Deleted scenes: Chapter Four
Monday, February 2, 2009 at 3:54AM
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.
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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.
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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.
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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).
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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.
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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)
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.