Last year's headlines offered grim commentary on the prospects for global integration. The World Trade Organization (WTO) meeting in Cancún, Mexico, collapsed when developing countries revolted over industrialized countries' refusal to reduce agricultural subsidies. Trade ministers scaled back plans for the Free Trade Area of the Americas (FTAA), sidestepping controversies over intellectual property and investment. The United States and the European Union (EU) traded diplomatic blows over free trade and the ongoing war on terrorism. Within the EU, the Growth and Stability Pact limiting budget deficits in the euro zone effectively collapsed, and political integration sputtered as Europe's leaders failed to reach consensus on a draft constitution. And the United Nations, perhaps the most visible symbol of multilateral cooperation, appeared immobilized as the rancorous debate over military action in Iraq unfolded.
Before anyone rushes to give last rites to globalization, keep in mind that we've heard it all before. In the months following the September 11, 2001, terrorist attacks, pundits were predicting the end of globalization as we knew it. The porous borders that made possible the unprecedented global movement of money, goods, people, and ideas were to be encircled by barbed wire and checkpoints, bringing trade and travel to a halt. Some doomsayers even predicted a global economic and political unraveling similar to the events preceding the First World War.
Yet, this year's edition of the A.T. Kearney/Foreign Policy Globalization Index shows that globalization endured in 2002. To be sure, it was a difficult year for global economic linkages, as a downturn in foreign direct investment (FDI) and a sharp drop in portfolio capital flows led to the lowest level of economic integration since 1998. But globalization involves far more than the ups and downs of economic cycles. That's why the A.T. Kearney/Foreign Policy Globalization Index uses several indicators spanning trade, finance, political engagement, information technology (IT), and personal contact to determine the rankings of 62 countries. We found that noneconomic drivers of global integration, from travel to telephone traffic, remained remarkably resilient in 2002, while access to the Internet worldwide continued to surge. These variables helped compensate for the weakening of international economic ties and deepened global linkages overall.
Globalization survived a period of considerable challenges in 2002: heightened travel alerts, stringent new security measures at airports, a major strike by dock workers at the busiest port in the United States, a string of high-profile corporate scandals in developed countries, financial market fallout from Argentina's economic unraveling, and jarring terrorist attacks in countries such as Indonesia and Kenya. Despite all its travails, the world was more -- not less -- integrated at the end of 2002 than it had ever been before.
Last year's index depicted a global economy stuck in reverse, with most key indicators of integration losing ground amid a world economic slowdown exacerbated by terrorist attacks. Measured as a whole, the economic links that bind countries together grew even weaker in 2002, reducing the gains from the late 1990s economic boom and -- relative to the size of the global economy -- settling below levels recorded in 1998.
The continued falloff in global capital flows, largely from the world's most advanced economies, was one of the chief reasons for this decline. Already down some 40 percent in 2001, FDI fell another 21 percent in 2002 to $651 billion, the lowest level in five years. Although the United States and United Kingdom accounted for nearly half of the drop, the trend was felt across the globe as FDI inflows declined in 108 nations. Reflecting this decline, countries worked harder than ever to attract foreign investors: 70 governments adopted a record 248 investment-friendly legal and regulatory changes, up from 208 such measures the year before and 150 in 2000.
Global flows of portfolio capital also dropped significantly when stock market losses in countries such as the United States, Germany, and Brazil erased wealth and Argentina's slow-motion economic meltdown made investors more risk averse. As funds dried up, the U.S. stock market saw its worst three-year performance in six decades, and industrial markets overall were down by about 20 percent in 2002. Throughout the year, emerging markets issued fewer equities than at any time since 1995, with China alone accounting for one third of all equity placements outside North America, Europe, and Japan.
Yet not all lights in the global economy were dim. In 2002, global economic growth finally began to recover after the shocks of the previous year. While the overall figures did not match the roaring 1990s (when global average growth was 4.8 percent per year), overall real growth inched up to 1.9 percent from 1.3 percent the year before. Developing economies got a strong boost, with growth rising from 2.4 percent to 3.3 percent even as advanced economies struggled along at less than 1.0 percent growth. Trade levels also saw a modest recovery in 2002, despite stringent new security measures at ports, airports, and border crossings. Overall, global merchandise trade rose a modest 2.5 percent, with strong growth in Central and Eastern Europe's transition economies and emerging Asian countries.