Does Globalization Affect Growth? Evidence
from a new Index of Globalization
Axel Dreher
Research Paper Series
Thurgauer Wirtschaftsinstitut
No. 6 april 2005
Axel Dreher
dreher@twi-kreuzlingen.ch
TWI and University of Konstanz
The paper presents an index of globalization covering its three main dimensions: economic integration,
social integration, and political integration. Using panel data for 123 countries in 1970-2000 it is
analyzed empirically whether the overall index of globalization as well as sub-indexes constructed to
measure the single dimensions affect economic growth. As the results show, globalization indeed
promotes growth. The dimensions most robustly related with growth refer to actual economic
flows and restrictions in developed countries. Although less robustly, information flows also
promote growth whereas political integration has no effect.
The author thanks Bernhard Boockmann, Christos Kotsogiannis, Quan Li, Verena Liessem, Fulvio
Mulatero, Torsten Saadma and seminar participants at the ENTER Jamboree Meeting 2003, the Passau
Workshop ‘Internationale Wirtschaftsbeziehungen’, the 6th Annual Conference on Global Economic Analysis,
the European Economic Association (2003), the Verein fuer Socialpolitik (2003) and the universities
of Goettingen, Universidad de las Americas and Exeter for valuable comments.
Does Globalization Affect Growth? Evidence
from a new Index of Globalization
april 2005
ABSTRACT
JEL: F02, F43, C82, H77, O57
Address: Hauptstraße 90, 8280 Kreuzlingen, Switzerland
Keywords: Measurement of Globalization, Growth
1
1. Introduction
Many non-economists expect the costs associated with globalization to exceed its
benefits. Fears of an erosion of social and environmental standards, high poverty rates in less
developed countries and ever higher frequencies of financial crisis resulted in protests like
that in Seattle in 1999. Quite the contrary, most economists strongly believe the net effect of
globalization to be positive. Apart from economic theory, this optimism is supported by
empirical studies as well. To measure globalization, most of these studies employed proxies
like trade and capital flows or openness to these flows. Using these proxies, Beer and Boswell
(2001) examined the consequences of globalization on inequality. Li and Reuveny (2003)
analyzed their effects on democracy. As Heinemann (2000) shows, more globalized countries
have lower increases in government outlays and taxes. Vaubel (1999) found them to have
lower government consumption.
The effects of globalization on growth have also been frequently analyzed with these
measures. Until most recently, however, most studies examined them employing cross
sections only. For example, Chanda (2001) uses an index of capital account openness to show
that more developing countries have suffered from globalization than not, while Rodrik
(1998) as well as Alesina et al. (1994) found no effect of capital account openness on
economic growth.
1
With respect to foreign direct investment (fdi) there is evidence of a
positive growth-effect in countries which are sufficiently rich (Blomström et al. 1992) and a
negative one in low income countries (Garrett 2001).
2
Among others, Dollar (1992) analyzed
the relationship between economic performance and openness to trade, Frankel and Romer
(1996) those between growth and actual flows. Their results show that both openness to trade
and actual trade flows are robustly related to growth. All of these studies present, however,
only cross sectional estimates. Moreover, they do not adequately control for endogeneity.
Their results might therefore reflect unobserved characteristics which do not vary over time
instead of being the consequences of globalization or might reflect reverse causality.
3
Aware of the shortcomings of the cross-section approach, some recent studies use
panel data to examine the relationship between some dimensions of globalization and growth.
Among them, Dollar and Kraay (2001) found that an increase in trade flows and foreign direct
investment resulted in higher growth rates. Greenaway et al. (1999) also report a strong
relationship between trade and growth. With respect to fdi, Borensztein et al. (1998) provide
1
Edison et al. (2002) summarize the literature on capital account liberalization and economic performance.
2
Studies examining the effects of foreign direct investment on countries’ growth rates have been summarized by
Durham (2000).
2
evidence of a positive growth-effect – given a minimum threshold stock of human capital.
