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3:54AM

Deleted scenes: Chapter Four

 

The political scientist Richard Rosencrance has described, over several books, how the homemarket-oriented state yielded to the rise of the "trading state," which in turn presages the rise of the "virtual state." As he describes the pinnacle from his perspective in 1999:

 

Amid the worldwide
 clamor of ethnic politics, regional conflict, and financial crisis, a
 new reality is emerging. Developed states are putting aside military
 and territorial ambitions as they struggle not for political
 dominance but for a great share of world output. In the process,
 nations are shrinking--in function if not in geographic size. The
 nation-state is becoming a tighter, more vigorous unit capable of
 sustaining pressures of worldwide competition. We are entering a
 world in which the most important resources are the least
 tangible--where land is less important than an educated populace,
where stockpiles of goods, capital and labor are less important than
 flows, and where parochial interests are less important than the 
international economy as a whole.

I judge Rosencrance's description to 
be generally accurate of the world we're moving toward, thanks to
globalization's increasingly dense networks. But in terms of state 
function, I think his description was largely premature for all but
 the most advanced members of global economy, or what I call
 globalization's Old Core (North America, Western Europe,
 Industrialized Asia). In terms of the numerous recent New Core
 entrants, chief among them China, I think we're entering a 
prolonged period of states aggressively marketing themselves both for
 home market development (the equivalent of the global economy's
 "f--k you!" money) and to capture the greatest possible share of 
world output/markets. So while there will be plenty of
entrepreneurial "virtual states" out there, shaping markets in a 
transparent fashion (meaning, behind the scenes), I also expect to 
witness a lot of cash-rich states nakedly putting their nations'
 global ambitions on display via state-owned companies, sovereign 
wealth funds, and national flagship firms that benefit directly from
 state policies. In short, not every horse will be a Trojan, but 
there will be plenty of Trojans in some of those horses.

 

Does this mean history ended with the 
Cold War or merely resumed? My short answer is yes.

 

Ideological
 conflict over the path to progress essentially ended: market-based 
solutions are held to be supreme, meaning the radical Left's 
economic "catch-up" strategies were completely bankrupted by 
Soviet and Maoist practice. Sure, it's fun to have a Hugo Chavez 
strutting around as a warning to the rest (This is how you ruin a
national oil company!), but that dead horse isn't worth beating 
anymore. Now the rest of the world argues about the limits and
 "fairness" of free trade agreements (as always) but rarely about 
their underlying utility. These are arguments about speed and
 breadth (likewise an argument of timing), but the overall direction 
is never in doubt. Indeed, the arguments over speed primarily have 
to do with other countries engaging in practices, like high tariffs, that we've long since abandoned in our market maturity. So to the
 extent that history is resumed, it's that we're all running the same race even as our starting blocks are dramatically staggered by
 past historical decisions. As such, most emerging markets want their 
handicaps acknowledged and accounted for in trade agreements, and if
 such "fair play" balance cannot be achieved there, these same states take matters into their own hands, balancing the playing field
 they view as decidedly unflat.

 

...

 

As 
the World Bank argued recently, most wealth in this world is 
"intangible," meaning encased in people and not things, so the 
wealthiest countries have the most talented workers and best 
institutions and leading technologies. Compared to high-income 
countries, where 80 percent of the nation's wealth is found in intangible assets, low-income countries have roughly 60 percent of
 their wealth in intangible capital, with more than a quarter of
 wealth derived from natural resources. In contrast, only two percent 
of high-income countries' wealth is derived from natural resources.
 What's interesting about the World Bank's calculations is that 
the only thing that changes when nations get richer is that they rely less on
 natural resources and more on their people. For all income categories (high, medium, low), the
 amount of wealth found in actual production or manufacturing remains
 the same--16-19 percent (America, by the way, remains at roughly 25
percent in terms of value, not bodies). Also interestingly enough,
 high-income countries tend to derive far higher per capital wealth
 from their natural assets, meaning they both conserve and exploit 
their natural resources better. 

 

...

