Feature

Globalization’s Last Hurrah?

The shock of terrorist attacks and a worldwide economic slowdown have prompted many observers to declare globalization's end. But any recent reversals in global integration must be measured against the remarkable advances of 2000. The second annual A.T. Kearney/Foreign Policy Magazine Globalization Index, which ranks the 20 most global nations, also sheds light on a crucial question: Has globalization hit a bump in the road, or is it on the verge of a fundamental shift?

"The era of globalization is over," declared John Gray, a professor of European thought at the London School of Economics and Political Science, less than two weeks after the terrorist attacks upon the United States. Gray had been a staunch critic of globalization, so it might be tempting to dismiss his musings as ideological triumphalism. But longtime proponents of globalization also had their faith shaken by the events of the past year. Even before terrorism, anthrax, and war dominated the headlines, other forces threatened to transform the process of global integration into one of disintegration.

Beginning in spring 2000, the tech bubble burst, prompting a free fall in stock markets worldwide. The United States, Japan, and Europe faced simultaneous economic slumps for the first time since the oil shocks of the 1970s, with the United States experiencing its longest decline in industrial production since World War II. Argentina teetered on the brink of default, portending a Latin American replay of the financial crises that swept Asian markets and Russia in 1998. Turkey faced its worst economic crisis in decades, and the value of the lira plunged by nearly 50 percent. At the outset of 2001, the Bush administration's unilateralist rejection of treaties on arms control and climate change renewed tensions with Russia and China while engendering bitter disputes between the United States and Europe.

Just as success in the stock market is ultimately measured by long-term gains instead of year-to-year returns, so too might it be premature to proclaim that 2001 sounded the death knell of globalization. After all, those countries that find themselves enmeshed in a global slowdown are measuring their losses against an unprecedented surge of economic growth and global integration in the preceding years. And at the moment, the world that has grown more integrated also seems to be more volatile. As Nobel laureate and former World Bank Chief Economist Joseph Stiglitz recently observed, "The borderless world through which goods and services flow is also a borderless world through which other things can flow that are less positive." The very forces that drove global integration over the past decade -- the free flow of capital, immigration, airline travel, the Internet, and the global media -- can be used by terrorist networks as well as businesses.

"The era of globalization is over," declared John Gray, a professor of European thought at the London School of Economics and Political Science, less than two weeks after the terrorist attacks upon the United States. Gray had been a staunch critic of globalization, so it might be tempting to dismiss his musings as ideological triumphalism. But longtime proponents of globalization also had their faith shaken by the events of the past year. Even before terrorism, anthrax, and war dominated the headlines, other forces threatened to transform the process of global integration into one of disintegration.

Beginning in spring 2000, the tech bubble burst, prompting a free fall in stock markets worldwide. The United States, Japan, and Europe faced simultaneous economic slumps for the first time since the oil shocks of the 1970s, with the United States experiencing its longest decline in industrial production since World War II. Argentina teetered on the brink of default, portending a Latin American replay of the financial crises that swept Asian markets and Russia in 1998. Turkey faced its worst economic crisis in decades, and the value of the lira plunged by nearly 50 percent. At the outset of 2001, the Bush administration’s unilateralist rejection of treaties on arms control and climate change renewed tensions with Russia and China while engendering bitter disputes between the United States and Europe.

Just as success in the stock market is ultimately measured by long-term gains instead of year-to-year returns, so too might it be premature to proclaim that 2001 sounded the death knell of globalization. After all, those countries that find themselves enmeshed in a global slowdown are measuring their losses against an unprecedented surge of economic growth and global integration in the preceding years. And at the moment, the world that has grown more integrated also seems to be more volatile. As Nobel laureate and former World Bank Chief Economist Joseph Stiglitz recently observed, "The borderless world through which goods and services flow is also a borderless world through which other things can flow that are less positive." The very forces that drove global integration over the past decade — the free flow of capital, immigration, airline travel, the Internet, and the global media — can be used by terrorist networks as well as businesses.

