World 3.0Global Prosperity and How to Achieve Itby Pankaj Ghemawat400 pages

Another WorldAs far back as 200,000 years ago, humans clustered in small groups for protection and sustenance. In this “World 0.0,” people who trusted each other lived together in strictly defined confines. World society in 3000 BC was based on intense tribal loyalties with almost one million “independent political entities...averaging only a few dozen people each.” As time progressed, populations grew, and this vast number of tribes decreased as clans merged into fewer than 200 different political groups. “World 1.0” was in full swing by 1600 AD; defensible national borders had replaced World 0.0’s “trust boundaries,” and nationalism had become the predominant mode of geopolitical thinking. By the mid- to late 20th century, world trade exploded. The word “globalization” described the imminent blending and blurring of national borders and group allegiances into one world. Experts said a planetary economy would span frontiers and render nationstates obsolete, heralding “World 2.0.” Then came the 2007-2008 global economic crisis.

Now What?The crisis and its lingering aftereffects prompted many different reactions across the political and economic spectrum. Some experts maintain a stubborn faith in unfettered markets and want the world financial system to continue its “World 2.0” trajectory. Opponents who believe “markets are bad and governments good” push for a return to World 1.0. Some even yearn for the simpler, primitive days of World 0.0. Instead, society should respond to today’s changed economic reality with a totally new tack: Rather than revert to old ideas, look to “World 3.0” for answers.World 3.0 brings together seemingly opposite strands as it joins global economic integration with national regulations, rather than pursuing one over the other. World 3.0 proposes more integration to achieve greater prosperity within government-imposed rules instituted to avoid the problems that unbound markets can cause. This economic philosophy argues for “semiglobal markets” and recognizes that national boundaries and relative geographic distances are important distinctions. It says reasonable regulation should “manage market failures and fears” within appropriate jurisdictions.

“Semiglobalization”The World 3.0 approach accounts realistically for the actual state of globalization, which is nowhere near as complete and encompassing as its proponents or its opponents suggest. They seem to agree that globalization is

here, with its benefits and problems. Yet the current level of globalization is only about 10% to 25% as assessed by potential “crossborder integration” and other measures. Numerous statistics show that the world has achieved only semiglobalization:

• Only 1% of postal mail crosses national borders; international phone calls constitute fewer than 2% of all calls; online messages between countries make up only 17% to 18% of the web’s total.

• In a sample of 30 nations, “almost every country gets all but 5% of its news from domestic sources.” In the US, only 21% of news deals with foreign affairs; in Europe, it’s 38%, but about half of that covers other European nations.

• Foreigners file only 15% of the patents issued in OECD (Organisation for Economic Co-operation and Development) countries.

• People tend to stay home. First-generation immigrants make up only 3% of the global population. Just 2% of university students are studying abroad, and “about 90% of the world’s people will never leave the country in which they were born.”

• Trade data can be deceiving. Setting aside double counts for goods in transit (tabulated at assembly points and within supply chains), exports are only 20% of global GDP.

• While the numbers fluctuate slightly from year to year, an average of only 10% of investments in companies span national borders; less than 20% of venture capital crosses country lines and offshore investors own only about 20% of equity markets.

• Government debt is close to a 35% “internationalization level.”

Some of these measures fell after the global financial crisis, further undermining claims that globalization is an unstoppable trend, destined to grow exponentially over time. In fact, much of what is written about just how integrated the world is makes those who protest globalization even more virulently opposed to it. Society becomes enmeshed in a “technotrance,” believing every tech step forward makes the world smaller. People said that of railroads, steamships and air travel, and they continue to believe it in the age of the Internet. But “connectivity is not the same as convergence”: Being able to reach out to the other side of the world doesn’t mean you will.

“The Law of Distance”The law, or heuristic, of distance states the “need to appreciate degrees of difference or distance,” since borders and geography play important roles in World 3.0 despite technology. Miles and boundaries constrain some of globalization’s more egregious aspects. In fact, examining the “cultural, administrative, geographic and economic” (“CAGE”) distinctions among nations is the best way to illuminate the barriers to a one-world paradigm.Consider the US and Canada, which share “the world’s longest undefended border” and conduct “the world’s largest bilateral trading relationship,” even greater than that of China and the US. Despite proximity, similar cultures and the same language, trade between the US and Canada is nowhere near as extensive as research and academic experts suggest it could be. Currency fluctuations, regulatory regimes and trade rules deter many potential exchanges. Moreover, trade between any two countries drops by 1% for every 1% rise in the physical distance between them. Nations that speak the same language have a 42% greater trade relationship than countries that speak different languages. Members of a trading group, like the North American Free Trade Association (NAFTA), are 47% more likely to trade with one another. A common currency

increases trade by 114%, and a shared border raises trade by 125%. Given these statistics, it’s clear that distance – as measured by aspects of CAGE – does matter, and not just in imports and exports; these gaps also affect flows of capital, information and people across national borders. Despite those differences, the world’s people can gain a lot from free trade and open markets in World 3.0. Increased exchanges of products, services, money, people and information correlate well with freedom and democracy. Economic and educational value can improve lives through the steps of the acronymic “ADDING value scorecard”: “Adding volume” and “decreasing costs” create benefits through economies of scale. “Differentiating” goods and services by their place of origin creates value and “intensifies competition.” Greater access “normalizes risk,” thus helping to “generate and diffuse knowledge” for greater productivity and more growth.

