A new index of globalisation: Measuring impacts of integration on economic growth and income inequality
| Date | 01 February 2021 |
| Author | Hyeon‐Seung Huh,Cyn‐Young Park |
| Published date | 01 February 2021 |
| DOI | http://doi.org/10.1111/twec.12998 |
World Econ. 2021;44:409–443. wileyonlinelibrary.com/journal/twec
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409
© 2020 John Wiley & Sons Ltd
Received: 11 April 2019
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Revised: 3 June 2020
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Accepted: 12 June 2020
DOI: 10.1111/twec.12998
ORIGINAL ARTICLE
A new index of globalisation: Measuring impacts
of integration on economic growth and income
inequality
Hyeon-SeungHuh1
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Cyn-YoungPark2
1Yonsei University, Seoul, Korea
2Economic Research and Regional Cooperation Department, Asian Development Bank (ADB), Mandaluyong City,
Philippines
KEYWORDS
composite index, economic globalisation, economic growth, extraregional integration, income inequality, intraregional
integration
1
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INTRODUCTION
The rise and fall of globalisation has been spectacular. The phenomenon has swept around the world since
the 1980s under the consensus that the free movement of goods, services, capital, technology and labour
among countries integrates individual markets and economies for greater efficiency of resource alloca-
tion, higher productivity and more investment opportunities. However, even as globalisation has brought
economic prosperity for the developing world, it has come under fire for its negative side effects. Some
gain from trade openness, while others lose. Fierce competition may have contributed to economic and so-
cial inequalities among individuals or countries, generating income and political polarisation, and poten-
tially undermining social and cultural cohesion. Eventually, it was seen as a risk to economic growth and
stability. The economic subordination of underdeveloped countries, the marginalisation of socioeconom-
ically vulnerable groups and the loss of sociocultural diversity are fiercely debated as related concerns.
Indeed, debate over the distributional effects of globalisation has intensified in recent years. Some
argue globalisation has been a major driving force in widening inequality between and within coun-
tries (Bourguignon,2016; Milanovic,2016). Recognition that globalisation comes with grave risks
has garnered political support for a new form of regionalism1—a departure from regionalism based on
1In the mid-1980s and early 1990s, regionalism was transformed by reconfigured regional institutions such as the Association
of Southeast Asian Nations (ASEAN), the emergence of the Asia-Pacific Economic Cooperation (APEC) forum and the
European Union (EU). Such new forms of regionalism gained ground through dealing with regional financial turmoil and
global economic crisis. Their actions led to the argument of a new regionalism being distinct from the old form of
regionalism, which had largely been drawn from protectionist postwar interests. Indeed, some see these new regionalism as
“open regionalism” as a building block of global economic integration.
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rather exclusive, protectionist trading blocs—as a strategy to build economic and financial
resilience.
Under open regionalism, regional economic integration is regarded as a building block of global
economic integration. Indeed, regional integration has gathered pace, expanding in parallel with glo-
balisation itself. The trend goes back more than two decades. For example, Sampson and Woolcock,
writing in 2003, observed that in one decade, the world had seen the most ambitious round of multilat-
eral trade negotiations successfully concluded, while at the same time, regional trading arrangements
proliferated. Further, growing attention has been paid to how the expansion of regionalism is related
to the context of globalisation (Söderbaum & Shaw, 2003; Woolcock,2006).
However, there appears to have never been an attempt to quantitatively assess the extent to which
regional economic integration and global economic integration have influenced each other: for ex-
ample, the contribution of regional integration to global integration, interactions between these two
processes and ultimately their separate and synergetic impacts on economic growth and income in-
equality. The distinction between the regional and nonregional forces that propel global economic
integration is particularly important when seeking to balance the slowing pace of globalisation with
integration policies that prioritise certain regions based on the common economic, security or political
interests and tackle weaknesses created by full economic integration at the global level.
Economic integration can take many forms, such as promoting trade and investment, developing
infrastructure, improving people's mobility, strengthening the provision of global public goods and
providing the legal and institutional basis for international policy cooperation. Recent studies have
introduced composite measures of globalisation that can accommodate various aspects of economic
integration. Among them, the most widely used is the KOF Index of Globalization, introduced by
Dreher (2006), which measures the economic, social and political dimensions of globalisation. The
KOF Index of Globalization 2017 is based on 23 variables and covers 187 countries from 1970 to
2014.
