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{{Short description|Economic effect}}
{{
In [[economics]], a '''spillover''' is
For example, [[externalities]] of economic activity are non-monetary spillover effects upon non-participants. Odors from a rendering plant are negative spillover effects upon its neighbors; the beauty of a homeowner's [[flower garden]] is a positive spillover effect upon neighbors. The concept of spillover in economics could be replaced by terminations of technology spillover, R&D spillover and/or [[knowledge spillover]] when the concept is specific to technology In the same way, the economic benefits of increased trade are the spillover effects anticipated in the formation of multilateral alliances of many of the regional nation states: e.g. [[South Asian Association for Regional Cooperation|SAARC]] (South Asian Association for Regional Cooperation), [[Association of Southeast Asian Nations|ASEAN]] (Association of South East Asian Nations).
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==Types of spillover effects==
There are different types of spillover effects which can take place. According to the Corporate Finance Institute,<ref>{{cite web |title=Spillover Effects |url=https://corporatefinanceinstitute.com/resources/knowledge/other/spillover-effect/ |website=Corporate Finance
1. Social Interaction Spillover Effect
2.
3.General
4. Externalities Spillover Effect
===Social interaction spillover effect===
Social interaction spillover effect occurs when community programs and initiatives have the effect of benefiting the welfare of people and in turn the community at large. For example, free education, social welfare payments and other public goods are designed to improve the social behaviour, education and employability of citizens which in turn could lower crime rates and poverty in the community in theory.<ref>{{cite web |title=Spillover Effects |url=https://corporatefinanceinstitute.com/resources/knowledge/other/spillover-effect/ |website=Corporate Finance
'''<big>Context equilibrium effect</big>'''
Context equilibrium effect emerges from interventions that influence social norms or behaviors within a specific context, such as a local area where the interactions take place.
===General equilibrium effects===
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===Externalities spillover effect===
External spillover effects are similar to general equilibrium effects in that they impact third parties which are not directly participating in the transaction. However, the key difference is that externalities are represented by social costs that are not reflected in a price change without government intervention.<ref>{{cite journal |last1=Hutchinson |first1=Emma |title=Principles of Microeconomics |url=https://pressbooks.bccampus.ca/uvicecon103/chapter/introduction-to-environmental-protection-and-negative-externalities/ |website=Pressbooks |date=16 November 2017 |publisher=University of Victoria |access-date=12 May 2022}}</ref> An example of an externality may be pollution resulting from production of goods and services. This cost does not appear in the cost of production, rather it exists outside of the market supply and demand schedule.
'''<big>Positive and Negative Spillover Effects</big>'''
'''Positive Spillover'''
Positive spillover occurs when changes in one behavior influence favorably changes in subsequent behaviors. An example can be free public education offered by the government.<ref name=":0" /> Students become smarter, gain knowledge and experience. This leads to more educated population, which can move out to the other countries.
'''Negative Spillover'''
Negative spillover is the opposite of positive spillover, meaning unwanted social, political, and economic impacts. An example is [[pollution]] caused by industrial plants, releasing smoke, [[Carbon dioxide|carbon dioxide gas]], oil wastewater, and other harmful waste materials into the atmosphere. As we know, pollution leads to [[global warming]], which affects all of us. Global warming causes the melting of ice, which leads to raising sea levels. Another example could be demand for commodities (such as palm oil or osy) in one country that cause deforestation in other countries.<ref name=":1">{{Cite web |date=2024-03-22 |title=Tracking Spillover Effects |url=https://sdgtransformationcenter.org/spillovers |access-date=2024-04-07 |website=sdgtransformationcenter.org |language=en}}</ref> Negative spillovers impact both the participants and non-participants.<ref name=":0" />
==Graphical representation==
Externalities in the supply and demand curve: Note the graph representing a negative externality below. To illustrate this concept the ‘marginal social cost’ (MSC) is used in comparison to the ‘marginal private cost’ (MPC). Marginal social cost is the line which includes all externalities including the social cost of pollution in addition to regular production costs. Alternatively, marginal private cost also considers the regular production costs used in a transaction.<ref>{{cite journal |last1=Hutchinson |first1=Emma |title=Principles of Microeconomics |url=https://pressbooks.bccampus.ca/uvicecon103/chapter/introduction-to-environmental-protection-and-negative-externalities/ |website=Pressbooks |date=16 November 2017 |publisher=University of Victoria |access-date=12 May 2022}}</ref>
Thus, in the diagram below, if the market was functioning properly by accounting for negative externalities, society would produce at quantity 2 (Q2) and a higher price (P2). Without considering negative externalities,, society would produce at Quantity 1 (Q1) and at a lower price (P1). Hence, due to negative externalities (social costs) being excluded from transactions, society overproduces products with negative externalities and underprices them.
