Presentation to a Leadership New Zealand seminar, 18 May 2006.
Keywords: Globalisation & Trade; Governance;
I am working on a book, The Globalisation of Nations, sponsored by the Marsden Fund. As the title suggests I am concerned with both the process of globalisation and how that affects the nation-state. Today I begin by giving a brief overview of the economics of globalisation, but my main focus will be about its impact on the nation-state.
Globalisation Themes
The study is founded on five themes. You will be surprised how often people write or talk about globalisation, without defining it, so my first I define it.
1. Globalisation is the economic integration of economies – regional and national economies. This definition is the standard economics one with ‘regions’ added to ‘nations’ because I do not want to preempt what is a nation.
Next, when has globalisation been happening?
2. Globalisation began in the early nineteenth century, so the phenomenon is almost two centuries old. Since globalisation is an historical phenomenon, focusing on the last few decades throws away a rich source of insights.
Third, what drives globalisation?
3. Globalisation is caused by the falling cost of distance: transport costs, plus the costs of storage, security, timeliness, information, and intimacy.
While we can not measure the fall in the costs of distance precisely we can observe them schematically. In 1855 it took about three months to get from New Zealand to Britain, whether it was sending a package, a person or a message. Let’s represent the time by a line:
************************************************
Today it takes only a month to get to Britain by ship. That’s because ships are faster, and they can go through the Panama Canal. That line now looks like:
**************
But that is misleading in regard to people and light valuable goods. Once they went by ship to London too. Today they can fly to London in less than two days. Compared to the 1855 their world looks like:
*
Yet information can be sent in vast quantities almost instantaneously via the world wide web. On the same scale that time is represented by something smaller than the full stop which ends this sentence.
One implication is that as long as the costs of distance fall, globalisation will continue. It may continue in different ways. Who even twenty years ago would have predicted a whole range of services were tradeable – business service offshoring, call centres, and electronic purchasing among other activities – facilitated by cheap telecommunications means. The future form of globalisation may surprise us.
Fourth, why is globalisation such a powerful force?
4. Globalisation has exceptionally powerful effects when the reduced costs of distance combine with economies of scale. The first half of the book sets out this story, but I wont go into it today.
My fifth theme is the consequences of globalisation.
5. Globalisation is not solely an economic phenomenon. It impacts on politics, society and culture, which within the context set by technology, influence the course of globalisation.
These impacts are investigated around two hypotheses.
– Globalisation causes cultural convergence;
– Globalisation causes policy convergence.
The study concludes that, ‘yes’ convergence happens, but ‘no’ differences are not eliminated. In summary
5A. Globalisation impacts on, but does not eliminate, cultural differences,
and
5B. Globalisation reduces, but does not eliminate, the policy discretion of states
Thus, and too my surprise from where I was when I started the study, I think the nation-state will continue despite globalisation, although it will have to adapt.
The Nation-State
While each Nation-State presents itself as having a long history, in fact it is a relatively recent phenomenon. We are partly misled by being English speaking, because we think of England as typical. Shakespeare’s Henry V, written 400 years ago, while the threat of the Spanish Armada still was in the memory, is so nationalistic that a film of it was made in 1944 as a part of the British war effort. However even Britain does not become a modern nation-state until the nineteenth century.
More typical is Germany. Two hundred years after Shakespeare, Germany’s greatest writer, Johann Wolfgang von Goethe, did not live in a Germany but moved between the forty and more German speaking principalities which existed in central Europe at the time. His literary community defined their Germanness by their common language, not by membership of a common nation-state – for it did not exist. Towards the end of Goethe’s life there was some amalgamation of the principalities and the formation of a customs union, but Germany as we know it, did not really begin until 1871. This is not untypical of most countries. New Zealand, while thinking of itself as a ‘young’ country, is actually an old one, about the 20th oldest nation-state on some criteria. Most of the world’s nation-states were formed after New Zealand’s, evven though their cultural roots may be much much older. .
For the nation-state was the product of globalisation, or more precisely the falling costs of distance. which drove the integration of localities into regions, and regions into a larger grouping we call the nation-state. The logic of this process might thought to be continuing amalgamation, with the nation-state losing all meaning in the future.
Curiously, the best example of this phenomenon occurred before the era of nation-states. Many of the peculiarities of the federation we know as the United States of America arose because had when its constitution was written, the model of the state was the European continent at the time of the young Goethe – fragmented, fluid, not particularly effective, and quarrelsome. While there were some who believed in the individual power of the US states, most notably Thomas Jefferson before he became president, the reality was they were stripped of their powers in order to provide a strong central government to protect the Americans from Britain and France.
When, almost two hundred years later, the sometimes called ‘United States of Europe’ was formed, the nation-state was in rude good health. So the European Union’s constitution gives greater weight to its constituent states, and less to individuals, than the US one does. Those nation-states are reluctant to give up many key powers: Europe was all over the place in the run up to the invasion of Iraq, and while we talk of the difficulties that the European Union is presenting in reforming agriculture in the Doha Round negotiations, the problem seems to be primarily obduracy by France.
