ORMAT Globalization: An introduction
Contents
1. What is globalization? 2
1.1 Openness to international trade at the country level 2
1.2 Internationalization of companies 7
2 Global value chains and trade in value added 8
2.1 The domestic and foreign content of exports 8
2.2 Measurement and policy implications 10
3 Is globalization irreversible? 12
3.1 A first episode in the XIXth century 12
3.2 Convergence of cultural values? 14
Références 19
List of tables
Table 1: Input-output matrix with detailed use of exports 8
Table 2: Average level of import tariffs, 1875-1913 12
Table 3: Déterminants of cultural distance 17
List of figures
Figure 1: Trade vs. GDP growth 2
Figure 2: Share of OECD countries in world GDP 4
Figure 3: Evolution of geographical composition of world trade 4
Figure 4: 2012 of the largest exporters of goods in the world 4
Figure 5: First divergence 5
Figure 6: Service exports since the 1970s 6
Figure 7: Exports of commercial services, 2012 6
Figure 8: Net inward FDI flows, percent of GDP 7
Figure 9: Outward FDI flows, percent of GDP 7
Figure 9: Décomposition of gross exports 8
Figure 11: Domestic and foreign content of exports 8
Figure 12: Domestic content of exports and income level 9
Figure 13: The value chain of an iPod 10
Figure 14: World trade imbalances, gross and in value added 11
Figure 15: The de-globalization backfire 13
Figure 16: Hofsteded’s cultural categories in the world 14
Figure 17: Evolution of cultural distance, 1989-93 to 2000-2003 17
1. What is globalization?
A set of inter-related factors including, inter alia:
- A rapid increse of the share of activities open to international competititon
- Internationalization of companies in the form of FDI and participations
- Increased mobility of production factors (labor and capital)
- Convergence of cultural and political values
1.1 Openness to international trade at the country level
The increase in goods trade is the easiest to measure since trade flows are recorded by customs administrations in practically all countries.
Figure 1: Trade vs. GDP growth
Trade in goods: (Import + export)/GDP / Growth of world trade vs. growth of world GDPSource: WDI / Source: WTO, World Trade Report 2013
Note the displacement of domestic activity by international competition (creation and destruction of jobs); the increased dependence toward the outside, but by the same token, reduced dependence to internal shocks; and the trend reversal at the end of the 80s: emerging countries become more open than industrial ones, whereas they had been less open before.
However, the opening up that took place between roughly the mid-1980s and 2000 seems to have come to an end, a phenomenon known as the “global trade slowdown” (Figure 2).
Figure 2: GDP and import growth in the long run
Source: Constantinescu, Mattoo and Ruta (2015).
The global trade slowdown seems structural rather than cyclical, its start pre-dating the global financial crisis of 2008, with China and the U.S. as the main drivers (Figure 3):
Figure 3: Share of manufacturing imports in GDP and in total imports, U.S. and China
Source: Constantinescu, Mattoo and Ruta (2015).
Notwithstanding the global trade slowdown, one of the key long-term trends observed during the recent decade is the decline of industrial countries in world activity and trade (Figure 4 and Figure 5).
Figure 4: Share of OECD countries in world GDP
(a) In constant dollars
/(b) at PPP
Source: World Bank, World Development Indicators
Figure 5: Evolution of geographical composition of world trade
Source: Yoshino (2012)
Figure 6: 2012 of the largest exporters of goods in the world
This trend reversal puts an end to the “great divergence” that started in the XIXth century (Figure 7).
Figure 7: First divergence
Source: WTO, World Trade Report 2013
Similar trends can be observed in terms of service trade (Figure 8). Their increase has levelled off in the end of the 2000s for developing countries but it is probably a temporary blip. The importance of India’s service trade exports is particularly spectacular.
