Special Report

Measuring Globalization: Who’s Up, Who’s Down?

Measuring Globalization: Who’s Up, Who’s Down?

Last year’s A.T. Kearney/FOREIGN POLICY Magazine Globalization Index offered a "before" photo on a worldwide scale — a snapshot of global integration prior to the September 11, 2001, attacks. This year’s index, in turn, gives a glimpse of the developing "after" image — an opportunity to assess the initial impact of the attacks on a process that many analysts see as the driving force of our times.

Certainly the smoke over the World Trade Center had yet to clear before the attacks by al Qaeda had become a powerful symbol in the debate over globalization. For the antiglobalization movement, September 11 was a gruesome vindication of its argument that global integration had widened the gap between the haves and have-nots, and in doing so created resentment that exploded with the destruction of one of the most famous icons of Western capitalism. For others, the message was entirely opposite, and the solution was not less globalization but more. U.S. Federal Reserve Board Chairman Alan Greenspan, in a speech shortly after the attacks, declared that "globalization is an endeavor that can spread worldwide the values of freedom and civil contact — the antithesis of terrorism." But even as both sides of the political spectrum reached opposite conclusions, they agreed on one point: The collapse of the twin towers was a body blow to what was seen, in some quarters, as an almost unstoppable force.

This year’s ranking of global integration among 62 countries (representing 85 percent of the world’s population) offers a dissenting view. To be sure, 2001 saw a dramatic downturn in some of globalization’s most visible drivers, from foreign direct investment (FDI) to international travel and tourism. In many cases, however, not only was a slowdown already in train before the attacks, but prompt response by policymakers to September 11 helped dissipate the negative economic effects. Moreover, globalization involves far more than the ebb and flow of economic cycles. That’s why the A.T. Kearney/FOREIGN POLICY Magazine Globalization Index makes use of several indicators spanning information technology (IT), finance, trade, personal communication, politics, and travel to determine a country’s ranking. And, in addition to giving each nation an overall score, we provide a multifaceted view of a country’s level of global integration by combining these indicators into four subcategories: economic integration, technology, personal contact, and political engagement.

What emerges from a close look at this year’s index is a much more nuanced portrayal than that captured in the stagnation or decline of FDI, trade, and passenger arrivals and departures. For instance, globalization’s leading economic indicators lagged, but levels of political integration shot up, spurred in part by cooperation in the war on terrorism and the continuing integration of Russia and China into the international system. Even the much lamented global economic slowdown had an uneven effect. Western Europe saw its level of economic integration decline dramatically, but Ireland remained, for the second year running, the world’s most globalized country, and Eastern Europe bucked the continental trend with expanded volumes of trade. Singapore slipped from third to fourth in this year’s ranking, but Southeast Asia remains the most economically integrated region among the emerging markets. And around the world, travelers who were unable or unwilling to go abroad still kept the lines of communication open through the expanded use of telephones and the Internet.

To say that al Qaeda’s attacks failed to untangle globalization’s web is not to say globalization was unaffected. But overall, the picture that emerges is one of September 11 as symptom, rather than cause, of the stresses inherent in the deepening of global integration.

Half Empty or Half Full?
Last year’s Globalization Index recorded new highs for global integration, as 2000 capped a decade of dramatic expansion in global economic flows and political engagement, as well as the increased mobility of people, information, and ideas.

This momentum slowed as the United States, Japan, and Europe experienced simultaneous economic slumps. World economic growth, for example, plummeted from 4 percent in 2000 to 1.3 percent in 2001. But sluggish economies had been a problem well before September 11. Moreover, despite the shock of the attacks, particularly to sectors such as aviation and tourism, the Organisation for Economic Co-operation and Development noted that half a year later, "the direct economic effects seem to have largely vanished," thanks in part to the rapid response of central banks worldwide, which aggressively lowered interest rates.

More fundamentally, the retreat of economic globalization must be put in the context of its tremendous advance over the last few years. Consider 2001’s stunning drop in levels of FDI, which fell more than 50 percent worldwide from $1.49 trillion to $735 billion, due in large part to a steep decline in cross-border mergers and acquisitions. In nominal terms (not adjusted for inflation), however, the total flows were still higher than any other year before 1999. And when viewed as a share of global economic output (as calculated in the Globalization Index), FDI flows in 2001 were nearly double their level in 1995.

