NTNU Globalization Research Programme

Research Focus Area: Global Economic Flows, Governance and Stability

Over decades international trade has grown substantially more rapid than total world production. Improved technological possibilities for trade and capital flows, and reduced regulations on the movements of goods and capital between countries, have made economies more open at the same time as they have become more interdependent.

Over the last 50 years there are some broad and important patterns of world growth. The western world had rapid growth in the first decades after the second world war. In recent decades Asia has been the growth winner. In 1960 per capita income was about the same in Asia and Africa. However, from then on we see a divergence – where Asia has grown and Africa has not. With current growth rates, half of the world population doubles its income every 10thyear.

The fast growing countries have at least two important common characteristics: They have plenty of cheap labour, but they have few natural resources. The result has been high prices on natural resources, and low prices on manufactured goods. This shift in relative prices has benefitted thosecountries that export natural resources and import manufactured goods – in particular Norway.

At the same time globalization has gone hand in hand with increased international macroeconomic imbalances. Most western countries have expanded their public or foreign debt. While on the other hand in particular China have had huge current account surpluses. Today most people would agree that the current economic imbalances are not sustainable, and many would also claim that they are a major cause of the recent financial crisis.

The patterns of economic globalization motivates several research questions for this focus area:

 

Why does China save so much?

High growth in China is due to high investments. At the same time China supply more goods on the world market than they demand. The combination of high investments and large current account surpluses can by definition only be possible when savings are high. The high savings rate in China may be seen as a puzzle. Much economic theory would predict that a country growing as fast as China should save less.

The high savings rate in China is important to understand not only to explain the current global economic imbalances, but also to predict future economic development. The development of Chinese savings will be key to future world economic development. In particular, for Norway the high prices of natural resources such as oil could get even higher if the savings rate of China decreases over time, as this could lead to even higher demand for natural resources.

 

Why does natural resources breed success in some countries but failure in others?

The increase in prices of natural resources with globalization has implied massive income gains to resource abundant countries. In the 1950s and onwards economists argued that countries with their comparative advantage in production based on natural resources would suffer from declining terms of trade. The price of raw materials relative to industrial goods would decline over time, making specialization in natural resource based production unattractive. Paradoxically, recently economists have argued that specialization in natural resources is unattractive for exactly the opposite reason; such specialization is so economically beneficial that in fact it may turn into a curse.

But the average effect of oil in Norway and Nigeria, or the average effect of diamonds in Botswana and Sierra Leone, may not be the most interesting nor relevant question. Rather than the average it is more important to understand the variation. Why has oil induced prosperity in some countries but stagnation in others? Why, and when, do natural resources fuel civil conflict?

 

How does globalization affect governance?

Economic institutions and economic reform are main drivers for economic and political development after the discovery of valuable natural resources. At least two questions form: How docountries reform when they receive resource rents? How shouldcountries reform when they receive resource rents?

Key elements of constitutions in many countries are "checks and balances" – institutional rules that limit the political abuse of power, balance political power, and may enhance growth. However, it seems to be the case that in countries where such rules are particularly important – for example because the country has substantial public income from natural resources – the institutional rules are undermined by politicians. If checks and balances limit political rents, why would voters support their removal as they have done in e.g. Bolivia, Ecuador, and Venezuela?

Contact person

Professor Ragnar Torvik

Department of Economics

Faculty of Social Science and Technology Management

E mail: ragnar.torvik@svt.ntnu.no