World 3.0

by Pankaj Ghemawat

  17. One reader pointed out that one might also want to account for the fact that some products and many services simply can't be traded across borders: think of the market for haircut services or restaurants. But even if one figures that only 40% of the U.S. economy consists of tradables (see Menzie Chinn, “Does Manufacturing Matter? An Update,” Econbrowser blog, August 21, 2006, http://www.econbrowser.com/archives/2006/08/does_manufactur.html), the export-to-tradables ratio is less than 30% for the U.S., and less than 50% for the global economy. And more importantly, pronouncements about World 2.0 such as Friedman's aren't qualified as applying to just the tradable sector, so it gives them too much of a free ride to allow for nontradability when they do not acknowledge its importance.

  18. This complete integration benchmark is equal to 100% minus the Herfindahl concentration ratio of countries' GDPs, for reasons that the interested reader can work out. Similar calculations can be performed for complete integration benchmarks for other types of cross-border flows and typically yield values in the 80%–90% range, i.e., significantly greater than the actual integration levels laid out in this chapter.

  19. These data are drawn from various issues of UNCTAD's annual World Investment Report.

  20. Estimate based on data presented in Joshua Aizenman and Jake Kendall, “Internationalization of Venture Capital and Private Equity,” NBER working paper 14344, September 2008.

  21. Figure is for 2005. Calculation is a weighted average based on market capitalization for forty-two countries based on data presented in Piet Sercu and Rosanne Vanpee, “Home Bias in International Equity Portfolios: A Review,” Katholieke Universiteit Leuven working paper AFI0710, August 2007.

  22. Estimate of cross-border ownership of bank deposits is a weighted average of regional estimates of the proportion of bank assets held by foreign owners. Regional estimates are from the IBM Institute for Business Value's report, “No Bank Is an Island,” February 2008. The proportion of bank assets from each region is from International Monetary Fund, “Global Financial Stability Report, Market Development and Issues: Statistical Appendix,” September 2006, 95. Estimates were made to fill in data gaps. Estimate of cross-border ownership of public debt is based on numerator (Gross External Public Debt) from World Bank Quarterly External Debt Database and denominator (Total Public Debt) from the Economist Intelligence Unit (EIU). Forty-eight countries were covered for calculation of this metric (based on data availability).

  23. Only 2% of it goes beyond U.S. borders, says the American Association of Fundraising Counsel. See Susan Kitchens, “Contrarian Charity,” Forbes.com, May 10, 2004, http://www.forbes.com/forbes/2004/0510/102.html.

  24. Data sources for the material in figure 2-1 are as follows: mail data (covering letter post) from Universal Postal Union Postal Statistics; telephone calls (minutes) data from International Telecommunication Union; university students data from UNESCO Global Education Digest 2009; immigrants data from UN Population Division International Migration 2009; charity (private giving) data from Geneva Global; foreign direct investment data from UNCTAD World Investment Report (various issues); patents data (for OECD countries) from OECD Science Technology and Industry Scoreboard 2009; venture capital data from Aizenman and Kendall (2008); internet traffic data from TeleGeography and Cisco; trade data (covering exports of merchandise and services, roughly adjusted for double-counting) from World Bank World Development Indicators; stock market data from Sercu and Vanpée (2007), op cit.; U.S. news data from State of the Media 2010; bank deposits data from “No Bank is an Island” (2008), IMF; government debt data from World Bank and Economist Intelligence Unit.

  25. The wage rate comparison is based on Economist Intelligence Unit database (EIU).

  26. Pankaj Ghemawat, “Why the World Isn't Flat,” Foreign Policy, no. 159 (March/April 2007): 54–60.

  27. Two such measures, ratification of international treaties and membership of international governmental organizations, didn't vary very much across the countries in the 2007 sample. And apart from Taiwan, the lowest scores in treaty ratification went to Iran, Israel, and the United States—countries with very different levels of international political connection and influence! A third measure of political engagement, contributions to UN peacekeeping forces, is simply odd. Such forces number less than 100,000 and are not considered particularly formidable. And the fact that the three leading contributors, by a large margin, are Pakistan, Bangladesh, and India suggests that contributions to them may have more to do with labor economics than political engagement or influence.

  28. David Livingstone, The Last Journals of David Livingstone, in Central Africa, from 1865 to His Death (Cirencester: The Echo Library, 2005), 351.