Or look at the 1.5 percent decline in the volume of world trade in 2001. First of all, it came on the heels of a dramatic 12 percent increase in 2000. Moreover, exports as a share of world economic output were actually higher in 2001 than in any year of the preceding decade, save 2000. In fact, the downward dip in trade probably says more about the bursting of the it bubble than it does about post-September 11 transportation bottlenecks. Airfreight charges shot up by 15 percent at the end of 2001, but the vast majority of goods continue to be shipped by sea.

Beyond the economy, global integration actually deepened on several levels. The war on terrorism, for instance, was a key factor fueling political integration. As U.S. Deputy Secretary of State Richard Armitage observed in the days following the attack against the Taliban in Afghanistan, "More than 180 nations are part of the coalition to fight terrorism; 25 nations are engaged in military operations and 132 have signed the International Convention to Suppress Terrorism Financing; 136 have contributed some other concrete assistance, running the gamut from humanitarian supplies to the use of airspace and base access rights."

But other drivers were at work as well. Membership in international organizations expanded significantly in 2001, with humanitarian and commercial organizations leading the way. China joined the World Trade Organization (WTO) and became the fourth-largest trader after the United States, Japan, and the European Union (EU). (And, despite ongoing political tensions with China, Taiwan also joined the WTO.) The International Organization for Migration, dedicated to the idea that humane and orderly international movement of people benefits both individuals and societies, saw its official membership grow and now includes 59 of the 62 countries covered in the Globalization Index. And, although the number of active U.N. peacekeeping missions declined in 2001, the number of participating countries grew. Even the anti-globalization movement went global in 2001, when activists gathered in Porto Alegre, Brazil, to stage the first annual meeting of the World Social Forum as an in-your-face challenge to the free-market agenda of the annual World Economic Forum in Davos, Switzerland.

Funding for key multilateral institutions also increased. Thanks to an upsurge in voluntary contributions, the World Health Organization’s budget for 2000-2001 grew more than 9 percent, from $1.65 billion to $1.80 billion. The International Monetary Fund’s (IMF) budget jumped 6 percent, from $638 million (April 2000 to April 2001) to $676.7 million (April 2001 to April 2002).

Although travel and tourism suffered a significant slowdown, it was less painful than many predicted following the September 11 attacks and the closing of airports in the United States. By the end of the year, the number of international tourist arrivals reached 597.5 million, down 0.95 percent from the previous year — the first year-on-year decrease since World War II. Hit particularly hard were Southeast Asia, the Americas, and the Middle East, where arrivals declined by 10 percent or more.

But even as family members and business people traveled less across borders, they helped push international telephone traffic to record levels. The International Telecommunication Union (ITU) estimates that international telephone traffic grew more than 9 percent in 2001, reaching 120 billion minutes. In this year’s Globalization Index, levels of personal contact (as measured by international travel and tourism, international telephone traffic, and cross-border transfers) had a profound impact on the rankings of some countries. Pakistan and India, for example, are almost evenly matched in their levels of economic integration (scoring 60 and 61 respectively). But Pakistan’s overall ranking (50) is higher than India’s (56), due in large part to its significantly higher level of personal contacts with the wider world (scoring 37, compared with India’s 49).

Moreover, even as the dot coms were going bust, the number of Internet users worldwide grew 22.5 percent, from 451 million in 2000 to 552.5 million in 2001 (and may now total as many as 580 million). Although this number suggests only 9.1 percent of the world’s population had access to the Internet in 2001, it marks a significant rise from 7.1 percent in 2000. China added 11 million new users in 2001, while emerging markets added some 32.5 million new users altogether, more than in any previous year.

Winners and Losers
As in previous iterations of the Globalization Index, small trading nations tended to rank ahead of larger economies in 2001. In some cases, the same integration that once brought capital pouring into a country suddenly, in 2001, helped facilitate its exit. Countries such as New Zealand, Romania, South Africa, and Turkey saw the previous year’s portfolio investments liquidated in large numbers (a phenomenon that other countries, such as Argentina, Indonesia, and Russia, have experienced for several years running).

