Global Connectedness Index Signals Strong Comeback for International Supply Chains

DHL has released the third edition of its Global Connectedness Index (GCI), a detailed analysis of the state of globalization around the world.

The latest report shows that global connectedness, measured by cross-border flows of trade, capital, information and people, has recovered most of its losses incurred during the financial crisis.

Especially the depth of international interactions – the proportion of interactions that cross national borders – gained momentum in 2013 after its recovery had stalled in the previous year.

Nonetheless, trade depth, as a distinct dimension of globalization, continues to stagnate and the overall level of global connectedness remains quite limited, implying that there could be gains of trillions of US dollars if boosted in future years.

“In the aftermath of the financial crisis, globalization has increasingly come under pressure and international trade negotiations face growing resistance,” said Frank Appel, CEO Deutsche Post DHL. “I am convinced that a prosperous world needs more, not less integration.”

The World Economic Outlook, which was also published recently, had a more cautionary note, however:

“In many advanced and emerging market economies, structural reforms are urgently needed to close infrastructure gaps, strengthen productivity, and lift potential growth,” said analysts.

The DHL Global Connectedness Index 2014 documents the substantial shift of economic activity to emerging economies that is pushing the world’s economic center of gravity eastward. Emerging countries are now involved in the majority of international interactions whereas before 2010, the majority of international flows were from one advanced economy to another.

Notably, the 10 countries where global connectedness increased the most from 2011 to 2013 are all emerging economies, with Burundi, Mozambique and Jamaica experiencing the largest gains.

“The GCI, with its unique 3-D approach, is the only one of the globalization indices to register what many observers regard as the biggest drop-off in the intensity of globalization during the financial crisis”Pankaj Ghemawat, Professor at New York University Stern School of Business

Advanced economies have not kept up with this shift. This suggests that they may be missing out on growth opportunities in emerging markets. “Counteracting this trend would require more companies in advanced economies to boost their capacity to tap into faraway growth,” said Professor Pankaj Ghemawat, co-author of the report and internationally acclaimed globalization expert and business strategist. “This is particularly evident in light of the fact that a decades-long trend toward trade regionalization has gone into reverse.”

In fact, the GCI 2014 reveals that every type of trade, capital, information and people flow measured has expanded over greater distances in 2013 than in 2005, the report’s baseline year.

The 2014 Index Results
In addition to a comprehensive overview on the state of globalization, the 2014 report also provides detailed insights into the connectedness of individual countries and regions. The Netherlands retained its top rank as the world’s most connected country and Europe is once again the world’s most connected region. All but one of the top 10 most globalized countries in the world are located in Europe, with Singapore as the one standout.

North America is the second most globally connected region and leads on the capital and information pillars, with the United States as the most connected country in the Americas. Overall the US is ranked 23rd place out of the 140 countries measured by the GCI. The largest average increases in global connectedness from 2011 to 2013 were observed in countries in South and Central America and the Caribbean. Middle East and North Africa was the only region to experience a significant decline in connectedness.

Global Connectedness Index 2014 Ten Key Take-Aways

Global connectedness started to deepen again in 2013 after its recovery stalled in 2012. Nonetheless, trade growth is sluggish, capital flows have yet to recover to pre-crisis levels, and the overall depth of global connectedness remains quite limited - lower than many people think - implying trillions of dollars in potential gains from boosting it.
Advanced economies have not kept up with the big shift of economic activity to emerging economies. This leads to declining breadth of global connectedness.Counteracting this trend would require more companies in advanced economies toboost their capacity to tap into faraway growth.
Emerging economies are reshaping global connectedness and are now involved in the majority of international interactions. The 10 countries where global connectedness increased the most from 2011 to 2013 are all emerging economies. However, in terms of their integration into international capital, information, and people flows, emerging economies still lag far behind.
A decades-long trend toward trade regionalization has gone into reverse. In fact, every type of trade, capital, information, and people flow measured on the DHL Global Connectedness Index stretched out over greater distances in 2013 than in 2005.
Europe is the world’s most globally connected region, with 9 of the 10 most connected countries. European countries average the highest scores with regard to trade and people flows, and North America is the leading region on capital and information flows.
Southeast Asian economies stand out for their high depth scores relative to what one would expect given structural characteristics such as their size and level of economic development. The top 5 outperformers were Malaysia, Vietnam, Cambodia, Hong Kong SAR (China), and Singapore.
The largest average increases in global connectedness from 2011 to 2013 were observed in countries in South and Central America and the Caribbean. Eight of the countries with the largest increases were in that region or in Sub-Saharan Africa. Middle East and North Africa was the only region to suffer a large drop in its connectedness.
The directionality of flows provides important guidance to policymakers in both the public and the private spheres. Its relevance is enhanced by the fact that imbalances in the majority of international flows have grown over time.
Looking ahead, the biggest threats to globalization may come from policy fumbles or protectionist interventions rather than macroeconomic fundamentals. Even after the IMF’s latest downward revision, the world economy is still projected to grow faster from 2014 to 2019 than over any of the past three decades.
Which globalization index you use matters. The DHL Global Connectedness Index is the only one of the established indexes that registers a big post-crisis drop-off in the overall level of globalization.

Measuring Globalization in 3-D
The report was commissioned by DHL and prepared by Pankaj Ghemawat (Professor at New York University Stern School of Business and at IESE Business School in Barcelona, Spain) together with Steven A. Altman (Senior Research Associate and Lecturer in Strategic Management at IESE Business School).

Unlike other established globalization indices, the GCI analyzes globalization in 3-D: It looks at the depth of countries’ cross-border interactions, their directionality (outward flows versus inward flows) as well as their geographic distribution (breadth). “The GCI, with its unique 3-D approach, is the only one of the globalization indices to register what many observers regard as the biggest drop-off in the intensity of globalization during the financial crisis,” explains Professor Ghemawat. “That should boost confidence in using it as the basis for diagnosis and decision-making.”

The 2014 DHL Global Connectedness Index draws on more than 1 million data points from international flows covering trade, capital, information and people accumulated over the last nine years. The ranking encompasses 99% of the world’s GDP and 95% of the world’s population.