  29. John Dewey, The Public and Its Problems (New York: Holt, 1927).

  30. Henry Ford, My Philosophy of Industry (London: Harrap, 1929), 44–45.

  31. H. G. Wells, The Shape of Things to Come (London: Hutchinson, 1933).

  32. George Orwell, “As I Please,” Tribune, May 12, 1944, reprinted in CEJL 3: 173.

  33. Martin Heidegger, “The Thing,” in Poetry, Language, Thought (New York: Harper and Row, 1971), 165.

  34. Marshall McLuhan, Understanding Media (New York: Mentor, 1964), 19.

  35. See, for instance, Gregg Easterbrook, Sonic Boom: Globalization at Mach Speed (New York: Random House, 2009).

  36. For a much more extended treatment of the relationship between technology and globalization and additional arguments against technotrances, see David E. Edgerton, “The Contradictions of Techno-Nationalism and Techno-Globalism,” New Global Studies 1, no. 1 (2007).

  37. See Tom Standage, The Victorian Internet: The Remarkable Story of the Telegraph and the Nineteenth Century's On-Line Pioneers (New York: Walker and Company, 1998); and Kevin H. O'Rourke and Jeffrey G. Williamson, Globalization and History (Boston, MA: The MIT Press, 1999).

  38. “Google Breaks $100bn Brand Value Threshold,” Marketing magazine, April 28, 2009, http://www.marketingmagazine.co.uk/news/901390/Google-breaks-100bn-brand- aluethreshold.

  39. Valery Kodachigov and Anastasia Golitsyna, “Google Tracks Traffic in Moscow, St. Pete,” Moscow Times, August 12, 2010, http://www.themoscowtimes.com/business/article/google-tracks-traffic-in-moscow-st-pete/412178.html.

  40. Natalya Hmelik, blog post, “The Kremlin Gets Tech Savvy,” August 12, 2010, http://frontpagemag.com/2010/08/12/the-kremlin-gets-tech-savvy/.

  41. “Google.com Has Tweaked Its Global Strategy for India,” News Relay, May 2, 2009, http://webcache.googleusercontent.com/search?q=cache:q-dX5qKuyZ8J:www.news-relay.com/latest-news/googlecom-has-tweaked-its-global-strategy-for-india/+google+globalization+strategy&cd=13&hl=en&ct=clnk.

  42. “A Virtual Counter-Revolution,” Economist, September 2, 2010.

  43. Zuckerman, “A Cyber-house Divided.”

  Chapter Three

  1. Note that distance, or to be more precise, external distance, is an attribute of two countries or locations, not one.

  2. See, for instance, Mykyta Vesselovsky, Florence Jean-Jacobs, and David Boileau, “Canadian Performance in the U.S. Market, 1995–2009,” analytical paper series 007, Foreign Affairs and International Trade Canada, 2010.

  3. John F. Helliwell, How Much Do National Borders Matter? (Washington, DC: Brookings Institution Press, 1998), 38.

  4. James E. Anderson and Eric van Wincoop, “Gravity with Gravitas: A Solution to the Border Puzzle,” American Economic Review 93, no. 1 (March 2003): 170–192.

  5. See, for instance, Patricia Lovett-Reid, “The Real Cost of Cross-Border Shopping,” MSN Money, November 13, 2009, http://money.ca.msn.com/investing/patricia-lovett-reid/article.aspx?cp-documentid=22580504.

  6. I prefer this approach to the one of backing out intranational trade from total production minus exports. The trouble with this latter approach is that it is hard to know what distances to associate with intranational trade—yielding wildly varying estimates. See, for instance, Matthias Helble, “Combining International Trade and
Intra-national Transport Flows,” working paper 13/2006, Graduate Institute of International Studies, Geneva.

  7. Ibid.

  8. The median value was a pretty astounding sixty-two!

  9. See, for instance, Natalie Chen, “Intra-national Versus International Trade in the European Union: Why Do National Borders Matter? Journal of International Economics 63 (2004): 93–118.

  10. Calculated on the basis of the gravity models described later in the chapter.

  11. Jarko Fidrmuc and Jan Fidrmuc, “Integration, Disintegration and Trade in Europe: Evolution of Trade Relations During the 1990s,” ZEI working paper B 03-2000, University of Bonn, 2000.

