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tr.ftddajr otna.c; • I'ormer Seaior Partner of MdCinscy &' CiMnpIIay. has c:owiseIIed.1iIajor cOrpor.aions and pml-
. aiIhts OD their ilUeniatiOul "fttec,I.es.~ opentio_ . for twenty ,_.. WIdely rICQFizaI . .IIIOIR· of UJd.fa '" busioess guruS, b=.the .:d&orrAthe .... - IMa'Cd TrW
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KENICHI,OIiMA.1!
END OF THE NAtION STATE
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ImmcIuc:doo: ~ Ibe BmIeD PaD in.~ \\bdd 1
1-. Ibe ~ 1DQsInn. 7
1. lhe'Udda'pfDpI1apntDl. II
To my former ttWueagies at M~Kim'q., who
have been - and remain - a constant $eurot: or ~pi.mtlon and intellectual ch.aLIe~e.
CONTENTS
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PREFACE
Ever since lwrote'The Mind oj the Sb:'allgtst. mfpmfessional activities have been Iargd.y devoted to hdpmg managers, and PQ~ alike lmaersWlci;, adapt [0, ana le:m:age the primary farces shaping the global economy. Chief among these foI¢s. in my view. art m'tir-· reversible effeers of teclmology~ panicular, modem infomtatiOD: .technotog)A-Ori.the saucture of 9usmess processes and on the values, judgments, and p~ of ciEizensand consnmers in all parts m the world. Indeed, sO powerful aJe these e£I:ects that, once the gnie of global in(ormatipn Row really gelS 01!11 of the bot de-and it is emainlyoot of ' me boule ri,aw~there can be no turning back. Against this kind of ewrent. no tn\ditionalscr3tegy. no fam~ lip,e of policy. and no entrenched form of organizaf!ij.OJil can stand untouched or unchanged.
As a gmup,oorporate managel'S have moved relatively quiCkly to embrace-and accommodate. and even, to cq:jloit', this torrent ohnfor~ mation. they have understeod from mhe outset.that ·then-companies would, not-and could not-remain immune to so fun&nnenqi a change in their environment. Goveroment leaders,howtY,e~ me men, and women resp:nmble for the affairs of both mooemnatiQrI stares. and the asseniblies of such states (the Uoited. NaUORs, for example. and Ute Euro~ Union and the parties to me NOM American Free Trade> Act INAFTAD. 'have luld a very diierent reaction, ~,such . catastrophesas unprecedented natural disaster., nuclear hol0Ca\lSt. or an Ul-statreQ cop.ventioIW wm; 'they' have. by apd! larg¢., ~.ed
vii
viii ' Preface
convinced that me entities they oversaw ~ remainprtuy much unaffected.
Individual" nations might, of course" do a liiwe better ora little worse in die ,glOba1 marketplace. The quality of cinzens' 'lives in 'One might Improee-a htde.faster or slower than illaflodter. The indpStrial m~ Qf value~g.qdivities .mght look a littJ'e; difmefl!t than it otherwise would have looked. But, surely. the information-led ,tranSition toa genuinely borderless economy would not call iamquesnen the relevance ef nat:i.on states as meaningful umes ·of economic ~dvity. Nor would it. call into question the aDiliry of governments to "manage," at least ingeneral tenns, the evolvin~ shape of that activity. Nor-at ihe bottom of it aU~would .It challt:nge the fundamental integri,ty orcoherence of 'the nation state irsdI To government leaders, dun was QO$itively unthinkable, On ~e maps that mattered, 'l!here wete~d always would be-borders 'between countries, The precise line of demarearicn migbt shift \Yidl events, but the mot ,truu such lines ~ted would not. Of this, government leaders were quietly and ,confidently certain.
But they were wrong. the forces now.at WQti( have, raisedrroubJing queStions about the .relevance-and dfecriveness=of nation states as meanIngful ~gates i~ terms of which to thinkabol1t. mu.ch less rna:nage" eeonomtc activity. Once-powerful. examples of such D3aon staleshilve eome ~n a~ the se~uns.CAt a conlerence of leading CEOs held in Srungan back in 199.0.1 predictedthat the "global logic" UFl~ leashed by these forces would lead to the collapse of the ¥vie;( Union. At. the time, no one else .tn the room believed me.) And many of the core values supporting a world order based on' giscrete, independent ~nation states---llbeml democracy as practiced in the West.
- .
for ihswu;ce, and even the-very notion of political sovereignty 1&1£-
have shown tibemsel:vesID serious need of redtdiriitioJ') or, perhaps, replacement, Indeed(. as the 21st century approaches and as what I call the fout "I's" -industry; investment. individuals, and infonnatioll'flowtelativeIy unimpW:ed! aeross naaonal borders, the building-'btock concepts aF>proprfute to-a [9dl-cen~wy; dosec;l<oumry model of the world nQ 10Age-r hold.
Still. for perfectly understandable ifea,.SOns,ma[ model and those concepts remam \0 'common, ~ly use. In. some companes-cand in
mostgovemme1lts--thete is a gap of'more thana cenrury between the C1DSS-'border 're3!ities of the external worltl,md. the fmin.twotk of ideas and Ilhe prmd;pl~ used to make· sense. of them. 1his is not surprisb'lg. Old ideas, ol'd exp.tanations die hard And me more obvious and mattet-of:ofact they seem. me twdeJ they die. Therefore, my'hope for ,t:I\is bpok is that,. tQ8¢ttlerwith many oJ the things 1 have written in the past, it will, provide ,~erS. scholars. and 89vetnment leaders with the begiMings of a. new set or principles ,for thinking about Why some regions prosper eronomicallyand ome,ts do not, and Why traditioi1al policies based on tracfuional principlesstmply cannot provide anadeqMle guide to the borderiess wdfld. It is· my 'soong hetie[ that. so long as the old priDci.ll,les coiuinue '~osha~ policy. the coorury-Iong gap between .intentionand resub cannot' be dosed by better execution or implementation. Nothing can.dose il. The prmcrples themselves have to ,clumge.
I would like·tlO tkmk Alan Kamrow for his b1renec~coritTcibution and ediooru.d assistanee. WtthouI his help. I would nor have. been able to crysttlli2eIl1Y thinking to this level. Ms. HarukO Man,lyarpa was inseumeatal in P~l!ting the llW'luScrlpr in O1idet Bill Mar:assoni has: shaped my aspimtion.~ be has for more ,t.h:an a deeade~.dIaw a message for global readers from, 'my primary immemon in the experiace of companies ·andindlilStries in. Japan and Asia. lowe, as well, a special debt of giatitudero the ~rs of Singapore. Malaysia. HQn~ Kong; amdIaiwan!. wHo have done so mudh tc-shew the rest of us the kind of prosperity dial is possibl~whep lOcal g~hl~.mre)~ to the global logiC of the berdedess economy.
My fonner con~es at McKinsey & Company,- to wbOUl I ~ed.icate this book have beenaconseane S01;1l"'€e of inspiration and in~ellecrual dlirllenge. Wimout doubt. ~dG~ is the most emphatically global organizamon 1 krrqw in terms of membership. organization. and value system. I am foml.Date to haVe been, for more than twO decades. pan of irS efforts to help create genuinely global ehterpRses. We were able to pmctice what we preached,
As for mysel( I have now·retired frOm Mc~' (owdik With a group of ci1:iztnS in Japan dedicated wrefotming tlrt,t country and its policies along the 'lInes of the ideas presented in l\his book and in . oilier writinSS of mine on the political and social situaaon in Japan.
x Th( End of t~ Nali9n 5tak
Here, too, I hope to pracncewhat I've preached.
For my friends and family, there is, of course, a special debt of gratitude. Wi~holn their afIecdon,and support. I would never have been able tosustain my enthusiasm for this new challenge, I'm sure they understand that what I' am now tryipg 10 do is make it possible for Ute.mam!, one c;lay. their children to enjoy a high :quality of life in the kind of country they deserve.
WHERE THE BORDERS FAllIN A BORDERLESS WORLD
With lhe ending of the frigid FiftyYeaJs' 'Mlr between Sovie[~tyle cOmmunism and rbe West's liheral detn~, some observers--Fm.ncis. Fukuyam:a, in panicWar~ounced that we bad reached' the· '''end ofhiswry;" Nothing could be futther from the truth, In fact,. now that dle bitter ideelogkal confrontation spukedby dIis century's co1&io~ of "isms" has ended" larger Rumbas of people oom more points on me globe than ever befOre have·~ come.forward to ~ in hist91}'. They have left behiDd centwies, even miDennla, ·of 'obscurity in forest and eben and rural isolaoon to request- from the world commonity--and from the global ecenemy :£bat linb ittogether--a decent [iCe fOr themselves -and a better life for their children. A' generation ago, even a decade ago, most of them were as vO~ress and invisib~ as dle)' had ;nways, been. ThiS is true no longtr: they have entered history With a vengeance. and they have dtmandS--economic demand.s-to malice'.
But [0 whom or to. what sheuld mey make them? Their fust impulse, of course, will likely be tQ tum EO the heads of the governments of nation states. These. aftu all, are the leaders whose plans and schemes have 'long shaped the' flow ·of public events. Bm, in
1
2 The End of 1I1't Ndliqn Sra.k'
today's more competitive world. nation states no long~r possess the seemingly bottomless well of resources from which they used to draw with impunity to fund tfieir~ ambitions. These days. even, ,they have to took for assistance to the global economy and make the changes at horne needed to' -illvite i.t in. So these eew claimants will wm to international bodies like the United Nations. But what is· the UN if nOI~ ;l collection of nation states? So they will tum to multtlatera1! agencies like the World Bank, but these tOO are the' creatures ofa natipn statedefined aad -funded universe. So they will rum to ~lidtly,ec€)nomi, groUpings like OPEC or '(;-7 or ASEAN or APEC or NAFTA or the EU (European Union). 6uronc,eagain, all they will find 'behind each new acronym is a grouping of nation states.
Then. if they are clever~ ,they may inteFlUptmei:r quest to ask a few simple quesuons .. Are these nation states---norwitb,slalldmg die obvi- _ ous and important role thq play in .woddaffail's--realJy the primary actors in today's global economy? Do they provide the best window on that economy? Do they provide, the best pon of access to it? Ina world where -eeonomtc borders are progressively disappe<;ning. are. th~ir ~,histoJically aCcide,ntal boundaries genuinely m~gftill in economic terms? .And if not) what kinds of 'boundaries do make sense? In other words, exactly what, at bottom. are' the natural business uni:ts---the ,sufticient, correodY"sized and sealed aggregations of people and activitie&-thmugh which. to :tap into dlat econQmy?
One way to answer these. questions is to observe the flows.of what I callthe 4 'Ts" that define it. First; the, capital markers)n most devdoped countries aJ,'e fl~h with excess cash fpr investment. J~. forexam:ple, has the equivalent of US'I 0 tril1li0Jl stored away .. Even where a country itself hovers close IO banlmlptq; there is onen a huge accumulation of money in pension funds and tife insuranee pro~. The problem Is t~t ~ui[ao~le-and suitabJy 1atge----'inv~tment opporrumnes are not often. avaitlableo in thesame geographies where this money sits. As a result. the capj,tal markets have developed a wide variety of mechanisms to. transfer i,t across national borders.1 Today, near!>' 10 percent or U.s.eensiOfl funds ts invested in Asia. Ten years ago, that degree of panidparlon im Asian marlce,u; would have been unthinkable.
Thus, investment-the first "I" -'is no longer geographicillycon-
strained. Now, wherever you slit in the world. if the()pponuni~ tsatttactiYe, me money will come in .. A:nd ·it will be, for the mostpart, "private"'money. Again, 'ten years ago, the flow ofcmss-border funds was prlimarily €romg~ment to ~em or'from rimlnlateQ11 lending·agency to gmremmeJlt. There-was a capital d~ and aPt army of publi<; bureaucrats on at lease one end of fh:e transaetion, That 'is no lORger~e cast. Because most of tlie money now: moving ~. borders is private. gove.mmems do, nor have lO be mvolvedat either end. All: ~t martersis the qualiry of the ilM$tment opportulliity. The money wi!ll go where the' good opportunlnes are. 2
The Second "1'L........in~us.tty-i:$ !1Iso far more gt'oOal in orientation today m(U'l. it was a decadeago. In the past. with the. interests of their home govemmems c1eamy in mind. companieS wqtilM smke deals with host governments t.o· bring in resources. and skills -in exchangefor privileged. access to local rnaJkeJS. This" too, lias changed. The strategies of modem multirultional corporations are no longer shaped and condtnoned by ~ns of Slate but. rather; by the desire~and the need-e-re serve anracrise ~[S wherever th~ exist and to rap atrractive pools of resources wherever they sit. Govemrnem-funded substdies=-old-fashrceed tax breaks for i,rivest:ing'in th~ or thaJ loca[iOlil~are becoming melevanr asa decision cdtetion. The Western firms now moving. (say, into parts of China and India are there because dtatis.,wnere their furore lies. not because the host government has suddenly dangled a carrot in front of the,jr nose.
& corporations move, of course. they hring wi·th them working
- capital Perhaps more importam .. they transfer technology and managerial }mow-haw: These are Rot concessions te host governments; uhq are the esseaual J;aW materials these compames need- to' do their work. But they also bring-.something,else. Fe,osion fund money in the United States. (or example, might look for decenr China-rellated oppommities by scouting oot t'he possibilities on ,the Shanghai stock exchange. The prospects thus idenrdietll, however, will be largely unfamHiat Money Ii1~nagerS wiH do their best to p~vide adequate research. but ,everyonewUl admi,t that relevant knowledge 'is limited. But if it is a GE or an IBM or a Unilever or a P&G_'that is quiJding a presence in China, the markets back home and elsewhere' in the developed. world will know how to evaluate that. They win be-more
4 Tht End of the Nation Slat(
eemfonable with it. ,An.d dtat, in rum, expands the range of capirai matkers on wtUch. dlese companies em draw fotresoun:es to be used inGhma.
The movement of both. ilwesttment and indUS1fY .has been greatly facilltated by the tlmd. "I" -information teclmology-whkh now makes 'itpps.sible ~o~ a compamy W operate in. various pans of .the world without havi;ng to build up an. entire business system in ,eaCh of ' the countries where' \1 has a presence. fnFjneetJS at workstations.in Osaka can easily control plant opemmoEs ilt newly exciting p;ms 'of China like Dalian, Product desgners in. Oregon can control the 3CEivities of a, network of£actbri.~ throughout As~~c. nus. the. hurdles [or. cross-bordec pam€i~tign and srraregic allian_ceJ have .com.e· way down. AI:mies of espens do nor have ,[0 be transfened; amues cf workers do not. have. to be lE,ljRed,. Capability can. 'reside in the network.and he,rrude awilabl~ally anywhere- -as needed.
Piita1ly\ ind1vidnalcQnsum~e fourth "I" ~ also~me. more global in orientation .. With ··better access to mforrnao.on about Jifest)'les around the. globe', they are mudh leSs likely (Q'wanno buyand mueh tess oondinoned by govemment-injanctions, re buy-Arneri'" can or french, or JapaneSe products merelY l?etawe.. of mdt rlational associations. Consumers increasiJi1gly want dle best and cheapest products.no matter where they come. mom. And clley have shown 'then: willingness 1O vote ,these prererenceS with their pocketbooks.
Taken oogether. the mobility of these four rs mak.es it possible- for Viable economic units in .any pan of the world to pull in whatever is needed "for development. They. need not look for assisWlce .only [.0 pools of resources dose. to home,. Nor needthey rely on the fomW efe,rts of governments lO,r8Uract resources from elsewhere and funnel them. to the ulriJi!att USC3. lbis makes the traditional "midctUemari" fuacdon, of nation s~d .of their govemmenrs-largely' unnec~. Because the global marlceES for all [h~ I's wod< juse' fine on tlmi r own. nation states no longer' ~e to playa, ID.adcet-making role. lin fact. given their' own troubles, which are considerable, theY FQOSt .ofren JUSt get lin t,he way. If aIlowed.global,soluJionswill ·flow to where they are, needed wi.th~ut the inrerventiO"'n of nation states. On CUFJ;ent ,evid¢nce. moreoven they flow better precisely because such iruervention is absenr,
This fumdameritaly: ehanges the economic equation. 1£ the unfettered m~ent of these 1'5 makes the micldlernan role of nation St3t,esObsoltHt, the qualificanoElS needed to sit at ~globa]r ,table,@d pull in global solutions begin to correspond not to the anifiOialPQlirical borders otcounmes, but. to rae more f<OCUSed'geographicil units--=Hong.KQng~ for exam'plle;, and me adjacent. stretch of southern China, or the 'Kansai ~"&ion around Qsaka. or Eatalonia-wnere real work gets .done and real IIWkets Oourish. I call! these units. "~on states:" Th,ey may lie ¢ntirely Within or across me borders of ananon state. This does not mauetr. It ;s the in:e:Ie\Wltres:ult of ,historical accident. What defines them is not rhe location of their political borders but. the fact that. they are the right size andscaie to be me true, nawr~ al business units in to4ay's global eC;Qnomy:' Th.eU;; .are me ~r· ders-s-and the c:onnec:t!ions-that mana in a' borderless;worid.'
In thechapleIS mat follow, I Will show why traditional nation states have become unnatural, even impossible, business tmi.ts in a global etonomy. I will also show why region states are, in fact. 56 effective ~ pcrts of entry: Ito it. And I will explore bow these, develcpments change, deeply and forever:. the logic that defines b,ow corpotaliii~Fl$ operate and how tbe,govc;m.mems of nation states understand £heir, proper-role in economicaffails.
ChapterOnt
THE CARTOGRAPHIC IllUSION
A fi:m.ny--;md, ,(0 many observers, a very trOubling-thiRg:has'bappened on the way to form" U.S. President Bush's so-called "new
- world order": the oJa world bas fallen apan, 'Most visibly, wim the' ending of the Cold ~ the long-familiar pattern of alliances and oppositions among industiWiz.d:JI nations has fractured beyond repair. less visibly~ Irnr ~ty fat more impolitant, the modemnanon state itsel-thar artifact ol the 18th and 19di. cenruri~has begun to crumble.
Po.r many observers, tbis erosion of the long-familiar building blocks of dte poWital world has been a source of discornfen at least and, far mort likely, of genuine distress. They used to be confident that they.could tell with cenaintywhere the boundary lines ran. These are our people; those are not. These are OUT interests; those are not. These rue our industries; those are not. It did' not matter ~1 little. economic acttvity remained truly domesnc in any sense that an Adam Smith Of a David Ricardo would understand. Nor did it. 'matter dun the people served or the interests protected represented a small and dimirashmg fractio~ of the complex social. universe within each see of established political borders.
The point. after 'all, was duueveryooe knew-or could talk and aot as if he or she l<new-where the boundary Unes nut. Everyone's deal-
7
8 1M·End ~ tnt Nation Stale
~ could rest, Wim oomfonable assurance. on the ,ce:rtain, knowledge" as Robert 'Reich has put i£;of who was "US" and who was "Ehem. II The inconvenient faa that most or the guns pointed Q1 anger during the 'past two decades were pointed by national governments at same segment of me people those governments would define as "us"--weD. dlat really did: nOt maner either. Boundaries are boundaries.
Politics. runs thenme-wom ~. is the an of the possible. 1hmslated, Ithat means it is also me aFt of ignoring or 'overlooking dscordant facts: guns pointed the wrong way, democratic institutions clogged to the point of pandysis by minority interestS defended in the name of the majp·riliy-and, perhaps most important, domestic economies in all increasingly borderless world of economic activity; So What if ~ GNP pet capita in Chma is $317 but, in Sheazhen, whose econom.y is closely linktd With that of Hong Kong, it is $5,695? Boundaries-are boundaries, and political d:ivi.dinglines mean far more dIan demonstrable communities of economic interest
No, they don't, Public debate may stiU be hostage to the outdated vocabulary of poliriad borders, but the dciUy realines ~ most pe0- ple in the developed and developing wodds--both es citizens and as consamers=speak a vastly different idiom. Theirs is the ~. of aninCRaSingly borderiess economy, a true global madcetplact .. But the' references we ha;ve__;me 1iJl8p5 and guide:s--.to dUs new tenain are stilllargdy drawn in political terms. Moreove~ as the primary feaaires on thislandscape"---lhe traditional nation stateS'--begin to come ,a,pan atthe seams, the overwhelming"temptation ;is to redraw obsolete, U.N.-style maps to reOect the shiftingboJ.tle:rs of those States. The temptation is understandable, but the result is pure illusion. No more than. the work of early cartographers do these new affons· show the boundaries and linkages that matter in the world now emergipg. They are the pnxl~et of illusion, 4U1d they are faithful to their IOOIS.
