globalization analysis essay

Globalization: An Economic Perspective Essay

Introduction, the concept of globalization, causes of globalization, critique of globalization, trade and redistribution, income inequality, positive effects of globalization.

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Globalization is a hotly debated phenomenon associated with a slew of theories purporting to account for its adverse, negligent, or beneficial effects on a wide range of topics such as earnings inequality, standards of living, environment, cultures, societies, job security, and domestic production potential among others. Globalization refers to the tendency of capital, goods, services, workers, innovations, and information to move across borders, thereby increasing levels of integration in the world and changing patterns of economic growth. Unfortunately, people’s understanding of the link between the trend and many aspects associated with it is still highly partial.

Therefore, both the resistance and championing of globalization has taken shape at cultural and governmental levels. In the late 1980s, many Americans were extremely optimistic about the phenomenon. 1 However, in the early 1990s, when the World Trade Organization was established in an attempt to facilitate economic liberalization, the anti-globalization movement emerged. 2

Those who oppose globalization often complain about the widening economic gap between countries, rampant materialism, deterioration of democracy, job losses, and unfair working conditions among others. 3 Proponents of globalization argue that its benefits include, but are not limited to, increased competition, lowering consumer prices, economic growth, the proliferation of democracy, cultural enrichment, technological advancement, and dissemination of information. 4

This paper aims to explore numerous characteristics of globalization, its points of contestation, and acclaim. The paper attempts to show that both drawbacks and benefits of the international flow of knowledge, investment funds, and labor depend on what aspects of the phenomenon are examined.

Given the vague status of the term globalization, it is necessary to define what it is and what it is not before proceeding with the exploration of the phenomenon. The term, which was popularized by Levitt in 1983, should not be confused with the concept of globalism that refers to “aspirations for an end state of affairs wherein values are shared by or about all the world’s five billion people.” 5 Neither does globalization describe the world in which states engage in interaction with each other without losing their autonomy. For example, the existence of the European Union, which is a supranational project, requires the partial dissolution of autonomy of its member states; therefore, the union exhibits characteristics of both internationalization and denationalization. 6

It means that globalization is not a project that seeks to dismantle the nation-state system. Also, the creation of a supra-national government cannot be considered a part of the process commonly referred to as globalization. Finally, the global development, which has been instigated by the policies aimed at the deregulation of financial transactions as well as the elimination of some restrictions on international trade, does not aim at equitable dissemination of its costs and benefits among participating parties. After all, free trade cannot be equated with fair trade. 7 It is hard to deny that this point automatically renders some criticism of globalization invalid.

It can be established with a high level of certainty that globalization is a transformational process. Furthermore, this process is closely linked with the concepts of internationalization and regionalization. The most interesting part of this connection is that strengthening of national activities on both international and regional levels can result in the promotion of globalization. It has to do with the fact that internationalization and regionalization “facilitate a decoupling from the national arena.” 8 Therefore, it can be argued that globalization is an inevitable feature of the modern world.

After having established what globalization is, it is necessary to consider its key causes. The following factors have often been named as major contributors to the promotion of globalization: neoliberalism, financial liberalization, liberalization of capital transactions, the New Industrial Revolution, and the collapse of the Soviet Union. 9 Neoliberalism has been pointed to as the main factor responsible for the evolution of globalization. The concept refers to the deliberate attempt of governments to liberalize capital movement, reduce spending, and promote laissez-faire economics. The movement aims to eliminate government interference with the market and opposes discretionary economic policies.

Also, distinguished scholars of neoliberalism such as Hayek and Friedman have wanted to get rid of as many regulations as possible, thereby showing their respect for individual freedom. 10 Both Thatcher and Reagan have shown their support for what they have considered being a social philosophy, thereby helping neoliberalism to enter mainstream economic thought. Financial liberalization, the aim of which is to dismantle international regulation has helped to “widen the scope for procurement of capital and investment.” 11 Financial liberalization activities have resulted in the dilution of the Glass-Steagall Act. Furthermore, the movement has led to the emergence of hedge funds and private equity funds as well as a dramatic increase in the use of securities.

Liberalization of capital transactions is a movement that was initiated by the International Monetary Fund (IMF) in the 1990s after the collapse of the Breton Woods system. 12 Through foreign direct investment, the movement has stimulated economic development in Brazil and India. It should be mentioned that liberalized capital markets can result in numerous inefficiencies stemming from asymmetric information problems. The New Industrial Revolution is another cause of globalization. The revolution started in the 1980s with the creation of the IT industry. 13 The rapid growth of the industry has offered unique possibilities for outsourcing. The collapse of the Soviet Union was another major stimulus for the evolution of globalization.

