less-skilled workers in rich countries, and this competitive pressure is a key reason why the growing integration is controversial in the industrial countries and why there is a significant political movement to restrict the opportunities of poor countries. More generally, the integration causes disruption in both rich countries and poor ones. Some people are thrown out of work, some capitalists lose their investments; in the short run there are clearly winners and losers. To some extent the extreme claims of anti-globalists that integration is leading to higher inequality across and within countries – claims that are not borne out by the evidence – distract attention from the real issues. Globalisation is disruptive, it produces relative winners and losers, and there are public policies that can mitigate these bad effects (social protection, investment in education). The key policy issue is whether to try to mitigate the bad effects of integration or to roll back integration.

3. Making Globalisation Work Better for the Poor

What are the implications of these findings – for developing countries, for rich countries, and for non-government organisations that care about global poverty? So far, the most recent wave of globalisation starting around 1980 has been a powerful force for equality and poverty reduction. But it would be naïve to think that this will inevitably continue.

Whether global economic integration continues to be an equalising force will depend on the extent to which poor locations participate in this integration, and that in turn will depend on both their own policies and the policies of the rich world. True integration requires not just trade liberalisation, but also wide-ranging reforms of institutions and policies. If we look at some of the countries that are not participating very strongly in globalisation, many of them have serious problems with the overall investment climate: Kenya, Pakistan, Burma and Nigeria would all be examples. Some of these countries also have restrictive policies toward trade, but even if they liberalise trade not much is likely to happen without other measures. It is not easy to predict the reform paths of these countries. (If you think about some of the relative successes that I have cited – China, India, Uganda, Vietnam – in each case their reform was a startling surprise.) As long as there are locations with weak institutions and policies, people living there are going to fall further and further behind the rest of the world in terms of living standards.

Building a coalition for reform in these locations is not easy, and what outsiders can do to help is limited. But one thing that the rich countries can do is to make it easy for developing countries that do choose to open up, to join the club. Unfortunately, in recent years the rich countries have been making it harder for countries to join the club of trading nations. The GATT was originally built around agreements concerning trade practices. Now, however, a certain degree of institutional harmonisation is required to join the World Trade Organisation (WTO) (for examples, on policies toward intellectual property rights). The proposal to regulate labour standards and environmental standards through WTO sanctions would take this requirement for institutional harmonisation much farther. Power in the WTO is inherently unbalanced: size matters in the important area of dispute settlement where only larger countries can effectively threaten to retaliate against illegal measures. If the US wins an unfair trade practices case against Bangladesh it is allowed to impose punitive duties on Bangladeshi products. Owing to the asymmetry in the size of these economies the penalties are likely to impose a small cost on US consumers and a large one on Bangladeshi producers. Now, suppose the situation is reversed and Bangladesh wins a judgment against the US. For Bangladesh to impose punitive duties on US products is likely to hurt its own economy much more than the US. Thus, developing countries see the proposal to regulate their labour and environmental standards through WTO sanctions as inherently unfair and as a new protectionist tool that rich countries can wield against them.

So, globalisation will proceed more smoothly if the rich countries make it easy for developing countries to benefit from trade and investment. Reciprocal trade liberalisations have worked well throughout the post-war period. There still are serious protections in OECD countries against agricultural and labour-intensive products that are important to developing nations. It would help substantially to reduce these protections. At the same time, developing countries would benefit from further openings of their own markets. They have a lot to gain from more trade in services. Also, 70 per cent of the tariff barriers that developing countries face are from other developing countries. So, there is a lot of potential to expand trade among developing countries, if trade restrictions were further eased. However, the trend to use trade agreements to try to impose an institutional model from the OECD countries on Third World countries makes it more difficult to reach trade agreements that benefit poor countries.

Another reason to be pessimistic concerns geography. There is no inherent reason why coastal China should be poor – or southern India, or Vietnam, or northern Mexico. These locations historically were held back by misguided policies, and with policy reform they can grow very rapidly and take their natural place in the world income distribution. However, the same reforms are not going to have the same effect in Mali or Chad. Some countries have poor geography in the sense that they are far from markets and have inherently high transport costs. Other locations face challenging health and agricultural problems. So, it would be naïve to think that trade and investment can alleviate poverty in all locations. Much more could be done with foreign aid targeted to developing medicines for malaria, AIDS, and other health problems of poor areas and to building infrastructure and institutions in these locations. The promises for greater aid from the US and Europe at the Monterrey Conference were encouraging, but it remains to be seen if these promises are fulfilled.

The importance of geography also raises the issue of migration – the missing flow in today's globalisation. Migration from locations that are poor because of either weak institutions and/or difficult physical geography could make a large contribution to reducing poverty in the lagging regions. Most migration from South to North is economically motivated. This migration raises the living standard of the migrant and benefits the sending country in three ways – reducing the labour force raises wages for those who remain behind, migrants typically send a large volume of remittances back home, and their presence in the OECD economy can support the development of trade and investment networks. These benefits are strongest if the migrant is relatively unskilled, since this is the part of the labour force that is in over-supply in much of the developing world.

Each year 83 million people are added to world population, 82 million of these in the developing world. Furthermore, populations in Europe and Japan are ageing and the labour forces there will begin to shrink without more migration. So, there are clear economic benefits to more migration of unskilled workers from the South to the North, and yet this flow remains highly restricted and very controversial because of its impact on society and culture. Because the economic pressures are so strong, however, growing volumes of illegal immigration are taking place – and some of the worst abuses of ‘globalisation’ occur because we are not globalised when it comes to labour flows.

Realistically, none of the OECD countries is going to adopt open migration. But there is a good case to be made to revisit migration policies. Some of the OECD countries have a strong bias in their immigration policies toward highly skilled workers, spurring ‘brain drain’ from the developing world. This policy pushes much of the unskilled flow into the illegal category. If OECD countries would accept – legally – more unskilled workers, it should help with their own looming labour shortages, improve living standards in sending countries, and reduce the growing illegal human trade with all of its abuses.

So, integration of poor economies with richer ones has provided many opportunities for poor people to improve their lives. Examples of the beneficiaries of globalisation will be found among Mexican migrants, Chinese factory workers, Vietnamese peasants and Ugandan farmers. Lots of non-poor in developing and rich countries alike also benefit, of course. But much of the current debate about globalisation seems to ignore the fact that it has provided many poor people in the developing world unprecedented opportunities. After all of the rhetoric about globalisation is stripped away, many of the practical policy questions come down to whether we are going to make it easy for poor communities that want to integrate with the world economy to do so, or whether we are going to make it difficult. The world's poor have a large stake in how the rich countries answer these questions.

Development Research Group, World Bank. Views expressed are those of the author and do not necessarily reflect official views of the World Bank, its Executive Directors, or its member countries. [1]

This estimate is only for the rural population of China. However, the available survey data show that there were almost no urban families living under this poverty line, either in 1980 or today. So, the estimate can be taken as a reasonable approximation of overall extreme poverty in China. [2]

The mean income in the rural household survey in China, converted into 1993 US dollars with the Summers and Heston PPP exchange rate, is about US$200 per year in 1978. Using the information on the distribution of income in the 1981 sample, the earliest available, the estimated number of people in China with income less than US$1 per day would be as high as 750 million. The number consuming less than US$1 per day would be smaller, since even the very poor have some savings in China. Also, the early surveys may not have done a good job with imputed consumption from housing and other durables. For these reasons I take 600 million as a rough but conservative estimate of the number of poor (consuming less than US$1 per day) at the beginning of China's economic reform. [3]

Milanovic (2002) estimates an increase in the global Gini coefficient for the short period between 1988 and 1993. How can this be reconciled with the Sala-i-Martin findings? Global inequality has declined over the past two decades primarily because poor people in China and India have seen increases in their incomes relative to incomes of rich people (that is, OECD populations). If you refer back to Figure 6, you will see that the period from 1988 to 1993 was the one period in the past 20 years that was not good for poor people in China and India. [4]

Dollar and Kraay (2001b) divide developing countries into more globalised and less globalised; the more globalised are the top one-third of developing countries in terms of increases in trade to GDP between the late 1970s and the late 1990s. The Freeman, Oostendorp and Rama study uses this classification. [5]

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Economic Integration and Growth

• Published: 25 August 2021
• Volume 69 , pages 467–469, ( 2021 )

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1 Challenges and opportunities…

Global economic growth and economic integration suffered major setbacks in 2020–21 owing to the Coronavirus crisis and the huge strains it put on people, companies and governments all around the world. Trade restrictions and global supply*-chain disruptions in particular became recurrent challenges during the pandemic. But even before the crisis, trade tensions and constraints to economic integration threatened to limit many countries’ abilities to reap the benefits of globalization. Against this background, the IMF Economic Review (IMFER) commissioned a special issue focused on the theme of “Economic Integration and Growth.” While the accompanying conference, which was to have taken place in Rabat, Morocco, with the cooperation of Bank Al-Maghrib, could not be held, we are delighted to introduce the articles in this volume, summarized below.

The first paper, “Infrastructure Investment and Labor Monopsony Power” by Wyatt J Brooks (Arizona State University), Joseph P Kaboski (University of Notre Dame and NBER), Illenin Kondo (Federal Reserve Bank of Minneapolis), Yao Amber Li (Hong Kong University of Science and Technology), and Wei Qian (Shanghai University of Finance and Economics), examines how transportation integration affects local labor markets. Exploiting variation induced by the construction of the “Golden Quadrilateral” road system in India, they demonstrate manufacturing employers in markets closer to the highway system that have reduced market power relative to employers in markets that are less connected. Importantly, they can separately identify changes in both monopsony power and output markups, and find highway construction is pro-competitive in both input and output markets. The net effect is to increase the labor share of income by approximately 2 percentage points.

The second paper, “Trade Integration, Global Value Chains, and Capital Accumulation” by Michael Sposi (Southern Methodist University), Kei-Mu Yi (University of Houston), and Jing Zhang (Federal Reserve Bank of Chicago), presents a framework to study the dynamic impact of global trade and fragmentation of production that had been accompanied by significant income convergence in many emerging economies. The paper builds a dynamic two-country model featuring sequential, multi-stage production, and capital accumulation. As trade costs decline over time, global-value-chain (GVC) trade expands across countries, particularly more in the faster growing country, consistent with the empirical pattern. Via Heckscher-Ohlin forces, GVC trade can generate back-and-forth feedback between comparative advantage and capital accumulation (growth). Moreover, GVC trade increases both steady-state and dynamic gains from trade. At the current juncture, the model can help us assess the consequences that reversing those globalization trends might have on income and welfare.

The third paper in the volume, “Entry and exit of informal firms and development” by Brian McCaig (Wilfrid Laurier University) and Nina Pavcnik (Dartmouth College), provides new insights into the economics of non-farm informal businesses in developing countries. Non-farm informal businesses comprise the majority of the firm distribution in developing countries. The paper documents a number of novel stylized facts about entry and exit of informal, non-farm firms using a nationally representative panel dataset over 15 years and across regions with varying levels of local economic development in Vietnam. First, informal businesses exhibit annual rates of entry and exit of around 15-19%. Entry and exit rates are similar and highly correlated at a point in time, within industries, and within regions, and they both decline over time and across space with economic development. Second, although market selection influences which firms survive, entry and exit has little net effect on aggregate (revenue) productivity or hiring of workers outside the household. Third, the large overlap in revenue of entering and exiting informal businesses and the high correlation between entry and exit rates are related to the education of owners and their economic activities before and after operating an informal business. Informal business owners are less educated on average than wage workers in the formal sector, but more educated than agricultural workers. The transitions in and out of operating an informal business reflect the underlying structure of economic activities of the working age population, with education gaps also playing a role. The most common transition into non-farm businesses is to and from self-employment in agriculture. The likelihood of this transition declines with economic development, highlighting the role of net entry from agriculture into informal non-farm businesses in structural change.

Greater integration of women into the labor force is perhaps one of the most powerful levers of growth in many emerging markets. This issue concludes with a Policy Corner article, titled “Social Norms as a Barrier to Women's Employment in Developing Countries” by Seema Jayachandran (Northwestern University). The article starts with a discussion of the relationship between economic growth and female employment, pointing out that a significant amount of variation is unexplained by economic factors, leaving an important role for norms in determining labor force participation. The article examines evidence of the role of several gender-related social norms, and discusses evaluations of interventions designed to overcome such barriers, both by helping women work around a norm, as well as by changing norms. Jayachandran concludes that both approaches can be successful, and that implementing supportive policies could substantially narrow gender gaps in the labor market.

We hope that you will enjoy reading this issue. The topics covered are of fundamental importance to the functioning of the global economics system, and speak particularly to the challenges and opportunities present in many emerging markets. Taken together, these papers present novel empirical evidence on labor market integration, the creation and destruction of informal firms, as well as new insights on the causes and consequences of the increasing dispersion of global value chains, and sound policy guidance on increasing female labor force participation.

We thank all the authors for their valuable contributions, and the referees for making the papers even better. Finally, we thank Tracey Lookadoo for ensuring a smooth process during challenging times, and Emine Boz, Andrei Levchenko, Prachi Mishra, and Linda Tesar, along with the IMFER for giving us the opportunity to create this issue.