  12. Jeffrey A. Frankel, Regional Trading Blocs in the World Economic System (Washington, DC: Peterson Institute for International Economics, 1997), 12.

  13. Volker Nitsch and Nikolaus Wolf, “Tear Down This Wall: On the Persistence of Borders in Trade,” Warwick Economic research paper 919, University of Warwick, October 2009.

  14. Marie Daumal and Soledad Zignago, “Border Effects of Brazilian States,” Centre d'Etudes Prospectives et d'Informations Internationales (CEPII), June 2008.

  15. Sandra Poncet, “Measuring Chinese Domestic and International Integration,” China Economic Review 14 (2003): 1–21; and Sandra Poncet, “A Fragmented China,” Review of International Economics 13 (2005): 409–430.

  16. By contrast, estimates for U.S. states and Canadian provinces suggest border effects are lower than five. See Holger C. Wolf, “Intranational Home Bias in Trade,” Review of Economics and Statistics 82, no. 4 (2000): 555–563; John Helliwell, “National Borders, Trade and Migration,” Pacific Economic Review 2, no. 3 (1997): 165–185.

  17. In addition to the U.S., where internal trade is significantly larger than international trade, data for countries such as Japan, France, Germany, and Spain indicate internal trade comparable to if not much greater than their total international trade.

  18. Edward E. Leamer, “A Flat World, a Level Playing Field, a Small World After All, or None of the Above? A Review of Thomas L. Friedman's The World Is Flat,” Journal of Economic Literature 45 (March 2007): 83–126, 100.

  19. UNCTAD, World Investment Report 2010, 18, and comparisons drawing on earlier World Investment Reports.

  20. Elizabeth Thompson, “That Which We Sell as a Jelly Bean by the Same Label Would Taste as Sweet,” Montreal Gazette, August 22, 2007.

  21. David Ganong, telephone interview by author, August 20, 2008.

  22. NACC, “Enhancing Competitiveness in Canada, Mexico, and the United States: Private-Sector Priorities for the Security and Prosperity Partnership of North America (SPP),” Initial Recommendations of the North American Competitiveness Council (NACC), February 2007, 19.

  23. David Ganong, telephone interview by author, August 20, 2008.

  24. This is a reason why official statistics overestimate the real amount of trade, as discussed in chapter 2.

  25. Mark Andrew Dutz, “Harmonizing Regulatory Mechanisms: Options for Deepening Investment Integration in South Asia,” World Bank working paper 36249, October 2004.

  26. Bruce Campbell, “More Than Jellybeans: The SPP Regulatory Framework Agreement and Its Impact on Chemicals Regulation,” Canadian Centre for Policy Alternatives, North American Deep Integration Series 1, no. 1 (September 2007): 6.

  27. Thompson, “That Which We Sell as a Jelly Bean.”

  28. Since Ganong is privately held, its profitability is not publicly known.

  29. Trade Data Online from Industry Canada, http://www.ic.gc.ca/sc_mrkti/tdst/tdo/tdo.php?headFootDir=/sc_mrkti/tdst/headfoot&naArea=9999&lang=30&searchType=CS&toFromCountry=CDN¤cy=CDN&hSelectedCodes=|3113&period=5&timePeriod=5|Complete+Years&periodString=&productBreakDown=Complete+Years&reportType=TE&productType=NAICS&areaCodeStrg=9999|TOP&runReport_x=37&javaChart_x=&gifChart_x=&outputType=RPT&chartType=columnApp&grouped=GROUPED#tag.

  30. At a 20% threshold—-the standard one.

  31. The exceptions are Quebec in Canada and Louisiana in the U.S.—former French colonies that retain, to some degree, French-style civil law, even though the French ceded political control more than two centuries ago.

  32. This calculation is based on a coarse definition of legal origins; a finer-grained one would significantly reduce that percentage.

  33. Samuel P. Huntington, The Clash of Civilizations and the Remaking of World Order (New York: Simon and Schuster, 2003); Geert Hofstede, Culture's Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations (Thousand Oaks CA: Sage Publications, 2001).

  34. Hofstede's original schema, probably the most widely used of its kind, focuses on four dimensions of culture: power distance, individualism, masculinity, and uncertainty avoidance. Subsequent work on East Asian cultures prompted him to add long-term orientation as a fifth dimension.

