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Report: World Less Globalized Today than in 2007
 

By Roy Maurer  2/18/2013
 
 

Global connectedness—defined as the depth and breadth of a country’s integration with the rest of the world and measured by international flows of products and services, capital, information, and people—is weaker today than it was five years ago, according to a recently released report.

The DHL Global Connectedness Index (GCI) is a comprehensive analysis of the state of globalization around the world. The GCI concludes that the world today is less globally connected than it was in 2007.

The GCI tracks the depth and breadth of trade, capital, information and people flows across 140 countries that account for 99 percent of the world’s gross domestic product (GDP) and 95 percent of its population.

Depth is defined as how much of a country’s activities or flows are international versus domestic by comparing the size of its international flows with relevant measures of its domestic economy.

Breadth complements depth by looking at how broadly the international component of a given type of activity is distributed across countries.

Based on data from 2005 to 2011, the index charts how globalization has evolved since the onset of the financial crisis at the global, regional and national levels. Despite modest gains since 2009, global connectedness has yet to recapture its 2007 pre-crisis peak.

The index compared trends across 10 distinct types of flows within four “pillars”: trade (merchandise, services), capital (foreign direct investment, portfolio equity), information (Internet bandwidth, telephone calls, trade in printed publications), and people (tourism, international education, migration).

“[D]eepening global connectedness has the potential to contribute to trillions of dollars in economic gains as well as various noneconomic benefits,” said GCI editor Pankaj Ghemawat of the IESE Business School at the University of Navarra in Spain, in the report.

International HR practitioners should find the index useful “because it provides new business and cultural data about many of the countries I do business with, as well as HR and business leaders I partner with,” said Thomas O’Connor, GPHR, former director of global mobility for United Technologies Corporation and past senior international HR manager at Raytheon.

“Most index or survey data we participate in, benchmark, view and use relates to policy, immigration, tax, benefits and compensation,” O’Connor told SHRM Online. “This data addresses the depth and breadth of countries’ integration into the world economy from a trade, capital, information and people perspective.” It’s supplemental to the intercultural and interpersonal experience of global HR, he said.

Global Connectedness Trends

Global connectedness growth was robust in the years before the onset of the global financial crisis, powered by rising trade, capital and information flows, according to the report. The capital pillar was the first to suffer a steep decline, falling from 2007 to 2008 back to slightly below its 2005 level. “The sharp drop in 2008 was driven in particular by a decline in valuations of international investment stocks,” the report asserted.

Trade was the next domino to fall, with exports of goods and services plummeting in 2009 to 25 percent of GDP from 30 percent in 2008. In contrast to capital, however, trade began a strong recovery in 2010 and by 2011 had recovered more than half of its prior losses, according to the report.

The information and people pillars have proven more robust through this turbulent period.

“The net result of these developments across different types of flows is that the world as a whole is only slightly more globally connected than it was in 2005 and notably less so than it was in 2007. That is a striking finding, since only a few years ago globalization was being celebrated or decried, depending on one’s perspective, as an inevitable trend or unstoppable force,” said Ghemawat.

Country Rankings: Europe the Most-Connected Region

The top ranked countries overall on this year’s index are, in descending order, the Netherlands, Singapore, Luxembourg, Ireland, Switzerland, the United Kingdom, Belgium, Sweden, Denmark and Germany.

“The fact that nine of the top 10 countries are located in Europe reflects Europe’s broader standing as the world’s most globally connected continental region,” the report said. Europe is also the top ranked region on the people pillar. The East Asia & Pacific region tops the trade pillar and North America leads on the capital and information pillars.

The countries that make up the bottom of the rankings were, in ascending order, Burundi, Central African Republic, Rwanda, Myanmar, Burkina Faso, Paraguay, Botswana, Nepal, Tajikistan and Lao PDR.

“This juxtaposition of the countries with the highest and the lowest ranks suggests some obvious effects of levels of economic development and geographic locations on global connectedness,” the report said. The top 10 are all among the world’s most advanced economies in terms of per capita income, human development and other metrics. In contrast, five of the bottom 10 countries, located in Sub-Saharan Africa, are classified as low or lower middle income countries by the World Bank.

Three economic and geographic factors alone, according to the GCI, can explain roughly 60 percent of the variation among countries’ global connectedness scores: GDP per capita, remoteness, and whether or not a country is landlocked.

All else being equal, if one country has a higher GDP per capita than another, its global connectedness score will tend to be higher, according to the report. If countries are remote from foreign markets around the world, there is a decline in connectedness. And if a country is landlocked, without direct access to the sea, its global connectedness score tends to be lower.

“In addition to these three major explanatory factors, speaking a common language with other major economies and having a large population also have more moderate associations with higher overall global connectedness scores.”

Returning to the highest and lowest ranked countries, then, it is unsurprising that nine of the top 10 are in Europe, which is the region where countries average the lowest remoteness, due to the many large economies close by. And while two of the top 10 are landlocked—Switzerland and Luxembourg—they benefit from well-developed institutional and physical infrastructures to connect them to world markets.

The nine landlocked countries in the bottom 10 lack such compensating advantages, the report stated. Five of the bottom 10 are located in Sub-Saharan Africa, the region that is farthest from international markets.

The geographic diversity of the leading countries expands substantially if one looks at the top 50 countries. Israel is the top ranked country in the Middle East, holding the 18th rank. North America enters the list with the United States ranked 20th. Australia holds the 30th position as the top ranked country in the South Pacific. Morocco is the highest ranked African country, in 38th place, and South Africa leads among Sub-Saharan African countries, in the 48th position. Chile is the top ranked South American country, at 41st place.

African Countries Post Largest Increases in Connectedness

Sub-Saharan Africa is the least connected region, but the top five countries in terms of connectedness score increases over the past year are all located there: Mozambique, Togo, Ghana, Guinea and Zambia.

These gains have been driven primarily by trade. Mozambique, for example, posted the largest increase in its overall global connectedness score (from the 130th rank to the 113th) based primarily on the value of its merchandise exports growing by 33 percent. Exports that had previously been directed disproportionately to the Netherlands were redirected toward other countries, principally China and the United Kingdom, according to the GCI authors.

Where Is the U.S.?

The United States has maintained a stable level of global connectedness since 2007, according to the report. U.S. economic ties are widespread. The U.S. ranks 20th overall and has the world’s second highest breadth score, reflecting its significant ties to nearly every other country around the world. It has a more modest rank on depth (89th), which is not unusual for a country with a very large domestic market, according to the report. U.S. international trade—relative to the size of the huge domestic U.S. economy—is actually much smaller than that of most other countries.

Also, U.S. global connectedness is more related to finance than to goods and services.

The U.S. has its strongest position on the capital pillar. On the other hand, the U.S. has a remarkably low score on the trade pillar.

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

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