Globalisation has not yet flattened the world: Pankaj Ghemawat
Alokesh Bhattacharyya and Anand J January 4, 2012Pankaj Ghemawat, Anselmo Rubiralta Professor of Global Strategy at IESE Business School, is one of the eight Indians in Thinkers50, a global listing of world's best business minds. In an interview with Alokesh Bhattacharyya and Anand J, he speaks on globalization.
On the world being flat
Yeah, the delusion, I think, that the world is flat is fairly common in the survey based on the blog that I write for Harwrd Business Review and as of this summer we were still getting responses suggesting that 60 percent or more than 60 percent agreed with the notion of flatness. And what I invite people to do because this is what I encounter with the audience I speak to as well is to look actually at the data on cross border interactions. Because that is something, if you go back and look at Thomas' The World is Flat book. It is a 500 page book without a single table, figure, chart, reference or footnote. So much of the discussion of globalisation takes place in a data free zone, given that Tom sold more copies of this book than all previous books on globalisation combined. So when you start looking at things like what percentage of phone calls occurred across national borders, you know, you come up with number around 2 percent, which is less than 1/10th what people tend to guess. Or when you look at foreign direct investment as a percentage of gross fixed capital formation, the most recent data we have is for 2009. Again you end up with number around 9 percent which people tend to over-estimate again in the 20-30 percent range.
So there are lot of data like that in my book. This is sort of chapter two of the book and the point is, first of all, if borders didn't really matter as you would expect the numbers in the 85-100 percentage range. None of the numbers are remotely there. And second, some sort of variables that I have surveyed on, people tend to over-estimate by factor of two- five - ten. The actual level of cross border interactions which is what I refer to global audience. It is not just Thomas who has an agenda of promoting that the world is flat and the number of copies of this book. People who don't have a book to promote also tend to have somewhat inflated notion of what the data actually suggest. And so, that is the starting point of World 3.0. I want to talk not just about what the world isn't and also, what the world is. And particularly what I refer to as the law of distance suggesting that in general those international interactions that do take place, bulk of them are accounted for by the countries that are close to each other geographically, culturally or historically.
On US-Mexico trade
I was speaking at the Mexico business summit about six weeks ago. So, I remember looking at detail the Mexican data and situation where more than 80 percent of merchandise exports go to the US is an illustration or another thing to think about is that the largest bilateral trading relationship of the world is still the US- Canada. The US makes sense, because it is the largest economy in the world, but Canada is only number 10th. The reason has to do with the fact that they speak the same language, they are part of NAFTA, they have similar colonial origins which leads to similarity in legal systems, they have a common geographic border and 90 percent of Canadians lives within 250 kms from US border. And they have similar levels of Per Capita Income, which net-net tends to boost trade. Say food manufacturer in US can expect similar price points in Canada, and therefore can use the samefor packaging and so forth. But one of the biggest exceptions, and Jagdish Bhagwati cites it all the time, to the law of distance is India and Pakistan.
When you take the cross country coefficient estimates and look at how India's trade patterns diverge from what one would expect, the biggest potential is always the potential to multiply trade with Pakistan several fold, if not ten fold and more. This reminds us that politics matters a great deal as well. But on average, things are subject to the law of distance. But I would see India-Pakistan as an aberration rather than the way Bhagwati sometimes characterises it as a general refutation of the law of distance.
If you go to my website and click on any country… there is a section on the website where maps on exports and by level of merchandise trade and if you click on any country, the rest of the world gets rescaled according to how much that focal country trades with the other countries and so… with Japan, you see a huge focus on East Asia, and it is particularly interesting to look at the smaller economies. We just finished a systematic analysis that was released at the APEC summit under the rubric of the DHL global connectedness index. Again I can send you the link. And one of the things that measurement exercise revealed is that typically 50-60 percent of the international flows that do take place occur within regions, which are obviously subject to less geographic distance than two randomly selected countries, but also have commonalties across other dimensions that creates trade. So in fact the intra regional component of things like trade has been growing faster than the inter-regional component of trade since world war 2. And regionalisation has really been a driver of globalisation rather than an alternative to globalisation for most countries. India, again is a bit of an aberration, India turns out in our rankings to have a relatively high score and unfortunately that is nothing to cheer about because this just reflects the fact that we happens to be in a bad part of the world in terms of the establishment of trading and other relationships with neighbours. So one of the challenges India faces relatieve to China is that China is part of the integrated East Asian production block. Whereas we have to look farther for our markets and our trade partners. Obviously political normalisation might help with some of that.
US-China trade versus US-Canada trade
The US imported more from China last year than from Canada. But the US doesn't export very much to China and since the trading pattern with Canada is more balanced, the aggregate trading relation with Canada is still, if I have the data correct, Canada was the no 1 trading partner last year. It is also interesting to look at other measures of international interaction beyond trade, you know, Mexico and Canada figure in the two of the three top trading partners of the US. They also are the two largest destinations for US outbound phone calls. They are also two of the three largest sources of crude oil for the US, which gets more of its oil from the western hemisphere than it does from the Middle - East and North Africa. So you sort of see the same kind of patterns… I like to think systematically that trade flows, capital flows, flows of people, and flows of information and along all these dimensions, you sort of tend to see a very high degree of localisation, regionalisation and variation even for the largest economy in the world. We know that the largest economies from the DHL study tend to typically have broader patterns of engagement with the world than the small economies.