This, too, is understandable. Much of the currera awareness of the decay of the modern nation Slate has 'been drive,n by the wrencr.mg experiences of the former Soviet Union and Czechoslovakia, which 'have fonnally ceased to exist as sUtgle national endues. Perhaps even more mglnenmg,. of course, is the noxioUs brew ,of ~cie~t harred, . more recem antagonism. and unbridled ambition in what used to be yugoslawt These are extremes. to be sure, but tbey are deeply. repre-
senWive of the kind of erosion that has at l3st begun to caprore an important share of pubJk attentioll.
Ina newly unlfied Gttmany, for example, unprecedented amounts of'power have been ceded to the indiYid~ I..i1iiJer.l In Canada. befell; the recent eleenoas in Quebee and. even before. the failure of the Meech 4ke accords, the French-speakU:tg proVince had been moving to cut hs ceasdtudoeal ties with the other, English-speaking provinces.2 In Spain, an explicit program of devolution is transfening much of the apparatus of independent statehood to the country's 17 "autonomous communities," ~y those like Catalonia with a deeply entrenched historical identity of their own. In Italy. long-preoccupied with the problems of the Mezzagiorno in the south, recent elections have shown the Lombard League in the nOM to be a real and! growing factor on the political scene} EVen ,in dirigiste Fnince." me prefeas cif Mittenand's government can ne longer unilatenilly veto loca] decisions in the country's 22 provinces.
Developmet,lts as striking as these d~ merit the attention they have received in the media and in the regular comments of opinion makers ana public 01icia1S. Nearly a half century of Cold w.u- cannot end without dramatic-and eminently noreworrhy=changes on both sides. R:eJaxa1!ion of the long-entrenched bipolar disciptine 'imposed by the United States and me former USSR cannot help but allow even older fault lines to spread. Equ~Jy so:ilting. however.; is the way <ill which such attention has been framed and articulated. To the extent these developments have been treated as evidence of a systemic challenge to traditional nation states (and not jJJSt as a challenge to this. or that current policy or set of leaders), they. have been interpreted for the most pan in political terms. Whatever their IVOt, the centrifugal forces now at work have been seen to be meaningful, first and ferernost.es statements about the inadequacies of established modes and processes-of political. order-that is. as evidence of troubling realignments wilhin previously estabhshed bOlders.
ThUS. as today's public debate would have it. thefission represented by local autonomy and hy ethnic or l'aciaI or even uibal uredentism, no less than the proposed fusion represented by Maastricht. shows clearlY that ,the ,postwar writ of central govmiments no km~t holds with anything like the power it enjoyed even a generation ago.
10 The Endcq die Nation Stale
Mel as that debate would also have it. tbJs failure of dte :pOlirlcal ~ ter. is "alegttimate cause for coneem, When no one seems to know where we are--or should be--going, initiative stagnates. spe.Qal interests reduce each omer to paralysis. and. (he consensus n~ for effective policy moves, still further our of reach. In tones of ~'me mole literary pundits like to cite Yea15: "1bi.ags fall apart, The center cannot hold." 'But the truerD,l~.,oomes from Ma:ttihew Arnold: we are "wandering be~ two worldsj One ~ the other uaable to bebem."
These lamenranonS at [east have the. vimiie of taldog the erosion of nationstates ,seriously. But they.view it almost entirely as the result of longcreeressed ',pouacalaspirarions bursting ~to the, open Qnce the vruious imposed restraints oJtb.e Cold 'Mlr 'em haw been reloed. No matterhew deeply roofed, ho~th~ aspDtiOns are- not the qn1y~r arguably. even the prtrnaJ:y--forces now at work Something else' Is~g on. The baweand the banMield have shifted
AQUfSDON Of CUUlJRE?
In a recent. highly influm$l article:. "The Clash of GMlizations?"5 Samuel Huntingtom offers"an if1le,rpremtio,R of what thar "some,1hlng dse" is. Acoo.rding [0 Huntington, the fault lines in our new. postCoM'Mlr worM do not flow from polltks or ideology, but from culture. From, now on. when brgemassesdf people join in common :pu~. the-primary link between them wilt incTe3singly be their shared heritage, of language. hiSlory, traditiOFl; and religioll---thatl1s; ,civilization. And when they ,StonUy face"eaGh'omeracross a divide, 'the unbri~le -gw berwem theill win be the lack of Just suoh a shared civilization. Groupings based onculture will become--in fact. ~~ready ~ofne-the most ~tful actors in wo~ affairs.
For all the nnrh ofthese observations. Huntington's aJg\lment ignores me fact that, even. within the same ciyiliption.peopl¢ have often fought against each other .From the outside, .~ differences beJtween CatheUcS and Pro~tS in Ncrdtem Ireland do ,notseemJike a good reason for intense ,hatred. 'But for political leaders and mass agitators, they are gpod enough. Agajn.fi:orn outside. it is.~ diffi.. cult to tell (lhe Huru&Om the "{utsi in Rwanda. aLl[ they have mo-wally
created, during the past decade', one 10f the bloodiest clashes in the world. Peop:le usually fight wlientheir political and/or military leaders inflaue~ute dilferences so as to sliit up latent h:a~not when "civilizations" clash. U l~ers·~ enlightened. they qn make their people'believe-in the, power OfwOF~g together lbisls the case today with the multiple raeesand culrureslli1ked pe,acefully by lee Kwan Yew m. Sin~pore and Dr MMatbir in, Malaysia (andwas m.tein the Yugoslavia of josip BIOZ :ntoan~, the India of Mahatma ~dhi an.d
_.- .
Jawahru:tal Nehru after World -w.u- U). It is not civiliczartons that pro--
mote clashes. They OCcur when old~faShioned leaders look for oldfashiOned· ways to solve problems ~by rousing their people to armed confrontation.
Such skinn~hes confuse the ground of geopQlincal lnterpreiatien, But they: confuse the ground of economic ilmeiiprelanon as well. The glue holdimgtQge"therolder constellatioFis pC nation-based political interests has visibly begtInlo wear thin. In ecenomicsas in politics, me older pattenis of natjon-io-nanon lin~e have begun £0 lose theirdomtnsnce. What is emergiRS in thetr place, however; is not a set of new channels basedoa culture instead of nations. Nor ish a simple realignment of previous Ilows of nation-based trade or investment,
In my view. what is reai,iy at stake is notreally which pany' or POlity agenda domiaates the apparatus of a nation state's central government, Nor is it the number of new, independent un.iis intO whiCh that old center, whicn has held through the -upheavals of iridusriiallzation and theagenieso] two world wars, is likely [0 decompose. Nor is it the culturalfault lines along which it i!! likdy to ~ent.
Instead, what we are wimessing is me cumulative effect of fundamental. changes in. the ~urrems of ecolJomic:, activity, around ,ole globe. So powedlll have these CU.J:TeDIts becornethat [hey 'have carved out entirely new charmels fOr dtemse1VesL-char~nEHs that owe notniJig [0 me lines of demarCation om traditional poLiticalrirlaps. rut simply. in terms of real flows of economic activi£y. nation slates havealr:ecidy lost their role as meanil1gfu[ units of participation in the global economy of today's bordedess world ..
In me first place, these long:..estahlli;hed,ptllil;i.~ defined unirs have much less to cOFlmJi:llite ...... and much J€$S itedom to' make COFlmbudons. The paiJ:lful irony is that, driven by a eoncem to, boost. over-
12 tht: ,End of ~ Nation State
all economic well-being, their effonstO assen ,ttaditionalfomls of eeonomic. sovereigno/ over the peoples and regioris lying ~ m.mr borders are now having precisely me ·opposite· effect. ReflexlVt twmges of SQVereignty make; the desired economic success impossible, ~ the glebal.eeonomy punishes twin~g countries by diverting rnvestment and infoimation elsewhere.
The uncomfonable tnIm is dw. in renns obhe glObal economy. JWion states have' become litde more than bit acw~. They may ~ bave been, in their mercantilist phase.jndependeru, ~ efficim.t engines of wealth crearion. More recently. ~ as d.e ~ eting logic of cleaoral politics has placed a death grip,(JIl mm economies. they.~ becOme-fust and foremost~indfk:ient engines at wealth disoibution. Elected political leaders .WOn and .la!ep ~ by yjN~ ing voterS what they want. and what .they want rarely entails a su.bsmntiaI decrease m. the benefitS, services. Of. subsidies banded out by me state.
Mpreovet; a? the workings of genuinely global capital markets dwa1f their ability to conpol exchange rates or·protect their currency, nation states have become inescapably vulnerable to the disdplme imposed by economic choices made elsewhere by people and institutions Over which they ~ no practical control, Witness, for example,. the recent, Maasmchr-related bout of specularionagainst the franc, the pound, and the kronoe Witness.. also, the 1:ID:S"IStainable but scl(:.itnposed burden of Europe's various sodal PFOgIaIDS. FmaUy, wim~ the
. complete absence of any economic value creation, save fer those around the world who stand to Ibmefit from pork4>a.rrel excesses, in 'such decisions as the Japanese Diefs commionem-copied from the New Deal policies of"Franldin Roosevelt--to build unnecessary highways and bridges on the remote islands of Hokbidoand Okinawa.
Second. and mOre to the point, the "nanon state is increasiJlgly 3' nostalgic fiction. It makes even less sense t~, for example, th.aR it did a fewyears agoto_S.~ of]taly orRussia or ChiDa6 as a singleeconomicunit, Each ,is a modey combination ofrerritOries witP vast.\y different needs and vastly different abilities 'to conmbute. For a private sector r1l3ru!&f!r or a public sector official to treat them as if they represented. a SWgle economic entity is to operate on the basis of dem0nstrably false, implausible, and nonexistent averages .. This may still be a political necessity. but it is a bald-~.,economic lie.
1he.~ DIusion 13
Third. when you look do5dy at die goods and services now produced aDd tn1dUt arOund the worJd, as wtll ~ at the COIIlp$Des responsible for them, it is no easy JD8UU to attach to them an accurate naOOnaIlabeL Is an automobile sokl11JiJdtt an Amt:rican marque really a U $. prochict when a Ialge pett:enrage of Us cOmpotlmts comes from abroad?7 ~ the perfounana: of IBM's foreign. subsidiaries or the performance of irs R&D operations in Europe mdJapan reaDy a measure of Us.. excdlenct. in technology?" for thai: ma~ are the j9b5 created by Japanese planES and factorits in the ~ '4Dey ~ a mea. sure of the health of the japIncsc, -and DOl the U.S", economy?9 The barbershop on the comt:r may ~tabIy be a pan of the dbmesric American economy. But it is just notpessible to make the same claim, with the same ~ of confidence, about the finnS active <In the global stage.lO
Finally. when economic attivity ~lywears a national label these days. that tag is usually present neither for the sake of acCUl'at)' nor out of concern for the economic we}I)L~g of individual consumtIS. his tDere primarily" as a mini-flag of cheap nationa1ism'--tha:t is, as a jingoistic cdebration of nationhood that places far more v31ue on emotio~ symbols than on real, concreteimprevements in quality of 1ife.11 By conttas~, we don't hear mum about feverish .~ of HOl1g Kong, ruu:lonaIism, but the people In. lfon,g. Kong seem to live rather well. 11 With muCh f.imfare. Ukraine ,and the BaItic states have now become independent. but do their people have mort fo¢d to eat or more energy to keep them wann during the winter or more electricity for light to see by?
AnaITe$Ong •. if often overlooked, fact about tooay's borderless economy' is that people often have better access to low-cost, IUghqualicy products when they ale. not Produced "at home." Singaporeans, for example, enjoy better.and chespe» :,tgricuirural products man do dwJapane5e, alilieugh Singapore-has no ~e~d no farmsof itS own. n Mu.ch fhe same is [rue of censtructton materialS •. which are much less expensive in Singapore, which produces none of them, than inJapan, whi<ih does,
Now, given dUs decliae in the ml~te of nation states as units of economic aCtivity, as well as the recent burSt of economic growth in Asia. the burgeoning poUttcal self-consciousness of Ishun. and
14 Tht End of.,the Nation State
the fragmentation, real or threatened, of such "official" poWical entities as Italy, Spain, ,Somalia, Rwanda, ~, $<ruth Africa,. and the former Yugoslavia; Czechoslovakia, ana Sov:i,et Union-given an this, it is e¥Y t9 see wi1Y observers like. HuntingtOn should look to culmral, reUSiol1S, ethnic, even .nibal affiliations, as the only p]a,USible Stopping point of the centrifugal forces unleashed by the end of the Cold w.:u-.
Once bipolar discipline begins to. lose its force, once traditional nanon.states no longer "hold," or so the ro:gumenrgoes, visionless'lead-eIS will Stan to giVe in to the {ear that older fault I:ines will again make themselves felt .. And given me bloody violence With which many of these lines have already begun to rtap~ these leaders will find it hard to see where this process of backsliding can come to rest short of oU'aditional groupings based on some son of oulnual affinity; -In oma: words, in the absCnce' of vision and the presence of slowly riSIDg panic, the only grouping1; that seem-to ma~ are based on civiliza-
nons, nor nations,
But are cultures' or civilizations me.a:ningM aggrtgares in terms of which to understand economic activity? Think, for a moment, of tile ASEAN countnes. In what sense is it useful to talk about ,them: ss a single, culturally defined economic area? As they affeCt local Patterns of work, trade, and industty, the tntema1l diffetences among ~eil ~uddhist, Islamic, C.atholic (in the Philippines and the Sabah s~te of Malaysia!), and COnfucian traditions are ev.erybit as large as, if not :largerthan, the diffet:mt.es separating any one of mese traditions from the dominant business cuhures of New \bJk or london OJ Paris.
Butin ASfAN, ar least, differences of this son do not ptovolm~e same kind? of: conflicts that often mise elsewhere, Most Wesrem. observers Imow, for example, that Spanish and Portuguese speakri5 can converse with each other; if wfth some minor degree of difficulty. Many fewer, however; know MIaf the' same is true of lndonesians and Ma&ysians_ Or dlat, ,in border regions between nwIand and! Mal¥ia. such as Phuket, there are peaceful, economically linked villages, sOme of which lraVe tnainIyBuddhist and Some mainly Islamic populaOOm. these on-the-ground realities have made it possible for ASEAN leaders to accept and to reinforce. with little fear of iJltemal fric'tlon. the devaopmern of cross-border economic :des like those stretehing across the
Strait of Ma1!aooa which are represented by the Greater GroWth Triangle of Phuket, Me$Jt, and Ptnang.
Even more important than such cultural differences Within a ctvi~ litamon, and ~t Huntington's line Qfthought leaves OUt, is lhe~ue of historical context. The parrieular dissolution. of bipolar. "great power" discipline that sogready afecfS l!1S today is not taking plafe in. the 17905 or the 18905, but the 19905_ And that, means it is mking place in a world whose peoples, no- matter how ~-fll1ng geographically or dispar.ite culturally, are all linked to' much the same sources of gJ.obal infOFmation. The immediacy' and completeness of t~cir access may \'3iy, of course, and governments may try to impose restrictions and cemrol, Even if they do, however, the barriers will not last forever, and leakages will occur all along the way. Indeed, the basic fact or linkage to global flows of information is a-perhaps, the~entra1, dlsnnguisBing fact .of our moment in history. Whateve.r the civilization to which a particular group of ,people belongs; they now get to hear about the way other-groups of people live, [he kinds of products they buy. me. changing focus of weir tastes and preferences as consumers, and the styles of life they aspire [0 '~.
But they also ~t something more. fur more than a' decade. some of us have been tallGngabout the progressive glob.ali.zation ofmarkets for
. .
consumer goods like 1Levi.'s jeans, Nike athletic shoes, and Hennes
scarves-s-a process, driven bY global exposure ~(), the 'same information, the same CUINta! icons, and thesame adverdsemenes, that I have elsewhere referred [0 as the "Califomia-izarion" of taste.l" Today, howevec the process of convergence goes faster and deeper. It reaches. well beyond taste to much more fundamental dimensions of woridView, mind-set, and even thought process, There are now-for example, tens of millions ofteenagers around me world who, having been raised in a rnultlmedia-rich. environment, have a lot more in comrson with each other than mey de with members 'of older ,generations in theit:' own cultures. fur these budding COnsumers, technolQ8Y~riven' convergence does not take place at the sluggiSh rate dictated by yesterday's media" It is inssarrtaaeous=-a nanosecond migration of ideas and innovaaons,
The speed and immediacy of such migrations take us over an invisible political threshold. In the post-Cold War world, the information
16 ~ En4 of die Nadon Sratt
flows underlying economic activity invimJ.a1ly an comers of the gldbe simply Cannot bt. maintained asthe possession of private dimes or public offi~. They are shared. increasingly, byaB citiZens and consumers. Thts-shaang does not, of eeurse, imply any necessary similarity in how local economic chokes finally get made .. But it, does imply i1a1 mere: is a powerful cennipew force -at work, ~tlnteraeti.qg and GOtllnterbalancing all the cemrifugal forces noted aI:x:Nt.
, The emotional nexus of culture, in other words. is not the Qrlly Web of shared interest ab)le to contain the. processes of disintegration t!IDleashed by the reap~ce cof older rault. lines. lnformation-drivefi panidpation ih th~-g.obal economy can do 50, too, ahead of thefervid but empty posturing of both cheap natio~' and cwnual messiabism. The weU-irifolB'ltd ci~ of a g!.obal maJketplaee:will not wait passively unalnanon states orcultural prophets deliver ,Wtgihle improvemems in lifestyle .. They no longer truSt them to do so.Ins(tad. they want to build their own funrre, now, for thernselvts and by themselves. They want their own' means of clinict access to What has hecome a genuinely global economy ..
lNCONVENfENT AVERAGES
What this combination. of forces at last makes dear .is' that the naaon state has become 'an unnaruml---even a dysfimttion:al----<JJXaliizatibril:rl unit for thinlfuig aIoout eConomic acl;ivity. It combines 'tbmgs at the wrong level of ~tion.
%at sense does it maRe, for example, to ihiQk of l,taly asa coherenreconomte en:tity within the EU? There, is' no "average" ltalyY; There is no huge social or eoonomicgroup~ precisely at me midpoint represented by such averages., no' constituency spectally adva:n~ed by,;,.........and,therefore, eager to suppon~pli,t; .. the-differehce political oompoolIiises. "There is, instead, an iridustrial north and a rural south, whidl are vastly dilerent in. their ability .(0 contribute :and their need to receive. lli economic terms; .mere is ~P1Y no j1!1Stdicadoh for neat'ing Italy as a ~ingle-interest entity; Doing so fotees you-as ptWate sector manager or public sector oftiCial----tb openne on the baSis of false, imp1a1:JSiljle,and inconvenient averages. They are a fiction" and a de .. slIUctivefictiort at that.
'NIt ~.llluiWn 17
But the root' problem goe$ ~ In III bordedess Jeconomy, any statisticalregime dw: takes me nation'~stram as its primary unit of ~ is-and mUst ~ out ,of dare.fOi" well over a decade ~ l'ltave been mguing just: this point in me context of die ]l(rennial squabbles between Japan and Ute United S~ on questions of trade and l:foIrle baJances·.16· On. both sides. howew.;most officials and 'even most commemators remaih ~ afflicted witll ttadeblindnt:SSi7-an in8bility tosee, let: mone understand. in llle'broad dayllght,of media anennen, the ~ fac(s: about cross-:border economic rurtMty.
Position ,paper$ and headlines notwimstan~ the rmcle problem between Japan and tile Unired States ~ nenber 'me American llI'CUie defiaioQf tfie JapaneSeSU,IpIus. The reason is q,uite simple; the (lows of activity measured by offidal t.r.tde: statisticsl8 :tqi)resenr' a tiny and steadily diriiinishing share of the ~n.omic ~ between the two countries. These data. remember; do not count the ~tl.es from services, ~, or mteUectrihl propeR}'. or from, goods ma.tlufactwed by us. firms in dmd countries but sold in Japan, or from goods both manufatti!Ite'd and sold in j~ DY U.S. firms, All they ~unt i;sthaE relativdy sma1:Iuniverse of things physically produced, in the United States, oared, loaded onto ,smps or IPlanes. ~d through ws.roms; and jhen unc;ratOO and sold in japan. I ?
