The Globalization Index 2007
http://www.foreignpolicy.com/story/cms.php?story_id=3995
The world may not be flat for everyone, everywhere, but there’s no turning back the clock on globalization. For the seventh year, FOREIGN POLICY partners with A.T. Kearney to measure countries on their economic, personal, technological, and political integration. Find out who’s climbing the ranks, and who’s sliding down.
Never before have the forces of globalization been so evident in our daily lives. An estimated 2 billion people witness Live Earth, a series of concerts held in 11 locations around the world to raise environmental awareness. Chinese manufacturers decorate toys with paint containing lead, and children around the world have to give up their Batmans and Barbie dolls. Mortgage lenders in the United States face a liquidity crunch, and global stock markets go berserk. Good, bad, and ugly—the effects of our supposedly “flattened” world are undeniable. But just how strong are these ties that bind? As former U.N. Secretary-General Kofi Annan once remarked, “Globalization is a fact of life. But I believe we have underestimated its fragility.”
That fragility is particularly apparent in this edition of the Globalization Index, the seventh annual collaboration between FOREIGN POLICY and A.T. Kearney. This year’s index draws on data from 2005, a year that, on the surface, exemplified the limitations of globalization’s reach. It began with the fallout from the devastating Indian Ocean tsunami, which left at least 300,000 dead, in part because there was no transnational network for emergency alerts in the region. Eight months later, similar scenes unfolded when Hurricane Katrina hit New Orleans, where the benefits of globalization failed to reach the poorest citizens of the world’s wealthiest country. Not long afterward, an earthquake devastated Pakistan-administered Kashmir, where officials put the death toll at 75,000, with more than 2.5 million left homeless.
The limits of globalization weren’t evident only against the backdrop of natural disasters; there were political fault lines, too. Sectarian violence continued to escalate in Iraq. Iran traded the conciliatory Mohammed Khatami for a more isolationist president, Mahmoud Ahmadinejad, who called for Israel to be “wiped off the map.” North Korea announced it had nukes. Voters in France and the Netherlands rejected a new European Constitution. And four suicide bombers terrorized London on July 7 with coordinated attacks on public transportation.
Despite the turmoil in many parts of the world, nations did prove they could play nice with each other. The Middle East was home to some unexpected moments of cooperation, with Israel’s withdrawal from settlements in Gaza and the West Bank, and Syria’s pulling its forces from Lebanon after a 29-year occupation. On the economic front, cooperation in regional trading blocs grew, even as the Doha round of global trade talks continued to stumble. The United States approved a free trade agreement with the Dominican Republic and Central American nations, and Southeast Asian economies implemented several bilateral agreements of their own.
The inevitable push and pull of globalization plays out in the index’s rankings, which incorporate indicators such as trade, foreign direct investment, participation in international organizations, travel, and Internet usage to determine rankings of countries around the world. This year, we added 10 states to the original list of 62 in an effort to expand representation from various regions. Together, the 72 countries account for 97 percent of the world’s gross domestic product and 88 percent of the world’s population. The index measures 12 variables, which are grouped into four “baskets”: economic integration, personal contact, technological connectivity, and political engagement.
The results provide an assessment of how much, or how little, countries are opening themselves up and connecting with others. For example, the International Convention for the Suppression of the Financing of Terrorism welcomed new participants including Argentina, Brazil, Egypt, and Ireland, which boosted their political engagement scores. On the other hand, many countries made fewer contributions to U.N. peacekeeping, both in terms of financial aid and personnel—showing that even the most globalized countries face challenges in maintaining openness.
Cultural factors can curb the benefits of globalization, too. For instance, France’s collective nationalism tilts the scale in favor of home-grown agriculture, and the United States’ fears of terrorism make foreign management of ports an unpalatable prospect—cultural clues that may partially explain why both countries have a relatively low economic ranking on the index. Perhaps the area of the world that bears the brunt of globalization’s economic failures is sub-Saharan Africa. Despite attempts to increase regional trade—Kenya, Tanzania, and Uganda launched an East African Community Customs Union that established common external tariffs—a large informal economy, accounting for more than half the workforce, makes it nearly impossible for governments to raise the revenue they need.