The European Union may be a better model of the future of the world than the United States of America. There is unlikely, in the mid-future anyway, to be any world government really powerful relative to the constituent states. Look at some supranational institutions – such as the United Nations, the IMF (the central bank of the world), and the World Trading Organisation. Their effectiveness is dependent on the cooperation of nation-states. Ironically, one of the chief resistors to a US model of world government is the United States itself, with its is reluctant to give up its sovereign power.
The book cautiously predicts that the US will become less economically powerful because of World economy structural changes consequent on globalisation (and earlier than need be, if it continues to be fiscally irresponsible). But I dont see any of the other four big economies – the European Union, China, Japan or India being eager for a powerful World government either.
In his Shield of Achilles, Phillip Bobbit argues the nation-state may become domestically irrelevant. He sees the nation-state, with a concern for the welfare of its peoples, transforming into the market-state whose primary purpose is to give people choice. Now Bobbit is an American Republican, which does not necessarily invalidate his argument, but tells us where he is coming from. He is more interested in the foundations of military power – an understandable concern of any American intellectual – but it means that the story he is telling makes more sense in America, whose public might have internal choice together with a sense of nationhood as the biggest bully on the block. Other countries do not have that option. In any case, it is pious to say all Americans have choice. Certainly many do, beyond the wildest dreams of their ancestors and much of the rest of the world today. But America has a largely disenfranchised underclass which, for instance, lacks access to decent health care. It seems unlikely they will remain quiescent forever. It is possible that Bobbit’s market-state unconcerned for the welfare of its people, may descend into fractious class warfare.
Today, however, my concern is going to be primarily with smaller, by population, nation-states than the US. Are they likely to fade away?
Here the two hypotheses of cultural and policy convergence become very relevant. A rejection of both hypotheses is necessary for the survival of the nation-state. First, suppose there is total cultural convergence, then what have the citizens of one state that distinguishes them from those just across the border? Why in such a world is one state of any significance over another?
So is there cultural convergence? Of course the adoption of common technologies leads to a kind of cultural convergence: an observer from a developing country will see similarities in all rich country cities, with their domination by the motorcar. But aside from technology it seems likely that the convergence process is weak.
To investigate the hypothesis I considered whether there has been convergence between Canada and the US, the longest peaceful neighbours with a common border, with the largest international trade flow. Testing the convergence thesis this way is a no brainer. Canada and America are very different societies, despite the 150 years of respect. Indeed, once I began thinking about the comparison, I was struck how there are very different societies within the US – the red-blue split of the Presidential elections being just one example. So the US cannot even get cultural convergence within it.
What is happening is that, despite globalisation (and technology) pressuring cultural convergence in a sort of deterministic economic way, the dynamism, the creativity, the eccentricity of culture means the convergence forces are unable to overwhelm the forces for divergence.
But nation-states not only have to reflect cultural commonalities which distinguishes them from the rest of the world. They have to be able to express that distinction. Hence the relevance of the policy convergence thesis.
Policy Convergence?
There is no question that there is much policy convergence. The book identifies two processes which drive it.
First an optimal policy, if it exists, is likely to be adopted everywhere. Thus virtually all countries use money as a means of bringing together producers and consumers.
The second policy convergence process arises from the consequences of international trade. Trading partners need commercial commonalities. The book illustrates this with the need for a common system of time and calendars. While in principle a sovereign country may choose a different clock and calendar, in practice they dont because the rest of the world sets the standard. We need to distinguish between de jure sovereignty– what a country can legally do with itself – and de facto sovereignty – its real freedom in a interdependent (globalised) world.
Some of these commonalities are so common, we hardly think about them. More contentious are commercial policy issues like the degree of border protection. Each country has the de jure power to impose tariffs and quotas, but its de facto power is limited by the international agreements it enters into, under its de jure powers, such as free trade agreements and the protocols of the WTO. Very often a country gives up this power reluctantly – which is the reason that the Doha Round to reduce border and related interventions is stagnating. But in order to get commercial intercourse between economies, concessions are necessary.
The concessions are slowly converging to a world in which there is minimal assistance to internationally traded commodities, although we are a long way from the rock bottom – especially for agricultural products.
However, not all commodities are traded – a couple of examples. First health care. The bulk of health care is not internationally traded. Pharmaceuticals are, some advice and testing can be using IT, medical personnel move around, and sometimes people change countries to get treated. But most health services are provided on location.
Moreover, there appears to be no optimal health care system, for while everyone has their own theory, there is little agreement. (Contrast the commonality of the agreement clinicians have about the treatment for most conditions.) Thus there can be considerable variation between countries on the funding and provider arrangements. Generally there are no reasons for international commercial policy to interfere in such arrangements.