It is beyond the scope of this paper to take an integrated approach to analyze globalization. Therefore, while discussing the points of contention with globalization, it is necessary to omit the social and environmental implications of the process and instead focus on foreign trade and income inequality that often results in the emergence of political conflict and populist backlash.

The contentious nature of globalization stems from its redistributive implications. 14 The Stolper-Samuelson theorem, which stipulates that under the conditions of free-trade, in an economy with two products and two factors of production, a factor used for the production of importable goodwill inevitably undergoes a reduction of its earnings. 15 Therefore, to anyone familiar with the theory, it is clear that under competitive conditions, trade liberalization always results in losses of varying magnitude. Furthermore, when it comes to the magnitude of the redistributive effects of the liberalization of trade, it always increases with the dissolution of trade barriers, thereby leading to smaller efficiency gains.

The distributional predictions of the Stolper-Samuelson theorem can be evidenced in the consequences of the North American Free Trade Agreement (NAFTA) for the US labor markets. Hakobyan and McLaren, who have measured the effects of the agreement by analyzing industry-specific census data, argue that American regions without tariff protection have experienced a steeper decline in wages than those localities that have been protected by tariffs. 16 Furthermore, the authors point to the fact that unskilled workers have suffered the most—the growth of their wages has reduced by 8 percent. 17 When it comes to the industry effect of the agreement, unprotected industries exposed to the trade with Mexico have contracted by 17 percent. 18

Trade-poverty nexus has often been presented by opponents of globalization. This connection can be subdivided into three major components: trade-induced growth, trade-induce shifts in prices and income, and trade-induced patterns of employment. 19 There is no disputing the fact that open markets facilitate the spread of information, new technologies, and capital goods, which results in the emergence of the economies of scale and increased competitiveness. As a result of the more effective distribution of resources, poverty in urban areas tends to increase. Castilho, Menendez, and Sztulman who have looked at the effects of agricultural trade across Brazilian states in the period from 1987 to 2005 argue that trade liberalization favors the growth in poverty in rural areas. 20 Furthermore, the authors argue that the ever-increasing integration of Brazilian states into world markets has resulted in the rise in poverty levels. 21

A cross-country comparison of income inequality performed with the help of Gini indices shows that globalization has resulted in substantial income differences on both regional and country levels. According to Jaumotte, Lall, and Papageorgiou, “while inequality has risen in developing Asia, emerging Europe, Latin America, the Newly Industrialized Economies, and the advanced economies over the past two decades, it has declined in some sub-Saharan African countries.” 22 The authors state that among the largest world’s economies, income inequality has declined only in France, whereas India and China have experienced a sharp increase in the disparities of the income distribution. 23 It means that during the recent phases of globalization, most countries have witnessed a widening gap between the incomes of their citizens.

Proponents of globalization argue that even though the process has not helped to eliminate the problem of income inequality in the developed nations, it has succeeded in reducing income discrepancies between citizens of the developing nations. Globalization has facilitated foreign direct investment (FDI), thereby shifting the pattern of the income distribution among different economies. Numerous studies point to the fact that increasing flows of FDI into nations such as India and China have led to the reduction of inequality gaps in terms of income. 24 It has to do with the fact that FDI flows lead to “a general rise in the capital quantity in the developing countries, which subsequently means that the marginal physical product of labor increases” thereby raising both real and nominal wages. 25

Another point habitually discussed by proponents of globalization is the decrease in the number of people living below the poverty line. According to Sang-Hyup, who investigated the economic benefits of globalization, there has been a reduction of people living on less than $1.25 per day in the period from 1980 to 2005. 26 Furthermore, the developing countries have experienced steeper GDP growth rates than the developed countries since 1996. 27 Therefore, it can be argued that despite substantial differences in sizes of economies between countries affected by globalization, more parties have partaken in the benefits of the process than those that have only experienced its costs. Also, the reduction in global poverty levels suggests that globalization has been a positive force in the lives of extremely poor people in the world.

The promotion of economic growth is another positive effect of globalization. A study on the economic development of the Organization of Islamic Cooperation (OIC) shows that globalization has a positive net effect on growth. 28 The authors of the study attribute this effect of globalization to the increase in the size of global markets as well as a more efficient allocation of resources that allows OIC countries to specialize in economic activities in which they have a comparative advantage. 29

Moreover, the researchers claim that a rapid spread of knowledge has led to increased productivity and technological innovation. 30 It can be argued that the implementation of new technological solutions requires higher levels of spending in the development of human capital, which directly promotes economic growth. Also, the information and financial openness inevitably lead to the creation of stronger financial systems that allow developing countries to benefit from globalization.

