DHL global connectedness index 2011 - Analyzing global flows and their power to increase prosperity

Pankaj Ghemawat with Steven A. Altman DHL GLOBAL CONNECTEDNESS INDEX 2011 Analyzing global flows and their power to increase prosperity DHL GLOBAL CONNECTEDNESS INDEX 2011 Pankaj Ghemawat with Steven A. Altman, IESE Business School 2 Preface Dear Reader, In a world ever more connected by the internet and social media, globalization continues to be one of the most discussed developments. While there is still a controversy about the social and cultural effects of globalization, it is obvious that its economic dimension has created new opportunities for countries worldwide. And one thing seems clear: globalization is likely to continue, and it sets the stage upon which many other global issues—such as the current sovereign debt crisis— will unfold. So at DHL, we decided to look for a deeper understanding of this core transforma- tion, recognizing that reliable data and a fresh scholarly approach would help en- lighten the debate. As the global logistics leader, DHL is strongly engaged in global trade and supply chain management. Each day, a significant share of the industrialized world’s goods flows through our international network. Our people are deeply knowledgeable about the markets and regions they serve, and they understand how cutting-edge logistics acts as a crucial enabler of wealth creation. From our position at the center of global commerce we have a clear perspective: free trade of products and services—alongside free movement of capital, information and people—contributes significantly to global prosperity. We believe increasing the world’s connectedness will continue to have a positive effect on people’s lives in the long term. DHL Global Connectedness Index 3 With our Global Connectedness Index, DHL offers an exciting new take on global- ization. This study challenges current methods of understanding globalization, focusing on the breadth and depth of a country’s integration with the rest of the world. The results are both surprising and encouraging. We are especially pleased to have secured the expertise of Professor Pankaj Ghe- mawat, the renowned economist and thinker, for this study. Step by step, Professor Ghemawat shows that globalization—contrary to current perceptions —is still in the early stages. He argues that globalization’s positive impact on world prosperity will continue to be of great importance. The study offers a detailed analysis of 125 countries, revealing strengths and areas of growth potential. Companies, as well as political actors, will be able to use this data to shape strategy and better define courses of action. With this wealth of new information, we expect to see the emergence of new di- mensions in the globalization debate. We hope this ongoing discussion will provide encouragement for the world’s struggling economies. We also hope it will reinforce the importance of global commerce—because a connected world is a better world. I trust you will find the study both useful and inspiring. Yours sincerely, Frank Appel CEO Deutsche Post DHL 4 Preface Dear Reader, Ranking countries based on their global connectedness is an enterprise that only makes sense in what I call World 3.0: a worldview that eschews the common ex- tremes of treating national borders as impermeable and neglecting cross-border interactions or fixating on the opposite extreme by assuming that national borders don’t matter at all and that cross-border integration is complete. This report begins by reviewing the evidence suggesting that cross-border interac- tions do matter but are still quite limited. It goes on to rank 125 countries in terms of their global connectedness based on up-to-date data about 10 different types of flows involving trade, capital, information and people. It presents systematic data not only about the depth of countries’ cross-border interactions but also their geo- graphic breadth—which reveals how much of globalization is actually regionaliza- tion—and their directionality. The report then reviews the links between global connectedness and welfare and explores the role of policy choices in influencing them. It concludes that policies aimed at enhancing globalization as well as those that improve the general business environment can lead to large gains in connectedness and welfare—a particularly interesting finding at a time of economic turmoil and great uncertainty about the way forward for the global economy. DHL Global Connectedness Index 5 Preparing this report has been a challenging assignment, but the opportunity it af- forded to delve deeply into patterns of global connectedness on a country-by-coun- try basis was a precious one, that brought a new level of acuity to my mental map of the world. I hope readers will find it similarly worth the effort, both practically and intellectually, to think deeply and broadly about the material in this report. I am grateful to Steven A. Altman who served as a partner in conducting the re- search that led to this report and is therefore listed as a co-author, to Tamara de la Mata for the skill and care with which she helped compile the data and conduct the statistical analyses reported herein, to Deutsche Post DHL for supporting this research, and to Dr. Jan Dietrich Müller, the Senior Vice President for Communica- tions Strategy and International Coordination at Deutsche Post DHL for his role in shepherding this project to completion. Pankaj Ghemawat Barcelona, October 17, 2011 6 Ten Key Take-aways 1 Netherlands leads the overall 2011 DHL Global Connectedness Index. Hong Kong (China) tops the rankings in terms of the depth of its international connections relative to the size of its domestic economy, and the United Kingdom leads in terms of the breadth of its connections around the world. 2 The top 10 countries on the 2011 DHL Global Connectedness Index range in size from the United Kingdom (the world’s sixth largest economy) to Malta, and the top 50 include representatives from every continent except Antarctica. 3 Absolute levels of globalization today are much lower than commonly thought, which increases the potential gains from raising them. 4 The lion’s share of international connections are still concentrated among countries that share borders as well as cultural and historical ties. 5 The leading countries in terms of global connectedness all enjoy very high levels of human and economic development. Larger countries score higher on the global breadth of their connections, and smaller countries excel in terms of the depth of their connect- edness. DHL Global Connectedness Index 7 6 The depth of global connectedness was hit hard by the financial crisis, but the prevailing trend since 2005 remains one of increasing connectedness. 7 The breadth of global connectedness has remained fairly stable since 2005; its more gradual evolution reflects the enduring effects of cross-country distances and differ- ences, as well as infrastructure, institutions, and relationships built up over decades. 8 Twelve policy and structural factors identified in this report can explain nearly 80 per- cent of variation among countries in terms of the depth of their global connectedness. 9 Public policies that directly target international flows as well as a broader set of poli- cies that improve the domestic business environment can both contribute significantly to improving global connectedness. 10 Increasing the depth of global connectedness can spur economic growth and help strengthen the recovery by yielding gains that can range as high as trillions of dollars. 8 Table of Contents I Preface Frank Appel page  2 Preface Pankaj Ghemawat page  4 Ten Key Take-aways page  6 Executive Summary page 10 1 Introduction: Why Measure Global Connectedness? page 14 Chapter 1 uncovers some widespread myths about the state of globalization and introduces the key distinction between the depth and the breadth of a country’s connectedness with the rest of the world. It also describes how the findings from this research can be applied to public policy and used by businesses. 2 Measuring Global Connectedness page 30 Chapter 2 explains how the DHL Global Connectedness Index was constructed and the aspects of connectedness it addresses.