A Fine Blend of ParadigmsA World 3.0 mind-set can address seven issues that globalization raises:1. “Global concentration” – Fears of monopolies and oligopolies arise from the misguided belief that a one-world economy is possible; the law of distance and gaps in nations’ CAGE factors should dispel those fears. Research among international industries indicates that globalization has, so far, increased competition and decreased concentration. Where concentration seems to be on the rise, such as in the soft drink industry, local preferences mean that even global brands have to market to local tastes. When monopolies occur, state authorities should use price regulation to break them.2. “Global externalities” – Antiglobalists complain about environmental damage, but globalization may not be the villain; it may, in fact, help. Since so much economic activity is domestic, solutions to domestically generated pollution should emerge at the local level. As nations join the global economy, their environmental impact tends to lessen as they collaboratively use green technology to limit the damage. International cooperation has cut acid rain by 65% since 1976. Nongovernmental organizations and industries are uniting to address global ecological issues, such as rain forest degradation.3. “Global risks” – An interconnected world includes threats that can infect the entire system, but that’s not new. Diversification mitigates risk. The spread of railroads in India diversified its transit system and ended periodic drastic famines in the early 1900s by bringing food to remote places during droughts. The law of distance creates some buffer to crises, diminishing their severity over geographic spans. For instance, despite recent experience, overall market volatility has dropped since the 1960s. Food and agricultural markets should be free from protectionist policies, while some regulation of short-term capital flows could dampen the risks of speculation. 4. “Global imbalances” – Disparities in levels of capital and populations around the world are a cause for concern. For example, the problem of having a huge US deficit heavily financed by Chinese savers might call for a domestic response and international agreements on “current account limits.” The growing age difference between the developed and developing worlds is equally pressing; improved immigration regulations could allow the aging rich-world population to benefit from an influx of younger developing-nation immigrants seeking economic opportunity. Migration restrictions inhibit the full productivity of the world’s citizens.5. “Global exploitation” – People see the inequities open markets have caused, from developing-nation farmers hurt by rich-world agricultural subsidies to developed nations’ unemployment in manufacturing. Yet technology, more than globalization, is to blame for worker displacement, since capital flows more

freely than labor. When people lose jobs, World 3.0 governments should ease their burdens – to “promote productivity and protect people, rather than protecting jobs” – with education, retraining, unemployment benefits and “wage insurance” to fund low-paying jobs for the long-term unemployed.6. “Global oppression” – Despite much-hyped fears, multinational corporations are not about to take over the sovereignty of nations. The influence of US companies has declined since the 1970s, and economic impact has begun shifting to the developing world. Studies say continued growth tends to foster more open, democratic systems, which lead to greater prosperity, improved social welfare and a more peaceful future.7. “Global homogenization” – Similarly, critics exaggerate concerns about the US’s cultural takeover of the world. Even that emblem of US hegemony, McDonald’s, practices both global “standardization” and national “localization.” It offers its usual menu plus food suited to local tastes and customs, such as the vegetarian McAloo Tikki Burger in India, the Kiwiburger with beets in New Zealand, the pork Bulgogi Burger in South Korea, the pita-wrapped McArabia in Saudi Arabia, and the kosher McShawarma in Israel. While inborn instinct can lead people to distrust foreigners, individuals should shun xenophobia and strive for a “rooted cosmopolitanism” that embraces diversity while respecting borders. Governments should encourage education on cross-cultural issues.

Getting to World 3.0The challenges that trouble most people about globalization aren’t that daunting, and each has its remedies, if individuals, businesses and political authorities approach them with fresh ideas and attitudes. That new way of thinking calls for taking globalization’s flaws and benefits into account, understanding that global markets can fix more problems than they create, and accepting that globalization doesn’t cause domestic problems, which localities should solve. Judicious regulation can help unite markets within each nation and can address inequities in global markets.Business should embrace the diversity that will predominate in commerce, no matter how much world markets integrate. Set up your global operations in light of CAGE considerations and “avoid market imperialism.” Most firms don’t need to be in every market. Determine how semiglobalization influences your business as it crosses borders and distances. Rationalize your supply chain. And encourage your stakeholders to prepare “on a personal level for World 3.0.”

About the AuthorPankaj Ghemawat is professor of Global Strategy at Barcelona’s IESE Business School. He also taught at Harvard Business School for more than 20 years. He has written extensively on globalization.