Globalization is back—but it looks different

Is it the best of times or the worst of times for globalization? Some exult over hyperglobalization; others worry whether globalization is "over."

Our 2014 DHL Global Connectedness Index shows that globalization is recovering from the hard hit it took during the financial crisis. However, international trade, capital, information, and people flows are not simply reverting to how they looked before 2008. The world is more international, but not necessarily more global, and trends vary across types of flows.

While large majorities of every type of activity that could take place either within or across borders are still domestic, the general pattern is one of a rising proportion of activity crossing borders. However, that pattern is not uniform. International information flows (measured based on telephone calls, trade in printed publications, and international internet bandwidth as a proxy for internet traffic) continue soaring to new records every year, and international equity investment (based on FDI and portfolio investment) and people flows (based on migration, international education, and tourism) posted more modest gains over the past year. However, international trade has stagnated, and trade and equity flows still remain below their pre-crisis levels.

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The trend toward rising proportions of activity crossing borders, what we call the "depth" of global connectedness, is good news because it has the potential to generate economic gains that could reach into the trillions of dollars, as well as other non-economic gains. Also, the fact that current levels of internationalization are still low should soften many concerns about increasing them. Many such fears are based on exaggerated perceptions ("globaloney") or politicians blaming outside forces for fundamentally domestic failures. Immigrants, for example, are only 3 percent of the world's population—about the same as in 1910—and when people are told the true proportion of immigrants in their countries' populations, opposition to more immigration can drop by as much as one-half.

Globalization, however, is not the same as internationalization, and the distinction between them has significant implications both for firms and for countries. For an activity to be considered truly global, not only must a high proportion cross national borders but those international flows should be distributed globally rather than narrowly focused, for example, with neighboring countries. The "breadth" of every category of international flows we track—trade, capital, information, and people—has declined since 2005. Countries' exports, equity investments, phone calls, and so on, resemble less closely the global distributions of the same flows than they did before the crisis. Even more intriguingly, every one of the specific interactions we study stretches out now over greater distances than it did just a few years ago.

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Why is the breadth of globalization declining, even as interactions take place over greater distances? The answer is that advanced economies (and firms within them) have not kept up with the shift of economic activity to emerging markets. Advanced economies and their firms are stretching over greater distances to tap into faster growth in faraway markets, but they are not redirecting their international flows as fast as global flow patterns are shifting. To cite one concrete example, Germany, a powerhouse exporter, grew the proportion of its merchandise exports going outside of Europe from 27 percent in 2005 to 30 percent in 2013, but to maintain its share of every other country's imports, it would have had to stretch even farther, sending 33 percent of its exports beyond Europe's borders. Had it done so, its 2013 exports could have been 17 percent larger!

The limited depth of the world's global connectedness — and its declining breadth — both point to untapped opportunities to accelerate global growth, which should take on increased urgency since the IMF, again, cut its global growth projections in October 2014. However, the gloom should not be overdone. Even based on the latest projections, the world economy is still expected to grow faster from 2014 to 2019 than it did during the 1980s, 1990s, and 2000s. And that is also good news for globalization, since trends in the depth of global connectedness are highly correlated with global macroeconomic growth.

Given these relatively healthy fundamentals, what we really have to fear are policy fumbles. Policies that improve countries' domestic business environments as well as those that directly target expanding international flows can shape both the depth and the breadth of countries' international interactions. With macroeconomic conditions still weak in many parts of the world, countries face the natural temptation to fortify borders and hunker down behind them. However, it is precisely when times are tough that countries can reap the greatest gains from expanding circles of cooperation.

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Your opinion on whether or not global connectedness should be boosted or scaled back may differ from ours, but in the words of the late Daniel Patrick Moynihan, "Everyone is entitled to his own opinion, but not to his own facts." Our purpose in compiling the DHL Global Connectedness Index was to assemble the hard data on actual levels of globalization required for a more informed debate. Since it is the only one of several globalization indexes that actually looks at the breadth as well as depth of international interactions, it will hopefully be used as an input to discussions of two of the key dynamics of our times: globalization and the big shift of most forms of economic activity to emerging economies.

Commentary by Pankaj Ghemawat and Steven A. Altman. Ghemawat is director of the Center for the Globalization of Education and Management at the Stern School of Business at New York University. Prof. Ghemawat also developed the DHL Global Connectedness Index, which was first released in November 2011. Follow him on Twitter @pankajghemawat. Steven Altman is a senior research associate and lecturer in IESE Business School's Strategic Management department, where he focuses on international strategy and emerging markets.