A business professor’s magnum opus argues that the world is not yet as integrated as some people think.
If one were to summarise Pankaj Ghemawat’s magnum opus on globalisation in a phrase, it would have to be “the world is not flat”. That would have been a more appropriate title for his book than World 3.0. Ghemawat, the Anselmo Rubiralta Professor of Global Strategy at IESE School of Business in Barcelona, is one of the biggest critics of the “flat world” theory as popularised in Thomas L Friedman’s bestselling book The World Is Flat: A Brief History of the Twenty-First Century, published in 2005.
Ghemawat’s book is more or less a compilation of articles and blogs that he’s written for the Harvard Business Review since 2007 in which he seeks to contradict the Friedmanian premise that the world is a highly integrated place in which goods, capital and people flow seamlessly across borders.
In a sense, the publication of this book is well timed. The post-Lehman world has seen the anti-globalisation brigade raise the red flag on the ill effects of integration. For this brigade, globalisation is synonymous with deregulation. Unbridled market forces caused the collapse of financial structures and an integrated world facilitated the spread of this contagion. Therefore, in the first section of his book, Ghemawat spends ample time explaining that the world is not as integrated and globalised as we would like to believe. In the second section, he takes the contrarian view and looks at some of the global imbalances in trade and capital, and builds a case for adequate regulation.
Ghemawat’s biggest problem with Friedman’s flat-world theory is the absence of any data to support Friedman’s views. In fact, Ghemawat produces interesting statistics to show how parochial the world is at this very moment. Guess what percentage of letters (physical mail) actually cross national borders? Not more than 1 per cent. And of the total percentage of telephone calling minutes, less than 2 per cent are international. Students studying overseas account for only 2 per cent of the world’s total university population.
Forget about mail and telephone calls, the figures are as dismal when one looks at foreign direct investment. After adjusting for exports, only 10 per cent of total direct investment goes into non-home countries. “Even for an avowedly international magazine like Time, only 20 per cent readership is outside its US home base,” says Ghemawat.
Therefore, he terms the current times we live in 2.0, or a semi-globalised state. He classifies the world into four different “worlds”. In World 0.0, or prehistoric times, life was nasty, brutish and short, because it was a world without regulation or government. The next phase, World 1.0, came when countries looked inward for everything. Then came the mercantilist world, when the cross-border flow of goods, capital and people began. To call ours a globalised or flat world is not appropriate because in his view it is still a “work in progress”.
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The statistics Ghemawat presents support this theory. Even in this semi-globalised world, geographical distance and local influences matter more than one imagines. For instance, after the 2008 financial meltdown, trade between Canada and the USA dropped by almost $100 billion to $600 billion in 2009. One would have thought that the worst hit would be China, but it appears that Canada is the USA’s largest trading partner. Yes, even in business, cultural, administrative and geographical distance matters, or so Ghemawat believes. One study he quotes has found that a common language between countries can lead to 43 per cent more FDI, and colonial links to 118 per cent more FDI.
But this is where the novelty ends. The second section of the book uses the old arguments in favour of globalisation. Ghemawat links many different schools of thought on globalisation to paint a rather pretty picture of an integrated world where exchange of goods, people, capital and technology helps countries deal with their own unique issues. For instance, ageing populations in Europe and Japan can benefit by facilitating the movement of people across borders.
The big idea behind this book is that free markets need not be deregulated. That is perhaps the best thing about the book — the proposition that free markets can succeed not with complete freedom, but with adequate doses of regulation.
Where Ghemawat fails to score is in explaining hotly debated issues like the impact of globalisation on the environment or divergences from a typical pattern in capital flows. While he touches upon the fact that when countries liberalise, the outflow of FDI is often higher than the inflow, as one would expect. But he leaves it at that without attempting to delve deeper into the subject. On the impact of globalisation on the environment, he says, “Research shows that it is impossible to conclude that globalisation is always bad (or good) for the environment; there are simply too many kinds of pollutants and country situations.”
Clearly, protecting the planet through poverty is not Ghemawat’s prescription. Yet the book does not respond to many vital aspects and questions relating to the globalised world. For instance, what about the impact of globalisation on societies, consumption and behaviour? Ghemawat has completely overlooked these issues.
WORLD 3.0
Global Prosperity and How to Achieve It
Author: Pankaj Ghemawat
Publisher: Harvard Business School Press
Pages: 400
Price: Rs 695