Globalization

David Ricardo

The most important paper by one of the founding fathers of economics, David Ricardo, written at the beginning of the 19th century comes to the conclusion that customs levied on agricultural imports were damaging for England, because that consumer disadvantages arising from this duty were not offset by the advantages for producers. Free trade leads to all countries producing precisely those goods for which they enjoy comparative advantages, or which they can produce using less resources than other goods. It thus increases the consumption potential of people compared to a situation without trade (autarchy). In the longer-term specialization through trade also enables higher production growth.

However, if the markets are incomplete, free trade, unlimited capital movements or international migration can also be damaging. In an award-winning paper ifo research professor Scott Taylor shows that the eradication of the American bison was accelerated by trade. However, the problem in this case was not the existence of trade itself, but the absence of property laws. The same can be said of climate change: trade can increase greenhouse gas emissions. The response, however, cannot be to limit the international movement of goods, but must be the development of the worldwide trading of emissions rights.

Challenges for the Modern Welfare State

Globalization creates major challenges for the modern welfare state. The liberalization of trade can lead to unemployment if it results in inflexible minimum wages or social benefits. This would destroy the prosperity gains from free trade. By reforming its labor market in the framework of Agenda 2010, Germany has taken the right steps towards making its labor markets fit for globalization. Restricting trade, on the other hand, would have saved the country painful adjustments, but would have meant renouncing the substantial gains from free trade.

Globalization almost inevitably creates winners and losers within a country. Under ideal conditions, however, the winners gain more than is lost by the losers, meaning that the cake gets bigger overall. It is then the task of economic policy to arrange the distribution of the cake so that it is possible to compensate the losers. The design of efficient compensation mechanisms is one of the central tasks of international trade research at the ifo Institute.

The Institute is also concerned with globalization as a broader process, including social aspects such as the exchange of information and ideas and political integration. For example, the Institute has collaborated on the new KOF Globalisation Index.