“Why the World Isn’t Flat”

Pankaj Ghemawat argues that, as a rule of thumb, US markets have only been about 10% international vs. 90% domestic:picture1

Exporters are in the minority. In 1992, only 21% of U.S. manufacturing plants exported anything.  And the minority of manufacturers who do export still sell most of their output domestically: around 2/3 of exporters sell less than 10% of their output abroad.

Pankaj says:

We seem to live in a world that is no longer a collection of isolated, “local” nations, effectively separated by high tariff walls, poor communications networks, and mutual suspicion. It’s a world that, if you believe the most prominent proponents of globalization, is increasingly wired, informed, and, well, “flat.”

It’s an attractive idea… In truth, the world is not nearly as connected as these writers would have us believe. Despite talk of a new, wired world where information, ideas, money, and people can move around the planet faster than ever before, just a fraction of what we consider globalization actually exists. The portrait that emerges from a hard look at the way companies, people, and states interact is a world that’s only beginning to realize the potential of true global integration. And what these trend’s backers won’t tell you is that globalization’s future is more fragile than you know…

What do such statistics reveal? Most types of economic activity that could be conducted either within or across borders turn out to still be quite domestically concentrated.

One favorite mantra from globalization champions is how “investment knows no boundaries.” But how much of all the capital being invested around the world is conducted by companies outside of their home countries? The fact is, the total amount of the world’s capital formation that is generated from foreign direct investment (FDI) has been less than 10 percent for the last three years for which data are available (2003–05). In other words, more than 90 percent of the fixed investment around the world is still domestic. And though merger waves can push the ratio higher, it has never reached 20 percent.

…The levels of internationalization associated with cross-border migration, telephone calls, management research and education, private charitable giving, patenting, stock investment, and trade, as a fraction of gross domestic product (GDP), all stand much closer to 10 percent than 100 percent. The biggest exception in absolute terms — the trade-to-GDP ratio shown at the bottom of the chart — recedes most of the way back down toward 20 percent if you adjust for certain kinds of double-counting. So if someone asked me to guess the internationalization level of some activity about which I had no particular information, I would guess it to be much closer to 10 percent — the average for the nine categories of data in the chart — than to 100 percent. I call this the “10 Percent Presumption.”

…Consider Canadian-U.S. trade, the largest bilateral relationship of its kind in the world. In 1988, before the North American Free Trade Agreement (NAFTA) took effect, merchandise trade levels between Canadian provinces — that is, within the country — were estimated to be 20 times as large as their trade with similarly sized and similarly distant U.S. states. In other words, there was a built-in “home bias.” Although NAFTA helped reduce this ratio of domestic to international trade — the home bias — to 10 to 1 by the mid-1990s, it still exceeds 5 to 1 today. And these ratios are just for merchandise; for services, the ratio is still several times larger. Clearly, the borders in our seemingly “borderless world” still matter to most people.

Geographical boundaries are so pervasive, they even extend to cyberspace. If there were one realm in which borders should be rendered meaningless and the globalization proponents should be correct in their overly optimistic models, it should be the Internet. Yet Web traffic within countries and regions has increased far faster than traffic between them. Just as in the real world, Internet links decay with distance. People across the world may be getting more connected, but they aren’t connecting with each other. The average South Korean Web user may be spending several hours a day online — connected to the rest of the world in theory — but he is probably chatting with friends across town and e-mailing family across the country rather than meeting a fellow surfer in Los Angeles. We’re more wired, but no more “global.”

…If globalization is an inadequate term for the current state of integration, there’s an obvious rejoinder: Even if the world isn’t quite flat today, it will be tomorrow. To respond, we have to look at trends, rather than levels of integration at one point in time. The results are telling. Along a few dimensions, integration reached its all-time high many years ago. For example, rough calculations suggest that the number of long-term international migrants amounted to 3 percent of the world’s population in 1900 — the high-water mark of an earlier era of migration — versus 2.9 percent in 2005.

Richard Florida has also written about how important geography is for determining economic activity.  The most obvious spikiness of economic output is the transformation of cities over the past couple centuries:

The most obvious challenge to the flat-world hypothesis is the explosive growth of cities worldwide. More and more people are clustering in urban areas—the world’s demographic mountain ranges, so to speak. The share of the world’s population living in urban areas, just three per- cent in 1800, was nearly 30 percent by 1950. Today it stands at about 50 percent; in advanced countries three out of four people live in urban areas.

…Five mega cities currently have more than 20 million inhabitants each. Twenty-four cities have more than 10 million inhabitants, sixty more than 5 million, and 150 more than 2.5 million. Population density is of course a crude indicator of human and economic activity. But it does suggest that at least some of the tectonic forces of economics are concentrating people and resources, and pushing up some places more than others. Still, differences in population den- sity vastly understate the spikiness of the global economy; the continuing dominance of the world’s most productive urban areas is astounding. When it comes to actual economic output, the ten largest U.S. metropolitan areas combined are behind only the United States… and Japan [in economic output]. New York’s economy alone is about the size of Russia’s or Brazil’s, and Chicago’s is on a par with Sweden’s.

…the flat-world theory blinds us to far more insidious tensions among the world’s growing peaks, sinking valleys, and shifting hills. The innovative, talent-attracting “have” regions seem increasingly remote from the talent- exporting “have-not” regions. Second- tier cities, from Detroit and Wolfsburg to Nagoya and Mexico City, are entering an escalating and potentially devastating competition for jobs, talent, and investment. And inequality is growing across the world and within countries. This is far more harrowing than the flat world Friedman describes, and a good deal more treacherous than the old rich-poor divide. We see its effects in the political backlash against globalization in the advanced world.