  35. Randy Boswell, “Canadians Approve U.S. Goals: Poll; Identify with Southern Neighbours More Than Other Nations,” Montreal Gazette, September 10, 2007.

  36. Lydia Saad, “In U.S., Canada Places First in Image Contest; Iran Last,” Gallup, February 19, 2010, http://www.gallup.com/poll/126116/Canada-Places-First-Image-Contest-Iran-Last.aspx.

  37. Jefferson Morley, “World Opinion Roundup: Canada's Anti-American Impulse,” Washington Post, January 23, 2006.

  38. Amita Batra, “India's Global Trade Potential: The Gravity Model Approach,” Indian Council for Research on International Economic Relations, December 2004. The ratio of India's potential to actual trade with Pakistan is estimated at 52.2 based on analysis using PPP-adjusted GNP and GNP per capita. Based on GNP and GNP per capita at current exchange rates, this ratio is 26.7. The estimate of 2%–4% is based on the general range implied by these ratios.

  39. Another geographic attribute that might be treated as Canada-specific rather than as a bilateral attribute of Canada and another country is Canada's privileged location relative to world markets. Scaled by distance in the way described in the next section, Canada faces effective overall export demand nearly seven times that of Australia, a country far removed from nearly everywhere else.

  40. Waldo R. Tobler, “A Computer Movie Simulating Urban Growth in the Detroit Region,” Economic Geography, 46, 2 (1970): 234–240. For a more explicitly multidimensional discussion of distance and of whether such distance dependence deserves to be described as a law or as an observed regularity, see Waldo Tobler, “On the First Law of Geography: A Reply,” Annals of the Association of American Geographers, 94 (2) 2004: 304–310.

  41. Even here, there are exceptions having to do with cultural, administrative, and geographic arbitrage. See Pankaj Ghemawat, Redefining Global Strategy (Boston: Harvard Business School Press, 2007), especially chapter 6.

  42. Traditional models of comparative advantage imply the former prediction; models of intraindustry trade based on monopolistic competition are more consistent with the latter.

  43. Edward E. Leamer and James Levinsohn, “International Trade Theory: The Evidence,” in Gene M. Grossman and Kenneth Rogoff, eds., Handbook of International Economics (Amsterdam: Elsevier Science, 1995), 1339–1394.

  44. Many of the differences cited in table 3-1 aren't followed up on in the specific estimation exercise reported on in the text, for varied reasons. Religion didn't work well in past empirical studies, nor did Hofstede-style cultural values. Legal origins are highly correlated with colonial history—which is more sharply measured in terms of colony/colonizer linkages than common colonizers. Political hostility is hard to measure systematically (although prior wars are reported by one study to shrink trade by 80%!). Most countries of any size do not vary much in terms of membership in the usual set of international organizations or ratification of the standard set of international treaties (although the U.S. is an outlier). Data on internal geographic distance continue to be problematic, and systematic, comparable data across broad cross-sections of countries are simply publicly unavailable for many of the kinds of economic differences/distances listed in table 3-
1.

  45. Note that this distance sensitivity is an elasticity in the sense that a distance sensitivity of –x% implies that a 1% increase in geographic distance leads to a predicted x% decrease in trade. The overall effect of geographic distance on trade is proportional to distance raised to the power of that distance sensitivity. For a distance sensitivity of –1, this formula simplifies to relative trade intensity being the reciprocal of relative distance.

  46. This positive effect is consistent with traditional arbitrage theories.

  47. Note that this figure picks up variations in the height of border effects rather than the (average) heights discussed earlier. It thereby quantifies, in a sense, the actual degree of difference, or distance. Also note that among the many dimensions of difference or distance missing from the calculation in the text is one that plays the single biggest role in boosting U.S.-Canadian trade relative to the averages: geographic proximity.

  48. These values are, once again, elasticities. See note 44.

  49. Christian Daude and Marcel Fratzscher, “The Pecking Order of Cross-Border Investment,” European Central Bank working paper series, no. 590, February 2006. Journal of International Economics 74, no. 1 (2008): 94–119.

  50. Jean-Michel Guldmann, “Spatial Interaction Models of International Telecommunication Flows,” Department of City and Regional Planning, Ohio State University (paper prepared for presentation at the 40th Congress of the European Regional Science Association, Barcelona, Spain, September 2000).