McClaren, J; Newman, A; (2002) Globalisation and insecurity. (Discussion Papers in Economics 02-06 ). Department of Economics, University College London, UCL (University College London), Department of Economics, University College: London, UK.

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Abstract

We construct a simple model of the e¤ect of increased interna-tional openness on risk bearing in an environment in which the onlyrisk-sharing institutions are self-enforcing agreements. We showhow increased openness can weaken long-term relationships, andhence risk sharing, by increasing the e¤ectiveness of the market,much as some critics of globalization have argued. However, theharm thereby done is tempered by the fact that in order to havesuch a negative indirect e¤ect, openness must have a direct e¤ectthat reduces risk. It is shown that on balance, globalization reducesrisk and raises welfare for those in small countries, but increases riskand reduces welfare for those in large countries. We construct a simple model of the e¤ect of increased interna-tional openness on risk bearing in an environment in which the onlyrisk-sharing institutions are self-enforcing agreements. We showhow increased openness can weaken long-term relationships, andhence risk sharing, by increasing the e¤ectiveness of the market,much as some critics of globalization have argued. However, theharm thereby done is tempered by the fact that in order to havesuch a negative indirect e¤ect, openness must have a direct e¤ectthat reduces risk. It is shown that on balance, globalization reducesrisk and raises welfare for those in small countries, but increases riskand reduces welfare for those in large countries.

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