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.

Globalization retreats?

(http://wiki.triastelematica.org/index.php/Protectionism)

Trends of a rise in protectionist measures by countries is considered a serious threat to an increasingly globalized world. While the world is getting connected and "flattened" by global supply chains and mobility, inward looking policies also have made their mark challenging the presumption that globalization is a given. Of course, Pankaj Ghemawat still believes that a large part of economic activity is still "national" or "local" rather than truly global. Parag Khanna,on the other hand believes that the world is moving towards more globalization.

I came across an interesting piece on globalization here. Titled "The Retreat of Globalization" Kevin M. Warsh and Scott Davis posit that the trend of globalization characterized by cross national investments and increased trade is on the decline.

"Trade is the glue that connects the global economy. Trade has grown much faster than economic growth for most of the last few decades, thanks largely to the globalization wave. Only twice since 1982 has global trade growth trailed economic growth. 

But trade has weakened over recent quarters. According to the International Monetary Fund, trade growth volume is projected to slump to 3.2% this year, down from 5.8% last year and 12.6% in 2010. The World Trade Organization recently cut its forecasts for global trade by more than a full percentage point for this year and next. Absent fundamental policy changes, these data mean that the IMF's global GDP forecasts for this year (3.3%) and next (3.6%) are challenging to meet. 

Yet even this cyclical weakness is not the gravest concern. What if the cyclical has become structural, and economic potential is falling? What if the world is getting more fragmented and the gains from globalization are being forgone and forgotten? What happens if policy makers remain preoccupied with short-term urgencies to the exclusion of long-term priorities?"

Protectionism is not the preserve of only a few countries. It is exercised by both the developed and developing worlds in times of economic crisis to protect domestic interests. Whether it actually protects domestic interests in the long run is an entirely debatable issue. Further, whose interests are actually protected is also open to scrutiny. Nevertheless, the increasing trend of "buy local" in France or aggressive "import licensing requirements" in Argentina is only symptomatic of a reaction of countries to address issues of economic crisis in a global world. As long as trade exists, there would be measures of protectionism. To what extent they spread and to what degree they violate trade agreements is the crucial factor.

Knowledge@Wharton interviews on globalization

Knowledge@Wharton had two interesting interviews recently. One of Pankaj Ghemawat and the other of Pascal Lamy

Pankaj Ghemawat essentially argues that the world is not as integrated as it is made out to be. In this semi-golbalised world, the benefits of integration, he feels, are immense. I had blogged about his views earlier here.

"So what I do in this particular chapter in World 3.0 is put together a lot of existing literature rather than just saying the gains are large, suggesting that when you pay attention to the customarily excluded components, you can bring the gains from trade liberalization itself up to 2% to 3% of the GDP without even really relying on very far-fetched estimates. Then there is service liberalization which people think can add and get us up to 4% or 5 % of GDP. Then there are flows other than products and services. There are flows of capital, flows of people, flows of information. 

People flows are really the big numbers. Some people at Stanford have done an analysis suggesting complete liberalization of immigration could double the world's GDP. Of course, that seems a bit optimistic given where we are. So I rely on estimates that more moderate increases might add another couple of percentage points to global GDP, around 3% to 4%. Around immigration, the gains are just huge as all the studies suggest."

Pascal Lamy speaks about the future of the multilateral trading system in the context of the impasse in the Doha round of trade negotiations.The risk of bilateral trade agreements and the relevance of multilateral trade negotiations are touched upon. Highlighting the political economy of trade negotiations and the complexity of concluding multilateral trade negotiations I found this point interesting:

"The second reason, and this raises a fundamental problem of trade negotiations, [is that] in this game, the losing parties know precisely why they lose and are able to form coalitions to support their causes, while the winning parties are often unaware they won. The tee-shirt you are buying cheaper today doesn't come with a "Thank You, WTO" sign on it! I have been working on international trade for 20 years, and unsurprisingly, it turns out that in emerging countries, public opinion is more and more open to trade liberalization, while in developed countries, it is less and less favorable to it -- not in the name of the poor in the South anymore, as was the case in radical circles in the 1990s, but on behalf of the poor in the North. The positive impact is obscured by the difficulties associated with the restructuring of Western economies -- by the crisis, of course -- but also by the great shift from industrialized countries to emerging countries, which may lead [some] to think that unemployment is due to relocation. Under these conditions, negotiators from developed countries now have less room to maneuver."

The debate about the extent of globalization, trade rules, the political economy of reducing barriers to trade and the way countries react to it continues. 

Market concentration and globalisation

I had earlier blogged about Pankaj Ghemawat's views on globalisation here and here. In another piece titled "Who's Afraid of a Few Big Companies Taking Over the World?" he addresses the issue of market concentration and argues that concentration is not such a serious issue.

"In this post I'll focus on one type of market failure: market concentration. There is often a lot of negative discussion buzzing around globalization and market concentration. As people see their local shops replaced with multinational chains and industrial megamergers make headlines, there is a perception that a small number of powerful competitors are taking over the world. This is one of the most widespread beliefs about globalization — in a survey of business executives I conducted a few years back, 58% agreed that "globalization tends to make industries become more concentrated." And among the general public, another survey reveals concentration to be the leading worry about the market economy in the U.S., Britain and Germany: people worry that large corporations will squeeze out small firms."

Arguing that globalisation has reduced concentration rather than increase it, he continues:

" And not only is globalization not systematically reducing competitive intensity by increasing concentration, it can actually help correct the problems involved when a small number of competitors take control of a market. When competition is lacking in domestic markets, consumers suffer from high prices, poor quality products, or a lack of variety. This is where foreign competition can lend a helping hand. Whether through trade or foreign direct investment, competition from abroad can provide consumers with immediate relief, as well as spur producers to up their game."

While the examples quoted being questioned and rebuttal of Ghemawat in the comments offer interesting insights, "equitable" globalisation is still an aspiration. How do large segments of population outside the system benefit from international trade and an interconnected world? How will it make a difference to their lives? How is international trade relevant to a tribal living in interior parts of a developing country? How will it benefit his or her family? Will opening up the economy in terms of trade directly benefit or negatively effect him? As consumers in a globalised world having access to a choice of products at competitive prices is only a limited way of looking at the issue. Large populations have no power to participate in the market? How can globalisation help? How can access be provided to them so as to be able to benefit from the fruits of growth and development? While globalisation does have an impact on domestic economies and will lead to job loss and unemployment, what mitigating factors need to be taken to offset this negative trend? Can multilateral trade rules provide some answers? A more critical piece on concentration and the negative role of big corporates is found here. Will look forward to Ghemawat's future posts on this for some answers.