Shawn Cole and Silvana Tenreyo

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Cole, S., Tenreyo, S. Economic Integration and Growth. IMF Econ Rev 69 , 467–469 (2021). https://doi.org/10.1057/s41308-021-00145-5

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ECONOMIC INTEGRATION: AN OVERVIEW OF THE THEORETICAL AND EMPIRICAL LITERATURE

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The effect of integration, global value chains and international trade on economic growth and food security in ECOWAS

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2. literature review, 3. methodology, 4. empirical results and discussion, 5. conclusion, additional information.

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This study analyzes the potential of regional integration through the advantage of global value chains in accelerating economic growth and achieving food security. This study examines whether countries must develop strategies to raise international trade or adopt policies to reinforce regional trade. The study estimates two models with panel fixed effects. The findings support that regional integration needs to strengthen and better promoted to stimulate the potential of each country to move from discontinuous to sustained growth. International trade is not the better solution for ECOWAS countries to boost economic growth.

• food security
• economic growth
• trade openness
• regional integration
• value chain

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Public Interest Statement

According to regional integration theory, integration can affect economic growth by raising the economy?s competitiveness and accelerating industrialization, and by creating better employment opportunities which lead to poverty decrease in the region. However, regional integration and international trade as a whole for African countries have not brought the expected results and some question remains unanswered: Why regional trade agreements are not pursued by countries in Africa? This study shows interesting perspective on why to strengthen the integration and how it can bring a triple benefit in terms of economic growth, food security and sophistication of export bundle to the rest of the world.

Competing interests

The authors declare no competing interest.

Food security and economic growth constitute the two challenges of the contemporary economy particularly in developing countries. Despite the improvement of the performance of African countries these recent years, the economic growth rate is still low. In fact, the report of Africa Growth Initiative ( Citation 2016 ) illustrates that low economic growth rate, weak industrial development and growing poverty characterize African countries due to poor human development, growing population living in urban slums with no access to elementary services, raise of corruption and disadvantage in global trade. In the case of ECOWAS Footnote 1 countries, the GDP per capita increased very slowly ($954 in 2010, $1,051 in 2011, $1,057 in 2012, and $1,137 in 2014) but the economic growth gap among Africa and other regions is not new and started to be structural between 1970 and 2000. While all other developing countries and the world experienced remarkable progress in reducing extreme poverty, in African countries the percentage of the population under poverty increased. This lack of involvement was the starting point of the fundamental contrast between Africa and the rest of the world. Also, Ndulu and O’Connell ( Citation 2006 ) note that this divergence augmented sharply when the continent missed out on the economic structural transformation that took place in the developing world, making poverty in Africa mainly a growth challenge. The economic growth rate in African countries has always been too low to initiate the development process. Subsequently, Maddison ( Citation 2007 ) identifies the erratic growth performance of African countries as the most important reason behind its lagging position in eradicating poverty.

Several approaches based on country case studies followed each other since the 1990s (Azam, Fosu, & Ndung'u, Citation 2002 ; Berthelemy & Soderling, Citation 2002 ; World Bank, Citation 2005 ) to investigate growth pattern and identify the constraints to implement sustained growth. This period, marked by the design and the implementation of various development program schemes and macroeconomic stability program failed to tackle poverty and generate a sustained growth. A summary of the large number of study on Africa’s slow growth (Calderon, Citation 2009 ; Chandra & Kolavalli, Citation 2006 ; Collier, Citation 2007 ; Comin & Ferrer, Citation 2013 ; Glaeser, La Porta, Lopez-de-Silanes, & Shleifer, Citation 2004 ; Ndulu, Lopamudra, Lebohang, Vijaya, & Jerome, Citation 2007 ) reaches the same conclusion that some factors (long distances from markets, geographical fragmentation, tropical climates and soils, small markets, demographic pressure, natural resource curse, aid, external economic shocks vulnerability, weak institutional capacity, low financial sector and information technology, risks and uncertainty of policies and political instability) are main dangers in achieving and sustaining growth. However, all these key factors influencing growth and channels through which these run, can be addressed by regionalism accompanied by transparency, innovation, sound policies and effective leadership. In fact, regional integration through the potential of community trade offers enormous opportunities to boost economic growth.

Regional integration by enlarging the size of the market stimulates the efficient allocation of resources, increases human capital and mobility of labor, develops agricultural research and development related activities, diversifies production and improves manufacturing sector, increases domestic saving and investment, improves infrastructure and reduce the need of foreign debt. Thus, regional integration directly affects economic growth by raising the competitiveness and accelerating industrialization, and by creating better employment opportunities which lead to poverty reduction in the region. However African economies are not strongly advanced in the insertion of global value chains which represent a crucial asset. Therefore, linking regional integration to global value chains can expand trade, create comparative advantage in world trade and strengthen partnerships opening the way to a faster economic growth rate.

In the same order, regional integration through its spill-over effects on agriculture, food prices and macroeconomic policies affects food security. Food and Agricultural Organization ( Citation 2003 ) reports that “food security will be affected by international trade in general and agricultural trade in particular. Based on the ability of intra-regional trade to foster economic growth and increase employment prospects and the income-earning capacities of the poor, it will enhance access to food. The increased intra-regional agricultural trade could also promote food security by augmenting domestic food supplies to meet consumption needs and by reducing overall food supply variability”. More specifically macroeconomic policies play significant roles in influencing food security directly or indirectly by affecting poverty, food production, prices, foreign exchange, employment, and wages. Reduce poverty among countries requires to raise food availability and at the same time food accessibility at national and household level. Integration is a better tool to address food security challenge because of the opportunities targeting trade and market integration, investment in agricultural resources, investment in agricultural and trade infrastructure, sophistication in improved agriculture technologies, reducing of domestic and foreign policy distortions, and economies of scale. It is well-established that integration substantially affects the agricultural sector performance by stabilizing food prices, strengthening regional market and reducing the dependence on International market, improving exports and decreasing imports which in turn influence the countries income distribution, rural development, employment creation and competitiveness of the economy, and the development of technologies against bad harvests or natural disasters. Consequently, all these channels target malnutrition, hunger, and famine, create an enabling environment to increase consumption and improve population nutritional well-being which directly addresses poverty reduction. However, the impact of regional integration on food security goes beyond food and agriculture dimension and encompass non-agricultural economy that has various implications on countries trade policy.

Regional integration offers a space for “learning to compete” and for “self-discovery” to firms and organizes them for the greater rigor and competition in global value chains. Global value chains being in infant stage in most African countries, what can be the potential of a regional integration oriented on regional trade value chains promotion on food security? Several indicators assessing food security have been conceived, but per capita daily dietary energy supply is mostly used to measure national food security. Consistent with the literature, per capita dietary energy supply is used in this study as food security indicator.

This study analyzes the potential of regional integration in accelerating economic growth and achieving food security with a focus on ECOWAS. The study explores whether countries must develop strategies to raise international trade through increasing openness degree or must adopt policies to reinforce community or regional exchange. Three particular instruments are investigated in ECOWAS integration (such as each country international trade openness, each country intra-regional trade openness and the community insertion in value chains) to identify the best way for economic growth and food security raising.

The remainder of the paper is organized as follows. Section 2 presents the literature review on empirical research between regional integration, economic growth and food security. The model specification, methodology and data are described in Section 3 . Section 4 shows the empirical results, interpretations and evidence based on policy recommendation and Section 5 concludes.

The literature presented in this study is organized into two main part. The first part investigates the research on regionalism, industrialization, and growth, and the second part explores food security aspects. The relation between trade liberalization and economic development are widely studied. Literature in international trade provides a lot of evidence on how trade liberalization positively influences the performance of economies which have liberalized trade to the world economy (Dollar, Citation 1992 ; Herath, Citation 2010 ; Leamer, Citation 1988 ; Sachs & Warner, Citation 1995 ). Trade liberalization is assumed to be a driving force of economic development in a country. Svatoš and Smutka ( Citation 2010 ) show that international trade has become a vital instrument in building external economic links among world economies. Grossman and Helpman ( Citation 1992 ) show that openness to international trade increases domestic imports of goods and services which include new technologies. Through learning by doing and the transfer of technology, the most open economies are growing at a faster pace than most protectionist. However, the authors add that these gains depend on several factors, including the initial situation. The latter determines the nature of the specialization of the country in the long run and therefore its growth rate. The openness of a small country may lead her to specialize in a low-growth sector, contributing instead to leave the Country in underdevelopment. In this case, the Country should adopt protectionist policies during the early stages of its development, then opt for appropriate opening policies.

According to Levine and Renelt ( Citation 1991 ), the causal relationship between openness and growth is through investment. A country liberalizing its trade will attract foreign investment flows. However, they may cause a decline in domestic investment due to stronger international competition, and the net effect then remains ambiguous. Grossman and Helpman ( Citation 1992 ) also argue that a country protecting its economy can stimulate growth, but only if government intervention encourages domestic investment according to the comparative advantages of the country.

Dollar ( Citation 1992 ), Barro and Sala-i-Martin ( Citation 1995 ), Sachs and Warner ( Citation 1995 ), Edwards ( Citation 1998 ) and Greenaway, Morgan, and Wright ( Citation 1998 ), using cross-sectional regressions, found that trade distortions due to the intervention of the State led to low growth rates. Ben-David ( Citation 1996 ) has also shown that it is only in open economies that we could observe an unconditional convergence. Frankel and Romer ( Citation 1999 ) use a method of instrumental variables including geographical features, and confirm that international trade has a significant impact on growth. Harrison ( Citation 1996 ) reaches similar conclusions using a variety of indicators of openness. By using different methods (cross-section fixed effects, five-year average, first differences), the results suggest a positive relationship between openness and growth. However, not all openness measures were significant, even though they were mostly a positive sign. Rodriguez and Rodrik ( Citation 2000 ) criticize trade openness indicators. They find that the positive correlation between openness and growth was not robust and the methodology used by other authors lacked crucial control variables to have a decisive effect on growth.

Jin ( Citation 2004 ) analyzes the co-movement between openness and growth in China. He checks if the relationship openness-growth was also valid at the provincial level and if we could detect a difference between the coastal provinces and those isolated. The results obtained are those expected: the effect for coastal region is significant and positive for four of them, and negative for the majority of landlocked provinces. Noguer and Siscart ( Citation 2005 ) leading a study on a sample of 98 countries, find a positive relationship between international trade and economic growth which improves the income segments of the population who engage in production activities.

Hubert and Satoshi ( Citation 2016 ) analyze East Asian trade and focus on global value chains effects on industrial networks. Using graph theory and input-output data to measure value-added, they show that trade value chains foster regional integration so that the inter-industry linkage moved from a simple hub-and-spokes cluster to a more complex structure with the rise of China and the specialization of several countries as secondary pivots. The intensification of value chains reduced variance among country tariffs duties and lowered transaction costs which promote export-led growth accompanied by industrialization based on domestic markets. It also improved logistics services and cross-border administrative procedures, lessened anti-export bias and enhanced the competitiveness of national suppliers. Their results prove the importance of global value chains in shaping industrial development based on trade.

Baldwin ( Citation 2008 , Citation 2011 ) examines the relationship between regionalism, trade, and industrialization in East Asia, and why building a supply chain is crucial. He demonstrates that compared to the past where successful industrial development (South Korea and Taiwan) took decades and involved a domestic supply chain, today intra-regional trade has the potential to bring countries in industrialization in only a few years by joining supply chains. He discusses that Emergence of the international supply chain has fundamentally reduced the complexity and time required for developing countries to industrialize. Therefore, it is much easier to join an existing supply chain than to build one from scratch domestically, as earlier industrializers like South Korea and Taiwan did.

Economic and Social Commission for Asia and the Pacific ( Citation 2015 ) provides stylized facts on the participation of Asia-Pacific economies in regional and global value chains and explores the relationship between global value chains and regional integration processes, in particular, the linkages between different types of preferential trade agreements and the evolution of global value chains. The study found that expansion of global value chains has opened opportunities for strong integration in Asia and the Pacific by allowing countries to pursue the division of labor and specialization. Using gravity model, the impacts of regional integration on global value chain-related exports to the region are methodically investigated. The results confirm the potential of value chains. First regional trade agreements have a positive association with global value chain-related exports of Asia-Pacific countries. Second, the impacts on intraregional exports appear to be stronger than exports to the rest of the world. The reduction of trade barriers from the perspectives of both exporters and importers seem to be associate with an increase in value chain-related exports from Asia-Pacific countries. Third, trade facilitation through the improvement of ICT, logistics and transportation systems, and removing behind-the-border obstacles can enhance global value chain-related trade between nations and make them key players in global value chains.

If numerous studies can be find on regionalism, integration and their spill-over effect on economic growth, only a few empirical works are done on regionalism and food security. Most of the studies done are limited to statistical analysis (Food & Agricultural Organization, Citation 1996 ; Food & Agricultural Organization, Citation 2009 ; Kakwani & Son, Citation 2016 ; Maxwell, Citation 2001 ; Sen, Citation 1981 ). The links between regional trade, international trade, and food security are complex and multiple. The debate that whether trade liberalization improves food security is hypothetically ambiguous. Based on studies, the nature and magnitude of the food security effect of liberalization depends on various factors such as the extent of adaptability of the poor to changing economic conditions; the degree of exposure of the country to food imports; the presence of favorable initial conditions and accompanying measures; and the time horizon considered.

