The future of globalization is shrouded by an unusual amount of ambiguity. Plummeting trade and capital flows during the 2008-09 financial crisis provided a reminder that globalization can go into reverse, and many saw the UK’s vote this past June to leave the European Union as a clear signal that globalization was heading into retreat. The headline “Britain’s Brexit just killed globalization as we know it” summed up the standard reaction.1
In such an environment, business and public policy decision-makers need the most up-to-date view of how globalization is evolving, which is what my co-author, Steven A. Altman, and I aim to provide in the biennial DHL Global Connectedness Index. On November 15th, we released the 2016 edition of the index, which now covers the period from 2005 to 2015. The DHL Global Connectedness Index measures globalization based on the latest hard data at the world level, for 140 countries that account for 99% of the world’s GDP and 95% of its population, and, as a special feature in this edition, across 113 major cities around the world.
Globalization Slowed in 2015
The world’s overall level of globalization—taking into account the depth and breadth of trade, capital, information and people flows—surpassed its pre-crisis peak during 2014. And while the available data for 2015 are more limited, they point to a slowdown rather than a reversal during that year. While international trade was under pressure in 2015, the depth (intensity) of capital, people, and especially information flows did increase. Currently available evidence – still preliminary in some areas – suggests that the world was about 8% more connected in 2015 than in 2005.
While it is still too soon to measure the effects of Brexit on global connectedness, my two laws of globalization provide some perspective.2 My law of semiglobalization, which calls attention to the importance of national borders, reminds us that the UK’s international flows are small enough that even under a worst-case scenario, the result would be a blip at the global level. And my law of distance implies that the largest effects beyond Britain’s borders will be felt by the (rest of the) European Union. How the EU responds and, specifically, whether it continues to hold together is what is much more consequential at the global level.
Europe Is Still the Most Connected Region
Disaggregating the global analysis to look at major world regions, Europe remains the world’s most globally connected region, followed by North America and then East Asia & the Pacific. Europe’s lead reflects both its structural characteristics (many wealthy countries in close proximity) as well as decades of policies aimed at promoting integration via the European Union (EU) and its predecessors. More than 70% of the average European country’s international trade, capital, information, and people flows take place within Europe itself—which highlights how much is at stake if Europe gives up on regional integration.
Proceeding to country-level results, the ten most globally connected countries in 2015 were (in descending order): the Netherlands, Singapore, Ireland, Switzerland, Luxembourg, Belgium, Germany, the United Kingdom, Denmark, and the United Arab Emirates. On the depth dimension of the index, which compares countries’ international flows to the size of their domestic economies, the five most deeply connected economies were: Singapore, Hong Kong SAR (China), Luxembourg, Ireland, and Belgium. On the breadth dimension, which evaluates the extent to which countries’ international flows are distributed globally or more narrowly focused, the leading countries were: the United Kingdom, the United States, the Netherlands, South Korea, and Japan.
Roughly 70% of the variation in countries’ observed levels of global connectedness can be explained based on structural characteristics such as their size, level of economic development, and geographic remoteness. The countries whose performance exceeded expectations most on the depth dimension of global connectedness, in particular, were: Cambodia, Vietnam, Malaysia, Singapore, and Mozambique.
Emerging Economies Continue to Lag
Comparing the global connectedness of advanced versus emerging economies reveals the former to be far more connected than the latter. On trade depth, advanced and emerging economies are roughly at parity, but advanced economies are about four times as deeply integrated into international capital flows, five times as much on people flows, and nine times with respect to information flows. The rising proportion of economic activity taking place in emerging economies continues to prompt international flows to stretch out over greater distances (and to become less regionalized), but this shift has decelerated since the crisis years.
If emerging economies become more similar to advanced economies in terms of their connectedness levels as they grow, this would provide a powerful boost to overall global connectedness. While recent trends do not provide strong evidence that this is taking place, the latest forecasts calling for faster growth in emerging economies3 do represent a positive signal.
Singapore Tops New City Level Globalization Indexes
This report also introduces two new city-level globalization indexes: “Globalization Hotspots” and “Globalization Giants.” While these new indexes cover the same four pillars as the DHL Global Connectedness Index, different (and fewer) component measures are used due to more limited availability of city-level data.
The Hotspots index parallels the depth dimension of the country-level DHL Global Connectedness Index by comparing cities’ international trade, capital, information, and people flows to their internal activity. It reveals which cities are most intensively focused on international interactions. The top 5 Globalization Hotspots in 2015 were: Singapore, Manama, Hong Kong, Dubai and Amsterdam. The Giants index looks beyond the cities themselves to assess their overall external projection by directly comparing the sizes of cities’ international interactions. The leading Globalization Giants were: Singapore, Hong Kong, London, New York, and Paris.
Use the Index
The real power of the DHL Global Connectedness Index lies in its utility for business and public policy analysis. As Harvard professor Dani Rodrik has written, “There is no better index that measures the overall global connectedness of nations – encompassing flows of goods and services, capital, people, and information across borders. An absolutely indispensable reference for discussions on the state of globalization, including debates on whether it is moving forward or backwards.”
The index shows that the depth and breadth of globalization are also much lower than most people presume, suggesting an opportunity to correct misperceptions and apprehensions that underlie at least some of the current anger about globalization. In my view, disseminating facts as an antidote to fears about globalization is imperative, especially since my research—elaborated in my 2011 book World 3.0: Global Prosperity and How to Achieve It —indicates that deeper global connectedness is generally beneficial (especially on a global net basis).
Public policymakers who share this view can use the index to compare levels of connectedness relative to other countries and over time. It can help them identify areas of particular strength and weakness and understand their policy and structural enablers, all with a view to capturing greater benefits from global connectedness. Thus, Mark Rutte, Prime Minister of the Netherlands, has endorsed the index as “a benchmark that helps us stay sharp, adapt to new developments and stay active in the global vanguard—connected to the future.”
For business executives, it is often useful to start with the same sort of country-level benchmarking to examine the strengths and weaknesses that a firm and its competitors inherit from the environments of their home countries and other countries where they concentrate their operations. The index can also help firms to make better decisions about where to locate particular types of activity around the world.
In summary, globalization will remain complicated and controversial, but a clearer, evidence-based view of actual levels and patterns of international interactions is required to advance the debate. As the late Daniel Patrick Moynihan put it, everyone is entitled to their own opinions, but not their own facts.
1 The laws and the evidence behind them are elaborated at length in Pankaj Ghemawat, The Laws of Globalization and Business Applications, Cambridge University Press, 2017.
2 See, for example, the October 2016 update of the IMF’s World Economic Outlook.
3 Pankaj Ghemawat, World 3.0: Global Prosperity and How to Achieve It, Harvard Business Review Press, 2011.