PONE-D-21-12597

Economic Convergence in a Globalized World: The Role of Business Cycle Synchronization

PLOS ONE

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Reviewers' comments:

Reviewer's Responses to Questions

Comments to the Author

1. Is the manuscript technically sound, and do the data support the conclusions?

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Reviewer #1: Partly

Reviewer #2: Yes

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2. Has the statistical analysis been performed appropriately and rigorously?

Reviewer #1: No

Reviewer #2: Yes

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Reviewer #1: Yes

Reviewer #2: Yes

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Reviewer #1: Yes

Reviewer #2: Yes

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5. Review Comments to the Author

Please use the space provided to explain your answers to the questions above. You may also include additional comments for the author, including concerns about dual publication, research ethics, or publication ethics. (Please upload your review as an attachment if it exceeds 20,000 characters)

Reviewer #1: The manuscript aims to explore the effects of economic globalization on economic convergence for a sample of 89 developed and developing countries in the period 1970-2015 by means of a dynamic panel data model. Overall, the paper approaches a hotly debated topic, being well structured and properly documented. At very first glance, the major concern is depicted by the quantitative approach which is too common. Nevertheless, there occur several shortcomings that should be addressed, as detailed in the attache Review Report.

Reviewer #2: ECONOMIC CONVERGENCE IN A GLOBALIZED WORLD: THE ROLE OF BUSINESS CYCLE SYNCHRONIZATION.

To begin with, the authors provide a historical context on the literature of economic growth and convergence. They suggest that the strand of literature studying economic convergence has concentrated on analyzing the converging process itself, rather than locating the causes that enforce this process, despite the continuous effort to identify the drivers of economic growth. They argue that the global financial crisis of 2008 and the COVID-19 recession are events that highlight the importance of economic integration-specifically in the context of economic convergence. Furthermore, they indicate that in an increasingly globalized world, business cycle synchronization has a twofold role: first, the synchronization of business cycles should be a policy aim in the effort to increase economic integration, and second, synchronization along with integration are significant aspects for economic convergence. In that line, they suggest that these two are the main drivers of economic convergence. Their work aims to prove that business cycle synchronization improves economic convergence in expansionary phases but exposes the countries to the risk of contagion in recessionary phases. Moreover, they propose that globalization-inducing policies in a-synchronized countries have greater effects on growth.

Following Artis and Ocubo (2008), the authors adopt the notion that globalization is the participation of many countries in the formation of a global business cycle. They associate the increased economic integration with more synchronicity of the world business cycle. Their literature review, therefore, is focused on discussing prior work of two main areas of interest: namely globalization and growth and the global business cycle and growth. Previous works studying the effect of globalization on growth, have been using as proxies for globalization either trade or financial and labor markets. They argue that even though those three are the main channels that promote globalization, the concept is wider and involves political and institutional factors. Therefore, either of those three proxies fails to capture the broader effect of globalization on growth. To that extent, indexes proxying for globalization have reported better results.

While discussing previous work on business cycles and growth, two seemingly contradictory views concerning the cause of economic fluctuations that impact growth emerge. They propose that the intuition has traditionally been that domestic shocks are those that impact growth. However, more recent studies suggest that the causes of these domestic shocks can be attributed to fluctuations of the world business cycle, and that is the hypothesis they adopt.

While discussing previous work on business cycles and growth, two seemingly contradictory views emerge, concerning the cause of economic fluctuations that impact growth. They propose that the intuition has traditionally been that domestic shocks are those that impact on growth. However, more recent studies suggest that the cause of these domestic shocks can be attributed in fluctuations of the world business cycle, and that is the hypothesis they prescribe to. Despite the theoretical allure of this hypothesis, the authors point out potential problems in the empirical use of global business cycles in models. The main problems are the definition of global recessions and data accuracy. The definition of global recessions is unclear, a fact that is highlighted in the construction of the global business cycle. Since negative growth rates are negated by positive growth rates in other countries, global economic recessions are hard to pinpoint. Moreover, data are not accurate for all countries across time.

A preliminary analysis of the data provides two important stylized facts. The distribution of countries according to the globalization levels shows that the more globalized countries are also the more synchronized. On the contrary, 80% of the asynchronized countries are among the less globalized. To that extent, the asymmetric effect between globalization and synchronization is pointed out. The relationship between globalization and synchronization is more prevalent among the less globalized and asynchronized countries. This leads to the second fact; the authors conclude that globalization is a necessary condition for economic convergence. Lastly, the authors point to the dynamic relationship between synchronization and economic growth, with synchronized countries experiencing more growth during expansions and more risk of contagion during economic recessions.

The problems described above, that arise from the nature of globalization and the effort to synthesize a global business cycle, inform to an important extent the methodological choices of the authors. The use of the KOF globalization index is more economical than the use of several explanatory variables and has reported better results in the literature. Moreover, the authors employ a dynamic factor approach as a grouping technique, to filter the synchronized countries and then simulate the world business cycle according to the common trend presented in their data.

The dynamic factor model is employed, and Bai and Ng’s criteria is used to certify the existence of one factor. The countries reporting positive factor loading are then selected to simulate the business cycle, which is comprised finally by 49 countries.

