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Free exchange
Signs of life
Despite some recent reversals, there is evidence that globalisation is on
the march again
Nov 15th 2014 | From the print edition
FOR most of the 1990s and 2000s, it seemed almost inevitable that the
world would become ever more integrated and borders ever less
bothersome. The crash of 2008, which spread havoc around the world
faster than any previous financial crisis, called that assumption into
question. Headlines about the world becoming flatter and more
interconnected gave way to talk of balkanised financial markets, stalled
trade talks and growing popular nationalism. Some economists have
predicted another era of “deglobalisation”, similar to the interwar years
of the last century.
The reality has always been more nuanced. Globalisation’s advance has
never been inevitable or smooth; nor, despite some backward steps
since the crash, has it ended. That, at least, is the conclusion of the
latest DHL Global Connectedness Index, published earlier this month.*
Two economists, Pankaj Ghemawat of New York University’s Stern
School and Steven Altman of IESE Business School compiled it using
data from 140 countries, which account for 99% of the world’s GDP and
95% of its population. It shows that, after a big post-crisis drop, the trend
of growing global interconnection resumed last year. Globalisation is
back.
There are many definitions of globalisation, and the index uses one that
is fairly all-embracing. It encompasses four main types of cross-border
flow: trade (in both goods and services), information, people (including
tourists, students and migrants) and capital. It tracks not just the depth
of international connections (how much activity crosses borders), but
also their breadth (how many different borders are being crossed) and
their direction (how do outward and inward flows compare). The authors
found that the depth of global integration, probably the most
straightforward definition of globalisation, fell sharply after 2008, by
nearly one-tenth. Yet since then it has recovered strongly. By 2013 it
was well above its pre-crash peak.
By contrast, the breadth measure continued to slide in 2013, and is now
nearly 5% below its peak. In other words, there are more cross-border
connections being made, but with fewer places. This may reflect the
growing popularity of bilateral trade deals in the absence of big
multilateral liberalisations. Another factor may be Western firms’ slow
response to the growing weight of emerging economies. In 2013
emerging economies generated only 17% of the profits of 100 of the
biggest firms based in rich countries, even though they accounted for
36% of the world’s GDP. The ten countries that globalised most in 2013
are all emerging markets, most of them in Latin America and the
Caribbean.
As the chart shows, the globalisation of information, measured by such
things as the number of cross-border phone calls and Skype usage,
slowed after the crash but did not fall, and accelerated again in 2013.
Capital flows remain below pre-crisis levels, however. Trade in goods
and services plunged in the aftermath of the crash, rebounded a bit, and
then started sliding again, when measured by value (volumes are rising,
albeit sluggishly).
Trading paces
How worrying is the decline in trade? The economists calculate that the
lower share of traded goods and services in total output is largely a
function of sluggish global demand, and predict that as the world
economy strengthens trade will too. There is evidence that protectionism
is growing. Global Trade Alert, a watchdog, says that since 2008, over
70% of the changes to trade rules around the world have curbed trade,
rather than spurring it. The World Trade Organisation (WTO), which is
supposed to resist and reverse such measures, has struggled to do so.
Encouragingly, however, on November 13th India and America resolved
a dispute over Indian agricultural subsidies, paving the way for a longstalled WTO plan to dismantle barriers to trade. The WTO projects that
the deal, its first global pact in 20 years, will boost the world economy by
as much as $1 trillion.
Meanwhile trade negotiators are becoming more open to building
“coalitions of the willing” rather than waiting for a global consensus. This
would be a new approach for the WTO, but it has the backing of its
boss, Roberto Azevêdo. Smaller deals do make progress: China and
America agreed, on November 11th, to reduce tariffs on IT products in
concert with other like-minded countries. Trade is also one of the few
areas in which co-operation seems possible between Barack Obama
and the Republicans who will soon control both houses of Congress.
The announcement by China (also on November 11th) of plans for a
new free-trade zone in Asia and the Pacific may help to concentrate
minds in Washington. Negotiations over a rival American scheme, the
Trans-Pacific Partnership, are two years behind schedule.
Still, if globalisation fares no worse in the next decade than it did in the
past five years, the world will be significantly more interconnected by
2025, argues the McKinsey Global Institute. It recently published its own
index of globalisation, which drew similar conclusion to DHL’s. That
would bring substantial gains. Other research from the institute
concludes that the more networked a country is, the better it does
economically.
There is certainly plenty of scope for further globalisation. DHL’s index
shows that whilst advanced economies tend to be more interconnected
than emerging economies, only a handful of small, wealthy places are
deeply interconnected, including Singapore, Hong Kong and
Luxembourg.
Past episodes of deglobalisation suggest that political pressure to
retreat from the world builds slowly but is also slow to dissipate. That
seems to be the case this time too, in many European countries at least,
where populist parties are still growing in strength, even though the local
economy has stabilised and, in most instances, started growing again.
The fact that globalisation is advancing again after such a calamitous
crisis is encouraging, but further reversals are perfectly possible.