'World is not Flat' hypothesis

Harvard Business School Professor Pankaj Ghemawat has written a new book, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter, which counters the popularly held notion made famous by New York Times columnist, Thomas L Friedman, that the "World is Flat". He argues that the world is only partly globalized or "semi-globalized", in which "neither the bridges nor the barriers between countries can be ignored", and even questions whether the world is actually becoming flat.

The HBS website carries an interview of Prof Ghemawat. He marshals global economic statistics to argue that the world is not that integrated as is being made out to be,

"The most commonly cited figure concerns international trade, which represents more than 25 percent of most economies. But when I began to research a broader range of measures including investment, phone calls, tourism, and immigration, I found that, surprisingly, the average extent of globalization is only 10 percent. For example, for every dollar of capital investment globally, only a dime is accounted for by foreign direct investment."

Prof Ghemawat identifies four dimensions of globalisation - cultural, administrative/political, geographic, and economic. In the first three dimensions, there can be no doubt that the world is far from flat, and is at best moving towards some form of semi-globalization. In fact, the emerging trends strongly points towards strengthening sub-national and local cultures, growing national identities and entrenched national governments. Border controls and national boundaries continue to be sacrosanct, and free movement of labor remains a distant dream. Economically too, apart from a few functioning Free Trade Areas (FTAs), the national economy remains overwhelmingly dominant over the global economy. Even in terms of economic globalisation, many studies have shown up surprisingly small levels of economic integration.

A few recent phenomena lends further credence to the semi-globalized world hypothesis. The global financial markets were deeply influenced by the carry trades, wherein forex traders borrowed in low interest rate Japan (the policy of the Bank of Japan to hold yen low made the yen carry trade a relatively low risk activity) to invest in financial markets where interest rates were relatively higher. It is estimated that over $ 1 trillion was traded in yen carry trade this year alone. Theoretically, in a flat world, and global financial markets are today as flat as they can get, such arbitrage oppportunities cannot be sustained. Speculative shorting of yen to invest in high-yielding assets elsewhere, calmed down only when the yen started rising against the dollar. Arbitrage opportunities for various financial instruments across geographical boundaries, continues to provide the biggest margins for most participants in the global financial markets.

The law of one price, one of the most fundamental concepts in economics, is as distant as ever in the real world of commodities and manufactured goods. This is despite the increasing role of internet in sales of these goods. Thus, as Prof Ghemawat analyses, the prices of some of the global commodities like Coke varies across countries by much more than what theory would suggest. The prices of a Mac burger, that ubiquitous symbol of flatism according to Tom Friedman, is another example of such variation. (The The Economist's Mac Index captures the reality) Multinational companies have different marketing and pricing strategies for different markets. In fact, studies have shown a massive extent of product differentiation across national markets, and this is showing an increasing trend.

The overwhelming evidence would point towards the world being not just topographically uneven, but also economically and socially far from being flat!