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Gains from Globalization

        The gains from globalization can be analyzed in the context of the three types of channels of economic globalization identified earlier.

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Trade in Goods and Services

        According to the standard theory, international trade leads to allocation of resources that is consistent with comparative advantage.  This results in specialization which enhances productivity. It is accepted that international trade, in general, is beneficial and that restrictive trade practices impede growth.  That is the reason why many of the emerging economies, which originally depended on a growth model of import substitution, have moved over to a policy of outward orientation.  However, in relation to trade in goods and services, there is one major concern.  Emerging economies will reap the benefits of international trade only if they reach the full potential of their resource availability.  This will probably require time.  That is why international trade agreements make exceptions by allowing longer time to developing economies in terms of reduction in tariff and non-tariff barriers.  “Special and differentiated treatment”, as it is very often called has become an accepted principle.

Movement of Capital

        Capital flows across countries have played an important role in enhancing the production base.  This was very much true in 19^th and 20^th centuries.  Capital mobility enables the total savings of the world to be distributed among countries which have the highest investment potential.  Under these circumstances, one country’s growth is not constrained by its own domestic savings.  The inflow of foreign capital has played a significant role in the development in the recent period of the East Asian countries.  The current account deficit of some of these countries had exceeded 5 per cent of the GDP in most of the period when growth was rapid.  Capital flows can take either the form of foreign direct investment or portfolio investment.  For developing countries the preferred alternative is foreign direct investment.  Portfolio investment does not directly lead to expansion of productive capacity. 
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It may do so, however, at one step removed.  Portfolio investment can be volatile particularly in times of loss of confidence.  That is why countries want to put restrictions on portfolio investment.  However, in an open system such restrictions cannot work easily.