Globalization has made our great cities incalculably richer but also increasingly divided and unequal. More than youth, ethnicity or even race, London’s riots are about class and the growing divide between the classes. This dynamic is not unique to London but is at work in many of the world’s great capitals. Instead of reducing and flattening economic distinctions, globalisation has made them sharper.”

To read more, check out Richard’s recent column in the Financial Times.

The United States has dropped off the list of the top 25 most globalized nations, according to the new Index of Globalization released today by the KOF Swiss Economic Institute. The U.S. slipped to 27th place overall and 43rd on more specific measures of economic globalization, according to the report. The report notes however that “As a large economy, a high proportion of [the U.S.’s] trade is internal, which means that [it] does not ‘need’ to be as globalized as small countries.”

The overall globalization of the world economy has also slowed as a result of the lingering economic crisis, according to the Index, which tracks trends in overall globalization as well as in three specific categories – economic, social and political globalization.

Belgium, Austria, the Netherlands, Sweden, and Switzerland took the top five spots on the overall Globalization Index, while Singapore ranks first in economic globalization. Switzerland took the top spot for social globalization, with Canada in fourth place, and France topped the list for political globalization.

With the help of my colleague Charlotta Mellander, I looked at the factors associated with the globalization of national economies across the 100 plus countries on the KOF Globalization Index.

Globalization is closely associated with the level of economic development. There is a considerable correlation (.81) between the Globalization Index and economic output (GDP per capita).

Post-industrial, knowledge-based economies are also more globalized. Globalization is closely correlated with human capital levels (.73) and the percentage of the workforce in professional, knowledge-based and creative jobs (.68).

Globalized nations boast higher levels of happiness and life satisfaction. There is a considerable correlation between the Globalization Index and happiness as measured via Gallup surveys (.73).

Globalization has slowed as a result of the economic crisis. High levels of unemployment, especially in the manufacturing industries, pressure governments to close off global trade and move in a more protectionist direction. The KOF Globalization Index suggests that such measures can work against a country’s interests. More globalized nations are wealthier and more knowledge-based, and their citizens are happier.

It wasn’t so long ago that we thought the world was flat.  Globalization had leveled the playing field, technology spelled the death of distance, and people were fleeing the cities for the comfort of the suburbs. We’d reached the end of history. And social media could never, ever be a tool of social activism.

Taken collectively, these popular nostrums shaped a vision of an unreal world inhabited by billions of solipsists – where, as Blair Kamin of The Chicago Tribune recently described it, people “lived in lonely isolation, lured away from the public square by the seduction of Internet chatrooms.” But the lesson of Egypt—and of Tunisia, Bahrain, Libya, Iran, and everywhere else that has been swept up in the wave of revolutionary activism—is quite the opposite. “The Web doesn’t supplant the public square,” Kamin declares, “It pushes people to it.”

Cities push us ever closer, enabling the rapid spread of new ideas.  This accelerates the flow of new technology, increases the rate of new business formation, and makes for vibrant artistic and cultural scenes. And those very same mechanisms that unleash our innovative and artistic energies also make cities veritable cauldrons, in which political energy and activism are pressurized and brought to a boil.

Consider the Boston Massacre of 1770, the Paris Commune of 1871, the October Revolution of 1917 in St. Petersburg, the Chicago Convention in 1968, the Tiananmen Square uprising of 1989, Cairo’s Tahrir Square last month, and many more—all of them were events of global consequence, but they were each the product of individual cities. “These uprisings aren’t just accidentally urban,” noted economist Edward Glaeser. “They would be unthinkable at low densities. Cities connect agitators, like Sam Adams and John Hancock. Riots require a certain kind of urban congestion; police power must be overwhelmed by a sea of humanity.”

The Middle East and the Arab World are highly urbanized and their rate of urbanization has increased substantially over the past several decades, according to data pulled together by my Martin Prosperity Institute team.  While it is true that Egypt has seen a much slower rate of urbanization than the rest of the world, as The New York Time’ David Leonhardt recently observed, Greater Cairo, which stretches to Alexandria and Suez, is the world’s second largest mega-region, with a population of more than 75 million people and an economic output of $91 billion.  The Tel Aviv-Amman-Beirut mega is the world’s 15^th largest, with more than 30 million people, making it bigger than the So-Cal mega surrounding Greater LA and economic output of $160 billion.

The map above shows the level of urbanization for the Middle East and the world.  2009 was the year the world went urban—for the first time, more than half of its total population was living in urban areas.  About eight in ten Americans live in urban areas, and roughly three-quarters of the citizens of EU countries.

