Measuring Globalisation Gauging Its Consequences Measuring Globalisation Axel Dreher · Noel Gaston · Pim Martens

Dreher • Gaston • Martens • Gaston Dreher Axel Dreher Noel Gaston Pim Martens Measuring Globalisation Gauging its Consequences Measuring Globalisation Gauging its Consequences Measuring Globalisation Axel Dreher · Noel Gaston · Pim Martens Measuring Globalisation Gauging Its Consequences 123 Axel Dreher Noel Gaston ETH Zurich, KOF Swiss GDC, Bond University, Gold Economic Institute, Zurich Coast, Queensland Switzerland Australia [email protected] [email protected] Pim Martens ICIS, Maastricht University, Maastricht The Netherlands [email protected] ISBN: 978-0-387-74067-6 e-ISBN: 978-0-387-74069-0 DOI: 10.1007/978-0-387-74069-0 Library of Congress Control Number: 2008922736 c 2008 Springer Science+Business Media, LLC All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC., 233 Spring Street, New York, NY10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identiﬁed as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper 987654321 springer.com For Nicole, Ifumi, Nic, Robin and Timo FOREWORD For a new book on globalisation, it may be common practice in this day and age to begin with an apology for adding to such an immense literature. A Google web search in October 2007 resulted in over 16 million references to “globalisation”, over 29 million for “globalization” and nearly 10 million for “mondialisation”. Not only would there be countless millions more references in languages other than English, American or French, but the numbers by the time this monograph reaches the bookstores is likely to be understated several-fold. The magnitude of the numbers is indicative of the widespread concern with everything and anything to do with globalisation. We suspect that globalisation leaves few people un- touched and indifferent. A visible manifestation, of course, is the protesters – in- creasingly from all walks of life – at WTO, IMF and G-8 meetings. It is clear that what may have been early unquestioned enthusiasm has been supplanted by genu- ine concerns about further global integration. As for an apology, we offer none. First, the sheer magnitude of the interest in globalisation reflects an interest in the effects that globalisation has on our daily lives. The Earth System may be the most complex entity that ever emerged in our universe and the contemporary process of “globalisation” may be the most intri- cate dynamic that will ever pervade that entity. Secondly, there is considerable confusion about what modern day globalisation really is. Globalisation is a poly- morphic concept. When it comes to globalisation, each social commentator or academic researcher has something different in mind. It is hardly surprising that some researchers find that globalisation is a substantial boon for a nation’s citi- zens, while others paint an extremely gloomy picture. It is one purpose of this monograph to focus attention on what globalisation is. We argue that an agnostic approach to the issue involves the scientific construction of sufficiently broad and encompassing indices of globalisation. In the following chapters, we define and then measure the forces of globalisation. Existing analyses of globalisation emphasise different factors as the key ele- ments behind the contemporary impact of this phenomenon. Moreover, they each presuppose a different definition of globalisation. In our opinion, rather than at- tempting to define globalisation and determine its effects by emphasising particular aspects or factors, it would be far more useful to adopt a more multi- dimensional, pluralistic approach. This approach prevents an over-simplification of the complexities involved in understanding globalisation, while permitting a flexible definition of contemporary globalisation. To illustrate, consider those regression-based studies that analyse the relation- ship between greater flows of international trade and labour market outcomes, e.g., earnings inequality. Two well-known problems with multiple regression analysis (the workhorse for social scientists) underscore the pitfalls of an overly narrow focus of analysis. First, there is the problem of omitting important variables. To avoid biassed estimates of the impact of globalisation on inequality, all viii Foreword relevant aspects of globalisation have to be included in a regression model. This list of omitted variables might not only include well-travelled economic variables, such as foreign direct investment, but also indicators of political engagement and social integration. Secondly, there is the ever pervasive issue of variable (mis-) measurement and interpretation. For example, economists tend to find the impact of trade liberalising agreements and greater international trade with less developed countries on the distribution of earnings to be quite small. However, it requires a substantial leap of faith to argue that globalisation has similarly small effects. It is hardly surprising that non-economists tend to view the sanguine pronouncements of economists about a more integrated world with a mix of disbelief and incredulity. To be in a position to evaluate the consequences of globalisation in a rational and scientific manner, objective indicators are needed. To assess the extent to which any country is more (or less) globalised at any particular point in time requires much more than employing data on flows of trade, migration or foreign direct investment. Although largely neglected in the economics literature, both political integration and social integration are likely to be important for income inequality. For example, in the absence of restrictions on capital mobility, a country is more likely to competitively lower taxes or offer subsidies to attract investment, the closer is a potential host country’s culture to that of a source country and the easier it is to exchange information. Lower taxes may also lower social stan- dards and this is one channel through which the social dimension of globalisation may be important for income inequality. On the other hand, political integration may ameliorate a potential “race to the bottom”, which may be induced by economic globalisation. Hence, while economic globalisation may increase inequality, political globalisation could actually serve to reduce it. While discussing the recent attempts to measure globalisation, we focus most of our attention on the KOF Index of Globalisation, which has arguably become the most widely used measure of globalisation used by academic researchers and social scientists. We also illustrate the usefulness of the KOF Index for investigat- ing some topical issues. Specifically, we investigate whether globalisation has affected government spending and taxation and if there has been a race-to-the- bottom in welfare state policies; whether globalisation has been good for economic growth; whether globalisation has contributed to declining union mem- bership widely observed in many developed countries; whether globalisation dam- ages the natural environment and, of course, whether globalisation has been responsible for the widespread increases in income and earnings inequality in the last two decades. To tantalise the reader, we simply note that while some of our results may be unsurprising, others shatter long-held beliefs and require a re- evaluation of the true effects of globalisation. Finally, we would like to thank our colleagues at the International Centre for Integrated Assessment and Sustainable Development (ICIS), University of Maas- tricht, the Universities of Exeter, Mannheim and Konstanz, the KOF Swiss Eco- nomic Institute at ETH Zurich, the Globalisation and Development Centre (GDC) at Bond University, the Institute of Social Science at the University of Tokyo and par- ticularly Christian Bjørnskov, Lotte van Boxem, Martin Gassebner, Ward Rennen, Foreword ix Torsten Saadma, Jan-Egbert Sturm, Heinrich Ursprung, Roland Vaubel and Daniel Zywietz for helpful comments and discussion. We thank Lukas Kauer, Peter Knox, Jaqueline Oh, Nadja Paenzer, Christopher Prieß, Rolf Schenker, Gilles Winkler and Christoph Woodtli for excellent research assistance. Thomas Schulz deserves a special vote of thanks for his assistance with the data as well as other parts of the project; his efforts were instrumental in helping us to produce a far better manuscript. Finally, we are grateful and indebted to Marilea Fried and Nicholas Philipson of Springer for their overall support and advice in helping us prepare the manuscript. Axel Dreher, Zurich, Switzerland Noel Gaston, Gold Coast, Australia Pim Martens, Maastricht, The Netherlands CONTENTS 1 Introduction 1 2 Towards An Understanding of the Concept of Globalisation 5 2.1 Capitalism as the incubator of contemporary globalisation 6 2.2 Technological innovation as the engine of globalisation 7 2.3 Political dimensions of globalisation 9 2.4 The Global Village and the social and cultural aspects of globalisation 10 2.5 Globalisation and the environment 12 2.6 Framing globalisation by its timeline 13 2.7 Digression:

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