## Back to Basics: Globalization Today

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**Canonical URL:** [Back to Basics: Globalization Today](https://www.imf.org/en/publications/fandd/issues/2024/06/b2b-globalization-today-adam-jakubik-and-elizabeth-van-heuvelen)

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## Bibliographic details
- Authors: ADAM JAKUBIK, ELIZABETH VAN HEUVELEN
- Published: June 3, 2024

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### Definition and historical context
- Globalization: the process of connecting the world economy more closely through the flow of goods, services, investment, technology, data, ideas, and workers.
- Timeline and drivers:
  - Began around 1870 and expanded notably after World War II as countries reduced restrictions on capital and trade.
  - Expanded further after the fall of the Berlin Wall, financial deregulation, and rounds of trade liberalization culminating in the establishment of the World Trade Organization (WTO) in 1995.
  - Technological and transport innovations (container shipping, deepwater ports, jet engines, fax machines, personal computers, mobile devices, global internet rollout) lowered organizational and transactional costs and made cross-border business easier.

### Upsides and downsides
- Benefits:
  - Unbundling of production stages increased efficiency and output.
  - Foreign competition boosted productivity; consumers accessed more varieties at lower prices.
  - Developing economies benefited from participation in global value chains without building entire domestic industries.
  - World income convergence and poverty reduction: poverty rates decreased from 47 percent in 1980 to 16 percent in 2010.
- Costs and distributional challenges:
  - Adjustment costs within countries: workers and capital shifted across industries, with uneven domestic policies (labor support, social insurance) affecting outcomes.
  - Lower-skilled workers in some places and industries lost jobs or experienced wage declines; effects were concentrated and sometimes prolonged.
  - Financial globalization may have increased volatility and crisis risk, requiring stronger macroeconomic governance and institutions.
  - Globalization may have contributed to rising income inequality, though taxation, redistribution, and technological change also played major roles.

### Measuring globalization — evolving metrics and findings
- Traditional measures: trade openness (imports plus exports as a share of GDP), openness to foreign direct investment, tariffs, capital account restrictions, cross-border financial transactions, visas for students and workers.
- Newer metrics and trends:
  - Participation in global value chains and trade in services (especially digital services) indicate continued or accelerated integration in some areas.
  - Foreign value-added content of exports rose from about 19 percent in the mid-1990s to 28 percent in 2022.
  - Digitally delivered services account for 54 percent of services trade, following growth of 8 percent annually over the past two decades.
  - Digital services represent a potential engine for future development.

### Emerging risks and policy headwinds
- Geopolitical and resilience concerns:
  - COVID-19 pandemic, Russia’s war in Ukraine, and intensifying geopolitical rivalries have prompted inward policy shifts.
  - Trade and foreign direct investment restrictions have proliferated, increasing about threefold since 2018.
  - Industrial policy measures that disrupt trade affected at least a fifth of global trade in 2023.
  - Policy restrictiveness for digital services has increased in the past decade.
  - Rotation of trade toward geopolitically closer partners may lengthen supply chains and raise costs rather than reduce vulnerabilities.
- Institutional strains:
  - The multilateral trading system is ill-equipped to respond to current tensions; credibility is suffering.
- Economic cost of fragmentation:
  - IMF research estimates global losses from trade fragmentation could range from 0.2 to 7 percent of GDP; costs may be higher when accounting for technological decoupling.

### Policy recommendations to preserve and improve globalization
- Reinforce multilateral trade rules and the WTO:
  - Accelerate WTO reforms to strengthen transparency and rules, including on subsidies.
  - Restore a fully functioning dispute settlement system.
  - Update the WTO rulebook to reflect the growing share of services and digital trade.
  - Use plurilateral agreements among subsets of WTO members to advance reforms in e-commerce and investment facilitation without excluding others.
- Strengthen domestic policies to distribute gains and manage risks:
  - Maintain sound macroeconomic governance, financial regulation, and supervision to prevent risk buildup from financial globalization.
  - Ensure tax systems geared toward efficient revenue mobilization.
  - Use labor market and fiscal policies to address worker dislocations and inequality, and to counter disruptions from new technologies, especially artificial intelligence.
  - Provide high-quality basic public services, including education, health, and social safety nets.
- Role of international organizations:
  - Act as a buffer during unexpected circumstances, promote commonly agreed rules of the road, and serve as a conduit for dialogue and cooperation.

*F&D Magazine — "Back to Basics: Globalization Today" by ADAM JAKUBIK and ELIZABETH VAN HEUVELEN, June 2024.*

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_Source: https://www.imf.org/en/publications/fandd/issues/2024/06/b2b-globalization-today-adam-jakubik-and-elizabeth-van-heuvelen_