The slowing pace of international economic activity affected different regions in markedly different ways. Initially, U.S. integration with world markets was not affected as deeply as that of many other countries — in large part because global capital markets saw the brightest prospects in the United States and continued to supply FDI and portfolio capital to U.S. companies, albeit at somewhat reduced levels. Recent estimates, however, suggest a further downward trend, with FDI estimated at $44 billion in 2002, down from $124 billion in 2001.

Meanwhile, Western Europe suffered a significant downturn in levels of economic integration, even as political, social, and technological integration continued to climb. FDI to and from the United Kingdom, for instance, dropped by more than 75 percent and to and from Germany by 70 percent. Portfolio investments to Italy were off by more than 50 percent, and even London’s financial center saw portfolio inflows dive from $258 billion to $64 billion — a 75 percent reduction. As a result, Western Europe was the only major world region to see its Globalization Index scores decline from last year’s levels (with nine of the 15 countries in the region posting lower overall scores). Finland, France, and Spain all dropped out of the top 10 this year for economic integration.

One country that survived the storm was Ireland, which for the second consecutive year ranked as the world’s most global country. Despite difficult times for the Irish economy, the strength of Ireland’s portfolio capital flows and its continued investment in high-tech industries actually deepened the country’s integration with the rest of the world. In 2000, Ireland ranked as the world’s fourth-largest recipient (and third-largest contributor) of portfolio capital. By 2001, Ireland had overhauled its financial services regulatory framework, introducing a single regulatory authority responsible for issues across the full range of the industry. At the same time, barriers to entry in financial services fell, due both to the effects of the single currency and to new legislation allowing any institution licensed by an EU member state to set up shop in Ireland. The impact on portfolio capital flows has been dramatic — an increase from $80 billion to $91 billion in 2001, even as France and the United Kingdom saw inflows tumble by as much as 75 percent.

Ireland has other strong links to the global economy, based largely on its heavy investment in high-tech and information technologies. The country increased trade levels in 2001, one of only a handful of countries to thwart the global trade slowdown. On the strength of robust exports of computer components, electronics, and medical and pharmaceutical products, Ireland ranked third behind Singapore and Malaysia in total trade as a share of gross domestic product (GDP). Its Internet infrastructure continued to grow, and countrywide the number of secure servers increased from 337 to 500. Ireland was also the world’s most talkative nation, owing to the heavy traffic into its call centers as well as the strong growth in outgoing international calls.

For the second year in a row, Switzerland ranked as the second most global nation. The country’s strong reputation as a financial services center has prompted high levels of capital inflows and outflows. In addition, Switzerland is distinguished by the sheer volume of income receipts from its investments overseas, which averaged $7,670 for each citizen in 2001. The country is a popular center for travel and tourism, not only because some 11 million visitors entered the country in 2001 but also because Swiss citizens made an average of 1.85 international trips that year, second only to the Czech Republic.

Sweden moved up one notch to claim third place in this year’s Globalization Index. In addition to strong Internet infrastructure, the differentiating factor was a huge jump in FDI, as German, French, and Finnish companies acquired shares of Swedish utilities. Inflows jumped from $22.1 billion in 2000 to $46.8 billion in 2001 — or $5,269 per Swedish resident.

Among emerging markets, Southeast Asia could again claim the title of world’s most economically integrated region, although its exposed export-oriented economies took a beating from the downturn in global trade, with exports (as a share of GDP) falling by more than 4 percent. Nevertheless, as a share of GDP, Southeast Asia’s exports grew by more than 22 percentage points since 1995, a record no other region can match.

Singapore and Malaysia ranked among the top 10 most economically integrated nations in this year’s index (at fourth and eighth place, respectively). Malaysia also scored fairly high in its overall ranking (18), with the number of Internet users jumping 35 percent to reach 5.7 million, making it Southeast Asia’s largest Internet center. Singapore dropped from third to fourth place in this year’s index, as both net FDI inflows and total portfolio capital flows declined. In 2001, Singapore concluded a free-trade agreement with New Zealand and was in the process of negotiating with countries such as the United States, Japan, and Australia. However, the global economic recession and the bursting of the it bubble, which led to reduced demand for computer components, hit Singapore’s exports severely — its trade surplus plummeted from $22 billion in 2000 to $12.7 billion in 2001. Despite these setbacks, Singapore remains the most globalized Asian nation in our survey.