Chand and Jumrani ( Citation 2013 ) explain the paradox of “hunger amidst plenty” prevailing in India and show that the income growth is a necessary but not a sufficient condition for reducing undernourishment and malnourishment because historical and cultural factors are linked to food security. Dorosh ( Citation 2004 ) argued that trade liberalization contributed to enhance national food security of Bangladesh by increasing the level of available foods for domestic consumption during the production shortfalls and therefore stabilizing market prices benefitting poor consumers. Chen and Ducan ( Citation 2008 ) report that an increase in real GDP resulting from trade in India improves the food security status of the poor. Herath, Cao, and Chen ( Citation 2014 ) capture the effects of trade liberalization on food security in South East Asia. Their findings support that discriminatory trade liberalization policies have positively influenced food security. They found that after the formation of the Association of South East Asian Nations’ Free Trade Agreement (AFTA), the level of per-capita daily dietary energy supply of the member countries has been increased moderately over time. Thomas and Morrison ( Citation 2006 ) show that the food security outcomes of liberalization varied by Country and the food security indicator used.

Bezuneh and Yiheyis ( Citation 2014 ) investigate whether trade liberalization has improved food security of developing countries. By applying multiple regression analysis on panel data, they found that trade liberalization exerted a negative short-run impact on food availability but the overall results fail to support the view that from the medium to long run, the effect of trade liberalization on food availability is favorable. Their findings provide evidence on the ambiguity of the impact of trade liberalization on food security. Grant and Lambert ( Citation 2005 ), Seck, Cissokho, Makpayo, and Haughton ( Citation 2010 ), Korinek and Melatos ( Citation 2009 ), Nin-Pratt, Diao, and Bahta ( Citation 2008 ) show that regional integration has not led to substantial allocation effects and the expected decrease in food prices caused by efficiency gains. Hence, the direct impact of integration on food security seems to have been small. Taking into account that allocation effects have been small, accumulation effects have also been limited. The evidence on the mixed and inconclusive relationship between trade liberalization and food security is confirmed by McCorriston et al. ( Citation 2013 ).

Maertens and Swinnen ( Citation 2015 ) analyze the contribution of trade value chain in developing regions through the significant increase in foreign investment. The results show that the demand for high-value products raises rural incomes and creates opportunities for developing countries to realize economic growth through expanding and diversifying their agricultural exports. Jaudy and Kukenovaz ( Citation 2011 ) find similar results which are explained by the potential of labor-intensive production systems implemented. Xiang, Huang, Kancs, Rozelle, and Swinnen ( Citation 2012 ) simulate the general equilibrium effects of the trade growth on household welfare. Their findings confirm the benefit of the value chain.

Beghin, Maertens, and Swinnen ( Citation 2015 ) and Maertens, Colen, and Swinnen ( Citation 2011 ) explain that trade value chains, directly and indirectly, affect food security by impacting smallholder producers. Smallholders, when included in value chains through contract-farming schemes across sectors and countries, can increase their income, raise their production and improve their competitiveness and in the long term better insert themselves in the global market. Along with this process of insertion of smallholders in value chains, some authors (Dries & Swinnen, Citation 2010 ; Minten, Randrianarison, & Swinnen, Citation 2009 ; Negash & Swinnen, Citation 2013 ) show that the improved access to inputs leads to a rise in technology transfer. This effect generates significant productivity increases both for the product itself and for other production activities at the farm level and has essential spillovers on household food security. In the same perspective, Mano, Yamano, Suzuki, and Matsumoto ( Citation 2011 ) illustrate that value chains enhance labor market by creating substantial employment and diversifying off-farm employment opportunities for women. The implications of gender and rural poverty are the empowerment of women and more access to income which allow more spending on food.

3.1. The impact of regional integration and international trade on economic growth

The theoretical frameworks used to assess the effect of integration and international trade on growth is drawn to the endogenous and neoclassical growth (Solow, Citation 1956 ) theories. Under neoclassical growth theory, institutional characteristics, policy regulations, and economic integration, are useless in disturbing the equilibrium growth rate, which is exclusively fixed by the exogenous degree of technological evolution. Changes in investment, institutional innovations or increases in efficiency succeeding regional integration have just transitory impacts on the growth rate. Transitory growth impacts occur as a result of changes in the overall level of productivity attributed to the formation, enlargement or extending of the regional integration agreement. The efficiency change induces faster physical capital formation that progressively decreases to the long run equilibrium. Therefore, integration is seen as any other crucial economic policy disturbing growth solely on the transition process leading to the steady state (Njoroge, Citation 2010 ). The endogenous growth theory (Walz, Citation 1997 ) on the contrary, by presuming increasing returns to the growth of capital considers long-term or permanent effects of regional integration. The long-term impact depends on the insertion of human capital which will maintain investment and disseminate knowledge. In turn, economic growth can accelerate due to the integration agreements extending technology on a large scale. The theory also explains how international trade fosters economic growth through human capital seeing as the engine of growth (Lucas, Citation 1988 ).

Based on Bezuneh and Yiheyis ( Citation 2014 ) and Herath et al. ( Citation 2014 ), panel data with fixed effects is used. However, all preliminary tests and Hausman test are checked to validate if fixed or random effects are appropriate. The dependent variable is represented by real GDP per capita. The keys interest variables are trade openness which measures international trade, the intra-community export which measures intra-regional trade and per capita domestic value-added which measures global value chains performance. Per capita domestic value-added captures the gains associated with exporting which accrue to local labor and capital. Domestic value added is the share of exported products that are not finished product and will be imported from other countries to be processed before being exported.

The data cover ECOWAS countries (Mali, Benin, Sierra Leone, Ivory Coast, Burkina Faso, Guinea-Bissau, Cape Verde, Ghana, Togo, Niger, Guinea, Liberia, Gambia, Nigeria, and Senegal) from 1995 to 2012. Real GDP per capita, trade openness, inflation and gross capital formation come from the World Development Indicator. Intra-community trade and foreign investment come from UNCTAD database. Per capita domestic value added is provided by OECD TiVA.

3.2. The impact of regional integration and international trade on food security

Based on literature (Darshini, Citation 2012 ; Herath et al., Citation 2014 ; IFPRI, Citation 2006 ; McCorriston et al., Citation 2013 ; Thomas & Morrison, Citation 2006 ), direct and indirect channels are identified through which regional integration or trade influences food security. Food security can be affected by growth in national income and employment. It is widely accepted that economic growth is a required stage for sustainability of poverty reduction and food security, even if in the short-run, growth may not be fast enough to achieve food security. Economic growth raises incomes and the ability of the poor to gain access to food and health and can lead to improved food security. Economic growth also develops infrastructures, services, and opportunities for a raise in the overall level of income.

Secondly, food security is associated with regional integration’s capability to rise global supply of the production (through a mixture of imports and domestic production) and to stabilize variations in food prices. Where the local charge of food was expensive compared to the rest of world due to trade barriers or tariffs, importing country will reduce domestic food at the same cost to increase the level of food consumed. However, the decrease in national commodity prices and cheaper imports would negatively affect domestic production and thereby the poor food security status whose key source of income and employment is food production. The third channel is through improved foreign exchange earnings. With the improvement of exports market access via multilateral liberalization and a more competitive production process based on comparative advantage, the export sector develops. The subsequent rise in foreign exchange gains improve the potential of the economy to expand domestic production and finance food imports. The fourth channel is reducing variability and uncertainty of food provision. Opening up the economy lessens the unpredictability of staple foods supply by helping offset undesirable domestic production shocks. Finally, market prices affect food accessibility and represent the purchasing power in the economy. The effect on the purchasing power is correlated to the magnitude of money supply which impacts local prices of goods and services and can also import inflation.

Per capita dietary energy supply is adopted to measure the food availability which approximates food security. The keys interest variables are trade openness, intra-community export trade and backward integration which assesses the extent to which a country is integrated and correspond to the country’s place in the value chain. Backward integration is the share of the imported value added from foreign suppliers upstream that will be found in the country’s exports. Increasing backward participation is associated with more competitive export, higher per capita domestic value-added in exports and $growing income. A higher share of backward participation is also linked to access of competitive inputs and a more-sophisticated export bundle and greater diversification over time.

Data on political instability, agricultural land, per capita dietary energy supply and the value of food production (constant 1$ per person) come from FAO. Foreign reserves, domestic credit and population growth are provided by World Development Indicator. Backward integration is computed with OECD TiVA database.

The result of the Hausman test (Table 1 ) after the estimation with fixed and random effects for Model (1) and (2) rejects the null hypothesis that there is a no difference between the coefficients obtained by fixed effects and random effects. The correct specification for both Model (1) and (2) is the fixed effects.

Table 1. Specification test results of the effects of integration, global value chains and international trade on economic growth and food security in ECOWAS

The estimation results for Model (1) and (2) are summarized in Table 2 .

Table 2. Results of the effects of integration, global value chains and international trade on economic growth and food security in ECOWAS

The coefficients for Model (1) are all significant except trade openness, and also have the expected sign according to theory. In the case of ECOWAS, trade openness which assesses the opening degree of each country to international trade does not affect economic growth. This result seems to be paradoxical but tends to support the viewpoint of some researchers (Noguer & Siscart, Citation 2005 ; Rodriguez & Rodrik, Citation 2000 ) who conclude after studies done in other developing countries that the relationship between openness and growth is inconclusive. Moreover, Grossman and Helpman ( Citation 1992 ) and Levine and Renelt ( Citation 1991 ) already discussed that the effect of trade openness on economic growth remains ambiguous. In ECOWAS, even if trade openness affects on growth, this effect is trivial which explains that in our estimation the coefficient is insignificant. Another explanation of this result in the specific case of ECOWAS is that countries trade more with world market than with regional market, and ECOWAS imports are not oriented to capital and industrial equipment which pulls economic growth. Trading with developed countries, the openness of ECOWAS countries which are small countries leads them to specialize in a low-growth sector, mainly the exports of primary products. The consequence is that the openness of each country to international trade is characterized by more imports than exports. International trade theory demonstrates that trade among countries with different levels of development does not benefit the poorest countries. For international trade to push countries, exchanges must be done among similar countries. Also, opening to international trade is not a necessary and sufficient condition to increase economic growth, other factors such as infrastructure, investment, comparative advantages, industrial development, protectionist policies, and technology progress need to be effective. However, in ECOWAS countries those factors are missing.

In contrast, intra-community trade and per capita domestic value-added positively influence economic growth. Even if ECOWAS intra-trade is low, it affects the economic growth of each country. This result shows that intra-regional trade is crucial for economic growth. The more regional exchange increases, the more per capita income rises, and the more economic growth can be boosted. This finding supports that regional integration needs to strengthen and better promoted to stimulate the potential of each country to move from discontinuous growth to sustained growth. In fact, intra-community trade within ECOWAS is estimated only at 9 percent in 2015. It is clear that if trade agreements are put in place to motivate countries to trade with each other, the impact will be different for producers and households in term of improving income, raise of investment and increase of consumption. Also, if the intra-regional trade is focused on the promotion of goods and services resulting from the consolidation of value chains among the different countries, economic growth can be exponential. An increase domestic value added is associated with high volume of trade which will raise the competitiveness and diversification of exports, enhancing each country place in global value chains. Therefore, comparing the results, intra-regional exchange and per capita domestic value-added boost more economic growth than international trade (trade openness).

International trade is not a solution for ECOWAS to boost economic growth but regional trade linked to the creation of value chains among each country can be the engine of the growth.

An examination of other control variables shows that they significantly contribute to economic growth as indicated in the literature. Foreign direct investment has a positive and significant effect on GDP. Klasra ( Citation 2011 ) finds the similar result in Pakistan. Ercakar ( Citation 2011 ) shows that in African economies, openness cannot achieve economic growth without foreign direct investment. However, the gross capital formation is even more important than foreign investment for countries. It affects positively more economic growth, showing the crucial role of domestic investment in the development process. This effect of the domestic investment on economic growth is also highlighted by Pam ( Citation 2017 ) in the case of sub-Saharan Africa.

Positive changes in inflation are associated with negative changes in economic growth, thereby suggesting that price volatility reduces growth because of the unpredictability of the macroeconomic environment and the challenge for the individual to have a rational expectation. This finding is in line with Kremer, Bick, and Nautz ( Citation 2009 ), Jafari, Ghaderi, Hosseinzadeh, and Nademi ( Citation 2012 ) and Pam ( Citation 2017 ) results.

In Model (2), all explanatory variables except foreign direct investment and intra-community trade significantly influence food security. International trade positively affects per capita dietary energy supply while the intra-regional is not significant. This finding has two main implications; (1) even if trade openness does not touch growth in ECOWAS countries, it significantly raises food security status because ECOWAS trade with developed and emerging countries is focused on imports of consumer goods. Therefore, an increase in trade openness improves food security. Trade between ECOWAS and the rest of the world is characterized by imports of primary products mainly agricultural goods and services, raw materials, imports of foods and foodstuffs coming from Asian countries such as Thailand, China, Vietnam, South Korea, Malaysia and Latin America (United Nations Conference on Trade & Development, Citation 2016 ). By not importing more capital and industrial equipment, the degree of openness is unusual to draw economic growth; (2) intra-regional trade, which significantly improves economic growth, does not influences per capita dietary energy supply due to the weakness of trade among ECOWAS countries. The findings are consistent with Ivica ( Citation 2016 ) results which advocate that international trade improves food security. Nevertheless, backward integration has a positive effect on food security thereby suggesting that participation in the value chain has spillover effects on countries food security.