In our own attempt to make sense of this borderless world, we present the second edition of the annual A.T. Kearney/Foreign Policy Magazine Globalization Index. We created this index to quantify what has arguably become the new century’s most abused buzzword. Advocates and detractors alike bend the definition of "globalization" to fit their arguments. In truth, globalization entails a dense web of cross-border relationships that range from the very evident (the spread of disease) to the very subtle (the spread of ideas).

One aspect frequently missed in the debates about globalization is its measurement: How extensive is globalization? Which countries are the most globalized? The least? And why? Those rare instances in which anyone attempts to gauge globalization typically rely on data concerning international trade and investment flows, to the exclusion of other aspects of global integration. To fill this gap, Foreign Policy teamed up with management consulting firm A.T. Kearney to create an index that employs indicators spanning information technology, finance, trade, politics, travel, and personal communication to evaluate levels of global integration in dozens of advanced economies and key emerging markets worldwide.

Last year’s Globalization Index yielded many surprising revelations about the shape of global integration through 1998. We found that the world’s most global countries boast greater income equality than their less global counterparts — a counterpoint to the common argument that developing countries are poor and unequal because of globalization, suggesting instead that history, economic policies, welfare programs, and education policies may play an important role in shaping income distribution. Moreover, we learned that the most global economies tend to be small nations for which openness allows access to goods, services, and capital not readily available at home. Last year, tiny Singapore ranked as the world’s most global nation, with the Netherlands, Sweden, and Switzerland not far behind. By contrast, the United States came in 12th place.

Also, with few exceptions, countries that scored high on the Globalization Index enjoyed greater political freedom, as measured by the annual Freedom House survey of civil liberties and political rights. And a comparison of our index rankings with Transparency International’s survey of perceived corruption suggested that public officials in the most global countries are less corrupt than their counterparts in closed economies. Moreover, various indicators of Internet use and access indicated that significant gaps exist within the global digital divide, with the United States, Canada, and Scandinavian countries like Finland and Sweden far outpacing other advanced countries in the diffusion of new information technologies.

The second iteration of the Globalization Index examines global integration through the end of 2000, with several important changes that provide a greater degree of focus than ever before possible. First, we have expanded our coverage by adding a dozen new countries to the 50 covered previously. The index now accounts for nearly 85 percent of the world’s population and more than 90 percent of its economic output, with enhanced coverage of Africa, Central and Eastern Europe, and South Asia. Second, the revised index incorporates new political variables that help assess the level of a country’s engagement in matters concerning diplomacy and international security by measuring membership in international organizations, commitments to international peacekeeping missions, and diplomatic representations hosted from abroad. Third, the index makes use of the latest available forecasts to make better sense of the world we are about to enter, as well as the one we are leaving behind.

These changes not only broaden our understanding of last year’s findings, they also reveal important new details of the changing geography of the digital divide, the status of emerging markets, the impact of globalization on government spending, and even whether globalization relates to perceptions of personal happiness. The consequences of September 11, 2001, and the events that have followed remain uncertain, but the data presented in this index will make it easier to assess whether global integration has hit a temporary roadblock or whether it is about to make a fundamental shift in direction.

GLOBALIZATION’S BEST YEAR?

Spurred by robust economic growth, global integration deepened substantially in 2000, a year that saw record gains in most indicators of international exchange. The value of world merchandise exports, for instance, surged by more than 12 percent in 2000, while trade in services jumped by 6.1 percent — both more than triple the previous year’s growth rate. Similarly, foreign direct investment (FDI) marked a spectacular increase in 2000, growing from $1.08 trillion in 1999 to $1.27 trillion in 2000, compared with only $203 billion in 1990. Much of this investment was driven by corporations buying or merging with companies in other countries, contributing to increasingly global multinational firms. In but one example of the results, top French firms earned more than two times more revenue from their foreign affiliates than from their domestic sales in 2000, double the level early in the 1990s. And foreign sales, on average, nearly equaled domestic sales for leading firms in the United Kingdom, Germany, and Italy.

