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Digital globalization and the developing world
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GLOBALIZATION is entering a new era, defined not only by cross-border flows of goods and capital, but also, and increasingly, by flows of data and information. This shift would seem to favor the advanced economies, whose industries are at the frontier in employing digital technologies in their products and operations. Will developing countries be left behind?
For decades, vying for the world’s low-cost manufacturing business seemed to be the most promising way for low-income countries to climb the development ladder. Since the Great Recession, however, growth in global merchandise trade has stalled, mainly owing to anemic demand in the world’s major economies and plummeting commodity prices.
If trade in global goods has indeed peaked relative to global GDP, it will be harder for poor countries in Africa, Latin America, and Asia to develop by becoming the world’s next workshops.
But globalization itself is not in retreat. While global goods trade has stalled and cross-border financial flows have fallen sharply since 2007, flows of digital information have surged: Cross-border bandwidth use has grown 45-fold over the past decade, circulating ideas, intellectual content, and innovation around the world.
New research from the McKinsey Global Institute (MGI) finds that cross-border flows of goods, services, finance, people, and data during this period increased world GDP by roughly 10 percent — an additional US$7.8 trillion in 2014 alone. Data flows accounted for an estimated US$2.8 trillion of this gain, exerting a larger impact than global goods trade.
Digitization disrupts everything: the nature of goods changing hands; the universe of potential suppliers and customers; the method of delivery, and the capital and scale required to operate globally. It expands opportunities for more types of firms, individuals, and countries to participate in the global economy. It also gives countries and companies everywhere an opportunity to redefine their comparative and competitive advantage. For example, while the United States may have been at a disadvantage in a world where low labor costs were paramount in global manufacturing value chains, digital globalization plays directly to its strengths in technology and innovation.
On its face, this shift to digital globalization would seem to work against developing countries that have large pools of low-cost labor but inadequate infrastructure and education systems.
Advanced economies dominate MGI’s latest Connectedness Index, which ranks countries on both inflows and outflows of goods, services, finance, people, and data relative to their size and share in each type of global flow. These flows are disproportionately concentrated among a small set of countries, including the US, the United Kingdom, Germany, and Singapore, with huge gaps between the leaders and laggards. China is the only emerging economy to have made it to the top ten on the index.
Yet digital flows offer developing countries new ways of engaging with the global economy. The near-zero marginal costs of digital communications and transactions create new possibilities for conducting cross-border business on a massive scale. Alibaba, Amazon and eBay are turning millions of small enterprises around the world into “micro-multinational” exporters. Companies based in developing countries can overcome local market constraints and connect with customers, suppliers, financing, and talent worldwide. Twelve percent of global goods trade is already conducted in ecommerce channels.
Moreover, a country need not develop its own Silicon Valley to benefit. Countries on the periphery of the network of global data flows can benefit more than countries in the center. Digital connections can help developing economies move to the productivity frontier by exposing their business sectors to ideas, research, technologies, and best management and operational practices.
Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Susan Lund is a partner with the McKinsey Global Institute. Copyright: Project Syndicate, 2016.www.project-syndicate.org. Shanghai Daily condensed the article.
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