In fact, the strengthening of trade value chains among ECOWAS countries can organize the production and manufacturing of goods in chains and concentrate the retail sector, the demand for higher quality products will increase followed by the raising of prices in international food markets. Expansion and diversification of agricultural products generate opportunities for people in the region and raise rural incomes which will allow rural and urban households to access adequate and nutritious food. Consequently, a joint effect of integration and value chains boosts food security.

Similarly, positive changes in economic growth and domestic investment translate into increase in per capita dietary energy supply while a rising of political instability in ECOWAS is seen to have a negative impact on food security. Economic growth improves food security, showing that a rise of household income directly targets the consumption of foods. This finding in line with Timmer ( Citation 2005 ) confirms that food security in ECOWAS is mainly a growth challenge contrary to others developing countries where economic growth alone does not solve the problem of food security. In ECOWAS countries, economic growth is essential for food security, and strategies at regional and national level need to be investigated. The promotion of trade value chains may be the bottom line to design these strategies because of the effectiveness of per capita domestic value added on sustaining economic growth. Value chains need to be implemented across countries and sectors, and the development program of ECOWAS must only target this goal. As expected, the incidence of political instability negatively affects food security. Political instability creates an unfavorable condition on food security through the decrease of investment and its impact on food supply from domestic production. Some researchers find similar results for ASEAN (Herath et al., Citation 2014 ) and developing countries (Bezuneh & Yiheyis, Citation 2014 ).

Growth in food production is associated with an increase in national food security. An enabling environment needs to be created by ECOWAS countries to encourage producers by increasing domestic consumption, improving the areas of farm household, making them able to cope with risk, uncertainty and sources of technical change, and raise industrial development to make food cheaper. Also, some measures must be taken by governments to improve market efficiency such as communications, transportation and storage facilities, legal codes to enforce contracts, credit availability to finance short-run inventories and processing operations, a market information system to keep all market participants from farmers to consumers fairly and accurately informed about market trends.

Increase in domestic credits, population growth, foreign reserves and agricultural irrigated land are associated with rise in per capita dietary energy supply. Domestic credits increase the consumer purchasing power and allow to access various and qualities commodities (Baldwin, Citation 2011 ). National food security can be improved if countries allocate more domestic credits for the segment of the population who needs it. It is well established that credits in most developing countries go directly into consumption and are used as an asset to smooth people’s income (Ivica, Citation 2016 ). Furthermore, credits act on food production and prices which are linked to food security. The amount of foreign reserves in ECOWAS contributes to food security. Foreign reserves enhance the ability of food importation of countries and are a channel to buy the capital machinery to accelerate production to achieve self-sufficiency. Also, the development of the industrial sector is mainly correlated to the earning of foreign exchange and the ability of people to buy food staples. The percentage of land irrigated significantly contribute to food security through its positive impact on domestic food production. The more households have access to land for growing crops the more food production and availability increase. An extension of agricultural land reduces prices and diversifies different cropping patterns that provide nutrient diversity and more stability of output.

Contrary to the findings of studies (Bezuneh & Yiheyis, Citation 2014 ) obtained for some region where population growth undermines food production, the results show that for ECOWAS countries, population growth affects positively per capita dietary energy supply. These results are explained by the fact that in African countries, most of the labor force is assigned to the agricultural sector. This sector employs more than fifty percent of the workforce. Therefore, a growing population raises food production, enlarges the variety of goods and improves the competitiveness of domestic market (Xiang et al., Citation 2012 ). The final result is an increase of food security due to more availability of food. However, stable population growth is better than rapid population growth which constitutes a danger.

International trade of agricultural products appeared very early as an enrichment factor of Nations. Through the development of exports, the precursors have demonstrated the strength of international trade to drive the economic growth of a country. By the international division of labor, international trade relies on exchange liberalization. The promise of liberalization is that by creating incentives for producers from different States to specialize in the products or services in which they have a comparative advantage, it will benefit all the trading partners since it will lead to efficiency gains within each country and to an overall increase of world production. Therefore, comparative advantage suggests that economic growth and poverty alleviation may result.

However, international trade for African countries has not brought the expected results. This study focuses on ECOWAS and attempts to respond to the inconsistency of the economic policies in African countries that turn away from the regional integration for the benefit of foreign markets. Three particular strategies are investigated in ECOWAS integration (such as each country international trade openness, each country intra-regional trade openness and insertion to value chains) to identify the best way for economic development in term of economic growth and food security raising. Two models are estimated with fixed effects over the period 1995–2012.

The results show that the relationship between openness and growth is not robust, while intra-community trade and per capita domestic value-added appear to influence economic growth. This finding supports that regional integration needs to strengthen and better promoted to stimulate the potential of each country to move from discontinuous to sustained growth. International trade is not a solution for ECOWAS to boost economic growth but regional trade linked to the creation of value chains among each country can be the engine of the growth. Countries should move more to regional integration than international trade.

Furthermore, international trade positively affects per capita dietary energy supply while intra-regional trade is not robust. This irrelevance impact of regional trade on food security can be justified by the weakness of exchange among ECOWAS countries. Nevertheless, backward integration has a positive effect on food security, thereby suggesting that participating in the value chain has spillover effects on countries food security. A joint effect of intra-regional trade and value chains trade can boost food security. This strategy optimizes economic growth and food security.

The authors received no direct funding for this research.

Notes on contributors

Almame abdoulganiour tinta.

Abdoulganiour Almame Tinta is a Doctor in Applied Agricultural Economics and Policy. His research interests focus on finance and banking, monetary policy, applied econometric, agricultural policy and international economics.

Daniel Bruce Sarpong

Daniel Bruce Sarpong is a Professor in the Department of Agricultural Economics and Agribusiness, and the Dean of the College of Basic and Applied Sciences at University of Ghana.

Idrissa Mohamed Ouedraogo

Idrissa Mohamed Ouedraogo is a Professor in Economics in the FASEG of Université Ouaga 2. He is the Director of CEDRES in Burkina Faso.

Ramatu Al Hassan

Ramatu Al Hassan is a Professor in the Department of Agricultural Economics and Agribusiness at University of Ghana.

Akwasi Mensah-Bonsu

Akwasi Mensah-Bonsu is a Doctor in the Department of Agricultural Economics and Agribusiness at University of Ghana.

Edward Ebo Onumah

Edward Ebo Onumah is a Doctor in the Department of Agricultural Economics and Agribusiness at University of Ghana.

1. The Economic Community of West African States (ECOWAS) comprises Benin, Burkina Faso, Cape Verde, Ivory Coast, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Sierra Leone, Senegal and Togo.

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Introduction

An overview of the petrochemical cluster in uae, swot analysis of borouge company, impact of regional integration on the company.

Bibliography

Globalization is a very contentious subject all over the world, starting from the definition of its impact on the economy. Alan Rugman defines globalization as a process through which the world is unified into one society and function. Globalization is multifaceted since it is a mixture of economic, technological, social, cultural, and political aspects. Globalization is enhanced through economic integration (both regional and international).

Globalization is a contentious subject since different people understand it in different ways. For instance, those who oppose it believe that globalization is a major threat to the world. They argue that globalization increases the dominance of multinational corporations, erodes local cultures, and threatens the global environment. However, the proponents believe that free movement of goods and people between nations enhances economic growth and development.

Due to increased demand and international trading systems in the modern world where international trade is no longer a treat but a necessity, regional integration is very important. Regional integration has become a necessity for the survival of many economies around the globe. This can be observed in the Middles East and Asian Pacific, where a considerable number of regional plans are in progress. Regional integration, as a significant policy to increase competitiveness, adds a new dimension to the existing business environment.

Most countries in the Middle East and Asian pacific are members of more than one regional organization, and therefore, it important for businesses in these countries to understand the rationale behind such integrations. This enables them to effectively take part in the integration process to promote and defend their interests. The underlying principle behind regional blocks in the Gulf region is the widening of the market for local goods and increased competition among companies. Besides competition and market expansion, globalization and regional integration have affected diffusion of technology, macroeconomic policies, and product quality and quantity, among others.

Oil and gas still remain the backbone of the UAE economy. Abu Dhabi alone boosts about 7.5 percent and 3 percent of the global reserve in oil and gas, respectively. However, the petrochemical industry is still at the infancy stage. Borouge, which is the leading petrochemical company in Abu Dhabi, is only ten years of age, unlike the oil and gas industry, which have been in existence for more than four decades.

In 2006, the Abu Dhabi government initiated a number of reforms in the oil and gas sector. These reforms led to the approval of the Abu Dhabi policy and endorsement of Abu Dhabi Vision 2030. The two policy documents aimed at creating a stable, diversified, and sustainable economy. This was to minimize over-reliance in oil and gas and to expand the export basket. Non-oil and gas sector by then only contributed less than 16 percent of the total revenue. Petrochemical industry provided an opportunity for diversification of the economy.

Petrochemical companies have continued to expand in the United Arab Emirates especially in Abu Dhabi. This is largely attributed to the fast growing Asian Market. The UAE companies have joined other Gulf States in fronting for highly integrated mammoth projects. However, experts warn that lack of diversification on their products is likely to slow their margins. As a result, UAE is striving to overcome over-reliance on chemical products by venturing into innovative plastic solutions.

Ethylene is the main raw material for the petrochemical companies and therefore, is the main determinant of cost and margins. Naphtha is another building block for petrochemical companies and produces other products such as propylene, butadiene, and benzene (benzene is extracted from butadiene). The two by products are mainly produced in Abu Dhabi. Another raw material used in petrochemical industry is ethylene which is derived from the natural gas (for instance, ethane, propane, and butane) which is also produced in large quantities by other gulf states besides UAE.

Borouge is a petrochemical company offering state of the art plastic solutions for different sectors of the economy. The company is a joint venture between Abu Dhabi National Oil Company (ADNOC) based in UAE and Borealis Company from Austria. ADNOC is a global supplier of oil and gas, while Borealis is among the world’s top providers of chemical and ground breaking plastic solutions.

Being a product of two global successful companies, Borouge is in the forefront of next generation plastic solutions. The company is based in Abu Dhabi and Singapore. The company also have subsidiaries in over fifty countries across Middle East, Asian Pacific, America, Europe, and Africa. At the moment, the company has employed approximately 1700 workers globally.

Building from the success of its parents company’s, Borouge’s provides state of the art technology and products for different sectors of the economy. The company projects an output of about 6 million tones per annum in 2014 which will make it the largest single producer of polyolefins products. The company is also investing in more plants and subsidiaries both locally and internationally.

Borouge is expected to finish the construction of its complex in Ruwais and Abu Dhabi by 2014. The two complexes are expected to add to the company’s capacity in the production of ethylene, polythene and polypropylene. Borouge’s planned Chemaweyaat complex, also in Abu Dhabi is expected to be the largest petrochemical unit in the world. The complex will host olefins plant, aromatic complex and numerous chemical and polymer plants. The Chemaweyaat complex is expected to be completed by 2016. The complex will consume large quantities of heavy naphtha in their aromatic units and light naphtha to produce about two million tones of ethylene and 700,000 million tones of propylene per annum.

The company also expect to increase its ethylene capacity from 3.5 million tones to 5 million tones by 2012. Generally, the company expect to increase their production capacity by 170 percent by the end of 2016. The driving force behind these expansions is the growth and strength of the Chinese market. Heavy use of naphtha in the Borouge’s Abu Dhabi plants will enhance the position of UAE in the Asian market (ahead of Saudi Arabia and Qatar). According to BMI’s Middle East index, United Arab Emirates (UAE) has remained behind Kuwait and Saudi Arabia. Luckily, UAE is ahead of Qatar with a slim margin. Their position is also under threat from other regional states.

The company is co-owned by two giant companies which are among the global leaders in their trade. Abu Dhabi National Oil (one of the co-owner) provides cheap feedstock/ raw materials used in the company. On the other hand, Borealis offers advanced technological knowhow to the company having over 50 years experience in the same. Borouge also enjoy strong logistical, fiscal, and edifying facilities available in the Abu Dhabi. The growth of the petrochemical industry in general is strongly supported by the strong macroeconomic policies in the country. Experts predicts that the industry will largely contribute to the country’s surplus in 2015 (15 percent) from the current 5.1 percent.

Borouge is a major player in UAE’s petrochemical industry and is in fact an extension of the oil and gas industry. Borouge receives its raw material suppliers mostly from numerous oil and gas companies owned by ADNOC (one of the parent company). The contractual relationship between these two leading companies has helped to front UAE in the global stage and to protect the country’s energy sector. ADNOC’s direct control of Borouge’s raw material suppliers means that the company is guaranteed cheap and steady supply.

According to the World Bank index, UAE is ranked the highest among all Arab states in the Middle East and North Africa in terms of good governance. In addition, the country’s well developed infrastructure (transport and telecommunication) eases the company’s operations. The company’s active participation and dominant position in the regional and global economic market also provides an added advantage especially in negotiating better terms of trade.