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[[File:Positive Externalities.png|thumb|Positive Externalities in supply and demand schedule]]
== Difficulties in Quantifying spillover effects ==
Quantifying spillover effects presents a number of challenges. Firstly, it is important to identify and measure the presence of these externalities: for instance, the spillover effects which result from the process of production often necessitate robust data collection and analysis. In order to assign a monetary value to the spillover effects of production it might be necessary to estimate such variables as healthcare costs from pollution or the value of clean water access. This presents a challenge because some of these variables lack direct market valuation. Moreover, subjectivity and uncertainty can intervene with the process since a conflict may arise among varying stakeholder perspectives. Lastly, ethical dilemmas are likely to arise in the process of quantifying spillover effects since this process involves placing a value to inherently invaluable aspects like biodiversity. It can therefore be argued that the process diminishes the intrinsic worth of these aspects.<ref>FasterCapital. (n.d.). Challenges in Quantifying and Valuing Externalities. FasterCapital. Retrieved from https://fastercapital.com/topics/challenges-in-quantifying-and-valuing-externalities.html#:~:text=Lack%20of%20data%20and%20information,extensive%20data%20collection%20and%20analysis.</ref>
== Methods of measuring spillovers ==
There are three main categories which contains methods for assessing international trade-related spillovers.
=== Multi-Regional Input-Ouput (MRIO) ===
MRIO is one of the categories of analysis which combines internationally harmonized input-output tables and trade statistics for sectors or groups of products or services of environmental use (e.g. land, water, timber), pollution (e.g. reactive nitrogen), or socioeconomis impacts (e.g. child labor, labor accidents, gender pay gap).<ref name=":1" /> The biggest advantage is the relative ease with which analyses can be performed for different countries. The disadvantage could be the fact that MRIO does not consider context-specific technologies, efficiencies or resource- or pollution- intensities but instead use average impacts. So, MRIO methods are best suited to asssessing spillover effects of aggregate sectors or product groups at country level.<ref name=":1" />
=== Life-Cycle Assessments (LCA) ===
These assessments are used to evaluate the environmental impact of individual products and their production processes across geographic and temporal scales. Moreover, they can also measure socieconomic impacts. These assessments are provided with a bottom-up method, which is an opposite to the top-down method in MRIO. The LCA are less suitable to assess spillover effects. They have to face the "truncation problem" and also requires vast volumes of data, which can be hard to get.<ref name=":1" />
=== Material-Flow Analyses (MFA) ===
These analyses track specific material flows along supply chains and across countries. The tracking is primarily done for raw or less processed commodities. It cannot be as globally comprehensive as MRIO, because it also suffers from the truncation problem like LCA.<ref name=":1" />
[[Material flow analysis|MFA]] is based on the quantification and measuring of matter and substances in relation to the processes in a system such as a city or country. It is confined to a specific period of time. Flows are expressed in kg/year or, alternatively, in kg/capita/year. MFA is based on the principle of matter conservation.
The aim is to identify problems and quantifying the exact impact of potential spillovers. However, it needs a large amount of data to accurately function and many countries do not have the data available to do such an analysis. On the other hand, MFA is commonly used especially in matters of [[Sanitation]] and can be used to determine the best sanitation technology. It’s especially well suited to planning and decision making. It’s been proven to be a suitable tool for detection of environmental problems and adequate solutions.
