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Welcome To Globalization 2.0. Or Is It 3.0?

Dr. Harry G. Broadman

By Harry Broadman

(Forbes) – It’s a safe bet that most Millennials and Generation Xers, and probably even many Baby Boomers, think that “globalization” is a modern phenomenon, having its start in the very latter part of the 20th Century.

Yet the notion that far-flung cross-border trade and investment flows began during our lifetimes is a false one. One need only think of the Ancient Silk Road, which dates back to the 2nd Millennium BC and comprised a 4000 mile long network of overland and maritime trade routes between Asia, the Arabian Peninsula, and Europe.

Of course, accelerating technological advances in transport, communication, and manufacturing procedures over the past several decades have significantly reduced the effective geographic space between national markets to unprecedented levels. That process—likely only to intensify over time—is startling enough to many businesses, governments and workers around the world. Indeed, it is a driving force behind the passionate debate about globalization in recent years.

But focusing on the time compression of these changes misses a much more significant compositionaltransformation of the global economy taking place, namely fundamental shifts in both the direction and the nature of international flows of products, services, capital, labor and information, especially between advanced economies (often referred to as “the North”) and emerging markets (“the South”).

Importantly, it is these compositional shifts—which are structural, not cyclicalphenomena–that are behind (as well as the product of) the capture of the lead-pole position in the global race for economic growth by the emerging markets from the advanced countries over the last two decades. In fact, as I indicated in an earlier column, emerging markets now actually contribute more to the growth of the entire world economy than do advanced countries.

So what are these global shifts? Here are three.

For one, the pattern of trade and investment between the North and the South has been changing markedly. The lion’s share of commerce for much of the last century was either among Northern countries (“North-North”)—think a Ford plant in the EU or Nestlé’s cocoa sales in the US–or between the North and the South (“North-South”), typically a Northern firm’s investment in the South—think Alcoa’s bauxite mining and alumina smelting operations in Brazil or Apple’s iPhone assembly facilities in China.

Over the past few years, however, there’s been a rapid rise of “South-South” trade and investment. Today, exports and imports flowing among emerging markets accounts for more than 25% of the world’s total trade, up from less than 5% a couple of decades ago. And, more than 1/3 of international investment in manufacturing activity and the like originating from an emerging market is deployed in another emerging market. China’s and India’s intensified investments in Africa in recent times perhaps best epitomize this phenomenon (which I’ve labelled “Africa’s Silk Road”).

An equally important directional change—and one perceived as much more commercially alarming, especially to certain groups in advanced countries–has been the step up of “South-North” commerce. This is best reflected in significant investments in the North being made by multinational enterprises from the South. Two well-known examples are the acquisition of AMC Entertainment—a Kansas-headquartered firm founded in the 1920s—by the Wanda Group, based in Dalian China, and the take-over of Britain’s Jaguar/Land Rover by India’s Tata Motors. Whether Northern businesses fully understand the strategic and competitive implications of their “home” turf increasingly being inhabited by such new rivals—challengers who emanate from the fastest growing economies on the planet—is an open question.

The second striking structural shift in the global marketplace is a trend ofreversals in the cycle of technological advancement. For more than a century, advanced countries were the exclusive incubators of major commercial inventions—that is, wholly new discoveries. By the time they made their way over the “product life cycle”, first diffused to middle-income countries as innovations, and, subsequently, diffused further across emerging markets, they evolved into dumbed-down, mass-market commodities.

Now, think Apple Pay or Google Wallet. It’s pretty cool to be able to buy something using only your smart phone, right? Well, guess where and when mobile payment systems first appeared? In Kenya and Tanzania, and in 2007. It is called M-Pesa (M is for mobile and pesa is Swahili for money). Google Wallet was first introduced in the US only in 2011, and Apple Pay began only just last year.

Mobile money is just but one among several prominent examples of significant commercial inventions that have been hatched in emerging markets in the past several years. It would seem that the product-life-cycle is apt to being turned on its head.

The last critical element of fundamental transition taking place in emerging markets that I’ll mention here is the rapid rise of a consumer class. This is probably not seen as a novel insight by most readers. Yet much of what has been written on this topic mistakenly equates “consumer class” with “middle class”—yet they are very different concepts; assumes the rapidity of this change was anticipated—but it was not; and analysis of this issue tends to refer to the same small number of large countries, such as Brazil, China or India, as illustrations where this is taking place—however, in fact, the transformation is prevalent in a significant number of African, East Asian, and Latin American countries.

Even so, the real news here is the fast—and unexpected—pace of thesophistication of consumption behavior in emerging markets. Purchase decisions by Southern businesses, government agencies, and individuals are increasingly being made on a life-cycle or present-value, rather than an out-of-pocket cost, basis.

Two examples make the point. A senior official of an agriculture ministry in a small Asian country bemoaned the fact that the ministry had been short-sighted in procuring locally manufactured tractors because they were the cheapest off-the-shelf; only a few years later he had to take the decision to junk them because they no longer worked properly, parts were difficult to attain, and repairs were too costly. For the ministry’s subsequent—and much larger—procurement, it earned kudos by saving money in the long run and improving productivity because a set of world-class manufactured, albeit considerably more expensive, tractors were bought.

The other example comes from the capital city of a sub-Saharan African country where the introduction of newly imported, cleverly designed but very inexpensive blankets in open-air markets resulted in huge sales volumes. However, soon they became known as the “wash and cry” blankets because once cleaned, they shrank considerably and the dye from the designs almost faded fully. In time, a rival importer from another country captured most of the market by introducing blankets woven from much higher quality fabric and imprinted with equally fashionable designs made from more durable dye, and fetching higher prices from consumers.

All of these shifts—as well as others–in the global economy are on-going, with newer ones yet to even unfold. To be sure, they are generating—and will continue to engender–both new opportunities and new risks for businesses, governments, workers and consumers.

But one thing is clear: this is not your father’s globalization, let alone your grandfather’s.

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