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Globalisation or globaloney?

It is generally accepted that the world is deeply interconnected and that it will become more so. Not true, says global strategy expert Pankaj Ghemawat.
Globalisation or globaloney?
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Most people agree that there is an ongoing and unstoppable trend towards more globalisation. Some people think this is good, some that it is bad, but much business and political discourse accepts that it is true. But it is not. The world is less globally connected today than it was in 2007, and global connectedness also falls far short of the levels commonly assumed by business executives and the general public.

I recently co-authored, with my IESE colleague Steven A. Altman, the DHL Global Connectedness Index 2012, which measures and analyses the global connectedness of 140 countries, covering 99% of the world’s GDP and 95% of its population. It measures the depth and breadth of countries’ trade, capital, information, and people flows. Twelve distinct components of connectedness are incorporated across those four pillars, with historical coverage back to 2005. More than one million data points were included into the calculation of this. This is hard data, not myth.

Here are some facts. Only 1% of post is sent internationally. At the highest estimate, just 5% of phone calls are international. The average person places about 40 minutes of international phone calls per year (excluding VoIP calls). Less than 15% of Facebook friends live in different countries, and roughly 25% of followers of Twitter users, on average, are located outside of a user’s home country. In China, 0.1% in of online news page-views are on foreign websites. This figure is under 10% everywhere data are available. In the U.S., 21% of U.S. news coverage across all media was international, and 11 % of that dealt with US foreign affairs. In Europe, 38% of news was international, but almost half of this was about other European countries.

Exports of goods and services add up to 30% of world GDP, but after you remove double- and triple-counting of products that cross borders more than once, the share of exports in value added comes down closer to 20%. Either way, it´s a far cry from the national average of 90% you would expect if we lived in a flat world. While the distance between a randomly selected pair of countries is roughly 8,500 km, the average distance traversed by merchandise trade, foreign direct investment flows, telephone calls, and human migration all cluster in the range from 3,900 km to 4,750 km. Most international flows take place within rather than between continental regions.

Common language
Countries that share a common language trade 119% more than countries that don’t. Countries sharing a trade agreement trade 29% more, and if you double the geographic distance between a pair of countries their trade will drop roughly in half. Globalisation is also uneven across sectors. In some industries, trade occurs mainly between countries with similar levels of development whereas in other industries trade leverages economic differences to take advantage of cost arbitrage possibilities.

The shocks of 2007 and 2008 reduced globalisation by numerous measures. For example, foreign direct investment flows as a percentage of gross fixed capital formation declined from 18% in 2007 to just 10% in 2010. (Although the average distance travelled by FDI flows rose from 2007 to 2010 from roughly 4,000 to 4,900 kilometres, and the proportion taking place within regions declined from 58% to 52%.) At the end of 2008, the global stock of international portfolio equity assets accounted for only 16% of world GDP, as compared to 31% one year earlier.

Exports of goods and services fell from 30% of GDP in 2008 to 25% in. 2009. Trade began a strong recovery in 2010 and by 2011 had recovered more than half of its prior losses. But the latest WTO estimates are that international merchandise trade will grow only 3.3%in 2013, up from 2% in 2012 but down from 5% in 2011 and 14% in 2010.Globalisation is a complex, nuanced thing, and rather than an unstoppable force, is often fragile.

During my speeches I have asked more than one hundred audiences to guess how globalised the world is, and every single audience has overestimated the real figures by a large margin. When Harvard Business Review asked its readers their guesses were, on average, three times higher than the real numbers – and the guesses of the CEOs among them were four times as high. That is not uncommon.

A recent French survey found that the public thinks immigrants make up 24% of France’s population. The correct figure is 8%. Incidentally, First generation immigrants account for roughly 3% of the world’s population – the same as 1910.

Arguments based on assertions about globalisation regularly feature prominently in political debates, business strategy deliberations, and in everyday life. But they are seldom backed up with hard data, and much of their content is so far removed from reality that it is no more than “globaloney”. As the late American politician and sociologist Daniel Patrick Moynihan said: “Everyone is entitled to his own opinion, but not to his own facts."

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