Global connectedness is on the rise again – but will it rekindle the fire of globalization?

DHL has released the third edition of its Global Connectedness Index (GCI), a report which provides analysis of the state of globalization around the world. Its findings suggest that globalization is recovering from the drop-off experienced in the wake of the financial crisis and that levels of global connectedness have begun to deepen again. However, while global connectedness, measured by cross-border flows of trade, capital, information and people has recovered most of its losses incurred during the financial crisis it has not yet reached its pre-crisis peak. The evidence suggests that in the future global connectedness will increase but that interconnectedness on a regional level is likely to become dominant in terms of trade flows.

The recovery, the report says, was driven by, “The depth of international interactions – the proportion of interactions that cross national borders.” However this is qualified by the recognition that, “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.”

The report shows that interconnectedness is on the rise. It also clearly suggests that this has been most prevalent in emerging economies, leading to their rapid development, rather than the more advanced economies.

While the GCI shows the pace at which interconnectedness is increasing in emerging economies is much faster than it is in advanced economies, their overall level and depth of interconnectedness still lags far behind. In fact the GCI’s findings show that Europe remains by far the most connected region, followed by North America. The disconnect between this growth and the more connected advanced economies is inhibiting the overall level of globalization and fostering a trend towards greater regionalism as countries increase their levels of connectedness with local trade partners, effecting bilateral growth.

If true globalization, rather than just regional connectedness, is to gather pace again then it would seem that advanced economies will have to do much more to engage with emerging economies. But as we have seen over the last few months with ongoing difficulties surrounding both the TTIP and implementing the WTO’s Bali package the political appetite may not be there.

Moreover if globalization is to resume its position as the dominant driver behind global economic growth it will have to overcome a raft of macroeconomic factors that are instigating a movement towards regionalization. Not least among these factors is the emergence of a growing middle class with rising wages and an increasing consumer appetite in developing economies. This is coupled with lower economic growth in developed economies. Together these factors mean that the last great stimulus for globalization, offshored manufacturing from advanced economies, is fading with more local nearshored alternatives beginning to be embraced. All the while the consumer bug in emerging economies means that more and more goods manufactured in those economies find their market of sale at home, removing the need for globalized supply chains.

It seems likely then that, as the GCI suggests, global levels of connectedness will continue to develop but that the depth of regional interconnectedness will rise at a faster rate. Leading to a different sort of global economic growth.

For more information on the developing role of emerging markets in the global economy and the impact they are likely to have on global trade flows take a look at the Global Emerging Markets Index 2013 or register your interest for the Global Emerging Markets Index 2014 here.