Global flows, facilitated by the development of digital technologies, have created a world economy more interconnected than ever before.
The McKinsey Global Institute’s (“MGI”) 2014 report studies the movement of goods, services, finance and people across the world, including the flow of data and online communication. Today, global flows are creating a high degree of interconnectedness amongst the world’s economies. In 2012, flows of goods, services and finances were valued at $26 trillion, or 36% of global GDP. One in three goods travel cross-border and more than a third of financial investments are international transactions. Such flows add between $250 and $450 billion to global GDP each year. MGI estimates that global flows could be valued at as much as $85 trillion by 2025 – more than triple their scale as measured only 10 years earlier. Importantly, countries with a larger number of connections in their global network of flows increase their GDP growth by up to 40% more than less connected countries.
“While the last era of globalization was driven largely by sourcing low-cost production, the next era will center on the rise of the global knowledge economy.“
Within the various flow types, knowledge-intensive flows grow faster than the labour- or capital-intensive kind. In the past, labour-intensive flows from low-cost manufacturing and commodities dominated global flows. However today, goods such as aircrafts, automobiles, pharmaceuticals and microelectronics are exchanging at a faster rate than all others. More precisely, knowledge-intensive flows are growing at 1.3 times the rate of labour-intensive goods flows. Such knowledge-intensive flows are valued at $12.5 trillion – nearly half of global flows – and are gaining share. China’s contributions in this regard are the second largest of all countries.
The Internet and development of new digital technologies are influencing all types of flows. Digitization reduces the cost of production and distribution, and transforms global logistics by replacing some physical flows with virtual flows. Furthermore, digitization changes the mix of flows, such that some goods flows are becoming service flows, for example. Furthermore, while originally governments and multinationals were largely the source of cross-border trade, today digital technologies have enabled small companies and entrepreneurs to function cross-border. Examples of these technologies include online platforms used by individuals which create a “virtual people flow”, microfinance platforms which enable raising money from global donors and digital payment platforms that facilitate quick and easy transfer of funds.
Today, there are many players participating in global exchanges. Developing countries are increasingly contributing to the network of global flows, now accounting for 38% of global flows – almost triple their share in 1990. Rising incomes are stimulating consumer demand, global production, commodities trade and migration. South to South trade between developing countries has grown from 6% to 24% of goods flows between 1990 and 2012, or the equivalent of between $198 billion and $4.4 trillion. The emerging markets that are becoming most connected include Brazil, China, India, Morocco and Saudi Arabia.
MGI’s in-depth examination of global flows reveals that the world is interconnected in a complex and rapidly expanding network of exchanges. A wider selection of players can opt into flows that vary in nature, particularly owing to the development of new digital technologies. This creates opportunities for governments and businesses to embrace the increasingly digital nature of global flows in order to drive growth and innovation.