The recent rejection of the EU constitution by the French, for example, resulted in large part from high rates of “no” votes in suburban and rural quarters, which understandably fear globalization and integration. But spiky globalization also wreaks havoc on poorer places. China is seeing enormous concentrations of talent and innovation in centers such as Shanghai, Shenzhen, and Beijing, all of which are a world apart from its vast, impoverished rural areas.

According to detailed polling by Richard Burkholder, of Gallup, average household incomes in urban China are now triple those in rural regions, and they’ve grown more than three times as fast since 1999; perhaps as a result, urban and rural Chinese now have very different, often conflicting political and lifestyle values. India is growing even lifestyle values. India is growing even more divided, as Bangalore, Hyderabad, and parts of New Delhi and Bombay pull away from the rest of that enormous country, creating destabilizing political tensions. Economic and demographic forces are sorting people around the world into geographically clustered “tribes” so different (and often mutually antagonistic) as to create a somewhat Hobbesian vision.



Ed Glaeser studies cities and says that cities bring opportunities for wealth by reducing the transactions costs of exchanging ideas, goods, and services.

THE CONSTANT INTERCHANGE of ideas has helped cities throughout the developing world find a pathway out of poverty and into prosperity. Average incomes reach a level more than five times higher in countries that are mostly urbanized compared with those in which most of the population stays in the countryside. Across districts in India, mean individual earnings increase by about 20 percent as density doubles, even when individual age and education are constant…

CITIES CAN BREED health as well as economic productivity. Today life expectancy in New York is more than a year higher than the national average. It isn’t entirely clear why older New Yorkers are healthier. Some people credit walking; others talk about social connections made possible by density. But among younger people, the reasons are no mystery. Motor vehicle accidents and suicides are two primary killers of people younger than 35 years, and both are far less common in cities. In New York City the death rate from motor vehicle accidents is more than 70 percent lower than in the country as a whole. Taking the subway after a few drinks is just a lot safer than driving drunk. Cities can also make humankind healthier by producing knowledge. John Snow, a founder of epidemiology, had his great breakthrough in 19th-century London when the city itself provided the information he needed to understand cholera…

[Cities] are where the seeds of revolution against bad government sprout, and living contiguously facilitates the coordination that enables citizens to create reform movements that rise up and oust dictators. Urban uprisings do not always end in stable democracies, but most stable democracies benefited at some time from an urban uprising. Europe’s first modern republic—the Netherlands—had its roots in centuries of popular rebel- lions in the wool-making towns of Flanders, such as Brugge. In the central square of Brugge stands a statue of a weaver and a butcher, urban artisans, who are celebrated not for their crafts but because they helped to organize their fellow guild members in the fight against French royal rule.

…The U.S.’s own uprising had its start in the dense corridors of 18th-century Boston, which connected revolutionaries-to-be such as Samuel Adams and John Hancock. Hancock had a commercial interest in getting crowds to agitate against British mercantilist policies; Adams knew how to conjure a crowd. Together they and their Bostonian allies—John Adams, Paul Revere and many others—became the nucleus of a fight for popular sovereignty.

In the same issue of Scientific American, Geoffrey West tells about the mathematical relationships of scaling

The numbers show that urban dwellers produce more inventions and create more opportunities for economic growth. Often large cities are also the greenest places on the planet because people living in denser habitats typically have smaller energy footprints, require less infrastructure and consume less of the world’s resources per capita. Compared with suburban or rural areas, cities do more with less. And the bigger cities get, the more productive and efficient they tend to become.

…By sifting through this flood of data, covering thousands of cities around the world, we have unveiled several mathematical “laws” that explain how concentrating people in one place affects economic activity, return on infrastructure investment and social vitality. Despite the rich diversity of metropolitan regions across the U.S., China, Brazil and other nations, we found a remarkable universality in the way that socioeconomic characteristics increase with a city’s population. For example, if the population of a city is doubled, whether from 40,000 to 80,000 or from four million to eight million, we systematically see an average increase of around 15 percent in measures such as wages and patents produced per capita. If eight million people all live in one city, their economic output will typically be about 15 percent greater than if the same eight million people lived in two cities of half the size.

We call this effect “superlinear scaling”: the socioeconomic properties of cities increase faster than a direct (or linear) relation to their population would predict… The data also reveal that cities’ use of resources follows a similar, though inverted, law. When the size of a city doubles, its material infrastructure—anything from the number of gas stations to the total length of its pipes, roads or electrical wires—does not. Instead, these quantities rise more slowly than population size: a city of eight million typically needs 15 percent less of the same infrastructure than do two cities of four million each. This pattern is referred to as sublinear scaling. On average, the bigger the city, the more efficient its use of infrastructure, leading to important savings in materials, energy and emissions. What we can say with certainty, however, is that increased population promotes more intense and frequent social interactions, occurrences that correlate with higher rates of productivity and innovation, as well as economic pressures that weed out inefficiencies. In a city with high rents, only activities that add substantial value can be profitable. These economic pressures push urbanites to come up with new forms of organizations, products and services that carry more value added. In turn, higher profitability, excellence, and choice tend to attract more talent to the city, pushing rents higher still, fueling the need to find yet more productive activities. This feedback mechanism, in a nutshell, is the principal reason cities accelerate innovation, while diversifying and intensifying social and economic activity.

…As city population increases … wages … and patents rise even faster… A typical example: St. Louis and Baltimore, with about 2.5 million inhabitants each, generate combined wages of $118 billion, yet Dallas, at five million people, has $130 billion in wages.