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June 2014
Global Flows in a Digital Age
By John Paul Galles

The McKinsey Global Institute recently issued an analysis of global flows in this digital age—how trade, finance, people, and data connect the world economy. First, they concisely describe global flows over time.

 

Global flows have been a common thread extending through the mercantilist and colonial eras, from trade routes of old such as the renowned Silk Road through the industrial revolutions that swept across Europe and North America in the 18th and 19th centuries to the more recent rise of emerging economies. But today the web of cross-border exchanges has exploded in scope and complexity.

 

The opening up of economies that started in the early 1990s and brought Eastern-bloc countries and Asia fully into the global economy set the stage. However, two major forces are now accelerating the growth and evolution of global flows.

 

The first is increasing global prosperity. By 2025, 1.8 billion people around the world will enter the consuming class, nearly all from emerging markets, and emerging-market consumers will spend $30 trillion annually, up from $12 trillion today. This will create enormous new hubs for consumer demand and global production.

 

The second major force is the growing pervasiveness of Internet connectivity and the spread of digital technologies. More than two-thirds of us have mobile phones. In 2012, there were 2.7 billion people connected to the Internet. A torrent of data now travels around the world. Cross-border Internet traffic grew 18-fold between 2005 and 2012.

 

Here is a summary of their very interesting findings.

 

Global flows are growing and contribute to GDP growth. Flows of goods, services, and finance in 2012 reached $26 trillion, or 36 percent of global GDP—1.5 times as large relative to GDP as they were in 1990. If the spread of digital technologies and rising prosperity in emerging economies continues, global flows could nearly triple by 2025 and boost economic growth.

 

Developed economies remain more connected than emerging markets. However, the latter are rising rapidly. Germany tops the overall list, while the U.S. is third. Among emerging markets that are becoming more connected are Brazil, China, India, Morocco, and Saudi Arabia. “Flow intensity”—the value of flows relative to the size of their economy—is significant. Among the world’s large economies, Germany has a flow intensity of 110 percent, China, 62 percent, Mexico, 78 percent, and India, 61 percent.

 

The knowledge-intensive portion of global flows increasingly dominates. Knowledge-intensive goods flows are growing at 1.3 times the rate of labor-intensive goods flows. Today knowledge-intensive flows account for half of global flows, and they are gaining share. Although developed economies as a group dominate knowledge-intensive flows, China’s knowledge-intensive flows are the world’s second largest.

 

Digitization is transforming and enriching all flows. Digitization reduces the marginal costs of production and distribution and is transforming flows in three ways: through the creation of purely digital goods and services that are either transformations of physical flows or entirely new products, through “digital wrappers” that enhance the value of physical flows, and through digital platforms that facilitate cross-border production and exchange. Moreover, digitization has begun to change the mix of flows. Some goods flows are becoming services flows, for instance. All this is creating significant new opportunities for innovation and disruption.

 

Networks of global flows are broadening and deepening as emerging economies join in. Emerging economies are becoming important as both consumers and producers in the global economy, and account for 38 percent of global flows, nearly triple their share in 1990. South-South trade between developing economies has grown from just 6 percent of goods flows in 1990 to 24 percent in 2012. In absolute terms, the increase has been from $198 billion to $4.4 trillion.

 

Global flows are shaped by—and are influencing—trends in major sectors. As global supply chains become more fragmented and countries specialize in production, flows of intermediate goods (as opposed to final goods) are soaring. Digitization is likely to help to transform global logistics and manufacturing sectors by replacing some physical flows with virtual flows. Digital platforms are enabling new players to participate in sectors ranging from shipping to payments.

 

Companies, entrepreneurs, and individuals have more opportunities to participate. Governments and multinational companies were once the only actors involved in cross-border exchanges, but today digital technologies enable even the smallest company or individual entrepreneur to be a “micro-multinational” that sells and sources products, services, and ideas across borders. Traditional business models are being challenged by micro-scale activities ranging from micro-work to micropayments and micro-shipments.

 

The McKinsey report portrays the new era of dramatically broadening and deepening global flows will create many new opportunities for governments and companies to drive growth and innovation and will open the door to greater participation by entrepreneurs and individuals. It also points out the necessity for new investments and focused policies, and challenges in dealing with new types of competitors—both at home and abroad.

 

Their parting words are food for thought: Finding ways to harness the positive potential of global flows to raise living standards and shared prosperity while mitigating the risks is imperative. The cost of being left behind—for countries, companies, and individuals—is rising.

 

 

See the complete April 2014 analysis at:

http://www.mckinsey.com/insights/globalization/global_flows_in_a_digital_age

 

See the Web of World Trade at:

http://www.ritholtz.com/blog/2014/06/the-web-of-world-trade/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBigPicture+(The+Big+Picture)

 

John Paul Galles is the publisher of Greater Charlotte Biz.
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