An even more difficult area is that of culture.. To what extent may a nation-state intervene in commercial operations to protects its culture. May Basques insist on labelling all products in Euskara in order to foster their language? What if the government restricted the provision of education to institutions dominated by locals, thereby excluding foreign providers? What about local quotas? Positive answers result in non-tariff barriers, anathemas to free traders. Such questions are unresolved, but despite great pressure from the dominant cultural provider – currently the United States – my guess there will be strong resistance to a free-for-all in cultural policy. However in some areas the effect of these policies will be to slow down convergence rather than prevent it. I shant be surprised if everybody’s second language is eventually English.
So there are still areas of policy discretion. Some will be crucial in sustaining the nation-state. One of the dimensions the Canadians distinguish themselves is they have a different – and one might daresay better – health system than the Americans.
But what about commercial policy. Again there may be some room for differences. New Zealand and Australia have differences in their competitions policy, I think it unlikely that the WTO will try to harmonise infrastructure policies. New technologies create new opportunities for difference – there is no internationally agreed commonality on research and development funding. There is a lot of discretion in education policy. So while the policy space for commercial assistance is narrowing, it is unlikely to be zero, except in some areas, especially where there is international intercourse across borders..
Borders
Nation-states need borders. Yet falling costs of distance and the resulting changes in commercial policy have made borders more permeable to goods, certain services, capital, technology and tourists, although they remain practically necessary for phytosanitary reasons and to restrict terrorism. The book suggests the freedom of workers across borders is less certain. Most countries are not as hospitable to foreign workers as we – or, better still, the Canadians – are. Of course there are great flows of highly skilled workers, it being quicker and cheaper to import them than to train them up domestically. But what about unskilled workers? Two quick points here – the study’s coverage is much richer.
First, international trade is a substitute for labour migration. Rather than the worker moving to a new country and producing the good or service there, the commodity is produced in the worker’s country of origin and moves to the country where the worker might like to locate and cannot, with the worker’s labour embodied in it.
Second, not all goods and services can be traded. You cant move land, which is why unskilled Mexicans can find jobs on US farms. Many services can not be traded either. One of the pressures for increased migration of unskilled workers comes from the aging of the rich countries’ population, suggesting that world migration flows may have to double current levels to deal with this. Since those migrants will be ethnically different from the host populations, they present quite a challenge.
Permeable or not, will the borders be stable? There are still border disputes – quarrels which occasionally boil over into armed conflict – but since the post-war settlement nation-state borders have been remarkably stable, with one notable exception. There has been considerable fragmentation including the breakup of the Soviet Union and Yugoslavia, the division of Czechoslovakia and the Indian subcontinent, and the break out of East Timor. Additionally there are implicit fragmentation in the successful demands for regional autonomy of the Québécois, the Scots and the Welsh, the Basques and the Catalonians for example.
The Size of Economies
This fragmentation at first seems counter-intuitive because we tends to think in terms of economies of scale, so that larger the economy is better. An economist might argue that fragmentation was a tradeoff between materialism and national and cultural autonomy. If so, and the cultural convergence hypothesis is an overstatement, this supports the optimistic case for the future of the nation-state.
But there is another strong argument for small states. Most economic analysis is about the market sector where, generally, there are economies of scale. In the non-market sector, arguably, there are diseconomies of scale. Big governments – in terms of the population they cover, not the proportion of the economy – are less efficient. Smaller government – above a certain population threshold – are better governments. You might say that small countries have a comparative advantage in the provision of public services. If this be true it explains a couple of features of the world. First, many of its richest countries – European and Australasian ones – have small populations. Second they are more likely to use non-market delivery for such things as health care and education, and achieve a high performance from those sectors. The contrast here is that the US, with its bigger population and less efficient government, has to use market delivery for health and education and has a relatively poor achievement, except at the elite end of tertiary provision.
The Future of Small Nation States
This is the good news for small countries. The bad news is they lack economies of scale in their market sector. But this deficiency can be mitigated by specialisation, so there are some big sectors by international standards – dairying in New Zealand for instance – which trade internationally, financing the importing of those products the economy does not produce. So small countries have to vigorously engage in international commerce to attain the economies of scale to be wealthy. In doing so they give up some of their de facto commercial autonomy.
This is nicely illustrated by Slovakia which separated from the Czech Republic (perhaps to its economic detriment).Then both countries joined the European Union as soon as possible. Small nation-states may join federations, but if the European Union is any guide, only if they believe they retain sufficient autonomy.
The conclusion that international commerce creates dependence applies to all small nation-states. Commercial success means a lack of commercial independence, almost exactly the opposite conclusion to the premise on which so many nation states were born, and evolved in the twentieth century.
And on that paradox, I leave the nation-state in a globalised world in – as I have said – rude good health but having to redefine itself as a cultural entity, with some but not unlimited policy discretion.