World 3.0

by Pankaj Ghemawat

  The possible bridges aren't confined to simply learning more about the other side. More tourism, for example, might help both the Americans and the Chinese develop more realistic perspectives about the other. In this regard, mention must be made of restrictive U.S. visa policies that fuel resentment in China and prevent more Chinese from getting an accurate picture of the United States. And on the Chinese side, blocking access to popular U.S.-based Web sites such as Facebook, Twitter, and YouTube (all inaccessible from China as of this writing) converts another potential bridge into a barrier.

  Reducing internal distance and improving national solidarity within the United States and China might be another way to help reduce the tension between them. With more internal cohesion, U.S. consumers and U.S. workers whose jobs are complements rather than substitutes for Chinese labor (like the California-based designers of the iPod) might be more amenable to the cheaper option of helping U.S. workers who are harmed by a cheap yuan, rather than supporting costly measures like tariffs. And in China, rebalancing would mean some losses in the export sector, but it also implies higher real incomes for the Chinese people who continue to put in grueling hours of labor making products for export, as well as ultimately a reorientation toward producing products for themselves and their fellow Chinese to enjoy. Reducing internal distance in this context implies addressing domestic distributional concerns to make support for integration more robust.

  The U.S.-Chinese relationship, with its tensions, will be an enduring feature of World 3.0. Recognizing its broader consequences, respecting spheres of influence, avoiding unnecessary provocations, improving connectivity, and strengthening solidarity can all contribute to making it a motor of the world's progress rather than a stumbling block.

  Think Differences

  Looking across the three cases, perhaps what stand out the most are the differences among them. This is a useful observation in and of itself: it suggests starting out by analyzing what is particularly different or unusual, if anything, about the case being considered. This should, among other things, be a bulwark against “one size fits all” thinking. World 3.0 implies not one model but multiple possible submodels.

  The rest of the recommended approach keys more specifically off differences/distances between that reference point and locations in other countries. Two additional diagnostic elements involve remapping the world to figure out what is close and what is far and understanding how CAGE factors shape cross-border flows. These provide important inputs into strategic choices about where and how to compete. In addition, there are the generalized strategic imperatives of working to reduce distance and distance sensitivity and remembering to tackle internal as well as external distance. Note that these points were all anticipated in chapter 12. The case studies now permit richer contextualizations of them.

  1. Recognize what is different about your situation

  Without a clear understanding of where you're starting from, you will inevitably be drawn toward one-size-fits-all models that fail to fully exploit the possibilities of World 3.0. The cases considered in this chapter highlight some of the dimensions of variation that can be important.

  The case of Andorra highlights the dimensions of country size and landlockedness. While this book has tended to focus on relatively large countries, there are more than a hundred countries with fewer than 10 million people, and fifty have fewer than 1 million. Smaller countries gain more in relative terms from openness, which is why openness is a common policy agenda that many of them band together, given their strength in numbers, to try to promote. And landlocked countries face particular challenges in building up relationships with nonneighbors.

  The case of Nigeria highlights yet another dimension—dependence on natural resources. Resource-rich economies face distinctive sets of challenges related to the so-called resource curse: large streams of resource rents seem to disrupt the development of the rest of the economy. And finally, the U.S.-Chinese relationship reminds us to look at bilateral as well as unilateral influences to figure out what is really distinctive about a country.

  2. Remap the world from your perspective

  With some sense of where you're coming from, figure out what is close and what is far and map the key relationships. The kinds of visualizations that maps permit cannot be achieved with textual material. Also, maps are particularly well suited to the visualization of spatial relationships, which makes them ideal for the present task.

  The specific idea, as described in chapter 12, is to develop rooted maps that depict other countries in terms of how important they are from the perspective of a focal country. The maps of Andorran and Nigerian trade patterns included in figures 13-1 and 13-2 are examples: all foreign countries are scaled to approximate their volume of trade with the focal country but attempts are made to preserve the shapes of and rough spatial relationships across countries so as to exploit preexisting geographic templates. And the U.S.-Chinese maps can be thought of as overlaying maps drawn from a U.S. and a Chinese perspective.

  Beyond such mapping efforts, it is worth calling attention to rapid advances in geographic or geospatial information systems (GIS) that involve the computer in capturing, storing, analyzing, and presenting data that are linked to locations. This merger of mapmaking, statistical analysis, and database management is leading to large improvements in our ability to discern and display interesting spatial relationships—that is, to envision World 3.0—and should therefore become even more important over time.

  3. Understand CAGE effects

  Having mapped what's close and what's far, or which relationships are large and which ones are small, try to understand the CAGE effects—the effects of differences versus similarities—on the relationships that are observed, and how those effects might be changing.

