Assessing the economic interdependence between states and regions
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In this paper we discuss how, and to what extent, the states and regions of the world are linked, and analyse how increased globalisation has affected the type and magnitude of linkages. Issues we address include: what are the channels for the transmission of good and bad shocks across borders and regions, and how does increased globalisation affect the type, number and magnitude of international transmission channels. The empirical evidence on international linkages, how these have evolved, and their impact on economic development, illustrates well that globalization has pros as well as cons. In sum, there is however little doubt that the globalization process – through the expanding and strengthening of international linkages – contributes to growth and economic development in the participating countries. The major downside of increased international interdependence relates to the issues of vulnerability and instability. We conclude with the discussion of two measures to reduce vulnerability: the choice of currency regime, and the supervision and practice of the banking sectors in the developing economies. It is important to keep in mind, however, that although international linkages imply an exposure to externally generated economic fluctuations and instability – this is just part of the story. International trade and international capital markets may in fact work as a means to dampen domestically generated fluctuations, and thus have a stabilizing impact.