In 2005, the world’s richest nations took some steps to acknowledge that not everyone has reaped globalization’s rewards. As part of its summit in Gleneagles, Scotland, leaders of the Group of Eight industrialized nations pledged $40 billion worth of debt forgiveness and an additional $50 billion in foreign aid to Africa. They also promised more peacekeeping troops and assistance in eradicating disease. To date, Africa has seen more assistance in some areas than others. Ultimately, it may take several years to see if globalization and good intentions can make the world a little bit flatter.
The Winners’ Circle
For the fourth time in seven years, Singapore tops the list as the most globalized country in the world. But there was plenty of movement in the rest of the top 20. Many of the countries that previously ranked high fell off because of stiff competition from newcomers to the index. The top new addition was Hong Kong, which debuted in second place and distinguished itself with the highest scores in both the economic and the personal contact dimensions. The Netherlands made its way back into the top three for the first time since 2001, mostly due to the merger of the Royal Dutch Petroleum Company and Britain’s Shell Transport and Trading Company. Worth about $100 billion, the deal helped to increase foreign direct investment outflows for the Netherlands by more than 590 percent over the previous year. Meanwhile, the United States slipped four places in the overall rankings to end up at seventh. Although U.S. trade grew by 12 percent, foreign investment shrank by more than 60 percent, mostly due to the effects of the 2004 American Jobs Creation Act, which granted tax incentives for hiring domestically. Clearly, the forces of globalization can turn on a dime.
Small, but Powerful
If there is one big factor that many of the most globalized countries have in common, it’s their size: They’re tiny. Eight of the index’s top 10 countries have land areas smaller than the U.S. state of Indiana; and seven have fewer than 8 million citizens. Canada and the United States are the only large countries that consistently rank in the top 10.
So, why do small countries rank so high? Because, when you’re a flyweight, globalizing is a matter of necessity. Countries such as Singapore and the Netherlands lack natural resources. Countries like Denmark and Ireland can’t rely on their limited domestic markets the way the United States can. To be globally competitive, these countries have no choice but to open up and attract trade and foreign investment—even if they’re famously aloof Switzerland.
Indeed, economic integration is where these top-performing, tiny countries flex their muscle. All eight rank in the top 11 on the economic dimension of globalization, which incorporates trade and foreign direct investment. Hong Kong and Singapore, the top two performers in this category, leave other economies in the dust. Additionally, the World Bank placed all the high-ranking, small countries except Jordan in the top 25 out of 175 economies in ease of doing business. Jordan, though, ranks first on the index’s measure of political engagement, due to its participation in treaties and U.N. peacekeeping missions.
And if you’re living in a small country, reaching out beyond your country’s borders may be the only way to find new opportunities. Not surprisingly, six of this year’s tiny globalizers also ranked in the top 10 on the personal dimension of globalization, which measures international phone calls, travel, and remittances. People in small countries boosted their countries’ rankings by chatting it up on the phone, or in the case of Jordan, by sending large sums of money home. It all goes to show that mini can be mighty.
Olympic Ambitions
There is perhaps no greater—or more expensive—stage in the world than the Olympics. Just ask China, which is pouring $40 billion into its preparations for next year’s games. Beijing has already completed construction on all but one of 37 new sporting venues. The government has disseminated etiquette booklets, and Olympic organizers are teaching conversational English to millions of residents in order to welcome an expected 300,000 foreign tourists. Beijing has even set up an Office of Weather Manipulation, which has employed scientists to investigate how to prevent rain during outdoor events. Other Olympic-sized projects could push the total to $67 billion by the time the games roll around next summer, more than four times the record-breaking amount that Athens spent in 2004.
But does all the copious cash and international publicity really pay off? Maybe not. If you look at recent host countries, the Olympic effect was negligible at best. There isn’t much of a long-term tourism uptick; both Japan in 1998 and the United States in 2002 experienced no increase in international travel before, during, or after hosting the Winter Olympics. The Summer Games, on the other hand, can provide a small economic boost. Australia and Greece enjoyed an investment spike of more than 100 percent when they hosted in Sydney in 2000 and Athens in 2004, mostly because of increased outlays in infrastructure, retail, and entertainment ahead of the games. But foreign investment dipped again the following year. And these marginal spikes weren’t enough to improve a country’s overall ranking in the index. Greece, in fact, has dropped steadily in the rankings every year.