The strong global economy and a host of events tied to the millennium also prompted the most extensive growth in global tourism in at least a decade. Worldwide, travelers made an additional 50 million trips across national borders in 2000 to reach 698.8 million international arrivals, up from 457.2 million a decade before. Asia and the Pacific saw the most substantial growth, but virtually all regions experienced considerable new flows of visitors from abroad. Other aspects of personal connectedness also grew. Cross-border telephone traffic, for example, saw a steady growth of roughly 10 billion minutes in 2000, driven primarily by rapidly declining costs.

At the same time, the number of Internet hosts (computers that allow users to communicate with one another along the Internet) continued to climb, growing by 44 percent in 2000. Yet this expansion was substantially slower than in earlier years and about one-third less than the explosive growth in 1999, a boom year for Internet-related businesses. In part, this slowdown reflects the downturn in the dot-com economy, but it may also have to do with saturation in some key markets, with growth in Internet users also cooling in 2000 to its lowest rate since the Internet’s emergence as a mass communications medium in the mid-1990s. Even so, 80 million new users logged on to the Internet for the first time in 2000. And as a sign of changes to come, 2000 may well have been the first year in which English was no longer the majority language on the Web. Estimates show that 192 million English speakers had regular access to the Internet, compared with 211 million non-English speakers. Although English remained the single most dominant language, Japanese, Chinese, and German were gaining ground, with the population of Spanish speakers set to experience substantial growth in coming years.

Moreover, political engagement has shown signs of slow but steady growth. Between 1995 and 2000, the advanced economies and key emerging markets tracked in the Globalization Index established 344 new embassies around the world. Only a handful of countries — including Bangladesh, Senegal, Turkey, and Venezuela — experienced a decline in the number of diplomatic representations they hosted from abroad. At the same time, 342 new memberships in international organizations were extended to the nations in our index, including new seats for Peru, Russia, and Vietnam in the Asia-Pacific Economic Cooperation forum. And while the number of active peacekeeping and nation-building missions approved by the U.N. Security Council declined slightly (from 20 in 1995 to 18 in 2000), the number of participating countries increased. By 2000, some 66 nations were contributing military and civilian police personnel, money, medicine, or other equipment. Of these, a diverse group of 11 countries — Austria, Bangladesh, Canada, Denmark, Finland, France, Ireland, Italy, Poland, Russia, and Sweden — made direct contributions to more than half the active missions that year, ranging from the U.N. Organization Mission in the Democratic Republic of the Congo to the U.N. Transitional Authority in East Timor.

In short, levels of global integration reached new highs in 2000, capping a decade of dramatic expansion in global economic flows and political engagement as well as the increased mobility of people, information, and ideas. While such free movement is likely to remain a defining characteristic of our suddenly smaller world, its persistence in the coming years cannot be taken for granted. Indeed, many of the countries that score high on the index are the ones most likely to bear the brunt of globalization’s unwinding.

WINNERS AND LOSERS

The Celtic Tiger Roars | As was true in last year’s index, small trading nations tend to show higher levels of integration with other countries than their larger neighbors, although the relationship between size and globalization remains complex. Last year, the A.T. Kearney/Foreign Policy Magazine Globalization Index revealed that Singapore was the "most global" nation. Topping this year’s list is Ireland, a country whose levels of economic integration have boomed since 1998, the end of our previous survey, in which Ireland ranked sixth.

Ireland’s strong pro-business policies and English-speaking population have long drawn interest from overseas business, helping to transform the island into a highly attractive location for foreign investors. Yet in the past two years, the Celtic Tiger has really begun to roar. In a bid to attract more international capital and technology investments, the country has cut corporate tax rates (already among Europe’s lowest) and adopted a National Development Plan designed to improve infrastructure and government efficiency. Privatization of state assets in telecommunications and banking have created positive signals for investment, while Ireland’s decision to join the euro currency zone has dramatically reduced barriers against financial flows to and from other euro zone countries.