When a U.5. softWare heusesells irs leading-edlge program in Tokyo, dlenade data capnne little, if an;y. of me value .added, When a U.5. chtp manufacture!' sells irs productsin Osaka, tlite sales ~ count towam me 20 pet:Qm.t or the IlUU'kel ea:rtnarked for U .5. firms, but~ the clrip,swcre, $isIikel)',actuaUy produced in ~ they will not show l'p in U.s. export statiStics. When a U.S. .sponswearoo.mpany retails in Ao'kkaido garmems sewn in Indonesia OJ Taiwan. the .~ do nQt matter to (hose who count bilateral trade flows. When enougbJapanese OOBS1!lmm see a U.S. movie t~ ge~ate, say. US 5;200 ~n in Pox office revenues and. perhaps, U.,S $40 million in royalties, these figures show up in japan's current account, but not in itS ttade'statistics. But if the moviemaker ~'sdld'" ,eaj:h copy of the fWn, to be shown in J~ for- US$l million, those p1'opies
would count as trade revenue.20 .
As ,every9lle should know by now, the official statistics thatamao[ so mudl poUpca1 anendon are unRliabIe. I'rnhei~ polite: dIey are an
is, ThcEl1d ofll1r:. Nation Stall'
out-and-out falsehood. They are neran, accurate reflection of real flews of economic activity.1l'ley are not an. aq:urate reflection of anything.' Indeed, m the mJd-1900s. if you included in these official numbers aJil the-sales inJapan of "American" (as consumers perc~we them) goodsaad ~~ces, you would lind ihat [he Japanese oo~ght-per capita-e-Iour times as much '"American" sruffas Americans bought "J~Ran~" sruIP)' Swce ih~n, the rario has onlY gotten laiger.
Trade; howeV,e.; is only the most visible of the areas in- which offl.. ctal, nation state-based statistics prove their wpnhl~ess. The list is long and varied. Some countries, for example, d:assiJy life'insurance as . savings; in others, it is. an 'expense. Some treat govemment..:funded pensions as pan ohndividual income; olhel$, as a'public liabllicy. Some view mongage inYe'Stment in a' home as consumption; others.as
a (omt of sasings, Same categQwe devices like microwave, ovens as white goods: others, as consumer electrorrics or even furniture. At even IAe simplest level. therefore, meaamgful c':Qmpa$o'ris,are hard to come-by, Apples and oranges are not ,the'problem. I("s fruit salad.
These. differences matter Inthe mid-1.9~ 1986, to rake a parliCNW examplen-the official Japanese domestic savings rare was I 6.6 peroeI\t; the U.S. nite was 4.3 percent, The result: loud and aerimomous-debate between the two ceunmes, with t'beUhited States calling on Japan to boost domestic consumprion and Japan inSisting that the_ United States g~r,i'ts own fiscal house in order byreduc~g wasteliUI,.deficit-financed consumption. These chaJrges .and countercharges cohtin]J~ to fl.y. Neither then nor now, however, do they bearmuch relanon to the underlying facts: the savings rate in both countries i,S pretty' much the same.
Japanese data on savings, Ifke those for most other countnes, are based on a. System of National Aecounts (SNA) advocated by the Uruted Nations. By. contrast. the U.S. data are based on Narionalln-, come and Product ~comrt,ts (NIPA), Which are adminiSteiIii by the Department of Commerce. Convening from N&PA to SN.A would boost the 1986 U.s. savIngs'rate from 4.3 ~ro~nt to 6.8 percent. This is a substantial jump, to be' sure. but stiU Car less 'than Japan's il6.6 percent. If you also removed the other structural mcol)Sistendes between Sr-:lAanQ MPA~the diffeting treatments of government social
IlIc ~tc-'lluston 19
inSWm\ce, for example, which SNA views as personal savinp and NIPA ~ ~t ~ 6 .. 8 percent figlm! wouJ.(f rise furrhereo 10.9 percent. And much ot the remaining 5. 7 ~tagt: pOint gap 06;(} ~~tv. 1O.9;~nU would disappear if you corrected for essentially SOCial differemres between the .lVIO ¢ouh.nit$:.
In ,the United. Stales, (or ,example, if you buy ,at house for. $200,000 and invest the' same amount a~ in ren_ova.ti.o.n. the: government counts the fus~ nWnber as savingS. and the second as consumption, WhenL you sell me nolil5e. of COW'5e. yoU hope to get at least $400,000 for it, wbicl!l eHecmvely equates overall res3le'value wim ~. ~ Japa:a.. however. where renavations.are usuaIly:-not appfedated by later buyers and 9rily land is treated as haviilg ,real value. the equivalent of $200.000 spent OR fixing dungs up 'U'ulyis eonsumptien,
There .are still other adjusaneni"S to be~e. Americans ,WId to buy on credit; me Japanese, gMm low resale values, '"save to 'buy." Adding savings to eonsumer credit in both counoies.~ roughly me same number: 29 pereenr of ~le' income. The onlY diierence is the timing of payment:- theJ~ buy lateJ; _thusshdWing more ~ in· the bank ill pres_ent; Amerioms buy now and pay later; thusoortowing from the fmure .. Mo~ for map pilrchasc!s like homes, japanese banh.require a mtilCh ~ down lpaymeIn than their U$. ceunterparts. If, in addition ro the other adjustnuuns noted 'above,iJ~'sbenks were tQ reduce their ,ItqUife!ilents (0 me low end of me US. spectn.mt--,-sa 10 percent.or so 01 the down ~ent~ all of the ~tistkal !"~gap" be~ me two ccunmes.would ~ The Ilwnl_Jels ~ne tmowsand everyone uses am simply untrue.
So, it is norcalnire mat produces the huge statist~ qiferen~es between me Am~ and the Japanese. It; is, the differences in their system-S---'taxariOtil, say, .9f banking on die statistical treatment of thinss like J;!efl$iOllS---\!hat collccnveiy 'make the ~o ,peoples behave very cliffe.reAdy., Qnain)y, the Ja~ aFenol by: nature more hardworking or more inolined to' save man the Americans. :me crucial paint, of course, is that if these systems, ~re changed, both WOtIt&~~
have pretty much tbe same. -
The evidence, then, is asahausove as 'il is \Hlcomfonable: in a bor-
_20 l1it &tdofdKNatilm Srarc
derless economy, the na,tion-focused maps we typically use to make sense, of economic ac$ity are woefully misleading. We must, l1UI[l<O agel'S and policymakers alike, race up at last [0 the awkWard and unc.o~fonabletmth: the old cartography no longer works. It has become no more than an ilusion.
THE lADDER OF DEVELOPMENT
Even III the most, titeIallevel. as the previous chapter shows, mere- is not much evidertc.e [0 support the notion that economic activi[)" in roday'slJonkrless woRd follOws enher the political boundary lines of I1'3ditionalnanon states or the chlruial boundary lines .of what Huntington calls ... c:Mli:iations." But dtere is plenty of evidence thar it does . follow infonnarion"<iroren efforts [.0 partlcipate ~nth.e global economy. Such efforts, moreover, tend not eo happen at rando.m-that is" there is a fairly predictable pajectory along which priorities ~hift as eeonomic areas move through successive phases.e] development. This movernent up the ladder of developmem has nothing to do With culture and everydting to do 'With a regi.on's ability ro PUt the right policies. institugpns. and infrastruCture in place at the right time. .
AI around the equivalent of us $3,000 per capita of GNf! there is usually a sanng but steady increase in the desire to achieve more active involvement wi.th die global econo'my, both as a llWket and as a source .or supply for basic consumer goods. (ln japan. for example, this took the form of rapidly ~ding,consunrer demand for re~rators, color T'Vs, and low-cost aut.omobUes.)l Below this, level-beTWeen, say. US $1.500 and $),090 per cipita-the emphasis is more on motorbikes (as it is today in Thailand); below US tl,5OO, it is more on bicycles (as in Shanghai'and Vietnam). AI the US $3,000
21
22 The EIul oJ!ht Ncltion 5t.c:1U'
threshold, therefore, 'it makes sense to bep serious collsuucri01l of modem hIghway systems, of rail uansponation systems in ~ma~r urban areas, and of the. nonamenity4ocused infras:trucmre----drinking water, elecmc power, communications, and ~ to suppona significantly higher level of international! commerce.
AI the US $5,000 threshold, things" c)lange ye,t~. The strength of the wish to be pan of the global economic system escalates rapidly. Later, at us $1.0,000; the symbol of achievement ts joining the OECD. AI·this midpoint, however, the symbol of choke seems to be hosting the. Olympic Games. Although dIe Mexico City Olympics of 1968 took place jtlSt as the country passed the $3,000 level, Japan passed the $5,000 marker in 1965, a year after it hosted the Tokyo Olympics. More recenrly, the Seoul Olympics of 1988 reflected South t(orea's haNingj,USt passed dIe $5,000 level.
AI. tlus stage of development. the demand [or quality automobiles takes oft", as does the need for up-to-date mterasnonal airports and a high-speed railway system. (tn lapan, dte first maj.or lUghway between Tokyo and Haneda Airpon opened JUSt a few weeks before the: 1964 games.) AI: this stage, also;' it. often happens that the dIive for even greater material prosperity begins to crowd out, even for local elites, quality of life considerations. which tend not to rerum in force until GNP moves wen beyond the $10,000 level. One common result is that air and water pcllunon rapidly become unbeatable, and govemmente-have to begin making the infrastructure tnvestments to reduce memo If they waittoo long, the price tag for cOTreCling rheseescesses down me. road in a thoroughly built-up industrial environment can easily become intolerable. aut they may not even have the lmrury. alheir mistaken, to wail. The more advanced industrial economies with which they trade may require. such remedial actions as the price of admission to developed country sratus.
But there is something that usually does not happen at $5,000: .although. linkages with the global, economy expand, the "softer" aspects of the 'economy (the currency, as wen as banking and communications. for example) do nor open up. The heaVy hand of government regulation and control remains pretty firmly in place. The 'temptation, of COUISe, is to leave thing-; as they are. After aD. why £ace the ,&ismpnon and loss of control that a deregulated and open esonomy would
bring? Most midSized counmes in Europe have gtvenill. to this temptation, which explains the sl~hnessWim whic,h.. mey have snuggled beyond the '5,000 barrier. By connast, 'Taiwan,2 at- a comparable point iE irs development, aggressively moved to ~ foreign exclumge,~ many othermarkets. As a result, ir::s e(!otiomy 'shot up to the $10,600 level in only a feW'years. Singapore did basicilly the same thing. So dld Hong Kong. which explains why irs economy shot by the $5.,000' barrier and Ko~'S did not, although it had competed neck-to-neck with Korea ,unw mat poiBt)
The evidence ,is clear: whara govenu:nentdoes at $D,OOO makes a huge difference to how quickly-and how well-it can join the $10,000 dub. As long as reasonably sensible policies are in place" if it makes use Q[--mat is, if ii genuinely opens itseH up ro-theglobal system, prosperity follows~ If it does not or iHt does so' only bal£·lieanedly;choosing to relo/ 'instead on the heavy, guiding himd of central .govemmem connol, its progress will falter.
Japan is somethmg of an excepnonto this. As we were making our way by the usual route toward-the $10,000 tbresheld. our unusual degree of energy-d~filence caused." us to focwS on creating Yety enetgydcient prodllcts. Moreover. Iaclang '3 well-deveioped ~way system, om companies decided to test on California highways the small C3IS we had designed primarily for our domestic market. Thus, Japanese carsjtLst happened to be available in the United States When theeneygy crisis of 1973 hit, and American eoasumers resPonded with unprecedented enthusiasm-and their checkbooks. There was no planning. It 'WaS pure, dumb luck.
Then came .the collapse of .the. Bretton Woods AgJ;eement, which forced ~df or not~to open up our currency market. (The stock. bond, and property markets, of course, lagged behmd.) Dumb luck again. Given the importance of our financt3l tnarlc:elS and given the ra.d.iatingconnections between me automobile and many other crtti.cal·indt:1Snie:s---elect:ro.nics, Sled, chemicals. batteries, tires, corrosion protection, and so on-these happy strokes of luck qotckly pulled us beyond the no,ooo bani~ even though government ~diI. had not relaxed its 'dose contrQ1 of the economy .
In themid-1980s. after the Plaza Agreement of 1985 aUowed the value of the dollar to faIl. a rapi'Uy appreciating yen boosted Japan's
2'4 The &rd. of rk Nalion $cau
per capita GNP [0 the $20,000 Level (in do~ tmnS) withWlSteI1llY baste. ~ that time, the yen/dollar ~gerate was at 265. Iotiay, with Japan at me us 530,000 level. 'the yen is bdow 100. In both, cases, we broke lhrO\~gh to new GNP W:eshoidSJ'iot so much because of anything we had done as because of events over which we had no control. It is the magic of currency exchange, not of dear~gt1ted econopU~ policy, that has made our perfomumce, as measured by dgUardenominated GNP per ca.pita. number one ,in the wo,rld. Our yen-besed income has not ~n appreciably since the plaza: accord
This is botha blessing and aCUFSe. The blessmg is obvious. The curse is that we ~d to build a mdy worlcklass tcotWl1Jf 'with~ out our ·government's bcing fO'R:ed to 'relaX irs grip and lead .induSuy through a sustained" ~~ntatic process of deregt,dation. Today,"a'i'a'result, we have a S30,()(X) economy, but a govemmentmind«,t---;and skitl level-better suited to a nation on the verge of' ~ckmg the $10,000 ceiting.4
No wonder consumer frustrations. mount and . trade 'fi'ictibns with the Unitect Slates multiply. The countries are speaJdrtg languages relevant to vastly different stages' of e<;onoDuc development, Although purt:has'm.gpower parity CPPI') calculations would put the "right" ex~ change'rate of the yen a~ about 190 to the dollar. a. stubborn automobile mdustty-loo tradesurplus has pushed it below the 100 mark. This penalizes conssmees and needlessly irritates aade relations. The nearly factor-of-two difference" is direct evide,nce ,of wh,at hap~.ru; when a go.vemmenr is slow to adjust IlS economic system to-the logic of the global marketplac~. If me Japanese goeemment d~lated and otherwise opened up domestic markers; consumers would benefit and PPP-'bRd excl\ang!;: rates would find their proper balance ..
The JalWle5e situation .notwithsl:Mditig~the poilit 10 remember
. about this llotional GNP' ladder is that it does apply, 3Cf95S diviqrng lines defined by CQlru:re, to all developing economies. The pull of the glo.Qal!~-onomy. eoupled Wim a growtng ability to use ,that eenaeetion to meve up along th~ ladder's vari.Ous.s~, is u~~d urn'\1ersally anracnve, In-a world where"mafiufacnu:ers often ci~t their prices for hardware by 20 percent or more and the ~ logisties costs of moving a product around tbeglObe are less than 10 percent flf i!1S end-user price QVs, for example, are 7 pero,t"Il,tj and
11lt~qf~t 25
automobiles less j~ 5 pClmu), physical distance bas ~ econo~imle'V8Iu: 'EConomic bo:ttIas.have·meaning, if al an. not as . the dividing tines be~civiliZal1ions or :nal!i0n states, but as the contours of infOmwion Row. Where m:fbrma.tion teaches, demand grows;wbere dcmandgrows, th~gIobal economy'his a IocM home,
Chapter Three
THE NEW "MElTINGPO~"
Day to day. for more than lWeD.ty}UlS. I have WOI'kM with senior managers in ~ pans of the Triad Oapan, Europe, and the United States), and In 'the newly industrialized economies of Asia,on the most anpertant sttategic issues facing their corporaaons, DUring that time, as I have descnbed-elsewhere in more detail (see. for example, Triad fbwQ;.1 Beyond National Borders," and 1lit &fderit:ss Worid:).,J diere bas been a fundamental. change .in th~ environment, witl:Un which those managers work At the hean of that disoon.MUity is a series of related developments in irifonnation technology.
Taken rogether;dlese developments, have had three broad effects.
First. at me maaoeconomic.1evel. they have made it possible for .a}pital to be shifted instantaneously anywhere in the wOldd. This means both that capital flOws no longer need be tied [0 the physical movement of gcxx;ls- and that; by ~on, the tradinonal fonns of Dade represent ,only a minute and clecreasing,i'tactio'fil qf cross-berder economic activity. Second.sr dIe company level, they have changed what rnanagers can Imow in teal time abeut their markets, produots. and or~nal processes. This means managelS can be far more responsive 00 what their customees want and far more flexible in 1iIow they organize to make and provide it. Third.at tlle Il'l3iket levd, these de;" velopments bavecbange.d what customers everywhere can know
27
28 The End t/ 1M NadQft St4le
about the way other people live, abOlU, the productS andsaviccs ,avai1- able to them, and &bOul the relative value such ~ ~ this means that economic nationalism mns an ever-smalkr infIuerx:e on purchase decisipns.
WhiChever me. counay" when customers walk into a store. dler bom. demand and expect to get the best and the cheapest:-dtat is. the highe;t-vaIue--produccs and services available. Indeed, consumers around the wodd are beginning to develop Similar cultural expecrations about what tIley ought 'to be able 'to buy as well as about what it is ·,they want Ito buy. From SAO Paulo to Singapore, this process of. conwrgence, which 1 have described eJse.whm asthe .. CaJifomiaization" or taste and preference, 4is making roday's"global" CORsnmers more like each other in many respects than meyare lW! either dreir nonglobally-OrieBted neigbboIs or their parents or ,gr;andparents.
A CR_OSS.:BORDER CMIJZATiON
On. old economic maps, me most imponanl cartograpbic facts 1.:1,10 do with· thirigs like the location of raw material deposas, energy sources, navigable rivtIS, deep-water ports. railroad lines, paved roads-and ,~na1 borde:rs~ QQ. today's tnapS, by COIlWSt, the most salient facts are the footprints cas~.by TV sate1]i~. the areas ~ by' tadia, signaJs~ apdthe geographic reach of newspapers anel rnaga-. lines. InfOnnation has replaced both propinquity and politics as the factor most IiIcdy to shape the tJaws of economic actiVity. p~ terrain and political boundaries still ~ of course. bur neither-and! especUilly nOt pOlitical boundaries-mattet as,much as what peqpJe know: or want or value;
In a 5ePSe. themtat:!gibJes of local knowledge. ra$re, and preferenCe have always pJayed a critical shape.gMng role. l..Qng befoR nation states cxisted.long before tbt.dtits. toWnS. and WJagesoot ofwhidl they gew took re.cognU.able roan. groups of people liIllc:ed by social and: culwra1 des tqUIarly exchang«l what they could hunt, fish, grow. ~ exaact. or make .. The meaningful boI'izons._of their lives Were dttu~ not by the an:ifice of fomud'poIidca1 insttruttoas. but by the land on which they lived and the social wtbs dw enclosed them. Even in the modem world, with its crazy quilt of poIi~l bordas,
1M New "Md#ng IU- 29
hundreds of millions of people-s-rural peasants, for example, in remote areas of China--exi.st in much the same fashion. Political dividin~ lines got added late, indeed. to these venerable maps of local e:xpertence. The ink is barely dry.
Even so, it is fading. And it is fading ever more quicldy. Better infor· marion, made possible by better technology. is the reason. As the quality, range, and avai1abili.ty of infonnation improve. growing numbers of people-no matter what their geographicallocation--come to know in ever finer detail how other people in other places live. AI the same time, they come to lmow what kinds of economic choices can be made and what levels of value attach to those choices. Such lmowledge and awareness, in rum, inevitably work to undennine the tyranny of both physical distance and government edict. The larger the field of known possibilities. the harder it is for a central authority to limit that field aIbitrarily-or to make those limitations stick.
Cenruries ago. the first Western travelers to reach Asia returned with goods and spices and artWOrks that forever changed the universe of possibilities out' oC which tastes and preferences at home would later crystallize. On this road. of discovery, there is no going back. Or going more slowly. Indeed. in recent ~. when the Silk Road is no longer a dangerous route through uncharted terrain but merely a degree of access to global media, like fux Tv. the time required. for exposure to new dimensions of choice has shrunk to vimuilly nothing. And the barriers to such exposure have either disappeared or proven endlessly porous.
Even given the irreduciQly local ponion in any mix of customs and preferences, a newly shared lmowledge of what is possible cannot help but lead across geographies to at least a partial convergence of tastes and preferences. Global brands of blue jeans. colas, and stylish athletic shoes are as much on the mind of the taxi driver in Shanghai as they are in the kitchen or the closet of the schoolteacher in Stockholm or SAo Paulo.
For several decades now. this process of CaJifom.i&-ization has provided much of the market-driven suppon for the development of a genuinely borderless global economy" But this kind of convergence, imponant as it is, goes only so fat It overlays new tastes on an esrablished, but largely unaffected. base of social norms and values. It adds
30 Thl- End 9f the Nation, State
new elements to the. leeal mix of goods and services. but leaves· the, wodcmew of the people who f')uochase them unchanged. It expmds the u~ of WIlat is desimble, but does nothmg to. shift the funda.mental mind.~t of those who experience those. pangs 6f desire. The contents of kitchens and GloseliSffiP-Y ~e,. but me' core m~ nisms by which ¢qJt\lR;S mainraintheir tdellfity fUld SOCializt Itheir YOWlg remain untouched. Political borders m.a:y offer_litde ~ reSistante [0 invasion by new consteUanons of consumer taSte, bursocial borders limit theiI.'5COpe and effectively quarantine the,m within the supe.riitialiayerS'of culture.
