Just a few years ago, the upward march of globalization seemed to many almost a law of nature. Trade would grow twice as fast as GDP while international investment and information flows scaled new peaks. In the wake of the global financial crisis, which hit trade and capital flows hard, many have been questioning whether globalization has stalled or even gone into reverse.
The reality is much more complex, as the recently released DHL Global Connectedness Index 2014 (GCI), shows. The GCI, of which I am co-author along with Steven A. Altman, gives a comprehensive account of the current state of globalization unlike any other index of its kind. It allows us to dive deep into the details and measure how connected our planet is. Thereby, it can inform policy choices and provide guidance as to where the potential growth opportunities are.
Let me share some of our key findings with you.
Globalization is recovering from the financial crisis
The DHL Global Connectedness Index 2014 reveals that globalization is recovering from the financial crisis. The report shows that global connectedness, measured by 12 types of trade, capital, information, and people flows, has recovered most of its losses incurred during the financial crisis.
Especially the depth of international interactions – the proportion of interactions that cross national borders – gained momentum in 2013 after its recovery had stalled in the previous year. This is good news, since the depth dimension of the index is correlated with economic growth and other indicators of prosperity. Nonetheless, these gains are not uniform across all types of interactions: trade depth continues to stagnate.
Moreover, we find that the overall depth of global connectedness remains quite limited – lower than you might think. If this can be boosted in the future, the potential gain could reach into the USD trillions. Deutsche Post DHL CEO Frank Appel takes the words right out of my mouth when he says: “I am convinced that a prosperous world needs more, not less integration.”
While depth started growing again in 2013, globalization breadth, on the other hand, has continued its multi-year slide. Breadth measures how closely a country’s distribution of international flows across its partner countries matches the global distribution of the same type of flows. The index reveals that breadth of global connectedness is declining because advanced economies have not kept up with the big shift of economic activity to emerging economies: their breadth is declining while that of emerging economies is increasing (albeit from lower levels).
Economic activity shifts eastward
Emerging economies’ faster growth and rising connectedness are pushing the planet’s economic center of gravity to the east. We found that the ten countries where global connectedness increased the most from 2011 to 2013 are all emerging economies, with eight of them located in two regions: South and Central America and the Caribbean, and Sub-Saharan Africa. Overall, emerging economies are now involved in the majority of international interactions – a milestone reached in 2010 – before then most international flows were between advanced economies.
The fact that advanced economies are not keeping up suggests they may be missing out on growth opportunities in emerging markets. To counteract this trend, more companies in these countries would have to boost their capacity to tap into faraway growth.
This trend is also reshaping the geography of global connectedness. After decades of rising, trade regionalization has gone into reverse. Every type of flow – trade, capital, information and people – we measured has expanded over greater distances in 2013 compared with 2005, the index’s baseline year.
Europe remains most connected
In addition to a comprehensive overview on the state of globalization, the 2014 report also ranks the world’s most globally connected countries. The Netherlands remains the top-ranked country in terms of overall global connectedness, although it leads neither the depth nor the breadth rankings. It is followed, in order, by Ireland, Singapore, Belgium, Luxembourg, Switzerland, the United Kingdom, Denmark, Germany, and Sweden. Note that nine of the ten most connected countries are located in Europe. The continent remains the world’s most globally connected region, averaging the highest scores on the trade and people pillars of the index. North America ranks second overall and is the leading region on the capital and information pillars.
The least globally connected regions are Sub-Saharan Africa, South and Central Asia, and South and Central America and the Caribbean – reflecting the fact that emerging economies typically lag advanced economies in this regard. But take a closer look and you’ll see that the results are mixed: Emerging economies are about as globally connected as advanced economies in terms of trade flows, but only about one-quarter as deeply integrated into international capital and people flows, and a mere one-ninth as globalized in terms of information flows. If emerging economies trend become more like today’s advanced economies as they grow, this could provide a large boost to global connectedness. Whether or not that will happen, however, remains uncertain, so we will continue to track it in the coming years.
Directionality offers important policy guidance
We also include information on the directionality of connectedness in the GCI by distinguishing between inbound and outbound flows. Such directionality is often a major concern of policymakers, who focus a lot on countries’ trade balances. But it turns out that merchandise trade is actually the most balanced of the interactions we tracked. Imbalances in the non-trade interactions range from two to five times as high. And over the 2005-2013 period, imbalances increased rather than decreased across most types of interactions.
We report on directionality separately because we can also use it as a diagnostic in relation to depth and breadth. If, for example, a country’s inward depth is higher that its outward depth, it may make more sense to focus on boosting depth on the outward direction.
The index matters
I think you’ll find that the DHL Global Connectedness Index provides the most comprehensive look at the state of globalization today, building up from detailed analysis of 140 countries to compare regions and ultimately to summarize how the world itself is changing. Our “3-D” approach – depth of international interactions, breadth of geographic distribution and directionality (outward vs. inward) – is based entirely on hard data so we separate the facts from fiction or “globaloney .” Moreover, it avoids mixing up flows and enablers of globalization so as to serve as a basis for better policy analysis.
In case that doesn’t convince you, the GCI is the only one of the globalization indexes to register what many observers regard as the biggest drop-off in globalization intensity during the financial crisis.
Download the complete report on the right side of this page. And feel free to share your thoughts with me in the comments below.
DHL Global Connectedness Index 2014: Where does globalization stand today?
Thomas Kipp, CEO, DHL eCommerce, and Pankaj Ghemawat, co-author of the report and internationally acclaimed globalization expert, discuss the results of the DHL Connectedness Index 2014, a detailed analysis of the state of globalization around the world.