Globalisation is still just beginning

Secretary-General of the OECD

The Dark Ages, the Renaissance, the Industrial Revolution: these may be phrases from previous centuries, but they carry a multitude of images, lessons and historical memories that are still relevant today. I believe that the end of the last century and the beginning of this one will be characterised as the dawn of the “Age of Globalisation”.

Not that globalisation is a new phenomenon. International trade and investment, to take just these examples from the many areas affected by globalisation, have a long history. And markets have been international for centuries. According to economic historian Angus Maddison, some 3,500 Dutch merchant ships plied the seven seas in about 1670. The Dutch fleet dwarfed all others at the time. The leading capitalist country of the 19th century, Britain, which embarked on market integration, albeit largely within a colonial context, developed a policy of eliminating tariffs and imposed the policy on others. At the same time, it opened its economy to agricultural imports and watched its own agricultural sector wither away.

The mobility of capital in the latter part of the 19th century and the early part of the 20th century was enormous. The gross nominal value of capital invested abroad in 1914 by the UK, France and Germany was greater than in 1938. Capital mobility was quite extraordinary at the end of the so-called liberal era before the First World War. In 1914, the stock of foreign capital invested by western European countries in developing countries was 32% of their GDP. Although we have, in recent years, drawn close to this level of investment in developing countries, we have never exceeded it.

So, why are we so preoccupied and concerned with the notion of free trade and globalisation today, if it is merely an extension of what we have already experienced? The difference is that the extent of global integration between national markets is much greater than in the past–although in many respects, less than popular opinion would have us believe. Moreover, it is the fast pace of change which has put enormous pressure on societies to adapt and to create new skills.

Just how integrated is today’s global economy? One indicator is trade, now a major engine of growth in developed and developing countries alike. The volume of world merchandise traded today is about 22 times what it was in 1950. During the same period, the value of the world’s output has increased seven times over.

Perhaps the deepest integration of all has been the cross-border link-ups of enterprises. The share of OECD countries’ capital formation founded on foreign direct investment (FDI) rose to more than 10% in recent years, having stood at around 4% for decades.

An increasing proportion of this is in developing countries, including “south-south” investment, but OECD economies still account for the lion’s share. Furthemore, the activities of foreign affiliates of multinational enterprises are perhaps the most important drivers of global integration. The share of foreign affiliates in manufacturing turnover has risen in nearly all OECD countries over the past decade.

Efforts to attract foreign capital, especially in the form of foreign direct investment, are critical to growth everywhere. As with trade, foreign direct investment is a win-win deal for host and home countries alike. According to OECD data, for each extra dollar of outward foreign direct investment there are two dollars of additional exports which, in turn, translate into additional jobs in the home country.

So, are we finished integrating? Globalising? Have we reaped all the benefits? Certainly not yet. It is the high-income countries that have predominantly participated in expanding trade and investment. And their firms will continue to think and act globally–they will not go into reverse. The non-OECD world can become much more integrated into the global economy too. The non-OECD Asian countries have joined world markets more successfully than Latin American and much more so than most African countries. And capital markets are still far from being fully integrated.

While developing countries can participate more, so can advanced economies. A recent (and widely quoted) OECD study argues that if trade, FDI and domestic competition barriers were reduced on both sides of the Atlantic, the cumulative effect on earnings would mean workers in the OECD area could make an additional full year’s wage or more across their lifetime.

This should be seen as good news. But at the OECD, which has a key role in bringing about a globalisation from which all benefit, we know it is not sufficient to point to such incontrovertible evidence that liberalisation and market integration work. It is also necessary to address the worries of citizens, and even countries, who see themselves as losers, with their noses pressed against the window looking in at the winners!

Global integration has much farther to go, not least in ensuring its benefits accrue to all countries. It has much more to achieve in terms of economic growth and concomitant social welfare. This is the age of globalisation, but it is just the beginning.

©OECD Observer No 250, July 2005

Economic data

GDP growth: +0.6% Q1 2019 year-on-year
Consumer price inflation: 2.3% May 2019 annual
Trade: +0.4% exp, -1.2% imp, Q1 2019
Unemployment: 5.2% July 2019
Last update: 8 July 2019

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