Globalization Report 2020 — The most important facts in 5 charts

Our “Globalization Report 2020” is now available

As announced last week, we are publishing the “Globalization Report 2020” today. The answer to the question of which of the 45 industrialized and emerging countries studied was able to achieve the largest globalization-induced growth in real gross domestic product per capita between 1990 and 2018 per capita and in euros is Japan. In this post, we present the five key findings of the report.

#1: Globalization has been declining slightly since 2007

The extent of a country’s interdependence with the rest of the world is measured with an index that is very closely aligned with the established “KOF Globalization Index” of the Swiss Federal Institute of Technology in Zurich. It comprises indicators of economic, social, and political interdependence.

From these data, a globalization index is developed for each country in a respective year, which can assume values between 0 and 100. The higher the index value, the greater the interdependence of this country with the rest of the world. Between 1990 and 2018, the globalization measured in this way has increased. Since 2007, however, there has been a slight decline (see Figure 1).

#2: Progressive globalization increases average real GDP per capita

Regression analyses are used to calculate the impact of changes in globalisation on the growth of real GDP per capita. For the period from 1990 to 2018 and the 45 economies, the following applies: If the value of the Globalization Index rises by one point, this leads to an average increase in the growth rate of real GDP per inhabitant of around 0.3 percentage points. What this means can be explained using the example of Germany (see Figure 2):

  • In 1990, real GDP per capita in Germany was around 21,940 euros. By 2018 it had risen to 32,160 euros.
  • Without the advancing globalization, real GDP per capita would only have reached a value of around 30,760 euros in 2018.
  • Over the entire period, the GDP growth per inhabitant adds up to around 31,130 euros. Over the 28 years in total, this means that the advancing globalization has increased the average GDP per capita in Germany by around 1,110 euros per year.

#3: Developed industrial nations profit most from advancing globalization

All 45 countries considered were able to achieve globalization-induced GDP growth. However, the figures vary considerably (see Figure 3): The largest average income gains per year and capita are recorded in Japan (around EUR 1,790), Ireland (around EUR 1,610), and Switzerland (around EUR 1,580).

At the bottom of this approach to measuring globalization gains are the large emerging markets. For example, the average globalization-induced GDP growth per year and capita is only around 30 euros in Nigeria and only 24 euros in India.

There are three main reasons for these differences:

  1. The starting level of GDP per inhabitant: the higher this figure is in 1990, the greater the absolute growth.
  2. The extent of the change in globalization during the period under consideration: The more the Globalization Index rises during the period under consideration, the greater the growth gains resulting from globalization.
  3. The timing of the increases in the Globalization Index: The earlier the value of the Globalization Index increases during the period under review, the greater the increases in GDP due to globalization.

Japan is in first place in this ranking, after still ranking second in the Globalization Report 2018. One reason for the improvement is that between 2007 and 2018, Japan achieved the strongest growth of all 45 countries in the Globalisation Index — while many other countries have experienced setbacks.

#4: Globalization and sustainability

In order to measure the connection between globalization and sustainability, two indices were developed that are based on selected sustainability indicators of the United Nations’ “Sustainable Development Goals“. Both can assume values between 0 and 100. Again, the higher the index value, the higher the corresponding sustainability.

  • A simple correlation shows that a higher value of the Globalization Index is associated with a higher value for social sustainability (see Figure 4, right). This fits in with the assumption expressed last week that globalization-induced GDP increases improve immaterial living conditions and thus increase social sustainability in a country.
  • In contrast, there is no significant positive correlation between the Globalisation Index and the Ecological Sustainability Index (see Figure 4, left). This result can be interpreted as meaning that the income gains induced by globalization were not used to promote environmental sustainability.

#5: Globalization and dependence on foreign trade

Globalization increases the material prosperity of people. The downside of these efficiency gains, however, is a greater dependence on imported inputs and end products. To get a rough idea of the dependence of the 45 economies on foreign trade, three aspects of cross-border trade are considered:

  1. The value-added exports of a country. They indicate the share of domestic value-added that depends on foreign demand.
  2. Value-added imports understood as the domestic demand for value-added from abroad. This figure indicates the share of intermediate inputs required domestically that comes from abroad.
  3. The share of imports in domestic consumption. This final demand import shows how strongly domestic consumers depend on products from abroad.

These three variables are combined into a dependency index. A low value means that the country is only slightly dependent on foreign countries.

Unfortunately, there is a methodological challenge: the data for value-added export and import cannot be taken from the annual national account statistics. They must be calculated from global input-output tables. The necessary complex calculations are performed at irregular intervals. The data currently available are those for 2014.

The index constructed in this way shows that small economies such as Luxembourg, Ireland, and Belgium, as well as Hungary, Slovakia, and the Czech Republic, have the highest dependence on foreign trade measured in this way (see Figure 5). The dependency on foreign trade is lowest in the USA, which can be attributed primarily to the size of the American domestic market.

With a high dependence on foreign trade, it is to be expected that an economic slump abroad will have considerable consequences for the affected national economy. A look at the economic development in the 45 countries examined after the Lehman bankruptcy in September 2008 shows that a high value of the dependency index in 2008 was accompanied by a large decline in real GDP in 2009.

If this correlation also applies to the economic crisis triggered by the coronavirus pandemic and the dependencies on foreign trade calculated on the basis of the data for 2014 continue to apply, the countries that occupy the top ranks in Figure 5 would have to reckon with particularly severe GDP declines in the wake of the current global recession.

However, it should be pointed out that the economic trend is also influenced by domestic economic conditions, e.g. domestic investment and consumption behavior, government stimulus packages, economic structure, to just name a few.

More detailed information on the “Globalization Report 2020” can be found in our Policy Brief and in the full study.

Here you can download the previous versions of our Globalization Report:

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Our mission on this blog is to shed light on Europe’s role in the world economy. https://globaleurope.eu/

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Global & European Dynamics

Global & European Dynamics

Our mission on this blog is to shed light on Europe’s role in the world economy. https://globaleurope.eu/

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