  In the Andorran case, for instance, geographic proximity and associated cultural and administrative similarities clearly had a very large influence on imports—and an even greater impact on exports—but the key administrative differences underpinning the arbitrage model had come under pressure over time, thanks in part to integration within the European Union. In the case of Nigeria, geographic distance didn't seem to matter much for oil exports but did influence nonoil exports, given Africa's significant size as a destination and continental Europe's status as the largest such market for Nigeria, thanks to a combination of proximity and overall market size. And the U.S.-China discussion flagged several dimensions of distance between the two countries as contributing to the tensions between them.

  For purposes of figuring out what to change, it is also worth looking for counterfactuals: key relationships that might be expected to appear in the data, but don't. Nigeria's nonoil exports to the United Kingdom and the United States, which are surprisingly limited given cultural and administrative links with them, are a good example. The CAGE parameter estimates can be used to systematize the analysis of predicted flows versus actual flows to figure out which ones appear to be below potential.

  4. Reexamine where you compete

  Comparing actual flows with potential or predicted flows is, of course, a critical element of reexamining where to compete—or, if you prefer, where to emphasize additional integration.32 From this perspective, overweighting (e.g., of Spain in Andorran trade flows) is just as interesting as underweighting (e.g., of the United Kingdom and the United States in Nigerian nonoil exports).

  Given the limitations of the CAGE-based gravity models used to form such diagnoses, however, I typically employ them to support a broader discussion of different types of countries as markets—and how to engage with them—rather than to dictate decisions to expand or shrink presence in particular countries. The discussions of opportunities for Andorra in Catalonia, the rest of Spain, France, the rest of the EU, and the rest of the world, and for Nigeria in continental Europe, the United Kingdom, and the United States, big emerging markets and the rest (particularly the west) of Africa are examples.

  Note that neither World 1.0, with its emphasi
s on foreign countries being far away, nor World 2.0, with its assumption that all of them are really close, picks up on this kind of variation in external relationships. That is an opportunity highlighted by World 3.0, with its explicit recognition that countries vary in how close or far apart they are.

  5. Reexamine how you compete

  Consideration of how to compete intertwines with consideration of where to compete. As we saw in the Andorran case, the focus on destinations that were very close minimized exposure to differences and adaptation requirements beyond a few very specific administrative differences that underpinned the country's arbitrage strategies. While Andorra was extreme in this respect, such distance aversion is a general problem to which we will return under the next point.

  Nigeria, in contrast, illustrates the typical approach of developing countries that try to compete in advanced markets: they start off by pursuing economic arbitrage and, over time, try to upgrade by establishing relationships and moving up price bands within the targeted categories. The caveat to this is that if Nigeria makes regional markets an important part of its strategy going forward, a different way of competing will be required, one focused more on exploiting similarities and the aggregation advantages afforded by Nigeria's large home base than on arbitraging differences.

  The overlay of aggregation on arbitrage is a road the Chinese have already traveled much farther down, stepping on Western competitors' toes. Established multinationals have to reinforce their traditional strengths at aggregation with more effective adaptation and arbitrage if they are to succeed against challengers from emerging markets—particularly on the latter's home turf. The strategies of aggregation, adaptation, and arbitrage (the “AAA strategies”) will be covered in more depth in the next chapter from a business perspective.33

  6. Reduce distances and distance sensitivity

  Even if a country does elect to perpetuate specific dimensions of difference, as in the Andorran case, it should generally seek to reduce distance and distance sensitivity along other dimensions.34 This recommendation reflects the large gains from additional cross-border integration discussed in chapter 4 and the general failure of the market failures and fears scouted in Part II to outweigh them. It is also worth recalling the many worthwhile reductions in distance and distance sensitivity that can be pursued unilaterally (at least in part): administrative streamlining as well as opening up, cultural facilitation, improved physical/virtual connectivity, and so on.

  Interest in unilateral improvements reflects, in part, impatience with multilateral initiatives, many of which have stalled in recent years: thus, the WTO's Doha round of trade talks is now in its second decade. While the global economic crisis hasn't helped, these problems also reflect a structural shift, from dominance by the United States (and, on occasion, the European Union) toward multipolarity, with more say for big emerging economies in particular. Yet the multilateral approach does have distinctive value and does need to be pursued: Doha would, in addition to the benefits on the table, lock in low tariffs and sustain the momentum around continuing liberalization. And if that last bit seems weak, note that according to the U.S. envoy to the WTO, Doha is important because it might be another quarter century before we see full implementation of liberalization measures agreed to under the next round of world trade negotiations.