All this, of course, may not mean much for China. Recent hosts already ranked fairly high on the index, and so may have had less to gain. China, on the other hand, is still a bastion of authoritarianism and ranks only 66th overall, lagging behind in international telephone contact and political engagement. There’s still hope that the games will goose communications with the outside world, encourage Beijing to loosen its grip, and perhaps even make businesses more accountable to international standards. But as with any Olympic event, we won’t know the outcome until it’s over.
Trafficking in Information
An advanced highway system is often credited for the rise of the Roman Empire; goods, soldiers, and tax revenues could move across great distances at remarkable speed for the age. But if all roads once led to Rome, today’s Internet superhighway leads to the world’s most open countries. More-globalized countries tend to have more international Internet bandwidth, a measure of the size of the “pipe” through which e-mail and Web pages cross borders. The United States leads the way in the amount of international cybertraffic it can handle; indeed, its capacity is so large, most e-mails zooming between Latin America and Europe pass through the United States. Likewise, London is a leading transit point for trans-Atlantic traffic destined for Europe. The sun may have set on the British Empire, but it is still a Heathrow of cyberspace.
Urban Outfitted
Cities can be a blessing or a curse. Millions leave their villages each year and head to bustling cities to find a better life. But urban centers can also be home to massive slums or sprawl—and the crime, disease, and poverty that come with it. It is generally true that the more urban a country, the more globalized it tends to be. Top-ranking Singapore is the best example; it is 100 percent urban, and its citizens are well educated and relatively affluent. Meanwhile, a less globalized society like Bangladesh is a quarter urban. In fact, less globalized countries often have faster-growing cities. And that is hardly good news. For example, in low-ranking Nigeria, the urban jungle grows by more than 2.5 million people each year. Dhaka, the capital of Bangladesh, was originally designed for a population of 1 million people; today that number stands at 12 million, and demographers predict that the city will be home to more than 23 million people by 2015. Pressures that great can push any city beyond its breaking point.
Baltic Tiger
Milton Friedman would be at home in Estonia. That’s because the small former Soviet republic has put many of the late Nobel Prize-winning economist’s ideas to the test. The result? Estonia, having shaken itself free from its communist-era shackles, may now qualify as the first Baltic Tiger; it debuts this year at number 10 in the index.
In keeping with Friedman’s free-market philosophy, the country’s government has moved aggressively to open itself up to the outside world. For all practical purposes, Estonia has no corporate income tax, and shareholder dividends are subject to a simple flat tax. Bureaucracy isn’t a problem, either; the government just steps aside to let investors do their thing. The World Bank ranks Estonia 17th among 175 economies in ease of doing business, and sixth in ease of trading across borders. Additionally, the government places no restrictions on foreign ownership of real estate, which has fueled a property investment boom among overseas buyers.
Although the index ranks Estonia 21st in technological connectivity, the country seems poised to pounce higher. The country, dubbed by some as “E-Stonia,” has launched a large online government initiative and even declared Internet access a fundamental human right. In March, it held the world’s first general election that allowed e-voting over the Web.
Former Prime Minister Mart Laar, who stepped down in 2002, is widely credited with introducing most of the policies that have helped his country roar ahead of the pack. But among his many awards and accolades, one seems particularly apt: the Cato Institute’s Milton Friedman Prize.
Standing Still
In 2005, member states of the Association of Southeast Asian Nations (ASEAN) implemented bilateral free trade agreements with Australia, India, Jordan, and New Zealand, were negotiating for eight more trade pacts, and started early talks for regional agreements with four other countries. Exports in the region jumped nearly 15 percent, and inflows of foreign direct investment rose 45 percent. Overall trade was up more than 70 percent from four years earlier.
It would seem that ASEAN has fully recovered from the Asian financial crisis of 10 years ago. Multinational corporations continue to invest in the region, increasingly adopting business strategies in which they build a second manufacturing plant in an ASEAN nation as a backup in case things go downhill in China. Yet, with the exception of perennial champion Singapore, the region’s countries place relatively low on the index. And if the addition of new countries is taken into consideration, Southeast Asian nations’ relative rankings remain virtually unchanged from last year. Why the stagnation? Simply put, there’s been little trickle-down effect. As former U.S. President Jimmy Carter once said, “If you’re totally illiterate and living on $1 a day, the benefits of globalization never come to you.” Take Thailand, for example. The country ranks an impressive seventh in trade, with exports growing 14 percent and imports jumping 25 percent between 2004 and 2005. But the fruits of economic growth, such as improved technological infrastructure, are still not available to most people in Thailand; the country ranks 49th in Internet access. Although the number of Internet users in Thailand is growing between 20 and 30 percent each year, nearly 85 percent of them are concentrated in urban areas. Unsurprisingly, Thailand’s cities are home to better education systems, higher investment in infrastructure, and more employment. The benefits of globalization rarely reach the 68 percent of the population that lives in rural areas.