After the construction of the global business cycle, the authors proceed to estimate a panel data convergence model, where GDP growth is regressed in the common factor that proxies for the global business cycle and the globalization index. The regression equation is the following.

ln(y_(i,t)/y_(i,t-1) )=β_0+β_1 ln(y_(i,t-1) )+β_2 (〖factor〗_(i,t) )+β_3 (〖KOF〗_(i,t) )+α_i+u_(i,t)

α_i is the country-specific fixed effects mean, while β_2 and β_3 represent the effects of synchronization and globalization, respectively. Due to the potential endogeneity and reverse causality the model is estimated using two-stage fixed effects, with the lag of the dependent variable acting as an instrument. This model is estimated using for the whole sample of 89 countries, and a sub-sample that contains the highly synchronized countries, in 4 different specifications.

The results suggest that both globalization and business cycle synchronicity have a positive impact on growth. Furthermore, globalization has a greater effect on the full sample of countries, which suggests that its effects on growth is decreasing on more synchronization. This means that the hypotheses are both confirmed. Finally, the specification including both explanatory variables report higher speeds of convergence. The process is repeated using another aspect of the composite globalization index, KOF, to proxy for globalization and the World GDP growth rate to proxy for the global business cycle. The qualitative qualities of the results are replicated even though the effects are smaller.

 

Comments - Questions

The causal relationship between synchronization, globalization, and growth. The authors hypothesize that business cycle synchronization is a facet of globalization. I have not understood whether this view is expressed as considering the synchronization as a prerequisite via policy channels, or whether it is viewed as a natural and unavoidable process.

An interesting point is that globalization implies higher growth levels but a greater risk of contagion, as well. However, the symmetry of this result is not discussed, i.e., it is not shown whether the gains from globalization in terms of growth are generally greater than the losses during the recessionary phases.

The discussion of the stylized facts in section 3.1 could be further supported via a scatter plot of the countries according to globalization and synchronization. The clusters that would form on the scatter plot would also be among the countries comprising the global business cycle.

In section 4.1 in the factor loading equation, is there a typo in η_(t-1)?

It would be interesting to include a graph presenting the evolution of the global business cycle in time and compare it with the World GDP growth used in the robustness tests to replicate the results. Moreover, it was unclear whether the global business cycle managed to reflect recessionary phases as well.

In section 5, in the last paragraph it is suggested that the last decade of globalization process, along with the recent COVID recession may alter some of the conclusions of the present work. However, considering the recent recession and its specific character, due to the disruption of global supply chains, wouldn’t we expect a validation of the results? After all, it is argued that globalization implies risks during recessions.

Would it be possible to include, the list of the countries in the sample in an appendix? While the list of synchronized countries is included in the report of the factor loadings, the extended sample is not outlined.

The text had a few grammatical errors. I have commented on them on a separate word file, on the text. I am hoping it is not out of place.

See whether you can update the literature. See for instance:

Holmes, M., Otero, J. and Panagiotidis, T., (2014), A NOTE ON THE EXTENT OF U.S. REGIONAL INCOME CONVERGENCE, Macroeconomic Dynamics, 18, issue 7, p. 1635-1655.

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Reviewer #1: No

Reviewer #2: No

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Economic convergence in a globalized world: The role of business cycle synchronization

PONE-D-21-12597R1

Dear Dr. Lopez,

We’re pleased to inform you that your manuscript has been judged scientifically suitable for publication and will be formally accepted for publication once it meets all outstanding technical requirements.

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Juan Carlos Cuestas

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Reviewers' comments:

Reviewer's Responses to Questions

Comments to the Author

1. If the authors have adequately addressed your comments raised in a previous round of review and you feel that this manuscript is now acceptable for publication, you may indicate that here to bypass the “Comments to the Author” section, enter your conflict of interest statement in the “Confidential to Editor” section, and submit your "Accept" recommendation.

Reviewer #1: All comments have been addressed

Reviewer #2: All comments have been addressed

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2. Is the manuscript technically sound, and do the data support the conclusions?

The manuscript must describe a technically sound piece of scientific research with data that supports the conclusions. Experiments must have been conducted rigorously, with appropriate controls, replication, and sample sizes. The conclusions must be drawn appropriately based on the data presented.

Reviewer #1: Yes

Reviewer #2: Yes

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3. Has the statistical analysis been performed appropriately and rigorously?

Reviewer #1: Yes

Reviewer #2: Yes

**********

4. Have the authors made all data underlying the findings in their manuscript fully available?

The PLOS Data policy requires authors to make all data underlying the findings described in their manuscript fully available without restriction, with rare exception (please refer to the Data Availability Statement in the manuscript PDF file). The data should be provided as part of the manuscript or its supporting information, or deposited to a public repository. For example, in addition to summary statistics, the data points behind means, medians and variance measures should be available. If there are restrictions on publicly sharing data—e.g. participant privacy or use of data from a third party—those must be specified.

Reviewer #1: Yes

Reviewer #2: Yes

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5. Is the manuscript presented in an intelligible fashion and written in standard English?

PLOS ONE does not copyedit accepted manuscripts, so the language in submitted articles must be clear, correct, and unambiguous. Any typographical or grammatical errors should be corrected at revision, so please note any specific errors here.

Reviewer #1: Yes

Reviewer #2: Yes

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6. Review Comments to the Author

Please use the space provided to explain your answers to the questions above. You may also include additional comments for the author, including concerns about dual publication, research ethics, or publication ethics. (Please upload your review as an attachment if it exceeds 20,000 characters)

Reviewer #1: The revised version of the manuscript improved in a proper manner. The whole suggestions and recommendations were implemented suitably. As well, appropriate explanations were provided.

Reviewer #2: (No Response)

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Reviewer #1: No

Reviewer #2: No