Although globalization could be found in the 19th century among many European powers, only recently has globalization occurred on a global scale. With the creation of the Bretton Woods system, which advocates for free international trade and also attempts to manage the international money system to prevent another Great Depression, increasing contact and trade began between many countries, and today almost every nation’s economy has become closely tied to the economies of the rest of the world. The term we use in political science and other fields to describe this phenomenon is interdependence.
Any event — be it economic, scientific, or even cultural — within any society will have an impact on the rest of the globe. An American economic downturn, such as experienced in late 2007, won’t only hurt the American people anymore but will start a major recession in the rest of the world. An outbreak of a pandemic disease, such as the coronavirus COVID-19, won’t just impact the country of origin, China in this case, but within weeks will affect the rest of the world. Even the emergence of an American pop phenomenon, such as Lady Gaga, will have an impact on the rest of the globe.
International trade, a measure of globalization
International trade is the major way we measure globalization today. We take the sum of imports and exports and then divide it by gross domestic product (GDP) to get a correct measurement of international trade. The higher the percentage, the more connected an economy is globally. In other words, the higher the percentage, the more interdependent a country is globally.GDP measures all economic transactions within a country. GDP per capita divides the overall GDP of a country by its population to measure a country’s wealth.
Foreign direct investment (FDI) is the second major example of globalization. The term refers to one country participating in the economic activities of another country. This can be done directly, through the ownership of property in foreign countries, or indirectly. The ownership of mines, oil fields, and factories are an example of direct foreign investment. A more indirect way of foreign investment includes joint ventures, transfer of management techniques and new technology, and even the purchase of foreign stocks and bonds. Today, trillions of dollars are exchanged every year in the form of foreign investments. While traditionally the most foreign investment occurs between the advanced industrialized world, this has been rapidly changing, with more and more foreign investment occurring in Third-World countries.To be able to invest in a foreign country or trade with a foreign country, a stable currency system has to be in place. This is usually referred to as a monetary system. This monetary system determines the value of a nation’s currency in relation to another nation’s currency, allowing investors, buyers, and sellers to calculate the costs of economic transactions. In other words, the monetary system determines a state’s currency exchange rate in relationship to other nations’ currency rates.
Comparing countries: The KOF Index of Globalization
The KOF Index of Globalization, developed by the Swiss Federal Institute of Technology, measures three dimensions of globalization: economic, social, and political. The following figure shows the increase of globalization from 1970 to 2017. As the figure shows, international economic integration has increased from about 35 percent in 1970 to about 62 percent globally in the last 47 years.
Source: Gygli, Savina, Florian Haelg, Niklas Potrafke, and Jan-Egbert Sturm (2019): The KOF Globalisation Index–Revisited, Review of International Organizations, 14(3), 543–574The KOF Index of Globalization.
The KOF Index measures globalization in economic, social, and political dimensions, using 42 variables and on a scale from 1 to 100. The higher the score for a country, the more globalized (integrated) a country is.
The economic aspects of the KOF Index include both trade and international finances. It measures both exchange of goods and services, including tariffs, taxes, and trade restrictions. The financial aspect looks at foreign investment as well as investment restrictions and international investment agreements.The social aspects of the KOF Index include personal contact, information flows, and cultural globalization. For example, personal contact includes tourism, migration, and international student exchanges. Information flows can include access to television and the internet and freedom of the press. Cultural globalization can include the number of American fast-food places abroad and the protection of civil rights, including gender equality.
Finally, the political aspect looks at the numbers of embassies a country has, how many international treaties a country has signed, how many international organizations a country belongs to, how often a country participates in U.N. peacekeeping missions, and how many international nongovernment organizations (NGOs) are located within a country.
NGOs are private organizations not connected to a government. They raise money and find volunteers to help the population in Third-World countries. They often work with local government to help the local population with issues such as disease, hunger, and natural disasters. Doctors Without Borders and the Children’s Defense Fund are examples of NGOs.
The KOF Index demonstrates that globalization has spread throughout the world since 1970. However, regional differences exist. In Africa, for example, many areas are barely topping the 30 percent level, which shows a very weak level of economic interconnectedness. In other areas, such as in many Western European countries, the KOF Index number has actually topped the 90th percentile, showing an almost perfect level of economic interdependence. In Western Europe, this is obviously the result of European integration through the European Union, but other countries such as Australia and Canada are following suit quickly.In the most recent index, Switzerland was the most highly globalized country in the world, followed by the Netherlands and Belgium. Switzerland was strongly globalized across all categories. The two least-integrated countries in the world are Eritrea and Somalia, both located in Africa.
Smaller countries tend to be more integrated with the global economy than larger countries, which aren’t as dependent on trade. For this reason, the U.S. occupies the 59th spot on the KOF Index.
At present, globalization is becoming a global phenomenon, slowly overcoming the North-South divide. While only about 20 percent of all goods traded globally were exported by developing economies in 1980, this number has changed quite dramatically. By 2005, developing countries had increased their level of trade/exports to 32 percent, and by 2030 that level of trade/exports is expected to increase to 45 percent.Seeing the light at the end of the tunnel
As many liberal economists had hoped for, free trade is slowly able to overcome the North-South divide. The creation of a global free market economy has the potential to overcome the gap between the First and Third World. Certainly, this won’t happen overnight but may take another generation or two. The First World seems to have realized this and has recently opened its exclusive club called the Group of 8 (G-8), including the eight largest economies of the world, to new members. Many are from traditional Third-World countries, such as Indonesia and Brazil.The most recent example of globalization is the creation of the G-20 in 1999. The Group of 20 (G-20) includes 19 countries and the European Union. Combined, these 20 economies represent about two-thirds of the world’s population, 80 percent of the world’s trade, and 85 percent of the world’s GDP. Its major focus is the maintenance of international financial stability and trade. In other words, the G-20 represents an attempt to deal with international economic crises globally.