== Types of Indexes ==
=== Spillover Index ===
The index assesses the positive and negative spillover effects of each UN Member State, based on indicators tracking environmental and social spillovers embodied into trade, economic and financial spillovers, and spillover effects related to security.<ref>{{Cite web |date=2024-03-22 |title=Tracking Spillover Effects |url=https://sdgtransformationcenter.org/spillovers |access-date=2024-04-08 |website=sdgtransformationcenter.org |language=en}}</ref>
=== Global Commons Stewardship Index ===
Using the MRIO trade data, environmental research, and industrial ecology, the Global Commons Stewardship Index features a global ranking and detailed features for ten countries and regions (the USA, the EU, China, India, Japan, South Korea, Indonesia, the Philippines, Brazil and Indonesia) alongside sector-specific analyses of spillovers embodied in trade flows.<ref name=":2">{{Cite web |title=Understanding the Spillover Effect |url=https://www.investopedia.com/terms/s/spillover-effect.asp |access-date=2024-04-08 |website=Investopedia |language=en}}</ref>
==Examples of spillover effects==
===Great Depression===
[[Great Depression|The Great Depression]] that began in 1929 is a significant example of how spillover effects can occur. It all started in the United States, but spread to the rest of the world and influenced local economies for many years.
Economists debate the exact cause of the Great Depression however, it is mostly regarded as a confluence of events including the stock market crash of 1929, banking panics and monetary contraction, decreased international lending and tariffs.<ref>{{cite web |last1=Duignan |first1=Brian |title=Causes of the Great Depression |url=https://www.britannica.com/story/causes-of-the-great-depression |website=Britannica}}</ref> A contributing factor which led to the Great Depression and Spillover effects was the stock market crash of 1929. As the stock market boomed during the 1920’s it was regarded as a way to earn profit easily. However as investors began to purchase stock through loans, the stock market began overpriced and highly financed through investor debt. Once prices fell, investors rushed to sell stock in order to limit losses leading to the spillover effects of low consumer confidence and in turn low [[consumer spending]], investment, production and high unemployment.<ref>{{cite web |last1=Duignan |first1=Brian |title=Causes of the Great Depression |url=https://www.britannica.com/story/causes-of-the-great-depression |website=Britannica}}</ref>
===Global Financial Crisis===▼
[[2007–2008 financial crisis]] is an example of how spillover effects occur both in terms of the mechanisms of a system but also geographically. Academics have found a correlation between the impact of a shock to a system and its impacts on other systems which have dependency. In the wake of the Global Financial Crisis many spillover effects occurred including a strong correlation between the volatility of the United States stock markets and other global markets.<ref>{{cite journal |last1=Mensi |first1=Walid |last2=Hammoudeh |first2=Shawkat |last3=Nguyen |first3=Duc Khoung |last4=Kang |first4=Sang Hoon |title=Global financial crisis and spillover effects among the U.S. and BRICS stock markets |journal=International Review of Economics & Finance |date=March 2016 |volume=42 |
=== Fukushima disaster ===
The accident at the [[Fukushima nuclear accident|Fukushima nuclear power statition]] in 2011 is another example of spillover effect. There has been a sharp decline in the stock prices of utilities that own nuclear power plants, which were observed on the Tokyo Stock Exchange.<ref>{{Cite web |last=Kawashima |first=Shingo |last2=Takeda |first2=Fumiko |date=2012 |title=The effect of the Fukushima nuclear accident on stock prices of electric power utilities in Japan |url=https://www.sciencedirect.com/science/article/abs/pii/S0140988312001752?via%3Dihub |website=ScienceDirect}}</ref> Such a catastrophe has always an impact on the other countries. One study shows that alternative energy stocks in French and German exhibit abnormal returns during the event window. This happened because market expected a change in policy towards alternative energies. On the other hand, the effect on the U.S. stocks was not confirmed.<ref>{{Cite journal |last=Ferstl |first=Robert |last2=Utz |first2=Sebastian |last3=Wimmer |first3=Maximilian |date=2012-05-01 |title=The Effect of the Japan 2011 Disaster on Nuclear and Alternative Energy Stocks Worldwide: An Event Study |url=https://doi.org/10.1007/BF03342730 |journal=Business Research |language=en |volume=5 |issue=1 |pages=25–41 |doi=10.1007/BF03342730 |issn=2198-2627|hdl=10419/103707 |hdl-access=free }}</ref>
Similar spillover effect was observed during [[Chernobyl disaster|Chernobyl nuclear-power accident]]. It has been shown that during 20-day period immediately following the accident, shareholders earned, on average, significant negative anbormal returns.<ref>{{Cite journal |last=Fields |first=M.Andrew |last2=Janjigian |first2=Vahan |date=1989 |title=The effect of Chernobyl on electric-utility stock prices |url=https://www.sciencedirect.com/science/article/pii/0148296389900532 |journal=Journal of Business Research |volume=18 |issue=1 |pages=81-87}}</ref>
