Globalization and Outlook

(Part 2)
Outline

 What is globalization?
 Two main drivers of globalization
 Technological revolution
 Liberalization
 False ideas about globalization
 Current trends in world trade

1. Two of the most important growth factors for globalization are:

• The innovation and improvement of major technologies (especially in

comunications and transportation services)
• The liberalization of international exchanges (geopolitical)

2. Both of these two factors reduce the costs of transaction for international
exchanges
 How do we
measure trade?
Trade

source
https://www.weforum.org/agenda/2015/05/how-can-we-
measure-the-value-of-international-trade/
https://data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-
59B2CD424B85
https://unstats.un.org/unsd/trade/globalforum/default.asp
 Two useful concepts:
- Gravity equation
- Border effect
Model: Gravity equation
The gravity model of international predicts bilateral trade flows between
two units (countries, regions….) based on their economic sizes (often
GDP) and distance between them

In short: countries are expected to have larger trade flows:

- If they are large
- If they are close
The border effect
Trade flow
Region A Region B

Region A Trade flow

Region B

border
1.
The border effect refers to asymmetries in trade patterns
between cities and regions of different countries and those that
are located in the same country.
Usually, trade volume is much lesser between cities and regions
if they are located in different countries.
The border effect
1.
The “border effect” has become much smaller

There is a lot of debate about the extent of this reduction, and a

whole discussion around the question “Is the world flat?”
Liberalization
Liberalization
1. Process initated after WWII
• Bretton Woods agreements (IMF, World Bank, GATT
(General Agreement on Tariffs and Trade, later WTO)
• Seek world peace through wealth sharing
Liberalization
1. Process initated after WWII
• Bretton Woods agreements (IMF, WB, GATT)
• Seek world peace through wealth sharing

2. Most visible in international trade and the financial

markets
• Average tariff in manufactures in the industrialized
countries was 40% at the end of WWII.

• At the beginning of this century they were as low as 5%

Trade: Lower transaction costs
- Trade liberalization: more freedom and technological advances
have facilitated economic integration and a lower cost of
transaction among countries

Source: IMF
Trade: reduction of tariffs

Source: IMF
Financial integration
More trade of goods and services has correlated with more financial
movements across borders
Financial integration

The Chinn-Ito index (KAOPEN)

is an index measuring a country's
degree of capital account
openness. The index was initially
introduced in Chinn and Ito (Journal of
Development Economics, 2006). KAOPEN
is based on the binary dummy variables
that codify the tabulation of restrictions on
cross-border financial transactions reported
in the IMF's Annual Report on Exchange
Arrangements and Exchange Restrictions
(AREAER).

Source: http://web.pdx.edu/~ito/Chinn-Ito_website.htm

Source: Chinn and Ito (2014)

Liberalization
1. Process initated after WWII
• Bretton Woods agreements (IMF, WB, GATT)
• Seek world peace through wealth sharing
2. Most visible in international trade and the financial
markets
• Average tariff in manufactures in the industrialized
countries was 40% at the end of WWII.
• At the beginning of this century they were as low as
5%
3. In the recent past, we have also witnessed an
increase in economic and political freedom,
although some suggest the trend is reversing
Economic liberty

Source: http://www.heritage.org/index/
https://freedomhouse.org/report/freedom-world/2021/democracy-under-siege