Professor Bart Smit, associate professor at Unisa’s Graduate School of Business Leadership (SBL), questions whether markets and production are really as global as we like to think.
The widely accepted definition of globalisation has to do with the process of becoming worldwide in scope and the increasing interdependency of nation-states. To judge whether or not globalisation is a myth or fact however, requires a full understanding of what the term means to its critics and advocates.
Prof Smit maintains that, in his view, globalisation of markets and productions is a concept embedded deep in the minds of modern men and women by the definitions of globalisation as opposed to being grounded in the real world.
He suggests that we don’t really understand the concept of globalisation at all as evidenced by his research in this area. “Many South African business executives have a very loose comprehension of globalisation which is in stark contrast to how this plays out, or doesn’t, in world markets and global firms. This is of concern given their perceptions of being ‘global players’ and contributors.”
He notes that deeper analysis of the definitions of globalisation have all at least three common elements. These include the notion of shrinking space, shrinking time and the disappearance of borders.
According to Prof Smit, the conundrum of this view is that deregulation and integration of markets became synonymous to globalisation, with regulation and national borders as the opposite on the other side of the scale. However, evidence shows that borders still matter.
“A common understanding of what deregulation means is apparently the conundrum here. According to definitions of globalisation, deregulation implies the disappearance of borders.
“However, the underlying reason for the deregulation of markets is based on the principle of comparative advantage – that there are gains form trade. This is why GATT was created in 1945, and why the WTO exists, to move away from protectionism towards free and fair trade.
“The basic principle here is that free and fair trade is a positive sum game. Free trade does not imply the disappearance of borders or the emergence of a single world market. The same argument applies to the free movement of capital. Goods, services, and capital flow between countries, not because the world is flat, but because countries differ and borders matter.”
Commonly used measures for globalisation of markets and production are the following ratios: World Exports/World GDP and World Inward FDI/World Gross Capital Formation.
“Data that has been gathered from various sources, including the World Bank shows that around 80% of all goods and services are still produced and consumed locally,” Prof Smit says. “Although exports increased from 18% in the 1980s to 26% in the 2000s, and FDI increased from 3% to 10 % over the same time, 74% of world markets and 90% of all investments remain local.
“As such, our average of exports as a percentage of GDP has remained at 22% and that of FDI as a percentage of total real investment at 6%,” he explains. “As such, our concept of being ‘global players’, is fundamentally flawed.”
Prof Smit cautions that some of the empirical data overstates export figures given that re-exports are included in these figures: “This analysis in itself gives an upward bias to exports as a percentage of GDP and creates a false sense of the degree of globalisation.”
To see if globalisation perceptions reflects current reality, it is critical to interrogate empirical evidence that goes beyond standard economic data , such as, mail, telephone calls, university students, immigrants, charity, patents, venture capital, internet traffic, equity investments, news media, bank deposits and so on; expressed as a percentage of world totals.
According to him, research has shown that the average of both economic and other empirical as a percentage of world totals is closer to 10% rather than the 60% to 80% that business executives perceived it to be.
In a world that is therefore far less global than we would anticipate, and where most firms remain local, Professor Smit therefore advocates for talking less about globalisation and more about the CAGE framework – where there is a focus on cultural (C), administrative (A), geographic (G) and economic (E) elements instead.
“In a world of CAGEs, there is no borderless world or ‘global village’ that operates outside this space. Countries are rather viewed as closed systems rather than the open systems that are described by the definitions of globalisation. This gives one a far more realistic view of the true nature of these relationships.”
In conclusion, Prof Smit notes that while there is certainly a level of globalisation that cannot be ignored, but it is not the dominating factor for the world economy that it is often made out to be.
“To this end, the concept that everyone writes about and that many people – particularly those within the realm of business and politics – use as an excuse for their policies or criticism of policies, is in large part based on the myth that we live in a global village were borders do not matter that much anymore.”