Abstract
Arguably, the first step in quantifying the consequences of globalisation is the ability to measure globalisation itself. With the introduction of the KOF Index of Globalisation in 2002, a number of studies empirically addressed the question of whether and to what extent globalisation affects social and economic phenomena. 28 Among the first to use the KOF Index for empirical analysis was Ekman (2003) who investigated whether globalisation affects the health of a country’s population. He finds a positive, non-linear correlation between the KOF Index and population health as measured by life expectancy at birth. In later studies, Sameti (2004) finds that globalisation increases the size of governments, while Tsai (2007) shows that globalisation increases human welfare, measured by the Human Development Index.
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Notes
- 1.
The results obtained using the KOF Index are summarised on the web page of the KOF Swiss Economic Institute (http://globalisation.kof.ethz.ch/papers/).
- 2.
According to Swank (2001) and Adserà and Boix (2002), globalisation increases the tax burden, while Rodrik (1997) and Vaubel (2000) show that globalisation is associated with decreased tax revenue. Garrett (1995) and Heinemann (2000) do not find any significant influence of globalisation on revenue. While Garrett (1995), Quinn (1997) and Swank (2001) show that globalisation leads to higher corporate taxes, Hansson and Olofsdotter (2003) report the opposite. The effects of globalisation on social spending are equally moot. Hicks and Swank (1992) and Vaubel (2000) report a significantly positive effect; while Swank (2001) and Garrett and Mitchell (1999) find a significantly negative one. Schulze and Ursprung (1999) and Dreher, Sturm and Ursprung (2006) summarise theoretical and empirical work on this topic.
- 3.
For a survey, see Schulze and Ursprung (1999).
- 4.
Notable contributions are Garrett (1995), Quinn (1997), Rodrik (1997) and Swank (1997).
- 5.
Research on the latter two lines of inquiry are Hicks and Swank (1992), Huber, Ragin and Stephens (1993), Garrett (1995), Cusack (1997), Quinn (1997), Swank (1997), Garrett and Mitchell (1997), Garrett (1998b, 1998c), Rodrik (1998a), Gaston and Nelson (2004) and Gaston and Gulasekaran (2007).
- 6.
See, for example, Brennan and Buchanan (1980).
- 7.
In the late 1990s there were initiatives to prevent “harmful” tax competition in the EU as well as in the OECD (Devereux, Lockwood and Redoano, 2002). See also European Commission (1998), OECD (1998) and van der Hoek (2003).
- 8.
Tax revenue can decline in capital exporting countries, however.
- 9.
For reviews of theoretical models on tax competition in the EU, see Krogstrup (2002), Schulze and Ursprung (1999) and Wilson and Wildasin (2004).
- 10.
See also Kind et al. (2000) and Ludema and Wooton (2000). See Wilson and Wildasin (2004) for a detailed discussion.
- 11.
As another example, European Commissioner Monti (1998) favours tax coordination, because he argues, labour would otherwise be penalised for being less mobile than capital.
- 12.
For comprehensive discussions on tax ratios, see Volkerink and de Haan (2001), Volkerink, Sturm and de Haan (2002) and de Haan, Sturm and Volkerink (2003).
- 13.
Since there is evidence of significant first-order autocorrelation in all models, the disturbance term is modelled as an AR(1) process.
- 14.
See Hansson and Olofsdotter (2003) for a detailed discussion.
- 15.
This issue is discussed in more detail below.
- 16.
Second-order autocorrelation must be absent in order for the estimator to be consistent.
- 17.
Using the 2002 version of the KOF Index, Dreher (2006b) confirms the positive effect of globalisation on capital taxes. Quinn (1997) and Rodrik (1997) find that the capital tax burden is positively related to integration. Devereux, Lockwood and Redoano (2002) show that a country’s openness increases average tax rates on several classes of investment. Krogstrup (2003) reports that capital taxes increase significantly with capital account liberalisation (as measured by Quinn’s 14-point index). The results run counter to those of Genschel (2002), who argues that the increasing tax competition due to globalisation substantially decreases governments’ leeway for independent policy. Although Genschel concedes that taxes on capital did not on average decrease, he claims that they would nevertheless be higher without integration, since the economic environment deteriorated. The analysis clearly refutes this conjecture since it controls for the economic environment.
- 18.
As in Krogstrup (2003), however, adding overall tax revenues (as a share of GDP) to the regression does not change the result.
- 19.
This is precisely what Dreher, Sturm and Ursprung (2008) do, using a previous version of the KOF index.