Kuwait (98%), Qatar (96%), Israel (92%) are among the most urbanized nations in the world, while  Bahrain (89%), Lebanon (87%), Saudi Arabia (82%) are all more urbanized than the United States (82%). Jordan (78%), UAE (78%), Libya (78%) are slightly more urbanized than the OECD nations on average. Oman (72%), Iran (69%),Tunisia (67%), Iraq (66%) are two-thirds urbanized. Morocco (56%), and Syria (55%) are above the world average. Egypt, where just four in ten people live in urban areas (despite being home to the gargantuan Great Cairo mega), is the exception to the rule. The Middle East as a whole is 61 percent urbanized, while the level for the Arab nations is 56 percent.

The Middle East and Arab nations have also seen a startlingly fast pace of urbanization over the past several decades. The share of Middle Eastern people living in urban areas increased from 35 percent in 1960 to 60 percent in 2009, while urbanization in the Arab nations jumped from 30 to 56 percent.  Urbanization increased from slightly less than a third (32.8%) to slightly more than half (50.3%) of the world during the same period. The advanced nations increased more slowly, which makes sense since they started with a much higher level of urbanization to begin with; the U.S., for example, increased by just 12 percentage points, from 70 to 82 percent.

Middle Eastern nations have seen some of the largest jumps, as the graph above shows.  Three nations posted gains of more than 50 percentage points: Oman (55%), Saudi Arabia (51%) and Libya (50%); Lebanon (45%) and Iran (35%) also saw significant gains. Urbanization levels in Tunisia increased by 29 percentage points, and by 27 percentage points each in Jordan and Morocco.

Middle Eastern cities are also quite dense. Density is key because it is what causes to people to connect and the pot to stir. It enables new ideas—whether about technological innovations, new artistic or musical styles, or revolutionary memes— to move quickly through the population. These density statistics, compiled by the consulting firm Demographia, are eye-opening.  (One caveat: These data cover entire metros, so density in the center of the city is undoubtedly higher). Cairo has 9800 people per square kilometer. Yemen’s Sana is even denser with 11,100 sq/km, while Iran’s Qom, another hot spot, is home to 11,000 people per sq/km, and Tehran10,300. Amman, which has felt rumblings, has 7000 per sq/km. All of these cities have greater densities than Shanghai (6300) or London (5100). Riyadh has a density of 3000 people per sq/km. And Bahrain’s Al Manamah, a significant locus of unrest, has only 1700 people per sq/km, but it is still on a par with greater Chicago (1500 per sq/km).

Unrest requires urbanism. Cities push us together and accelerate the spread of political activism. The same forces that are making the world spiky are making it increasingly volatile as well.

The Judgment Call section of today’s Financial Times asks:

Last week, Volkswagen chairman Ferdinand Piëch announced the company was interested in buying Alfa Romeo, the Italian brand. While at Fiat, chief executive Sergio Marchionne says the company is “Italian based but not an Italian company.” In the era of global business, does a company’s national identity matter?

Here’s my answer:

It depends who you are talking about.

For companies, nationality is becoming less important. Their products have to be in the major markets, no matter where they are. You need to source stuff where the capabilities and the prices are right. One thing I learned way back in the 1980s and 1990s, when I was studying the globalisation of auto manufacturing, is that it’s often harder to upgrade and transform existing plants at home than it is to set up not just new factories but whole new work systems in new places. For unions, nationality matters because factory jobs are tied to locations: it’s not as though existing workers can be transported abroad. Workers can benefit when foreign companies invest in new countries and generate new jobs overseas but often those companies prefer to operate without unions. Countries, meanwhile, worry that globalisation will hollow out their economies.

Domestic companies, politicians believe, are more inclined not just to create jobs but to invest in national projects. Maybe so, but foreign companies have considerable interest in making their offshore locations more productive and engaging local employees and communities more effectively. Corporate nationality is losing ground to globalisation. Those that try to prop it up only stand in the way of their own progress.

The rest is here.

Last week the Global Entrepreneurship Research Association (GERA) had its annual meeting in Santiago, Chile and launched the 2010 Global Entrepreneurship Monitor (GEM) executive report. The annual meeting was held in a developing country for the first time. The meeting is a mixture of media events, planning meetings, and strategic decision-making. In addition, social events make this a welcome activity.