 

Based on China's recent experience, this is how I would sketch out a perceived evolutionary path, based 
on three crucial frontiers that must be reached. The first frontier is that of market empowerment. So long as the state plans the 
economy, whether directly (communism) or from afar (colonialism), the 
capacity for innovation is severely limited, due primarily to poor 
incentives. Punching through that first frontier can be achieved in three ways for a centrally-planned economy: it can either evolve 
toward state-guided capitalism (Deng's choice); devolve into 
oligarchic capitalism (Boris Yeltsin's gangster capitalism of the
1990s); or, if it's small enough that outside help can prove 
immediately decisive ("Calling all expatriates with money!"), it
 might make the "shock therapy" leap (or is "convulsion"?) 
directly to either big firm or entrepreneurial capitalism (or some combination there of). Small, ex-Soviet satellites that appear to 
have successfully transformed in this way are the Baltic nations of 
Estonia, Lithuania and Latvia--in that order. Also somewhat
 successful are Georgia, Hungary, and the Czech and Slovak republics.

 

As far as former European colonies are
 concerned, except for the smallest, city-state ones, most countries, 
once independence was achieved, shifted straight into oligarchies--a
 very short journey (what are colonies but a local oligarchy selected by outsiders to rule?) made infinitely more tolerable if you have few 
people and lots of oil. Most former colonies remain trapped in this
 category to this day.

 

Once past the market frontier, the next
 one lies between extensive and intensive growth patterns. Both 
state-directed capitalism and oligarchic capitalism can manage
 extensive growth, with the former better at industrial development 
and the latter more suited to rural-based commodity processing.

 

To punch through the "smart growth" frontier, state-directed economies can either move toward big firm capitalism, as Japan and South Korea successfully managed, 
or--again--if they're small enough, they can engineer a shift in 
the direction of an R&D-intensive, entrepreneurial model, like 
that of Singapore. A third variant would be China's gradualism 
model, which seems to be aiming for that happy medium the United States now manages between big firm and entrepreneurial capitalism. India, long a victim of too much state guidance, would seem to be 
heading in the same rough direction, leaning more heavily toward the entrepreneurial model in IT and pharmaceuticals while a few big firms
 stake out global trajectories in industries like steel, air travel,
 and even automobiles. Meanwhile, India, like China, seeks to
 gradually cannibalize its leaden state-run enterprise sector.

 

In the case of oligarchic capitalism, 
there would seem to be the safer, short-term fix of moving from that situation toward state-guided capitalism, the path Russia seems to be 
taking under Putin. As for direct transitions to either big firm or 
entrepreneurial models, we currently see the small Gulf Cooperation 
Council nations (city-states, really) emulating the path of
 Singapore. Indeed, Doha and Dubai seem to be competing for the title
 of "Singapore of the Persian Gulf." Saudi Arabia would seem to 
be attempting more of a big firm development pathway, but of course, 
that's limited by the lack of the kingdom's ability to evolve 
itself politically away from clan rule married to austere (for the 
masses, that is) religious orthodoxy in the form of Wahhabism.

 

Once you approach either the big firm
 or entrepreneurial-style capitalist models, the last frontier to be conquered is, in my mind, the shift to political pluralism or 
democracy. Unless you're a well-endowed city-state, it gets
 awfully hard to simultaneously pick winners and losers among big 
firms while engineering the conditions for entrepreneurialism, absent
 significant political feedback loops. If your judiciary is clean and 
independent and you regularly rotate your leadership, with some 
competition for advancement within the ruling party or elite, then I
 think very small states, if national identity is assiduously
 maintained, can manage themselves ad infinitum as essential 
technocracies, perhaps capped off with a figurehead royal. But if
 you're a country of any real size, especially one that combines 
both "body" and "head" assets, it's hard to see why your 
people would long suffer the planning inefficiencies and corruption 
that are endemic to non-democratic or single-party regimes. You 
simply need to compete the top political spots at all levels of government: local, provincial and national.

