That’s what we found in a paper published in the journal Economic Letterswhere we calculated measures of economic correlation using data on gross domestic product for 70 countries in the last 60 years. Along with fellow economics scholars Yoonseon Han and David Lindequistwe found that physical distance is actually less important than it used to be, especially with regard to how countries are connected to each other.

Specifically, we measure the extent to which countries find their business cycles – the traditional boom-bust intervals of economic performance – in sync. For example, if there is a positive production shock in Germany, to what extent will it affect income in the United States?

We are interested in whether the relationship between distance and economic correlation has changed over time.

What we found was that from 1960-1999, business cycles were strongly localized. That is, a country’s economy is more likely to be affected by shocks in nearby countries than by shocks in distant countries. For example, the US is more affected by the economic conditions of Canada or Mexico than the economic conditions of the United Kingdom or South Korea.

This finding is not surprising and fits well with a long economic literature showing that countries are more likely to trade nearby countries and that the volume of trade between the two countries is a significant predictor how synchronized their business cycles are.

However, we found that this relationship between physical distance and economic correlation began to break down after 2000. In particular, in the last 20 years, no statistically significant relationship between geographical distance between two countries and the extent to which the two countries’ incomes move together – what economists call their economic covariance.

Why is this important?

In the late 1990s and early 2000s, a number of economists, including Frances Cairncross and Thomas Friedmanpromoting the idea that new technologies such as the internet and containerization leading to the death of distance, where our new lives will be more globalized. They envision a future where these new technologies not only affect how things are made – like global supply chains — but also how we work and live.

Such theories are met with some skepticism by trade researchers of time, and not all prophecies have come true. For example, the link between distance and trade flow has proved stubbornly persistent. Even today, the top-two trading partners of the US remain Canada and Mexico. And only one needs to be seen house price in major US urban centers to find that physical location remains highly valued by most people.

However, our research suggests that at least some of the popular predictions about the globalized economy may come true. For example, the global economy appears to make countries more vulnerable to global, as opposed to local, shocks.

This was made very clear to millions of people during the pandemic, when supply chain bottlenecks hit the world, subsequently creating a global increase in prices. As a result, discussions of US economic and trade policy have increasingly focused on potential vulnerabilities to foreign shocks. In fact, a new buzzword during the Biden administration is “supply chain stability.”

What is not yet known

Our work provides evidence that business cycles and economic shocks have become more globalized over the past two decades. Many of the main economic events from 1960-2000 – like in the 1980s savings and loan crisis or the 1997 Asian currency crisis – have mainly local effects. But recently, the main economic events of the last two decades — such as 2008 financial crisis – has more global implications.

What we don’t know is whether this pattern will continue, resulting in a new era in which most of the world’s economies come together. Or a new turn on economic nationalism lead to a transformation in which economies – and economic shocks – become more localized once again?

the Brief Research a brief take on interesting academic work.

Josh EderingtonProfessor of Economics, University of Miami and Jenny MinierJulian Lange Professor of Economics, University of Miami

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