Oh, Baby, It's a Wide World

Don't believe all they say: the world is not getting all that much smaller

When Thomas Friedman stated in 2005 that the world is flat, he gave shape to the fears of many regarding globalisation. Distance, he said, was dead: it was no longer a dominant characteristic of the world economy. Now all those low-wage workers from once far-away places were offering their services right on your doorstep. There was no way to compete but by racing to the bottom. Friedman’s book became a best-seller.

Not so fast, say others. If the production cost of a gadget in China is peanuts but it sells for several dollars in the final market, a big part of the difference is attributable to distance. And distance, mind you, is not just kilometres piling up on each other: it is also differences in language, culture, legal systems, even religion—and, of course, trade barriers.
So, we have two groups: the “death-of-distance” bunch, championed among others by Friedman, and the “not-so-fast” brigade, who argue that this, still and for quite a while to come, is a big world after all.

CESifo researcher Steven Brakman and his colleague Charles van Marrewijk are two worthy warriors of this later camp. Their latest CESifo Working Paper uses various methods and data sets to substantiate why they assert that distance still dominates all aspects of international trade and why many threats posed by global competition to the position of the OECD countries are unwarranted.

The Case for the Death of Distance
You use your US-designed, Taiwan-innovated, Chinese-assembled PC to e-mail proofs of a book to be published to someone you’ve never seen who sits 8 time zones away. For you, the other person is simply right there, one mouse-click away. A problem with your electricity bill? Pick up the phone and a voice will happily tell you what you want to know; the fact that the voice belongs to a person in India does not even register. The irrelevance of distance works the other way as well: think of how often you communicate with your colleague next door by e-mail, for instance.

For all that talk of distances becoming somehow smaller, according to this view nowadays you are supposedly forced to run faster… just to stay in the same place. In other words, income earners in developed countries have to put in extra effort in order to keep their advantage over the competition. And real wages in some developed countries have indeed tended to stagnate lately.

That means that this earth-flattening disappearance of distance should lead, in time, to income convergence across the globe. Did not the Chinese start out with rock-bottom wages, only to see them steadily rise over the years? In fact, now some of China’s manufacturing jobs are migrating to its Asian neighbours where labour costs are still cheap. So, on the face of it, convergence seems to be on the march.

But Let’s Look at the Numbers
Messrs. Brakman and van Marrewijk, however, did not want to rely on anecdotal evidence to verify whether income is converging across the globe or whether distance is indeed becoming increasingly irrelevant in trade: they carefully examined many data sets on trade, investment flows and per capita income and, for some items, looked some 2000 years into the past to reach their conclusions.

For one thing, regarding per capita income relative to the world average they found that leapfrogging is not unusual: that is, different countries are in the lead or lag behind. Think about Italy in the year 1 –absolute top dog– and now, where it ranks as just middling among the prosperous. Or the Netherlands in 1700, with an income other countries could only dream of. Or that between 1500 and 1600, Canada, the USA, Australia and New Zealand all qualified as laggards, their income lying fully 30 percent below the world average.

Over a two-millennium span, the authors even found clear evidence that income has diverged, with the leader’s position improving over time and the laggard’s deteriorating. At any rate, there is no support for convergence since 1500.

When it comes to the effects of distance on world trade, there is the so-called "gravity equation", which relates trade to distance and for which empirical evidence is nearly as overwhelming as that for its cousin, physical gravity. Actual international trade flow data clearly show that trade is to a large extent determined by distance: a 10% increase in distance reduces trade by about 9 percent. Moreover, the importance of distance seems to have increased, not decreased, in the second half of the 20th century. Distance is equally important for foreign direct investment (FDI) flows, which mostly originate in high-income countries with a destination in another high-income country.

Trade barriers also play a role. In terms of international trade, they act like a mountain range between the trading partners: having to surmount them definitely increases distance. And trade barries have anything but disappeared.

So, roll over death-of-distance preachers. This world, globalisation notwitshstanding, is still a pretty big place after all.

Steven Brakman & Chrales van Marrewijk : It’s a Big World After All, CESifo Working Paper No. 1964, April 2007.

• See other papers dealing with globalisation
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