Impacts on Economic Foundations During Globalization: A Cross-Country Empirical Study (1996–2015)

Introduction

Globalization has been regarded as an indispensable medium of transition from planned to market economy. However, it has been subjected to a mixed bag of reactions among the scholars. Scholars like Nobel laureate economist Joseph Stiglitz (2008), Brown (2008), and De Soto (2008) had been critical of globalization on the grounds of disastrous outcomes of market liberalization in South America and Sub-Saharan Africa, abject failure in improving the conditions of the poor accompanied by an increase in the quantum of absolute poverty across the world in the aftermath of globalization, and lack of both adequate infrastructural framework and governmental effectiveness required for ‘mitigating’ the adverse effects of transition respectively.

Collier’s (2008) work pointed to the fact that 5 billion people’s income had increased in the developing countries due to globalization; however, at the same time about 1 billion people in the poorest parts of Africa and some other “land-locked” countries suffered the worst as the fallout of globalization.

Bhagwati’s (2008) support for globalization came with a caution that the fruits of globalization may be achieved if the glaring issues of gender discrimination, poverty alleviation and exploitation of children as laborers were handled as top priorities.

The focal point of this research is centered around the formulation of an index, formally termed as Index of Economic Foundation (IEF); based on six independent variables (regressors) which would help to provide us a normative view about how a country that has adopted economic transition has been able to perform on the major economic grounds in a holistic sense. The choice of variables and the rational reasons for choices are as follows:

• 1.

  Change in GDP – A high level of growth in the level of GDP (in current US$) on an annual basis would imply that globalization has helped to boost the economic growth of the country in transition per se;

• 2.

  Ratio of Trade to GDP – The ratio of Trade to GDP acts as a major indicator (variable) in deriving the IEF of a country as a greater share of trade in GDP for the said country indicates that it is becoming more ‘globalized’ and transitioning towards market economy;

• 3.

  Ratio of FDI to Gross Domestic Product – The FDI to GDP ratio (FDIGDP) acts an indicator of the given economy’s strength in terms of a preferred destination for attracting foreign investments to foster economic growth;

• 4.

  Ratio of Gross Capital Formation to GDP – Since private (physical) capital formation is essential for the growth of gross investment of a given economy, hence the ratio of gross capital formation to GDP plays the role of a major indicator in determining the strength of the economic foundation of an economy in transition;

• 5.

  Product Concentration Index – The Product Concentration Index (PCI) which is also referred to as ‘The Herfindahl - Hirschmann Index (Product HHI)’ is used to measure the level of ‘concentration’ of products that are generally produced by a country. The values of normalized HHI ranges between 0 and 1;

• 6.

  Product Diversification Index – The Product Diversification Index (PDI) is computed by measuring the absolute deviation of the trade structure of a country from world structure. The diversification index ranges between 0 and 1. A value closer to 1 indicates greater divergence from the world pattern; and

• 7.

  Gini coefficient – The Gini coefficient (GIC) measures the extent of deviation between the existing and perfectly equal distributions of income among the individuals or households within an economy. It ranges between 0 to 100 where 0 refers to perfect equality and 100 refers to perfect inequality.