Journal of International Commerce, Economics and Policy Vol. 1, No.

1 (2010) 2132 World Scientific Publishing Company DOI: 10.1142/S179399331000007X

GLOBALISATION, INTERNATIONAL COMPETITIVENESS AND GROWTH: ADVANCED AND EMERGING MARKETS, LARGE AND SMALL COUNTRIES

DOMINICK SALVATORE Department of Economics Fordham University, New York, 10458 Salvatore@fordham.edu The past three decades have witnessed a rapid tendency toward globalisation in the world economy. A great deal of controversy exists, however, as to whether and to what extent globalisation has increased nations international competitiveness and growth. After discussing the common characteristics of the rapidly growing economies and the meaning and importance of globalisation, this paper examines the relationship among globalisation, international competitiveness and growth during the most recent period of rapid globalisation for all the countries for which data exists as a group, and then separately for advanced and emerging markets, and for large and small countries. Keywords: Globalisation; international competitiveness; growth; globalisers; non-globalisers. JEL Classification: F43

1. Introduction The past three decades have witnessed a rapid tendency toward globalisation in the world economy. A great deal of controversy exists, however, as to whether and to what extent globalisation has increased the international competitiveness and growth of nations around the world. Joseph Stiglitz (2002) concludes that globalisation has benefited mostly the rich or advanced countries at the expense of the less developed of poor countries. Jagdish Bhagwati (2004), on the other hand, comes strongly in defense of globalization. Paul Krugman (1994) states that nations need to consider only productivity and that concern with competitiveness is a dangerous obsession. This paper examines the relationship between globalisation, international competitiveness and growth in advanced and emerging markets, and in large and small countries over the most recent period of rapid globalisation, which started in the early 1980s. 2. The Growth Report In 2008, the high-powered Commission on Growth and Development published The Growth Report (2008) which provided an in-depth analysis of the common
21

22 D. Salvatore

characteristics of the 13 high-growth economies of the post-war period. The highgrowth countries are defined as those that achieved an average growth rate of at least 7 per cent per year over a period of at least 25 years from 1950 to 2005.1 Although the Commission could not find any unique blueprint for ensuring high growth, it found that the high-growth countries shared five common characteristics. They: (1) (2) (3) (4) (5) Fully exploited the world economy; Maintained macroeconomic stability; Mustered high rates of savings and investment; Let markets allocate resources; Had committed, credible and capable governments.

While not specifically mentioned by name, globalisation and international competitiveness seem essential characteristics embedded in a high-growth strategy. The first characteristic (fully exploited the world economy) means globalisation and the fourth characteristic (let markets allocate resources) is an essential ingredient of international competitiveness. 3. Globalisation of Production and Labour Markets There is a strong trend toward globalisation in production and labour markets in the world economy today. For those firms and nations that do take advantage of this trend, the results are increased efficiency, competitiveness and growth. Global corporations play a crucial role in the process of globalisation. These are companies that are run by an international team of managers, have research and production facilities in many countries, use parts and components from the cheapest sources around the world, sell their products globally, and are financed and owned by stockholders throughout the world. More and more corporations today operate on the belief that their survival requires them to be one of a handful of global corporations in their sector. This is true in the automobile, steel, telecommunications and aircraft industries, and for companies that produce computers, consumer electronics, chemicals, drugs and many other products and services. One important form of globalisation in the area of production is outsourcing, or the foreign sourcing of inputs. There is practically no major product today that does not have some foreign inputs. Foreign sourcing is often not a choice made by corporations in the hope of earning higher profits, but simply a requirement for those that wish to remain competitive. Firms that do not look abroad for cheaper inputs risk not being able to compete in world and even domestic markets. Such low-cost, offshore
1 The

13 high-growth countries and the period of their high growth are: Botswana (1960 2005), Brazil (19501980), China (19612005), Hong Kong SAR (1960 1997), Indonesia (19661997), Japan (19501983), Korea (19602001), Malaysia (19671977), Malta (1963 1994), Oman (1960 1999), Singapore (19672002), Taiwan (China) (1965 2002) and Thailand (19601997).