 

Once you're into true democracy, then 
I think there are only two evolutions worth mentioning for now. The first is to move from unitary state structures to federated 
structures, whether that occurs downward, within a single state, or 
upwards, as unitary states bind together with other states in 
multinational unions. The key to heightened efficiency with a truly 
federated structure, like America's, is that a competitive 
environment is created both horizontally (between states, counties and municipalities) and vertically (local, state, federal). If you
 want the best rules, competition and regular elections are the way to
 go. The second evolution is to move toward a more common law 
philosophy in the court system as opposed to the continental European
 tradition of civil law. If you want bottom-up ingenuity from your
 citizens, better to decide the case first and then reach for theory 
rather than the other way around. Activist judges beat interpreters
 by fostering a greater competition in ideas within the judicial 
system, and that makes for a better business climate--on average. 
Check out the Heritage Foundation's annual "index of economic
 freedom": states with a common law heritage (hint, they tend to be 
former British colonies) tend to rank higher than those with civil 
law traditions (down with Napoleon!).

 

So back to Rosencrance's point about 
optimizing a state's structure to the point of becoming a "vigorous 
unit capable of sustaining pressures of worldwide competition":
 what Baumol et. al's analysis suggests is that, even with 
Fukuyama's "end of history," there remains substantial room for 
improvement within the market-based model of capitalism--as in, not
 all models are equal but instead represent stages along an
 evolutionary branch. In my mind, there's a clear hierarchy, moving
 from least to most evolved, from oligarchy to state-directed to big 
firm to entrepreneurial, with the sweet spot triangulated somewhere 
between big firm and entrepreneurial, accompanied by a wide-open 
political system that welcomes immigration.

 

Why the last bit? With development 
comes lowered fertility and aging, so in order to maintain a 
consistent influx of new minds, new talents and new ideas, the most
 competitive economies need to attract new workers, whether permanent
 (immigration) or circulatory (the global commute), at levels of both
 high and low skills. Eventually, citizenship will be offered to the
 most highly-trained talent for economic reasons just as it's today sometimes offered for Olympic-level sports talent and in return for 
military service (one of America's oldest laws). As Thomas 
Friedman has argued, one rule we could probably readily agree to in
 this hyper-competitive global labor market is: Get your PhD in my 
country and pick up your citizenship papers on the same day! Trust me, it'll come faster than you think. Citizens will someday change
 national citizenship like free-agent sports stars change teams.

 

What 
I'm really trying to say by way of this analysis is that America
 needs to view the rise of state-guided capitalism for what it really 
is: the best iteration some states can muster in the short run, 
given where they started, and not a long term 
threat to America's continuing evolution as a mature market
 economy. When resource windfalls drive it, like among the oil-rich 
states, there's a clear half-life to that evolutionary stage, because no one commodity gets to dominate the global economy for long
 at relatively high prices compared to its alternatives. Moreover, when you contemplate the inevitable movement of the global economy to 
a significantly reduced carbon footprint over the course of this
 century, as many Middle Eastern regimes are already doing, you
 recognize the imperative of diversifying your economy, which in turn
 means specialization of your labor and then we're back on more
 familiar economic tracks. As argued above, closer examination of
 China's success over the past two decades does much to dismiss the
 myth of state-guided capitalism being superior to 
entrepreneurial-style capitalism. Simply put, we've got bigger and
 more important fish to fry with China, as I'll argue in the next 
chapter. 

 

...

 

Collier sees four
 "traps" that keep the bottom billion down: 1) conflict 
(three-quarters of the bottom billion have recently suffered a civil
 war or suffer one now); 2) an over-reliance on natural resources for 
export, especially oil (one-third are resource "cursed"); 3) 
landlocked and tied to bad neighbors (40 percent live in landlocked 
countries and 30 percent have bad neighbors as well); and 4) bad 
governance (three-quarters have suffered a long period of bad
 government economic policies).

