How deep is globalisation?

Pankaj Ghemawat and Steven A Altman have come out with this exhaustive report on globalisation titled "Depth Index of Globalisation 2013" which "provides up-to-date data and analysis on the depth or intensity of globalization and relates it to what we call the big shift: the rising proportion of many types of activity occurring in emerging economies. It points out that overall, globalization’s post-crisis recovery stalled last year, as a result of which the world is still less deeply interconnected today than it was in 2007. It also shows that while growth in emerging economies has slowed somewhat, the big shift continues."

The 10 take-aways from the report are:

1. Globalization’s post-crisis recovery stalled last year, leaving the world still less deeply interconnected in 2012 than it was in 2007. Macroeconomic weakness was the main culprit, but there is also evidence of increasing protectionism.

2. Foreign direct investment depth plummeted 21% in 2012 and the share of the world’s economic output traded across national borders declined modestly, but growth on the information and people pillars continued. The number of international tourist arrivals crossed the 1 billion mark for the first time.

3. Internet fragmentation has become a growing concern even as international bandwidth continues expanding. Interactions on social media, like other information flows, mostly remain domestic and regulatory impediments may curtail the potential of technological advances (e.g., cloud computing) to expand them. 

4. The big shift in the share of world output from advanced to emerging economies continued, with the latter driving most of the growth of international flows even as the largest among them, China, significantly reduced its reliance on exports and foreign investment. 

5. Emerging economies are only about one-quarter as deeply integrated into international capital and people flows and one-ninth as globalized in terms of information flows as advanced economies, but are roughly at parity with respect to international trade.

6. The big shift has already driven profound changes in the pattern of globalization, e.g., declining regionalization of merchandise exports after increases for most of the post-war era. If emerging economies tend toward advanced economies’ levels of globalization as they grow wealthier, the big shift beyond trade has only just begun.

7. Multinational firms are struggling to keep up with the big shift. While multinationals from emerging economies remain few and far between, firms from advanced economies are falling behind their new competitors. Their people, in particular, have not globalized as fast as their operations and sales targets.

8. At the regional level, Europe is still the most deeply globalized region despite recent setbacks. Sub-Saharan Africa and South & Central Asia lag the farthest behind—although South & Central Asia did experience the second biggest increase in depth of globalization in 2012, behind North America. 

9.Strengthening international flows could bolster macroeconomic recovery, with every country (and region) possessing untapped possibilities to increase its depth of globalization through domestic as well as international policies.

10. Looking ahead, the largest threat to globalization comes from policy fumbles rather than macroeconomic fundamentals, since the world economy is still projected to grow faster from 2012-2018 than over any of the past three decades.

I have earlier blogged about Pankaj Ghemawat's works here.

Pankaj Ghemawat on the extent of globalization

Since we are into rankings and globalization,here is another globalization ranking index - the DHL Global Connectedness Index 2012. I had earlier blogged about the E&Y globalization index.

Pankaj Ghemawat, who believes that the world is not as globalized as claimed to be (not really as flat as some would claim) commented on the globalization rankings here. His analysis of the world not being as globalized as claimed is found here:

 "...Among the several dozen audiences to which I have administered this test over the years, that third quote, which suggests that the we live in one, integrated world — what I call World 2.0 — is the one that garners the most support, usually a majority. Spouting such attitudes — the flattening of the world, the death of distance, and the disappearance of differences across countries — seems to be considered a hallmark of global thinking.
But I prefer to think of it as globaloney. 

Why? Because economic data simply don't support the view that we live in a flat, connected world, even if we are technologically connected with everyone, everywhere, all of the time. Data show that most types of economic activity that could be carried out across national borders are actually still concentrated domestically. For example, take foreign investment. Of all the capital being invested around the world, how much would you think is foreign direct investment by companies outside of their home countries? 25%, maybe? More, if you've heard the globaloney about "investment knowing no boundaries"? The fact is, the ratio was less than 9% in 2009 and, while it may be pushed higher by merger waves, has never reached 20%."