Ireland was also among the world’s largest beneficiaries of the global boom in high tech and information technologies. Its success in attracting it investments in earlier years gave it a "first mover" advantage when these industries began to experience truly global growth. By 2000, technology giants such as Microsoft, Intel, Gateway, and Global Crossing were calling the "Silicon Isle" their European home. These high-tech investments help explain Ireland’s steadily growing fdi inflows, which rose from an average of close to $3 billion per year throughout the mid-1990s to $20.5 billion in 2000, or nearly $5,500 per resident (three times more than the $1,653 per resident in Finland).

Even more dramatic has been the increase in portfolio capital flows, marking Ireland’s rise as an important center for international financial transactions. These inflows and outflows totaled a scant 1.6 percent of the national economy in 1996, on par with countries like Chile, the Czech Republic, and Israel. By 2000, however, portfolio flows had grown to the world’s largest when measured as a share of gross domestic product, owing largely to the growth of Dublin’s International Financial Services Center, a leading location for international banking, investment funds, corporate treasury, and insurance activities.

Ireland also scores high in other indicators. Its growing tourist industry and advanced telecommunications infrastructure, for example, place the country atop the ranking for personal connections across international borders, and its rapidly growing online population places it among Europe’s Internet leaders.

Singapore slipped to third place in this year’s Globalization Index, largely as a result of its performance in certain economic indicators. While the island economy remained the world’s top trading nation, it struggled to take full advantage of the rising tide of global portfolio capital flows. A reorganization of its primary stock exchange helped to pull in some additional capital and position the country as a future financial center, but the country evidently proved less attractive than others with larger or more dynamic economic hinterlands, including the combined euro zone. Thus, while portfolio inflows to Ireland grew by some $26 billion between 1998 and 2000, Singapore saw only $1.3 billion in additional inflows.

Yet Singapore continued to score well in a variety of other categories, most notably in terms of personal connectedness. Although already leading the world in international telephone traffic per capita, for example, residents increased average call times in 2000 by another 2.5 percent, bringing the total to nearly 400 minutes per person in outgoing international calls alone (with another 317 minutes per person in incoming calls).

Up From Down Under | The United States and Canada remain the leaders in Internet penetration. Nearly 35 percent of the U.S. population and 41 percent of the Canadian population were online by January 2001, putting the two countries well within the world’s top 10, if slightly behind the competition in Scandinavia. The United States excels in levels of it infrastructure development, with one Internet host for every three residents — more than triple the number in Sweden, Norway, and Finland and more than 10 times the number in the United Kingdom. The United States also maintains some 77,000 of the world’s 118,000 secure servers (computers capable of supporting encryption and other advanced functions necessary for e-commerce transactions). And the vast majority of worldwide Internet content is physically housed in the United States, which helps to explain why 95 percent of the bandwidth that ties together world regions flows to and from the country.

Last year’s Globalization Index revealed that, in terms of Internet use and development, Scandinavian countries had far outpaced their continental neighbors in the closing years of the 1990s. By 2000, however, Oceania (comprising Australia and New Zealand) began to emerge as a new regional center, with higher average levels of connectedness than even the Scandinavian countries [see chart on page 50]. In Australia, the online population topped 35 percent in 2000, surpassing the United States, while New Zealand ranked fourth in the number of Internet hosts per resident. Both countries also ranked within the world’s top five in providing secure servers per capita. As in Scandinavia, this dramatic growth may have as much to do with a combination of economic prosperity and a sense of geographic isolation — along with the convenience of Internet communication across the vast distances of sparsely populated countries — as it does with supportive policy environments.

