4 - WHY THE WORLD ISN'T FLAT (GHEMAWAT)

In The World Is Flat, New York Times columnist Thomas Friedman asserts that 10 forces - most of which enable connectivity and collaboration at a distance - are "flattening" the Earth and leveling a playing field of global competitiveness, the likes of which the world has never before seen. It sounds compelling enough, but it's wrong. So writes Pankaj Ghemawat, Professor at Harvard University's Graduate School of Business Administration, in Foreign Policy.

Despite talk of a new, wired world where information, ideas, money, and people can move around the planet faster than ever before, more than 90% of all phone calls, Web traffic and investment are local. The portrait that emerges from a hard look at the way companies, people, and states interact is a world that's only beginning to realize the potential of true global integration.

Globalization is real, but fragile, and not guaranteed, argues Ghemawat, citing the following:

Investment: The total amount of the world's capital formation that is generated from foreign direct investment (FDI) has been less than 10% for the last three years for which data are available (200305). In other words, more than 90% of the fixed investment around the world is still domestic.

Trade: Trade flows are growing, but the ratio of domestic to international trade is still substantial. Even Canadian-U.S. trade, the largest bilateral relationship of its kind in the world, still exhibits a "home bias" of 5 to 1. That's down dramatically (from 20 to 1 in 1988, before NAFTA), but represents merchandise trade only; for services, the ratio is still several times larger.

Cyberspace: Web traffic within countries and regions has increased far faster than traffic between them. Just as in the real world, Internet links decay with distance.

Migration: The number of long-term international migrants amounted to 2.9% of the world's population in 2005, lower than in 1900.

Along other dimensions of globalization, it's true that new records are being set. But this growth has happened only relatively recently, and only after long periods of stagnation and reversal. As to the constellation of policy changes that led many countries - particularly China, India, and the former Soviet Union - to engage more extensively with the international economy, such policy openings are important. But clearly borders still matter. Global integration is only beginning, and is fragile and reversible.

For example, the so-called Washington Consensus around market-friendly policies ran up against the 1997 Asian currency crisis and has since frayed substantially. To take another example, there is an unmistakable swing toward neo-populism across much of Latin America. In terms of economic outcomes, the number of countries - in Latin America, coastal Africa, and the former Soviet Union - that have dropped out of the "convergence club" (defined in terms of narrowing productivity and structural gaps visa-vis the advanced industrialized countries) is at least as impressive as the number of countries that have joined the club. At a multilateral level, the suspension of the Doha round of trade talks in the summer of 2006 is no promising omen. In addition, the recent wave of crossborder mergers and acquisitions seems to be encountering more protectionism, in a broader range of countries, than did the previous wave in the late 1990s.

Of course, given that sentiments in these respects have shifted in the past 10 years or so, there is a fair chance that they may shift yet again in the next decade. The point is, it's not only possible to turn back the clock on globalization-friendly policies - it is relatively easy to imagine it happening. Specifically, concludes Ghemawat, we have to entertain the possibility that deep international economic integration may be inherently incompatible with national sovereignty - especially given the tendency of voters in many countries, including advanced ones, to support more protectionism, rather than less. And even if cross-border integration continues on its upward path, the road from here to there is unlikely to be either smooth or straight. There will be shocks and cycles, in all likelihood, and maybe even another period of stagnation or reversal that will endure for decades. It wouldn't be unprecedented.

Copyright FutureScan Oct 2007
Provided by ProQuest Information and Learning Company. All rights Reserved