:ai,lt dUs, too, is n0W, beginning to change. Ewn social bord~ are starting to give way to the info.'nrialion- and' t.ech,nology..d.riven processes of con~nce that have already turned' political· borders, into lru:gely m.earungl'ess lines on economic maps. There are two reasons for this" First" as societies move up the economic ·ladder of development pas~ the US $S,OOOperC3pim th.reShold,_ there is a notable u~rn.tchl:r;iIiIg, in the speed with which the lifestYleS. of their ~ ple~wha£ Ithey see and 'hear. what ,they buy, how d!,ey ospend ·their ~ more 'and more alike. The elects of dlls flywheel-like 3(:celenuion reach, (0. some extent" into the underlying nexus of cultUre. Some tough threshOld does exist beyond which clmnges in degree pf sha!ed lifestyle become clmnges in kind of attitude and orientation.
Second. and 'more impo.qant, thi$.acc.elemtioo is \taki.qg place ata morqetu ,in, his~ry when the very nature oltbe media exposu.re driv'ing iris itself underg(>ingm_dical. change. The multimedia_exPeriences b;1creasingly made j>Qssible by new ~eGhnology have cdnseq1!lences that go far beyond surf3ce issues of taste (andtkdr nnplicationSfor culture> to fu~~taI: issues of thought process and mind-set, In those societies opea to rhe influence of multimedia, me c:ritiCal-balance is; alreadybegi.nilfug, to shift.: children and reeIJaget"$are; at deep levels of sensibility and worldview, 'becPtning muem mote like ,their counterparts ,in other societies siDiilatIy mfluenced' than they' ate like the older generations widUn their OWI'l cultures. The essenfialconnnui,IY 'between generationS; on which every mew necessa:riIy depends for ilS,integrity and surviwl, has begun to fray; l1iis fraying-U:IiS tilting of·the balance-ccan, perhaps, bt most ctearIy seen in the context of die recem $odal histOry ofJapan.6
UKE fAJHEJt. UKE •.. ?
The cemral fact ~ud,apanese dtizcnsin theirOOs is that they exp¢enced 'M>tId. 'Mtt n. Either ditey panicipate9in iJ ditwly, or: Ihey suffered from tts inQitect effects. Then. they wenl-out and, from me ashes of defeat, built d1e instimtionsand indmmes, of a remaikahly successful postwarJapan. To mem, me quQn' of life they have been able to create is like ·beaven Endltss, unquesOOncd toil,m4 hard work do not matter; "I"llg aq:ept> lOOth witbaut complaint as the ped'ectly. telerable price of a safe and secureexist:ence. The military ~tensioIiS of ~ power StatUS, b~ they <fa not~t. for aD things milirary represent a dlreat to ,e.vuything they 'have so painst3kinm- .built. "lhey
are, with precious few exceptiGBS, padfistin word and deed, ..
WhentIDsperation now in its 00s begaB irs WOJ)k of tttol1Stn:I<:tion, its commitment to SUStained ~. wOJk ~ the 9J>lidt-and , entirely credible=-promise of an anlactive lifestyle m rerum. If they held up meir end, rhe:y Coulp live in areasonable (and ~na&lypncedt fashion, could 1legitiIrtately aspire tOOWfl. their own extended family-sized homes, could reach tbeirjobs in major urbm:l areas: with a commute of no qlore ,than 30 or' 'lO minutes. and could look fl9rwam to a decent standard of living after retirement, with at Ieast some of their dtildren and, gpmdchild(el1 JiviQg,nearby (or withfherru [0 look after their needs. for the generation now in ns 50s and late 405. hoW-
ever, none of·this is nue. '
This middle~ geneFationalso )mew the hUIlger and povertY of immediate p0St::WaJ:Japan. but was (00 young to take pa{t jin the rebuildimg p~r inthe6l1ltan8' of the promise it held our for improving petsQnal lifesryJes: They were bro:uglu up, in dfeClt, by Douglas MacAnh:ur: meir fol1l"l.ative yem in school took place during. the OCC\lpation.. This had] ,its befi.ents, Com~ with Itheirparmts and grandpar:eDrs, these mdiyidttals were exposed. early on, to a remarkably oosrrtopolitan wew of the wo~. Su.t it also had its CQSts. The ~ they' hemd, dw after day, was that their country was a completely 4efeated, third-rate power--a powet moTecr«r, mat had done so mucbbann [0 its neighbors that the bese thing it oould now do was 0(0 disen~ fromtheresr of the. world and leave,~ne else alone .. In the world of t11,e vi9tors, meir country ~ each of them
32 1lIe End of'dte MUfoii.Statt
was-a meee child. me U.N. wasa benevolent though deDumdmg uncle, and the United States was theall·poweIfuI·parent from wboui all good ~ came.
After the formal occupation by the U.S. troops ended, the·JapanU.S. Security Treaty took effect in April of 1952. lhetreaty gnmted the United SUites the right to mainrain military bases, ~t [0 keep watch for possible reamwnent and la~ 3$ a forward line of defense against che Soviet U~n's expansionist impulses in ASia" fur the now m.iddle-~ generation. I me debate leading up to the ratification of this treaty'throughout the 19605 was every bit '3$ divisive a'politicaI and cultuml issue as VIetnam was for its counterpart in AmeriCa' It nearlY tore the country apart. At a minimum, it fOrced dJis genemtionaI cebon, the~. to think long and hard about me.-world and about, the future security of the countty. J,t pushed. many into the arms of stl"Oqgly l~t. even communist ideologi(s: And as me'Vietnam WM ilSelf heated UP. the fear mat the U.S. bases might male Japan itSelf a wget for SOviet nuclear misSiles only sdded fuel to the
domestic_ ~torm of protest alreatly mgiJ1g. '.
Even those Americans who grew up with the nightly ~ coverage of bloodshed in Vtemam and protest at home have. as a rule. little sense of I10w troubled ang violm~ those years were in Japan:~' ,the late 1960s and early 19705, there were endless public detnonsaations, dWing which quite a few peOple gOt killed.. including ~ K,amOOm,the daughter of a well..fmow.n professor At Tokyo Univetsity. Yasuda AudiWrium \ViIS,. bumed dQWJ1. 'Fhink of what happel:led at Kent State University and then imagjne it many' times .worse, more sustained •. aJi1d more violent. lmagin¢ it. as well, taking plate not JUSt at one or twO UJIliveISi~,but all across the nation. fUnher imagine these.forces of Pl'9teSt as legitimately ~ at the time as being seen to 'have--the power to topple the national govemmem, GoUDt,. less numbers pf students put off their careers and.opted to stay on or about campus to be pan of the action. The battles with the aumorities were real. the srakes were real, me bloodshed was real.
In the aftermath. these leftist group; pretty much turned tp. on themselves and spent mosr of the test, of the 19705 in internecine bat,. tles, Their pro'test became a minoeevem, During the late 19605, hQWever it was a major public event.natio~. But its long-tcnn d£ects
1ht New "Mdting 'W" . 33 on the genetaOoo that is now mi.dd1e~ proved cmio~ limited. When. after a delay, they tmally ·DJatk theitway as ~ into the regular work farce, thqseemed to forget their urgent social and, political concerns- about the world and about their own country. Like many of their counterparts in the United Slares. they simply budded down to work-in. effect. as the bag carrim of the men now in their 60s.
But the ,implicit "deal" such work offered had. grown substantially less am3ctive. Commuting to work now took.longa; as saIarymen had to IllOV'e.ft.mher and further tI!N'I!f. from downmwn areas eo find aff0rdable hl;)using. The houses d1e1nselves were Smaller and could Do longer accommodate three-generation families; 11teir post-retirement prospectS were much less tcnain. With their 6uDilies now physically sepa:ratfd. who woukl look after them in their old age? Because they had reac;:bed the station a tittle bit, late. the rdiable ttain to the gocxl life baa a1m1dy left. Their diildre:n Would not even bavea chanct to catch it.
One possible response. ef ceurse, given rougtUy two decades of patient labor. was to accept:!hiS diminution of fomme ill qUiet frustration and ·disillusion. Another. howeva; was to reeall ·the more active days df their young adulthood and. after a long delay, to again ~ theirvoices heard on social and political :mattei's. m~, these people are making this latter choice. This is me.generation. now most solidly ~hind the call for domestic refO"IDl. To iliem, special-interest gridlock in the govemmemtis n6t acceptable. The estordenate demands of me farmers are not acceprable. The pacifist and defeatist policies on the intemaaonal stage of the men in their 60s. and 70s are nor acceptable. Though they have come [0 the :pa11iy late, the men and women o£mkyow still belieYe they ~d, more and more, that they rnust=changerhe world in which they and thetr children live.
Thegeaeranon just behind them, oowever, the peoplein meir mid~ 30s to mid-40s. see drlngs quite di1ferendy. They are, in ,effect, J~~'s "lost" genmtion. Their lives have.never been maned by abject want or poverty. They have never known anything othet lham thefirrn, paternal hand of the Uberal Democratic Party (lOP) at the tiller of government. Their univetSity ~ were not a period of social protest, "but a temporary 1ul1 before careers as housewives or salatymen. What dtey had wasnot bad. and they had no experience in challenging au.thority Dr finding fault with the status quo. True, their residences were f!,OW
34 The End rftlk Nation Stak
only IaIge enough for a tiny nuclear family ar best, and their conimure to. work now took an hour and a halfdF more. But their response hz; Jatgely been to keep their heads down and make the best orit.
10 the next generation. the "angry young men and women" in fueir mid·2Qs to mid~lOs, dUs in~lool$lg passivity seems no·more dum small':minded se1fislmess. lJ1ey do not respect their ~ elders, whom I;hey view as cowardly 'messag¢ ~~ and flO!: as creatiYe. hiture.orninded leaders. 'ret this latm group blocks dleir advan~t into positiOns Wfide they could talce more active ~ for thing5.
, w.mmg patiently for their rum. howevet is not a particularly tokmble option, because the bubble economy of the late 19805 efIeaivelypw an anractiYe quality of life out of reach. The maxim\lm these yoqng peop'le will be able to spend on. a house ,is 35 million yenor so, and even that will lock them intO a commute ofrwp hours.or moee each way. If mer want to live only' an hour from ~rk. the kind of spaCe they can aftOrd-rotighly 50 square merers-wilLgive them minimal personal privacy and· virtually no room to mise children. No WQllder they are ~
At the same time, ~they are acrivdy exploring novel ways to build, a pleasant life for themselves. If they cannot mimage deoenr hOusIDg,at bQme,Why not allocate discretionary income, denommated in: a strong yen, to vacatiQIiltrtps--an,d buying tti~? indeed, 'Fu)Jy 97 percent of newly married couples in this whon now take their honeymoons Gutside the COUDny, mostly in Hawaii, Califor· rna, Australia's Gold Coast. or Europe. By contrast, only 3' percent of the middle-aged. generation went overseas for' m,m honeymoons. The Japan in which they howe grown up is. on a statistical basis, ,extremely afiluent. Bur their only real chance to participate .meaningfully in that afHuence is duough one or anotberform of ~.
fu~ navel. of course, is only the most obvious ~n of this. More imponatu in its effecJs, but less obvtous to foreign observers, is ~ addiction of this age group to pu.~licariQrur like Shonm Jump •. a~,::anoo.n~1ike maga$e. with a ~ ciroWation of six ·million· and an editorial content modeled on the ~in romances so popularin the United Swes.Whal the stories in Shontn JumpteU them over and over again in' countless different ways is that friends matter more than famijy. that nothing comes to the individual Who refuses to make the needed effon. and that such elfons--if SUCCC$Sful-brin
The New ·Meltlng fbr" 35
not glorious victories, but small moments of personal satisfaction: a date with the prettiest girl or the handsomest boy in the class, a happy day windsurfing at the beach. a good evening spent talking with friends over tasty food and drink. Dreams of happiness, such as they are, are small, transient. inrensely personal, and have nothing to do with family, society, or country.
Between this generation and the one immediately preceding it the nexus of social continuity is stretched thinner and finer than between any pair of generations discussed so far. In the world of Shonen Jump, family, parents, school, community, and country are all unpleasant disrracrions from the small pleasures of life. 'They are all unwelcomeand avoidahle=-sources of intrusive authority. They destroy the lime possibility for happiness that does still exist. Much benet; therefore, to ignore them, to refuse to accept the value systems they represent, and to go one's own way with one's friends.
THE N1NTENDO l«DS
Bur even this liaying of the bonds of social continuity plays out, for the most pan, ~thin a distinctively Japanese cultural environment. To be sure, the world of Shonen Jump quietly ignores a number of tradinonaljapanese values, but it respects many others as well: the aesthetic pleasures to be found in small things. for example, or the importance of thoughtful interpersonal courtesies, Between this generation and the cohort of 15- to 25-year-olds, however, the web of continuity is stretched thin enougn to Mally break.
The differences here are fundamental. The relevant changes are not JUSt in degree but in kind. and they go beyond surface issues of value to the underlying realities of mind-set and thought process. This is because the younger group came of age in a heavily multimedia-influenced environment: in Japan's 67 million households. there are now more than 30 million Nintendo and Sega "famicom" game machines. The inevitable result the first true generation of "Nintendo kids."
The profound cultural divide these kids represent stems directly from the sustained experience they have had playing interactive Dragon Quesr-:1ike games. What this 'exposure bas given them is a direct sense, not readily available in Japanese culture through other means,
36 11at End oJd1e Nation SlP.re
of ,playing multiple roles in the same oontext, of8Skmg me ~wbat if" questions they could never comfonably ask tJefore (beca1i1Se of the ShinfP 5uperstitipn that .sayi1lg a, dUng would inake it happen), of making different eomplex trade~off decisions and then having me chance to 'o~oo:nUn£ent sets' of outcomes. an~ most impqlwu--ofrevisiting bask "roles of the game" and, when. neeessary, even repFOJVammmgmem.
The implicit messagein all dUs, which. is completely. alien to nadit tionalJ~ QIlmre and education. is-mat it ispqssible to ~l)r: take cpnu:oi of one's situation or orcumstances and~ the,reby, to' change one's fate. Nothing need be accepredas an Unalterable fait at~ emnpli No one need submit pas§ively to the dictateS of ~ authOrity. Ev:erything can be expiored, rearranged. reprograramed. 'Nothing'~ro be fixed or final. Everything" linany. is open [0 eonstderedcheice, initiati,w. atativity-and daring,
Consider, Cot exa:inple. '(he smdeats at Keio University'S ~cntal 'rujisawa campus. Because they are an on-line, they can offel' realtime reactions and. conttiburtons to the curriCumm. to me strucnrrecf "their pwn progquns of studY, to ,me conteat ohheir courses, and to the quality of lheiF insrructors, 1£ thq need information to supplemeat a tt'J« mey are reactiNg or a repon theyare writing, they can ,l:raCk .il down duough Internet. If ,they want to consult an expm anywhere tn the world, mey can '~h him or her thesame way. What a profes-sor ~ in.class,no 'longer has to be treated as unquestioned,gospeL If they have dmibrs, they can use the netwQIR to raise them and to sdlicitaltemative 'points of view: They have stopped being passive consumers of an educational expelience de6ned,s~, and evaJuarea W the Ministry of Education. Theteclmoiosy has allowed !them. in a most non-Japanese fashion, to become de6rters and shapers and evaI:wuots,---and quesnonerS,.....memseMs.
Pol the Japanese, this'is an entirely new way' of thinking. As $.1Ch, it represents a. d~p ~prure between gene~tioris, not something shared between them. !tCUts. at last. the already thinly stretched cord:,-seve.r~ ing bcHb the vem<;ai linbge$ across ~e 8rouPs and. the teJati0l1$hips' of authority that have long held Japanese SOCiety t~theI In their place-, it weaves new connecmi.ons-1ilQ~, however. with. older cehons of Japan~. but with the tens of millions of kidS everywhere else in
111( New -Mdting Rlt- 37
the world who have teamed to -play the sanlf sorts of games and have so been ~ to the same im:plicit~essoDS, 1ht web ofculnue UKd to be spun out of the stories a child beani at a g$ldparmt'S knee. In tOday's ~ subnuc;1ear families, it derlVes from. a child'sexpenence with interactive multimedia. .
The sOCial glue of ,intimate ~ty and shared experience once came only from participation in and wim ,~ Now it comes from watching'hQW a kid from anomer culture wnom you've never seen before reveals chanIcter and mind-set thFat;lgb progtamming style. But it goes fimheI; too. "The '\Ods in Japan amd ~ who master a joy stick-driven environment ommoye, with unbelievable speed, re comparable mastery of a PC'S' aJpbanU);neric .kqboard. This is especially important iJl.japam, where ~rUm,:I pmbl~ of wririllg-and typing Iutvt long been a·scuta of incgrPup SOdal coHesion. Today, millions of Niritendo kids have readY acce$S to multiple avmues of exte11'UIl communication. This is tMn truer for their younger siblings 'and will 'be truer still Cof'their dhildre.n, lD.e fulk among generatiqns'bas been broken; a new link widt those Sharing similar experiences has been forged.
Reflecting on the huge waves of immigradon from Europe that changed ithe demography of the United States during the 19th century. the histotian DsCM ~dlin described the- upheaval triggered by such large-seale socia1' mcwemen£s as one of passing througha "brutal filter." Along t4e way, some-but not aIJ--.-of the ties and allegianees snapped dlat had long kept the members of particular Old World sodeties bound tqgetheI:' Deep.ly- entrenched connections between gen~ erations came unroored .. lneVitably~ the elements and groupings so abruptly set free came togetherm the new "co~U'yin countless new combinations and pennuwions--a true "meltillg pot" of pos.,gbilities. Some lirikages entiIdy disapp¢aiOO; some' smviyeditltact; ~me new ones were formed; all were changed,
Worldwide, the ~nenCt of today's Nintendo kids is leading evidence that dle tastes, preferences. and even mind..set5 of individuals around the world. are beginning to, move--,-~if at different speeds and i,Il different seC(uenc~mrough ananaiogously bmtalfilter in.rome
38 The End <f dtt N4ltion S~
melting pot of the borderless' economy. This Iate~2Oth-ccntury waw of inunigratiofl and convetgence is ~ driven, on me smfact. by the development of g10lW brands ana popular culture ancL at a much deeper level, by the infectious spread of new informalion.-rdated tech-. nologies. It is a new kind ,of soqaIprocess, some~ we ~ nC\'ef seen before, 'and il is leading to a new kind of socia1 reality:. a genuinely ~ civilizatiOn, numtred by exposure to eommon ~ gies and sources of informati011, in which horimnw linkages' wilbin the same generation in differem parts of the world are stronger than traditional, vemqd ~es between genem.tions in panicu1ar Pans of it.
The journey is still 81 a6Ddy early srage. Even so, it is ~ to see its broad eonrows and peral direction. The counq1es &om which lhese uprooted people are independently ~ out are traditional. ~ litica11y defined ruuipn states. The rounD'}' to wtnch they an: an migtat,. mg-....hdped alOng tile WZj by shared:exposure to the EngHshIanguage, 1:0 the Intmlet. to fuJ1'I. the·BBC, CNN, ana M1'l. and by inreI3ctNe communication rooJs...-is the giobal eoonomy of-the borderless world.
Not surprisingly; national governments tend ~ resist, mther·tban encourage, such migration. For them, convergence is a problem" not Iii happy i!tdicaJ:ion of positive forces at work. In 1l1SiSting, their p~ is not so much ~ oppose California-italion itself or to fmsaate their ctazens' desire for the best and the cheapest pnxlucrs from around the world. Their concern, ins~ is' to protecr the jobs of small, but politically powetrFul. speci3l-imerest groups. "l1lat is why they so often forlJid.or restrict imports (in the United States, steel.and textiles), defend natural resources against foreign ."exptoi.teIS" (Mahlysia in "the years before. Prime M,iniste,r ~ihir's "loo~-;Jiast" program), or force their citizens to select from among either unduly mcpensive products Origh-prtced beef and rice in Japan) or high-priced and poor~ products (autornobUes in AusnaUa, India, and Brazill. ~I time, however; the qplosWeOow of information renders these taCtics in-
~~yunwo~w. "
In the face of insistent, kOowl~le demand, ruuion states are less andl~able to dictate individual economic choices. Should" they tty to do.so in too restnonve a faShion, elecuonicalJ.y based O~ of capital will h~ elsewhere, penalizing their currencies and starVing
The New ':'Aklling Ax" 39
them offunds for imvestment. And individual <Dusac.tions Will migrate to channels that lit out of their Sight as weUas out ofd1eir reach.