Taxes Stay Intact | One of the most heated debates about globalization today is whether competition between countries forces them to cut taxation — as well as social spending — in order to attract foreign investors and other international business interests. Some observers have argued that, in this way, globalization generates a race to the bottom in which local populations lose out as their governments curtail spending on the jobs, education, and social safety nets that higher taxation levels might support.

To test this hypothesis, we looked closely at World Bank statistics on each country’s level of taxation as well as government expenditures on the full range of public goods and then compared each against Globalization Index scores. Our findings show that taxation levels and spending levels go hand-in-hand but that neither correlates well with levels of globalization. In fact, some of the highest levels of taxation are in countries that are also highly globalized, and levels of spending vary across the board. Israel and the Czech Republic, for example, rank among the most global of emerging markets, yet collect taxes totaling more than 40 percent of national economic output. Those levels are far above tax collection rates in such countries as Colombia, Indonesia, and Pakistan, which rank much lower on the Globalization Index. By the same token, Sweden and Finland, which rank among the world’s most global countries, boast levels of social spending that are among the most generous in the world — all supported by relatively high tax rates. And with Scandinavian countries attracting record levels of FDI in recent years, there is little evidence that high tax rates are driving away investors, who appear more concerned about economic prospects, available infrastructure, education levels, and other fundamentals.

Don’t Worry, Be Happy | Since 1995, an international network of social scientists has collaborated on a global investigation of sociocultural and political change known as the World Values Survey. These researchers conduct national surveys in more than 65 societies, accounting for almost 80 percent of the world population. Each survey features hundreds of questions, ranging from assessments of personal satisfaction and financial security to views on whether local governments are capable of coping with environmental decay or runaway crime.

What happened when we examined the World Values Survey’s measure of "subjective well-being" — the share of people in each country who describe themselves as "very happy" or "happy" and the share indicating high satisfaction with life as a whole — with each country’s Globalization Index score? The results [see chart on facing page] did not necessarily prove that globalization brings happiness, but they clearly showed that people in highly globalized countries (including Ireland, Denmark, and the United Kingdom) tend to have higher levels of perceived well-being than do people in societies that are not as well connected to the outside world.

Although most of the highly globalized countries tend also to be wealthy, the correlations among globalization, wealth, and happiness are fuzzy at best. Researchers from the World Values Survey, for example, have found that per capita income correlates well with happiness levels up to a certain level of economic development, beyond which happiness becomes a much more subjective phenomenon.

The Divides Deepen | Although 2000 saw an unprecedented surge in global integration, a closer look at the data reveals a more mixed picture for the developing world. For instance, although emerging markets have seen Internet access grow at remarkable rates (on average twice the rate in the developed world in recent years), those same markets are still dwarfed by the industrialized countries. The Organization for Economic Co-operation and Development (OECD) estimates that 95.6 percent of the world’s Internet hosts in 2000 were located in its member countries. Hong Kong, Singapore, and Taiwan accounted for more than half of the remainder, leaving little for the rest of the world. By the end of 2001, OECD countries are likely to have had more than 100 Internet hosts for every 1,000 inhabitants, while the rest of the world may be lucky to average 1 for every 1,000.

This digital abyss only made it more difficult for many emerging markets to expand their integration with the rest of the world in 2000 (although emerging markets might make up ground in 2001). While no region experienced net "de-globalization," several individual countries — including Botswana, Egypt, Peru, and Saudi Arabia — saw their levels of integration decline relative to the rest of the world, suggesting an inability to keep pace with the increased movement of goods, capital, people, and ideas (as well as technological developments) at a global level. Even as emerging markets attracted $265 billion of new FDI, for example, their share of total flows declined for the fourth year in a row — from 43 percent in 1997, followed in each year by 30 percent, 23 percent, and 21 percent. Meanwhile, African countries attracted several million new tourists but saw their combined share of the booming global tourism market hover at 4 percent of the global total.

Moreover, evidence suggests that some regions are becoming relatively less integrated within the world economy. The African countries, for example, saw their average level of economic integration fall, then rise, then fall again over the past six years, a reflection of variable economic performance and the rise and fall of prices for oil and commodity exports, their main connection to global economic markets.