Globalisation, International Competitiveness and Growth 23

purchase of inputs is likely to continue to expand rapidly in the future, and is being fostered by joint ventures, licensing arrangements and other non-equity collaborative arrangements. Foreign sourcing can be regarded as manufacturings new international economies of scale in todays global economy. Just as companies were forced to rationalise operations within each country during the 1980s, they now face the challenge of integrating their operations for their entire system of manufacturing around the world in order to take advantage of the new international economies of scale. The most successful multinational corporations are those that focus on their core competencies which are indispensable to their competitive position over subsequent product generations and outsource all the rest from outside suppliers (see Salvatore, 2010). Even more dramatic than globalisation in production is the globalisation of labour markets. Work that was previously done in the United States and other industrial countries is now often done much more cheaply in some emerging markets. This is the case not only for low-skill, assembly-line jobs, but also for jobs requiring advanced computer and engineering skills. In fact, a truly competitive global labour force has been developing that is willing and able to do their jobs most efficiently at the lowest possible cost. Even service industries, such as making airline reservations, processing tickets and answering calls to toll-free numbers are not immune to global job competition. Highly skilled and professional people are not spared from global competition, either. Workers in advanced countries are raising strong objections to the transfer of skilled jobs abroad. Nevertheless, companies in all advanced countries are outsourcing more and more of their work to emerging markets in order to bring or keep costs down and remain internationally competitive. In the future, more and more work will simply be done in those emerging markets best equipped to do a particular job most economically. If governments in advanced nations tried to restrict the flow of work abroad to protect domestic jobs, their firms would risk losing international competitiveness and they may end up having to move all of their operations abroad. Globalisation in production and labour markets is thus important and inevitable important because it increases efficiency, and inevitable because international competition requires it. Besides the well-known static gains from specialisation in production and trade, globalisation leads to even more important dynamic gains from extending the scale of operation to the entire world and from leading to the more efficient utilisation of capital and technology of domestic resources at home and abroad. 4. The Degree of Globalisation Does globalisation lead to greater international competitiveness and faster growth? To begin answering this question we need a measure or index of globalization. The best such measure is KOF Index of Globalization (2009). This provides a cardinal measure

24 D. Salvatore

of the degree of globalisation of various countries based on each countrys (1) degree of economic globalisation, which is measured by trade and financial flows, (2) social globalisation, which is measured by the personal contacts (information and cultural flows) between the nations residents and residents of other nations, and (3) political globalisation measured by the nations participation in international organisations. Table 1 gives the globalisation index of the 53 countries2 for which data are also available on their international competitiveness and growth (to be used later to show the relationship between a nations level of globalisation and the level of its international competitiveness and growth). From Table 1 we can see that 19 out of the 22 advanced countries (large and small marked by an asterisk) and 17 out of 23 small countries (advanced and emerging marked by a plus sign) appear in the top half of the list, and so we can conclude that the more globalised countries are overwhelmingly advanced and small, as opposed to emerging and large. A country is defined as large if its population exceeds 1112 million people. To be noted is that although the most recent KOF Index of Globalization became available in 2009, it is based on 2006 data and so it more appropriately refers to the year 2006.

Table 1. Globalization indices, 2006.

Country 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Belgium* Ireland* Netherlands* Switzerland* Austria* Sweden* Denmark* Canada* Luxembourg* Hungary Czech Republic New Zealand* Finland* Singapore Portugal* France* Estonia Spain* Index 91.5 91.0 89.9 89.9 89.1 88.7 87.4 86.3 86.3 85.2 84.7 84.6 84.2 84.1 83.9 83.7 83.5 82.9 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. Country Slovenia Norway* Germany* Slovak Republic Croatia Australia* United Kingdom* Italy* Poland Lithuania Greece* Malaysia Jordan Chile United States* Bulgaria Israel Romania Index 82.4 82.3 81.8 81.2 80.6 80.4 79.3 78.8 78.0 77.2 77.0 76.2 75.5 75.0 74.9 74.9 74.7 70.6 Country 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. Ukraine South Africa Thailand Turkey Korea Russia Argentina Mexico Peru Japan* Brazil Philippines China Colombia Venezuela Indonesia India Index 69.3 67.1 66.5 66.4 65.9 65.2 65.2 64.1 63.6 63.5 61.7 60.6 59.9 59.7 58.4 57.7 51.4

Source: KOF Index of Globalization (2009).