Using a telephone, r. machine, or ~nat computer lirtked to the Internet, for example, a Japaile$e consumer in Sapporo can place an order for clothing wim "Lands,' End in Wiscensin or- L L Btatl in Maine, have me. merchandise de~ by UPS orYamaro, and charge the pw:chase. to American Express, V1Sa, or MasterCard. That same consumer can also access software. support or remote computer repair services provided, say, by a company based in Singapore or 1<uala Lumpur bur relying on Indian en~ee:ts based in Bombay and on database maintenance carried out in China. Moreover. even with Japan's tighr corurof on banking activints, that same consumer can call or fax First Direct in Great Britain or any number of financial insntutions lin dle United: ~wes 24 heurs a day, traRS~er money &om anywhere to anywhere, and so avoid the anmcially low interest rates imposed by the government to' protect domestic ba:nks Weakened by the collapse of the bubble econOmy. 7.8
For Nin.reru:lo kids, this' will be ,8 normal pan of evetyday life. By end-running Japan's U"aaition(l} business systems; they will save money. boost fltxibili.ty, and increase their range of choice. But they will also make an ever.Jarger share of their economic Irransacrions effectivdy inVisible. to ~rnment. Where-m any of these business systems--caB Customs officers ~. duties, local governments claim value-added mxes, or bureaucrats eompileaccurate trade. statistics?
Thus, as more and more individuals pass duough me' brutal fillter separating old-fashioned geographies from the global economy. power over economic ,activity will inevitably migrate &om the central governments or nation states 00 the bordedess network of countless indiVidual, market-based decisions. In recent years, only where armed might has tntervened, or threatened to inrervene, ill the name of "narioilal interest" have govemmenrs been able to ignore with. impunity-and then only at the cost of yet more :rumn to their people's quality of life-che corrosive effects on meir poll tical control of the natural flows of economic activity in a borderle:ss ,economy9 And in the new melting pot of today's cross-border civilization, these flows will only gain
in srrengthand depth. .
Chapter Four
THE ,CIVlL MINIMU.M
In a borderless economy, the workings of the market's "invisible lumd"have a reach and a strength beyond anydllng mar Adam Smith could have ever imagined. In Smkh's day, economic activilty took place on a landscape largely defined-s-and circumscribed=-by the political borders of nason stares: Englarid with its wool, Ponugal with its wines, Now, by co.mrast,it is economic activity that defines me landscape on which all other instimt!ions, including me appatams of state-
hood, must 'Operate. .
For John Maynard Keynes, that great prophet of modem economic thought, the laWs. ,that ultimately had te be obeyed were laws tfuu defined the inescapable rel!ationships between economic activities within a nation Slate. If demand inCreased, supply would follow. IF supplY: increased. so would the number of jobs, if the economy needed stimulation, lower interest rates and heightened government spending would prOvide it. If . the economy needed to' be cooled down, higher interest rates would do. it. In practice. of course. me dcM!l. wotild. all ways be in the details, and dl.e precise degree to nlm this or that knob of policy might take some effO'rt to determine. But, given sensible calculations and sophisticated modifications of theory •. twisting dial knob would lead EO, the outcomes desired. People' might differ, of course, on just what mose outcomes should be; but theY were pretty
41
42 The End of the Nad(m Statz
much of a sIngle mind'--eXl.'.:ep£ for the-extreme fringe.ofmone,tarisl Qpinio.n---on how [0 get there. As President Nixon said, "We are ail Keynesians now. "
We ate no longer. In a borderless economy; an increase in dernani:i, in one country may boost supPlY-and with it, the number.of job!r= in apother. Even if me new increment of supply were to be dOfiiIes'tir cally provided, iE might have a negligible e{{e·er on blue- or even white.collar employmel1!t, given the recent improvements in productivity made po3i$ible by com,puler.; and robors, or "steel-collar" workep;·.11 Mereover, far from automancally raising supply at horne, lower interest rates might just as easily c::Irive supply~nunuIing capital abroad to other counmes where the promised returns look more attractive. And higher interest rates, far fromaepressing consllimption~relared demand, might actually ratchet it up-at least in the shoo m~by erearirig fear that resurgent intl!ationwHt only make things. more expensive in me fu tl.1re.
On "questions of economic pOlliey, 'therefore, the tables have wmec:t--wUh a vengeance. As the previous chapters have showa, the nation state has rapidly become an unnatural, even dysfundional, unit in' Itenus of which to think about or orgamize eCQnomicacrivi.1:y. This shsuidoccasien no real surprise. As the creation of a much earlier stage of industria:l history. it has neidler the will nor the incentive nor thecrediWitynor the.tools nor the political base to·play an efecn,ve role in a genuinely borderless eoonomy.2
.By nentage'and by experience, nation statesarecomfortable with the marke(s invtsilile hand only when. they centrol the 'fur more visible
. robot ann to which ir is attached. By virrue of their orientation and (heir'skiUs: they cannot help bm make 'economic chokes primarily·.in terms of their potiticaJ. not 'their economic, consequences. By the rules. of electoral logtc and popularexpectanen, they must .~~ sacriflce general, indim;t. long-term benefits in favor of immediate, tangible, and focused payoffs. They are a willing hos,rage to the past. because (he future. is a consntuerey thatcasts no vote. No wonder they.have grown OUt of place as actors in a gldbal ecorromy. VirroalJY by definition. they are unable to 'put global logic-that is, the true "qualiryofl'ifeft interestS of aU their people-first in any of me. decis.ions the)! make.
GOVElU'lMENI PERFORMANCE .
~.~ ~ili~ to ~t-or ~ ~OYil~ logic. 15 slowly put surely" dissolviJ;lg the fabric h9lding nanon StiltS tdatthtt
lrused [0 be possible, for exampJe, {or g:o:vemm.ents to exm:iSt ~ no~1y cOl'l~l ~! m~ info~mem their people received and, by domg so, to mrpJiody dictate meJr' .economic chOices. lnjapan, for example. bethrec the Megi R.estoraOQn, dIe monopoly was ~.ccR:~ plete: as a matter of policy, Ja1'31l: haa minimal contact with me QutSide world through an island known as Dqima in Nagasakj pttf~ ture, WliUU:,infunnation did rome in from abrOad was kept in libraries, to which only· a handful ofcarefuUy selected schelars and bureaucrats had! access. Common citizens did not. Ifven ~er'the country ":opened. up" to the. rest of the world in the t850s .. govemmeru: remained the primary collection and d.ismrib~uion point for aU cress-berder informanmit excl1ange.
As aresWt, the picture JapwiI€Se citizens receIved of'developm.ents elsewhere=-who was' strong millitarily, who posed an economic threat---'~ en~ly the product of goyemmem decision. As, of course, were the media reports. school te.xthoOks, aru:I forms of training 'that, the govemmeJu either proYided irself or approved. So, too, fOr that matter, was mfgnnaliWn about dlesi~t:ioli.il. at home. Were food and .fuelsuptiUes so very limited that an: expansionist ·eH'ort to_ demlnaleotner ·geographicaiareas was necessary? OnJ;y the goven:imem really ~. And,. to \~ir great ~[, the people on1y knew what the gove~nt chose to tdl dlem.
HaPpily, because ]aMO lOday Is an active pan ·01 lhe borderless economy. its government cannot mo.Jil.opol!ze infonnation socompletely. By conaast; North Korea and M~ are DOt, and their governments ca:n.~d do. Deng·Xiaoping'$ famous puabfe_ of birds in the cage isa good case in point: leaders areaftaid of iettingmem om for fear they ~ never come b.Jcll ~te righdy, These governments see control of information as a critical ,pan of their ap~.of politi~ cal conm.'>l. and dl.ey have been wiUU}g (0 pa)"-ilr, rath~~ to haVe the,ir ~tizens pay-fhe priee for it in a ~ly dimirt.ished staJldard of liv~ ~g. These regimes understand all tOO well that a free flow o~acCUrate. mformatian ~bout ~onditi9ns at home or quality of life elsewhere
+f. The End oj tilt Nation Stare
would bring their people Q1wthe streets and ,melt dictatorship to its knees. Unike more open environments; where an enhanced. now of information helps make govenunent control stable by spetding-and smoolhing-the transition to a genuine market economy, in countries like these h can nurture a market only by rudely bursting die shackles ofcontrol.
Jap~ maintained its self-willedisolarion long before the appearance of modem mformaoon technology;, Nonh Koru and M~ do so afterwards. To enable a mt:aningful flow of infonnation, such. technology is a neeessarybut not a sufficient, condition. Somerhlng else is needed: a certain readiness or receptivity on the part of individuab;, whether in their rote as citizens or as consumers. As the history' of developing economies in Asia and elsewhere indicates, when GNP per capita reaches something llke the $5.000 level., discretio~ income crosses an invisible threshold. Above it, there is enough ~ ineconomic life for people 00 begin wondering whether they have reasonable access ,(0 the best and cheapest aVaiJable products and services and Whether tbey have an adequate quality of life. More trol,lblmg. for those in political comrol, people also begin to wonder whether their government is d.oing as well. by them as it might .. Global flows of information discipline the governments of nation states.
In Taiwan. which has crossed that threshold. people have begUn to took orlticaUy at their ownlifestyles'and at the economic opporasniues around them. and to Question the politicians' Insistence on remainlag in a perpetual Slate .of war with the 'mainland.' Similarly, in South Korea, there was such popular pressur-e to relax travel restrictions {so honeymooners and others could enjoy in person the lovely areas of Hawail and Australia that they ha<;l often' seen on television) lthat tourism was final'ly deregulated in 1991. There was. even pressure to
stop blammgjapan for an the problems at home. .
for a half centuryand more, the South Korean government has taught its people that the japanese are merciless imperialists who may work hard but who have ice where.their hearts-should be. When traVel restrictions were relaxed in the early 19995. RQOds of KOrean honeymooners 'made their way to Kyusnu, a southwestern island in Japan sprinkled M.th volcanoes, hot spri,ngs, and lovel¥ flowers. Onrc: there. they discovered that the Japanese" are, In fact, quite hu~an.
quite capble of smiling and beiI}g gracious to visitqFS., and-in many ways-qwte like Korems themselVes. Ibis ha$ made it increasingly difficult for the Korean government to I:ay at J'apan's door plausible blame for everything dlat. does not go well at borne. For growing numbers 9f Koreans. such demonizing of Japan and me Japanese simply does' not square with their OWn personalexperi.ence of the
country and its people. '.
As a result, it has become much easier to acknowleclge mat many of South Korea's problems with the dciqulation and glbba&anon of its economy stem direc,tly from the intense,parochial 'nationalism so painsrakipgly crafted and ,maintained by President Kim YongSam's predecessors. lndeed, as one high~nmking trade offictal in Seoul told me recen:gy, "The reason we .hive proposed that Kerea provide the cb.airman.4up for the new World liade O~titm is' thai: we may not be .able to leapfrog to-an open. economy on our QWn. But if the Wl'O had a Korean chairman, our snongJf natioQ]istic people wiD. not let him down. Sa it will be much easier for them 1(0 support mea-
sures to d.erngulate and open up our economy. " .
The. exact deJJails will vary from country to' country; but the general pattern is clear: widt subsistence- ensured, disaetionary money avafi,. able, and infannation about the rest of the World accessible, people will inevit:3bly start to look around them and ask. why they cannot have what others have. Equally impenant, they will snin. to ask why they were not able to.haVe it in the past. They will also look wim a much DlOmcritital eye at the perfoanaace o.f their government in general as a coordinator of individual access to. the good dlin~ in life.
Such a pciformance review is not likelytQ be pleasant. When governmenrs contrdl mformation.-:and. in, large measure, because they do--u is an too easy for ,them to believe dtat they "awn" ~e people. That usually means restRaillg access to certain kinds of goods or services or pricU1g them far above what economic logic would elk,tate.
If them.arlcet..driven liN'e1 of col1:Sli1mption ttmflict$ with some pet government policy or with its general desire for conrrel, as if often does. the obvious response is to resttict consumprion. And if people would choose otherwise if gi~ the appommity, so what? Don't give b to them: Don't" even let m.e.m know you're not going to do so. '~t they don't know can'[ nun you-or, ~uch of the rune. your favored
4Q The End oj the NadOn Slau
alftes-andconfederates, those interest gJOUPS that, one way or ano~ do so much to prop up your regime.
IN Singapore reoendy, me government aggressive~ quesnoneda newspaper for what it found a most disturbing bit of "illega:l" aaivity: making, public go~mment data on the country's economic growth rate. This kind of official attirude, ifSlllStained overtime and applied to a broad. range of info~tion, wUIcenainly cause mat economy--and any fi1aIket economy-etc s~e. The reason is simple: in marketbased. secienes, it is the free -now of information 'mat fuels me economic engine. Cut it off or rut it back and you starve mat engine of what it most needs to operate, Still, the temptation to close the valve at least pan of the way is often ~ to resist. Indeed, above the $S,oeo threshold, when ~nrumce questions start 10 get asked it is not jllISt polmcal leaders, but the whole network of cronies; middlemen, and bareaucrats whose attachments to-and benefits fromthe established system come under threar.
,
NATION STAlES AND THEIR DlSCONTiENTS
Experience teaches that governments uswilly respond m one of-three ways to sucl:I a threat. If the information monopoly is still fairly solid and cennecnens with the borderless economy ate not essenaal, they tiilay face it down with.force or the threat of force. This, of course. is the black hole into which outlaw regimes so easily fall. 1£ me monopoly is incomplete but still powerful and the pressures for change uncoordinated, they may tty to tough it out. Bur-if me monopoly js leaky and public pressure substantial. they may try to buy it o[
In the more developed economies. this third opnen is lJSU31ly the response of choice. And for a while,mough incredibly expensive. u usually works. The only problem is that. overtime, it probably does more than either of the other responses to on away at the fabric of dle nation stare that adopts it. Ne~.ther ra<t~lililg sabers nor fnserneg earplugs threatens the (1tistence of me state. They may weH provoke ~ufficient hostility to overthrow individual leaders or WADle governments, but they do not usually lead to an.erosion of the nation ·stale itself The Ithird option does.
Faced with .nsmg demands frem.an ever-more com~ mix of do-
The Civil MinlinUl'll 41'
mesne constituencies, govemments foUowtng ,this third option climb, in e1fe<l~ not so ~ttY onto me back of a very moody tiget They cannot safely get of{ Once it becomes known that they are willing to respend to me inany claimants to theiF resources by buying them of{ as cheaply as possible, the number of ¢lairhants limng up far their turn inevitably skyrocketS .. As. d9E$ dle lewl of support that satisfies.
WoJSe, as public expectanons about the legitimacy of such support harden, it 'becomes progressively more difficulr for governments ·[0 re- . voke me principle or to exclude, as a matter of euher policy or discretionary judgment. any but the most marginal categories of people willi outstretched'hands. Worse still. once the eHtidement mentality gets so fully entrenched that demands on the nation's resources exceed the available s.upply, the reaction of interested constituencies is not to adopt a more'mooe,rate stance or to offer to accept less in the name of the common good. It is, rawer. to rumwitn a vengeance en competing constituencies in hopes of discreditlng them or otherwise capturing part of thetrshare. And it is precisely this kind of intramural skinnisbing that produces the acid moot likely to eat away the .fabric of the nation state.
In practice, here's how the process usuall:y WOR<s. Japan, for exampIe, has a few uIDan areas with great population density, as well as many OUi~g regions and islands that ai@ much more sparsely settied In the ,l'liU'Re of fairness to its, multiple claimants and as a wU\I of showing that its monopoly of power is equitable, the government agrees to provide, a common level of public services everywhere in the country. This "civil mmlmum" ~ phone service. for ~ple-applies whether you live on the rem()te island of Okinawa or in the heart of downtOwn Tokyo. Much the same is true of IpostaJi service, water supply, electrical power. and a host of other govemmerrt-funded services.
The problem" of course, is that me cost of proViding [hese services varies wildly among reglon,s,and someinevirably Wind up sobsiOizing---or believing that mey are subs.idi.Zing-others. Worse., dnzens in the more remote locations stan to expect, and l'hen. eo d,emand, the same leve'! of service from me central government-the same railroads and schools and haIbors and highways--enjoyed hy those doser to' the center. These pressures, in tum, force local politicians to metamor-
48 Tht End of rh, Nalion Star,
phose from disinterested public se~ts. Into lobbyists and "pork~ bearers" for their own little lOWflS or dismct.$. No longe_' can they at: ford to keep their anention focused on the ~ter pub~ g~ or on broad questions abQut the budget deficit or global economic trends:
Rising ~ctations at home have redefined their role: they are now, filS'l and foremost. merchants of pam. 4
1£ the economy is healthy, theqUaUty .Qf life improving, and the taX burden on individuals felt to be re1ati~ly light.. such subsidies usually pass without notice. But. when the economic picture is less rosy or when increased infonnarion about lifesl)'l€S elsewhere boosts espectanons too rapidly, envy and resentment begin to spread. Do I, as a hardworking middle manager in a Tokyo-based cotpOIation, as someone who lives in a small apartment and hasto spend more than three: hours a. cUi).> commuting to ad from work on crowded aams. really not begrudge the money-spent on'efficient services for rural farmers in lbhoku district? Not llkely~pecially ii£the images brought to. my home television screen show: me the extremely attracnve Wf!.Y my peers liVe even in countries like I~ or Australia, where the GNP per capita is less than half that of Japan. And espedally if I feel that the ~ .life that my hard work buys for me and my family lags far behind the contribution that my efforts make to the nation's economic performance.
If the expense of urban housil1g means ·that I have to commute 40 or 5€>kit.ometers to my jab in Tokyein mnns packed like sardine cans, muchef the countrjside I can see out the Window'is covered with, small farms and rice paddies. In fact, within a 50-kilometer mdlus' of Tokyo, 65 percent of the land-nearly 330,000 hectares of some 01 the most expE:nsivi property Inthe world-is devoted to wildly inem.. dent agriculture. If only one quarter of this land were sold for private hous~ng .. Tokyp-area families would 'be able to afford no to 150 square meters of living space, instead of today's averar~ of 88 sqlilMe meters (Exhibit· 4-1). Moreover, cheaper=-and more available-land would cut the cost of essentia] public works like providing better sewage, removing traffic bottlenecks, and double-tracking commuter trains.
Why is this not possible now? There are three reasons-sell nation state-based and all irrelevant. First, because i·t feds it must be fair and
. - ... ,
evenhanded in its treatment of au farmers and fishermen across the
EXHIBtt4-1
Housing: Size and Price
AusaaI.iI (1993) U5.A (992) South ~ (993) U.K (]992) Gmnmy(l993) J3p8ll (1993)
-
191.0 u':u lt9.)
9'.0 90.8 88.6
96.6 121.0
N.A lOi." U4.01 In.6
Sowrces; u.s. Burau 0( the Cm$Us; NadooIJ Assori:mon of Rako.a dim '* u.s.A 1992; Naliomride IBUilding Society_ b U.K; ftderal Sa.dsdal 0ffiI:c daia lOr Gmnmy; Bznk of Kora; ~ AssocWdon of J<m:i data· b KDm.; AusttaIIm BumIu or Sa- 1isdc5; RaJ' ~,IImtiw.teOf'Au.suaIU. h AusmWa.
country, th~ Minisoy of AgricultUre and fisheries (MOAF) does. not want eo apply different crireria to different regions. 'There can, then, be no exception made (or Tokyo. H people' in other pans of the country grow lice and catch fish, so shoukh-and ~ ill the greater Tokyo region. [f die land allocated tonee 6mning shrinks over time as domestic rice oonsuurption faDs, the sbrtnkage around Tokyo can be no more and noless thah, the>sfuinkagee1sewhere. F.Ur is fair.
