Information and development: Globalisation in transition
Phuah Eng Chye (3 August 2019)
In a recent report, the McKinsey Global Institute (MGI) suggests “important structural changes in the nature of globalization have gone largely unnoticed” and that “globalization is in the midst of a transformation”. They point out “global value chains are being reshaped by rising demand and new industry capabilities in the developing world as well as a wave of new technologies”. MGI suggest global value chains are undergoing five structural shifts.
- Goods-producing value chains have grown less trade-intensive. Trade is still growing in absolute terms, but the share of output moving across borders has fallen from 28.1 percent in 2007 to 22.5 percent in 2017. The decline in trade intensity is especially pronounced in the most complex and highly traded value chains. This trend reflects that China and other emerging economies are now consuming more of what they produce.
- Services play a growing and undervalued role in global value chains. In 2017, gross trade in services totalled $5.1 trillion, a figure dwarfed by the $17.3 trillion global goods trade. But trade in services has grown more than 60 percent faster than goods over the past decade. The full role of services is obscured in traditional trade statistics. First, services create roughly one-third of the value that goes into traded manufactured goods. In addition, imported services are substituting for domestic services in nearly all value chains. In the future, the distinction between goods and services will continue to blur as manufacturers increasingly introduce new types of leasing, subscription, and others as service business models. Second, intangible assets represent tremendous value, but they often go unpriced and untracked unless captured as intellectual property charges. Finally, trade statistics do not track soaring cross-border flows of free digital services, including email, real-time mapping, video conferencing, and social media. They estimate these three channels collectively produce up to $8.3 trillion in value annually – a figure that would increase overall trade flows by $4.0 trillion (or 20 percent) and reallocate another $4.3 trillion currently counted as part of the flow of goods to services.
- Trade based on labor-cost arbitrage is declining in some value chains. MGI points out that contrary to perception, today only 18 percent of goods trade is based on labor-cost arbitrage. The share of trade based on labor-cost arbitrage has been declining in some value chains, especially labor-intensive goods manufacturing (where it dropped from 55 percent in 2005 to 43 percent in 2017). This mainly reflects rising wages in developing countries. In the future, automation and AI may amplify this trend, transforming labor-intensive manufacturing into capital-intensive manufacturing with important implications for how low-income countries participate in global value chains.
- Global value chains are growing more knowledge-intensive. In all value chains, capitalized spending on R&D and intangible assets such as brands, software, and IP is growing as a share of revenue; rising from 5.4 percent of revenue in 2000 to 13.1 percent in 2016. In many value chains, value creation is shifting to upstream activities, such as R&D and design, and to downstream activities, such as distribution, marketing, and after-sales services. The share of value generated by the actual production of goods is declining (in part because offshoring lowered the prices of many goods). This trend is pronounced in pharmaceuticals and consumer electronics, which have seen the rise of virtual manufacturing companies that focus on developing goods and that outsource actual production to contract manufacturers.
- Value chains are becoming more regional and less global. Reversing a long-term trend, the intra-regional share of global goods trade has increased by 2.7 percentage points since 2013, partially reflecting the rise of emerging-market consumption. This development is most noticeable for Asia and the EU-28 countries. Regionalization is most apparent in global innovation value chains, given their need to closely integrate many suppliers for just-in-time sequencing. This trend could accelerate in other value chains as well, as automation reduces the importance of labor costs and increases the importance of speed to market in company decisions about where to produce goods.
MGI highlighted several salient points on the changing patterns of globalisation. First, “one of the forces reshaping global value chains is a change in the geography of global demand…The map of global demand, once heavily tilted toward advanced economies, is being redrawn – and value chains are reconfiguring as companies decide how to compete…McKinsey estimates that emerging markets will consume almost two-thirds of the world’s manufactured goods by 2025, with products such as cars, building products, and machinery leading the way. By 2030, developing countries are projected to account for more than half of all global consumption. These nations continue to deepen their participation in global flows of goods, services, finance, people, and data”.
This “offers an opportunity for exporters in advanced countries. Only 3 percent of exports from advanced economies went to China in 1995, but that share was up to 12 percent by 2017. The corresponding share going to other developing countries grew from 20 to 29 percent. In total, advanced economies’ exports to developing countries grew from $1 trillion in 1995 to $4.2 trillion in 2017. In the automotive industry, Japan, Germany, and the United States send 42 percent of their car exports to China and the rest of the developing world. In knowledge-intensive services, 45 percent of all exports from advanced economies go to the developing world”.
In addition, as China and the other emerging economies have matured and moved “beyond assembling imported inputs into final products. It now produces many intermediate goods and conducts more R&D in its own domestic supply chains…The decline in trade intensity reflects growing industrial maturity in emerging economies. Over time, their production capabilities and consumption are gradually converging with those of advanced economies. Declining trade intensity in goods does not mean globalization is over; rather, digital technologies and data flows are becoming the connective tissue of the global economy”.
Second, the “new technologies are changing costs across global value chains”. In this regard, “the explosive growth of cross-border data flows…From 2005 to 2017, the amount of cross-border bandwidth in use grew 148 times larger…Instant and low-cost digital communication has had one clear effect: lowering transaction costs and enabling more trade flows. But the impact of next-generation technologies on global flows of goods and services will not be as simple. The net impact is uncertain, but in some plausible scenarios, the next wave of technology could dampen global goods trade while continuing to fuel service flows”.