2 IMD

calculated the competitiveness index for 57 economies but four of them (Hong Kong, Kazakhstan, Qatar and Taiwan) had to be excluded because either the globalisation index or the growth data (that we need to use later in conjunction with the globalisation and competitiveness indices) were not available.

Globalisation, International Competitiveness and Growth 25

5. The World Competitiveness Index There are several measures of the overall international competitiveness of nations. One of the best is the one by the Institute for Management Development (IMD) in Lausanne, Switzerland (IMD, 2008, 2009). Competitiveness is defined as the ability of a country or company to generate more wealth for its people than its competitors in world markets and is calculated as the weighted average of four competitive factors. These are: (1) economic performance, which includes domestic economy, international trade, international investment, employment and prices; (2) government efficiency, which includes public finance, fiscal policy, institutional framework, business legislation and societal framework; (3) business efficiency, which includes productivity, labour market, finance, management practices, and attitudes and values; and (4) infrastructure, which includes basic infrastructure, technological infrastructure, scientific infrastructure, health infrastructure and education. Table 2 gives the competitiveness index for 2009 for the same 53 countries listed in Table 1. From the table we see that in 2009 the United States was ranked as the most competitive economy with an index of 100. Japan is ranked 15th with an index of 78.2 while the United Kingdom is 19th with an index of 76.1. This means that on a systemic or economy-wide level, Japan and the United Kingdom are about 2224 per cent less internationally competitive than the United States.

Table 2. Competitiveness indices, 2009.

Rank/Country 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. United States Singapore Switzerland Denmark Sweden Australia Canada Finland Netherlands Norway Luxembourg Germany New Zealand Austria Japan Malaysia Ireland China Score 100.0 95.7 94.2 91.7 90.5 88.9 88.7 88.4 87.8 86.6 86.3 83.5 79.6 79.3 78.2 77.2 77.0 76.6 Rank/Country 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. United Kingdom Belgium Israel Chile Thailand Korea France Czech Republic India Lithuania Slovenia Slovak Republic Portugal Estonia Peru Bulgaria Spain Brazil Score 76.1 76.0 73.4 70.9 70.7 68.4 68.1 66.8 66.5 64.9 64.6 63.9 62.6 62.6 59.3 59.0 57.8 56.9 Rank/Country 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. Jordan Indonesia Philippines Poland Hungary Mexico Turkey South Africa Russia Italy Colombia Greece Croatia Romania Argentina Ukraine Venezuela Score 56.0 55.5 54.5 53.9 53.9 53.9 53.4 52.9 52.8 52.1 51.5 50.8 48.6 46.9 43.1 40.4 39.1

Source: IMD (2009).