The demand for petrochemical products in UAE is relatively low evidenced by the low number of converter industries. Limited number of converter industries is also attributed to the limitation imposed on foreign ownership. In addition, the demand for petrochemical products is still short in UAE compared to western economies. United Arab Emirates is a member of the OPEC (Organization of the Petroleum Exporting Companies). OPEC dictates the policies of the member states and as a result limits their oil production capacity. This also limits the production of the associated gases which are building blocks in the petrochemical companies including Borouge. The potential capacity of the petrochemical industry is additionally limited by the high ethane consumption in the power generation plants in the region.

The general unemployment rate in UAE is relatively low (less than 3.9 percent). However, this rate is much higher for the locals and stands at two digits. This is mainly attributed to attractive remunerations in the public sector which makes it harder for the private sector to attract the local labor. Majority of the local labor is dominated by unskilled work force. Therefore, private entities including Borouge Petrochemical Company are forced to part with higher remunerations to attract the locals and to employ expatriates from other countries.

Opportunities

Despite of the increase in non oil and gas product (approximately 23 percent in 2011), experts still predicts dominance of oil and gas in the near future. The country’s macroeconomic policies mostly apply to the city of Abu Dhabi. This is the reason why Abu Dhabi is not only the richest city in UAE, but also in the entire gulf region. Abu Dhabi being the main producer of UAE’s oil and gas, its products is less diversified than the country in overall. Therefore, increased pressure to diversify products in Abu Dhabi presents an opportunity for the development of petrochemical companies.

UAE business environment is conducive compared to other gulf states. One of its principle strength is the complimentary tax policy. The country’s corporate tax or income tax is argued to be among the lowest in the world. This is a major incentive to petrochemical companies including Borouge. UAE used the tax incentive to attract foreign investors regardless of its limit on foreign ownership of local firms/companies (not more than 50 percent). The limit to foreign ownership is meant to ensure that locals remain the principle stakeholders in the county’s economy.

Experts hint at the use of Naphtha as a substitute for ethane. This is likely to offer an opportunity for the government to review its policy on direct foreign investment to expand oil and gas industry. The country has been increasing investment in the development of human capital. UAE government expanded the Petroleum Institute in Abu Dhabi into a world class institution offering engineering courses and other research courses related to oil, gas and petrochemical industries. Petroleum Institute in Abu Dhabi is also affiliated with numerous Universities in Europe and Asia (for instance, University of Maryland and China University of Petroleum).

Petroleum Institute offers courses such as mechanical and petroleum engineering, metallurgical and polymer science, chemical engineering among others. To supplement the government efforts Abu Dhabi National Oil and Borealis Company have set up a competency assurance management system among its affiliate companies including Borouge to develop new and existing man power. This is aimed at equipping the new and existing workers with skills necessary to tackle the current challenges.

Generally, the innovative capacity of UAE and Abu Dhabi lower than a number of Gulf States and European nations. However, the local institutions have tried to avert this situation by undertaking joint research projects with foreign institutions especially from the west to enhance the innovative capacity of the petroleum industry. Petroleum Institute in collaboration with Maryland University and Colorado School of Mines has direct research contracts with local petrochemical companies. This provides a great opportunity to improve their innovative capacity. Borouge on the other hand, has been enjoying the services of Borealis’ (parent company) innovative centers based in Australia, Finland, and Sweden. In addition, the company is looking forward to establishing its own center in Abu Dhabi in the near future.

Abu Dhabi government has created Specialized Economic Zones and Khalifa Industrial Zones targeting mostly metallurgic and petrochemical industries. These industrial zones have been developed along with state of the art sea port which will be operational before the end of 2012. Companies operating in these zones are exempted from custom duty, other tax exemptions, and long-term land leases. This provides a great opportunity for the local petrochemical companies including Borouge.

The anticipated instability in Iran provides a major threat to the oil, gas and petrochemical industries in UAE. Iran is one of the UAE’s main trading partners and any disruption in Hormuz strait, UAE’s strategic maritime channel, passing through Iran could have massive impact on the economy. However, the country is trying to explore an alternative route through the gulf of Oman. Nonetheless, instability in Iran could mean opportunity for other gulf states to market their petroleum products.

UAE is a member of numerous regional blocks including Gulf Cooperation Council (GCC), Organization of the Petroleum Exporting Companies (OPEC), and Gulf Petrochemical and Chemical Association (GPCA) among others. These regional blocks have provided an avenue for harmonizing policies relating to the petroleum industry. GPCA provides an avenue for media collaboration among the petrochemical companies in the gulf region.

GPCA was founded by eight members from the gulf region. Its main objective was to offer technological assistance and resources required for the development of the petrochemical and chemical industry. GPCA was speedily formed and was right away accepted by the member states. At the moment it is the main trade association, revered and accepted by petrochemical and chemical industries as their voice in the region and world at large. GPCA provides trusted data on the region’s petrochemical and chemical industries and has gone ahead to provide all members with a platform to network and share ideas.

Initially, petrochemical industries in Europe and North America dominated the global market. However, emergence of Petrochemical and Chemical Association (GPCA) has completely changed the competitive landscape of the global petrochemical and chemical market. Even though Borouge has a relatively low market share in the international arena, its global expansion hints at a brighter future. Regional integration has enabled the petrochemical companies in the gulf region to effectively compete in the global market. Borouge has been able to form global partnership with well established global companies, for instance, Dow Chemical to take advantage of the growing Asian market and to increase it global market share.

Petrochemical industry being a capital intensive sector, it is very significant for the company to have a global presence. Borouge has managed to achieve these using two approaches: geographical expansion and product segmentation. A lot of attention is being put on the polymer markets in Asia. Over the recent past, the company took advantage of the stringent measures adopted by European and American petrochemical companies like Dow Chemicals to enhance its status in the global market.

One of the most important aspects of the petrochemical industry is research and development. Most GPCA members have been carrying out research and development together and sharing best practices. This has relatively reduced the company’s cost on the same. The leading research centers on oil, gas and petrochemical products are in Europe and U.S. Globalization and joint partnerships have enabled the company to acquire innovative and value creating plastic solutions. The European and American petrochemical industry spends more than 3 percent of their revenues in research and development. Meanwhile Borouge spends less than 0.4 percent of its revenue in research and development. Therefore, globalization/joint partnership has enabled the company to cut cost on research and development while maintaining its global presence.

The demand for petrochemical products in Abu Dhabi and UAE is relatively low and is estimated to be less than 20 kilogram per individual per year compared to European countries which register more than 75 kilograms per individual per year. Therefore, regional and global economic blocks provide a great opportunity for the company to expand its market. Especially for polyethylene and propylene products whose demand is almost negligible in the local market. The global petrochemical market has grown beyond oil and gas and is currently estimated to be 3 trillion dollars. However, the markets for these products are concentrated in Europe, Asia and America.

United Arab Emirates is a member of the OPEC (Organization of the Petroleum Exporting Companies). OPEC dictates the policies of the member states and as a result limits their oil production capacity. This also limits the production of the associated gases which are building blocks in the petrochemical companies including Borouge. The adoption of Capture Technology by the oil companies to recover the large volumes of fleeing associated gases has really been relatively successful.

However, this has not been able to meet the current gas demand. The potential capacity of the petrochemical industry is additionally limited by the high ethane consumption in the power generation plants. Regional economic blocks have significantly influenced the country’s macroeconomic policies. These policies tend to favor local petrochemical companies, mainly Borouge to enable it to compete in the region and world at large. These policies include tax waivers, expansion of research institutions and training facilities to develop skilled labor, government acquisition among other.

UAE’s petrochemical industry has considerably grown over the past 10 years. The industry was an extension of oil and gas sector. Globalization and regional integration have had considerable impact on the petrochemical cluster in UAE.

Essentially, globalization and regional integration have increased competition and widened the market for petrochemical products. They have influenced the adoption of cutting edge technologies and global expansion by the local companies. They have also enhanced sharing of ideas and best practices among different stakeholders. Regional blocks have significantly influenced the country’s macroeconomic policies in oil, gas, and petrochemical sector. Globalization and regional integration have even influenced the level of output and product differentiation in UAE’s petrochemical sector.

Alan, Rugman, The Regional Multinationals: MNEs and “Global” Strategic Management . Cambridge, UK: Cambridge University Press, 2005.

Alan, Rugman, Globalization and Regional Business Strategy , Oxford: Oxford University Press, 2000.

Borealis AG. Annual report 2011 . Web.

Borouge. Shaping the World with Plastics , Web.

Business Monitor. United Arab Emirates Petrochemical Report 2011 . Web.

Saudi Basic Industries Corporation. Annual report 2011 . Web.

The Dow Chemical Company. Annual report 2011 . Web.

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Open Access

Peer-reviewed

Research Article

Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities

* E-mail: [email protected]

Affiliations Faculty of Management, Universiti Teknologi Malaysia (UTM), Johor, Malaysia, Department of Management, Mobarakeh Branch, Islamic Azad University, Isfahan, Iran

Affiliation Applied Statistics Department, Economics and Administration Faculty, University of Malaya, Kuala Lumpur, Malaysia

• Parisa Samimi, 
• Hashem Salarzadeh Jenatabadi

• Published: April 10, 2014
• https://doi.org/10.1371/journal.pone.0087824
• Reader Comments

This study was carried out to investigate the effect of economic globalization on economic growth in OIC countries. Furthermore, the study examined the effect of complementary policies on the growth effect of globalization. It also investigated whether the growth effect of globalization depends on the income level of countries. Utilizing the generalized method of moments (GMM) estimator within the framework of a dynamic panel data approach, we provide evidence which suggests that economic globalization has statistically significant impact on economic growth in OIC countries. The results indicate that this positive effect is increased in the countries with better-educated workers and well-developed financial systems. Our finding shows that the effect of economic globalization also depends on the country’s level of income. High and middle-income countries benefit from globalization whereas low-income countries do not gain from it. In fact, the countries should receive the appropriate income level to be benefited from globalization. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

Citation: Samimi P, Jenatabadi HS (2014) Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities. PLoS ONE 9(4): e87824. https://doi.org/10.1371/journal.pone.0087824

Editor: Rodrigo Huerta-Quintanilla, Cinvestav-Merida, Mexico

Received: November 5, 2013; Accepted: January 2, 2014; Published: April 10, 2014

Copyright: © 2014 Samimi, Jenatabadi. This is an open-access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Funding: The study is supported by the Ministry of Higher Education of Malaysia, Malaysian International Scholarship (MIS). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

Competing interests: The authors have declared that no competing interests exist.

Introduction

Globalization, as a complicated process, is not a new phenomenon and our world has experienced its effects on different aspects of lives such as economical, social, environmental and political from many years ago [1] – [4] . Economic globalization includes flows of goods and services across borders, international capital flows, reduction in tariffs and trade barriers, immigration, and the spread of technology, and knowledge beyond borders. It is source of much debate and conflict like any source of great power.

The broad effects of globalization on different aspects of life grab a great deal of attention over the past three decades. As countries, especially developing countries are speeding up their openness in recent years the concern about globalization and its different effects on economic growth, poverty, inequality, environment and cultural dominance are increased. As a significant subset of the developing world, Organization of Islamic Cooperation (OIC) countries are also faced by opportunities and costs of globalization. Figure 1 shows the upward trend of economic globalization among different income group of OIC countries.

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https://doi.org/10.1371/journal.pone.0087824.g001

Although OICs are rich in natural resources, these resources were not being used efficiently. It seems that finding new ways to use the OICs economic capacity more efficiently are important and necessary for them to improve their economic situation in the world. Among the areas where globalization is thought, the link between economic growth and globalization has been become focus of attention by many researchers. Improving economic growth is the aim of policy makers as it shows the success of nations. Due to the increasing trend of globalization, finding the effect of globalization on economic growth is prominent.

The net effect of globalization on economic growth remains puzzling since previous empirical analysis did not support the existent of a systematic positive or negative impact of globalization on growth. Most of these studies suffer from econometrics shortcoming, narrow definition of globalization and small number of countries. The effect of economic globalization on the economic growth in OICs is also ambiguous. Existing empirical studies have not indicated the positive or negative impact of globalization in OICs. The relationship between economic globalization and economic growth is important especially for economic policies.

Recently, researchers have claimed that the growth effects of globalization depend on the economic structure of the countries during the process of globalization. The impact of globalization on economic growth of countries also could be changed by the set of complementary policies such as improvement in human capital and financial system. In fact, globalization by itself does not increase or decrease economic growth. The effect of complementary policies is very important as it helps countries to be successful in globalization process.

In this paper, we examine the relationship between economic globalization and growth in panel of selected OIC countries over the period 1980–2008. Furthermore, we would explore whether the growth effects of economic globalization depend on the set of complementary policies and income level of OIC countries.

The paper is organized as follows. The next section consists of a review of relevant studies on the impact of globalization on growth. Afterward the model specification is described. It is followed by the methodology of this study as well as the data sets that are utilized in the estimation of the model and the empirical strategy. Then, the econometric results are reported and discussed. The last section summarizes and concludes the paper with important issues on policy implications.

Literature Review

The relationship between globalization and growth is a heated and highly debated topic on the growth and development literature. Yet, this issue is far from being resolved. Theoretical growth studies report at best a contradictory and inconclusive discussion on the relationship between globalization and growth. Some of the studies found positive the effect of globalization on growth through effective allocation of domestic resources, diffusion of technology, improvement in factor productivity and augmentation of capital [5] , [6] . In contrast, others argued that globalization has harmful effect on growth in countries with weak institutions and political instability and in countries, which specialized in ineffective activities in the process of globalization [5] , [7] , [8] .