Greater mobility of capital, information, workers, goods, and services is linked by proponents of the phenomenon with a positive effect on human well-being. The multi-dimensional effects of globalization in the period from 1970 to 2010 have been explored by Mukherjee and Krieckhaus 31 who argue that “on balance, all forms of globalization positively affect well-being.” Similarly to other proponents of globalization, the authors claim that international treaties lead to the reduction of a conflict whose negative effects diminish human well-being. 32

Furthermore, Mukherjee and Krieckhaus espouse the belief that the IMF and World Bank are not responsible for the poor economic performance of the countries that have been influenced by these international bodies. 33 It is hard to disagree with authors in that the existence of international programs such as the United Nations Development Program (UNDP) and the United Nations Children’s Fund (UNICEF) helps to decrease the amount of misery in the world, thereby improving human well-being.

Globalization is a process that attracts extremely contradictory perspectives. The discussion of the benefits of globalization in this paper has not been sidetracked by the analysis of extremely important but non-economic issues such as climate change, cultural appropriation, and human rights. Instead, the paper has focused on the reshaping of the patterns of global trade, income inequality, economic growth, and poverty.

It can be argued that despite a great deal of emphasis on the unequal distribution of benefits of globalization among participating parties that is often pointed to as a major drawback of the phenomenon by its opponents, the reduction in the prices of goods have benefited consumers across the world. However, it is impossible to deny that during the recent phases of globalization, most developed countries have experienced a widening gap between the incomes of their citizens. This is a negative effect of globalization, which has to be taken into account when assessing the impact of the process on the world economy.

Taking into consideration the fact that globalization is associated with economic growth, it can be argued that it improves the global economy. Furthermore, the process has facilitated the movement of labor across state borders, thereby helping workers to sell their skills in the areas of the world, which are the most appreciative of them. Other positive effects of globalization include, but are not limited to, increased competition, the proliferation of democracy, cultural enrichment, and dissemination of information. However, given many negative factors associated with the phenomenon, it can be concluded that globalization has both positive and negative effects on the world’s economy.

Castilho Marta, Marta Menéndez, and Aude Sztulman “Trade Liberalization, Inequality, and Poverty in Brazilian States” World Development, August 2 nd , 2012, pp. 821–835.

De la Dehesa Guillermo, What do we Know About Globalization: Issues of Poverty and Income Distribution, Carlton, 2007, pp. 112-115.

Dignam Alan and Michel Galanis, The Globalization of Corporate Governance, London, 2009, p. 90.

Ekmekcioglu Ercan “The Effects of Globalization on World Income Inequality” International Journal of Academic Research in Business and Social Sciences, April 13 th , 2012, pp. 140-145.

Hany Makhlouf “Facets of Globalization” International Journal of Business and Social Science, January 2 nd , 2014, pp. 59-64.

Hirai Toshiaki, Capitalism and the World Economy: The Light and Shadow of Globalization, Abington, 2015, p. 9.

Hirst Paul, Grahame Thompson, and Simon Bromley, Globalization in Question, Cambridge, 2009, pp. 24-27.

Jaumotte Florence, Subir Lall, and Chris Papageorgiou “Rising Income Inequality: Technology, or Trade and Financial Globalization?” IMF Economic Review, May 21 st , 2013, pp. 271-309.

Mukherjee Nisha and Jonathan Krieckhaus “Globalization and Human Well-Being” International Political Science Review, June 12 th , 2011, pp. 150-170.

“Pros and Cons of Globalization” InternationalRelations . Web.

Samimi Parisa and Hashem Jenatabadi “Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities” PLOS, April 10 th , 2014, 70-94.

Sang-Hyup Shin “A Study on the Economic Benefits of Globalization: Focusing on the Poverty and Inequality Between the Rich and the Poor” International Area Review, September 15 th , 2009, pp. 191-214.

Seay W. “The Birth of the World Economy and Finance.” Econ 491: Virginia Commonwealth University, Summer 2017.

Shushanik Hakobyan and John McLaren “Looking for Local Labor Market Effects of NAFTA” Review of Economics and Statistics, October 16 th , 2016, pp. 728–741.

Willarts Barbara, Alberto Garrido, and Ramon Liamas, Water for Food Security and Well-Being in Latin America and the Caribean: Social and Environmental Implications for a Globalized Economy, Oxon, 2014, p. 121-124.

