NCPA - National Center for Policy Analysis

WHY GLOBALIZATION WORKS

May 26, 2006

Globalization works, and the problem today is not that there is too much globalization, but that there is far too little, says author Martin Wolf of the Financial Times.

The last 25 years has seen a global liberalization revolution that culminated with the fall of the Soviet Union and the subsequent reunification of Europe. But these are just a few of the drivers at play as globalization sweeps the world, says Wolf:

  • Declining transport costs play a modest role in globalization.
  • The big transformation is the reduction in the marginal cost of collating and disseminating information to close to zero.
  • The final driver is Asia's rise and the entry of billions of people into the world market economy.

Moreover, the impact of this combination of changes on the world economy has been great, says Wolf:

  • Rising reliance on trade and unbundling of the production chain results in a decline in value added per unit of exports.
  • Rising foreign direct investment, as all economies rely on foreign know-how and organizational skills and production is integrated across frontiers.
  • An increasing number of competitors and a collapse in monopoly power has improved the short-run inflation-output tradeoff and helped lower inflation worldwide.
  • The greater mobility of capital and some highly-skilled labor puts pressure on tax systems to become more competitive.

Furthermore, although the consequences of globalization are not irreversible, overall it is a very powerful economic force that has powerful consequences for the internal stability of countries, their ability to thrive economically and for international relations, says Wolf.

Source: Martin Wolf (Financial Times), "Remarks at a National Center for Policy Analysis conference in London," May 2006.

 

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