Final remarks

This chapter has developed a unified and yet tractable framework that integrates many key insights of the fields of international trade and economic growth. Its distinguish­ing feature is that it provides a global view of the growth process, that is, a view that treats different regions of the world as parts of a single whole.

Despite the length of this chapter, some important topics have been left out. The first and most glaring omission is asset trade. This type of trade allows the world economy to redirect its investment towards regions that offer the highest risk-adjusted return.^[332] To the extent that patterns of trade are determined by comparative advantage, these are the regions where capital is scarce and productive and this raises efficiency in the world economy. To the extent that patterns of trade are determined by luck, asset trade magnifies the effect of this randomness and this could either raise or lower the efficiency of the world economy. If this were all there is to asset trade, it would not be too difficult to add to this chapter a section on asset trade in which we endow the world economy with a complete set of asset markets. But asset trade does not seem to work as the standard theory of complete markets would suggest. Empirically asset trade seems both much smaller and much more volatile than it would be warranted by its fundamentals, i.e. savings, human capital and industry productivities. To understand these aspects of asset trade it seems necessary to incorporate to the theory features such as sovereign risk, asymmetric information and asset bubbles.

A second important omission of this chapter is government policy. A central aspect of globalization so far has been its imbalanced nature. While economic integration has proceeded at a relatively fast pace, political integration is advancing at a slower pace or not advancing at all. The world economy today features global (or semi-global) markets but local governments. In this context, globalization can lead to a decline in growth and income through a reduction in the quality of policies. International spillovers eliminate the incentives to adopt good but costly policies. Trade also “bails out” regions with bad policies since they can spare some of their costs by specializing in industries where bad policies have little effects. As a result of these forces, globalization could create a “race to the bottom” in policies that lowers savings, human capital, and industry productiv­ities. And this could potentially mitigate or even reverse the benefits from economic integration.^[334] Understanding the circumstances under which this “race to the bottom” can happen and the appropriate policy corrections that are required to allow the world economy to take full advantage of globalization is another important task. But this task would also require another chapter of this magnitude and cannot be undertaken here.

At first sight, factor movements might seem a third important omission. But I think it is less so. As mentioned in Section 2, the notion that physical and human capital is geographically immobile seems a fair description of reality. Moreover, the benefits of factor mobility might be reaped without factors having to move at all. What is really important about factor movements is that they permit factors located in different regions to work together and produce. Advances in telecommunications technology and the standardization of software allow producers around the world to combine physical and human capital located in different regions in a single production process.

The goal of this chapter has been to convey a global way of thinking about the growth process. To claim success, you should be persuaded by now that developing and sys­tematically studying world equilibrium models is a necessary condition to gain a true understanding of the growth process. By “true”, I mean the sort of understanding that allows us to frame clear and unambiguous hypotheses about why some countries are richer than others or what are the main forces that drive economic growth in the world economy. To claim success, you should also be convinced by now that much is already known about the structure of world equilibrium models. But you should also be aware that the global view of economic growth that these models reveal is still somewhat fuzzy and blurred. Sharpening this view is a major challenge for growth and trade theorists alike.

Acknowledgements

I dedicate this research to the memory of Rudi Dornbusch, the best mentor, colleague and friend a young economist could have hoped for, and always capable of making others see things differently. I am thankful to Fernando Broner, Gino Gancia, Francesc Ortega and Diego Puga for their useful comments and to Matilde Bombardini, Philip Saure and Ruben Segura-Cayuela for providing excellent research assistance. I am also grateful to the Fundacion Ramon Areces for its generous financial support.

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