The CESifo World Economic Climate survey was recently released for the second quarter 2018. The results showed that respondents view the present situation remains basically unchanged from the first quarter.
However, expectations for the future have declined noticeably. The survey index dropped from 23.9 to 6.1, the lowest level since the third quarter of 2016. Experts are looking at rising inflation expectations, rising interest rates, and weaker trade growth.
While these surveys provide interesting data points, it may be worth looking at common misperceptions that potentially cloud the information. Pankaj Ghemawat, a professor at NYU Stern Business School, is the author of several books on globalization. During his February 2017 interview with the Harvard Business Review he highlighted a number of widely held misconceptions about the current state and the degree of globalization.
One of the questions he examined was, in terms of foreign direct investment, what percentage of all the investment that occurred in the world in 2016 was accounted for by cross-border investment? In other words, what percentage of overall investment was made by companies outside of their home nation. The answer was less than 10%. This actual number was far lower than most people expect.
Another interesting observation was the way the World Trade Organization estimates trade as a percentage of GDP. As an example, he posits that a South Korean company provides a component to a Chinese company for an iPhone.
That component counts towards trade between South Korea and China. When assembled and that phone is shipped to the US, the entire phone counts towards trade between China and the US. Accordingly, that component is effectively counted twice. Depending on the supply chain there could be triple and quadruple counting, thus overestimating the amount of global trade that actually occurs.
Ghemawat also shed some interesting insight on an intensely debated aspect of globalization – immigration. In terms of first-generation immigrants, people born in another country, who have chosen to live in the US, what is this number as a percentage of the total US population? The answer turns out to be 14%. Three surveys taken at about the same time put the estimate of first generation immigrants at between 32% to 42%. So perhaps the movement of people around the globe is less than commonly perceived.
Although immigration is often marked by polarizing views, the U.S. Fertility Rate (defined as total births per woman) suggests it perhaps shouldn’t be quite so controversial. As of 2016, the rate in the U.S. was 1.8 per woman. This is below the replacement rate of 2.1, meaning that we need other sources of people (namely, immigration) in order to maintain our population.
The high-level takeaway is that perhaps the actual impact of globalization may be overstated. But because of the perception that it is so pervasive, it tends to be blamed for a host of ills, including the absence of wage growth within the US. Ghemawat’s view is that technological advances have far more to do with downward wage pressure than globalization and that the benefits of trade dramatically outweigh the pitfall