The 2010 GEM executive report, in addition to reporting on the state of entrepreneurship in the world, had sections on the economic crisis and social entrepreneurship. The main finding was that entrepreneurial activity had declined in the developed countries but not in the developing countries. In other words, do not look to Europe to lead the world in the future. As a founder of the Hungarian team, the so-called transition countries are not going to lead either. The labor force of Europe is in decline and, therefore, Europe and Japan are in no position to provide entrepreneurial leadership in the future as they age.

By the year 2050, most of the labor force in Europe will be aging and the under 40 labor force will be in the developing world according to my colleague Jack Goldstone at George Mason University. In other words, the creative, innovative and entrepreneurial talent will be in Brazil, Chile, India, China, and Indonesia. The developing world will have to provide the economic leadership for the market. While the world will be flat, hot, and crowded, the creative talent will also be in these places. GERA is uniquely positioned to measure and track the progress that the world is making in shifting the creative epicenter from Europe to Asia and South America.

This seminal meeting of the GERA represents the first step of the association in this transition. After spending the first 10 years of this decade trying to figure out if Denmark is more entrepreneurial than the United States, we are now shifting to measuring the entrepreneurial progress of the developing countries. As Richard Florida said to me a few years ago, the young are the same all over the world. If that is the case they will surely be the leaders in the future.

Many things are interesting, but one of the most interesting is how people use creativity to become more innovative. I call this entrepreneurship. People in all countries are creative and want to make a better life for themselves and their families. How well are they doing?

Over the past few years, my colleagues at the Global Entrepreneurship Monitor have developed a way to measure this activity, and to suggest ways in which countries can improve on their performance. The Global Entrepreneurship Index is a tool that allows countries to understand how your country is doing on a wide range of indicators. You can download a copy for free. While lots of indexes exist, for almost everything, they very seldom allow you to actually see how to improve your current position.

Last week at a conference in Istanbul I presented the index to an audience and suggested how the world would be able to improve its well-being by following along. The results were interesting and over the next few weeks, I will be presenting a step-by-step report on the index, how it works, how it can be improved, and how it can improve lives.

I have been involved with GEM for almost a decade and have helped move this organization toward its present global position. I hope that this new index will propel it to a new level.

It’s my pleasure to announce the release of a new study of immigrant entrepreneurs in the U.S. high-tech sector, which I co-authored with David Hart and Spencer Tracy. The central finding of the study is that about 16 percent of the nationally representative sample of high-impact, high-tech businesses that we surveyed count at least one foreign-born person among their founding team.

Only about three percent of the founders of high-impact, high-tech companies are foreigners (60 out of 2034). 97 percent are U.S. citizens, and specifically 87 percent are U.S.-born, while the other 10 percent are naturalized U.S. citizens. Furthermore, most foreign-born founders lived in the US for decades.  These founders are statistically very similar to the average U.S. population in terms of birth and immigration status.

An interesting but unanswered aspect of the study is how these high-tech immigrants (many not new), part of the international creative class, help integrate U.S. business in a post-American world? Do they as some have claimed strengthen America in a post-American world, or is it a non-issue? If they strengthen our connection to the rest of the world through “brain circulation” is the flight of the creative class not a major public policy issue?

A second issue has to do with closing the borders. If America closed the borders to high impact entrepreneurs, would its own citizens fill the breach? Would more students become better high school students and go on to college and graduate school in engineering and the sciences? This is a much more difficult question to answer, but is again at the heart of public policy today.

Most people think the biggest threat to globalization is mounting economic nationalism and trade protectionism. That may well be true. But in a thoughtful and provocative article in the Harvard Business Review, George Stalk argues that globalization faces another threat – a looming infrastructure crisis that is creating huge bottlenecks in the flow of global products and services.

As supply and distribution chains have become longer and more complex, companies have begun to realize that increased logistics costs can reduce or even eliminate the benefits of manufacturing where labor is cheap. The congestion and bottlenecks of a transportation system strained beyond capacity compound the problem, making supply chains seem even longer and more unpredictable.

There’s a lot of talk about improving transport times for people, but at this time of rapidly falling imports and exports, there’s not much talk of increasing capacity for goods. High fuel prices are not the only issue here. It’s also the other costs of congestion: higher cost of inventory for goods that are locked up longer in transit; the costs of uncertain, more variable transport times; and the inability to react to changes in consumer demand.

Stalk argues that while the crisis provides a temporary reprieve, the stimulus is not addressing this looming longer-run economic threat.

If pre-recession trends reappear when the economy recovers, lack of infrastructure capacity, in combination with rising oil prices, will constrain global trade and drive up costs. The U.S. stimulus package, with its focus on “shovel-ready” projects that quickly create jobs, will produce newly painted bridges and newly paved roads but is unlikely to address the capacity problem.

