Not that long ago, the world was supposed to be flat. Hardly a day passed without references to globalization and “borderless markets.” This led many policymakers and business leaders to jump on the bandwagon of open globalization, treating all interconnection among countries as equally beneficial.
But this perception that “the world is flat” was so exaggerated that it is fair to call it “globaloney.” The last few years — of financial crises, weak growth, and mounting protectionist pressures — have demonstrated that the world is far less connected than it appeared to be. The real world is roughly only 10 to 25 percent globalized. Most of the activities that could take place either across or within national borders are still domestic, and the international flows that exist vary widely among countries, industries, and types of business interactions.
Now the trend is toward localization. The same policymakers and business leaders who once sought universal openness are focusing their investment, attention, and effort within their own home countries. Few of them, however, have actually measured the level of globalization that exists in their country; fewer still have quantified the untapped potential for growth in their countries. If they had, they would recognize that they need increased global connection, even more than before — but in a smarter, more conscious, more considered form.
In plotting a course toward smarter integration, the differences among countries matter a great deal. Two attributes merit special consideration. The first is global depth. When used to describe a country’s interactions, it refers to the magnitude of international flows — of goods, labor, information, and capital — relative to the size of its domestic economy. In other words, an economy’s depth represents how much of it is devoted to exports or imports. Because international trade and investment are generally beneficial, the practical prescription for most countries is to work toward increasing their depth.
The other important dimension of global connectedness is breadth, which is the extent to which a country’s international trade flows are spread out globally versus confined to a particular set of partner nations. Breadth can be too great or too small: Some countries would benefit from more diversification whereas others could gain more from greater focus. But although the particulars may vary, the general rule holds true around the globe: By strategically increasing international connectedness, political leaders have the potential to unleash tremendous economic and social gains.
Connectedness and Growth
An accurate read of the potential value of globalization for your particular country is the first step. Because public policies and business plans have to be enacted in specific countries and regions, breadth and depth must be analyzed on a country-by-country basis. The DHL Global Connectedness Index, which we compiled for the first time in 2011 — the new edition is due out at the end of 2012 — was created with this purpose in mind. The index is based exclusively on hard data instead of surveys, to counteract the effects of globaloney. It measures connectedness according to countries’ participation in 10 types of generally beneficial international flows: merchandise trade, services trade, foreign direct investment, portfolio equity investment, international telephone calls, international Internet traffic (as indicated by the proxy of bandwidth statistics), international trade in printed publications, international tourism, international education, and international migration. (A few types of flows are excluded because the risks seem to outweigh the benefits. For example, the flow of “hot money,” in the form of short-term debt, can be risky; it can rapidly reverse itself, robbing economies of financial capital just when they need it most.) The depth and the breadth of each flow are measured, and the results are aggregated to score and rank each country’s global connectedness.
