This question is to explore Dr. Pankaj Ghemawat’s central objectives – global pr

Question

This question is to explore Dr. Pankaj Ghemawat’s central objectives – global prosperity and how to achieve it and, more directly, the world isn’t flat and distances still matter.

Include the following in a broad discussion of ‘globalization’:

1. Dr. Pankaj Ghemawat’s contribution to the scholarship on globalization – what is he teaching us? Consider reflecting on his major models (AAA, CAGE, Value ADDING)

2. Please give a recommendation for Dr. Ghemawat – consider a constructive criticism – or, your criticism can be a proclamation of his significant contribution. Repetition in his narratives isn’t an effective criticism.

3. Identify your personal philosophy of globalization and the strategy/approach that best supports your view on the best way forward for the modern corporation to create value for itself and for the market.

Explanation / Answer

GLOBAL PROSPERITY AND HOW TO ACHIEVE IT - Dr. Pankaj Ghemawat’s

The financial and economic crisis the World has faced from 2008 was the starting point for the thorough and systematic review of the World Pankaj Ghemawat offers us in the book World 3.0. The global crisis, with strong effects in several countries and industries, has shattered the convictions on the benefits of globalization. Ghemawat proposes analyzing and provide a factual answer of 2 fundamental questions: 1) are the alleged benefits of market integration greater than market failures it arises? and 2) does it make sense to reduce – instead of increasing – the integration of markets to make the problems smaller and easier to address? The answer to these questions offer the readers a data-driven perspective of globalization and a simple understanding of the leading market failures commonly associated to globalization. Ghemawat also puts forward an avenue for the future – the World 3.0 – where there is no trade-off between further integration and greater regulation of markets.

Prof. Ghemawat demonstrated, through figures, that there appears to be a widespread belief that we are living in World 2.0; that technology has created a “flat” world. This flat world concept was found to be the most widely supported view in a survey of Harvard Business Review readers. However, Ghemawat’s new book proposes that we are still in World 3.0. Prof. Ghemawat began the presentation with an interactive overview of the World 3.0 concept and its implications. Prof. Ghemawat surveyed the audience for guesses on various metrics of global integration such as the percentage of cross-border phone calls, immigrants, direct investment, etc. A survey of Harvard Business Review readers found asymmetric errors in guesses with a large (10-20%) bias toward overestimating globalization. What does this mean for business? Firstly, this means that there is a large space for additional gains – significantly larger than estimates (Doha round estimates in particular). Secondly, this means that fears surrounding globalization may be reduced or reversed. In fact, there is evidence that globalization reduces cross-country inequality. In terms of withincountry inequality, the United States has only a third of the trade intensity of Germany but social inequality is much higher in the US than in Germany. The determining factor has more to do with the changes in social policy since Reagan than level of globalization. Given how little globalization actually is, we can imagine that changes to tax regimes may be more important in affecting social inequality. So, focusing on the EU, is the EU in EU 2.0 (very integrated) or EU 3.0 (where local still matters)? The concept of EU as a World 2.0 (very integrated) landscape is grossly inaccurate. There is a notion that the EU is nearly as integrated as the United States. However, per data, this appears to be far from the reality. Data were gathered for the World 3.0 book, and trade maps are available on Prof. Ghemawat’s website, which show that even the more integrated countries (such as Belgium) trade mostly with countries relatively close in terms of linguistic similarities, common land borders, and per capita income. The implication is that commonalities boost trade. This pattern applies to both goods and services. In integrated economy merchandise, there is a home bias. Other goods would have even more home bias.

The CAGE Distance Framework can be applied to measure the differences between countries. CAGE stands for Cultural, Administrative, Geographical, and Economic. These four dimensions of distance provide a way of analyzing differences between countries. In the EU versus US question, Trust, is one indicator of integration. Trust levels are high between US states but between EU countries, trust levels drop significantly between the home country and other countries in the EU. In terms of trade, the US has an Interstate Commerce Commission but within the EU it is still very administratively difficult to do business in other member countries. The economic disparity between US states is nothing when compared to the per capita income differences in the EU. Migration rates across the USA are several times as high as in the EU. In terms of culture, cross-state coverage in terms of news is much higher than cross-EU country in EU countries. Prof. Ghemawat used the CAGE Framework to propose solutions to lessening the barriers. Although much attention has been paid to Administrative barriers, it is the Cultural dimension which is most often ignored. Cultural barriers have been neglected/ignored with the idea that the population will follow given the legislation. However, a deep-seated resistance is manifesting itself and this can be a strong barrier to integration. In order to alleviate cultural barriers, Europe should consider encouraging the exchange of information - dispelling the idea that integration means extermination of local things through information. Cultural exchange should be encouraged through programs such as the Erasmus Exchange. National governments should pay attention to press releases and local news – for example, the scare over Spanish Cucumbers did not serve to increase trust in the EU. It should is also very worthy of noting that economic problems contribute to fracturing. When unemployment rises, it often does so with a hardening of xenophobia. In order to move to World 3.0, Europe must examine all aspects of the distances separating its member countries.  

Another question which arose was the question of whether globalized finance presents a lot of risk. Prof. Ghemawat responded that the book addresses four flows of globalization (goods, services, labor, and capital), and that the Capital flow is the most vulnerable to imbalances. There are a few things which the global community might consider implementing: 1. Alarms for when the capital accounts imbalance exceeds 3% of global GDP. This is an indicator that things are heating up. At 4%, historically, this has resulted in a crisis. 2. Circuit-breakers should be practiced in the domestic context (e.g. Black Monday) but there are times when things in the short run drive to an undesirable long run and this is difficult to foresee. 3. Buffers should be instituted – Mr. Market miscalculates. It is not reasonable to run a country on the assumption/basis that markets will be reasonable all the time.

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