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Breaking through on trade: How a changing world dynamic affects policy

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Przemyslaw Kowalski and Susan F. Stone1

Integration of industrialised and emerging economies has shaped globalisation

Integration of industrialised and emerging market economies through international trade and investment has been one of the major factors shaping the global economy in recent decades. Technological advances leading to reductions in trade and communication costs and pro-market reforms reducing policy-induced costs in both industrialised and emerging economies have narrowed the divide created by natural and man-made barriers. They have also enabled more efficient specialisation and greater unbundling of the production process across national borders (OECD, 2006; OECD, 2009).

This integration has generated large economic gains as well as structural change best illustrated by the increasing shares of several emerging economies in world output and rising per capita incomes. The extent of gains and structural adjustment reflect the large differences in initial conditions and resources, which is exemplified by the large pools of labour emerging economies have contributed to the world labour force. Today, when we are still at an early stage of the globalisation era, the BRIICS (Brazil, Russia, India, Indonesia, China and South Africa) continue to account for about 49% of the global labour supply and only 17% of the value of world production. Integration of these economies with the world economy has been, and continues to be, a significant shock to world relative resource endowments and thus the pattern of relative productivity, with ratios of available labour to capital or natural resources increasing at dramatic rates.

Trade and Foreign Direct Investment (FDI) have been among the principal channels through which some of these and other differences in countries’ endowments are being reduced. Indeed, evidence presented in this book points out that while many emerging economies continue to export products that have relatively high labour and natural resources content, they have gradually expanded exports of technology, physical and human capital-intensive goods as well (e.g. Chapters 3 and 5). These trends are likely to continue so that further large and pervasive structural changes can be anticipated for the global economy as income levels continue to increase across emerging economies and per capita production and consumption levels approach those of today’s OECD economies.

The recent financial and economic crisis was a brusque reminder of the importance of international trade and investment in today’s world economy (OECD, 2010). Yet, the crisis also reminded us of the complexity and interconnectedness associated with the unprecedented levels of integration and this has reinforced for some, doubts regarding the direction and even desirability of interdependent global markets. Moreover, the crisis and the uneven pace of recovery that has followed, echo the profound changes in the geography of world trade that has occurred over past decades with the economic weight shifting rapidly away from the OECD economies to emerging economies, most notably in South and East Asia. The massive government intervention in response to the crisis in national, but very much internationally connected, economies triggered concerns about the potential transmission of this intervention’s effects beyond national borders (e.g. OECD, 2010).

The relationship between international trade and economic growth and the role of governments in influencing this relationship have been long debated issues in economics and economic policy making. Dating back to the export-promoting and import-restricting mercantilist doctrines of the 17th and 18th centuries and their subsequent critique by the 18th and 19th century precursors of modern economics, the debate in the public sphere is far from concluded today, as evident in the on-going deliberations of the merits of exportled growth, industrial policy, pursuit of specialisation in high value added products, defiance of comparative advantage, or restrictions on trade of raw materials.

This book collects a number of papers reflecting some of the recent thinking about the classical concept of comparative advantage that has been pivotal to studying changes in world trade and assessing their economic effects. It provides an empirical stocktaking of developments in trade in both goods and services and underlying policy factors in OECD and major non-OECD countries in the last two decades and offers reflections on implications for modern policy making. Each of the chapters addresses one or more of the following key questions: Is comparative advantage still relevant today? How have the patterns of trade evolved? Can governments influence trade patterns in a fashion that is sustainable and beneficial for the country and world commerce?

 
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