Is Globalisation making a comeback?

Globalisation ebbs and flows. There has been remembrance of the events of a century ago, when a rising tide of globalisation suffered a colossal retreat. Many observers watching the aftermath of the world crash of 2008 feared the same. Suddenly the headlines about the world becoming ‘flatter’ and more interconnected gave way to talk of fragmented financial markets, stalled trade talks and growing popular nationalism. Some economists have predicted another era of “deglobalisation”.

The Economist report the conclusion of the latest DHL Global Connectedness Index (see graph) based on data from 140 countries, which account for 99% of the world’s GDP and 95% of its population. It shows that, after a big post-crisis drop, the trend of growing global interconnection resumed last year. According to this analysis, Globalisation is back.

There are many definitions of globalisation, and the index uses one that is fairly all-embracing. It encompasses four main types of cross-border flow: trade (in both goods and services), information, people (including tourists, students and migrants) and capital. It tracks not just the depth of international connections (how much activity crosses borders), but also their breadth (how many different borders are being crossed) and their direction (how do outward and inward flows compare).

• The authors found that the depth of global integration, probably the most straightforward definition of globalisation, fell sharply after 2008, by nearly one-tenth. Yet since then it has recovered strongly. By 2013 it was well above its pre-crash peak.
• By contrast, the breadth measure continued to slide in 2013, and is now nearly 5% below its peak. In other words, there are more cross-border connections being made, but with fewer places.

In 2013 emerging economies generated only 17% of the profits of 100 of the biggest firms based in rich countries, even though they accounted for 36% of the world’s GDP. The ten countries that globalised most in 2013 are all emerging markets, most of them in Latin America and the Caribbean.

As the chart shows, the globalisation of information, measured by such things as the number of cross-border phone calls and Skype usage, slowed after the crash but did not fall, and accelerated again in 2013. Capital flows remain below pre-crisis levels, however. Trade in goods and services plunged in the aftermath of the crash, rebounded a bit, and then started sliding again, when measured by value (volumes are rising, albeit sluggishly).

However, there is evidence that protectionism is growing. Global Trade Alert, a watchdog, says that since 2008, over 70% of the changes to trade rules around the world have curbed trade, rather than spurring it. The World Trade Organisation (WTO), which is supposed to resist and reverse such measures, has struggled to do so. Encouragingly, however, we may be close to a long-stalled WTO plan to dismantle barriers to trade. The WTO projects that the deal, its first global pact in 20 years, will boost the world economy by as much as $1 trillion.

Still, if globalisation fares no worse in the next decade than it did in the past five years, the world will be significantly more interconnected by 2025, argues the McKinsey Global Institute. It recently published its own index of globalisation, which drew similar conclusion to DHL’s. That would bring substantial gains. Other research from the institute concludes that the more networked a country is, the better it does economically.

In the Telegraph, Jeremy Warner argues that China has taken the first step towards opening its financial system. It may change the world, ushering in a Globalisation 2.0. China’s integration into the world economy is now a 35-year-old story, and the consequences have been transformational and not always in an obviously good way. Many jobs have been lost to the cheap labour of the East, and median wages have been eroded accordingly. Yet although China is now an integral part of the global supply chain, its financial system remains pretty much a closed shop. This mismatch between trade liberation on the one hand and capital account constraint on the other has been a headache. Tentative steps taken by China this week towards capital account liberalisation – allowing money to flow more freely in and out of China – are therefore of potentially huge significance. As the Bank of England puts it, “few other events over the next decade are likely to have more impact on the shape of the global financial system [than financial deregulation in China]”.