===COVID-19 pandemic===
A high profile example of spillover effects is the [[COVID-19 pandemic]]. The global economy has become more interdependent in the 21st century as globalisation has enhanced countries' reliance on other parts of the world for economic growth. Therefore, when the emergence of the pandemic forced countries to close their borders, this had a spillover effect, creating an economic shortfall. Studies from BIS Quarterly<ref>{{cite journal |last1=Kohlscheen |first1=Emanuel |last2=Mojon |first2=Benoit |last3=Rees |first3=Daniel |date=6 April 2020 |title=The macroeconomic spillover effects of the pandemic on the global economy |url=https://www.bis.org/publ/bisbull04.htm
On the other hand, the COVID-19 pandemic caused also some positive spillover effects. Due to the fact that many industrial plants were shut down because of the lockdown measures, pollution fell all over the world significantly.<ref name=":0" />
▲===Global Financial Crisis===
▲[[2007–2008 financial crisis]] is an example of how spillover effects occur both in terms of the mechanisms of a system but also geographically. Academics have found a correlation between the impact of a shock to a system and its impacts on other systems which have dependency. In the wake of the Global Financial Crisis many spillover effects occurred including a strong correlation between the volatility of the United States stock markets and other global markets.<ref>{{cite journal |last1=Mensi |first1=Walid |last2=Hammoudeh |first2=Shawkat |last3=Nguyen |first3=Duc Khoung |last4=Kang |first4=Sang Hoon |title=Global financial crisis and spillover effects among the U.S. and BRICS stock markets |journal=International Review of Economics & Finance |date=March 2016 |volume=42 |page=257-276 |doi=10.1016/j.iref.2015.11.005 |url=https://www.sciencedirect.com/science/article/abs/pii/S1059056015002270}}</ref> This impact shows how high default rates on home loans in the US did not have isolated impacts. Rather it resulted in spillover effects into equity markets domestically as well as internationally.
==Influences on spillover effects==
===Globalisation===
[[Globalization|Globalisation]] has been a prominent influence on the economic spillover effect in the global economy. Due to rising economic interactions including trade and investment between economies, the likelihood has risen that events impact one economy will in turn impact others who have economic ties and dependencies. Recent research<ref>{{cite journal |last1=Thomas |first1=Lina |url=https://ssrn.com/abstract=4474329 |access-date=3 August 2023| journal = SSRN - Preprint Finance Research Letters | title = Ripple Effect: Disentangling the Global Impact Web of US Monetary Policy | date = 2023 | doi = 10.2139/ssrn.4474329 }}</ref> suggests that even a small change in US monetary policy can have significant ripple effects on economies worldwide, particularly those that are financially open or trade open. This is due to the US' dominant role in the global economic system, impacting all other countries simultaneously and leading to cross-country effects which amplify the global impact. The extent of spillover effects can vary depending on the country from which the shock originates and the recipient country. For instance, China's spillovers impact mostly through trade, while the US impacts the rest of the world mostly through financial channels, and other major economies like the Euro area, UK, and Japan have more regional impacts.<ref>{{cite journal |last1=Thomas |first1=Lina |title=The Tale of Two Titans: Us and China's Distinct Impact on the Global Economy |journal= SSRN - Preprint Finance Research Letters |date= 2023 |doi = 10.2139/ssrn.4518123 |url=https://ssrn.com/abstract=4518123 |access-date=3 August 2023}}</ref>
There are opposing views on the aggregate impact of globalisation as having either positive or negative spillover effects for the global economy. For instance, studies by Applied Economics journal<ref>{{cite journal |last1=Dreher |first1=Axel |title=Does globalization affect growth? Evidence from a new index of globalization |url=https://www.tandfonline.com/doi/abs/10.1080/00036840500392078 |journal=Applied Economics |year=2006 |volume=38 |issue=10 |pages=1091–1110 |publisher=Applied Economics Journal |doi=10.1080/00036840500392078 |s2cid=153683838 |access-date=12 May 2022}}</ref> indicates that globalisation has been impactful in promoting economic growth across nations in part due to the spillover. However studies by<ref>{{cite journal |last1=You |first1=Wanhai |last2=Lv |first2=Zhike |title=Spillover effects of economic globalization on CO2 emissions: A spatial panel approach |url=https://www.sciencedirect.com/science/article/pii/S014098831830183X |journal=Energy Economics |date=2018 |volume=73 |pages=248–257 |doi=10.1016/j.eneco.2018.05.016 |s2cid=158427298 |access-date=12 May 2022}}</ref> find that despite there being evidence that there is a positive correlation between trade openness and carbon dioxide emissions (negative externality), there could also exist benefits from globalisation impacting the environment through factors including spread of technology and knowledge beyond borders.
