Why growth? Why globalization at all?

Two years in the making: Our “Globalization Report 2020” comes out next week

Next week we publish our “Globalization Report 2020”. Every two years since 2014, we have used this report to examine the impact of advancing globalization on the real gross domestic product (GDP) in industrialized and emerging markets.

Reports show that an increase in globalization systematically raises the growth rate of real GDP per capita. We view this as a positive development. Even though GDP is not an ideal indicator of people’s well-being, there are good reasons why a growing supply of goods and services also improves people’s intangible living conditions.

GDP: Conceptual clarification and criticism

Gross domestic product (GDP) corresponds to the value of all tangible goods and services produced in a country within one year. GDP thus provides information on the economic performance of a nation. However, this indicator also has some shortcomings:

A central criticism concerns the fact that GDP only covers goods and services exchanged for prices via markets. Economic activities that take place within a household or that are provided without monetary consideration are not taken into account. Thus, if self-sufficiency plays a significant role in certain societies, GDP underestimates the actual economic performance of that country. This underestimation becomes even greater if, in addition, the statistical recording of economic activities by the official authorities is incomplete.
A second significant weakness results from external effects. These are economically relevant costs or benefits that are not included in market prices. In the case of a negative external effect (e.g., pollution), GDP does not fully capture the production costs to society as a whole. In this case, depreciation would have to be captured on the value of the environment or natural resources. Consequently, GDP overestimates the amount of economic value-added.

Despite these and other shortcomings, GDP is still a key economic policy target. There are good reasons for this; for example, GDP per capita improves most people’s intangible living conditions.

GDP and intangible living conditions

Rising GDP per capita includes the following improvements in living conditions (see Figure 1):

Medical care and the state of health of people improve, infant mortality falls, and life expectancy increases.
The economic need for children to be involved as workers in economic production processes declines. As a result, the opportunity costs of school education fall, so that the level of education rises and the chances of better access to the labor market increase.
Productivity gains decrease working time, so people have more time for self-determined activities—people’s time prosperity increases.

chart economic growth

These relationships are not only theoretical, but can be seen in the relationship between GDP per inhabitant and life expectancy at birth in various countries (see Figure 2).

chart gdp life expectancy

Globalization and GDP growth

Globalization understood as economic, social, and political interdependence between different countries, can increase the level of real GDP in an economy through various channels. Among the most important are the following:

The international mobility of labor and capital means that the production factors available worldwide are used where they make the greatest contribution to overall economic value creation. For the world as a whole, this means a larger quantity of goods and services is available at a lower price.
The intensification of trade between countries increases competitive pressure and thus the need to reduce production costs through innovation and the technical progress to remain internationally competitive. A reduction in costs through technological progress implies an increase in productivity and a higher GDP.
When a company produces for the world market, this means a considerable expansion of its production. Often, the advantages of mass production can be used. This corresponds to an increase in productivity, which increases GDP.
Political agreement on mutual recognition of product standards facilitates cross-border trade. This also promotes economic growth and allows consumers to have a wider choice of products.

In the end, if the economic, social, and political interdependence of a country with the rest of the world increases, this increases the real GDP of the entire economy. On average, this means that the real GDP per capita grows.

Past globalization reports have shown that advancing globalization does indeed have this growth-promoting effect. Since 1990, all 42 industrialized and newly industrialized countries under consideration have been able to record increases in GDP due to globalization.

To determine which country derived the greatest economic benefits from advancing globalization since 1990, we calculated the absolute – i.e., expressed in euros – average GDP growth per inhabitant over the period under consideration. Figure 3 shows the top 5 countries in the respective reports.

globalization report chart

The “Globalization Report 2020” will be published here on September 10. There will be some changes compared to the previous reports: We included three new countries (Luxembourg, Indonesia, and Nigeria), and are looking for the first time at the connection between globalization and social as well as environmental sustainability.

Additionally, we looked at which countries are particularly dependent on foreign trade – and, therefore, significantly affected by the slump in the global economy due to the current coronavirus pandemic. Stay tuned for the 2020s results!