Global flows and global growth

Financial Mirror (Cyprus) - - FRONT PAGE -

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 pre­re­ces­sion 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 pre­re­ces­sion 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 cross­bor­der 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 re­sour­cein­ten­sive 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 sec­ond­largest 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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