First Teaching Unit / First Learning environment

Essential reading

Economic evolution of the countries

Content

1 Economic processes

2 Economic freedom

3 Economic evolution

4 Conclusions

Keywords: globalization, first level country, second level country, third level country, nation, State.
1. Economic processes
Surely, globalization is a concept that you have listened recently, although, this concept is not
new. According to the Business Dictionary (2018), globalization is a worldwide movement toward
economic, financial, trade and communication integration. The first wave of this movement
started in 1870 and ended with World War I. After this period, the world started a protectionism
era with high tariffs and trade barriers. Later, after World War II, countries started to rebuild their
economic processes, to raise the cities that were devastated by the war, this led to a second wave of
globalization to emerge that lasted from 1950 to 1980. The main goal was to restore the commercial
relations between Europe, North America, and Japan. Many institutions were created to ease
economic integration, such as the World Trade Organization, the World Bank, and the International
Monetary Fund, among others.

Did you know that…?

According to the Global Competitiveness Report (2018), Colombia is
ranked 66 among 137 economies.

The third wave of globalization appeared due to the advances in technology, communications, and
transportation, as well as the reductions of the trade barriers which made it easier for countries
to exchange goods in the form of exports. Also, the industrial revolution had a great impact in
globalization, because of the changes it brought to the economies, becoming a driven force of
modern global economies (Fink, 2013). Colombia started its globalization process in 1991 and it has
changed the country’s economic processes making it more competitive and advanced.

Nowadays, countries are being measured in different aspects, not only economically, but also in
terms of education, wellbeing and social development. This evaluation is done by the World Economic
Forum (WEF), a special branch of the World Bank in charge of ranking the economies of each
country. Every year, the WEF publishes the Global Competitiveness Index in which they evaluate
12 pillars to determine the competitiveness landscape of 138 economies, providing insight into the
drivers of their productivity and prosperity.

The 2018 Report (Schwab & World Economic Forum, 2017) showed the following results:

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 Table 1. Global competitiveness index: ranking according to the World Economic Forum Report (2018)

Country (2018) Score (2018) Ranking 2017

1. Switzerland 5.86 1
2. United States 5.85 3

3. Singapore 5.71 2

4. Netherlands 5.66 4

5. Germany 5.65 5

6. Hong Kong SAR 5.53 9

7. Sweden 5.52 6

8. United Kingdom 5.51 7

9. Japan 5.49 8

10. Finland 5.49 10

… … …
65. Jordan 4.30 63

66. Colombia 4.29 61

67. Georgia 4.28 59

136. Mozambique 2.89 133

137. Yemen 2.87 138

Source: Schwab & World Economic Forum (2017)

As you can see, Colombia lost 5 positions from one year to another. Why? To understand this report
is important to analyze the 12 pillars used to rank each country. These pillars are divided into three
main groups: basic requirements, financial enhancers, and innovation and sophistication.

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 Global competitiveness index

Innovation and sophistication

factors sub index

Pillar 11. Business sophistication

Pillar 12. Innovation

Efficiency enhancers sub index

Basic requirements
sub index
Pillar 5. Higher education and training
Pillar 6. Goods market efficiency
Pillar 1. Institutions Pillar 7. Labor market efficiency
Pillar 2. Infrastructure Pillar 8. Financial market development
Pillar 3. Macroeconomic environment Pillar 9. Technological readiness
Pillar 4. Health and primary education Pillar 10. Market size

Figure 1. Global Competitiveness Index Framework: the 12 pillars based on information from World Economic Forum
Source: Schwab & World Economic Forum (2017)

Globalization has been spreading all over the world thanks to the need of the countries to enter inter-
national markets as a way to contribute to their economic processes.

2. Economic freedom
Suppose you are planning to export shoes to France, ¿does the Colombian government has control
over your money? ¿Are you free to receive the payment of the export process? This has to do with
what is called economic freedom, the ability of the people to make economic decisions. Economic
freedom includes trade, business, investment and property rights. Colombians have power over their
own money. For example, if you want to buy a car, a house or just go on vacation, you don’t need
to ask permission to the president to use your money. That is because Colombia, as a second level
country has developed economic freedom policies.

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 Did you know that…?
Colombia is a second level country.

2.1. First level countries

The term first level countries, or first world countries, normally refers to the countries that have
reached a high level of human development in terms of life expectancy, quality services, health
and education. This concept appeared after World War II, referring to the allies of the United
States during the cold war. Nowadays, the first level countries are those who have high levels of
industrialization, technology, and developed economies. Countries like Canada, United States,
Japan and Europe are considered first level countries.

2.2. Second level countries

This term was first used when speaking about socialist countries such as Russia and China. After
World War II, when United States and Russia divided the German territory, Russia established a
socialist economic model based on protectionism. Today, this term is used by the economists to refer
to the so-called emerging markets or developing countries, such as India, Brazil or Mexico. These
countries are none for their geographical position and developing economies. Among this type of
countries, China, Russia, and Brazil stand out thanks to their market size.

2.3. Third level countries

The term third level country was first used by the French economist Alfred Sauvy in 1952 when
referring to the developing countries. Nevertheless, this term is referred today to poor countries that
are found in Africa and some Asian and Latin American countries like Bolivia or Haiti.

