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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.