How connected is the world?

The newly released DHL Global Connectedness Index 2016 shows that despite protectionist tendencies, globalization has not gone into reverse – though the future of world trade will depend heavily on the decisions of policymakers.

The world appears to be an increasingly fragile place. Slowing economic growth, geopolitical volatility, the threat of terrorism and rising inequality in many countries provide the backdrop against which both nationalism and protectionism seem on the rise. There is a widespread perception that countries and regions are drifting apart while the world is entering a phase of de-globalization. But despite these apparent setbacks to a more connected world, new evidence points to the fact that globalization is not dead.

The 2016 DHL Global Connectedness Index (GCI) provides a comprehensive and up-to-date view on the state of globalization. It shows that the world’s level of connectedness actually surpassed its 2007 pre-crisis peak during 2014 and advanced modestly in 2015. The available evidence indicates that the world was roughly 8 percent more connected in 2015 than in 2005. In other words: Although globalization is not advancing as rapidly as it was before the financial crisis, the GCI suggests it has not gone into reverse.

The biennial index offers the most complete view of how globalization is evolving, and compares the performance of 140 countries around the world, accounting for 99 percent of the world’s economic output over the two-year period from 2013 to 2015.

The level of global connectedness is gauged by measuring the international flows of trade, capital, information and people. Uniquely, the study not only captures the depth (the proportion of crossborder interactions) of countries’ connectedness, but also how widely those international flows are spread around the world, rather than just focused on a few key trading partners – dubbed the “breadth” of connectedness.

Trade slowdown

The information pillar – measured by international internet traffic, telephone call minutes and trade in printed publications – showed the strongest growth over the reporting period (2013-2015). The gains in capital and people flows have been more modest, while the decline in the proportion of goods traded across borders – which began in 2012 – accelerated in 2015.

Merchandise trade fell 13 percent in dollar terms from 2014 to 2015 – with China’s export depth falling from a peak of 35 percent in 2006 to only 21 percent in 2015 – prompting speculation as to whether world trade has reached saturation point. But merchandise trade volume rose a modest 2.7 percent in 2015, roughly in line with global output. That still remains a far cry from the 17-year period before the banking crisis, when trade was regularly expanding at twice the pace of world GDP growth.

Europe remains the world’s most connected region, followed by North America. However, most international flows take place within rather than between regions – and nowhere is this better illustrated than Europe, where nearly three-quarters of the average country’s trade takes place with other European nations.

All but two of the world’s most connected countries are in Europe, with top spot going to the Netherlands, followed by Singapore, Ireland, Switzerland, Luxembourg, Belgium, Germany, the U.K., Denmark and the United Arab Emirates.

However, the star performer is undoubtedly Singapore, which also came top of two new city-level indices introduced to the 2016 report – Globalization Hotspots and Globalization Giants.

The Hotspots index looks at the depth of a city’s connectedness – comparing its internal flows with international dealings – while the Giants index takes a broader look by directly comparing the size of cities’ international activity.

Singapore tops charts

On both measures, Singapore topped the charts. The “Lion City” – one of the world’s only city states (apart from the Vatican City and Monaco), with 5.6 million inhabitants and the third-largest global financial center  – was the top Hotspot, followed by Manama (Bahrain), Hong Kong, Dubai, Amsterdam, Tallinn, Dublin, Geneva, Abu Dhabi and Skopje.

Meanwhile, in the Globalization Giants index, Singapore also led the way, ahead of Hong Kong, London, New York, Paris, Tokyo, Shanghai, Seoul, Beijing and Toronto.  However, London and New York – the world’s two biggest financial centers – ranked only 47th and 76th in the Hotspots index.

Remarkably, Singapore also topped the country rankings when gauged on depth of global connectedness alone. Other outperformers on this metric were Cambodia, Vietnam, Malaysia and Mozambique.

The U.K. was the top country when judged by breadth of flows alone – the extent to which international flows are spread around the globe – followed by the U.S., the Netherlands, South Korea and Japan.

Some might be surprised that the U.S. ranked just 27th out of the 140 countries measured over the two-year period, even though North America as a whole had the largest gain in overall global connectedness.

However, as the index points out, one easily overlooked reason for this is that the vast majority of economic activity in a large country such as the U.S. takes place within the country’s borders, while smaller countries tend to have a much higher proportion of their business activity involving foreign buyers or sellers.

Perhaps unsurprisingly, advanced economies are four times as deeply integrated into international capital flows as emerging market countries, five times more so on the movement of people, and nine times greater on information flows. Language also makes a huge difference to flows, with 22 percent of trade and 34 percent of migration taking place between countries that share a common language.

Despite the political uncertainties, Frank Appel, CEO, Deutsche Post DHL Group remains optimistic about the future. “Globalization has served as the world’s engine of progress over the past half-century,” he says. “The GCI documents that globalization has finally recovered from the financial crisis, but faces an uncertain future. It is imperative that policymakers and business leaders support an environment in which globalization can continue to flourish and improve the lives of citizens around the world.”

To download the report, please click here

An interview with Pankaj Ghemawat

To what extent do you think the decision of the U.S. Government to pull out of the Trans-Pacific Partnership (TPP) will influence globalization and future global growth?

We are already starting to see effects. Countries in TPP are realigning for the new reality, eyeing a future in which the only major trade deal on the table in Asia is the China-led Regional Comprehensive Economic Partnership (RCEP). And back in the U.S., President Trump is celebrating, among other things, a deal struck with Carrier Corporation to scale back the company’s plans to relocate work to Mexico. The U.S. president pledges to renegotiate trade deals, and there is still a great deal of ambiguity about what such renegotiation will entail. A retreat from globalization would be a negative signal for growth, but President Trump has also promised much faster U.S. economic growth.  The transition from politics to policy is still in its early stages, and many difficult tradeoffs have to be managed along the way. Meanwhile, one definite implication is a heightened level of uncertainty about the prospects for both globalization and growth.