26 D. Salvatore

Since 18 out of the 22 advanced countries listed in Table 2 appear in the top half of the list, we can conclude that the more internationally competitive countries are overwhelmingly advanced. On the other hand, only slightly more than half (13 out of the 23) of the small countries in the table are in the top half of the list of the most competitive countries. To be noted is that measuring international competitiveness is an ambitious and difficult undertaking. One alleged shortcoming with the above competitiveness measure is the sometimes low observed correlation between the competitive index and the real per capita income of the nation in relation to other nations. For example, Germany has a much higher competitiveness index than Italy, even though its real per capita income is only slightly higher than Italys. But this is not a shortcoming of the competitiveness index because it measures the nations ability and prospect for future growth, while a high per capita income measures the nations past economic successes and growth. Italys relatively high per capita income today is based on past accomplishments (between 1950 and 1970 Italy grew faster than any other advanced country with the exception of Japan). Its very low international competitive index today reflects Italys poor growth prospects for the future. Indeed, Italy has been growing more slowly than most other advanced countries during the past two decades, exactly as predicted by its past low international competitiveness index. Furthermore, a nation that ranks low on its overall competitiveness score may be highly competitive in some sectors, and this is clearly shown by the more disaggregated data that go into the calculation of the overall competitiveness index for the entire economy. But even the overall index for the entire economy has significance and importance. Entrepreneurs and managers around the world do rely on these overall international competitiveness indices or measures in deciding whether to invest in one nation rather than another. For example, all other things being equal, a multinational corporation would prefer to invest in Germany rather than in Italy because of the much higher competitiveness index for the former than for the latter. Even Krugmans (1994) criticism that competitiveness is a dangerous obsession can be easily disposed of. According to him, a nation needs only to be concerned with its productivity and forget about international competitiveness. The statement seems profound but in fact it is not so because a higher productivity leads to greater international competitiveness. Indeed, the United States is more internationally competitive than the United Kingdom, Japan, the euro area and the large, advanced, continental European countries because of its greater efficiency (productivity) which is based on its lower fiscal pressure, lower cost of starting a new business and less labour market rigidity, but a greater ease of doing business (see Table 3). 6. Relationship between Globalisation and International Competitiveness We are now ready to address the question of whether and to what extent the more globalised nations are more internationally competitive than the less globalised

Globalisation, International Competitiveness and Growth 27

Table 3. International competitiveness factors, 2009.

Nation/Group of Nations United States Japan United Kingdom Euro area Western Europe large continental (1) 100.0 78.2 76.1 71.3 70.9 (2) 31.3 34.5 39.5 44.9 45.0 (3) 0.7 7.5 0.7 6.0 8.2 (4) 0 16 10 38 40 (5) 4 15 5 27 27

Notes: (1) competitiveness index (from Table 1), (2) taxes as a percentage of GDP, (3) cost to start a new business as a percentage of the yearly per capita income of the nation, (4) labour market rigidity (0 100) and (5) ease of doing business (0 100). Source: OECD (2009), IMD (2009), World Bank (2009a).

nations. Specifically, is a relatively higher level of globalisation for a given nation in a given year associated with a greater relative international competitiveness of the same nation in the same or a subsequent year? Table 4 shows the rank correlation coefficient (RCC) between globalisation and international competitiveness of 0.572 between the 2006 globalisation index (which became available in 2009) and the 2009 international competitiveness index. The RCC is 0.611 between the 2006 globalisation index and the 2008 competitiveness index, and RCC 0:729 for the 2000 globalisation index and the 2008 competitiveness index. The RCC is higher when using the 2008 instead of the 2009 competitiveness index very likely because of the cyclical disturbance created by the present deep world-wide financial and economic crisis and deep economic recession.3 These results indicate that there is a fairly high correlation between globalisation and international competitiveness. The more globalised countries are more internationally competitive than less globalised ones. Are more internationally competitive
Table 4. Relationship between globalisation and international competitiveness.
Globalisation Ranking International Competitiveness Ranking In 2009 In 2008 In 2008 Rank Correlation Coefficient 0.572 0.611 0.729

In 2006 In 2006 In 2000

the 2007 competitiveness index gives a RCC of 0.725, about the same as using the 2008 index. To be noted is that the 2008 competitiveness index is based mostly on 2007 data, before the current economic crisis started. In any event, globalisation in one year represents a structural change really, a revolution and its full effect on international competitiveness can take several years to fully take effect.