Figure 8: Service exports since the 1970s
(a) Service exports as a percent of gDP, by income level / (b) Same thing, India onlySource: World Bank, World Development Indicators
Figure 9: Exports of commercial services, 2012
Source: WTO, World Trade Report 2013
1.2 Internationalization of companies
The internationalization of companies can be seen in the growth of FDI flows. (Figure 10).
Figure 10: Net inward FDI flows, percent of GDP
Source: World Bank, World Development Indicators
Note the much smaller order of magnitude (1%-5% of GDP) than for trade. Note also that FDI is very cyclical, particularly so for industrial countries. Finally, flows into Southern and Northern countries are positively correlated: No apparent substitution effect.
Figure 11: Outward FDI flows, percent of GDP
Source: World Bank, World Development Indicators
As for outward flows, those coming from emerging countries have grown very rapidly (albeit from a very low base). Until the 2000s (roughly) outward flows from developing countries were essentially panics dues to a deteriorating domestic situation. More recently, one can observe a movement of internationalization of Southern companies, like Kenyan supermarkets opening stores in Uganda, Chilean companies expanding into Argentina, and so on), reflecting their increasing power and ambition.
2 Global value chains and trade in value added
2.1 The domestic and foreign content of exports
One classical problem of international trade statistics is that exports are not net of intermediate consumption which can be imported, which leads to massive double counting. For instance, if the U.S. exports compressors to Mexico for assembly into refrigerators to be re-exported to Colombia, international trade stats will count, in Mexico’s exports, the value of the compressors embodied in that of refrigerators. This means that the compressors will have been counted twice (once as U.S. exports, once as “embodied” Mexican exports) (Figure 12).
Figure 12: Décomposition of gross exports
How can the black box of exports be opened up? The procedure needed to generate trade in value added statistics is complex. The first step is to start by detailing the uses of exports, direct and indirect, by combining an input-output matrix with international trade data (Table 1).
Table 1: Input-output matrix with detailed use of exports
Figure 13: Domestic and foreign content of exports
Source: Koopman et al. (2011)
One would expect the domestic content of exports to go up with income level, as rich (industrial) countries have a “denser” industrial fabric and so can produce more intermediates at home rather than importing them. However it’s the opposite (Figure 14): poorer countries have a higher domestic content. This is likely to be a composition effect across goods: poorer countries export less technologically sophisticated goods which have less foreign content (extreme case of domestic content: agricultural products).
Figure 14: Domestic content of exports and income level
Source: Johnson Nogueira (2010)
An extreme case of the double counting is illustrated in Figure 15 with the ipod’s value chain. China’s gross export value per ipd is over $200 apiece, yet it contributes only a tiny fraction of all the value added.
Figure 15: The value chain of an iPod
Source: Adapted from Dedrick et al. 2008
2.2 Measurement and policy implications
How to come up with an estimate of the domestic value added embodied in gross exports? Conceptually, the problem is as shown in
Table 2: Domestic value added embodied in gross exports
Let be country i’s gross output, the final demand in country j for goods from country i, and the absorption of country i’s output as intermediates in the production of country j. The uses of country i’s gross output, with two countries , can be decomposed by the following equation:
1)
where is how much of country i’s gross output is sold as an intermediate to country j (domestic absorption for , export for ). The equation can be inverted to get «inverse Leontieff matrices» (how much production needed per unit of final demand). Let
be the total final-demand vector (domestic and exported). Let
be the inverse Leontieff matrix.[1] Gross output can be expressed as a function of final demand as follows:
2)
Finally, let be an N-dimensional vector of ones, N being the number of countries; here N = 2. Let be the share of value added in gross output in country j ; that is,
3)
We use our inverse Leontieff matrix to construct
. 4)
The share of value added in gross exports (what we are interested in) can finally be expressed by multiplying each element in by the ratio of gross output to gross export, :
5)
In , the diagonal elements give the share of domestic value added in a country’s gross export (“trade in value added”) while the off-diagonal ones give the share of foreign value added in a country’s gross exports. These estimates can be used to compare trade imbalances in gross exports vs in value added. The result is shown in Figure 16, where various bilateral trade deficits are shown in gross trade on the horizontal axis vs. in value-added trade on the vertical one. Each point is a trading partner of the U.S.. China lies below the 45-degree line, meaning that the U.S. deficit with China is higher in gross trade vs. in value-added trade, which is natural in view of Figure 15. For Japan, it is the other way around, which is also natural in view of Figure 15.