COLLATERAL DAMAGE

By now, we’ve all seen the before-and-after photos of the New York City skyline, perhaps forever altered by terrorism. In a similar vein, this year’s A.T. Kearney/Foreign Policy Magazine Globalization Index presents a "before" photo on a worldwide scale — a snapshot of global integration in the period before September 11, 2001. We are not yet certain to what extent the globalization skyline has been damaged by recent events, but we can make some educated guesses.

Even before the terrorist attacks, a number of globalization’s key components showed signs of setting a slower pace. International Monetary Fund projections showed global economic growth slowing from 4.7 percent in 2000 to a mere 2.4 percent in 2001, just below levels considered to be recessionary. Similarly, global trade growth in 2001 was expected to remain nearly flat, while predictions showed FDI flows dropping more than 40 percent from the record highs in 2000.

In the aftermath of the attacks, however, even these dire predictions appear optimistic, as heightened security concerns compel nations to tighten their borders. Rising public anxiety and new travel restrictions, for example, appear likely to curtail travel between countries, perhaps leading to a decline in global tourism for the first time in the last 50 years. And with global investors skittish about all but the safest opportunities, developed markets may see slow growth in equities, and emerging markets may see portfolio investment from abroad draining away more rapidly than at any time since the mid-1980s.

These trends are likely to affect disproportionately those countries that are closely integrated into the world economy. The global downturn in the it sector and tourism has hit Ireland particularly hard, and some forecasts see its growth slowing to 3 percent in 2002, compared with 11 percent in 2000. Singapore, with its small domestic economy and heavy reliance on trade, has already begun to feel the pain of globalization’s downturn, with exports and imports alike plummeting more rapidly than at any time since the country’s independence in 1965. Other countries in which trade accounts for the lion’s share of integration with global markets — including Malaysia, Slovakia, Panama, Thailand, and the Philippines — may also see globalization levels affected over the coming year. Others that are heavily exposed to international portfolio capital and fdi flows — including Ireland, the Netherlands, Finland, Spain, and even the United States — could likewise struggle to maintain their overall globalization scores.

Yet even as the global economy retrenches, other aspects of globalization are likely to sustain their forward momentum. These include personal contact across borders, which has become an indelible part of an increasingly globalized world. Telephone calls and Internet messages may well come to substitute for "being there" at a time when travel has grown more difficult. With the International Telecommunications Union estimating that call rates are falling 20 percent per year, on average, there is no reason that international telephone traffic — which has maintained a steady growth of roughly 10 billion minutes per year since 1997 — would be reversed because of the events of September 11. In fact, international calls to the United States now average less than $0.50 per minute, no more than domestic long distance rates in many countries. The Internet, too, will continue its impressive expansion, particularly in developing countries like China and India, where penetration remains low. And the new global emphasis on fighting terrorism on military, diplomatic, and economic fronts could serve to increase levels of international political engagement over the coming years.

Nor can forward momentum in the global economy be ruled out. Even as nations are struggling to pull themselves out of recession, they are continuing to strengthen the mechanisms for global integration. Two years after WTO negotiations broke down amidst tear gas and rioting in Seattle, the delegates in Qatar agreed to launch a new round of talks to cut trade barriers on a wide range of industrial and agricultural goods. After 15 years of tortuous negotiations, China has finally acceded to the World Trade Organization, and Russia — enjoying a second honeymoon in East-West relations following the September 11 attacks — is optimistic about joining the global trading body by the end of 2002.

Next year’s Globalization Index will begin to assess whether these predictions will come to pass. But even our most pessimistic scenarios do not portend the end of global integration. They merely highlight the extent to which global integration has made us more vulnerable, even as it has made us more prosperous. Perhaps the most profound ideological casualty of the September 11 attacks was the belief that a more globalized world would necessarily be a safer one.

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