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3. Economic evolution
The world has changed and therefore economies have also evolved. Adam Smith, for example, spoke
about a country’s absolute advantage, explaining the fact that one country can have advantage over
others when it’s been able to produce goods more efficiently in terms of costs, especially those who
were dependent on natural resources.

David Ricardo, on the other hand, proposed the comparative advantage theory, that stablishes that a
country must specialize in the product it makes best.

Finally, Michael Porter talked about the competitive advantage theory, in which a company can be
competitive only if they develop high valued products or services.

All these theories have played an important role in the economic evolution of several countries. Today
we can still find countries that depend on their natural resources as their only way of maintaining their
economy stable, while other countries are basing their economy on innovative products and services
with high added value.

Colombia has based its economy in exporting oil, coal, emeralds, and flowers; Sweden, on the other
hand, is implementing green energy strategies. So, who is economically evolving? Obviously Sweden,
thanks to the environmental strategies that are leading to the independence of natural resources,
and, moreover, they are innovating.

Figure 2. Economic evolution: oil vs green energy

Source: Freepik (2017)

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 3.1. Economic variables

Along with the economic evolution, the economic variables used to measure the economies also
changed. For many years, economies were measured through its Gross Domestic Product (GDP),
that defined if a country produced enough goods to satisfy their population’s needs.

In recent years, an economist named Joseph Stiglitz contradicted the theory that the economy can
only be measured using the GDP. Stiglitz proposed that other economic variables should be included,
such as access to education, health, personal safety, property rights, among others (Stiglitz, 2002).

In consequence, many other indexes were taken to account to measure economic development,
such as the Gini Index, Human Development Index, Social Innovation Index, Environmental and
Sustainability Index, and Peace Index. Each one measures countries’ economies in different aspects
rather than only in the financial one.

3.2. Economic models

The modern economy is complex and difficult to understand. Its job is to distribute the limited
resources among the individuals within a country. This isn’t an easy job. That’s why economists try to
interpret economies and predict their behavior. Modern economists build models to try to understand
the factors that affect the economies, but what is exactly an economic model?

“An economic model is a simplified description of reality, designed to yield hypotheses about
economic behavior that can be tested” (Ouliaris, 2011). On these bases, you can find two economic
models: the theoretical and the empirical. The theoretical model, for instance, will show a positive
relationship between the customer’s expenditure and income. The empirical model, on the other
hand, will show a dependent relationship between the variables: if the income increases, the
expenditure will increase, but if the income decreases, the expenditure will do so.

But what makes a good economic model?

Before answering is important to know that an economic model is not perfect, but it can help
economists to predict economic scenarios, like the economic crisis in 2008, which had repercussions
until 2010 for most of the economies. When an economic model forecasts errors, economists must
check the model and recalculate.

No economic model can give a perfect description of reality, but the very process of constructing,
testing, and revising models forces economists and policymakers to adjust their views about how an
economy works (Ouliaris, 2011).

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4. Conclusions
Globalization is a worldwide integration process that affect everyone all the time. Every decision made
by one country will have a positive or negative influence on lives and economies of another country.
Technological advances contribute to make some countries more globalized than others. The fact that
you can listen to foreign music, read international books, or watch movies from overseas makes you
part of this globalized world.

Knowing this, countries cannot be measured only with economic variables, because there are other
aspects that influences people’s lives. First level countries, for example, surely will have better access
to high quality education and health than third level countries.

Do not be surprised if first level countries are developing better economies by promoting the use of
high added value product and services to improve their quality of life. Colombia needs to become
a first level country, but to do so it needs to promote among their citizens the culture of the
competitive advantage, rather than the absolute advantage.

To summarize…
Colombia is a second level country. ¿Do you want it to be a second level
country forever?

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References
Business Dictionary. (2018). Globalization. Retrieved from:
http://www.businessdictionary.com/definition/globalization.html

Fink, M. (25 September 2013). A Brief History of Globalization. Global Edge.

Retrieved from: https://globaledge.msu.edu/blog/post/1555/a-brief-history-of-globalization

Schwab, K. & World Economic Forum (Eds.). (2017). The Global Competitiveness Report 2017-2018.
Geneva: World Economic Forum. Retrieved from: http://www3.weforum.org/docs/GCR2017-
2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf

Ouliaris, S. (2011). What Are Economic Models?. Finance & Development, 48(2). Retrieved from
http://www.imf.org/external/pubs/ft/fandd/2011/06/basics.htm

Stiglitz, J. E. (2002). Information and the change in the paradigm in Economics. In J. E. Stiglitz,
American Economic Review (pp. 460-501). New York: American economic Association.

References of figures
Freepik (2017). Economic Evolution: Oil vs Green Energy [Vector]. Retrieved from:
https://www.freepik.es/vector-gratis/diseno-ecosistema-contaminacion_2730090.
htm#page=1&query=ecosistema%20y%20poluci%C3%B3n&position=0

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 TECHNICAL INFORMATION

Module: Globalization and Competitiveness

First Teaching Unit: Introduction and historical background
First Learning environment: Economic evolution
of the countries

Author: Sandra Milena Chicas Sierra

Academic advisor: Claudia Rocío Puentes Mendoza

Graphic designer: Brandon Steven Ramírez Carrero
Assistant: Eveling Patricia Peñaranda Izquierdo

This material belongs to the Politécnico Grancolombiano.

Total or partial reproduction is prohibited.

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