The new look of globalization

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The new look of globalization


Mohamed El-Erian

Globalization is back, and it is evolving rapidly. That, at least, is the message of an interesting new report from the McKinsey Global Institute that looks at how trade, financial, human and data linkages have developed over the past decade or so.

In today’s fast-moving world, it can be hard to get a handle on what’s happening with global interconnectedness, and to sort out the complex ways in which it influences the well-being of the nations and people involved. To that end, the McKinsey study, led by James Manyika, represents a serious and much-needed contribution. There are at least four notable takeaways.

First, the financial crisis has not derailed the trend toward greater interactions and integration across national borders. Cross-border linkages are no longer limited to a small group of countries and multinational companies, and the developing world is playing an increasing role. Overall, flows of goods, services and people have already surpassed their earlier peaks. The main exception is financial flows, which are still down quite a bit from their 2007 peak - a shift that can be seen as a positive adjustment from pre-crisis excess.

Second, the study adds to the evidence that connecting with the rest of the world is a good thing. Using an approach designed to evaluate causality, it finds that greater openness to all kinds of cross-border flows has beneficial effects on economic growth, contributing as much as $450 billion to global growth each year. The more connected the country, the better it does.

Third, today’s globalization is about much more than outsourcing labor-intensive production to lower-wage countries. The study finds that inflation-adjusted flows of “knowledge-intensive” goods, which entail a lot of investment in research and development or highly skilled labor, have been growing at 1.3 times the rate of labor-intensive flows over the past decade. All kinds of knowledge-intensive activities, from business-related communications to professional travel, are on the rise.

Fourth, the information revolution is deepening and spreading to every level of global society, and doing so rapidly. By looking at the development of cross-border bandwidth, the study extends the analysis of global interactions to data and communication flows. It finds striking growth, turbocharged by advances in digital technologies and the Internet, along with the sharp fall in acquisition and access costs.

The report offers perhaps the best picture yet of a development - the empowerment of people and companies in ways that were unthinkable not so long ago - that will have long-lasting and, as yet, far from predictable effects. It also helps explain why others are taken out of their comfort zone, challenged to adapt their approaches to evolving consumer demand, production setups and delivery chains - and how these challenges involve both what they do and how they do it. Finally, it puts into context the massive catch-up challenges facing our governance and coordination systems, be they national, regional or multilateral.

The expanded scope of the report - critically to include flows of information - speaks to trends that are durable and consequential, if only because they are considerable enablers of human talent at both the individual and collective level. The good that comes of this, starting with more and cheaper choices for consumers and greater opportunities for entrepreneurs, will inevitably be associated with some bad, including transition costs and labor displacements.

The longer it takes us to understand the phenomenon, the more likely we are to be surprised by the range of outcomes - and the greater will be the challenge of ensuring, as the McKinsey report puts it, that “economies are positioned to benefit.” Policy makers would do well to pay attention to such efforts to better measure and understand the scale of what is at stake, so they can plan and respond accordingly.

By Mohamed El-Erian,Chief economic adviser at Allianz SE
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