Given the conflicting theoretical views, many studies have been empirically examined the impact of the globalization on economic growth in developed and developing countries. Generally, the literature on the globalization-economic growth nexus provides at least three schools of thought. First, many studies support the idea that globalization accentuates economic growth [9] – [19] . Pioneering early studies include Dollar [9] , Sachs et al. [15] and Edwards [11] , who examined the impact of trade openness by using different index on economic growth. The findings of these studies implied that openness is associated with more rapid growth.

In 2006, Dreher introduced a new comprehensive index of globalization, KOF, to examine the impact of globalization on growth in an unbalanced dynamic panel of 123 countries between 1970 and 2000. The overall result showed that globalization promotes economic growth. The economic and social dimensions have positive impact on growth whereas political dimension has no effect on growth. The robustness of the results of Dreher [19] is approved by Rao and Vadlamannati [20] which use KOF and examine its impact on growth rate of 21 African countries during 1970–2005. The positive effect of globalization on economic growth is also confirmed by the extreme bounds analysis. The result indicated that the positive effect of globalization on growth is larger than the effect of investment on growth.

The second school of thought, which supported by some scholars such as Alesina et al. [21] , Rodrik [22] and Rodriguez and Rodrik [23] , has been more reserve in supporting the globalization-led growth nexus. Rodriguez and Rodrik [23] challenged the robustness of Dollar (1992), Sachs, Warner et al. (1995) and Edwards [11] studies. They believed that weak evidence support the idea of positive relationship between openness and growth. They mentioned the lack of control for some prominent growth indicators as well as using incomprehensive trade openness index as shortcomings of these works. Warner [24] refuted the results of Rodriguez and Rodrik (2000). He mentioned that Rodriguez and Rodrik (2000) used an uncommon index to measure trade restriction (tariffs revenues divided by imports). Warner (2003) explained that they ignored all other barriers on trade and suggested using only the tariffs and quotas of textbook trade policy to measure trade restriction in countries.

Krugman [25] strongly disagreed with the argument that international financial integration is a major engine of economic development. This is because capital is not an important factor to increase economic development and the large flows of capital from rich to poor countries have never occurred. Therefore, developing countries are unlikely to increase economic growth through financial openness. Levine [26] was more optimistic about the impact of financial liberalization than Krugman. He concluded, based on theory and empirical evidences, that the domestic financial system has a prominent effect on economic growth through boosting total factor productivity. The factors that improve the functioning of domestic financial markets and banks like financial integration can stimulate improvements in resource allocation and boost economic growth.

The third school of thoughts covers the studies that found nonlinear relationship between globalization and growth with emphasis on the effect of complementary policies. Borensztein, De Gregorio et al. (1998) investigated the impact of FDI on economic growth in a cross-country framework by developing a model of endogenous growth to examine the role of FDI in the economic growth in developing countries. They found that FDI, which is measured by the fraction of products produced by foreign firms in the total number of products, reduces the costs of introducing new varieties of capital goods, thus increasing the rate at which new capital goods are introduced. The results showed a strong complementary effect between stock of human capital and FDI to enhance economic growth. They interpreted this finding with the observation that the advanced technology, brought by FDI, increases the growth rate of host economy when the country has sufficient level of human capital. In this situation, the FDI is more productive than domestic investment.

Calderón and Poggio [27] examined the structural factors that may have impact on growth effect of trade openness. The growth benefits of rising trade openness are conditional on the level of progress in structural areas including education, innovation, infrastructure, institutions, the regulatory framework, and financial development. Indeed, they found that the lack of progress in these areas could restrict the potential benefits of trade openness. Chang et al. [28] found that the growth effects of openness may be significantly improved when the investment in human capital is stronger, financial markets are deeper, price inflation is lower, and public infrastructure is more readily available. Gu and Dong [29] emphasized that the harmful or useful growth effect of financial globalization heavily depends on the level of financial development of economies. In fact, if financial openness happens without any improvement in the financial system of countries, growth will replace by volatility.

However, the review of the empirical literature indicates that the impact of the economic globalization on economic growth is influenced by sample, econometric techniques, period specifications, observed and unobserved country-specific effects. Most of the literature in the field of globalization, concentrates on the effect of trade or foreign capital volume (de facto indices) on economic growth. The problem is that de facto indices do not proportionally capture trade and financial globalization policies. The rate of protections and tariff need to be accounted since they are policy based variables, capturing the severity of trade restrictions in a country. Therefore, globalization index should contain trade and capital restrictions as well as trade and capital volume. Thus, this paper avoids this problem by using a comprehensive index which called KOF [30] . The economic dimension of this index captures the volume and restriction of trade and capital flow of countries.

Despite the numerous studies, the effect of economic globalization on economic growth in OIC is still scarce. The results of recent studies on the effect of globalization in OICs are not significant, as they have not examined the impact of globalization by empirical model such as Zeinelabdin [31] and Dabour [32] . Those that used empirical model, investigated the effect of globalization for one country such as Ates [33] and Oyvat [34] , or did it for some OIC members in different groups such as East Asia by Guillaumin [35] or as group of developing countries by Haddad et al. [36] and Warner [24] . Therefore, the aim of this study is filling the gap in research devoted solely to investigate the effects of economic globalization on growth in selected OICs. In addition, the study will consider the impact of complimentary polices on the growth effects of globalization in selected OIC countries.

Model Specification

Methodology and Data

This paper applies the generalized method of moments (GMM) panel estimator first suggested by Anderson and Hsiao [38] and later developed further by Arellano and Bond [39] . This flexible method requires only weak assumption that makes it one of the most widely used econometric techniques especially in growth studies. The dynamic GMM procedure is as follow: first, to eliminate the individual effect form dynamic growth model, the method takes differences. Then, it instruments the right hand side variables by using their lagged values. The last step is to eliminate the inconsistency arising from the endogeneity of the explanatory variables.

The consistency of the GMM estimator depends on two specification tests. The first is a Sargan test of over-identifying restrictions, which tests the overall validity of the instruments. Failure to reject the null hypothesis gives support to the model. The second test examines the null hypothesis that the error term is not serially correlated.

The GMM can be applied in one- or two-step variants. The one-step estimators use weighting matrices that are independent of estimated parameters, whereas the two-step GMM estimator uses the so-called optimal weighting matrices in which the moment conditions are weighted by a consistent estimate of their covariance matrix. However, the use of the two-step estimator in small samples, as in our study, has problem derived from proliferation of instruments. Furthermore, the estimated standard errors of the two-step GMM estimator tend to be small. Consequently, this paper employs the one-step GMM estimator.

In the specification, year dummies are used as instrument variable because other regressors are not strictly exogenous. The maximum lags length of independent variable which used as instrument is 2 to select the optimal lag, the AR(1) and AR(2) statistics are employed. There is convincing evidence that too many moment conditions introduce bias while increasing efficiency. It is, therefore, suggested that a subset of these moment conditions can be used to take advantage of the trade-off between the reduction in bias and the loss in efficiency. We restrict the moment conditions to a maximum of two lags on the dependent variable.

Data and Empirical Strategy

We estimated Eq. (1) using the GMM estimator based on a panel of 33 OIC countries. Table S1 in File S1 lists the countries and their income groups in the sample. The choice of countries selected for this study is primarily dictated by availability of reliable data over the sample period among all OIC countries. The panel covers the period 1980–2008 and is unbalanced. Following [40] , we use annual data in order to maximize sample size and to identify the parameters of interest more precisely. In fact, averaging out data removes useful variation from the data, which could help to identify the parameters of interest with more precision.

The dependent variable in our sample is logged per capita real GDP, using the purchasing power parity (PPP) exchange rates and is obtained from the Penn World Table (PWT 7.0). The economic dimension of KOF index is derived from Dreher et al. [41] . We use some other variables, along with economic globalization to control other factors influenced economic growth. Table S2 in File S2 shows the variables, their proxies and source that they obtain.

We relied on the three main approaches to capture the effects of economic globalization on economic growth in OIC countries. The first one is the baseline specification (Eq. (1)) which estimates the effect of economic globalization on economic growth.

The second approach is to examine whether the effect of globalization on growth depends on the complementary policies in the form of level of human capital and financial development. To test, the interactions of economic globalization and financial development (KOF*FD) and economic globalization and human capital (KOF*HCS) are included as additional explanatory variables, apart from the standard variables used in the growth equation. The KOF, HCS and FD are included in the model individually as well for two reasons. First, the significance of the interaction term may be the result of the omission of these variables by themselves. Thus, in that way, it can be tested jointly whether these variables affect growth by themselves or through the interaction term. Second, to ensure that the interaction term did not proxy for KOF, HCS or FD, these variables were included in the regression independently.

In the third approach, in order to study the role of income level of countries on the growth effect of globalization, the countries are split based on income level. Accordingly, countries were classified into three groups: high-income countries (3), middle-income (21) and low-income (9) countries. Next, dummy variables were created for high-income (Dum 3), middle-income (Dum 2) and low-income (Dum 1) groups. Then interaction terms were created for dummy variables and KOF. These interactions will be added to the baseline specification.

Findings and Discussion

This section presents the empirical results of three approaches, based on the GMM -dynamic panel data; in Tables 1 – 3 . Table 1 presents a preliminary analysis on the effects of economic globalization on growth. Table 2 displays coefficient estimates obtained from the baseline specification, which used added two interaction terms of economic globalization and financial development and economic globalization and human capital. Table 3 reports the coefficients estimate from a specification that uses dummies to capture the impact of income level of OIC countries on the growth effect of globalization.

https://doi.org/10.1371/journal.pone.0087824.t001

https://doi.org/10.1371/journal.pone.0087824.t002

https://doi.org/10.1371/journal.pone.0087824.t003

The results in Table 1 indicate that economic globalization has positive impact on growth and the coefficient is significant at 1 percent level. The positive effect is consistent with the bulk of the existing empirical literature that support beneficial effect of globalization on economic growth [9] , [11] , [13] , [19] , [42] , [43] .

According to the theoretical literature, globalization enhances economic growth by allocating resources more efficiently as OIC countries that can be specialized in activities with comparative advantages. By increasing the size of markets through globalization, these countries can be benefited from economic of scale, lower cost of research and knowledge spillovers. It also augments capital in OICs as they provide a higher return to capital. It has raised productivity and innovation, supported the spread of knowledge and new technologies as the important factors in the process of development. The results also indicate that growth is enhanced by lower level of government expenditure, lower level of inflation, higher level of human capital, deeper financial development, more domestic investment and better institutions.

Table 2 represents that the coefficients on the interaction between the KOF, HCS and FD are statistically significant at 1% level and with the positive sign. The findings indicate that economic globalization not only directly promotes growth but also indirectly does via complementary reforms. On the other hand, the positive effect of economic globalization can be significantly enhanced if some complementary reforms in terms of human capital and financial development are undertaken.

In fact, the implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. However, countries with higher level of human capital can be better and faster to imitate and implement the transferred technologies. Besides, the financial openness brings along the knowledge and managerial for implementing the new technology. It can be helpful in improving the level of human capital in host countries. Moreover, the strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in developing countries. Overall, with higher level of human capital and stronger financial systems, the globalized countries benefit from the growth effect of globalization. The obtained results supported by previous studies in relative to financial and trade globalization such as [5] , [27] , [44] , [45] .

Table (3 ) shows that the estimated coefficients on KOF*dum3 and KOF*dum2 are statistically significant at the 5% level with positive sign. The KOF*dum1 is statistically significant with negative sign. It means that increase in economic globalization in high and middle-income countries boost economic growth but this effect is diverse for low-income countries. The reason might be related to economic structure of these countries that are not received to the initial condition necessary to be benefited from globalization. In fact, countries should be received to the appropriate income level to be benefited by globalization.

The diagnostic tests in tables 1 – 3 show that the estimated equation is free from simultaneity bias and second-order correlation. The results of Sargan test accept the null hypothesis that supports the validity of the instrument use in dynamic GMM.

Conclusions and Implications

Numerous researchers have investigated the impact of economic globalization on economic growth. Unfortunately, theoretical and the empirical literature have produced conflicting conclusions that need more investigation. The current study shed light on the growth effect of globalization by using a comprehensive index for globalization and applying a robust econometrics technique. Specifically, this paper assesses whether the growth effects of globalization depend on the complementary polices as well as income level of OIC countries.

Using a panel data of OIC countries over the 1980–2008 period, we draw three important conclusions from the empirical analysis. First, the coefficient measuring the effect of the economic globalization on growth was positive and significant, indicating that economic globalization affects economic growth of OIC countries in a positive way. Second, the positive effect of globalization on growth is increased in countries with higher level of human capital and deeper financial development. Finally, economic globalization does affect growth, whether the effect is beneficial depends on the level of income of each group. It means that economies should have some initial condition to be benefited from the positive effects of globalization. The results explain why some countries have been successful in globalizing world and others not.

The findings of our study suggest that public policies designed to integrate to the world might are not optimal for economic growth by itself. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

The policy implications of this study are relatively straightforward. Integrating to the global economy is only one part of the story. The other is how to benefits more from globalization. In this respect, the responsibility of policymakers is to improve the level of educated workers and strength of financial systems to get more opportunities from globalization. These economic policies are important not only in their own right, but also in helping developing countries to derive the benefits of globalization.

However, implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. In fact, countries with higher level of human capital can better and faster imitate and implement the transferred technologies. The higher level of human capital and certain skill of human capital determine whether technology is successfully absorbed across countries. This shows the importance of human capital in the success of countries in the globalizing world.

Financial openness in the form of FDI brings along the knowledge and managerial for implementing the new technology. It can be helpful in upgrading the level of human capital in host countries. Moreover, strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in OICs.

In addition, the results show that economic globalization does affect growth, whether the effect is beneficial depends on the level of income of countries. High and middle income countries benefit from globalization whereas low-income countries do not gain from it. As Birdsall [46] mentioned globalization is fundamentally asymmetric for poor countries, because their economic structure and markets are asymmetric. So, the risks of globalization hurt the poor more. The structure of the export of low-income countries heavily depends on primary commodity and natural resource which make them vulnerable to the global shocks.

The major research limitation of this study was the failure to collect data for all OIC countries. Therefore future research for all OIC countries would shed light on the relationship between economic globalization and economic growth.

Supporting Information

Sample of Countries.

https://doi.org/10.1371/journal.pone.0087824.s001

The Name and Definition of Indicators.

https://doi.org/10.1371/journal.pone.0087824.s002

Author Contributions

Conceived and designed the experiments: PS. Performed the experiments: PS. Analyzed the data: PS. Contributed reagents/materials/analysis tools: PS HSJ. Wrote the paper: PS HSJ.

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What is Economic Integration?

Understanding economic integration, comparative advantage example, stages of economic integration, benefits of economic integration, drawbacks of economic integration, related readings.

• Economic Integration

Agreements between countries that usually include the elimination of trade barriers and aligning monetary and fiscal policies

Economic integration involves agreements between countries that usually include the elimination of trade barriers and aligning monetary and fiscal policies, leading to a more inter-connected global economy. Economic integration is consistent with the economic theory, which argues that the global economy is better off when markets can function in unison with minimal government intervention.

Economic integration, like the name implies, involves the integration of countries’ economies. Another term to describe it is globalization , which simply refers to the inter-connectedness of businesses and trading among countries. An economy is defined as a set of inter-related activities that determine how limited resources are allocated. In the modern economy, all economies feature a form of a market system. A market-based economy utilizes the economic forces of demand and supply in order to distribute these limited resources.

Traditionally, economies were thought of as separate for each region or country, with each country managing its own separate economy and largely unrelated to other countries. However, globalization allows the movement of goods, services, capital between countries and blurred the distinctions between economies.

Today, there is no economy that functions completely isolated from other economies. There is a simple reason for such an occurrence – trade benefits all economies in most cases. It allows for specializations of economies with comparative advantages and can trade with other economies that possess alternative comparative advantages.

For example, consider a country that happens to possess an abundance of oil sands located within its borders. The country can extract the oil and trade it for other resources that it lacks, perhaps food such as corn or wheat.

Another country may enjoy optimal weather for growing such crops and therefore can specialize in growing corn or wheat and trade it for oil to provide energy for their society. It illustrates how trade can benefit all economies by taking advantage of specialization and comparative advantages.

Economic integration is expected to improve the outcomes for all economies by many economists and policymakers. Within economics, there are seven stages that lead to complete economic integration:

• Preferential Trading Area
• Free Trade Area
• Customs Union
• Common Market
• Economic Union
• Economic and Monetary Union

Many countries move in and out of the above stages with other partner countries. The best example of complete economic integration is with the European Union (EU) . The EU is made up of separate member countries, including:

There are also many other countries in the EU, totaling 27 separate nations. However, each country functions separately politically and keeps defined borders, different laws, and government systems. Economically, the 27 countries function as one – with free trade between the countries and unified monetary policies and fiscal policies.

Economic integration is beneficial in many ways, as it allows countries to specialize and trade without government interference, which can benefit all economies. It results in a reduction of costs and ultimately an increase in overall wealth.

Trade costs are reduced, and goods and services are more widely available, which leads to a more efficient economy. An efficient economy distributes capital, goods, and services into the areas that demand them the most.

The movement of employees is liberalized under economic integration as well. Normally, employees would need to deal with visas and immigration policies in order to work in another country. However, with economic integration, employees can move freely, and it leads to greater market expansion and technology sharing, which ultimately benefits all economies.

Lastly, political cooperation is encouraged, and there are fewer political conflicts. Political conflicts usually end with economic losses stemming from trade wars or even military wars breaking out, resulting in extreme costs for all combatants.

Nationalists, or people who believe that their country is superior to others, are critical of economic integration. In order to appeal to nationalists, some countries employ forms of protectionism, which leads to higher tariffs and less free trade between other countries.

The notable feature of economic integration is the loss of individual central banks who control monetary policy. It leads to less national sovereignty, and the responsibilities of central banks are delegated to an external body instead. The external control becomes troublesome in terms of managing a cohesive fiscal and monetary policy among many different countries.

Thank you for reading CFI’s guide to Economic Integration. To keep advancing your career, the additional CFI resources below will be useful:

• Comparative Advantage
• International Trade
• Market Economy
• Non-Tariff Barriers
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What Is Economic Integration?

Economic integration explained, real-world example of economic integration, the bottom line.

• Government Spending & Debt
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Economic Integration Definition and Real World Example

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Investopedia / Ellen Lindner

Economic integration is an arrangement among nations that typically includes the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies . Economic integration aims to reduce costs for both consumers and producers and to increase trade between the countries involved in the agreement.

Economic integration is sometimes referred to as regional integration, as it often occurs among neighboring nations.

Key Takeaways

• Economic integration, or regional integration, is an agreement among nations to reduce or eliminate trade barriers and to coordinate monetary and fiscal policies.
• The European Union, for example, represents an economic integration among 27 countries.
• Strict nationalists may oppose economic integration due to concerns over a loss of sovereignty.

When regional economies agree on integration, trade barriers fall and economic and political coordination increases. 

Specialists in this area define seven stages of economic integration: a preferential trading area, a free trade area, a customs union, a common market, an economic union, an economic and monetary union, and complete economic integration. The final stage represents a total harmonization of fiscal policy and a complete monetary union.

Advantages of Economic Integration

The advantages of economic integration fall into three categories: trade creation, employment opportunities, and consensus and cooperation.

More specifically, economic integration typically leads to a reduction in the cost of trade, improved availability of goods and services, a wider selection of them, and gains in efficiency that lead to greater purchasing power.

Economic integration can reduce the costs of trade, improve the availability of goods and services, and increase consumer purchasing power in member nations.

Employment opportunities tend to improve because  trade liberalization leads to market expansion, technology sharing, and cross-border investment.

Political cooperation among countries also can improve because of stronger economic ties, which provide an incentive to resolve conflicts peacefully and lead to greater stability.

The Costs of Economic Integration

Despite the benefits, economic integration has costs. These fall into three categories:

• Diversion of trade: Trade can be diverted from non-members to members, even if it is economically detrimental for the member state.
• Erosion of national sovereignty: Members of economic unions typically are required to adhere to rules on trade, monetary policy , and fiscal policies established by an unelected external policymaking body.
• Employment shifts and reductions: Economic integration can cause companies to move their production operations to areas within the economic union that have cheaper labor prices. Conversely, employees may move to areas with better wages and employment opportunities.

Because economists and policymakers believe economic integration leads to significant benefits, many institutions attempt to measure the degree of economic integration across countries and regions. The methodology for measuring economic integration typically involves multiple economic indicators including trade in goods and services, cross-border capital flows, labor migration, and others. Assessing economic integration also includes measures of institutional conformity, such as membership in trade unions and the strength of institutions that protect consumer and investor rights.

The European Union (EU) was created in 1993 and included 27 member states in 2024. Since 1999, 20 of those nations have adopted the euro as a shared currency. According to data from the World Bank, the EU accounted for roughly 16.6% of the world's gross domestic product in 2022.

The United Kingdom voted in 2016 to leave the EU. In January 2020, British lawmakers and the European Parliament voted to accept the United Kingdom's withdrawal. The UK officially split from the EU on January 1, 2021.

What Are Examples of Economic Integration?

There are numerous examples of economic integration around the world. In North America, the United States–Mexico–Canada Agreement ( USCMA ) is an example of a free trade agreement between the three countries. The Asia-Pacific Economic Cooperation is a forum of 21 Pacific Rim countries aimed at fostering free trade across the region. As mentioned above, the EU is another such example of economic integration, as is the Eurasian Economic Union (EAEU).

What Are Risks of Economic Integration?

Economic integration can come with downsides and risks. Primarily, countries participating in regional integration may have divergent priorities when it comes to fiscal and monetary policy. Resolving such conflicts can be challenging and costly in terms of time and resources. In addition, economic integration can create a system in which a select group of stakeholders reap the economic benefits, such as more revenue from trade, while others bear the costs, such as job market shifts. These are important considerations to weigh when assessing the value of economic integration.

What Are Benefits of Economic Integration?

Economic integration can increase trade, benefiting both producers, consumers, and involved countries. For instance, with the elimination of trade barriers, a firm may be able to produce and sell more products, earning more revenue, and increasing their home country's gross domestic product (GDP) . For customers in other countries, they can count on having more product selection and potentially lower costs, as well.

Economic integration is a form of coordination between different states, in which barriers to trade are eliminated and fiscal and monetary policies are harmonized. These arrangements can lead to increased economic activity, job creation, and stronger political ties. They may also come with drawbacks, such as trade diversion and loss of national sovereignty.

The EU is a well-known example of regional economic integration, as it is comprised of 27 member states, 20 of which use the same currency.

Pressbooks. " Core Principles of International Marketing: 2.4 Regional Economic Integration ."

Allianz Global Investors. " Allianz Global Investors Insights. "

European Commission. " Official EU Currency. "

The World Bank Group. " GDP (Current US$) - European Union, World ."

Library of Congress. " BREXIT: Sources of Information ."

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Benefits and Challenges from Globalization

Thanks, Ashish, and thanks to the U.S.-India Business Council, the Confederation of Indian Industry, and the Bombay Stock Exchange for organizing this event.  As always, what I have to say reflects my views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System. 1

It is a pleasure to have the opportunity today to talk about the issue of globalization.  Although the debate about the benefits and challenges of globalization is not new, it has recently come into sharper focus.  This debate is important to all of us, and I think it is particularly relevant to India given its growing role in the global economy. 

Globalization means different things to different people.  In my remarks today, I will focus on the role of globalization as a force for international economic integration and economic development.  I will highlight three themes:

First, the important role that trade plays in promoting higher standards of living globally. 

Second, how changes in trade can create challenges for industries that become less competitive.  We have not adequately considered and remedied the very large costs this can impose on certain communities and households. 

Third, the answer to those challenges is not greater protectionism.  Instead, we need to provide greater support to displaced workers so they can obtain the skills needed to find new well-paying jobs.  We need to do better in preparing workers to deal with the challenges of globalization and technological change.  

These issues are important to me as a central banker, as they affect the long-term health and productivity of the economy, and the economic opportunities available to our people. 

The debate around globalization, particularly in advanced economies, reflects a range of factors.  Undoubtedly, the global financial crisis and subsequent slow recovery have been significant.  But, just as important have been longer-term trends, such as growing income inequality, the loss of middle-income jobs, and the rise of large emerging market economies such as China and India. 

Although the debate about globalization is not new, I believe we are at a particularly important juncture.  If support for liberalized trade and an integrated global economy were to suffer a significant setback, the consequence could be slower economic growth and lower living standards around the world. 

While considerable effort has gone into liberalizing trade and developing the existing set of trade agreements, that does not mean they cannot be improved upon.  I have no doubt some trade agreements could be enhanced or updated.  Some may not adequately address recent changes in the global economy—such as the rise of digital trade—and may need to be refreshed.  And, important trade barriers still remain and should be addressed.  In particular, from a U.S. perspective, the access of U.S. firms to some foreign markets and the protection of intellectual property rights are issues that deserve close attention.  But, in addressing these issues, we should take care to preserve the vital benefits of trade to higher standards of living in both advanced and emerging market economies.  Our focus should be on further strengthening an open trade regime, and, as appropriate, amending and improving these agreements.

The Pace of Globalization

To begin, let me briefly describe the pace of globalization as a reminder of what is at stake.  Global economic integration has increased dramatically in recent decades.  Trade, for example, has grown from nearly 40 percent of global GDP in 1990 to 57 percent in 2015.  Over the same period, the stock of foreign direct investment has increased from roughly 10 percent of global GDP to 34 percent.  Ultimately, economies have become more integrated and interdependent. 2

This rapid growth in trade reflects falling trade barriers, declining transport costs, and improved information and communication technology.  These trends have enabled the development of complex global supply chains that allow companies to manage their production more efficiently.

Emerging market economies now make up a much larger share of global trade, the global economy and global growth.  As an illustration, emerging market economies have accounted for 70 percent of global output growth since the crisis—double their share from two decades ago. 3   This growth has provided much-needed support to world economic activity, as advanced economies have recovered slowly from the crisis. 

Rising economic integration is also very evident when we examine the trade relationship between India and the United States.  Bilateral trade flows have risen tenfold, from $11 billion in 1995 to almost $110 billion in 2015.  In particular, half of U.S. imports of computer services are now sourced from India.  In 2015, the stock of bilateral foreign direct investment in both countries was $37 billion, up from $4 billion in 2002. 4 The potential for further increases has been reinforced by the liberalization measures India announced last year to encourage greater foreign direct investment. 

