Holger Görg Gave a Talk on Globalization at the German Council of Economic Experts

Prof. Holger Görg Ph.D., KCG Managing Director, was invited to give a presentation on globalization at the German Council of Economic Experts (Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung) on April 27, 2017 in Wiesbaden. His talk aimed at providing research-based evidence to an important question of whether globalization is rather a boon or a bane for Germany.

Germany has been more and more intensively integrated into the world economy over the past decades, as suggested by annual trade and foreign investment statistics. Although the GDP per capita in Germany has almost continuously increased over the same period, whether globalization has brought more benefits than costs to Germany remains to be a key open question for different stakeholders, including the public.

Görg focused on two dimensions of globalization in his presentation: foreign trade and foreign direct investment. Taking foreign trade as an example, he showed that previous research results generally suggest that globalization brings more benefits than costs to countries involved in foreign trade. Through engaging in foreign trade, countries can specialise in the areas where they have a comparative advantage. Firms also benefit from economies of scale through enlarged markets. The more severe competition in the world market may induce firms to continuously improve their competitiveness that can be supported by their increasing use of better (and probably cheaper) resources and intermediate goods the world over and/or their engagement in innovation and upgrading to enhance their productivity. Consumers benefit from globalization as well, for example, through easier access to a larger spectrum of products at cheaper prices.

Still, the potential gains from globalization are not equally distributed between countries or/and individuals within the same countries. Country-specific characteristics may lead to different extents of globalization gains for different countries. In the same country, individuals also benefit differently from globalization. For example, employees in exporting firms may enjoy higher wages and more job security than employees in non-exporting firms. Increasing international sourcing can support firms to enhance their competitiveness by lowering their production costs and also motivate firms to further improve their products to gain an edge over their competitors. Those firms, which are successful at restructuring to best make use of the imported goods and/or to compete with foreign providers, will be more capable of providing higher wages to their employees, while those firms which failed in restructuring may be forced to exit the market.

Although previous research provides evidence showing that globalization is rather a boon than a bane to countries involved, we could not and should not ignore the fact that some countries and some individuals have indeed less benefited from the intensifying globalization than others. Policies and actions are necessary to support a better distribution of the globalization gains, without endangering further progress in globalization. Whether these policies and actions would be best initiated and coordinated in a top-down manner through governments or in a bottom-up way through firms’ awareness and own initiatives is an important question that needs to be further investigated and discussed in the future.