• “Pros and Cons of Globalization” international relations. Web.
• Alan Dignam and Michel Galanis, The Globalization of Corporate Governance, London, 2009, p. 90.
• W.Seay. “The Birth of the World Economy and Finance.” Econ 491: Virginia Commonwealth University, Summer 2017.
• Alan Dignam and Michel Galanis, The Globalization of Corporate, p. xiv.
• Toshiaki Hirai, Capitalism and the World Economy: The Light and Shadow of Globalization, Abington, 2015, p. 9.
• Toshiaki Hirai, Capitalism, p. 9.
• Guillermo de la Dehesa, What do we Know About Globalization: Issues of Poverty and Income Distribution, Carlton, 2007, pp. 112-115.
• Guillermo de la Dehesa, What do we Know, pp. 112-115.
• Paul Hirst, Grahame Thompson, and Simon Bromley, Globalization in Question, Cambridge, 2009, pp. 24-27.
• Hakobyan Shushanik and John McLaren “Looking for Local Labor Market Effects of NAFTA” Review of Economics and Statistics, October 16 th , 2016, pp. 728–741.
• Barbara Willards, Alberto Garrido, and Ramon Llamas, Water for Food Security and Well-Being in Latin America and the Caribean: Social and Environmental Implications for a Globalized Economy, Oxon, 2014, p. 121-124.
• Marta Castilho, Marta Menéndez, and Aude Sztulman “Trade Liberalization, Inequality, and Poverty in the Brazilian States” World Development, August 2 nd , 2012, pp. 821–835.
• Florence Jaumotte, Subir Lall, and Chris Papageorgiou “Rising Income Inequality: Technology, or Trade and Financial Globalization?” IMF Economic Review, May 21 st , 2013, pp. 271-309.
• Florence Jaumotte, Subir Lall, and Chris Papageorgiou “Rising Income Inequality,” pp. 271-309.
• Ercan Ekmekcioglu “The Effects of Globalization on World Income Inequality” International Journal of Academic Research in Business and Social Sciences, April 13 th , 2012, pp. 140-145.
• Shin Sang-Hyup “A Study on the Economic Benefits of Globalization: Focusing on the Poverty and Inequality Between the Rich and the Poor” International Area Review, September 15 th , 2009, pp. 191-214.
• Parisa Samimi and Hashem Jenatabadi “Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities” PLOS, April 10 th , 2014, 70-94.
• Nisha Mukherjee and Jonathan Krieckhaus “Globalization and Human Well-Being” International Political Science Review, June 12 th , 2011, pp. 150-170.
• Ibid., 156.
• Nisha Mukherjee and Jonathan Krieckhaus “Globalization,” pp. 150-170.
• Chicago (A-D)
• Chicago (N-B)

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Peer-reviewed

Research Article

Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities

* E-mail: [email protected]

Affiliations Faculty of Management, Universiti Teknologi Malaysia (UTM), Johor, Malaysia, Department of Management, Mobarakeh Branch, Islamic Azad University, Isfahan, Iran

Affiliation Applied Statistics Department, Economics and Administration Faculty, University of Malaya, Kuala Lumpur, Malaysia

• Parisa Samimi, 
• Hashem Salarzadeh Jenatabadi

• Published: April 10, 2014
• https://doi.org/10.1371/journal.pone.0087824
• Reader Comments

This study was carried out to investigate the effect of economic globalization on economic growth in OIC countries. Furthermore, the study examined the effect of complementary policies on the growth effect of globalization. It also investigated whether the growth effect of globalization depends on the income level of countries. Utilizing the generalized method of moments (GMM) estimator within the framework of a dynamic panel data approach, we provide evidence which suggests that economic globalization has statistically significant impact on economic growth in OIC countries. The results indicate that this positive effect is increased in the countries with better-educated workers and well-developed financial systems. Our finding shows that the effect of economic globalization also depends on the country’s level of income. High and middle-income countries benefit from globalization whereas low-income countries do not gain from it. In fact, the countries should receive the appropriate income level to be benefited from globalization. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

Citation: Samimi P, Jenatabadi HS (2014) Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities. PLoS ONE 9(4): e87824. https://doi.org/10.1371/journal.pone.0087824

Editor: Rodrigo Huerta-Quintanilla, Cinvestav-Merida, Mexico

Received: November 5, 2013; Accepted: January 2, 2014; Published: April 10, 2014

Copyright: © 2014 Samimi, Jenatabadi. This is an open-access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Funding: The study is supported by the Ministry of Higher Education of Malaysia, Malaysian International Scholarship (MIS). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

Competing interests: The authors have declared that no competing interests exist.

Introduction

Globalization, as a complicated process, is not a new phenomenon and our world has experienced its effects on different aspects of lives such as economical, social, environmental and political from many years ago [1] – [4] . Economic globalization includes flows of goods and services across borders, international capital flows, reduction in tariffs and trade barriers, immigration, and the spread of technology, and knowledge beyond borders. It is source of much debate and conflict like any source of great power.