 

Bottom billion economies are also 
small, with much of the population surviving on small, rain-fed
 farms, growing staple crops with a Malthusian logic: more food means 
more survive and vice versa. Again, tell me this doesn't sound an
 awful lot like China pre-Deng and still to a large extent now, as 
most of the poverty inside China is located in the rural interior.
 If the EU effect, as Parag Khanna observes, lures Eastern Europe up 
to minimum international standards and the Bush administration's 
clever Millennium Challenge Account plays a similar role among 
"threshold economies" (i.e., near emerging), then who can the 
Core get to play such a rule-set upgrading role among the bottom 
billion? The answer, of course, is China. Growth rates among the 
bottom billion were up an average of 1.7 percent across 2000-2004, 
much of this due to China's progressive economic penetration. 
Because, as Collier argues, Asia's emerging economies basically 
block Africa's integration by having first attracted
 globalization's connectivity in the 1980s and 1990s through lower 
wages, Africa must wait until Asian wages rise high enough for a 
similar gap to emerge, making Africa attractive enough for Asia's 
integrating efforts (a possibility I'll soon address below).

 

...

 

Back to Easterly's point about 
artificial states: my argument is that when such economies open
 themselves up to globalization's scary makeover, there's also the 
great chance they'll succumb to its disintegrating impulses.  Business guru Ian Bremmer pioneered this line of reasoning to great 
effect in his intriguing 2006 volume, The J Curve, in which he
 notes that authoritarian regimes often come apart at the seams when 
they first truly embrace globalization's broadband connectivity. If
 survived, the country can ultimately emerge on the far side of that 
journey far more stable. But that's a big if. Bremmer's point is
 this: be careful what you wish for in opening up closed systems,
 because disconnectedness both hides and enables state failure, so 
once opened to globalization's many reformatting dynamics, you're 
basically unlocking a Pandora's box of instability. Most closed 
systems are authoritarian, meaning they possess what Bremmer calls an
 "ideological immune system" that justified both their existence
 and their distance from an "evil" world. That's why economic 
and political sanctions have no real effect; they simply meet the 
dictator's demand for an external enemy image and thus strengthen
 his rule (see North Korea, Iran, Cuba under Castro).

 

I basically agree with Bremmer's
 thesis, but here's my qualifier: the dissolution of the system as
 it travels along the "J curve" (i.e., moving from 
stable-but-disconnected "down" through the trough of 
connecting-but-unstable and up the far side to "connected-and-stable) 
is primarily a function of its fakeness, or artificiality (Easterly's point). When you go through Bremmer's list of historical cases,
 the vast majority of state systems that fell apart were truly fake
 states: Yugoslavia, the Soviet Union, Iraq. The states that seem to 
survive this journey are far more real, like South Africa, Turkey, or
 Russia today.

 

How do the more real states, in effect, 
"jump" Bremmer's J-curve? In other words, how do we get 
relatively stable but disconnected nations to embrace globalization
 while not falling apart and yet somehow move toward political 
pluralism? The counter-intuitive answer, or arguably the one 
requiring the most strategic patience, is that most countries that
 completed that journey in the past did so as single-party states.
 Good examples are Mexico, South Korean, Japan, Taiwan, and Malaysia.
 For decades all five presented themselves as quasi-multiparty
 systems, and yet all were long dominated by a ruling party whose 
permanently weak opposition played the role of Washington Generals to 
its Harlem Globetrotters (i.e., the patsy who always makes a game of
 it but is never allowed to win). Eventually, in each instance the 
dominant party finally fell and serious democracy broke out.

 

If stable democracy is an outcome of, 
rather than a means for, successfully embracing globalization, then effective sequencing of change (political, legal, economic) would
 seem of paramount importance. Here, I think three models are most 
pertinent.

 

The most familiar model is that of 
Asia's "tigers" (e.g., Japan, South Korea, Singapore, 
Malaysia): Establish a firm legal rule set first, then pursue rapid
 economic advance through export-driven growth, and once enough wealth 
is accumulated in a growing middle class, let the political system
 open up slowly.