- 20.
See Devereux, Lockwood and Redoano (2002) for details.
- 21.
For example, Chanda (2001) uses an index of capital account openness to show that the majority of developing countries have suffered from globalisation, while Rodrik (1998a) as well as Alesina, Grilli and Milesi-Ferretti (1994) found no effect of capital account openness on economic growth. Edison et al. (2002a) summarise the literature on capital account liberalisation and economic performance.
- 22.
As for FDI, there is evidence of a positive effect on growth in wealthy countries (e.g., Blomström, Lipsey and Zejan, 1992) and a negative one for low income countries (e.g., Garrett, 2001). Studies examining the effects of FDI on growth rates are surveyed by Durham (2000).
- 23.
Dollar and Kraay (2001, p. 13) summarise criticisms of this approach.
- 24.
Among them, Dollar and Kraay (2001) find that an increase in trade flows and FDI results in higher growth rates. Greenaway, Morgan and Wright (1999) also report a strong relationship between trade and growth. With respect to FDI, Borensztein, de Gregorio and Lee (1998) provide evidence of a positive growth effect – given a minimum threshold stock of human capital. Carkovic and Levine (2002), on the contrary, do not find a robust effect of FDI on growth. A detailed analysis of the impact of several indicators on financial integration and growth is provided by Edison et al. (2002b), who find that no robust relationship exists.
- 25.
Carmignani (2001) provides an overview.
- 26.
The Polity IV index was developed by Marshall and Jaggers (2003).
- 27.
In comparing these results to those of cross-sectional studies, note that the country fixed effects employed here do not give much room for institutional variables to affect growth.
- 28.
Moreover, the GMM estimator is consistent, whereas the within-groups estimator is inconsistent in the presence of a lagged dependent variable in a short panel (Nickell, 1981).
- 29.
This confirms the results of Dollar and Kraay (2001). Note that initial GDP is not significant when per capita GDP growth is used as the dependent variable, while most of the other results are unchanged. In particular, the choice of dependent variable has no impact on the influence of the Index of Globalisation.
- 30.
Dreher and Siemers (2005) show that capital account restrictions and corruption tend to reinforce one other.
- 31.
To analyse this relationship in more detail, we also interacted the index with the measures of financial market quality introduced above and with the rule of law index. All resulting coefficients are, however, completely insignificant. This result is consistent with Rodrik (1998a).
- 32.
The weights obtained are 0.08 (assassinations), 0.1 (strikes), 0.25 (guerrilla warfare), 0.15 (crises), 0.16 (riots) and 0.27 (revolutions).
- 33.
For instance, Blau and Kahn (1996) find that a lot of the difference in wage inequality between the United States and nine other OECD countries can be explained by what they term “union-pay levelling effects”, i.e., unions compress wage distributions.
- 34.
This section is a substantial revision and update of Dreher and Gaston (2007).
- 35.
On wage inequality see Rowthorn (1992), Zweimüller and Barth (1994) and OECD (1997); on unemployment see OECD (1997); and on growth see Calmfors and Driffill (1988), Rowthorn (1992), Calmfors (1993) and Danthine and Hunt (1994).
- 36.
Some recent evidence consistent with this line of argument is provided by Haskel, Kersley and Martin (1997) who show that increasing labour market flexibility in the United Kingdom has resulted in labour input being more closely aligned to the business cycle.
- 37.
See also Katz (1993) and Ehrenberg (1994).
- 38.
Scruggs and Lange (2002) also find insignificant effects of economic globalisation on union membership trends. In addition, Wallerstein and Golden (1997) argue that while there is no general decentralisation of wage setting underway in the four Nordic countries, Swedish decentralisation is largely the result of a deliberate, politically-motivated attack on the political power of organised labour.
- 39.
As in Peetz (1998), for instance.
- 40.
See Atkinson (1997). For an excellent survey see Brune and Garrett (2005). See Bhagwati and Srinivasan (2002) for a discussion of how trade affects poverty in poor countries.
- 41.
See Deininger and Squire (1998). Lindert (2000, p. 173) argues that “[t]he Kuznets curve has to some extent tyrannised the literature on inequality trends. Energies that could have moved earlier into exploring the underlying causes of inequality were diverted into a debate over whether or not there was an inverted U curve, either in history or in post-war international cross-sections”.
- 42.
This section is a substantial revision and update of Dreher and Gaston (20078).
- 43.
