Does Globalization Affect Growth

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LDoes Globalization Affect Growth?
Axel Dreher§

First version: October 2002 This Version: January 2003

Abstract The paper presents an index of globalization covering its three main dimensions: economic integration, social integration, and political integration. Using panel data for 123 countries in 1970-2000 it is analyzed empirically whether the overall index of globalization as well as sub-indexes constructed to measure the single dimensions affect economic growth. The results show that globalization promotes growth – but not to an extent necessary to reduce poverty on a large scale. The dimensions most robustly related with growth refer to actual economic flows and restrictions in developed countries. Although less robustly, information flows also promote growth whereas political integration has no effect.

Keywords: Globalization, Growth JEL-Codes: H77, O57, F43 Acknowledgement: The author is grateful for helpful suggestions by Bernhard Boockmann, Quan Li, Verena Liessem, Fulvio Mulatero and Torsten Saadma. All errors are mine.

§ University of Mannheim, Lehrstuhl für Volkswirtschaftslehre, L7, 3-5, D-68131 Mannheim, Germany, e-mail:


1. Introduction
Many non-economists expect the costs associated with globalization to exceed its benefits. Fears of an erosion of social and environmental standards, high poverty rates in less developed countries and ever higher frequencies of financial crisis resulted in protests like that in Seattle in 1999. Quite the contrary, most economists strongly believe the net effect of globalization to be positive. Apart from economic theory, this optimism is supported by empirical studies as well. To measure globalization, most of these studies employed proxies like trade and capital flows or openness to these flows. Using these proxies, Beer and Boswell (2001) examined the consequences of globalization on inequality. Li and Reuveny (2003) analyzed their effects on democracy. As Heinemann (2000) shows, more globalized countries have lower increases in government outlays and taxes. Vaubel (1999) found them to have lower government consumption. The effects of globalization on growth have also been frequently analyzed with these measures. Until most recently, however, most studies examined them employing cross sections only. For example, Chanda (2001) uses an index of capital account openness to show that more developing countries have suffered from globalization than not, while Rodrik (1998) as well as Alesina et al. (1994) found no effect of capital account openness on economic growth.1 With respect to foreign direct investment (fdi) there is evidence of a positive growth-effect in countries which are sufficiently rich (Blomström et al. 1992) and a negative one in low income countries (Garrett 2001).2 Among others, Dollar (1992) analyzed the relationship between economic performance and openness to trade, Frankel and Romer (1996) those between growth and actual flows. Their results show that both openness to trade and actual trade flows are robustly related to growth. All of these studies present, however, only cross sectional estimates. Moreover, they do not adequately control for endogeneity. Their results might therefore reflect unobserved characteristics which do not vary over time instead of being the consequences of globalization or might reflect reverse causality. 3 Aware of the shortcomings of the cross-section approach, some recent studies use panel data to examine the relationship between some dimensions of globalization and growth. Among them, Dollar and Kraay (2001) found that an increase in trade flows and foreign direct investment resulted in higher growth rates. Greenaway et al. (1999) also report a strong

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Edison et al. (2002) summarize the literature on capital account liberalization and economic performance. Studies examining the effects of foreign direct investment on countries’ growth rates have been summarized by Durham...
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