The broad effects of globalization on different aspects of life grab a great deal of attention over the past three decades. As countries, especially developing countries are speeding up their openness in recent years the concern about globalization and its different effects on economic growth, poverty, inequality, environment and cultural dominance are increased. As a significant subset of the developing world, Organization of Islamic Cooperation (OIC) countries are also faced by opportunities and costs of globalization. Figure 1 shows the upward trend of economic globalization among different income group of OIC countries.

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https://doi.org/10.1371/journal.pone.0087824.g001

Although OICs are rich in natural resources, these resources were not being used efficiently. It seems that finding new ways to use the OICs economic capacity more efficiently are important and necessary for them to improve their economic situation in the world. Among the areas where globalization is thought, the link between economic growth and globalization has been become focus of attention by many researchers. Improving economic growth is the aim of policy makers as it shows the success of nations. Due to the increasing trend of globalization, finding the effect of globalization on economic growth is prominent.

The net effect of globalization on economic growth remains puzzling since previous empirical analysis did not support the existent of a systematic positive or negative impact of globalization on growth. Most of these studies suffer from econometrics shortcoming, narrow definition of globalization and small number of countries. The effect of economic globalization on the economic growth in OICs is also ambiguous. Existing empirical studies have not indicated the positive or negative impact of globalization in OICs. The relationship between economic globalization and economic growth is important especially for economic policies.

Recently, researchers have claimed that the growth effects of globalization depend on the economic structure of the countries during the process of globalization. The impact of globalization on economic growth of countries also could be changed by the set of complementary policies such as improvement in human capital and financial system. In fact, globalization by itself does not increase or decrease economic growth. The effect of complementary policies is very important as it helps countries to be successful in globalization process.

In this paper, we examine the relationship between economic globalization and growth in panel of selected OIC countries over the period 1980–2008. Furthermore, we would explore whether the growth effects of economic globalization depend on the set of complementary policies and income level of OIC countries.

The paper is organized as follows. The next section consists of a review of relevant studies on the impact of globalization on growth. Afterward the model specification is described. It is followed by the methodology of this study as well as the data sets that are utilized in the estimation of the model and the empirical strategy. Then, the econometric results are reported and discussed. The last section summarizes and concludes the paper with important issues on policy implications.

Literature Review

The relationship between globalization and growth is a heated and highly debated topic on the growth and development literature. Yet, this issue is far from being resolved. Theoretical growth studies report at best a contradictory and inconclusive discussion on the relationship between globalization and growth. Some of the studies found positive the effect of globalization on growth through effective allocation of domestic resources, diffusion of technology, improvement in factor productivity and augmentation of capital [5] , [6] . In contrast, others argued that globalization has harmful effect on growth in countries with weak institutions and political instability and in countries, which specialized in ineffective activities in the process of globalization [5] , [7] , [8] .

Given the conflicting theoretical views, many studies have been empirically examined the impact of the globalization on economic growth in developed and developing countries. Generally, the literature on the globalization-economic growth nexus provides at least three schools of thought. First, many studies support the idea that globalization accentuates economic growth [9] – [19] . Pioneering early studies include Dollar [9] , Sachs et al. [15] and Edwards [11] , who examined the impact of trade openness by using different index on economic growth. The findings of these studies implied that openness is associated with more rapid growth.

In 2006, Dreher introduced a new comprehensive index of globalization, KOF, to examine the impact of globalization on growth in an unbalanced dynamic panel of 123 countries between 1970 and 2000. The overall result showed that globalization promotes economic growth. The economic and social dimensions have positive impact on growth whereas political dimension has no effect on growth. The robustness of the results of Dreher [19] is approved by Rao and Vadlamannati [20] which use KOF and examine its impact on growth rate of 21 African countries during 1970–2005. The positive effect of globalization on economic growth is also confirmed by the extreme bounds analysis. The result indicated that the positive effect of globalization on growth is larger than the effect of investment on growth.

The second school of thought, which supported by some scholars such as Alesina et al. [21] , Rodrik [22] and Rodriguez and Rodrik [23] , has been more reserve in supporting the globalization-led growth nexus. Rodriguez and Rodrik [23] challenged the robustness of Dollar (1992), Sachs, Warner et al. (1995) and Edwards [11] studies. They believed that weak evidence support the idea of positive relationship between openness and growth. They mentioned the lack of control for some prominent growth indicators as well as using incomprehensive trade openness index as shortcomings of these works. Warner [24] refuted the results of Rodriguez and Rodrik (2000). He mentioned that Rodriguez and Rodrik (2000) used an uncommon index to measure trade restriction (tariffs revenues divided by imports). Warner (2003) explained that they ignored all other barriers on trade and suggested using only the tariffs and quotas of textbook trade policy to measure trade restriction in countries.

