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McKinsey: flows in digital age have created tightly interconnected global economy

In the McKinsey Global Institute paper ‘Global flows in a digital age: How trade, finance, people, and data connect the world economy’ published last month; the global flow numbers are huge and show world trade is increasingly cross-border and world-wide:

  • $26 trillion flow of goods, services, and finance in 2012, equal to 36% of global GDP
  • Up to $450 billion added to global GDP growth each year by flows—and 40% more benefit for the most connected countries than the least connected
  • 63% of global goods flows through the top 50 routes in 1990, down to 54% in 2011
  • 18-fold increase in cross-border Internet traffic between 2005 and 2012
  • 38% of total cross-border flows of goods, services, and finance from emerging economies in 2012, up from 14% in 1990.

Two major forces at work

McKinsey believe there are now, “two major forces are now accelerating the growth and evolution of global flows”:

  1. increasing global prosperity. By 2025, 1.8 billion people around the world will enter the consuming class, nearly all from emerging markets, and emerging-market consumers will spend $30 trillion annually, up from $12 trillion today. This will create enormous new hubs for consumer demand and global production. 
  2. the growing pervasiveness of Internet connectivity and the spread of digital technologies: More than two-thirds of us have mobile phones; in 2012, there were 2.7 billion people connected to the Internet; A torrent of data now travels around the world as cross-border Internet traffic grew 18-fold between 2005 and 2012.

Connectedness impact

The study data covered 195 countries between 1980 and 2012. McKinsey reviewed the dynamics and network structure of these flows and their cumulative impact on countries and growth.They have created the McKinsey Global Institute Connectedness Index, which measures each country’s level of integration into the global network of flows for 131 countries.

MGI Connectedness Index

Source & Copyright©2014 - McKinsey & Company

Of particular note in the chart are how:

  • Germany overtook the USA as the most connected country
  • Russia is now the most connected emerging country at 9th overall
  • Mauritius and Morocco gained 28 and 26 places respectively, the most of any country.

This analysis showed that the developed economies at the moment are more connected than emerging markets - but the latter are growing rapidly, as shown above. And also that knowledge-intensive flows—rather than labor-, capital-, or resource-intensive—increasingly dominate global flows.

Conclusions

McKinsey’s key conclusions from their research were that:

  • While the last era of globalisation can be characterised by the search for low cost production, the next era will be one in which knowledge-intensive flows are an increasingly large and dynamic component of cross-border activity.
  • Digitization is profoundly changing the composition of flows and how they travel, opening up new opportunities to SMEs and individuals. The network of flows is being redrawn as supply chains become more global and emerging economies become more central hubs in the world economy. The pace of change is likely to accelerate even more dramatically as more of the world goes online. 
  • For players of all types—whether regions, countries, cities, businesses, or individuals— there are major economic opportunities from participating in global flows. The imperative for policy makers is to fully embrace the new era and ensure that their economies are positioned to benefit from it.

N.B. The partners of McKinsey & Company fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, visit www.mckinsey.com/mgi.


CTMfile take: Connectedness is a clearly vital in countries’ economic success. Digitization of communications and trade will enable small countries, e.g. Mauritius and Morocco, and SMEs to participate in global trade. This is where the growth in global trade will come from, this is where your opportunities lie.


This item appears in the following sections:
Financial Supply Chain Platforms
Trade & Counterparty Risk Mitigation
Trade Finance
Trade Transaction & Payment Services

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