===Systems built on dependency===
Systems in society are built on relationships and interactions that create mutual value for a wide range of stakeholders. This has created circumstances where impacts to one or more of these entities can spillover to the other entities that depend on the system. This can be examined in the Global Financial Crisis example of 2008. As banks granted loans to borrowers with a high chance of default, banks suffered from liquidity risk which led to significant macroeconomic impacts including losses for shareholders across all markets, significantly increased unemployment, bailouts from the Government and low investor and consumer confidence.<ref>{{cite journal |last1=Edey |first1=Malcolm |title=The Global Financial Crisis and Its Effects |journal=Economic Papers |date=September 2009 |volume=28 |issue=3 |
===Trade policy===
In the same way that Financial crises and recessions can cause negative spillover effects through increased dependency between nations, trade policy can create positive spillover effects. It has been observed that one of the main positive spillover effects occurs as developing economies trade more with advanced economies leading to technology, information and investment flows<ref>{{cite book |last1=Dixon |first1=Tim |last2=O'Mahony |first2=John |title=Australia in the Global Economy |date=2019 |publisher=Pearson Australia |isbn=9780655780731 |edition=11}}</ref> (Dixon & O’Mahony, 2019). Data shows that China trading with more advanced economies has increased its access to new technology and information leading to improved competitiveness in global markets. It has been shown that there is a correlation between China’s trade activity with OECD nations and improved domestic productivity.<ref>{{cite journal |last1=Chuang |first1=Yih-Chyi |last2=Hsu |first2=Pi-fum |title=FDI, trade, and spillover efficiency: evidence from China's manufacturing sector |journal=Applied Economics |date=21 August 2006 |volume=36 |issue=10 |
===Foreign direct investment===
Firms who seek to minimise costs in supply chains by using resources from overseas have been shown to invest in local infrastructure. This is classified as foreign direct investment. This dynamic is common as firms from advanced economies expand their production base overseas to take advantage of cheaper labor and capital costs. Studies have shown that foreign direct investment creates productivity gains as local infrastructure of a developing nation is invested into.<ref>{{cite journal |last1=Meyer |first1=Klaus |last2=Sinani |first2=Evis |title=When and where does foreign direct investment generate positive spillovers? A meta-analysis |journal=Journal of International Business Studies |date=26 February 2009 |volume=40 |issue=7 |
== Special Considerations ==
=== Unconnected Economies ===
The unconnected economies are these which are not influenced or just a little bit by spillover effects from the global market. These economies are though rarer and rarer. Even North Korea as a closed-off economy has begun to feel the spillover effects from intermittent Chinese slowdowns.<ref name=":2" />
=== Safe-Haven Economies ===
Certain developed economies are sensitive to some economic phenomena that can overwhelm spillover effects, regardless of their strength. For example Japan, the United States, and the Eurozone, all influenced by spillover effects from China, this influence is partly offset by investors seeking safety in their respective markets during global market uncertainties.<ref name=":2" /> So, if one of the economies has some difficulties, investments shift to the remaining safe-havens.
This effect was seen with the U.S. investment inflows during the EU's struggles with the Greek debt crisis in 2015. As funds flowed into U.S. Treasuries, yields decreased, reducing borrowing costs for American consumers, borrowers, and businesses. This serves as an illustration of a positive spillover effect from the perspective of U.S. consumers.<ref name=":2" />
==See also==
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{{economics}}
{{authority control}}
[[Category:Economic geography]]
[[Category:Economic growth]]
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