Monday, September 1, 2014
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Global Flows and Global Growth

BERKELEY – A growing share of the world’s economic activity involves cross-border flows. But just how interconnected is the global economy? How are cross-border flows among activities, sectors, and countries changing? How do national economies rank in terms of their cross-border flows or “interconnectedness”? And what are the implications for business and policymakers?

A new report from McKinsey Global Institute addresses these questions by analyzing the inflows and outflows of goods, services, finance, people, and data and communications for 195 countries over the past 20 years.

Both aggregate data and micro examples confirm that the world has become more tightly linked, with cross-border flows increasing in scope and complexity – and embracing a larger number of countries and participants within them. Despite a significant contraction from 2007 to 2009, resulting from the deep global recession, the combined value of financial flows and trade in goods and services was 36% of global GDP in 2012 – 1.5 times higher than in 1980.

The report also confirms that greater openness to global flows has been a significant source of economic growth for individual countries and worldwide. Overall, the research estimates that global flows have contributed 15-25% of global growth each year, with more interconnected countries receiving 40% more of the growth benefits than less interconnected ones. This is consistent with economic theory: interconnectedness fosters growth via productivity gains from specialization, scale, competition, and innovation.

Cross-border flows of goods, including commodities, remain the largest category, growing at 11% per year during the last decade and surpassing their pre-recession peak in 2012. Today, more than 35% of goods cross national borders.

Cross-border flows of services have also recovered to pre-recession levels and have been growing rapidly at 10% per year since 2002. Nonetheless, although services account for roughly two-thirds of world GDP, cross-border flows of services are less than one-quarter those of goods.

Cross-border flows of finance are still 70% off their pre-recession peak, yet even at today’s depressed levels they account for more than one-third of all global financing. By contrast, the cross-border flow of people, measured by the percentage of people living outside their country of birth, is small, hovering around 2.7% since 1980. But cross-border movements of people for short-term purposes – tourism, work-related travel, and education, for example – have been growing by 3.5-4.8% annually during the last decade.

And cross-border flows of data and communications have exploded, expanding by more than 50% per year since 2005. International telephone minutes have doubled, and cross-border Internet traffic has increased by 1,800%. Migration flows may not be gaining as a share of the world’s population, but as a result of digitization, people are more interconnected than ever before.

Digitization is also transforming cross-border trade flows in three ways: the creation of digital goods and services, such as entertainment and products manufactured by 3D printers; so-called “digital wrappers,” including tracking devices for physical flows; and digital sales platforms, such as eBay and Alibaba.

On eBay, for example, more than 90% of commercial sellers export products to other countries, compared to less than 25% of traditional small firms. Digital technologies are boosting global flows and competition, enabling even the smallest companies – and even individual entrepreneurs – to be “micro-multinationals.”

Knowledge-intensive flows requiring relatively high levels of human capital and research and development are now larger than labor-intensive, capital-intensive, and resource-intensive flows and are growing faster than all three. Flows of low-value, labor-intensive goods like apparel are declining as a share of global flows, while flows of R&D-intensive products, such as pharmaceuticals and business services, are gaining share.

By 2012, knowledge-intensive flows accounted for nearly half of the combined total value of flows of goods, services, and finance. This trend is an advantage for developed countries, which account for two-thirds of knowledge-intensive flows. China is the exception, claiming the second-largest share of flows (after the United States).

Traditional measures of an individual country’s global interconnectedness compare the size of its global flows to its GDP. According to these measures, smaller countries with smaller domestic markets appear to be more interconnected than larger ones. But this approach is misleading, because it does not consider a country’s share of global flows. The McKinsey report’s index of global connectedness remedies this shortcoming by considering both the size of a country’s global flows relative to GDP and its overall share of global flows.

The MGI Connectedness Index shows Germany, Hong Kong, and the US ranking first, second, and third, respectively. But some major economies fall well behind. Despite strong exports, South Korea and Japan rank 20th and 21st out of 85 countries, because they lag on immigration and cross-border Internet traffic. China, which ranks 25th, has a strong export engine and large capital inflows but ranks low on people and data flows.

On average, emerging market economies rank lower than advanced economies, but several emerging market economies – including Morocco, India, Brazil, Saudi Arabia, and China – have improved their ranking significantly since the mid-1990’s. Today, emerging markets account for about 38% of global flows, triple their share in 1990.

Yet a “digital divide” between developed and emerging economies persists in both data and communication flows and knowledge-intensive flows – and that gap does not appear to be closing. Emerging economies produce 40% of global output, and are home to 80% of the world’s population, yet they account for only 24% of cross-border Internet traffic.