See Wood (1994), for instance. The great majority of empirical research on this issue has focussed on developed countries. Possibly as a result of data limitations, there are very few studies of developing countries. However, the studies that have been done seem to indicate that increased openness has coincided with increases, and not decreases, in inequality. See Kanbur (2000) and Attanasio et al. (2004). One argument is that imported technology has raised the relative demand for highly skilled labour in LDCs, see Arbache, Dickerson and Green (2004), e.g.
- 44.
Slaughter (2000) surveys the empirical research based explicitly on the Stolper-Samuelson theorem.
- 45.
See Atkinson (1997). For example, Friedman (1999) equates globalisation to “Americanisation”. Hence, globalisation may imply that many labour markets are in the process of becoming less unionised and less regulated, as discussed in section 4.4.
- 46.
See Rodrik (1998b). Interestingly, Bordo, Eichengreen and Irwin (1999) carry this argument further, suggesting that the presence of sizable welfare states may have played an important role in providing sufficient indifference to globalisation, that policies like support for the GATT/WTO system and the Bretton Woods institutions continued even in the face of recessions that might have had system-closing consequences in earlier eras.
- 47.
See Garrett (1998) and Swank (2002).
- 48.
The wage data are from either national statistical sources or the OECD and are adjusted to facilitate international comparability.
- 49.
See Deininger and Squire (1998). Galbraith and Kum (2004) provide complete details of the data construction. Galbraith (1998) shows that inequality – measured by either pay or by income – has risen in what he terms the age of liberalisation (loosely defined as the 1980’s onwards). Details about the evolution of the measures of inequality (as well as the actual data) can be found at the UTIP web-site: http://utip.gov.utexas.edu/data.html.
- 50.
This also accounts for the potential endogeneity of globalisation, e.g., inequality may induce policy-makers to pursue more inward-oriented policies. Anticipating the result, the Sargan test reported below indicates that endogeneity is not an issue.
- 51.
In fact, this is what Evans (1997) and Krugman (1999) argue, i.e., an increase in democracy is significantly associated with market-oriented reforms.
- 52.
This amounts to standardised regression (beta) coefficients of 0.30 and 0.25, respectively. Overall, the regression models explain between 39 per cent and 77 per cent of the within-groups variation for inequality.
- 53.
This finding concurs with Atkinson (1997, 2003) and Francois and Rojas-Romagosa (2005) who find that changes in inequality have been episodic rather than steadily trending and not “glacial”, as had been previously thought.
- 54.
For an in depth discussion, see MacMillan (2001).
- 55.
Alpay (2002) provides an extensive summary.
- 56.
WT/CTE/W/67, 7 November 1997, “Environmental benefits of removing trade restrictions and distortions“, Note by the Secretariat.
- 57.
However, Mani and Wheeler (1999) also show that the tendency to form pollution havens is quite limited. See also Cole (2004).
- 58.
BOD is available for a maximum of 114 countries over the period 1980–2001 (World Bank, 2005). We employ the logarithm of emissions in kilograms per day and per capita.
- 59.
http://themes.eea.eu.int/Specific\_media/water/indicators/bod/index\_html (accessed September 10, 2007).
- 60.
Data for CO2 are available for up to 188 countries covering the years 1970 to 2000 (World Bank, 2005). However, as Gassebner, Lamla and Sturm (2006) point out, these data are based on calculations instead of being measured directly.
- 61.
See Table A-2 of Gassebner, Lamla and Sturm (2006) for an overview of the empirical literature. For a robustness test employing Bayesian averaging of classical estimates see Lamla (2007).
- 62.
For reasons other than the expected shorter duration of dictatorships, Olson (1993) argues that dictators wish to maximise tax revenues and thus oppose any policies that would reduce revenue, e.g., those that result from increased pollution abatement expenditures. See also Gassebner, Gaston and Lamla (2008).
- 63.
To some extent, these results are contrary to Lamla (2007), showing robust support for the environmental Kuznets curve hypothesis. See also Gassebner, Gaston and Lamla (2008).
- 64.
Gassebner, Gaston and Lamla (2008) reach a similar conclusion with respect to environmental policy. Proxying environmental stringency by the lead content of gasoline, they find that the KOF Index has no statistical by significant effect. While they do find that economic considerations are important, it is domestic rather than international concerns that drive environmental policy.
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Dreher, A., Gaston, N., Martens, P. (2008). Consequences of Globalisation Reconsidered: Applying The KOF Index. In: Measuring Globalisation. Springer, New York, NY. https://doi.org/10.1007/978-0-387-74069-0_4
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