Coming back to the globalization index.The index "tracks the depth and breadth of trade, capital, information, and people flows across 140 countries that account for 99% of the world's GDP and 95% of its population. Based on data covering the period from 2005 to 2011, it charts how globalization has evolved since the onset of the financial crisis at the global, regional, and national levels."

The study concludes with a series of recommendations on how to increase the depth of "global connectedness" by studying the case studies of Netherlands (the most globally connected economy), Vietnam and Mexico. I found two of these conclusions interesting:

"6. Focus on value, not on volume. That was how Pascal Lamy, director-general of the WTO, summarized the implications of the ADDING Value scorecard, pointing out how trade professionals still often think mainly about increasing trade volumes rather than the value generated via trade.65 Vietnam and Mexico can both tap into large gains from increasing the share of domestic value-added in their exports at the same time as they continue growing their trade volumes. 

7. Recognize the importance of imports. Don’t mistake an export-only development strategy for a true global connectedness strategy. Recall the emphasis Vietnam’s exporters placed on challenges associated with the cost of imports. Imports of capital goods – machinery, equipment, and infrastructure-related products – boost productivity by facilitating the adoption of new technologies. New evidence suggests that imports might be associated with even more domestic innovation than exports. Importing is also usually the first step in the internationalization of small and medium-sized businesses that later go on to export."

Countries normally follow an export-led growth model shunning imports and seeing them as competition to domestic industry. However, imports that are inputs to various products can be a vital factor to boost a country's global connectedness. 

The report ends with a country-wise analysis of the factors that constitute global connectedness with a rooted map. A great source of information about issues of globalization and how connected we actually are.

Of rankings and a globalization index

"Globalization - Looking beyond the obvious" is the new report on the issues in globalization released by Ernst and Young recently. It highlights, inter alia, that for future investments in a globalizing world, companies must look beyond the BRICs to other "hotspots" like Turkey, Mexico and South Africa.

"For many multinational companies Brazil,Russia, India and China were the big bets of the past decade. And there’s no question that these powerhouses will continue to be major players in the world economy. Not only will the BRICs’ gross domestic product (GDP) grow faster than that of the other countries included in the Index (see Figure 3), but the BRICs will also integrate further with the global economy. Yet the challenges of operating in the BRICs are increasing, as their slowing real growth, rising inflation and labor costs, political instability, infrastructure shortfalls, and bureaucratic obstacles chip away at business confidence."

Referring to the other growing, emerging economies, the report states:

"Against this backdrop it is critical for businesses to look for alternatives - and the search may well involve making unconventional choices. Increasingly, non- BRIC rapid-growth markets are emerging as hot spots for global business. These markets are more globally integrated than the BRICs on a range of trade, investment, cultural and technological criteria, and this is set to continue through 2016, as our Index data shows. Many of these markets also show consistently high economic growth close to that of the leading BRICs. For example, Turkey, Mexico and Indonesia closely shadow China and India in terms of GDP growth from 2000 through 2015. Other promising locations include Peru, Colombia, Venezuela, Malaysia and Vietnam, as well as several countries and regions in Africa that are shaping up to be among the most dynamic parts of the world for investment." 

The report also announces the Globalization Index for 2012 which is essentially a ranking of countries in terms of them being "globalized" in terms of their trade volumes and openness to businesses. The main variables of this index are the "share of main trading partners in total trade, as a percentage of GDP (trade in goods and services); trade in information and communications technology (ICT) goods, as a percentage of GDP (technology); foreign direct investment (FDI) stocks, as a percentage of GDP (capital and finance); and total international fixed telephone traffic (culture). The last two of these variables are substitutions for FDI flows as a percentage of GDP (capital and finance) and international outgoing fixed telephone traffic (culture)."

 
Hong Kong tops the list once again about which I had blogged about last year here! China surprisingly is 44th on the list.