The economic gains of interconnectedness are significant, but so are the challenges. To capitalize on the opportunities of digitization and the shift to knowledge-intensive trade, countries must invest in talent and infrastructure; reduce barriers to cross-border flows of people and information, without jeopardizing their citizens’ privacy and security; and expose their producers to robust foreign competition while ameliorating the resulting costs of disruption for their communities and workers. If the gains from globalization are not widely shared, political support for greater openness to global flows will decline – as will the economic benefits that such flows create.

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  1. CommentedTom Wood

    You would think after reading articles like this for the last 20 years the US and other developed nations would be rolling in prosperity. I must be living in a different reality.

  2. CommentedEdward Ponderer

    The is a story of a depression-era salesman dragging u and down the stairwell of tenement buildings to try to eek out a living from his wares. And at the end of each day he would slip off his worn shoes from his feet and say to himself, "If only I were rich--I mean really $rich$! Boy, then I would buy myself a real good, comfortable pair of shoes to go up and down those stairs with." --Silly man of little vision, he doesn't get it, JUST LIKE US!

    In the analysis of all these macro flows, and anecdotal moments of micro focus, can one analyst--one organization of individuals--a mere sum of parts, capture all interactions of even the limited economic parameters studied? And what of taking ecology/climate, peak-resource/waste-management, ideology/terror/war, and countless "out of the woodwork"effects--the no longer secondary and tertiary--such as pathogen-resistance/trans-species-pathogen-infections.

    The assumption in classical analysis is the limit, as idealized in the Calculus. Hence, an approximate model and characterization was expected to converge with reality or at least by asymptotic to it. Late 20th century study of the dominant realities of nonlinear science--best represented by deterministic chaos, introduces fractal geometry and the tendency to divergence rather than convergence. Old modeling methods still worked in terms of regularly updated "course corrections" where systems were simple enough, and moving slowly with very dominant first-order principle in operation--including in terms of inputs and outputs, and most particular in terms of controls. As complexity increases, and metamorphis speed of the cloud outraces course correction, analysis, implementation, and accuracy--our modeling methodology falls to pieces. This is exactly what has been happening to economics, why predictions are going 180 degrees--read random--and economics students are starting to go on the warpath because they are best able to see through the smoke screen.

    A totally new paradigm is called for, and it is the one proven successful in nature in virtually all natural systems. The only thing required--on the human level--is education on the general process of globalization as an evolutionary reality--not somebody's politics. Further, education on how we need to integrate, at all levels, in terms of mutual responsibility ("enlightened self-interest" -- the life-and-death real thing, not some lip service anymore), id critical. Beyond this, a grand mutual responsible network will per force form (as ice through a volume of water undergoing hydrogen bonding--save that for living systems, the matter will go fractal as required due functional "surface-to-volume" ratio issues). It is the network--the brain (as opposed to the brain cells), that will successfully sense, weigh, and respond in accurate, real-time balance to maintain the global homeostasis.

    The sooner we prepare the birth canal, the less painful will be the delivery, and the more healthy and happy will be Baby Humanity.

    The Whole really will be greater than the sum of the parts.

  3. CommentedZsolt Hermann

    Gradually we are revealing what a global world truly means, how much humanity has become interconnected and as a result interdependent.

    This presents a completely new state we have no historical experience or precedence for.
    When most of the trade, economical, financial activity, not to mention cultural and media influence is spreading across the globe in a "viral" manner, the "old school" local, even regional calculations, governance is becoming incompetent moreover destructive.
    It is impossible to micro-manage a global system, where every planning and action needs to take into consideration the state and flow of the whole system.

    Many of the nations, regions trying to secure independence, isolation do not understand the long term implications of such moves, since in a global integral world even countries like Russia, China or the US would not be able to survive alone in isolation.

    If we add to this the fact that in a closed and finite natural system we exist in constant quantitative growth is simply impossible to sustain, any future growth has to be qualitative, improving and strengthening the interconnections in between regions, countries or even individuals.
    This would go along with the evolutionary trend of separate cells, organs joining forces into more comprehensive and complex organisms in order to survive an prosper.

    The future of global humanity also depends on how we can change today's ruthless competition, succeeding at the expense of others into globally mutual, complementing collaboration.
    And since trade and economy is basically the external representation of human inter-relationships first of all we have to adapt our relationships to the necessities of a global, integral world.

    If we start using the already existing global inter-connections in a positive, benevolent way we can solve the crisis and raise our quality of life to an unprecedented high level.

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