Hong Kong and Singapore march ahead

Globalisation is still the trend among most of the world’s leading countries, despite protectionist pressures amid a miserable outlook for the global economy, according to Ernst & Young’s third annual globalisation report, released yesterday.

But, in case we didn’t need reminding, Thomas Friedman’s grand idea of a world without contours is simplistic at best.

“The world isn’t flat — it’s curved, bumpy and you can’t see what’s ahead,” wrote the authors of the report.

Small countries with open economies rank highest in the firm’s “globalisation index”, with Hong Kong and Singapore taking first and third positions — and wounded Ireland ranked second.

“Ranked first and third respectively, it is no doubt that Hong Kong and Singapore are leading the way with innovation and diversity,” said Lou Pagnutti, Ernst & Young’s Asia-Pacific managing partner. “The ability to adapt and react with flexibility, responsiveness and unconventional thinking put them in the leading positions.”

The report draws on two sources of original research: a proprietary globalisation index, which measures the world’s 60 biggest economies according to their “degree of globalisation relative to their GDP”, based on five equally weighted categories — openness to trade, capital movements, exchange of technology and ideas, labour mobility and cultural integration; and a survey of 1,000 senior business executives worldwide, conducted in late 2011 by the Economist Intelligence Unit. It also incorporates GDP forecasts over the next four years.

The index suggests that globalisation will continue to advance this year and up to 2015, with indicators showing a pronounced upward trend in medium-sized emerging economies such as Malaysia and Vietnam, Mexico and Colombia, and in smaller European nations such as Austria, Belgium, Denmark and Slovakia.

The US sits uncomfortably in 23rd place, behind the UK and Germany, ranked 13th and 14th respectively. China is positioned at number 39, but ahead of still-insular India (55th) and, despite its enthusiastic promotion as an investment opportunity, Indonesia at 57th only ranks higher than Venezuela, Algeria and Iran.

Nevertheless, regionally, Asia is in the vanguard of taking down barriers and is also showing the strongest signs of maintaining economic growth.

“While globalisation continues apace regardless of weaker growth around the world ... this year 14 of the world’s 60 largest economies according to their degree of globalisation relative to their GDP come from Asia, compared to 12 the year before,” said Pagnutti.

Ernst & Young forecasts that the combined GDP of emerging markets is set to grow by 5.3% in 2012, with emerging Asia expanding by 6%, to some extent off-setting sluggish growth in developed economies. It predicts that the GDP of emerging markets (on a purchasing power parity basis) could overtake that of the developed economies as early as 2014, with about 70% of total world growth in the next few years coming from the emerging markets, of which more than half will be from China and India.

“Asia will continue to be the most dynamic region in terms of trade. Ernst & Young estimates that, by 2030, 40% of spending by the global middle class will take place in Asia, which compares to 10% currently,” said Pagnutti.

But, fans of an integrated world can’t be complacent. As much as 90% of business executives surveyed expect protectionist measures to rise in frequency, should the major economies fall into a double-dip recession. About two-thirds of them think it likely that there will be another worldwide financial crisis triggered by eurozone debt defaults.

In addition, conditions in rapid growth markets are getting tougher for them. Costs are rising, competition is becoming more intense, operational complexity is increasing, government policies are less predictable and it is becoming harder to recruit suitable staff.

Companies will have to shed their organisational baggage, devise innovative strategies and take a broader stakeholder view toward the investment. One inference is that they must shed the vestiges of a traditional reliance on shifting expatriates from head office to satellite countries.

They “must develop highly flexible business models that enable them to respond to new opportunities and threats. And they must understand why inclusive leadership is increasingly important to thrive in constantly changing conditions”, said Pagnutti.