Krugman [25] strongly disagreed with the argument that international financial integration is a major engine of economic development. This is because capital is not an important factor to increase economic development and the large flows of capital from rich to poor countries have never occurred. Therefore, developing countries are unlikely to increase economic growth through financial openness. Levine [26] was more optimistic about the impact of financial liberalization than Krugman. He concluded, based on theory and empirical evidences, that the domestic financial system has a prominent effect on economic growth through boosting total factor productivity. The factors that improve the functioning of domestic financial markets and banks like financial integration can stimulate improvements in resource allocation and boost economic growth.

The third school of thoughts covers the studies that found nonlinear relationship between globalization and growth with emphasis on the effect of complementary policies. Borensztein, De Gregorio et al. (1998) investigated the impact of FDI on economic growth in a cross-country framework by developing a model of endogenous growth to examine the role of FDI in the economic growth in developing countries. They found that FDI, which is measured by the fraction of products produced by foreign firms in the total number of products, reduces the costs of introducing new varieties of capital goods, thus increasing the rate at which new capital goods are introduced. The results showed a strong complementary effect between stock of human capital and FDI to enhance economic growth. They interpreted this finding with the observation that the advanced technology, brought by FDI, increases the growth rate of host economy when the country has sufficient level of human capital. In this situation, the FDI is more productive than domestic investment.

Calderón and Poggio [27] examined the structural factors that may have impact on growth effect of trade openness. The growth benefits of rising trade openness are conditional on the level of progress in structural areas including education, innovation, infrastructure, institutions, the regulatory framework, and financial development. Indeed, they found that the lack of progress in these areas could restrict the potential benefits of trade openness. Chang et al. [28] found that the growth effects of openness may be significantly improved when the investment in human capital is stronger, financial markets are deeper, price inflation is lower, and public infrastructure is more readily available. Gu and Dong [29] emphasized that the harmful or useful growth effect of financial globalization heavily depends on the level of financial development of economies. In fact, if financial openness happens without any improvement in the financial system of countries, growth will replace by volatility.

However, the review of the empirical literature indicates that the impact of the economic globalization on economic growth is influenced by sample, econometric techniques, period specifications, observed and unobserved country-specific effects. Most of the literature in the field of globalization, concentrates on the effect of trade or foreign capital volume (de facto indices) on economic growth. The problem is that de facto indices do not proportionally capture trade and financial globalization policies. The rate of protections and tariff need to be accounted since they are policy based variables, capturing the severity of trade restrictions in a country. Therefore, globalization index should contain trade and capital restrictions as well as trade and capital volume. Thus, this paper avoids this problem by using a comprehensive index which called KOF [30] . The economic dimension of this index captures the volume and restriction of trade and capital flow of countries.

Despite the numerous studies, the effect of economic globalization on economic growth in OIC is still scarce. The results of recent studies on the effect of globalization in OICs are not significant, as they have not examined the impact of globalization by empirical model such as Zeinelabdin [31] and Dabour [32] . Those that used empirical model, investigated the effect of globalization for one country such as Ates [33] and Oyvat [34] , or did it for some OIC members in different groups such as East Asia by Guillaumin [35] or as group of developing countries by Haddad et al. [36] and Warner [24] . Therefore, the aim of this study is filling the gap in research devoted solely to investigate the effects of economic globalization on growth in selected OICs. In addition, the study will consider the impact of complimentary polices on the growth effects of globalization in selected OIC countries.

Model Specification

Methodology and Data

This paper applies the generalized method of moments (GMM) panel estimator first suggested by Anderson and Hsiao [38] and later developed further by Arellano and Bond [39] . This flexible method requires only weak assumption that makes it one of the most widely used econometric techniques especially in growth studies. The dynamic GMM procedure is as follow: first, to eliminate the individual effect form dynamic growth model, the method takes differences. Then, it instruments the right hand side variables by using their lagged values. The last step is to eliminate the inconsistency arising from the endogeneity of the explanatory variables.

The consistency of the GMM estimator depends on two specification tests. The first is a Sargan test of over-identifying restrictions, which tests the overall validity of the instruments. Failure to reject the null hypothesis gives support to the model. The second test examines the null hypothesis that the error term is not serially correlated.

The GMM can be applied in one- or two-step variants. The one-step estimators use weighting matrices that are independent of estimated parameters, whereas the two-step GMM estimator uses the so-called optimal weighting matrices in which the moment conditions are weighted by a consistent estimate of their covariance matrix. However, the use of the two-step estimator in small samples, as in our study, has problem derived from proliferation of instruments. Furthermore, the estimated standard errors of the two-step GMM estimator tend to be small. Consequently, this paper employs the one-step GMM estimator.