Southeast Asian countries also continue to rank poorly in international political participation. Malaysia may rank third in trade, but it places an abysmal 63rd in the political dimension. You don’t exactly see a lot of Malaysian troops deployed around the globe on U.N. peacekeeping missions. Nor do you see Southeast Asian nations donating much foreign aid. The region certainly has been a beneficiary of international political cooperation—most notably with relief efforts in the aftermath of the devastating tsunami in December 2004. Perhaps the political rankings of ASEAN states will go up as they find ways to give back. Indonesia, which ranks 67th in participation in U.N. peacekeeping missions, recently offered to contribute troops to a joint U.N.-African Union effort in Darfur. Such initiatives may help it lead the ASEAN pack in the years ahead.
Methodology
The A.T. Kearney/FOREIGN POLICY Globalization Index tracks and assesses changes in four key components of global integration, incorporating measures such as trade and investment flows, movement of people across borders, volume of international telephone calls, Internet usage, and participation in international organizations.
The 72 countries ranked in the 2007 Globalization Index account for 97 percent of the world’s gross domestic product (GDP) and 88 percent of the world’s population. Major regions of the world, including developed and developing countries, are covered to provide a comprehensive and comparative view of global integration.
Economic integration combines data on trade and foreign direct investment (FDI) inflows and outflows. Personal contact tracks international travel and tourism, international telephone calls, and cross-border remittances and personal transfers (including worker remittances, compensation to employees, and other person-to-person and nongovernmental transfers).
Technological connectivity counts the number of Internet users, Internet hosts, and secure servers through which encrypted transactions are carried out. Finally, political engagement includes each country’s memberships in a variety of representative international organizations, personnel and financial contributions to U.N. peacekeeping missions, ratification of selected multilateral treaties, and amounts of governmental transfer payments and receipts.
For most variables, each year’s inward and outward flows are added, and the sum is divided by the country’s nominal economic output (GDP) or, where appropriate, its population. Two of the political engagement indicators remain as absolute numbers: memberships in international organizations and number of treaties ratified. A country’s contributions to U.N. peacekeeping missions are measured as a weighted average of financial contribution divided by the country’s GDP, and the country’s personnel contribution divided by the country’s population. Hence, the indicator counts a country’s contributions relative to its capacity to contribute, rather than the absolute size of contribution. This overall process produces data for each year that enable comparisons between countries of all sizes.
The resulting data for each given variable are then “normalized” through a process that assigns values to data points for each year relative to the highest data point that year. The highest data point is valued at 1, and all other data points are valued as fractions of 1.
The range of normalized scores for each variable each year is then multiplied by a “scale factor.” For simplicity’s sake, the base year (1998 in this case) is assigned a value of 100. The given variable’s scale factor for each subsequent year is the percentage growth or decline in the GDP- or population-weighted score of the highest data point, relative to 100. With the scale factor, comparisons between countries in the same year are preserved, and comparisons between changes in individual variables over time are possible.
Country variable scores are then summed, with triple weighting on FDI and double weighting on trade due to those factors’ particular importance in the ebb and flow of globalization. Technological variables and political variables are each collapsed into single indicators, with equal weightings for the component variables. Globalization Index scores for every country and year are derived by summing all the indicator scores.