  Multilateralism is too broad a topic to be tackled in its entirety here, but a World 3.0 sensibility does suggest a half dozen points that I'll mention briefly. Two are directly related to the enormous heterogeneity across countries highlighted in this book. This probably requires, for one thing, more varied responsibilities than many multilateral accords envisage. Thus, while Doha has proposed special protections for “small and vulnerable economies,” that idea could be taken further: forcing sub-Saharan Africa to pay high prices for life-saving drugs doesn't make a lot of sense. Second, because of variations in bargaining power, perfect fairness is probably also unrealistic: while it is reasonable to check that your country gains from a multilateral accord, insisting on the fair division of gains can end up ruling out win-win outcomes.35

  Third, many multilateral bodies, although not the WTO, need to be reorganized around country size or growth potential rather than income levels, to better reflect the weight of large emerging markets. Fourth, while the WTO's one country–one vote approach has several attractions, including protecting smaller countries with little leverage of their own, having more than 150 member countries in the room does get a bit unwieldy. Is it time to consider—as suggested in the discussion of global warming—a two-track approach, with all countries being consulted as well as informed, but with negotiations concentrated among a core group? Fifth, the broader point is that World 3.0 is about multiple parallel efforts and diversity, not single-track uniformity. Appropriately constructed bilateral and regional trade agreements, for instance, can be useful complements to global trade deals. And last, while a multilateral structure such as the WTO can help marshal some support for multilateral processes such as the Doha round, there are limits to how far it can go without support from the national level—which is what seemed, as of the end of 2010, to be wanting.

  7. Remember internal as well as external distance

  Finally, in addition to doing the things that need to be done to connect a country more effectively with the outside world, there is also the idea of reducing internal distance. Opportunities for internal integration are, in many situations, as large as if not larger than the opportunities for external integration. For example, even for tiny and in some respects very open Andorra, intranational economic activity exceeds international economic activity. And even in that case, I inferred some integration issues associated with the foreigners living in Andorra. Nigeria presents a whole panoply of internal integration opportunities that, given the country's size and poor internal connectivity, are probably larger and more urgent than its regional integration opportunities. And even the U.S.-Chinese relationship could potentially benefit from the reduction of internal distance within those countries.

  The tools for internal integration parallel those for external integration (see table 12-2 and the accompanying discussion), so I won't repeat them here. What I do emphasize is the idea that achieving such distance reductions often requires shifts in mind-sets—not just among governmental policy makers but also among business executives and even the general public. The kinds of shifts required of business executives and of individuals are elaborated in the two chapters that follow. What needs to be noted here is the role that government can and should play in helping orchestrate them.

  Maximizing Country Potential

  As we have seen, there's a lot of room in World 3.0 for countries to pursue strategies aimed at maximizing their potential. Invest the time required to get a clearer understanding of the internal and external distances that condition the opportunities and challenges in your own part of the world. Figure out which distances are the most important to bridge, where to compete, and how best to capture the benefits of integration. And, of course, don't forget to address the failures and fears that won't be going away any time soon.

  All that is fairly workmanlike. Ideally, a pinch of vision can be added to the mix. Think about the context in which the idea of forming the European Coal and Steel Community, precursor to the EU, was proposed. The year was 1950. How would you have reacted, in the wake of World War II, to a proposal by the French foreign minister to integrate Europe so that “any war between France and Germany becomes not only unthinkable but materially impossible”?36 My point here is not always to decide in favor of such big visions, but to give yourself the freedom to think big and to be open-minded in your evaluation. Today's European Union, all the (justified) worries about the euro zone notwithstanding, represents the triumph of a vision of integration that was preposterous when it was hatched. That kind of vision does not, for now, seem to have taken hold in West Africa, or in my native South Asia.

  Chapter Fourteen

  Business in Worl
d 3.0

  NATIONAL GOVERNMENTS' jurisdictional and historical legacies condition them to start from the World 1.0 perspective, and only with prodding do they embrace the World 3.0 dual roles of integrator and regulator. By contrast, business leaders tend to be among the most ardent supporters of World 2.0 because of the seemingly limitless opportunities for profit that it promises. But when World 2.0's exaggerations run up against the reality of semiglobalization, the results disappoint. Companies that fail to respect the law of distance suffer performance penalties, and inflict collateral damage on society at large. Companies with a greater appreciation for differences can perform better both from a private and a public perspective.

  My fundamental prescription for business is, therefore, to think different. Not just think differently—but think different, in the sense of becoming more sensitive to and genuinely welcoming of local differences. For most companies, thinking different entails nothing less than a fundamental restructuring of a firm's global strategy. Corporate approaches to dealing with globalization often presume that the world will continue to become much more integrated and that companies just need to keep up with rising levels of globalization. But that kind of World 2.0 thinking leads to blunders rooted in underappreciation of differences and, at the extreme, even in a lack of respect for individual countries' sovereignty. Shifting to a World 3.0 mind-set can help managers avoid such costly mistakes. Furthermore, if businesses really respect differences, they will improve their business performance in ways that also better contribute to society at large, fostering a climate of broader trust and confidence that can pave the way for further integration while dampening protectionist pressures. And in case prolonged economic malaise does lead to a resurgence of World 1.0's protectionist forces, companies that respect differences will also better position themselves to deal with the increase in cross-country distances that such an eventuality would imply.