Carkovic and Levine (2002), to the contrary, do not find a robust influence of foreign direct
investment on growth. A detailed analysis of the impact of several indicators of financial
integration and growth is provided by Edison et al. (2002a). Their results show that no robust
relationship exists.
While those studies provide very detailed analysis of individual sub-dimensions of
globalization, none of them examines the consequences of globalization on economic growth
in greater detail.
4
The effects reported might therefore appear only because other important
aspects of globalization are omitted from the regressions. Most dimensions of globalization
are strongly related to each other, so including them separately in a regression induces
collinearity problems. Excluding those dimensions which are not the primary focus of the
analysis – the method preferred in the literature – can, however, severely bias the coefficients
estimated. Moreover, it is not obvious that all dimensions of globalization affect economic
performance in the same direction. Since the overall effects of globalization are what matters,
the lack of an overall measure and an analysis of its relationship with growth is a serious
omission. The only study trying to measure overall globalization is A.T. Kearney/Foreign
Policy Magazine (2002). They calculated a globalization ranking using various subgroups.
Their ranking is, however, only available for three years. Moreover, important dimensions of
globalization are omitted. The measure can therefore not be used in an empirical
investigation.
This paper does not try to give specific policy advice. It tries to contribute to the
literature in examining the overall effects of several dimensions of globalization on growth
empirically in a time-series cross-section context. Since many of these dimensions are highly
correlated, it is impossible to include them all individually in one regression. Therefore, the
paper develops an index of globalization covering its most important aspects: economic
integration, social integration and political integration. To measure these dimensions, 23
variables have been combined to three sub-indexes using an objective statistical method. The
sub-indexes are in turn aggregated into one single index of globalization.
The remainder of the paper is structured as follows. First, I present the methodology
and rationale of the index and present some results. I proceed by analyzing empirically the
relationship between this index and economic growth. The final section draws conclusions.
3
Dollar and Kraay (2001: 13) summarize criticisms of this approach.
4
For a detailed analysis of the several dimensions of globalization on economic policies in the OECD countries
see Dreher (2005).
3
2. Methodology and Rationale of the Index
Throughout the paper globalization is meant to describe the process of creating
networks of connections among actors at multicontinental distances, mediated through a
variety of flows including people, information and ideas, capital, and goods (Clark 2000: 86).
It is a process that erodes national boundaries, integrates national economies, cultures,
technologies and governance, and produces complex relations of mutual interdependence
(Norris 2000: 155). Among others Keohane and Nye (2000: 4) highlight the following
dimensions of globalization:
- economic globalization, characterized as long distance flows of goods, capital and
services as well as information and perceptions that accompany market exchanges,
- political globalization, characterized by a diffusion of government policies and
- social globalization, expressed as the spread of ideas, information, images, and
people.
To measure the degree of economic globalization, two indexes are constructed. One index
measures actual flows: trade, foreign direct investment and portfolio investment (all in percent
of GDP). Income payments to foreign nationals and capital employed (in percent of GDP) are
included to proxy for the extent a country employs foreign people and capital in its production
processes. The second index measures restrictions on trade and capital using hidden import
barriers, mean tariff rates, taxes on international trade (as a share of current revenue) and an
index of capital controls. Given a certain level of trade, a country with higher revenues from
trade taxes is less globalized. To proxy restrictions of the capital account most previous
studies employed rather crude measures.
5
Rodrik (1998) used the proportion of years for
which the capital account was free of restrictions. Alesina et al. (1994) coded a 0-1 dummy
variable. Since openness is not a yes-or-no question – it can and does occur in differing
degrees in different countries – I employ an index constructed by Gwartney and Lawson
(2002). It is based on the IMF’s Annual Report on Exchange Arrangements and Exchange
Restrictions and includes 13 different types of capital controls. The index is constructed by
subtracting the number of restriction from 13 and multiplying the result by 10.
The data on actual flows and on restrictions are aggregated into two sub-indexes and
one overall index as described below. All variables, their precise definitions and data sources
are listed in the appendix.
5
An exception is Garrett (2001) who employs a ten scale indicator constructed by Brune (2000). He does,
however, only report cross-section results.
