Economic Globalization

Broadly speaking, economic globalization has two dimensions. First, actual economic flowsare usually taken to be measures of globalization. Second, the previous literature employs proxies for restrictions to trade and capital. Consequently, two indices are constructed that include individual components suggested as proxies for globalization in the previous literature.

Actual Flows: The sub-index on actual economic flows includes data on trade, FDI and portfolio investment. Data on trade are provided by the World Bank (2011), stocks of FDI (normalized by GDP) are provided by UNCTAD STAT (2011). Portfolio investment is derived from the IMF’s International Financial Statistics (December 2011). More specifically, trade is the sum of a country’s exports and imports and portfolio investment is the sum of a country’s stock of assets and liabilities (all normalized by GDP).

While these variables are straightforward, income payments to foreign nationals and capital are included to proxy for the extent that a country employs foreign people and capital in its production processes.

Restrictions: The second index refers to restrictions on trade and capital using hidden import barriers, mean tariff rates, taxes on international trade (as a share of current revenue) and an index of capital controls. Given a certain level of trade, a country with higher revenues from tariffs is less globalized. To proxy restrictions of the capital account, an index constructed by Gwartney et al. (2011) is employed. This index is based on the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions and includes 13 different types of capital controls. The index is constructed by subtracting the number of restrictions from 13 and multiplying the result by 10. The indices on mean tariff rates and hidden import barriers are also derived from Gwartney et al. (2011). Mean tariff rates originate from various sources.

Gwartney et al. allocated a rating of 10 to countries that do not impose any tariffs. As the mean tariff rate increases, countries are assigned lower ratings. The rating will decline toward zero as the mean tariff rate approaches 50 percent (which is usually not exceeded by most countries among their sample). The original source for hidden import barriers, finally, is the

World Economic Forum’s Global Competitiveness Report (various issues).