Introduction.
Globalisation involves the increased integration and interdependence of national economies. Globalisation reflects the increased importance of the whole international economy. Globalisation affects increased international trade, increased inward investment and an expanded role for global multinational companies.
Three fundamental factors have affected the process of economic globalisation and are likely to continue driving it in the future. First, improvements in the technology of transportation and communication have reduced the costs of transporting goods, services, and factors of production and of communicating economically useful knowledge and technology. Second, the tastes of individuals and societies have generally, but not universally, favoured taking advantage of the opportunities provided by declining costs of transportation and communication through increasing economic integration. Third, public policies have significantly influenced the character and pace of economic integration, although not always in the direction of increasing economic integration.
Interactions among the Fundamental Factors Driving International Economic Integration
Although technology, tastes, and public policy each have important independent influences on the pattern and pace of economic integration in its various dimensions, they interact in significant ways. Improvements in the technology of transportation and communication do not occur spontaneously in a commercial vacuum. The desire of people to take advantage of what they see as the benefits of closer economic integration—that is, the taste for the interests of integration—is a key reason why it is profitable to make the innovations and investments that bring improvements in the technology of transportation and communication. And, public policy has often played a significant role in fostering innovation and investment in transportation and communication both to pursue the benefits of closer economic integration (within as well as across political boundaries) and for other reasons, such as national defence.
The tastes that people have and develop for the potential benefits of closer economic integration are themselves partly dependent on experience that is made possible by cheaper means of transportation and communication. For example, centuries ago, wealthy people in Europe first learned about the tea and spices of the East as the consequence of limited and costly trade. The broadening desire for these products resulting from limited experience hastened the search for more accessible and cheaper means of securing them. As a by-product of these efforts, America was discovered, and new frontiers of integration were opened up in the economic and other domains. More recently, if less dramatically, it is clear that tastes for products and services produced in faraway locations (including flavours exercised through travel and tourism), as well as for investment in foreign assets, depend to a significant degree on experience. As this experience grows, partly because it becomes cheaper, the tastes for the benefits of economic integration typically tend to rise. For example, it appears that as global investors have gained more experience with equities issued by firms in emerging market countries, they have become more interested in diversifying their portfolios to include some of these assets.
Public policy toward economic integration is also, to a substantial extent, responsive to the tastes that people have regarding various aspects of such integration, as well as to the technologies that make integration possible. On the latter score, it is relevant to note the current issues concerning public policy concerning commerce conducted over the internet. Before recent advances in computing and communications technology, there was no internet over which trade could be performed; and, accordingly, these issues of public policy naturally did not arise. Regarding the influence of tastes on public policy, the situation is complicated. Reflecting the general desire to secure the perceived benefits of integration, public systems usually, if not invariably, tend to support closer economic integration within political jurisdictions. The disposition of public policy toward economic integration between different authorities is typically more ambivalent. Better harbours built with public support (and better internal means of transportation as well) tend to facilitate international trade—both imports and exports. Import tariffs and quotas, however, are intended to discourage people from exercising their tastes for imported products and encourage production of domestic substitutes. Sadly, the mercantilist fallacy that seems to provide reasonable support for these policies often finds political resonance. Even brilliant politicians, such as Abraham Lincoln (who favoured a protective tariff, as well as public support for investments to enhance national economic integration) often fail to understand the fundamental truth of Lerner’s (1936) symmetry theorem—a tax on imports is fundamentally the same thing as a tax on exports.
Human Migration
Throughout most of the historical time, extending back roughly five thousand years, human migration has remained the predominant mechanism of interaction and integration of different societies. Use of the horse and other beasts of burden changed somewhat the technology of human movement (and had a more significant effect on methods of warfare), and boats were used to cross water barriers. However, most people most of the time continued to travel on foot. Although migration was slow (by the standards of present speeds of human transport) and often posed considerable risks, it proceeded on a vast scale. Indeed, even for many societies that pursued agriculture (as well as hunting and gathering) migration was a widespread phenomenon up until quite recent times—as is testified to by the waves of movement out of Asia and across Europe extending up to roughly 1000 AD.
What fundamental factors were driving these waves of human migration? Relevant technologies (e.g., use of horses) presumably had some effect, and changing tastes may also have mattered somewhat. But, the critical factor was surely public policy. In some cases, society would see that it was exhausting the productive opportunities in a particular location and decide to move on. Also, if one organisation thought it had the military might to improve its welfare by taking over the territory and other property of one of its neighbours and perhaps also enslave its citizens, it would launch an attack. Seeing discretion as for the better part of valour, the society under attack might decide to move on—and perhaps attack somebody else.
Trade in Goods and Services
Traditionally, economists tend to focus on trade in goods and, to a lesser extent, services as the principal mechanism for integrating economic activities across countries and as a critical channel (but not the only important one) for transmitting disturbances between national economies. Indeed, in the economic theory of international trade (specifically the Heckscher-Ohlin-Samuelson theory described in most textbooks), trade in goods is seen as a substitute for mobility of factors of production. Under certain restricted conditions, which do not apply entirely in practice, the theory says trade in the outputs of production processes may be a virtually perfect substitute for mobility of factors, with the result that factor returns are equalized internationally, for example, factor price equalization is achieved—without the necessity for elements to move abroad to make this equalization.
If the conditions for factor price equalisation did apply, there would be no economic benefit from the international mobility of factors of production. Full economic efficiency could be achieved exclusively through trading outputs. A key reason why the conditions for factor price equalisation do not fully apply is because of barriers to trade in outputs that effectively prevent the equalisation of relative output prices at different locations. These barriers take two forms: natural barriers to trade in the way of transportation costs and also costs of information about product prices and availabilities at different locations; and artificial barriers to trade arising from tariffs, quotas, and other public policy interventions. Indeed, even if the broader conditions for factor price equalization (e.g., identical technologies with constant returns to scale) and, consequently trade in goods alone (without factor mobility) is not sufficient to achieve full international economic integration, a focus on natural and artificial barriers to trade is still relevant in assessing the extent to which global economic integration through trade makes as much as is possible through this channel. Precisely, if there were no natural or artificial barriers to trade in goods or services, then the relative prices of all products and services would be equalised everywhere, and integration through the channel of business would be perfect and complete. In practice, of course, there are significant natural and artificial barriers to trade which preclude such perfection. In general, the higher are the barriers to trade, the lower will be the degree of international integration through trade, and conversely. Thus, it is relevant to consider what has been happening to barriers to trade as a means of assessing what has been happening to international economic integration through this critical channel.
Conclusion.
The economic profile of the new global economy has been driven by technology, fuelled by innovation and entrepreneurial initiative, and is based on new ideas, new perspectives and new business strategies. It has opened the door to new investment opportunities and acted as a catalyst for employment creation. At the same time, the new economy has altered the economic landscape and realigned the linkages between different sectors of the economy. In short, technological innovation and entrepreneurial initiative are alive and well in the new global economy of the 21st Century.