Second. as an institution ... MOM does Dot WaJU to see .the amount of farming in lb.e TokY,o menopolitan·area f.aJl very much, because the bureauerars who RQiI, it have 0'0 desire to lose' 'meir status, disrupt their lives, and move away from TokyQ. Administrative reform effons :within the govemment have creamed. substantial pressure to relecase nonessential bureaus and activities to less ~nsive areas outside Tokyo. MOAFhas no interest in voluDteering. But it does have an interest in :keeping plenty of vocal faJpla:s >ill the' Tokyo area, and ~ ing them active on its behaJ[
Andthtrd, although Japan has, only 170,000 fuUwlime. and 4,300,1000 ~:...time Camm, whose income from farming, on avetage. now represents less dian 20 pereent of their total household in€ome" there are. some 420,000 clerks in the variousfanneIS cooperatives, who handle all the paperwork related to ~ltural products, feniJizw ers, pesUctdes, and the the like. And. of course, there are the 90,000 bureaucrars ,in 'MOM. of whom as many·as 11,000 spend their time, ~'-duremlt grades of rice. So in debates·over land use· $I1d in
50 TIu: End oj tnt NelliQIi Slare
trade negotiations with the United States, it is ~bun!imtly d~ Where the liDinisr,ry's interest-as wellas that of its allies-lies. Howevet the tnteresr of the japanese people, a11d even ofJapcmesefarmers,lies: somewhere else.
Japanese. consumers have, at last, begun to titgure this out. lncreasingiy, the dVil minimum no longer appeals to dlem as a fair enougll ecenom« "glue" to hold the body polinc together. [,t seems more Uke exploitation. '1if laQl.a hrurlwork;ing middle manager, I resent It, and I resentthe government mat provides it. fur years, given the nature of its political base, the Ubera1 Democratic hny (LDP) was markedly reluctant to change the comparative electoral weigi'n.of votes from rural, ltraditional farming areas- and from urban o,r suburban areas, whose residents are-largcly chiving the country's dynamic economic growth. In terms .of potiti.cal Influence, the former nowcount four times more than the buter. As. a salaryman andeensumet I see no sense in this. Mer all. what have the farmel'$ or fishermen done for me ,recendy?:
Why shou.ld I have to pay the excessise cost of the food that we could just as easily-and much more cheap,ly.:-i-UlJPQn from abroad?
The government tells me, Remember how much _hunger there was throughout the country during World 'Mlr II and tnme ¥Car5 immediately after ir?'Thar mUSE never happen agai:n. And so we must pay any price and abserb any. political' inefficiency or apparent unfatmess in order to make ourselves self-sufficient in food. But the-govemrnenr's logic simply does not hold -water; 1 mow. it.. Everybody 'knows it. Our country is totally' dependent on imported food and fuel amyway. We have oil reserves that will last, at most, for 180 days. If there is an, emergency, just what is it that we are sopIX>sed to cook our rice with on the 181st day thar we h~ve gWen up our votes to op,t.atn~' Many ether necessary daily commodaies will be exhausted iong before we: get ~~ the bottom of our rice mountain. Who is fooling whom?S
The answer to many of these quesrtons.became dear iI1I ]993 when Japan suffered an unusually cold summer growing season and its rice crop feU :20 pereent short. The emergency reserve rbat MOAF was supposed to have saved up-all J80 days elf it-was D.ot there. In pamc.rhe government made the uncomfonable public. decision to imp0n some 300',000 ,wns. 1,[ then made a far more comfortable 'no n','I1OIII'11I", decision to sell E~tdmponed rice at inflated domestkrates, to
the difference between those rates .and i",it~llIation,al prices-more than US $1 billion-entirely. for itself. and to use it to further subsidize domestic fanners-, who werep,6'lirically unhappy with the decision to. import. Regular consumers enjoyed none of the benefit_. The farmers, moret>ver-, also reeeived--and kept-ample insurance pay~ rnents for their damaged crops. Tbus, theii income was much higher in the disastrous condinons of 1993_than in 1994, whim thecrqp was unusually good. And MOAF's mflueIilce-notwtthstanding the abjlKt failure of itS comingenqr measures+-wasgrearec This is perverse.
Still, It has been very difficuJIt mj"apan, ;which is suc, 3 small couacry, to convmoe people' that having one system, one civil minimum, is bad policy. the 'r~'Y, of course, is that beca~ Japan'8cHffe~nt regions have developed in very differeJlit ways, the distribution, In the ratio of What ~giorn:s cQnmbute, W what they receive 'is dramatically uneven, despile me relativety flat mstribuHon ofweald,l. Of the councry's 47prefecrures, H are net tecipierns of gwemmen_:_r subsidies. The other-rkee-Tokyo, Osaka, and. Aidti {Nagoya)~pay for the rest. The imbalance is striJdng: Mote t~n 85 percent of Japan's wealth is created in the regions of Tokyo, Osaka, Fu'kuoka; Sapporo, <and Nagoya. AU the others recehre more from the central government than they pay in:.
This arrange:Jil1en~ is both 'refl~ted in and sustained by the councry's vODRg paue.~ .. The heart: of the L.DP's t~ditional SUppOI'[ came from the rural areas, to whidh it returned a disproportionate share of the centraHy provid~d: sub$idies, in the form either of djrect grants of money or services (sueh as for the consaucnon of highways , railroads, harbors, airportS, and dams) or of .inditect. prmection'!ike rrade harriers against the import of foreign rice oe beef. LDP stands 'f'or Libesal Democratic Party. but what it practiced for years is hothir;tg bur ru@l socialism. Similarly, the Japan Socialist Party aSP) has been practicing labor socialism. Together, they have devcred -all tlieir energies to redistriburing weahh, in vote.,c;oFlsciQtIS ways, :SO as to subsidize the poor!y managed regioEls and uncompeti'tlve industries [hat keep them in power
.' If I live in one ofJa,pan's rhree-IIU!-jor cities; (his arrangen:tenfquidtly begins to lose it~ appeal. I may be as ~easonable·as the next man, but it is hard <to see wh¥ I should keep footing this kind of bilt Give me
52 The End· of ~ Natfon State
access [0 land, give me access [0. w,e good life, give me a ba11bttb2[ counts every bit as much as me next man's. lhat's. what I want---'fiot a huge tax mat goes' [0' support farmers 01' some other fringe constimency. Taking money out of my pocl<et to 'support ,such groups is acceptable fer a while, mme name of ,fairness. But how long is "a while?" The tqgic of doing dtjs forever is hard for me [0 grasp. Fpl'Ce that policy on, me wid,out explanation, ignore my concerns, and ratchet up the unequal contribution t already have [0 make, and I will stan to. question the whole system .. In poliacal terms, the road from ",let's be a m,t more equitable in shaiirig the' burden" [0 "who needs those fringe groups anyway?" is painfully shon.
For their part, of course, these groups dUnk, they get, if anything. too little. After all, their need is greater and the difficulties of their lives more pronounced. \Vhy _ should mey be treated as second-class cirizens?Either they are a pan of Japan or not, If mey are, men there is no legitimate reason why they should watch the civil minimum ~ing applied elsewhere but not at home, particularly with respect. to lifestyle iss\!1es~.6
In the good old days, mdivtduaIJapanese citiZens would never hare complained. They were taught and trained not to object to what the government said or did, but. £0 accept it withom a munnw: Today. however the marked disparity in economic burden. coupled. ~Ih 'an equally marked dispari£y in tifestyle. has 6naIly begun to tear up 'that old social fabric and, with it,chat old habit of acquiesence. Thi-; may sound like an exaggeration but it, is not. ,AI tong last. dle Japanese are finally joining die rest of informed industrial society.
, Throughout the Triad; this predktahle cycle of poUliCaI. emonon and its symmenical dynamic of enVy and resenrment have become regular feanrres of the political landscape. Once goeemments' embark on a lpolicy geared to the civil minimum. ,to protectionism for special interests. they tend to. stay wnh it no matter what, and. wherepossible. £0 t'lu:ow additional benefilts in the way of those who complain the loudest. This is because the concrete. visible dangers of ewn trying 10 climb off this particular tiger are roo triglnening (0 contemplate,
The problem. is that the dan,gers of staying aboard, though less tmmediilteir rangible and far harder EO see.are often much greatet ~ to climb off pUts only 'mecurrem'govemment and its leaders at riSk;
The Civil Minimum 53
crying to, . Stay aboard ultimately threatens me nason state itself. Historically, the ethos. of equally shared. contributions to the common good (even though the benefits may not be shared qUite so equally) has been the foundation on which genllinel¥ democratic societies, no less than the nations that grow tip around them, rest. When that ethes wanes orgoes into. eclipse, so does the glue that holds those nations togelher. The tyranny of modem democracy ~ that it [ends to give equal weight to votes before contributions to the maintenance of society as a whole are taken DUO account. Everywhere, the result is the same: elected officials, just like the candidates trying to replace them, focus their ateennon and their language on a promised equality of 'resuhs. nor of connibuaon,
10 be, sure, ~me governments, though politically unable to back aw<rf from theircommitment to the civil minimum orto the protection of domestic indus:tIies no matter how weak they are, nave begun to experiment with other means to roe same end. In. the United States, for example, dIe great upsUlge in industry d~gulation during me 19705 and 19805 had the effect of letting the allocation of many services=-loeas availability of air transport ,fm' one-be set by market forces. Much the same is true of other -counmes that have begun to experiment with serious programs of privatization and other forms of market liberaUiation. mcludtng deregulation. 7
These developments have. indeed, trimmed away some of the more obvious domestic cross-subsidies, but they have done so only imperfecdy. In the United Slates, deregcla,tion of me airline industry was not accompanied by deregulation or airport gates or landing sloes, which meant a strengetnot a, we$e~ oligopoly. Moreover, [he politi~ cal price for deregubtion has often been a renewed government commitment to a threshold or Ysafety net" level of service (a basic level of telephone service in the United States. for example) that remains available to all-and remains funded out of g~neralrevenues. In Japan, the privatization of Nl'Thas led. <to a much stronger Ministry of Communications and Postal Services.(MOCPOS), which now bas lifeand-deafh power over :NU as weU as over the newly introduced common carriers, through its control of pricing and other approval processes,
Before NTI was privatized it was a prominent stare-owned enter-
54 Tht ~ of tht Nation Sta~
. .L.l,. bu .'_ ea U ... ..,rv. rhat repo·rted to.no one. Mer~ts "li~;
pnse a powel'l.,",," o.#_ ,... ... -,J .U'14 '.' .
tion': Cro-m nominal state control with. me partial sale of its shares w the public in Febl"1.Jal"}' of 1987, its targest:shareh.older--at least leCh~ nically--be<;ame the MiniStry of Finance. Moreover, as a priv,are company; NIT now has to get approval for changes .in tariffs or fot new services &om MOCroS. T~, the comp.y has tl? file aU its pricing strategies for distance, time, aad ~ of dIll-some 12,000 dilIerent ilt?:m5' in all-with MOCPOS. Worse, MocPOS now W3li1FS to break up NIT ~a US $66 bil:li9n enterprise wi,th 150;000 employees-into 'HILne regional companies. Lawmakers are sympathetic. Nine babyNTIs means nine regi.onal. headquarters to ,~tt and preside ove!', and ninemanagement staffs on which MOCPOS offictalS can. Md positions:aftenhey reach thesiandsroryrearemenr age of 55. This is not. exactly'what Prime MinistefYasuhiro Nakasone's poweiful adminisrra,tive reform. gronp had in mind when it moved in 1985 to free NIT from gQVemment bureaucracy.
This kind of'siwation, whether inJapan or elsewhere in the TtWl, has become painfully fainiliar. Wherever it occurs, it leadS to polildcal. gridlock No sitting government bas been willing or ahk to climb oi. the civil minimum ,ngef or resist the pressme £rom special interests. Even worse,me govemmeat consistently tightens not o;n\ly i,ts holQPn metiget's 'back. but also irs own ce.ntralitOO powe; by its ability to mise arid. diStribute taxpayers' money. The more the economic positions of the rich, the poor, and the geogtaphR:.a\ regions are determined by the artifice of gpvemmeJlr-deQed policies and gCJVCmment-definoo <;Iistti~· bunons, the tess the whole arrangemenr ~ with the logic of either
economics or equity. .
What'~ as a system to serve, fairly. the interesrs·cif the people inexorably becomes li;ctle more tho <N system ito conserve ten.tral'ized poWer And when" as iBevitably happens, that power is threatened by more demands than it can reasona.bly·meet-wken the tiger proves too hungry-the power tums to the presses and printS more. money. To .stay comfort?bly in the· saddle today, it will shamelessly mon~e die' future. This. of course, is not the way to promote healthy growth. All it does is Fedismhute lI'!eql;lalities. llIa: the United Snares,s Canada,9 and many EuropeMl counmes, Japan has funded these obligatioRs byissu~ ing so many .Iong-term (30-YeaI} bonds that it ,has virtually exhausted
1htCMI~ 5S
its capidly tobotroW against me eamingJ)ower of its children, ~ ingly, dte .~( mrs now ~posed fundmg its ambitious ~. for an information ~ byissuing;60-yeo: bcmds--that is, by mo~ the earning power of its gtandchildnm ..
In an indUstrialized countries, the price of sta}Ulg aboard. and staying generous bas been ancever.l;n:ger and, increasingly inefijdenl allocation of resou~. In th~ past, these S,Jlibsidies were never sUpportiVe of overall levels (If competitiverress; at best, th¢ Du.men th~ added was not'lmge eoough to trouble otherwise hea1thyeconomies. 1bciay, even that is changing. Because many of die· Triad economies are 5OUggliiig, the absolute burden imposed by ~ cMI minimums and inrerestgroup subsidies is a quite rea1--and visible---problem.
Adding to these blllI'dens, of COUfSe, is the steadily growing share. of the cM1 minimU01 demanded ofgovemment in me :fonn of. broadbased social p:rogratll5--weffitte, l,lnemplqymel1t compsnsanon, public educati€'ln, old~ag~. pensions, health Insurance, and the lilce. Beyond the ~ne@r .fuwldaldiiffitulties th~ ~ ~e:nts cause, they reflect an even more, troubling sChizophrenia in dre public mind. As recent elections' in, almost all me industrial democracies make clear, vocal and influentia.l: co~tiruencies of citizens do net want these benefits reduced' but, as, taXpayers', they do not want to pay for .them" 'Ibe inevitable result; on the providersid.e, an illogical patchwork of support that ratchets eyer upward; and, peEhaps moreuoabllilg, on the
. receiving side. an ever-gteat~I' addiction 'to. ~);lch support, It is hard, indeed, to think of an industry or a region that, once hoo}red en the dvil minimum, hasrerumed te freeStanding healtlii
In Germany, for example, the coses of these programs ~add up to roughly 33 perceJl:t of Gf)P. Uy the year: 2030, if presentnenm
. continue, they will accQU~I for neatly 50 pereent. This~ would predp'i~ tate a fiscal disastet If Germany chose to pay fenhese services by ~ ing bonds • .'dte interestpaymen£$/would be orushing. 1£ it chose to.pay for them, du-ough ,rromtion;me confiscatory rates would either drive . competitive businesses elsewhere or lead them to substitute more capital (in. me form of additionalmachiFleS' and a1!lnomatiori) for- people. This, of oourse, would Hft unemployment ye,t another notch' and. so boesr srillfurrher .rae social cests requirmg heignten'"ed "tmiCation in
the furs[ place. . .
'6 1M End of the No.tiCN'l Sro.u
Iiowewt they get funded. social benefits and costS of this magnitude inevitably reduce the motivation of people to wmk at their Cl11TeIlt jobs, to make that current work more productive; and even--when necessary-to accept a1ternatWe employment at ~ wtIgeS. Again. in Ger .. many, the avernge. manufacturing worker's annual days off for vacalion, public holi~, ~d sick l~ (but not C01!mting days lost through snik¢S or maternity 'leave) come to 61-nlDre than double the ~tmlber in the United States or Japan. 10 In total, an the nonwage iIabor costs associatOO witb such workers add up to half the [Oral COSt or mctnpowtt Inevitably, competitiveness suffers.
But there is worse, much WOIse. The cycles of envy and, resennnem to which these arrangements ·inevitably Ie3£! have grown steadily more proncanced. Itt many countries.,Japan included, they howe become troublespme. enQugh to have engendered serious public disafftotion wirh ,the wh01egrid1ocked~tem of Which ,t,hey are a key pan. By all relesant measures. governments are UUnking. badly flunking. the performance test. AI the same time, these cycles have st~ eaten aWay at the communalist ethos that has tt'3ditionally held thesenations togemet: And aU this, remember; is happening at a time when the major flows or economic aetivit:y in a bordedess world no longer follOw me channels marked out by the boundary lines on political maps.
The urth~ppy facE is that, in most modem nations. me govemmenr has strangely~bu.I all tOO undCfIStandably-,-become an enemy of the public at 131:&e" Tbe bulk of the working population. the so-called "sileru majority" that for years ptoViCledi a stable center.ol social and p0- litical grnvhy; no longer has access to panies that DUly represent its communal interesrs. Instead, estabhshed pOlitical~rems have more and more becomethe creature of special interests and the poorer geo-. graphical disUictS, which regularly trade their SlJppon for irs protection and largesse. Thkyo, for example, has produced only one prime minis[er Ochiro HatoYJlm3) during the past. 59 years. AmGlIIg Comer prime mtnisrers, Nobors Takeshira comes from the very. poorest prefecture, Shimane: lsutomi Ham from Nagano, the "Alps" ofJ~; and Monro.. FO Hosokawa from the island. of Kyushu (as, for dul~ mattet does the current Incumbenr, TomUchi Murayama). The "Shadow shogun," Shin Kanemaru, came. from the smallest prefecaire, Yamanashi; the po\\'erful lchiro Ozawa, from the "Tibet" of Japan. lware prefecture.
The Civil Minimum 57
. This growing alignment of government power wid:a domestic spe_ cial interests and have-not regions makes it virtually impossible for those at" me' center to adopt responsible pollides for a nation as a whole, leI alone for its participation in the wider bordedess economy-and tbis.at, a time when, prosperity at homeis increasingly the result ofsupporr .lirom abroad. It does not seem to matter that, as recent analyses byrne World Bank ha~e demonstrated yet again, free trade and a free How of economic. activity work, on balance, to ratse everyone's standard of nving. The alignments of power' pay little. if any; heed to such sentiments. They represent only themselves, not the people or the people's interests.
No matter how understandable the political or even social pKSsures behind! these alignments, they make no sense economically, Investing money inefficiently never. does. In, a borderless world, where economic interdependence creates ever-higher degrees of sensirtvii£Y·to other economies, j I it is inheJ1emly unsustainable. Sooner or later, usually sooner. the invisible hand of the rnarl<et Will move value-creating acrivny elsewhere. During the past several years, for instance, me Japanese government has pumped more than US $300 billion into the dornesnc economy in a l<eyt;}esian .auempt to jump-stan demand and so create new jobs in the wake of the post-bubble recession. The plan worked. Demand did increase. Jobs too. But the new increments of supply camefsem=end newjobs·were created in-s-Chlna, Rorea. and the rest of the world, [jotJ~pan. In other words. what (he Unued Stales experienced in the '80s Japan is going through now, with far greater dilliculty and agony.
The inevitable resU'i,t of prolonged detachment from the public at large isa further erosion both of trust in government and of me traditional nanoo state as a significant unit of economic activity. As 3' prac-, tical matter, given irs long experience on the back of Ehe nger, no central government will find i,t easy to redress-or even rethink-the imbalance among its consritnent regions, Wha( seems fair tosome will seem extremely unfair to others. The pieces cannot be put tqgerh· er again.
"'NATIONAL INTEREST" AS A DECLININ,G INDtJSTRY
But why, it is reasc;mable ro ask, does the_glue that held tmditioRal nation suI..tes together no longer seem to work? Why can the pieces., not be put tQ~ther again?' Are. our leaders going about a per£ebtly doable task, but in a. wrong .and badly outroned way? Or is it that the cask i,tself has become impos$ble. to accomplish?
The intense bUrst of "t1m;m: me' rascals out" sentimenr, which so boldty colored recent elecnonsm France, I,raly, Japan, the United States. and' other pans of ,the indl!l.Strialized world. points 'towaroan answer; ~ it reflects. in parr, widespmtd disgusf wim the fever~ ish and ofreri oop:upi attempts of those in. power to stay there_ ~ one columnist aptly noted, "The less ehe old parties have no offer the elec[Orate, the nwIt desperate they ,are to mse the QUllpmgnfundSto stay in power; dile more spent they are as a historical force', me more they need to spend_.r} But it also reflects a deeper sense that. more ts gqing on dwt just an excesSIve level of abuse of an otherwise .worlc.able 'JX>lil~ ical system,
There is .growing sendment mat that system hse1f:-t'be much patched and mended apparatus .of the modem nation stale-is art. madequate'mecbani$m for dealing with me ,threats and opponunlties of
60 The End of-rite Nation Start
a global economy. Fndeed, according to Gianni De Michelis, the former foreign minister of Italy, "We are wil11essmgthe explosion of a long-obsolete model of liberal" democracy that can no lqnger aecommodate our dynamic, complex societies with their sophisticated electorates o[ WSt diversity and highly differentiatedintel"eSr."