3 Using

28 D. Salvatore

nations also growing more rapidly than less internationally competitive nations? This is the next question that we will try to answer. 7. International Competitiveness and Growth Table 5 gives the average growth rate of real GDP for the 20002007 period for the same 53 countries for which the globalisation and international competitiveness indices were given in Tables 1 and 2. Table 5 shows that the emerging markets grew much faster than advanced countries. China, of course, tops the growth rankings with a spectacular average growth rate of 10.3 per cent. Among the other BRICs (Brazil, Russia, India and China), India does very well (with an average growth rate of 7.8 per cent for the 20002007 period), Russia does well with an average growth rate of 6.6 per cent, but Brazil (with a growth rate of 3.3 per cent) does not. With a population growth rate of 1.2 per cent and the need to bring its still significant subsistence sector into the market, Brazil needs to double its growth rate in order to stop being the nation of the future. Have more internationally competitive nations grown more rapidly than less internationally competitive nations? As the Commission on Growth and Development pointed out in its Growth Report (2008), growth depends on many factors ranging from being open and globalised, having macroeconomic stability and good governments, as well as having flexible markets. This only confirmed what has been more or
Table 5. Average growth of real GDP, 20002007.
Country 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. China Estonia Lithuania India Ukraine Russia Jordan Romania Slovak Rep. Turkey Singapore Bulgaria Ireland Malaysia Peru Thailand Indonesia Philippines Growth 10.3 8.1 8.0 7.8 7.6 6.6 6.3 6.1 6.0 5.9 5.8 5.7 5.5 5.4 5.4 5.3 5.1 5.1 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. Country Colombia Croatia Korea Argentina Czech Rep. Venezuela Chile South Africa Greece Slovenia Luxembourg Poland Hungary New Zealand Spain Brazil Australia Israel Growth 4.9 4.8 4.7 4.7 4.6 4.6 4.5 4.3 4.3 4.3 4.2 4.1 4.0 3.4 3.4 3.3 3.2 3.2 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. Country Finland Sweden Canada United States United Kingdom Mexico Norway Austria Belgium Denmark France Swtizerland Japan Netherlands Germany Italy Portugal Growth 3.0 3.0 2.7 2.6 2.6 2.6 2.4 2.0 2.0 1.8 1.8 1.8 1.7 1.6 1.0 1.0 0.9

Source: World Bank (2009b).

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less generally known for a long time (see, for example, Salvatore, 1993; Grilli and Salvatore, 1994; Stern, 2002; and Salvatore, 2004). Table 6 shows the rank correlation between the international competitiveness and the average growth rate for all 53 countries being studied together and then for various sub-groups of nations. Of course, correlation does not show causality that is, that greater international competitiveness possibly leads to higher growth but neither does regression analysis. Table 6 shows that the correlation between the 2008 international competitiveness index and the average growth rate of real GDP over the 20002007 period is negative when calculated for all the 53 countries studied. But if we break the sample down in sub-groups, we get some interesting results. The RCC for the 22 advanced countries is 0.28, but for the 10 large advanced countries it is 0.33, while it is 0.12 for the 12 small advanced countries. The result is similar for emerging markets: the RCC 0:25 for all 31 emerging market economies, 0.27 for the 20 large emerging markets, but only 0.02 for the 11 small, emerging market economies. Separating the transition economies from the large and small emerging market economies (i.e., without double-counting) gives a RCC 0:01. Thus, we can conclude that international competitiveness has some positive correlation with growth in large countries (advanced and emerging) but not for small countries (advanced or emerging). With a small domestic market, small countries needed to be open or globalised from the very beginning of the development process if they wished to grow rapidly. That is, for small countries, openness or globalisation has always been a necessary (if not a sufficient) condition for rapid growth. If globalisation leads to faster growth in small countries, it may do so directly and through other domestic factors not captured by our international competitiveness index. The lack of correlation between international competitiveness and growth in small countries may be due to the fact that their growth rate does not exhibit much difference or variation. While not exactly addressing the question as to why there is practically a zero or even negative correlation between small countries level of international competitiveness
Table 6. Rank correlations between international competitiveness in 2008 and average growth or real GDP in 20002007.
Groups of Countries All Countries (53) All Advanced Economies (22) Large advanced economies (10) Small advanced economies (12) All Emerging Markets (31) Large emerging economies (20) Small emerging economies (11) Transition economies (12) Rank Correlation 0.35 0.28 0.33 0.12 0.25 0.27 0.02 0.01

