Book review by Mischa Kowell (Economics) - Book review- "Globalization of the Economy" by Jeffery Frankel
Frankel, Jeffrey A., "Globalization of the Economy", National Bureau of Economic Research Working Paper Series. Cambridge, MA, August 2000, Paper #7858
Jeffrey Frankel's paper, "Globalization of the Economy", from the National Bureau of Economic Research's working paper series is designed to give an overview of the extent to which globalization has taken place while outlining some barriers that still remain. As well, Frankel touches on some economic and social issues involving globalization including the environment. There are many issues covered by this paper and I will only examine the ones that I feel are most worthy of discussion.
Pros
I'll start by giving the good news first. The main analysis that Frankel does looks at two different ways of evaluating the extent of globalization. These two methods are (1) judging by the standard of 1900 and (2) judging by the standard of perfect international integration. The explicit use of two different benchmarks for measuring globalization is a very interesting way to look at the issue. We assume that globalization is happening through the relaxation of trade barriers and lowered communication and travel costs, but we don't know the extent to which it is happening. These two measures look at how "globalized" we really are. They force the reader to look at the bigger picture in a very interesting way.
One of the fundamental points that Frankel makes which is generally overlooked is the fact that globalization is neither new, nor complete, nor irreversible. With the advent of the Internet, and other communication advances, public perception is that the lowering of communication and transportation costs is a recent development. With the decline of these costs, as a result of new technology, we immediately think of globalization as a new phenomenon and one that is sweeping, or rather steamrolling across the world with no end in sight. Frankel provides historical evidence that globalization is not a certainty nor is it an inevitability. This view is not widely held by the public, but it is very intriguing. Frankel makes a good argument and is sure to make the reader think.
Frankel also touches on the issue of home-country bias. Some factors that Frankel focuses on include distance, geographical variables, linguistic, and political issues. These natural barriers to trade are usually overlooked, but contribute to the great difficulty in creating perfectly free trade. As well, these issues help put globalization into perspective for the reader. Frankel shows us that certain issues will never be resolved though trade agreements. It is unrealistic to think that we will ever have completely free trade in the sense that doing business across town will never cost the same as doing business across the country or the world (regardless of free trade agreements).
One final positive point that I will mention is my personal favorite issue raised in the entire paper. Frankel acknowledges the assumptions present in the classical theoretical economic analysis of trade. I was very surprised to see that these assumptions were not only highlighted, but also deemed unrealistic. Economic theory is very useful and interesting when looking at trade issues. Problems arise when we don't fully acknowledge these assumptions in economic theory. Too many times economists and non-economists take the results of economic theory at face value without recognizing the implications that assumptions make. This is actually my chosen paper topic and to see Frankel acknowledge this problem (or at least the issue of assumptions) is very refreshing and an extremely positive point in his paper.
Cons (Now for the bad news …)
Frankel's examination of macroeconomic interdependence is lacking. It is commendable of Frankel to acknowledge this serious flaw in globalization, but more analysis should be done. One recommendation that I would give is to include some empirical evidence from markets that are more integrated versus markets that are less integrated. This issue is not a central focus to his paper, but some empirical evidence would greatly augment the value of his examination of this issue.
Frankel also examines the effects of globalization on other social goals such as the environment. There are a couple of problems with the environmental section of this paper.
A theory developed by Grossman and Kreuger found what is called an environmental Kuznets Curve(2). This shows us that growth in the economy is bad for air and water pollution in the initial stages, but as economies become more prosperous they can afford to clean up their environment. This seems to be a fundamental flaw in economists' trivialization of the initial degradation of the environment, which is present in many trade economics theories. Economists assume that this initial degradation of the environment is reversible, where in reality we cannot be sure of this. Especially in cases such as air pollution and ozone destruction we can be almost certain that these effects are irreversible. Not only are some environmental effects irreversible, but adverse health effects that may accompany environmental degradation are usually irreversible too. In discussing this issue Frankel has fallen into a common trap.
Another problem with the environmental section of this paper is the mention of econometric data without the display of such data. Data supporting trade, such as noting a study that determines a 1 percent increase in GDP due to openness reduces Sulphur Dioxide concentrations by 1 percent, are given. The problem is where Frankel acknowledges that there are econometric studies that have differing views depending on what measures of pollution they use. The data mentioned is not given, and it seems that the reader would get a more unbiased idea of the issue if data for both sides of the argument were given.
Overall this paper raises some good points, but Frankel may have spread himself too thin on such a large topic. He is not always consistent in reporting data and examples leading the reader to a potential biased view of globalization. Such occurrences are few, but would greatly help the paper if they were more closely examined.
Economic issues such as the measure of globalization are very well done and easy to understand. Someone without formal economic training can most certainly read this paper. This is a major benefit and makes economic thinking more accessible to the public, an issue that the vast majority of economic research struggles with.