Has globalization reduced the importance of physical distance? As for economic shocks, new research suggests ‘yes’

National economies increasingly move in sync and respond to the same booms and busts as a result of near-real-time communications and interconnected global supply chains. This represents a sharp change from most of the twenty-first century, when economies were primarily affected by economic shocks in neighboring countries.

This is what we found in A Research published in the Journal of Economic Letterswhere we calculated measures of economic correlation using data about gross domestic product for 70 countries over the past 60 years. With his fellow economists Eunsun Han and David LindquistWe found that physical distance was actually less important than it used to be, especially in terms of how closely connected countries were to each other.

Specifically, we measured the extent to which countries succeeded in synchronizing their business cycles – the traditional boom-bust periods of economic performance. For example, when a positive shock to output occurs in Germany, to what extent does this affect income in the United States?

We were interested to know whether the relationship between distance and economic connectedness had changed over time.

What we find is that from 1960 to 1999, business cycles were strongly localized. This means that a country’s economy was more likely to be affected by shocks to neighboring countries than by shocks in distant countries. For example, the United States was more affected by economic conditions in Canada or Mexico than by economic conditions in the United Kingdom or South Korea.

This result is not surprising and fits well with the longer economic literature showing that countries are more likely to trade with Neighboring countries The volume of trade between the two countries is Important predictor About how synchronized their business cycles are.

However, we found that this relationship between physical distance and economic connectedness began to break down after 2000. Specifically, over the past 20 years, there has been no Statistically significant The relationship between Geographic distance between two countries and the extent to which incomes in the two countries move together – what economists refer to as “income”. Economic disparity.

Why does it matter?

In the late 1990s and early 2000s, a number of economists, including… Francis Cairncross and Thomas Friedmanpopularized the idea that new technologies such as the Internet and Container transportation This has led to the death of distance, as our new lives become more globalized. They envisioned a future in which these new technologies would not only impact how goods were produced Global supply chains – but also how we work and live.

Such theories have met with some skepticism before Business researchers At that time, not all expectations were met. For example, distance has been linked to trade flows He proved stubbornly persistent. To this day, the United States’ two largest trading partners remain Canada and Mexico. One has only to look Housing prices In major urban centers in the United States to know that physical location is still highly valuable to most people.

However, our research suggests that at least some common predictions about a globalized economy may be coming true. For example, the global economy appears to have made countries more vulnerable to global shocks, rather than domestic shocks.

This became devastatingly clear to millions of people during the pandemic, when supply chain bottlenecks reverberated around the world. Resulting in higher prices around the world. As a result, economic and trade policy discussions in the United States have increasingly focused on potential vulnerabilities to external shocks. Indeed, the new buzzword during the Biden administration has been “Supply chain flexibility“.

What is still unknown

Our work provides evidence that business cycles and economic shocks have become more globalized over the past two decades. Several major economic events from 1960 to 2000 – e.g The savings and loan crisis of the 1980s or The Asian currency crisis of 1997 – They had primarily local effects. But more recently, major economic events of the past two decades – such as the global financial crisis 2008 financial crisis – It had much larger global impacts.

What we do not know is whether this pattern will continue, leading to a new era in which most of the world’s economies move in tandem. Or there will be a new turn towards Economic nationalism Will this lead to a reversal in which economies – and economic shocks – become more localized again?

the Search summary It is a short overview of interesting academic work.