Total Trade
Goods, imports + Goods exports + Services, credits + Services, debits
Total Trade as a Share of GDP
1 Singapore 456.0%
2 Hong Kong, China 385.0%
3 Malaysia 223.2%
4 Belgium 168.3%
5 Estonia 165.2%
6 Slovak Republic 160.0%
7 Thailand 148.9%
8 Ireland 148.7%
9 Jordan 145.1%
10 Vietnam 141.7%
11 Czech Republic 141.2%
12 Panama 138.0%
13 Bulgaria 137.6%
14 Hungary 135.3%
15 Slovenia 129.2%
16 Netherlands 127.4%
17 Taiwan 126.2%
18 Austria 109.4%
19 Croatia 105.4%
20 Costa Rica 102.5%
21 Ukraine 102.4%
22 Switzerland 101.0%
23 Tunisia 100.6%
24 Philippines 100.0%
25 Ghana 97.7%
26 Denmark 92.1%
27 Sweden 91.6%
28 Israel 88.7%
29 Botswana 88.0%
30 Saudi Arabia 83.8%
31 Korea, Rep. 81.9%
32 Morocco 80.4%
33 Finland 78.4%
34 Nigeria 78.0%
35 Romania 76.8%
36 Germany 76.4%
37 Sri Lanka 76.3%
38 Poland 74.6%
39 Chile 72.7%
40 Egypt, Arab Rep. 72.4%
41 Norway 72.1%
42 Canada 71.8%
43 Senegal 69.4%
44 China 69.0%
45 Portugal 65.9%
46 Indonesia 65.1%
47 Kenya 62.3%
48 Turkey 62.0%
49 Mexico 61.7%
50 Venezuela, RB 59.8%
51 New Zealand 58.5%
52 Spain 56.8%
53 United Kingdom 56.7%
54 Russian Federation 56.7%
55 Iran 56.4%
56 South Africa 55.8%
57 Tanzania 53.3%
58 France 53.2%
59 Italy 52.2%
60 Uganda 45.3%
61 Argentina 44.8%
62 India 43.9%
63 Pakistan 43.6%
64 Peru 43.6%
65 Greece 41.7%
66 Bangladesh 41.2%
67 Australia 40.6%
68 Colombia 40.0%
69 Japan 28.2%
70 Brazil 26.3%
71 United States 26.2%
72 Algeria 11.1%
Foreign Direct Investment
Sum of FDI inflows and outflows divided by GDP
Rank Country FDI 2005
1 Hong Kong, China 38.51%
2 Netherlands 25.89%
3 Estonia 25.13%
4 Denmark 24.08%
5 Singapore 21.94%
6 Ireland 17.79%
7 Panama 14.06%
8 Switzerland 13.27%
9 Belgium 12.51%
10 Jordan 12.05%
11 Colombia 12.04%
12 United Kingdom 11.91%
13 Sweden 10.97%
14 Australia 10.60%
15 Czech Republic 9.56%
16 Bulgaria 9.50%
17 Ukraine 9.39%
18 France 8.43%
19 Chile 7.41%
20 Hungary 7.21%
21 Romania 6.49%
22 Israel 6.22%
23 Egypt, Arab Rep. 6.09%
24 Morocco 6.02%
25 Canada 6.00%
26 Austria 5.96%
27 Norway 5.92%
28 Spain 5.48%
29 Malaysia 5.30%
30 Croatia 4.89%
31 Slovak Republic 4.33%
32 Botswana 3.96%
33 Vietnam 3.81%
34 Tanzania 3.76%
35 China 3.73%
36 Finland 3.71%
37 Nigeria 3.66%
38 Russian Federation 3.63%
39 Costa Rica 3.49%
40 Italy 3.36%
41 Peru 3.32%
42 Argentina 3.21%
43 Mexico 3.16%
44 Slovenia 3.09%
45 Venezuela, RB 3.08%
46 Poland 3.03%
47 Turkey 2.97%
48 Uganda 2.96%
49 Indonesia 2.90%
50 Germany 2.80%
51 Tunisia 2.75%
52 New Zealand 2.68%
53 South Africa 2.66%
54 Portugal 2.29%
55 Thailand 2.23%
56 Taiwan 2.21%
57 Pakistan 2.01%
58 Brazil 1.99%
59 Saudi Arabia 1.87%
60 Ghana 1.46%
61 Korea, Rep. 1.45%
62 Sri Lanka 1.32%
63 Philippines 1.32%
64 Bangladesh 1.14%
65 Algeria 1.08%
66 Japan 1.07%
67 India 1.02%
68 Senegal 0.97%
69 United States 0.90%
70 Greece 0.72%
71 Kenya 0.16%
72 Iran, Islamic Rep. 0.06%