When-the well-being of these societies depended. on their safe and. sure ability to exploit scarce _natural resources, national interest was dear: protect those resources, with military fome if necessary, and control rheir use. But as 1 have argued inTheBardertess World2 and elsewhere.' in today's knowledge-driven economy, the nations, that stili define their interests' pnmaJily in theseterms .... -such as Brazil, Indonesia," or AastraUa, and the oil-producing countries of the Middle Easr-5ufi'er hom what I call (he "resource iHusion."5 In. the name of protecting their national tnterest, they wan: themselves off from the most.powerfsl engines of growth.
~1ra1..ia is a very good case 'in point. If has- a laad mass 2.0 times the size of Japan. and fewer than 20 million people, more than 85 percent or whom live in maJor cities l~ Sydney, Melbourne, Adelaide, Brisbane, and Penh. Thus, despite the country's reputation as a commodirty supplier of metals, minerals, andagncultural products, it is, in fact, quite an uroan,knowledge-in,tensive 'SOCiety. PaUll Keating. its_ prime minister, has made public his meennon to take AUsaana out. cjf, rh~ British Cormnonwealth and make' it a freestanding republic by the year iOOQ--,a republic, moreover, linked innmatdy With the other rapidly growing economies in Asia.
In comparison with those economies, Ausmdia is perhaps me furthest along in applying computers and telecommunications to business and in developing ameniqr/luestyile-onented products and services_":housing. furniture, interior design. landscaping, and environmemal engineering, for example-at a reasonable cost.6 These are the kinds of skills and products that wj,U be in increasing demand as consumers in the rest of Asia focuS evef more attention on their quality of life. Even so, Australian managers still tend to suffer from
.phobia. japan, fOF example, could ,easily become Australia's DI)Gi~~·. market for amentty-based products, but Australian hOusUlg prolet:.:[5i stH! focus on Indonesia and. engineering projectS on Laos and dia japan also accounts for more !!han 50 percent of irs minerals
portS, but none of the top extCUtMs from the re1evant companies has ~ lived ill Japan. None speaks Japanese. Instead, ~ companies rend toreIyfor theirJapan "presence" onJ~ uadinglinns.7.8
In fact, according to Pete:r HancheI' in the AustmIian Finandal .Re-
. ~ "If Paul Kea~ were to invite Aus~'s three biggtst ~ to a confidentW briefing on A1!lstralian ttade pOlicy, he might be embaJraS,sed to find dw ,twO ,of them are not AUStralian. at all. After BHP, the next biggest exp0Rf1S are Japanese uading houses ... MitsUi and MitsUbishi . . . Altematively, Keating miglit like t'O host a reception when he arrives in TOkyo in a ceuple of weeks rOr the Japan representarives of Australia's biggest 100 companies. l,t wouldn't need to be a 1avish affim He could hOld it in a. microbus. that's because only 14 of: them have a represemanse 'in Japan, which only happens to be Australia's biggest l1l3l'Io!t.and the world's 5eCOlld.!DlggeSt economy. "9
This is ltoo sad to' be funny. less amurng still is the way foreign investment in Ausnalia is restricted. The. Foreign Invesunent Review Board (FIlm) issues gutdetines on the upper limit of foFeignowner; ship of Australian companies and on the OWilerShip of real propeny. Equity panic:ipaJion c:JVe[ 15 percent reql!l.ires special, FIRB approval, which has uaditionally gone (in descending ordfT of preference) to companies- from'New zealand, Britain, and the United Sta~es-an order hardly consistent with the primeminister's "look North" pofi.. cy. Moreover,.if a foreigner buyS' a piece of '!arid in Austtalia to build an apartment complex, he or she must start. building on the land within one year, sell units off:.me-plan (iliatis, before construction is completed), and ensure U.1,at at least 50 percent of me units get sold to' Australian nalionals.
Stategevemments, such asthose in QUeensland and Vtetona, tend to be a bit more t1cOble. but, me central govemment still has its defenses up. The p~ctablt result: not only lew penenation of Asian markets, but also row investment in Austtalia, which has l'ed, in KIm, to spotty returns, a chronic=-albeit entirely unnecessary-e-capual shonage, and a degree of vola.ti.lity that discou~ investment in the future.lb1s is. neimer a-sensible nor a sustainable stt;Uegy. If a counuy like Austtalia keeps·the global. economy at ann's length, its resources Will, over ti'me; become cornmodines, and commodity prices inevi£ably fall.
I .
62 The' End oJ me Nation SfaU
Growth depends on inviting the global economy ,ul, net keeping it out. It depends on creating and leveraging value-adding economic linkages dt.aE ignore political borders, .not on nnhlessly stamP~ them out In the name of "national interest" as an insult to the prerogatives of sovereignty A closed-country model makes cities and regions rivals . with each other. This is because the dues and regio~for example, Sydney and Melbourne-or Osaka and Tokyo-f~1 that they are competing [or a larger share-of'a finite-sized pie. The nation stale solution assumes a "zero-sum" game for limited resources. The region state model, open to the global economy, is "plus sum" as prosperity 'is brought in from without.
More and more" however, "nauonalinterest" gets used as a kneejerk defense of special interests, not of a people's intetests, Consider, fOr a moment, the whaling industry. in Japan. Today; there are only four companies with 500 or so people-to,tal=t1evoted to whale hundng in ,dIe entire country. The realil)' is mat not mat many people ear. whale meat or use whale oil anymore. As a result, even these companies have, for a long. rune. been diversifying mto otherareas.
But the whalers=end the bureaucrats in MOAF who nominally supervise them-are reluctant to sacrifice any of their-influence or the economic benefits that now from it So they play, sham.elessly.but wim a straight face, to nadonalpnde. Arrogant.forelgners are tdling us to stop, they complain. We shouldn' { give in to matson, of ham-handed pressure: our national pride is at stake. Worse. those foreigners are being thoroughly hypocritical. In-years past, theythemselves were by far the most aggressive whalers in [he world, Merely because they chose to SEOp. why should we?
This is, of course, transparent nonsense, but it. is effective. Waving the Ilag us~Uy is. If patriotism is, as Dr. Johnson used to remark, me last refug~ of the scoundrel, wrapping outdated industry in me mande of national Interest is r,he last refuge of the economically dispossessed, Ineconomic terms, pleading national imerestis the declining couagt industry of those who have been bypassed by the global economy.
In their move responsible moments •. those who work in rhts ind~ try, as well as those who are swayed by its vocal protests, know benet They know they are figh.ting a-losing, rearguard aedon, lt is----and. heart, they know that i,t is---'-an action (hat: deserves to be lost. its
deriyingcaase may be peIfecdy understandable and itS emouongeauine, The reason (t affects poItcy. ho~,·has nothing to do with comprehensibilirx· or genuineness or competinveness, In.Japan and elsewhere, the maunderings of ~ cottagE: industry have' the effect they do oI\lly because of me dispropomoaare politieal deuc of dle economically backward ceastiraencies from which they ceme, Period.
Declining industries usually fdUaw their own vicious cycle down.
The competent players have all left, and those dtat remain are, as the Japanese proverb hlJS it. trying to hang on to a snaw as they drown. few use their br.nns. Whale kiUing JTl!lY be a declinilig mdusty, for example, but.m Hawaii and elsewhere wfudt-wakhing has become quite an araacrfve=-and lucrativec--=3etMly. Glasgow may have 'high unemployment and an out.-of-the-vvay location. 'but it also offer.; an eager; low-cost SOUKe of labor and a. convenient entry point [0 Euro~ for U.S. invesiment. AJapanese fishing pon like Hachmohe may have fallen on hard times because youngsters no longer want to work in the rough seas off Okhotsk and the Russians are getting testy about enforcing the,if lOO-nille exclusion zone. Bm ~ fishermen would be willing tosell their catches at appealing pJjces in exchange for access both toJapan's exoonsiv( mar:ket and ro hard currency
Moreover. if govmunen[ subsidies to the japanese fleet, which in the past ~ funded undenu:ilized shlps with elaborate electronics and refrigemtion facilities, were also extended [0 the RussiaQs, japan's supply df tiesh" nonhero fis~ essential to meeting domestic con. surners' demand for sushi 'and sashimi--could be grearly expanded at relatively low COSL Alternatively, the J~ could JUSt loan the Russians their boats. Either way, everyone would benefit, "National inter'est, " however. makes ,these ammgeq1ellts unlikely. governments find it hard LO justify .spending money on anything that is not expli~hly .. theirs"~en when, in practice. the alt~mative is (0 pay OUt even. more monq, ine~dy, by way of subsidy.
Indeed. through me civil minimum, govemmen(typically responds to the backward-looking demands of hard-pressed industries by proViding subsidies. Through made, capita1marlcet. and regulatory policy. it responds [0 ~m by providing protection. Together. subsidies. and protec·tion-neimer cream incentives for healthy, if deliberately paCed, change. nor work to build a censntueney in favor of such incentives.
64 The WoJthtNCUiJQn SUUt
The only thing they do is buy .df(cu~t political qppositiOIf, and they do so at a horrendous Icost-in IRloney, )pst employmp:l1:" and potential for future .gro~mat must be absoibed 'by au cilizens in their roles as woikBrs and. consumers. In fact, as a recent Study: by my IOJiw met eolleagees at McKinsey (sf Co. mdieates. quite clearly. ~t proteolrion··otdomestic product m;U'ke~ is every bit as impona:nt:a eause (if not mere 5(1') of escalating unemployment kvels hall pans of the 1had10 as Hgidi.ties in labor marlcets themsebes.
My point is simple:iri a bordedess world, traditional national inrereSt-whlch has become little more than a ~look for SJlbsidy and pro-tection-e-has no me·aJiJ.ingftil place. It has turned iato a flag of ecnvenience fOF those who, Jtaying been left behind, Want not so much .;;1 chance to mow forward as to holg' o~back.·a5. wen. Let me repeat: trus, -Is a point alxmt what us'will:ygoes wrongcwnen eeonomte activities and .int.erest groups ate bundled together in a SiiIgle nation -state, not. about the value of co-ioeatmg. sudl acl'Mues in the same geographi~ area This distinhion matters.
Several contempowy scholars-Michaet Porter; in. 1he Com~ AdYantage oJNiltions. 11 being chief among them-have argued persuasively and. 1 think, oorrectly fer me criticalimportance •. especially in a global economy, oFhaving clwren; cf related factor endowments loaned close ttogether. Even in an infonnation-driven .age, skilkd WOIkeFs, extenstse networks of sup,plie:rindusoies, and so on----me ~gredients of wha.t Poner calls the "diamond" orcompe!l:itiven~o. indeed, perform bette.r when meytOOs' in close -geographical pJt)x:imity; No argument here .. Lt does not fQUow, however, that 00 be effective, such grograpbical groupings must co-txistwilhm. dle borders of a sin&M 'nation. Stale, and thereby participate in the same natiorW mterest. J.n.. deed, as l hope to show in the, chapters to come, these necessary groupings work eqully WeD -and perhaps' even beuer'-~wlilen they. lit across political borders-and SO·aFe free-of me burden of national iftteresn Conversely, as Anrialee .5axenian so cleatty demom;~U",S in her book Regional Advantag(;u Silieon v.illey prospers bur Boston's Route 128·· declines, even thoujl they-are ,in me same country AI a lIJinii. murri; the success lOr an industry Of' a region is not the Function of. nation pene. bU,t of me particular combination of individuals. instim-dons. and culture in this, m:dusm:y or mat region.
~NatiolJall!ttmst~ as.a DeclinIng Industry 65
This.pouu is worth funher atrention. StUdies of an indJ:lStry's inlernationa1com~titiveness. often. owrlook £he ent:ire·5pe(;trlUTJ of .industry in the ¢GUIl~nym question. When, for instance, $ChoWs around the world .~. [0 seek fori exp,lanatiot;lSforjapan's great industrial success durtng the BnOs aad 198()s, mey qpickly' fas[tmed on siich ~lananons as the rote of me Minis.ttY of Irntemationa1 Trade and: lnd$try (Mf11J, Ime effectiveness of total quality ~ntetu P~. the leverage: p~ed, Py a uro-ddects approach to manufacruring, and even the im,scrutali)le carrutraderie provided by company songs. Inoimually; each 'of these eXp~t:io~nCl many dmeJ's like them--has some merit. 1Oge.rb~ however, they add up to nomiilg. As·l I'uM: repeatedly rugued. over the years, lI!3 it was n0tJappn mat was so stunningly com~til1Ne. but only a handful of ·indtlStries Wi[hin Japanl" and:~ more tothe point. ~. a ~dfulef c9.mpanle5 led by soong individuals within those indusmes.15
Japalil is the nile here. nor the exception. COFO~titive.ness does not flourish across dre~. In Swit:rerland; there is world-dass competi~ ~en~ o~ in the insurance, pharmaceutical. food, and machinery industries; mGermany. in the chemical and 3l!JtomOIM!: industries; in Bnraln, in media-related businesses; in Atis,tlJlfia, in miinng andagricultural, products; in the Philippines. in accounting seJ:\lii.ces and brewing: in Sweden, in paper o@mainersand power generation, Outing the :I. 980s in 1;1pall. to~t performance wa; I~ in ~hesemiconductot consumer eleerronics, and. autom.otive industries, A generanon earlier, it was in shipbl!Jilding, textileS; and steel Today, it is in office equipment and electrontc games.
Over nme and at any given moment in time. a country does not prosper Uri:ifonnly. Indl!1Smes vary, and regions vaq.'; bl the Urii[edi. i[a(e5· .for example, with i~ ricb mix ofpeoplcs ~d' cultures, irs,loose ederahsm on the eeonomrc front, and ,its unusuaUy good ability to ~[ to dllang6S:in rhe keydnvers of comRttitive ~cc~, regions are ,n:lanvely· free to work OUt their own road to prosperity........or to fall be~ ~nd. Thew was onee a booming textile industry in New Eng1aQd. Ught manufacruring once f1o-urished in New VOrl<. City, Both are 'noW' gone. The heady mix of defense. energy, Ulde.ntenainmetft. industries that fueled! the rapid post-was development of Los ktgeles is a bit more problematiC than it was a decade ago. Silicon ValleY. which led
66 Tnt End oJIht Nalion S'tate
me country and die worl~d into me computer age, bas new 'rivals in ~ and the mountain states. Once dominant urban centers=-such as the Detroit of the glory d~ of the U.S. auoomobileindustty-are now pla:gued with me seemingly mtracrable inner<ily problems of drugs, violent crime, and decayiTIg in,frasuucrure.16
Simihmy, even during the height of Japan's economic success, the vast majority of workers,-in fact, 87 percent or more-were ,engaged in not Vet)' competitive indusmes.t? To outside observers. onlythe world-class tip of the iceberg was visible. For most workers, the daily reality wasahogether different. Nor wasthere much pressure to change. Because the few Il'Uly successful industries were such incredible engines of profit, the. govemrneathad the 'resources to keep subsidi2ing weaker industries and weaker regions. It had the Jwrury-the mistakea luxury, it I'!0w seems-to prop them up rather than expose , them to the rigorso! gfobalcompetition. Sheltered, ,they never grew [ougb--just ever more addicted to centrally provided suppon. .
We are now ~yi:ng the price for this false kindness. Our once mighty automotive ~'and consumer electromcs industries now look distinctly vulnerable. To revitalize themselves; they haVe bad to minsfer most of their operations outside the high-cost environment of Japan. 10 3! fairly shon period of time, me producuon qq>acity forme million cars a year has migrated to North Amenca, and the production capqcity [or much of our consumer electronics to Southeast Asia. Much of what's left behind fume same old set of troubled, uncompedtive indusmes thar cannot survive without subsidies-and that, when their marktLS are finally deregulated and opened, win die even with subsidies.
The much vaunted "Japm, Inc.," has so taken its-success for grant .. ed that it does not ,reaDy want to face-nor does it genuinely know how eo face-tbe erosion of irs ability to keep the charade of subsidy and protection going .. High unemployment, d'ed~g tax income, exteasivecorporate restructuring-this is not the kind of environment to which the japanese system can easily adapt. Even if it wanted to take corrective action, an individ1!1al cornpan,y. for-ejCample, cannot sell off many of its real assets (because the govemment fears rM doing 50' might depress land prices), cannot get rid of its equity ho'lding5 (because the Ministry of finance fears that doing 50 n:Ugnt depress the
~atfonaf·lnrmst" as a DtdirMs ~ 67
N~i index), and cannot Jay oJ many 0{ its workers 0.... the M.iniStiry of Labor fears that doing 50 might tri8gtt social uma6.
This is managerial gridlock Oll a Jarge scale. Morettoubbng. per.. haps.it is nor same new and unhappydevdopmenL Nor is it a set of unrelated pmblems dW appeaRd suddenly and out of the blue. h is----alld has been~ and parcel of Japan's "success" at ~ step along ,the \\lay. The coumry as a whole was never competitive, remembet Just a handful ofm~ were. What .kept the sluggiSn ~ormance of the rest from marring the picture was not managerial competence or poliq genius, but luck-and. of course, a decade and
more of omrageously.high land prices. .
The stOry is, by now. familiu; Because the supply of land in Japan is so limired. me prices associated:with it rose d~ the 19805 by a factor of five. this ~ explosion of land. values showed up on many companies' balance sheets as a huge increase in assets, whlch irnm~ mmslated. into higt;ler price/earnings ratios and those Fa-tios; in tum. into much cheaper-even W:tUaIly '"free"-5Qurces of capital. Being hmnan,]apane;e managers and bankers took credit for these dMlopmmfS' and trea~ mem as resulting from SOUJild judg-ment and tareful acIion, not pure scddent. Wtth their competence so poweriWly justified, they then toek chese resources and mvested them with a massive ,lack of wisdom. BuoyM by SO great a pool of liqukfity. they built UnnKDSe amounts of unnecessary capacity. What they di~ not do, ,~ was update their management structures and systems, globalize their otpnimtions, or develop their peqple.Widl the golden goose so active in the laying house, why do anything other than feastoontinuoU$ly .op omelette after omelette?
Today, of coarse, the- illusion dw made ·alJthis indulgence~ible lies shattered. The debris is everywhere. 'Investments have nrmed sour, people are i,rtadequatew skilled. management systems remain CIS" sified, and bank loans are delinquent; seculide:s finnshave burnt their fingers on the u.s. slocktxehange. tradiRg, companies have burnt theirs in fore~ exchange dealin~,' consumer electroiucs finns have burnt theil's in ana:ngements with HoU}WOOd·srudios, and property developers have burnt theirs in real estate in Los Angeles, Hawaii, ~ ble Beach, . and New York. WRere is Mm in aU this? Or the MiI)istJiy of Fmance? Or ~rial panaceas like total quality management? Or
68 The End of the Nation' Staff
the armies of scholars who argued ,tha.[ Japan had solved [he problems of late-2o.th"cenrury competition?
The answer is obvious: the sound 'and fury was}nst thar-e-soand and fury. None of it made··;dl that much sense before. and none of it does now. Thefe are, indeed, successful, world-class Japanese companies from which managers around the globe do have much to learn. BU[ the same is true of Europe and the United States. Wherever you look and whenever you look, oruy a. few industries and a few compa-
. ha \
rues prespen I. t's it. Competitiveness is nOl-,and simply cannot
be-the propeny of a nation state.Jn the borderless world, the key factors for success depend increasingly on universal, not local. cendi'lions.
Arthe ~n, inteIli$em central government policy ean cehain.ly help. Bad policy can hun. But no policy can sebsnture for the effortS of individualrrumagers in individual institutions to link their activities with the global economy. And no central: government am sufficiently free irself from the burden of both protecnon and the cMl minimmn to embrace. let alone facHitate, those linkages. Natio.n states cannot help but provide the locus. and the fuel for the engine of "national interest." And that engine cannot help but drive the machinery of industrial decline. As the .evidence shows, it is not a means. for hamesstng the power of the global economy. Instead. it is a polished, tested. and streamhned apparatus for creating ever~grea:.ter addiction 10 cemtatly-provided support.
In an earHel,' age, [0 be sure, national mterest rneanr something differem. It used to provide a clear and unmistakable dividing line between what was ours-and what was someone else's. 'Ihis plot of land is ours, not theirs: this factory is ours, riot theirs; this ~ompan!Y is ours, not theirs, But how does this kind of logic apply t~day to a Honda plam in Ohio or a Nissan plant in Tennessee or an ~BM plaht inJapan or a Motorola plant in Malaysia? Whose "interests" does each: ef diese serve?Tlie answer is far from dear.N3
Qr take' a more controversial example: in 1971, the Unlted States, which had administered the island of Okinawa since d'\e end of the war m 1945, returned it to Japan. The Okinawans themselves. proud of [heir independent Ryuku civilization and still mindful ef [heir forcible incorporation into Japan' in me 19th century, were not unt-
~NatWna1 fM''_'· .... _JJ_j. l_-Z
. .' , ..... ,~, as a ~lUlng muUSlry 69
fonnltyenthusiastric. But for the Japanese, the rerum of Okinawa was, an essential, if belated act. It acknowl~ sovereignty where sovereignty was due. Since men, of course, Japan has had to pour something iUkt US- $]0' billien into a not yet saccessful effort (0 help the island become economically seU-supponing.