 

With the Soviet Union/Russia, the path 
has been the exact opposite: A political opening-up, followed by economic liberalization, followed by bureaucratic retrenchment.
 Mikhail Gorbachev initiated political change (glasnost) that
 he hoped would quickly lead to economic revitalization (perestroika).
 Instead, the USSR dissolved as a political union. Next came Boris
 Yeltsin as Russia's first truly elected leader. His rapid and widespread privatization policy effectively snipped Moscow's lines of 
control across the economy. The result was an equally rapid emergence
 of "gangster capitalism" by which corporate wealth was 
concentrated in the greedy hands of the so-called oligarchs. The 
oligarchs were, in turn, dethroned by Yeltsin's successor, Vladimir 
Putin, in a nakedly aggressive re-nationalization of the economy's
 commanding heights (extractive and energy industries). Putin's
 law-and-order leadership reflects the return to power of the Soviet 
Union's security elite, or the siloviki ("power men"), who 
now attempt to clone a "double" of their ruling party as a 
conveniently pliable opposition (sound familiar?).

 

China's model, as we saw earlier, plied 
the third course: Deng Xiaoping chose first to focus on economic liberalization with his "four modernizations." When the 
grassroots democracy movement sprang up in the late 1980s, a
 political crackdown ensued (Tiananmen), and ever since China's 
leaders have focused on constructing the country's business rule sets
 while delaying political liberalization.

 

In sum, we face less of a conundrum 
than it might first appear in that globalization's remapping 
dynamic tends to reconfigure fake states while pushing real ones 
toward single-party rule as a transition mechanism that allows a
 previously disconnected nation to embrace globalization more on its
 own terms (i.e., accepting connectivity but demanding the political 
right to censor the content flows that ensue--especially on 
questions of political liberties). By casting it as a temporary
 phase, we understand why several New Core pillars (chiefly, China and
 Russia) embrace state-guided or authoritarian capitalism.

 

The real conundrum comes in realizing 
that the bottom billion, once well exposed to globalization, are 
likely to face centrifugal forces in the manner of Bremmer's 
J-curve, and that the most likely agent of such connectivity, China, 
has a profound aversion to all the "isms" likely to unfold:
 extremism, terrorism, separatism (the founding "fears" of China's 
Shanghai Cooperation Organization in Central Asia, a region full of
 fake states and bottom-billion dwellers). If there is one area where 
U.S.-Chinese strategic dialogue should concentrate, it is on this
 difficult point. Otherwise, we're likely to find ourselves at 
loggerheads over such failed/failing states, even as we agree on the
 collective security dangers such countries pose. The answer would
 seem to be that the United State and China need to target the bottom 
billion for pre-emptive nation-building and "external" improvements that better link them to globalization's chain 
networks.

 

...

 

This is a complete win-win in 
grand strategic terms, with America and the West focusing on creating 
the stability and economic security to facilitate the East's 
progressive integration of African economies into buyer- and
 producer-chains that connect those economies to globalization's
 Functioning Core markets. Instead of pretending that weak African 
economies can scale that mountain on their own, we hitch their cars 
to the rocketing train engines that are India and China's emergence
 within globalization's network trade: linking African firms to
 their firms to our firms to everybody's markets. Global-market
 targeting FDI is the "Holy Grail" of globalization, with 
opportunities for local firms ranging from the role of "generic 
exporter" to "premium supplier" in apparel, food, consumer
 goods, electronics, machinery, automotive parts, automotive assembly,
 and so on. In the end, this is all about pulling Gap regions into 
the Functioning Core's main arteries of circulation (e.g., networking investment, production and trade).

Reader Comments (1)

"As the World Bank argued recently, most wealth in this world is "intangible," meaning encased in people and not things, so the wealthiest countries have the most talented workers and best institutions and leading technologies."

What about all those intangible side bets on the sliced and diced sub-prime mortgages, and the crews of 'analysts' that created the math models to justify and sell those over leveraged side bets?

Faith in those intangibles was as useful as faith in magic and fortune tellers centuries ago.
February 4, 2009 | Unregistered CommenterLouis Heberlein

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