Connecting Across Oceans

Ever since the autumn of 2008, when the financial crisis shook the world economy, it has been almost axiomatic that the downturn would have a serious impact on globalisation. Headlines warned that a less-globalised world was around the corner. Now, with the economic data for the past year becoming available, the verdict is nuanced. Global integration has lost momentum in some areas, but picked up speed in others. Deceleration of globalisation has hurt the developed West more than East Asia. And with the growth in mobile telephony in India and other parts of Asia and expanding bandwidth, the region seems set to increase, rather than slow, its integration with the rest of the world. 

The crisis has had different outcomes in the developed and the developing worlds. While developed countries’ GDP fell by 3.3 per cent from the previous year, developing countries, other than those in Central Asia and Eastern Europe, were in positive territory, with China and India leading. Trade — one of the major indices of globalisation — suffered a precipitous and synchronised drop in early 2009, but has recovered somewhat. Even so, a recent World Bank report notes the volume of world trade remained 2.8 per cent lower than its pre-crisis level and about 10 per cent below the pre-crisis growth trend.

Faltering trade has been accompanied by a dramatic drop in international capital flows and, in some cases, by massive repatriation of capital from emerging markets.  

Another reversal was evident in the 94 per cent drop in the Baltic Dry Index, the global benchmark for freight costs for dry bulk commodities, in the six months following the crisis. On a full-year basis, air freight declined 10 per cent with an average load factor of 49 per cent. International air passenger traffic, which dropped sharply in months after the financial crisis, has since recovered, but, in December 2009, it was still 3.4 per cent below its 2008 peak. Airliners flew with nearly a quarter of their seats empty. There is no data available to explain the drop in international travel, but the tightening of work permits, visa restrictions and intensified security control must have played a role.

Ernst & Young, which publishes an annual Globalisation Index tracking the international integration of trade, capital, technology, labour and culture, found that the average overall level of globalisation fell by around 0.1 points in 2008, followed by a further drop of 0.4 per cent in 2009. Yet, amidst the general economic decline, there was variation of fortunes, with smaller countries generally relying more heavily on international markets for their growth and economic prosperity. At the top of this year’s index of globalised countries was Singapore, followed by Hong Kong, another highly trade-dependent territory. But developed industrialised countries have dropped in the rankings; and large countries like China and India are increasingly reliant on their large domestic markets, as illustrated by their 40th and 46th positions, respectively, in the globalisation index.

The same pattern follows for companies from smaller countries counting more on international sales for revenue, also apparent in the Ernst & Young survey. Interviewing western businesses about their expectations for internationally driven revenues in next three years, the survey found that over half expect at least 50 per cent of their sales to come from overseas markets. Around 67 per cent of European firms expect to derive most of their revenues from international markets over the same period. In contrast, firms in the Asia-Pacific region, with larger domestic markets and limited international exposure, indicated more restricted expectations.

That, however, could also be in part the function of a still limited connectivity to the world, which may be changing. New fibre optic connections and mobile telephony could strengthen the sinews of trade with more closely integrated information network and falling price of bandwidth. For instance, the Google-led international consortium that had earlier built a trans-Pacific bandwidth pipe linking Los Angeles to Chikura, Japan, will be connected this year to India and Southeast Asia, adding a massive 960 gigabits through a second pipe for data transmission. Worldwide, by 2011, some 28 submarine cables link will be added to the existing 93.

Judging by the increasingly apparent trends, information technology and knowledge economy are going to be the growth drivers. As a result, a more intensified integration, rather de-globalisation, could be the outcome.