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and their growth rate, the data presented next show that globalised economies (large and small) have been growing faster than non-globalised economies. 8. Globalisation and Growth Figure 1 shows the weighted yearly average per capita income at purchasing power parity (PPP) for advanced (rich) nations, globalised developing countries and nonglobalised developing countries for each decade since 1960. The data is from Dollar and Kraay (2001), updated by the author to the 20002007 period. Dollar and Kraay identified 24 globalised developing countries based on their trade opennness.4 The non-globalised developing countries include the worlds poorest countries. Figure 1 shows that advanced or rich nations experienced a declining growth rate for every decade since 1960. The opposite is true for globalised developing countries. Non-globalising developing countries grew fairly rapidly during the 1960s and 1970s, but then their growth rate collapsed in the 1980s and has risen since then but remains fairly low. If we consider the most recent period of rapid globalisation since the early 1980s, we find that globalised developing countries grew increasingly faster than advanced countries and sharply reduced their inequalities in relation to the former.

Source: Dollar and Kraay (2001). Updated to 20002007 using data from the World Bank (2009b).

Figure 1. Weighted yearly average real (PPP) per capita income growth in rich nations, globalisers and non-globalisers, 19602007.

4 The

24 globalised developing countries identified by Dollar and Kraay are: Argentina, Bangladesh, Brazil, China, Colombia, Costa Rica, Cte dIvoire, the Dominican Republic, Haiti, Hungary, India, Jamaica, Jordan, Malaysia, Mali, Mexico, Nepal, Nicaragua, Paraguay, the Philippines, Rwanda, Thailand, Uruguay and Zimbabwe.

Globalisation, International Competitiveness and Growth 31

On the other hand, the non-globalised developing countries grew less slowly than even the advanced countries (except for the 20002007 period) and so their relative inequalities increased vis--vis the other two groups of countries. Thus, globalisation seems to be strongly associated with higher growth in globalized developing countries during the most recent period of rapid globalisation. Nonglobalised developed countries grew faster than the other two groups of countries during the 1960s and 1970s because when starting from a very low level of income, a nation can grow rapidly by mobilising resources (as in the case of Russia in the former Soviet Union), but as development proceeds, efficiency, openness and a market economy become more and more crucial to continued rapid growth. Non-market economies did not globalise and grew very slowly during the 1980s and 1990s. They only started growing faster when they opened up to the world economy and moved toward a market economy. If the nation did not open its economy and globalise and if it did not restructure its economy to move toward a market allocation of resources, its efficiency and international competitiveness remained low, and so did its growth.

9. Conclusions Globalisation is important because it increases productivity; it is inevitable because nations and their firms cannot hide from it. The more globalised economies are usually more internationally competitive than less globalised ones. More internationally competitive countries also tend to grow faster than less internationally competitive ones. But this seems to be true only for large countries. For small, highly globalised economies, growth seems to depend mostly on other internal factors not directly captured by the competitiveness index. References
Bhagwati, J (2004). In Defense of Globalization. NY: Oxford University Press. Commission on Growth and Development (2008). The Growth Report: Strategies for Sustained Growth and Inclusive Development. World Bank, Washington, D.C. Dollar, D and A Kraay (2001). Growth is good for the poor. Policy Research Working Paper 2587. World Bank, Washington, DC. Grilli, E and D Salvatore (1994). Economic Development. Westport, Connecticut: Greenwood Press. IMD (2008). World Competitiveness Yearbook. IMD, Lausanne, Switzerland. IMD (2009). World Competitiveness Yearbook. IMD, Lausanne, Switzerland. KOF Index of Globalization (2009). http://globalization.kof.ethz.ch. Krugman, P (1994). Competitiveness: A dangerous obsession. Foreign Affairs 73(2), 2844. OECD (2009). Economic Outlook 85. Salvatore, D (1993). Protectionism and World Welfare. NY: Cambridge University Press. Salvatore, D (2004). International trade and economic development. Institutions and Economic Development, 6, 543551.

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Salvatore, D (2010). Managerial Economics in a Global Economy, 7th ed. NY: Oxford University Press. Stern, N (2002). A Strategy for Development. World Bank, Washington, DC. Stiglitz, J (2002). Globalization and Its Discontents. New York: W.W. Norton. World Bank (2009a). Doing Business in 2009. NY: Oxford University Press. World Bank (2009b). World Development Indicators. World Bank, Washington, DC.