This paper develops a new global economic integration index (GEII) based on 25 variables for 158
countries over 2006–14.2 The key difference from existing composite measures of globalisation is that
the GEII can be decomposed into regional and nonregional integration. Specifically, two subindexes
are first constructed: an intraregional economic integration index (IEII) and an extraregional eco-
nomic integration index (EEII). The IEII compares a country's economic activities with that of other
countries in the same regional grouping, while the EEII compares that with countries outside the re-
gional grouping. The weighted average of IEII and EEII is then computed to ascertain the GEII. As
such, the GEII can assess the relative contributions of intraregional and extraregional integration to a
country's globalisation. This can be useful for assessing the role of regional integration in relation to
globalisation in any national development strategy and informing policymakers about how best to
manage economic integration at different layers of geographic groupings, given its potential benefits
and risks.
The second part of this paper examines empirically the possible effects of globalisation on eco-
nomic growth and income inequality using the index. Many studies have tackled the issue of economic
integration, growth and income inequality in parallel with globalisation (Aghion & Williamson, 1998
and the World Bank, 2002 give detailed reviews). However, empirical test of the dynamics between
2Globalisation is more than a purely economic phenomenon. However, no consensus has been reached concerning which
noneconomic features need to be included in the measurement of globalisation. As Dreher etal.(2010) note, the
environmental impact of globalisation is a good example of the debate. Further, many noneconomic features are difficult to
quantify or lack proxies for numerical analysis. In view of this, the proposed index attempts to capture multidimensional
aspects of global integration covering both economic and noneconomic activities.
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economic integration, growth and income inequality has been a challenge. First is the measure of
economic integration. Economic integration is a multifaceted process, but earlier studies used proxy
variables capturing a narrow scope of economic integration. As this was often focused on trade and
investment flows, it created severe bias in the estimates. Second, socioeconomic variables associated
with global economic integration may be strongly correlated with one another, leading to collinearity
problems if each are included in the same regression. To tackle these deficiencies, Dreher, Gaston,
and Martens (2008) suggest using a composite index that aggregates the multidimensional aspects of
globalisation into a single measure. The suggestion is followed in this paper.
The rest of this paper is structured as follows. Section2 reviews economic literature on the open-
ness–growth–inequality nexus and the evolution of index approach to empirically testing the relation-
ship. Section3 discusses the process of constructing the composite indexes. Section4 presents the
composite indexes of the GEII, IEII and EEII and discusses their performance and features. Section5
empirically examines the possible effects of globalisation on economic growth and income inequality.
Section 6 concludes.
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LITERATURE REVIEW
A substantial theoretical and empirical literature has investigated the role of economic openness
and globalisation in advancing developmental goals. Economic integration is expected to promote
growth through scale economies in common markets and production networks, free trade and in-
vestment flows, technology diffusion and knowledge spillovers. Endogenous growth models show
that integration has positive effects on both output level and growth (Baldwin,1989; Grossman &
Helpman, 1991; Rivera-Batiz & Romer, 1991; Walz, 1998). While quite a few studies also pre-
sented a positive relationship between trade openness and economic growth (Dollar,1992; Dollar
& Kraay,2004; Edwards, 1992, 1992; Frankel & Romer, 1999; Frankel & Romer, 2001; Harrison,
1996; Harrison & Hanson, 1999; Sachs & Warner, 1995), their results were often subject to serious
econometric (often endogeneity or missing variables) issues and data problems. Moreover, the extent
to which increased income brought about by economic integration reduces poverty seems to have
varied across and within countries.
An increasing number of studies have investigated the effect of globalisation on income inequality
in recent years. Dollar and Kraay (2004) argued that globalisation leads to faster growth and poverty
reduction in poor countries based on individual cases and cross-country analysis. Potrafke (2015)
found that globalisation has boosted national incomes and helped improve gender equality and human
rights, but it has nonetheless increased within-country income inequality. Gozgor and Ranjan (2017)
also presented evidence to show that globalisation has increased both inequality and redistribution.
After reviewing the related studies, Ravallion (2018) suggested that multiple factors, including trade,
capital and labour mobility, work in often subtle and ambiguous ways to influence inequality.
Recent studies note nonlinear impacts of globalisation on growth and income inequality. Lang and
Tavares (2018) also employed composite indices to capture the multidimensional nature of economic
globalisation. Using the KOF index, they find that economic globalisation improves incomes at early
and medium stage of globalisation, but increase income inequality within countries. Gygli, Haelg,
Potrafke, & Sturm (2019) also used the KOF index to investigate the impact of globalization on
growth, separating de jure from de facto globalization. They find that while economic, social, political
globalization is all positively associated with economic growth especially in developing countries, de
jure economic and political globalization and de facto social globalization are more pronounced when
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