Bloomberg News

’Flat’ World Will Take Time to Smooth Out: Pankaj Ghemawat

October 24, 2011

(Updates seventh paragraph in op-ed published Oct. 20 by qualifying export contributions to globalization.)

Oct. 20 (Bloomberg) -- Six years ago, Thomas Friedman published “The World Is Flat,” which has sold about 4 million copies and set the pace for global blockbusters. The book continues to have a strong grip on people’s imaginations.

A Harvard Business Review blog posting from this spring provides evidence: I conducted a mini-survey asking which of three quotes about globalization came closest to reflecting readers’ views. Of 642 respondents, more than three in five picked the following pronouncement from Friedman over two more moderate alternatives:

“The world got flat … [creating] a global, Web-enabled playing field that allows for … collaboration on research and work in real time, without regard to geography [or] distance.”

Belief that this flat world is upon us, or is imminent, is one of few points that unite pro-globalization and anti- globalization forces. Pro-globalizers tend to cheer this vision of complete integration. Anti-globalizers consider it a grave threat. Both groups have a flawed perception of the world we live in and the degree to which globalization has shaped it.

In fact, data indicate that most people consistently overestimate current levels of cross-border integration and similarly underestimate the impact that distances and differences still have in keeping countries apart. Immigration, for example, is a contentious issue on multiple continents. Yet only 3 percent of the world’s people actually live outside the country in which they were born, and only 2 percent of university students study outside their homelands.

What about the much-vaunted flow of information throughout our hyperconnected world? Only 2 percent of telephone calls are international, and less than 18 percent of Internet traffic crosses national borders. Based on a popularity survey of online news sites in 30 countries, most users get all but a tiny portion -- roughly 5 percent -- of their news from domestic sources. According to the Pew Research Center, only 20 percent of U.S. news coverage across all types of media focuses on international issues, and almost half of that concerns the U.S.’s own foreign affairs.

Exports provide the most visible face of globalization, yet even they comprise a smaller proportion of the economy than many believe, accounting -- without double counting products that cross a border multiple times -- for about 20 percent of world gross domestic product.

Finally, consider capital, which is presumed to respect no boundaries. Foreign direct investment makes up only 9 percent of all fixed investment globally. Roughly 15 percent to 20 percent of venture capital is deployed outside the investing fund’s home country, and equity investors have only 20 percent of their stock holdings abroad.

Upon learning such figures, many people react similarly -- concluding that if complete globalization isn’t here today, it’s certainly coming tomorrow. Yet trend data dispel that notion, too. Immigration intensity, along with some measures of net capital flows as a proportion of GDP, peaked before World War I. The ratio of foreign direct investment to GDP has broken new ground, but only in recent years; it wasn’t until the 1990s that this ratio surpassed levels experienced immediately prior to the Great War.

Trade intensity -- measured in terms of exports as a proportion of GDP -- has reached an unprecedented level of about 20 percent. But 20 is still much closer to 0 than to 100. And recent trends aren’t all positive. The intercontinental share of Internet traffic is decreasing, for reasons ranging from surging peer-to-peer traffic, which tends to be relatively localized, to the development of new switching hubs outside the U.S. (reducing the American role as the global switching hub).

No matter how you slice the numbers, the bulk of the flow of goods and services is domestic, not international, and will remain so for the foreseeable future. Even the international flows that do take place are constrained geographically. Not only are international migration, telephone calls, trade and direct investment small in comparison with domestic counterparts, but more than 50 percent of international flows in these categories are contained within distinct continental regions.

In fact, if you double the distance between countries, trade between them falls by half. Similarly, otherwise identical countries trade 42 percent more if they share a common language, 47 percent more if they are part of a common trading block, 114 percent more if they share a common currency and 188 percent more if one colonized the other at some point in history.

Understanding that the world is much less integrated than many believe, and that distances and differences still matter, provides breathing room to consider more calmly whether to continue pushing forward with globalization.

The simple answer is: We should. We have expanded our prosperity and security by broadening the circles of cooperation to an extent that far surpasses anything our distant ancestors could have imagined. A realistic assessment of globalization reveals that we still have enormous capacity to benefit from further expansion of those circles. By advancing integration, we can extend our reach across the world, enrich our economies and, in the long run, ease violent conflicts. Since we haven’t yet achieved this goal, we have evidence of a simple fact: The world is not flat.

(Pankaj Ghemawat is professor of strategic management at IESE Business School in Barcelona and author of “World 3.0: Global Prosperity and How to Achieve It.” The opinions expressed are his own.)

--Editors: Francis Wilkinson, Stacey Shick

Click on “Send Comment” in sidebar display to send a letter to the editor.

To contact the writer on this story: PGhemawat@iese.edu

To contact the editor responsible for this story: Francis Wilkinson at fwilkinson1@bloomberg.net


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