On the outlook for globalisation, including easy economic transfers, movement of humans, and various other factors:
India ranks quite poorly relative to low averages of the world. The Economic Times recently ran an article of mine that gets into some detail on exactly what the DHL connectedness index suggested about India's level of connectivity, even compared to these limited global averages. But to back up to the global level, the reason, I like to point out that globalisation is 10-20 percent lower than complete, is two fold. First of all, recognising that the levels of globalisation are limited reminds us that thinking that the world is flat would naught the potential for additional integration.
If we believe that we are already there, there would be no more juice to squeeze out of that lemon, and we are very, very far from that. The other thing is that many of the fears that people have about globalisation tend to get exaggerated by intuitions of how globalised we already are. So I was at the Harvard summit on US competitiveness… of course the big issue was in the minds of the people present there, was the US trade imbalances with China as the "the thing" that needs to be fixed to solve all the US problems. in that context it is helpful to point out that 1-2 percent of US personal consumption expenditures are accounted for by products made in China. And so taking care of "the trade relationship with China" is not going to make huge dent in the unemployment rate, which is still close to 9 percent. To start with the example that initially motivated me to write World 3.0. I started writing it at the time that the international rice prices had tripled by over a 6-8 months period and of course that usual met with usual calls like statements from Sarkozy of France of speculators, that we need to crackdown on the globalisation.
Now when you actually look at the rice markets, it comes out that 5 percent of the rice produced in the world is traded internationally. So the impact of any kind of supply shock or demand shock get loaded on to that 5 percent. And it is hard to see how reducing the 5 percent to a 2 percent or 3 percent or 5 percent is going to improve matters. While it is relatively easy to see that increase in that 5 percent to maybe 10 percent would do to significant amount to level out some of the price volatility that we see. So those are just two examples of ways in which inflated intuitions about how globalised we are may lead us to see that globalisation is the problem, when it is actually the solution.
On why globalisation isn't happening faster, despite potential economic returns
I think it is partly the fear of the unknown but I think it is useful to decompose that a bit. Part of it is the misguided intuition and the hype that I was talking about. Let me give another example. When you ask Americans what percent of US budget goes to foreign aid; the average according to the survey that the Chicago Council on Foreign Affairs did said that it is 30 percent. The actual aide is around 1 percent. And when you tell people that it is 1 percent, they become a bit more willing to consider additional foreign aid. So some of it is the exaggeration and some of it is much more deep seated, and this is the whole introductory chapter to my book, which talks about World 0.0 onwards. Basically we come out of the history which, you know, when we were living back in caves; it was safe to trust just people living in one's own cave or the next cave, but not people we don't know. So there is this sort of, people like Steven Tinker, have written about this kind of hard-wired fear of strangers that is a basic element of our makeup. And that particularly tends to worryingly come to the fore in the present context when the times get tough. But it is there and its been with us for a long time. Even before the eurozone crisis, when you did surveys in Europe, then Europe is the most integrated major region in the world. You find that the typical educated citizen of a West European country is twice as likely to trust co-citizens a lot as he or she is citizens of other west European countries. And roughly four times likely to trust co-citizens than citizens outside western Europe and those numbers have probably deteriorated as the Euro zone crisis started. So there is this sort of deep rooted tendencies that we have as a species that distrust foreigners. That's why foreigners make such attractive scapegoats as in the case of US-China trade case, when trying to get tough in particular. And that is something that we have some idea of what the interventions are to change that. Research on educational systems around the world suggests that higher education typically helps ameliorate such suspicion and xenophobia. So do most forms of international exchanges involving people. So does, you know, the use of technology to reach out to become part of global networks and so forth. But having said that, it's a deep rooted fear that tends to be obviously hard to eradicate, and it particularly tends to rise during times of economic uncertainty like the one that we are currently experiencing.
On the possibility of dramatic shifts in attitude
I think the minimum is that policy makers can avoid fanning the flames. We have a situation where studies suggest that coverage of foreign news for instance tends to move from negative to positive. In a context like that, without arguing for control of the press, which obviously will be antithetical to not just your perspective you need in a democracy. When German politicians reflexively reach out to Spanish farmers to explain why cucumbers are killing people in Germany, that builds a lot of ill-will. More importantly, given the unemployment rates in the western world, the focus for now in the very short run is to prevent high levels of unemployment from triggering protectionist steps. But I think, the longer run agenda remains clear, to aim for more integration while curbing I think, this is the other advantage that explains the one thing that I recognize the world is over is only 10-20 percent globalised, while curbing the negative side effects as necessary through national regulation. If the world is completely integrated there would be no room left for national regulation. When one recognises the actual levels of integration, that builds some confidence as some of the awkward or unpleasant aspects globalisation -- and I do talk about those in my book as well - are things that can be controlled that we don't face an either-or choice of totally abandoning ourselves to market forces, or alternatively closing ourselves down. That we should open up, but apply regulation as necessary.
Particularly in the Indian context with the cuts in growth rates, one of the levers that India still looks very bad on, 20 years after the reform process started, is levels of international integration and so on. While we do have things that need managing the things like trade deficits with the Chinese. If one is thinking about how to charge up Indian growth, it is hard to think of a more promising lever than additional integration.