Almost Equi-Marginal Principle Based Composite Index of Globalization: China, India and Pakistan

Abstract

The present study proposes an alternative method to construct an index of globalization which is based on the principle of almost equi-marginal contributions (AEMC) or Shapley values of the constituent variables to the overall index rather than the correlation coefficients among the constituent variables and the overall index (the KOF index based on the principal component scores). This has been done by minimization of the Euclidean norm of the Shapley values of the constituent variables. As an exercise, secondary time series data (1970-2013) on the measures of globalization in three different dimensions (economic, social and political) of three economies (China, India and Pakistan) have been used. A comparison of the AEMC index with the KOF index reveals that while the former is more inclusive, the latter is more elitist in matters of inclusion of the weakly correlated constituent variables in the overall (composite) index. As a consequence, the AEMC index is more sensitive than the KOF index of globalization. Both indices capture the trends in globalization in the countries under study and are highly correlated between themselves. Thus, AEMC is an alternative or perhaps a better method to construct composite indices.

Keywords: Globalization; KOF index; equi-marginal; Shapley value; global optimization, China, India, Pakistan

JEL Classification: C43, C61, C71, F60, P52