Meanwhile, East European countries stood resilient against the tide of bad economic news in 2001. Bucking the international trend, both the region’s exports and imports grew. In fact, all of Russia’s former satellite countries covered by this year’s Globalization Index scored higher than Russia itself.

The Czech Republic (in 15th place) was the most globalized nation in Eastern Europe and ranked higher than Western neighbors Italy (24) and Greece (26). The Czech Republic has proved attractive to foreign investors (including automobile manufacturers Toyota and PSA), thanks to its geographic location at the center of Europe and competitive advantage in terms of lower cost yet highly skilled workers.

High levels of economic integration made Panama (ranked 30th) the most globalized nation in Latin America for the second year in a row. Panama scores consistently well in part due to its Colon Free Zone at the gateway of the Panama Canal, which imports goods from the United States, Europe, and Asia and then reexports them to the rest of Latin America. (In 2001, exports from the Colon Free Zone declined due to weaker demand throughout the region. Nonetheless, the country’s overall exports saw a modest increase of $34 million.) Panama also ranks high in the Globalization Index because it holds the world’s largest shipping registry and Latin America’s largest international banking center (as measured by the number of banks). And in 2001, Panama witnessed a significant increase in portfolio flows — from 1.9 to 8.1 percent of its GDP — as banking authorities conducted major international refinancing operations, issuing U.S. dollar-denominated bonds to restructure its international debt.

By contrast, Venezuela ranked last in Latin America, dropping from 57th to 60th place. The country’s decline in 2001 was due to the temporary drop in oil prices (the petroleum sector accounts for 80 percent of all exports) and because FDI plummeted by 23 percent to $3.5 billion. Local business leaders blame President Hugo Chávez for the accelerated pace of capital flight from Venezuela — citing, for example, a new law on hydrocarbons that raised royalty taxes from 16.6 to 30 percent and the president’s threat to withdraw public deposits from banks to "defeat financial speculators" intent on buying dollars and taking them abroad.

Venezuela’s problems represent an extreme case of Latin America’s overall malaise in 2001. Total FDI in the region fell by more than 10 percent (due, in part, to simultaneous economic crises in Argentina and Venezuela), and trade declined by 2.3 percent (due to reduced demand in the United States and Europe and the decline in commodity prices for oil and coffee). But one notable development augurs higher levels of personal and technological integration for Latin American countries in the years ahead: The number of wireless telecommunications subscribers grew 33 percent (more than 86 million people) in 2001, or double the world growth rate. David Kerr, of the research firm Strategy Analytics, suggests that since many Latin Americans cannot afford personal computers, the region’s "trajectory is more like that of Scandinavian markets and indeed some Southern European markets where wireless is the default access to the Internet."

Similar growth occurred in telecommunications in Africa. The "African Telecommunication Indicators 2001" report, published by the ITU, notes "the penetration of telephone subscribers in Sub-Saharan Africa surpassed the psychological milestone of one for every 100 inhabitants during the year." The oft-quoted statistic that Tokyo has more telephones than all of Africa is no longer true; the continent now has twice as many phones as Japan’s capital city. Yet the digital divide with the rest of the world remains wide. In 2001, Africa had only 0.31 Internet hosts per 1,000 people (compared with 163 per 1,000 in the United States). Africa also remains the region least integrated into the global economy. The continent’s share of global trade has actually declined in the last decade. G. E. Gondwe, director of the IMF’s African department, notes that "if the region’s countries had merely maintained their export market shares of 1980, their 2000 exports would have amounted to $161 billion — more than double the actual outcome."

Botswana saw its exports decline by nearly 9 percent in 2001, as the sluggish global economy depressed the demand for diamonds, which account for 80 percent of the country’s export revenue. But Botswana still came out on top as Africa’s most globalized nation, thanks to being ranked No. 1 in the index category of transfer payments. (A significant number of Botswanans work abroad, largely in South African mines, and send their remittances back home to their families.) Kenya was the least globalized African nation in this year’s index. The country’s reputation for corruption and bureaucratic inefficiency continue to drive away foreign investment.