Why did Singapore score so well (both at city and country level)? What can we (and other countries) learn from Singapore’s outperformance?

Part of Singapore’s large role in international flows can be chalked up to the general pattern that economies with structural characteristics like Singapore’s tend to be deeply globalized. Countries that are small, rich, on the sea, fluent in major languages and close to major markets tend to have deeper global connectedness than those that are not. Singapore shares all of these characteristics, as well as a unique location and mix of cultures that make it an ideal hub for its region.

Credit, however, must also be given to the role of public policy. In 1972, just seven years after Singapore’s independence and decades before the term “global city” became popular in academic and policy circles, Singapore’s first foreign minister, S. Rajaratnam, gave a speech titled “Singapore as a Global City.” He articulated a vision in which Singapore’s economic development would be driven by its growing connections beyond its immediate neighborhood.

Singapore went on to implement a multipronged approach to globalization, tying together industry-specific strategies, infrastructure development, promotion of inward foreign direct investment, and so on. A 2014 article in Time magazine summed up the results: “No other place on earth has so engineered itself to prosper from globalization – and succeeded at it.” Indeed, our analysis affirms that even after we statistically control for Singapore’s structural advantages, Singapore still outperforms on the depth of its international flows.

PANKAJ GHEMAWAT: Co-author of the DHL Global Connectedness Index, professor at NYU Stern and IESE.

What does the performance of small cities such as Tallinn, Dublin and Skopje in the hotspots index tell us about global connectedness, and how have they managed to outperform much bigger cities?

This is an interesting question, and one that we cannot yet answer based on statistical analysis. However, the general lesson I take away from this pattern at this point is that cities across a wide size spectrum can enjoy the benefits of global connectedness. And smaller cities with strong specializations, in particular, can play important roles beyond the borders of the countries where they are located.

What was the probable cause of the slowdown in the growth of global connectedness in 2015?

The largest contributor was declining depth on the trade pillar of the index, and even more specifically the merchandise trade component. While merchandise exports as a percentage of world GDP has been on a declining trend since 2012, its fall accelerated in 2015. The causes are multifaceted. First of all, trade value is affected by commodity prices and exchange rates – the trade picture looks somewhat brighter if analyzed in terms of volume instead of value (merchandise trade value in U.S. dollar terms fell 13 percent in 2015 but merchandise trade volume grew a modest 2.7 percent over the same year). But even in volume terms, trade flows remain weak. The causes involve a combination of cyclical (macroeconomic) factors, structural factors (e.g. China’s rebalancing from an export-driven growth model to one that relies more on domestic demand), as well as policy measures. With regard to the latter, there is mounting evidence that protectionist policies are dampening trade growth.

Why are emerging economies less connected than advanced economies – other than obvious factors such as poorer infrastructure?

Whereas global connectedness can contribute to faster growth, low levels of economic development can also constrain connectedness. As you mentioned, infrastructure is an obvious barrier. However, physical infrastructure constraints are of maximum importance for merchandise trade, and that is the only type of flow on which emerging economies match advanced economies’ levels of integration.

The largest discrepancy is on international information flows, on which advanced economies are nine times as connected as emerging economies. This presumably reflects both bandwidth limitations as well as lower levels of digitization overall in less developed countries. On the people and capital pillars, policy constraints also come into play to a greater extent. Citizens of emerging economies face more stringent visa requirements when traveling abroad, and emerging economies also tend to place more restrictions on their international capital flows.

What is the most encouraging takeaway from the 2016 survey for you personally – and the most discouraging?

In my view, the most encouraging finding is that people tend to greatly overestimate levels of globalization, and that correcting those misperceptions can soften or even reverse many common concerns about it.

To cite a very concrete example, immigration was a big issue in the Brexit debate, and surveys indicate that Britons think there are more than twice as many immigrants in the U.K. as there actually are. Moreover, simply telling them the actual level of immigration into their country cuts the proportion thinking there are too many immigrants by 40 percent. To me, that illustrates the value of a study like the DHL Global Connectedness Index. Globalization will remain controversial, but it is essential to strengthen the debate by grounding it more effectively in hard data.

The most discouraging finding, in my view, is that growth on the depth dimension of global connectedness slowed in 2015. This is a serious concern because the depth dimension of global connectedness has been associated with faster economic growth.

Are you an optimist or a pessimist on the future of globalization? Is the continued growth of global connectedness inevitable in the longer term, ­regardless of short-term hiccups, given the information and technology revolution?

Globalization can go into reverse over very long periods – decades or more – as we saw in the mid-20th century. But over even longer time horizons, I still tend toward optimism. Human progress over centuries and even millennia has been marked by expanding circles of cooperation. We have advanced from small bands of several dozen people up to larger tribes and eventually to nation states and beyond. Pushing these boundaries has always involved taking real risks, and there have often been setbacks. But the gains have been enormous and are worth continuing to pursue.

For globalization to prevail, do political adjustments need to be made to allay public concerns?

Absolutely. There is still much to be gained from strengthening the links between countries, and many of the problems blamed on globalization result more from domestic than international causes. But just because the problems of globalization tend to be exaggerated does not mean they are not real at all. International flows can sometimes have negative consequences. The solution, however, is not to draw back from international engagement across the board. National governments actually have far more power to manage it than is commonly presumed – more can and should be ­done to assist people who are harmed by the side effects of globalization. 

Published: February 2017

Infographics: Mirja Loth