In the specification, year dummies are used as instrument variable because other regressors are not strictly exogenous. The maximum lags length of independent variable which used as instrument is 2 to select the optimal lag, the AR(1) and AR(2) statistics are employed. There is convincing evidence that too many moment conditions introduce bias while increasing efficiency. It is, therefore, suggested that a subset of these moment conditions can be used to take advantage of the trade-off between the reduction in bias and the loss in efficiency. We restrict the moment conditions to a maximum of two lags on the dependent variable.

Data and Empirical Strategy

We estimated Eq. (1) using the GMM estimator based on a panel of 33 OIC countries. Table S1 in File S1 lists the countries and their income groups in the sample. The choice of countries selected for this study is primarily dictated by availability of reliable data over the sample period among all OIC countries. The panel covers the period 1980–2008 and is unbalanced. Following [40] , we use annual data in order to maximize sample size and to identify the parameters of interest more precisely. In fact, averaging out data removes useful variation from the data, which could help to identify the parameters of interest with more precision.

The dependent variable in our sample is logged per capita real GDP, using the purchasing power parity (PPP) exchange rates and is obtained from the Penn World Table (PWT 7.0). The economic dimension of KOF index is derived from Dreher et al. [41] . We use some other variables, along with economic globalization to control other factors influenced economic growth. Table S2 in File S2 shows the variables, their proxies and source that they obtain.

We relied on the three main approaches to capture the effects of economic globalization on economic growth in OIC countries. The first one is the baseline specification (Eq. (1)) which estimates the effect of economic globalization on economic growth.

The second approach is to examine whether the effect of globalization on growth depends on the complementary policies in the form of level of human capital and financial development. To test, the interactions of economic globalization and financial development (KOF*FD) and economic globalization and human capital (KOF*HCS) are included as additional explanatory variables, apart from the standard variables used in the growth equation. The KOF, HCS and FD are included in the model individually as well for two reasons. First, the significance of the interaction term may be the result of the omission of these variables by themselves. Thus, in that way, it can be tested jointly whether these variables affect growth by themselves or through the interaction term. Second, to ensure that the interaction term did not proxy for KOF, HCS or FD, these variables were included in the regression independently.

In the third approach, in order to study the role of income level of countries on the growth effect of globalization, the countries are split based on income level. Accordingly, countries were classified into three groups: high-income countries (3), middle-income (21) and low-income (9) countries. Next, dummy variables were created for high-income (Dum 3), middle-income (Dum 2) and low-income (Dum 1) groups. Then interaction terms were created for dummy variables and KOF. These interactions will be added to the baseline specification.

Findings and Discussion

This section presents the empirical results of three approaches, based on the GMM -dynamic panel data; in Tables 1 – 3 . Table 1 presents a preliminary analysis on the effects of economic globalization on growth. Table 2 displays coefficient estimates obtained from the baseline specification, which used added two interaction terms of economic globalization and financial development and economic globalization and human capital. Table 3 reports the coefficients estimate from a specification that uses dummies to capture the impact of income level of OIC countries on the growth effect of globalization.

https://doi.org/10.1371/journal.pone.0087824.t001

https://doi.org/10.1371/journal.pone.0087824.t002

https://doi.org/10.1371/journal.pone.0087824.t003

The results in Table 1 indicate that economic globalization has positive impact on growth and the coefficient is significant at 1 percent level. The positive effect is consistent with the bulk of the existing empirical literature that support beneficial effect of globalization on economic growth [9] , [11] , [13] , [19] , [42] , [43] .

According to the theoretical literature, globalization enhances economic growth by allocating resources more efficiently as OIC countries that can be specialized in activities with comparative advantages. By increasing the size of markets through globalization, these countries can be benefited from economic of scale, lower cost of research and knowledge spillovers. It also augments capital in OICs as they provide a higher return to capital. It has raised productivity and innovation, supported the spread of knowledge and new technologies as the important factors in the process of development. The results also indicate that growth is enhanced by lower level of government expenditure, lower level of inflation, higher level of human capital, deeper financial development, more domestic investment and better institutions.

Table 2 represents that the coefficients on the interaction between the KOF, HCS and FD are statistically significant at 1% level and with the positive sign. The findings indicate that economic globalization not only directly promotes growth but also indirectly does via complementary reforms. On the other hand, the positive effect of economic globalization can be significantly enhanced if some complementary reforms in terms of human capital and financial development are undertaken.