The June unemployment numbers do not look very pretty for the United States. After four months of improvements in the number of jobs lost, the numbers again increased to 467,000 up from 322,000 in May. The unemployment rate, now at 9.5 percent, is the highest in 26 years. The recession is entering its 20th month and will soon reach two years with little end in sight.

While the great recession of the 21st century grinds on, explanations for it continue to elude us. Some think that it is a depression and they may be right. I suggest that we have at least four issues on our plate that have emerged as a perfect story. The solutions to all are institutional. First, let’s start with the financial crisis. This financial crisis resulted from market failure. The lack of rules or what some like to call regulatory arbitrage, that is, working the rules led to the financial meltdown. We are still not out of the woods on this one because the rules have not been fixed. Without rules markets cannot work.

Second, we now have a global recession with falling demand and rising unemployment. A classic case of underused resources. The recession was in part caused by the financial crisis, but only in part. It is clear now that at least two interpretations are in order. First, it was a classic case of over-investment in housing. We have about two to three million too many houses. It will take about six years to work this off through population growth and attrition. This “inventory recession,” to use an old phrase, is nothing new, only the sector is – housing. The other interpretation is that it was caused by imbalances in the global economy between rich and poor countries. In either case, as Richard Florida pointed out with housing, or Business Week with global imbalances, new rules are needed.

Third, we have finally realized that we do indeed have a sustainability issue in the environment. It is both about the carbon footprint and about the type and amount of energy used. This is not a cause of our current financial and economic problems but it impacts it directly since it is about investment, and with a huge amount of uncertainty where to invest it is also putting a drag on the economy. Rules would help.

Finally, we are just realizing that globalization that started a few decades ago might be a dead end. It is a dead end not because the world does not want to globalize (most do) but because markets cannot work without rules. And in a global economy we need global rules. Here is the rub. All of the above problems in some way suffer from having a global economy without a set of global rules. When the last era of globalization ended at the dawn of the first world war, the rules that governed up to then also evaporated and it took decades to put them back in place after the second world war.

We are now into the second decade of the second globalization of the world economy. Until we are able to put the “rules of the game” in place markets, I am afraid the economy, and the financial sector, cannot be expected to lead to growth. The environmental rules are even more onerous. We just might need to start working on the rules of the game sooner rather than later. This seems like a task for the creative class. What is needed is talent and honesty in order to put a global structure in place where all can prosper. This is no small task.

Globalization skeptics have long complained about the alleged out-sourcing of good, high-paying American jobs. But even globo-optimists, like Tom Friedman, have conceded that U.S. jobs are vulnerable with the rise of a flat world. In a 2006 essay in Foreign Affairs, Princeton economist and Obama adviser Alan Blinder argued that globalization would likely bring about a mass off-shoring of American jobs. Blinder later used Bureau of Labor Statistics data to estimate that some 30 to 40 million U.S. jobs, 22 to 29 percent of all, including significant numbers of jobs in knowledge work and high end services were “potentially off-shoreable.”

International economist Richard Baldwin takes a close look at the actual figures and finds a very different trend. Examining IMF data on the dollar volume of trade in services originally compiled by economists, Mary Amiti and Shang-Jin Wei, Baldwin plots the dollar volume of out-sourced U.S. service work against the dollar-volume of service work that has been attracted to or in-sourced by the United States.

As the chart shows, the U.S. is a net in-sourcer of service jobs, with the U.S. in-sourcing gap actually increasing over time. Based on this, Baldwin concludes that:

The US, as it turns out, is a net “insourcer.” That is, the world sends more service sector jobs to the US than the US sends to the world, where the jobs under discussion involve trade in services of computing (which includes computer software designs) and other business services (which include accounting and other back-office operations. … Blinder is right in that the US importing an ever-growing range of commercial services – or as he would say, the third industrial revolution has resulted in the offshoring of ever more service sector jobs. However, the US is also “insourcing” an ever-growing number of service sector jobs via its growing service exports. The startling fact is that not only is the trade not a one-way ticket to job destruction, the US is actually running a surplus.

The data only cover the period 1980 to 2003, so it is certainly possible that the trend-line has changed since then, but Baldwin argues that the logic of trade in services suggests this basic trend will continue.

Since services are highly differentiated products, and indivisibilities limit head-to-head competition, my guess is that we shall see a continuation of the trends in the chart. Lots more service jobs “offshored” and lots more “onshored”. What governments should be doing is helping their service exporters to compete, not wringing their hands about one-way competition from low-wage nations.