Globalization: Dormant But Not Extinct

In the late 1990s and 2000s up to the financial crisis in 2008, globalization seemed a powerful inexorable force.  The world was becoming more interconnected. Goods, services, capital, and people were moving ever more freely around the globe without regard to borders. The world was getting flatter. Global champions, we were told – whether companies or individuals – could arise from any corner of the globe. Millions in developing economies would rise out of poverty as their economies became tied to developed ones. And the story of China’s astonishing growth seemed to blot out everything around it. 

The trajectory of that narrative, however, changed dramatically with the financial crisis of 2008-09. Economic activity collapsed, and countries withdrew into themselves as they tried to right things at home. Trade in goods and services plunged, and cross-border capital flows and migration slowed. Economists started to talk first about “decoupling” and then about an age of “deglobalization.” In addition, as economies focused inward, there were signs of the world becoming a more fractured and tribal place. Religious and cultural identities started becoming powerful divisive forces, and separatist movements gained momentum.

It is true that hundreds of millions in emerging markets did rise out of poverty thanks to globalization. And China did become the largest or second largest economy in the world, depending on you how you measure.  But the world did not turn out the way we expected in the mid-2000s.  Healthy economic growth in China today is far from inevitable. Two of the other “BRICs” from the early 2000s, Brazil and Russia, are in near-crisis.  And the United States, not China, is the resurgent factory to the world. With its cheap energy and new-found cost competitiveness, the U.S. has been enjoying a surprising manufacturing renaissance.  In a recent International New York Times article, Jan Svenjar of Columbia’s School of International Public Affairs called the U.S. “the most promising emerging market in the world.” In the same article, an executive from Dutch company Royal DSM noted that the company no longer studied where to locate its new plants because it was clear that they would just go to the U.S.

Still, globalization is a matter of degree, not an all-or-nothing phenomenon, and there are recent signs that cross-border activity is coming back to life. Wealth continues to spread to developing economies: the seven richest nations held two-thirds of global income in 1988, but just half by 2010. And while global foreign direct investment is below its 2007 peak of $2 trillion, it did rise 9% last year to $1.45 trillion, with half going to developing nations. Trade remains below pre-crisis levels, but it is expected to rise again slowly as global demand recovers.

Economists Pankaj Ghemawat of NYU’s Stern School and Steven Altman of IESE Business School also found that globalization has been making a comeback in recent years. In their DHL Global Connectedness Index, they used data from 140 countries to measure cross-border movements in trade, information, people, and capital.  They looked both at the depth of cross-border movements (how much activity there was) and the breadth of activity (how many borders were crossed). As the charts on this page show, the volume of cross-border activity is now higher today than pre-crisis times (the depth), but that activity is taking place among fewer places (the breadth). That may not be surprising in a world where economies are in various states of distress or recovery.  Those pockets of the world that are struggling to stabilize their domestic economies or that are in the grip of populist politics that lean against globalization will simply have less capacity for global economic activity.

The zigs and zags of globalization’s course remind us that we seldom know how things will turn out. Few in the mid-2000s would have guessed that the U.S. manufacturing would be born anew, or that China’s growth could look fragile. Likewise, today it can be difficult to imagine how the more distressed economies of the world could recover and re-emerge on the world stage. That suggests that there is a growing case for investors to look outside the U.S. for opportunities. The U.S. recovery is well advanced and that is reflected in its stock market prices. But this is not yet the case in many pockets of Europe and emerging markets, where things may be worth a closer look.