In fact, the implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. However, countries with higher level of human capital can be better and faster to imitate and implement the transferred technologies. Besides, the financial openness brings along the knowledge and managerial for implementing the new technology. It can be helpful in improving the level of human capital in host countries. Moreover, the strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in developing countries. Overall, with higher level of human capital and stronger financial systems, the globalized countries benefit from the growth effect of globalization. The obtained results supported by previous studies in relative to financial and trade globalization such as [5] , [27] , [44] , [45] .

Table (3 ) shows that the estimated coefficients on KOF*dum3 and KOF*dum2 are statistically significant at the 5% level with positive sign. The KOF*dum1 is statistically significant with negative sign. It means that increase in economic globalization in high and middle-income countries boost economic growth but this effect is diverse for low-income countries. The reason might be related to economic structure of these countries that are not received to the initial condition necessary to be benefited from globalization. In fact, countries should be received to the appropriate income level to be benefited by globalization.

The diagnostic tests in tables 1 – 3 show that the estimated equation is free from simultaneity bias and second-order correlation. The results of Sargan test accept the null hypothesis that supports the validity of the instrument use in dynamic GMM.

Conclusions and Implications

Numerous researchers have investigated the impact of economic globalization on economic growth. Unfortunately, theoretical and the empirical literature have produced conflicting conclusions that need more investigation. The current study shed light on the growth effect of globalization by using a comprehensive index for globalization and applying a robust econometrics technique. Specifically, this paper assesses whether the growth effects of globalization depend on the complementary polices as well as income level of OIC countries.

Using a panel data of OIC countries over the 1980–2008 period, we draw three important conclusions from the empirical analysis. First, the coefficient measuring the effect of the economic globalization on growth was positive and significant, indicating that economic globalization affects economic growth of OIC countries in a positive way. Second, the positive effect of globalization on growth is increased in countries with higher level of human capital and deeper financial development. Finally, economic globalization does affect growth, whether the effect is beneficial depends on the level of income of each group. It means that economies should have some initial condition to be benefited from the positive effects of globalization. The results explain why some countries have been successful in globalizing world and others not.

The findings of our study suggest that public policies designed to integrate to the world might are not optimal for economic growth by itself. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

The policy implications of this study are relatively straightforward. Integrating to the global economy is only one part of the story. The other is how to benefits more from globalization. In this respect, the responsibility of policymakers is to improve the level of educated workers and strength of financial systems to get more opportunities from globalization. These economic policies are important not only in their own right, but also in helping developing countries to derive the benefits of globalization.

However, implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. In fact, countries with higher level of human capital can better and faster imitate and implement the transferred technologies. The higher level of human capital and certain skill of human capital determine whether technology is successfully absorbed across countries. This shows the importance of human capital in the success of countries in the globalizing world.

Financial openness in the form of FDI brings along the knowledge and managerial for implementing the new technology. It can be helpful in upgrading the level of human capital in host countries. Moreover, strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in OICs.

In addition, the results show that economic globalization does affect growth, whether the effect is beneficial depends on the level of income of countries. High and middle income countries benefit from globalization whereas low-income countries do not gain from it. As Birdsall [46] mentioned globalization is fundamentally asymmetric for poor countries, because their economic structure and markets are asymmetric. So, the risks of globalization hurt the poor more. The structure of the export of low-income countries heavily depends on primary commodity and natural resource which make them vulnerable to the global shocks.

The major research limitation of this study was the failure to collect data for all OIC countries. Therefore future research for all OIC countries would shed light on the relationship between economic globalization and economic growth.

Supporting Information

Sample of Countries.

https://doi.org/10.1371/journal.pone.0087824.s001

The Name and Definition of Indicators.

https://doi.org/10.1371/journal.pone.0087824.s002

Author Contributions

Conceived and designed the experiments: PS. Performed the experiments: PS. Analyzed the data: PS. Contributed reagents/materials/analysis tools: PS HSJ. Wrote the paper: PS HSJ.

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Home / Essay Samples / Social Issues / Globalization / The Effects of Globalization: A Comprehensive Analysis

The Effects of Globalization: A Comprehensive Analysis

• Category: Economics , Social Issues
• Topic: Globalization , Indian Economy

Pages: 3 (1463 words)

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History of Globalization

Features of globalization.

• It leads to greater interaction between different populations in social terms.
• Culturally, globalization represents the exchange of ideas, values and artistic expression between cultures and even a trend towards the development of a single world culture.
• Globalization has paid political attention to intergovernmental organizations such as the United Nations and the World Trade Organization.
• Legally, globalization has changed the creation and enforcement of international law.

Factors That Led to Globalization

Globalization on the example of indian economy.

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