MGI notes three sets of technologies will continue to reduce cross-border frictions in the years ahead. “Digital platforms such as E-commerce marketplaces have already enabled significant cross-border flows by aggregating huge selections and making pricing and comparisons more transparent”. New logistics technologies “could reduce shipping and customs processing times by 16 to 28 percent…could potentially boost overall trade by 6 to 11 percent by 2030”. “The growing adoption of automation and advanced robotics in manufacturing makes proximity to consumer markets, access to resources, workforce skills, and infrastructure quality assume more importance as companies decide where to produce goods…Companies in advanced economies are already automating some customer support services rather than offshoring them. This could reduce the $160 billion global market for business process outsourcing (BPO), now one of the most heavily traded service sectors…we estimate that automation, AI, and additive manufacturing could reduce global goods trade by up to 10 percent by 2030, as compared to the baseline…It is also possible that these technologies could lead to nearshoring and regionalization of trade instead of reshoring in advanced economies. Moreover, developing countries could adopt these technologies to improve productivity and retain production, thereby sustaining trade”.
Third, technology is transforming products and services, altering the content and volume of trade flows in the process. “The shift from physical to digital flows that started years ago with individual movies, albums, and games is now evolving once again with streaming and subscription models. Streaming now accounts for nearly 40 percent of global recorded music revenues. Cloud computing uses a similar pay-as-you-go or subscription model for storage and software, freeing users from making heavy capital investments in their own IT infrastructure. The advent of ultra-fast 5G wireless networks opens new possibilities for delivering services. Remote surgery, for example, may become more viable as networks transmit sharp images without any delays and robots respond more precisely to remote manipulation. In industrial plants, 5G can support augmented and virtual reality–based maintenance from remote locations, creating new service and data flows”. In addition, the shift to electric vehicles (EVs) could reduce trade in vehicle parts since EVs have many fewer moving parts than traditional models and dampen oil imports.
The changing patterns of trade support the hypothesis that globalisation is an information driven process. Global exchange benefits from advances in communications, exchange of ideas and cultures and cooperation. Changing information capabilities not only changes the composition of trade content, it leads to the globalisation of information effects such as intangibility, size, speed and transparency.
In this context, the emergence of networks has affected geo-political dynamics. Jean Pisani-Ferry’s hypothesis is that “transformations in the global economy have been re-established centrally from intangible investments, to digital networks, to finance and exchange rates”. In this context, “history proved the conventional wisdom wrong”; that rich countries would get richer and poor countries poorer. “The single most important economic development of the last 50 years has been the catch-up in income of a significant group of poor countries”.
Jean Pisani-Ferry notes that the world emerging from centrality “does no longer looks flat anymore. It looks spiky”. “One reason for this is that in an increasingly digitalised economy, where a growing part of services are provided at zero marginal cost, value creation and value appropriation concentrate in the innovation centers and where intangible investments are made. This leaves less and less for the production facilities where tangible goods are made”.
In addition, “digital networks also contribute to asymmetry. A few years ago, it was often assumed that the Internet would become a global point-to-point network without a center. In fact, it has evolved into a much more hierarchical hub-and-spoke system, largely for technical reasons: the hub-and-spoke structure is simply more efficient. But…a network structure provides considerable leverage to whoever controls its nodes”.
“This new reading of international interdependence has two major consequences”. The first consequence is to magnify “the centrality of US monetary policy for all countries, big and small” such that “the dollar exchange rate of the two countries’ currencies matters more than their bilateral exchange rate”. In this regard, “the distribution of gains from openness and participation in the global economy is increasingly skewed. More countries wonder what’s in it for them in a game that results in uneven distributive outcomes and a loss of macroeconomic and financial autonomy. True, protectionism remains a dangerous lunacy. But the case for openness has become harder to make”.
“The second major consequence of an un-flattened world is geopolitical: a more asymmetric global economic system undermines multilateralism and leads to a battle for control of the nodes of international networks…weaponised interdependence: the mutation of efficient economic structures into power-enhancing ones”. “US President Donald Trump’s ruthless use of the centrality of his country’s financial system and the dollar to force economic partners to abide by his unilateral sanctions on Iran has forced the world to recognise the political price of asymmetric economic interdependence. In response, China (and perhaps Europe) will fight to establish their own networks and secure control of their nodes. Again, multilateralism could be the victim of this battle. A new world is emerging, in which it will be much harder to separate economics from geopolitics”.
Overall, analysis of globalisation has traditionally focused on goods, finance and services. The changing trading patterns and geo-politics means greater attention should be paid to the information elements of globalisation. In particular, there is a need to assess future prospects for globalisation due to the changing geo-political dynamics.
Henry Farrell, Abraham L. Newman (2018) “Weaponized interdependence”. http://henryfarrell.net/wp/wp-content/uploads/2018/11/Weaponized-Interdependence_IS.pdf
Jean Pisani-Ferry (2 July 2019) “Farewell, flat world”. http://bruegel.org/2019/07/farewell-flat-world/
Phuah Eng Chye (15 July 2017) “The significance of information effects”.
Susan Lund, James Manyika, Jonathan Woetzel, Jacques Bughin, Mekala Krishnan, Jeongmin Seong, Mac Muir (January 2019) “Globalization in transition: The future of trade and value chains”. McKinsey Global Institute (MGI). https://www.mckinsey.com/featured-insights/innovation-and-growth/globalization-in-transition-the-future-of-trade-and-value-chains
 The ratio of gross exports to gross output.
 Defined as exports from countries whose GDP per capita is one-fifth or less than that of the importing country.
 such as Vietnam, Bangladesh, Malaysia, India, and Indonesia.
 “The significance of information effects”.
 Jean Pisani-Ferry notes Gunnar Myrdal, Andre Gunder Frank and François Perroux “warned of rising inequality among countries, the development of underdevelopment, and economic domination”.
 Jean Pisani-Ferry cites a recent paper by Henry Farrell and Abraham Newman.
 See Henry Farrell and Abraham Newman.