The Middle East displayed the most dramatic upward and downward movement in this year’s rankings. Morocco jumped from 46th to 29th place, making it the most globalized country in the Arab world. Much of this movement was driven by high-profile foreign investment deals associated with the liberalization of the country’s telecom sector. Saudi Arabia (in 61st place, down from 37th last year) is simultaneously the largest economy and least globalized country in the Arab world. Its FDI flows fell by roughly 98 percent in 2001, due to falling oil prices and increasingly negative perceptions of the kingdom among the international business community.

In many ways, Saudi Arabia is a poster child for why the Middle East as a whole remains marginalized by globalization. Economic growth throughout Arab countries has stagnated. The Middle East accounted for 10.7 percent of world exports in 1981 and only 3.5 percent in 2001. A recent report by the World Economic Forum blames Arab governments for pursuing a one-dimensional growth strategy based upon the accumulation of capital: "The export structure of the region as a whole is still primarily based either on its absolute advantage in petroleum products, as in the case of the major oil-producing countries like Kuwait and Qatar, or on its comparative advantage in labor-intensive manufactures, as in the case of Morocco and Tunisia." The United Nations Development Programme offers an equally grim assessment of the region, noting that Arab countries have one of the lowest levels of it access in the world: Only 1.2 percent of Arabs can access computers, and half that number use the Internet. Large-scale illiteracy and deficiencies in the educational system have contributed to a capability gap throughout the Arab world.

Cause and Defect
Princeton historian Harold James suggests that most people tend to confuse the cause of globalization with its effects. International openness, he says, did not lead to the spread of technology. Rather, it was "technical changes and efficiencies of scale that have made purely national markets relatively inefficient," thereby compelling business to spread across borders.

That argument offers insight into why globalization did not grind to a halt after September 11. Some assumed that as nations took measures to tighten control of their borders to protect themselves from international terrorist networks, they would also staunch the flow of people, goods, and services. But open borders are not the cause of globalization as much as they are the result. The most destructive act of terrorism in history could not destroy the underlying drivers of global integration.

Even as deepening global integration makes nations more vulnerable to exogenous shocks, it only strengthens their resolve to cope with crises. Witness how the Bush administration, which had long cast a skeptical eye on financial bailouts, recently threw its support behind a $30 billion IMF loan package for Brazil to prevent that country’s economic crisis from spreading throughout Latin America and ultimately affecting U.S. trade. And, in the aftermath of the terrorist bombing in Indonesia that killed nearly 200 people, leaders at the November 2002 summit of the Association of Southeast Asian Nations pledged to strengthen regional efforts to combat terrorism.

Globalization might be resilient to external shocks, but it tends to create its own internal stresses. Professor James offers another history lesson that warns against complacency. Many believe the Great Depression — which effectively ended the 20th century’s first era of globalization — was the direct result of World War I. By contrast, James cites three factors inherent in globalization that he claims caused it to auto-destruct: the instability of capitalism, the backlash among those who did not reap the benefits of global integration, and the failure to create institutions that can adequately "handle the psychological and institutional consequences of the interconnected world."

There are signs that some parts of the world believe the costs of globalization now outweigh the benefits. Argentina implemented a series of stringent reforms to more effectively open itself up to the global economy; for its troubles, the country got the largest debt default in history — prompting President Eduardo Duhalde to declare the system "broken." The anti-globalization movement has gained political traction as populists have made electoral gains in Europe and Latin America. And the global war against terrorism has provoked fears of a human rights race to the bottom, as nations eager to calm jittery foreign investors by clamping down on terrorist activity might also excessively clamp down on political freedoms.

But the jury is still out on whether history is repeating itself today. As this year’s index makes clear, technological and personal integration continues unabated even in countries whose overall levels of economic integration were minimal. Political engagement has expanded because the benefits of multilateral cooperation still outweigh the costs of going it alone. The forward momentum of these trends in the face of al Qaeda — a transnational terrorist network that is itself a manifestation of the darker side of globalization — testifies to the resilience of global integration. But, as the war against terrorism continues, those most interested in promoting global integration must do more to heed the concerns of those who feel marginalized by it, lest the backlash against globalization become a self-fulfilling prophecy.

Or, put another way, al Qaeda is not the real threat to global integration. Globalization has nothing to fear but globalization itself.