Figure 16: World trade imbalances, gross and in value added
Source: Koopman et al. 2011
The implications are very important in terms of “trade diplomacy”. Creating trade and hence political friction with China on the basis of its huge surplus in gross trade may not be a good idea if the gross trade figures reflect value added realized in other countries—in particular Japan—rather than China itself. Whatever China does with its exchange rate, if one looks at the ipod’s value chain, it is unlikely to make much of a difference on the value of an ipod and even less on employment in the U.S..
3 Is globalization irreversible?
Globalization is often considered to be both new and irreversible. However, today’s globalization wave is the second episode, the first one having ended badly.
3.1 A first episode in the XIXth century
The development of railway and the first communication technologies (telegraph) in the XIXth century led to a first wave of globalization between 1815 and 1875, which was «officialized» by a web of bilateral free-trade agreements between the main trading nations in the 1860s. This wave of globalization was followed by a severe return of protectionism between 1875 and the First World Was (Table 3).
Table 3: Average level of import tariffs, 1875-1913
Source: Bairoch et Kozul-Wright (1996)
While not able to stiffle the growth of international trade which was fueled by a massive decrease in transportation costs, the return of protectionism was accompanied by a rise in xenophobic and nationalistic rhetoric that contributed, together with trade rivalries (e.g. between the UK and Germany) to the start of the First World Was. It is between the two World Wars that the anti-globalization movement reached its paroxysm, in particular between the Great Depression of 1929-1935 (Figure 17).
Figure 17: The de-globalization backfire
Source: WTO, World Trade Report 2013
Could such a collapse of globalization happen again? One might think so in view of the rise of xenophobic, anti-immigrant and cross-community hate speeches in all countries of the world and the dark political forces that surf on the wave. However there is one basic difference between today’s globalization wave and the previous one—the existence of supra-national institutions such as the World Trade Organization, the World Bank and the IMF that were created at Bretton Woods precisely to avoid a repetition of the tragedy of the 1930s. In particular, the WTO codifies what is allowed and not allowed in trade policy. We will return to this later on.
3.2 Convergence of cultural values?
A couple of years ago there was a debate about whether capitalism and democracy were universal or Western values. While people like Amartya Sen argued that democracy was a fundamental right and that economic freedom was closely linked with it, prominent statesmen in the East such as Lee Kwan Yu of Singapore countered that democracy was neither necessary nor sufficient for economic development and was essentially a Western value. Are political values converging or not? And how about deeper cultural values?
The definition of differences in cultural values between countries goes back to the work of Hofstede (1980) who characterized societies along five dimensions of work attitude from a worldwide survey of 117’000 employes of IBM (where he had founded a personnel research department) between 1967 and 1973. In their original form, the dimensions were (with some renaming to make them more transparent):
1. Power acceptance
2. Individualism
3. Risk-aversion
- Competitiveness (what he called «masculinity»)
To which he added two others later on
5. Patience
6. Restraint
Hofstede’s work started an industry of cultural distance measurement and its implications for corporate behaviour (e.g. entry modes). Roughly, power acceptance is stronger in emerging countries; individualism is strongest in Western industrial countries. Risk aversion is stronger in Latin America and German-speaking countries. Competitiveness is very low, for instance, in Scandinavia and in Chile as well, but very strong in Japan and Switzerland. Patience is strongest in Asia; restraint is strongest in East Asia. All in all, what these traits tell us about societies is not always very clear.