Development Theory and Globalization, the Second Wave: A Reinterpretation

Abstract

The second wave of globalization, usually dated from 1985 to the Present, is characterized by an increase of the goods and services ratio to World GDP of 9 pp, integration of capital markets with an expansion of 23 pp in FDI over GDP, more intense communication and information relationships with significant transfers of human capital and build-up of business and technological networks. The integration of the Communist countries, including Russia, China, Eastern European and East Asian countries led to a massive expansion, about one third, of the world production possibility set as well as the world market. It redesigned the polyhedron of international trade with the large transfer of manufacturing (5.5 trillion USD from 1985 to 2010) from the developed world to China and East Asian countries. The transfer of technology with the intensification of trade and investment led to an unprecedented convergence in East Asian countries and a reduction of 400 million persons under the poverty line, predominantly in China and India. Another major contribution of our paper is to give an integrated index of trade costs at national and international level that reflects technological progress and trade integration. Coupled with the increasing differentiation and geographical reallocation in factor endowments across the world, they fully explain globalization. The analysis calls for further integration of growth and trade theories. Our reinterpretation is fully consistent with the first wave of globalization and also gives a better framework to estimate the limits of the present globalization wave.Appendix I for this paper is available at the following URL: http://ssrn.com/abstract=2444622Appendix II for this paper is available at the following URL: http://ssrn.com/abstract=2444625