Benefits of Open Trade

Increased trade, through its longer-term impact on productivity, has been a key contributor to global growth and prosperity since the Second World War.  Openness to trade brings many benefits to the supply side of the economy.  These include:

• larger markets, greater specialization opportunities, and the increased ability to exploit economies of scale and scope;
• faster transmission of technology and innovation; and
• greater competitive pressure on domestic firms to increase their productivity. 

Collectively, these forces lead to a more efficient allocation of a country’s scarce resources—one that is more closely aligned to its international comparative advantage. 

As a consequence, consumers can benefit from lower prices, higher real incomes, and greater variety and quality of goods and services.  Increased openness may also reduce wasteful rent-seeking behavior on the part of protected industries and the related costs of corruption.

These benefits from open trade are very evident in India.  Academic research has found substantial gains for India following its dramatic trade reforms in the 1990s, which benefited consumers via lower prices and firms via higher markups.  These higher profit margins spurred innovation and provided funds for the development of new products. Looking ahead, the upcoming implementation of the goods and services tax in India—which will create a common market internally—is expected to provide many of the same benefits as trade liberalization does internationally. 

Openness to trade has certainly played a large role in the economic ascent of Asia.  Following the rise of Japan, Korea, Taiwan and others, fast growth in China and India has lifted hundreds of millions of people out of extreme poverty—an unprecedented feat in human history.  The benefits of economic integration and other reforms are exemplified in India’s higher growth rate since the introduction of market reforms in 1991.  Growth has averaged 6.5 percent annually in the post-reform period, compared to about 4 percent annually over the prior 40 years.  Indeed, India is the fastest-growing major economy in the world today.  Reflecting these gains, a number of emerging market countries have been strong supporters of open trade, a sign of how much the world has changed in recent years. 

A few examples can help to illustrate some of the benefits of globalization. India’s green revolution—which helped to greatly increase its agricultural productivity and food security—was facilitated by U.S. technology and scientists working with their Indian counterparts.  Similarly, as is well known, Indian engineers and entrepreneurs have played a key role in the technology sector’s tremendous achievements in recent decades and now lead some of America’s largest companies, including Google and Microsoft.  This success, in turn, has had important benefits for India as well, including increased foreign investment flows and employment opportunities that have helped develop a vibrant information technology ecosystem. 

But, increased openness to trade is not a panacea in and of itself.  Actual benefits depend on a range of other critical factors, including macroeconomic policy, the business and regulatory environment, the legal regime, the quality of infrastructure, and the quality of public services, including education.  While the gains from a liberalized trade regime are not guaranteed, the alternative of trying to achieve a high standard of living by following a policy of economic isolationism will fail.  Trade has played a key role in nearly all of the high-growth success stories since the middle of the last century.

Challenges of Open Trade

It is important to recognize that while trade and international integration tend to increase the overall economic pie, the distribution of the larger pie may be very uneven.  In fact, slices for individual groups may shrink.  Some workers—particularly those in industries that are less able to compete and whose skills have become less relevant—can be hurt and find it difficult to adjust.  This often requires individuals to change industries and to relocate to different regions.  So, while trade is almost always a win for a country’s economy, not everyone within that economy will be a winner.  This is especially the case where there are no policies to cushion the negative consequences of trade and to facilitate adjustment. 

Effects are also country- and industry-specific, and depend on initial endowments and conditions.  Low-income workers in emerging markets, for example, may find it more difficult to adapt given weaker safety nets and less financial resources available to deal with adverse economic shocks.  The bigger the adjustment process, the more the gains from trade will tend to be eroded. 

While the rise in the skill premium from trade liberalization has been well established for both developed and developing countries, determining the aggregate impact of trade on jobs has been more challenging.  To date, the evidence has been mixed.  We need further research in this area to determine with more confidence a reasonable range of estimates for these employment effects.  Although evidence on the extent to which jobs have been lost due to global trade is inconclusive, job losses that are attributed to trade tend to be viewed differently.  That is, they are seen as having been “lost to foreigners” and are often viewed as a consequence of the policy decision to liberalize trade in the first place.

Having said that, the challenge of adjusting to open trade is a serious issue that has not received the degree of attention it fully deserves.  This may partly reflect the fact that the burden has been borne unequally and spread out over a long time period.  It also may reflect the fact that the winners from trade have often tended to have a stronger voice than those who have been the losers. 

Research has documented that the effects on individuals of job dislocation—including those resulting from trade—can be significant and long lasting.  Older workers tend to suffer larger earnings losses, and may face larger transition costs.  Displaced workers may not have the appropriate skills to find good jobs in other areas of the economy, including in growing export sectors.  When the affected industry represents a large share of the local economy, the damage is often magnified.  In this case, the burden is more widespread because wages across the community are likely to be hit as well.  And, this doesn’t begin to capture the full human toll—including the impact on workers who have lost confidence in the future and the poorer health outcomes that occur because of increased stress.  For too many individuals in the United States, for instance, the American dream has been put at risk, with parents increasingly pessimistic about whether their children will have the opportunity to do better than they did. 

We should find better ways to help communities that are struggling because of the effects of free trade.  In the United States, we have historically experienced a high degree of geographic labor mobility—much higher than in other advanced economies.  The ability to move in search of better opportunities, when possible, has helped to mitigate some of the adverse effects of trade.  But, mobility has declined in the United States in recent years, implying that the adjustment costs to trade may have increased.

Protectionism Is Not the Answer

Given these costs of global integration and more liberalized trade, what is the best path forward?  Protectionism can have a siren-like appeal.  Viewed narrowly, it may be potentially rewarding to particular segments of the economy in the short term.  Viewed more broadly, it would almost certainly be destructive to the economy overall in the long term. 

Countries need to compete better, not compete less.  Trade barriers are a very expensive way to preserve jobs in less competitive or declining industries.  They blunt opportunities in export industries and they reduce the affordability of goods and services to households.  Indeed, such measures often backfire, resulting in harm to workers and diminished growth. 

A better course is to learn from our experience.  From a U.S. standpoint, we should work to reduce remaining foreign trade restrictions that impair our ability to capitalize on our comparative advantages.  For example, market access restrictions can mean that certain U.S. industries cannot realize their full potential.  Similarly, weaknesses in the protection of intellectual property rights limit the ability of U.S. producers to realize the full returns from their investments.  This lowers profits and diminishes incentives to grow the business and employ more workers. 

If we are going to enhance the benefits of free trade and better manage its costs, it is critical that we continue to strengthen the global rules-based system.  On the positive side, I would point to the WTO’s recent Trade Facilitation Agreement, which addresses customs procedures and could reduce global trade costs by almost 15 percent.  But, at a broader level, the momentum behind global trade reform has clearly waned in recent years.  This has occurred notwithstanding the fact that there are substantial areas in need of further reform, such as agriculture, services and non-tariff barriers.  That momentum needs to be rekindled and reaffirmed.  Although advanced economies historically have tended to lead the way, it is important that large emerging market countries now play a greater role.  This is appropriate given their growing prominence in the global economy. 

There are many approaches to dealing with the costs of globalization, but protectionism is a dead end.  Trade restrictions address the symptoms and not the underlying problems, and they introduce other costs and distortions.  While such measures might generate temporary boosts to growth from greater domestic production and consumption, these would likely be offset by a range of other costs.  Over time, such measures would retard productivity growth and thereby shrink the economic pie.  As an illustration, import substitution models that were pursued by many emerging market economies following the Second World War eventually led to lower long-term growth outcomes.  This was the experience in India, which helped trigger the reforms of the early 1990s. 

In assessing the benefits and costs of trade, it is important to understand that a nation’s trade balance reflects much more than its trade policy.  Just as important are the country’s saving and investment spending proclivities, which are affected by many factors, including tax and fiscal policies.  For example, in the United States, we have a chronic trade deficit because domestic investment spending exceeds our domestic saving.  Foreign capital inflows make up the gap.  In this process, the foreign exchange value of the dollar plays an important equilibrating mechanism.  If the domestic saving/investment imbalance is unchanged, then any reduction in the trade balance from higher trade barriers will be offset by lower exports.  The domestic currency will appreciate to cause the trade deficit to widen to accommodate the desired capital inflows.  Thus, trade restrictions affect the composition of trade but not the gap between exports and imports, which is determined by the difference between domestic savings and investment.  At the end of the day, the protectionist country would produce more goods in sectors protected by higher trade barriers but also fewer goods for export.

The expectation that higher trade barriers would save jobs ignores these critical second-round effects.  Moreover, the story may not end there.  What happens if another country that now faces higher trade barriers responds by raising its own barriers?  That would push production even further out of high-value-added exports that are now deterred by the higher foreign trade barriers and into those exports that face lower trade barriers, or into the goods protected by the higher domestic trade barriers.  Raising trade barriers would risk setting off a trade war, which could damage economic growth prospects around the world. 

Measures that raise trade barriers typically would protect lower-wage, import-competing jobs, but would also weigh on the prospects for jobs in the more efficient export sector, which tend to be higher-paying.  The outcome would be countries producing more where they have a competitive disadvantage, and less where they have a competitive advantage—the exact opposite of what we should be aiming for.  For example, in the United States, one of our largest manufacturing exports is aerospace parts (which requires skilled labor) and one of our largest imports is apparel (which requires less skilled labor). 

These second-round effects would also likely hurt productivity growth.  Scarce resources would be used less efficiently and trade protection would likely lessen the level of competitive pressure that helps drive innovation.  Moreover, lower productivity growth would likely lead to a slower improvement in a nation’s living standards over time. 

This negative consequence of higher trade barriers can be illustrated most starkly by the estimates of the costs per job saved through protectionist measures.  Researchers that have studied this closely estimate that the costs per job saved from protectionist measures in the United States typically run into the hundreds of thousands of dollars per year.  To illustrate, consider the case of import restrictions on Chinese tires.  The cost of a job saved was estimated at $900,000 per year while the measures were in place, or more than 20 times the average worker’s compensation. 5

Better Approaches to Deal With Globalization

Rather than protectionism, a better policy would be to help domestic workers and companies compete more effectively, rather than compete less.  We need additional mechanisms that allow us to more fully capture the benefits from liberalized trade and to more proactively mitigate its costs.  Ideally, policy should also better address job losses and income inequality from automation and other technological advances.

How we respond should depend on regional and industry circumstances.  These include the nature of trade impacts, the skill sets and location of the workers that have been affected, and the amount of resources that can be mobilized to facilitate adjustment. 

Increasing specialization brings real economic benefits, but can also leave workers more exposed to shifts in demand for their services, potentially on short notice.  These issues are not going away, especially as emerging market economies take on a larger role in the global economy and automation continues apace.  If we are to maintain a more open trade regime, globalization must be socially and politically sustainable.  For that to be the case, we have to provide greater support to those who are hurt by trade. 

Policies should include more assistance with job retraining, help with job search and mobility, and broader unemployment support.  We need to do more research into what measures have been effective in economies around the world, and we should encourage greater experimentation with new approaches.  Getting the balance right between providing assistance and making sure that individuals hurt by trade can get back on their feet and achieve their earning potential will be a challenge, and we need a better understanding of what actually works. 

More generally, we need to do a better job positioning our workforce to cope with globalization and technological change.  This will involve improvements across a range of areas, including not only education and training, but also the business regulatory environment and infrastructure investment that could support greater worker mobility.  These measures would also promote higher productivity growth.  While the scope and scale of issues differ substantially by country, many of these policy areas may also be relevant in India. 

Lastly, there are various measures available in current trade agreements, such as antidumping measures and countervailing duties for dealing with “unfair” trade, as well as escape clauses that provide safeguards for industries that face a sudden surge of imports.  Again, the challenge is to ensure that such measures are effective, that they help facilitate rather than retard adjustment, and that they are not abused so as to avoid foreign competition.  But, both sanctions and temporary relief have been provided for in global trade rules.  We should be willing to use them when their use would lead to more equitable outcomes and would help sustain political support for a more open trade regime. 

Free trade is a concept that remains compelling but periodically will be tested by economic change.  That is an inescapable fact of life and is a good thing because it requires the economics profession to articulate anew the value of a liberalized world trade regime.  While the value from trade is very high, the associated adjustment costs can be significant and will require greater attention if globalization is to work for all of us.

Thank you for your time. I would be happy to take some questions. 

1 Mary Amiti, John Clark, Gerard Dages, Matthew Higgins, Tom Klitgaard and Joseph Tracy assisted in preparing these remarks.

2 Figures from UN World Investment Report, IMF World Economic Outlook Database, World Bank World Development Indicators. 

3 IMF World Economic Outlook, April 2017, in market exchange rate terms. 

4 Figures from Office of the U.S. Trade Representative, UN World Investment Report. 

5 Hufbauer and Lowry, “US Tire Tariffs: Saving Few Jobs at High Cost”, Peterson Institute for International Economics, April 2012. 

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Home — Essay Samples — Economics — Gold — The Golden Straitjacket: An Analysis of Global Economic Integration

The Golden Straitjacket: an Analysis of Global Economic Integration

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Introduction, national sovereignty and the golden straitjacket, economic performance under the golden straitjacket, social equity and the golden straitjacket.

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