Pankaj Ghemawat began his presentation by asking delegates at the Fifth Annual European Investment Conference a series of provocative questions. How global are we? What patterns do we observe about our inter-connectedness? And finally, what are the implications for Europe?
Popular perceptions today are that the world is shrinking, technology is reducing the barriers to distance, and national borders are increasingly unimportant. Yet Ghemawat contends that despite the benefits and ease of technology, human behaviour still matters, distance still matters, and yes, borders still matter — and these factors overwhelm the perception of a small, frictionless world. Citing evidence from his primary research on the subject of globalisation, Ghemawat argued that we are a lot less globalised than many people perceive. He shared data highlighting the percentage of all telephone calls that are international (2%), the percentage of all citizens in a given country who are recent immigrants (3%), the percentage of all foreign direct investment (10%), and finally, the percentage of all exports relative to GDP (30%). Importantly, Ghemawat argued, most people overestimate the percentages in each of these categories by a substantial margin — hence, he refers to globalisation as “globaloney”.
Ghemawat reasons that we are not as connected as many perceive because of the law of distance — meaning that differences among groups of people determine the ability and willingness of different groups of people to interact with each other. These differences can be cultural (e.g., different tastes), geographical (e.g., physical distance and barriers), administrative (e.g., in the European Union or not in the European Union), or economic (e.g., differences in affordability and/or living standards). Moreover, these differences compound and help to explain the limited nature of globalisation today.
Illustrating the data in a unique way, Ghemawat used maps of trade flows across borders where the physical size of each country on the map is re-sized according to how much money the country trades with other specific target countries. What the map demonstrates is that most countries’ trade ties are more interconnected with countries that are in close proximity, rather than with countries that are far away. This was true for virtually every country.
In his blog, Ghemawat argues that current economic problems stem, in part, from the special characteristics of finance, which is highly dependent on sentiment and therefore particularly susceptible to crises.