Meanwhile. rhe Japanese ·government has not even been able to keep usnonhem island of HokkaiDo busy with industry. It's tried shipbuilding;-,it~s mea coal; it's tried pulp and paper; it's med aluminum smelting; it's tried steel, Nothing ~ worked. Uke Okinawa, Hokkaido still lives on US $20 billion. worm of annual subsidies from Tokyo .. And now. of COU.ISe, bowing to intense political sentiment, Japan's weakened political leaders have decided to keep a. wary disranee from any prodecnve relationship with the Russian government until it resolves the "northern temtenes" question-that is, unnl it rerums the foUr islands of the l<wl1es so that we can again pick up the tab for suppon:ing mem.
The emondn here is clear enough. So is me political posturing, And so is the so-called national interest. But where is the people's interest? Why should ~ worry about getting more. islands hack before we have figured out how to make the ones we already have work Without endless subsidies?Wheie is the economic sense? Where is the hardheaded, ol1jectiye. concern f{fr how" 00'( to improve the quality of life of japanese citiZens and consumers?
Chapter Six
SCARING'THE GLOBAL EG,Q,N0MYAWAY
- . -
These substantive questions about where economic interest iii€!) in' a. borderless world ~, is rum, a question of process. Are that world's major political llUlir.s---l!ts nation states-actually capable of addressing such interests in a ¥t, way? aurclened as they are wirh electoGilly potent demands to :provide !!he eMlliIlinimum and defend the nationa] inrerest~ other word's. with demands for subsidy and protecrion-----ckJ Jhey have the flexibility, and the win, to- make the hard and necessary choites? Equ.a.Ny imponant, do the}! still have the mechanisms in .place to act on those choices if they realty are able-to .make
~~ "
Wuh the endUtgofthe,R,ftyYe,ars' \Mlr·betw:een Sovitt.s94e-communismand the industrial demecraeies, the c4scipline exelited by both sides in Uaa_t cotJ,llicl has r.!f)jdly began toemde. One result,. not~d previously; has been a. nuuked upsurge in, loea:! and tribal oonflicts. Sup" paned by perso~ computers, mobile. phanes. faxrnachines. anda cache of arms, old loyalties '~. found ~neWed expre$S'ipn,
But these loyalties flow. for the most part, ,from the same pamoti(: sentiment and desire for independence drat anb1l?teil Western nanon builders a century and more ago. Whethet lif successful. they win lead
11
72 Thc'End 6fth, ]!.1alion StaU
to &eestaIlding geographic u.ru,tsable (0 go i[ alone in :a global economy is another ma~ter entirely. it is-not; for example, immediately o~ous what would draw that economyto a proposed free-trade .ZOne around Trtneomalee harbor wan mdependE;Illt Tamil statetanorthem Sri Lanka. The aspi,rao9i1s are dear, btu the jury will be out for a while.
The jt\ryis aIready.filing· baek in, howeeer (0 offer i~ verdict on a closely related case. The same eroston of Fifty Years' \Mtr "disdwooe. has funcla@emally altered me chall.enge £acing nation Slates. No IOl1~ is dlekey issue Wh~ther they are aple to hold up their-end, mili;r;arlly if necessary, in this, or that: alliance. Nor is it whedlfr, by pointing guns lhe WFong.way; they are able to mainlWn control of.ilieirpeeple. Nor is i,t whether theyare able, by sovereign act, tospeed up or slow down rheexpansion of free trade. They can. h is, rather, whether they are able to meet the same kind o[ test that will ultimately decide the. fate of rhe splinter ·groups and rump countries described a,bove. Can. they draw the global economy in, leverage it productive.~ and .keep it involved? On this key issue, the answer appears [0 be, trOt very welL
The Chin~ gpvemment, for example, used to control. its people and its regions through mwtaIo/ powecthe appoinl[lnent of keypelisonnel, and money.. Today the global capital markers, the investment strategies of global corporauons; and the growing a~uIOnomy of regional economic activities provide a discipllile dlat prevents it from ~exercising.cenrro! of this SOrt. If there we-re anotherevenr like Tiananmert Square, foreign capital would leave China, ne.w foreign companies would not. enter, .aad those a1readypresent would slow down or stop tbeir provision of needed skills'lUild technology. As the government in Beijing is an too uncomfortably aware, this might not put' an end to !be economic development of China. but i,t would cenainly put -@, very suddenanq abrupt end to rhe country's ~bjhty to develop at all}'thmg more dl31l a_sMi~'space.1
This would bean in(olerabl:e outcome. Other .countri~mdia, In'
. donesia, Argentina, and Brad. for-example-are increasingly in competition for as large a slice as possible of [he same pie;,the favorable "mind snare" of global! capital markets and of the CEOs of glomrlicomparties. Gwen worldwide flows of inlormauon, me tising expeclamons or China's people for a better lU"e, the continuing drain on resources represented by noncomperuive state-owned _ent~rprises,and die
Scaring the GWbdI EOO~ Away 13 country'S own aspirations for ~onal eresen globalleadedlip. the Chinese government simply bannor dsJtanother T_IaIlalU11etl-IikeUSe of itS military; . , -
Nor can it exercise old-~nioned conwol through .rbe power of money. In the past, it could extract whatever money it liked from state-owned e,nretprises, and. ,USe -that monW to ~ oppoeinsn or buy suppcn. Sin~ goods and services neeer'had real prices attac~ and no one.knew what real COSts were, me government could juggle the books as it liked. !he oJjl(tling up.of the economy, however, has meant facing up [0 thef;1tt ma,t i~ can n0101}ger do this. Sr:a[e~owned enterp~; once ~ to domestic compennon from the .neWly-es,. rablished subsidiartes or JOint venliUres of leading glePal firms. ean no longer afford to pnce in a vacuum. They have .to start keeping realr books, and real books pu~. strict limits on the. govfmmelu's range of discrerumary acaon ...
Effol'1S by-die cennal.government to compensate Jor this I~ of maneuveriI1g room bt irttrOdu:cthg \VeStem-styie tax regimes are PVOhlemane .. A '~t attempt. to inttoduce .. ava1ue~added lax,· (or eXample" ended in COllfusion. Mme to the point, an effo.tt to we domestic corporations would produce little revenue since few make any _m()neywell mere- man half, in, fact, pesi.tiVelY ,lose money. And an eionto make: up the ShPnfall by h¢aVily taXing foreign compani~::would. only induce ,them. eimer to leave'ono r.ltchet,d'6wn ,theirm..counuy opera-
tions. .
In Cl\tina, until very recently, there WBsno term for unempfoytnenc What people sp6ke about instead was tatyt Of "waiting for assignment" SueD euphemisms"w.ilI no kmger suffice. B¢'ijing- win bave to face tlt~and ether-e-eeonomlc issues squarely and' honestly .. When it does, ihoweYet,it. wUlJlecome dear to ~ryone that Beijl'ng does not have theanswet. - Nor should it. This ils np[ a nation state.-sp6cific:: wprobleAi" 'that ,me Central governmentis somehow obligated to sol¥e entirely on irs'(lW:Jl. [t isa problem that affects the whol1e global eeonomy.
Thus. Chinese leaders can reasonably look to tchat gl.oDal networl< of economic ,activity forheIp in defining-and -addressing 'their pooblems. for their pan, me leading playerS in clt.at ne.t\lJQt:k will see i't to be in their own self-interest ~o 'help. Jf China's'.;fConomk modemeation
-74 TIlt: end of tht NClti'on Stole
slews down or fails, everyone wi!U suffer from the loss of antactive new marketS. Similarly, if it succeeds. btu in a careless and Irresponsible way, the resultingpoUution of the environment and f1:00d of imila~tiGn productS will also aJIec( everyone. Pm simply, theM€hina 'proble~" is not China's problem alene. In, th~'borderless economy of an imerdependent world, ~ere need -not be:,any such thing as loca1:·sovereignry over local difficulti~,. The global economy om help provide solutions. It.will not need to be coaxed; it will want to, do so. The ques..tiDn. rather. is whether government will seek out and accept such !lel~
~ .
and whether it will. so organize bsdf as to make both the seeking and
the acceptance effective and cli1cient.
To do this, China wiN have to proceed much further down dle Rlad of gran~g regionaL ~autonomy inecenornic ma~. Eq~ tmportant, it will have to redefine the role of me eentral government. On both fronts, tl1e country has made. far better progress than Russia. Even so, its effitrt:s to date have been piecemeal and ad hoc. The logic underlying them has not been fully worked out, ner has adherence to it been either umversal Of consistent. But it is only such a logic~an explicit commitment to 'heightetiea regiQna1 autonomy within a' "com-
. .
menwealth" o( Chma- =that will free up the energies needed 'to har-
ness tb,e· support of the global economy. ~f Beij'ing could. embrace the idea of hemming the chungf\wa, or "prosperous center land." iri a commonwealth of regional entities, confidence everywhere would ~ up. global sUp{Xlrt would p6ur in, and. a precedent would be establiShed for the .1Qf\g-tenn 'integration or Hong .Kong and Taiwan.
rune is short. billanonary pressures have,~ begun to CJYet'he,ar the development engine. Global firms an: acliVely debating how rapidlY to expand their opeaneas and aspiFations inside China .. Huge mcome dispaii;ties~'.ritie.s measured by a factor, of 20 or mere-s-have opened between infund .and €oasraI; regions. Proposed foundlng mernbersfuq:) in the World Trade O~tion depends on much greater openncssQf mmkets. The. furure political direction of Thiytan is even now being reeJefii;aed. Hong Kong revens baCk to Chmeseconsol in 1997.The'qu~tions, therefore, ~ [0 be answered.
Fus~, jusr how seriousis China about treating the, global economy not as a~wljf intrusive presence to be kept at ann's length. but as a---,perhaps itne. only-~ source of the ·talent, reseurees, and e"~ergy
needed tpbuUd a. better l1fe for its ~ple? ABd: second, JUSt how willing are the le3cl~ in Beijing [0 ignoretbe old 'reflexes of sovereigmy and c-entiat control in forging mean.J liriks wi~h mat economy?
dl.ma~. pemaps; an ex.tteme txam.ple.l?ut the verdict does have geaeral applieahiligr: the old means of control no tQng~r work and can no longer be used wIth imp~nity. They will simply scare the global economy ~,amdactive ,panicipapon 1:&' mat economy .is essential to d(Neiopmem in aborderless world. Unless they cAoese to wall! themseNes off from itent:irely. as Nonh Korea has more or less done (although funds ~tificome in. lmofficially of course. from -arms sales abroad and ~frorn large numbees of Koreans in Japan), govemments have s~ply lost the power to keep tne global capil'al markeffS at 'baY (see Appendix A), AI.. the-same time. they still.retain'"-buE are gradually lqsing----the power Ito keep their .domesnc I1lalhts dosed both [0 foreign .g<>Qds and to oiren pamripation by foreign comp.yties.
That mere will be pressure to keep all this at arm's len~h is predictable. PoHtically influ~ntial eonstimencies wi'll always exist that favor the civil minimum aFld protection in the name: p~ the natiena] interest. The test for governments of nation states is not whether S\i1ch pressures ~, but whether they have the wiU-ano the ability-to resist them and to embrace. not just grucl:gi:ngly· accept, the glo,b:il economy. Again, the ve,rwct so far 4;; in 'most cases, probably not.
The liberol'iridustrial democl"4cies, in particular, have..dev-eloped in a way that seems to put bothwill and abU~ty ever furrher our of reach. Consider. first, the notion of traditional liberalis,m itself. that. great foundation '~tone of the modem. nation state in:. the West. The essence of the. ~bernl ideal in oMc life is phHosophical support, backed up by extensive: public investments i,n education, for both re5p0flSible inclividual. acaon, and cultural diversity~cept wh~re either conflicts directly with dle bro~der public good. In practical terms, this ddih~ the iliTl,plidt charter between govemmentandgave:mf;d In terms of the former's comrnitmem, having'sup,plied tbe necessary educational resources, to tolerate and respect a teeming pluratism etC style and aspiration in excl1an~ [Olt the lands commitment beth to exre,nd that' same C"ounesy to others. and to defer, wi.th.Qut divisive h~ggling. on those l.inUted occasions wnerr the public good really does demand, both obedience an;! suppo~.
76 The End 4/ the,NatiQi! Stall!
Historically. the classic liberal ideal represenrsagenlline, creattve clfort to' deal faidy and honorably wtdun unprecedented level Of social pluralism-that is, to smke aFt alrogerher'new, werkable balance be~ tween the uniformity of behlwiOIttaditionally demanded of cttiiensby the state and the limited lulity'of pwpose thOse states genuinely require to survivtand prosper in the comemporary world.
For this ideal to work in pracnce, however;theIl! ml4St be murual respect (so that differences in ·style or preference, are .not inleIp~ted as a threatening challenge), mutual trust (so duu actions are· not interpretedas a FWT0w·minded imposition on otheI5)" and ~t infbr. ma,tion (so tha'liln members of society "can be con£id~nt of [he essential fairness of what gets decided. even if' ~hey do not ~cularly like ir). Judgments by the state inevir:ab1y limitsomEtindMdual's or some group'sfte~om. All citizens, (or~'ple. may warn to be abl~· te drt~ a-ear to work in .a crowded. urban bUSiness dis.oict.Bu.t, in the ·genet';ll:. public interest, the.re may' have to 00 restrictions on their 00- fettered. abiUty to do so. Experience shows that. such' :restii.cnoms are most readily accepted when they-and rhe·· process ordeba~e leadmg up to cllem-meet the three criteria. noted. above.
In most cases, neither pnvate behaVior nor govemmesracdon in the liberal democracies t~y meets these criteria. Given thoroughly inadequate ~vestments in.OO!ucation"even the core value of pluralism has become suSpect because it niight give an advatltagt to. someone t!'lse.'s groqp. Civic responsib'ility has bug~ty diSap,peared. b:t its place, as dtscussed previously, :hasevolved self-interested com{>etition. among issue-focused inrerest ~ups, which lack both ·mumalrespect ana mumaltrust, In recent local elections inJapan. only-about 30 percent or the e~Ie population voted. That means, in practice, mat an o~.d group of 16 people out of every hundred eligible voters am effecnvtdy play the 'role of a d~QCratic. majority, dominate- the public agenda. and ensure preferential· t:reaunem of irs own ifi1_tell!S[S. Because these voters llav.e the numbers. they do not hare t€l ,listen [0 others, and! they do not have [0 respond.
Worse saU, given the nuts-and-boltS mechanics of how decisions acrually get made" infonnation has become opaque., not transparent. .,On the vast majority 0£ topits" an "iron mangle" of lawmakers. bureaucrars, and special in'telieSts dommases the process.s 'thus" ded-
Sc:amng 1M Global Economy~ 77
sions about urhanuaffi~ resmceons dispropc)ltioIlateIy tend to reOcct the mB.uemial votces of gantge and pSIiking lot owners. say; or of developers Whose property w(Juid increase in vall1le if.new 'commuter rail lines were· 'to' be built. Drivers licenses, Whi€h,ost wd1 over $2,000 in Japan. cannot be freed. up because of powedullobbying lly the driving schools. Expensive tar tnspecnonseannor 1Je:~moved because of the need to keep automobile. repair shops fully fed. As a result, few wembers of these sodeties are c0mfbnable with the jud~ems among compe,ting interests that tdtimately ge,t made.
Lacking comfort, members 'of democratit soPf;ties lack comity.
Lackir:tg comity, they have np motiYation to smve for-{)r accept-a reasonable balance amang, competing demands. for the indiVidual, the only re'levant standard quickly OOeOJiQ'e5 1)0 more and no less tfum "whether, ngnt now, today, 1 get mine." And when such a'"sl@l1ciard is in force, the pluralist ethos of Hbendisrp irreparably decays. long-len decisions in me communal interest-dedsio-ns, for example. in l(avor of putting gle.balIQgicfust-<:an rarely get made.
This collapse of libqaliS:m is,' olhviously" III latge part 'ef the reason why the mdusmaldemocraGi.esfind it so bard to .open th~mselves actively to the oofderless economy, Now, the implications ef this. collapse could be, offset, (0 some d~gree, if pollacal leaders came to office deeply schooled andexpenenced in the complex: dynamics of that economy, or if mey were'. better able 'to widlStruld surih pressures and SO' provide a constiruency .for g!.oballogic. But they do not and cannot.
In a. political ~na increasingly dominated by televisiQAartd other media, it maneIS profOWldly Ithat the aveFage japagese and Amelii€$l viewer's $pan of IV anenoQn is 15 and 12 seconds, re$~pvely. Pglltics by sound bite simply do not ,petmitsophisticaterl"ooml1').on gGOd" ayguments in favor of global fgg1.c. They do, howeve~ both pennit and encourage ;:I-high level of-anennon to bepaidto dt.eself-interested demands of vocal, J)owerful groups. Witl\t few exceptions. cenmru:~ forces are in the sadille, and mey scare the global. ecqnomy away. It does not have, to be r:hi<l W3!f' (see Appettdix B).
On balance. men,pre€isely ata time when. die economic~weU-being of people around the world inereasingly depends on their ability to' participate in the glob31 economy.the narion states in ~hich they live find it both structUrally .and,plirilosoph:ically difficult to offer systemic,
18 Th~ End of the Nation State
continuous support for such pamdpatlon. The recom,l of C()U1Se. ~' not entirely dark. The recent agreemenrs on NIAFIAand GAT! as well as the vema} commitment of APECta trade nberalization. are all to dte good. Modem nation states. however. will find it hard te escape for long either the .backwaro pun of national interest and the civil minimum or the fragmentation of communal interest represented by me collapse of Eraditiena:J. liberalism.
This. is, in an itnI?Ortant sense, not a new problem. Writing sbour much the same issue of cpmpe~. factional interests under the pseudonym Publius more ,w.antwo cenrenes ~o, James Madison not,ed jn the Tenth Fed~ist Paper mal "it is in vain to say that wlightened statesmen Wilt be. able [0 adjUst these clashing 'interests, and render them all subservient to me public good. Enlightened sraresmen will not always.be a~ the helm." As a result" he argued. the only intelligent· and responsible course-s-the course represented, in his day,. by numcation of a federal constirution--was to accept ,the fact 'that "'the causes of faction cannOt be removed, and that relief is only to be sought in the means of centrelhng its effects." For Madison. this meant building a republic large enougll [hat no sin,gle interest could dominate and that varied and competing interests would balance each other out
The danger against wnich Madison sought to create a practical defense was the historical tendency of majorities under such forms of government to impose their will on the minority .. In this. he succeeded. He did not inquire, hOWeVer, what was best to do when this balancing among facaons led not to a refined. synthesized vision of the long-term eommongoed, but to a continual focus on' interests so separate. short-term, and disconnected that no.ceherent vision of the common good could be agreed upon, much less implemented. In today's borderless economy, however, that is p:-recisdy the question facing nation States. And. on the evidence 10 date, it is a questioll they MemM~illy~lo~
THE EMERGEN,CE OF ,REGION STATES
. .,
As the preW.ous chapters have shewn. the glue holding trndinonal Ra~ don ~Eates (~ at least in economic terms, has .begun to dtssolve. Bulfeted by sudden changes in industrY dynamics. available miormanon, consumer preferences, and flows of capital; burdened by demands for thect:vil minimum and for open-ended subsidies'in the name of the national imerest; and hog-tied by pOlirtcal·systems that PI"O'Je ever-less respeasive. [0 new challenges, these political aggrega~ nons no lOlJ8(lr make compelling .: sense as discrete, meaningful units on an up-to-date map of economic activity. They are ~tiIl ilie;rt. of course, still major players on (he world Slage. But they have. fo1' the most pan. lost the abiliEy to put globa:lIOgic first m the decisions they make.
For nation stases and especially for their leaders, the primary issue remains prorecdon=ef temtory, {)f resources. of jolls, .ef industries. even of ideology. In G~ou. however, the capital of the S,'ta:te of Guangdong, young Chinese ladies have somethmg else on their rnindss AVDn lipstick Some lime back. Avon ra:n;a.·1V commeretal that implied that Cantonese -girls. if Ithey managed to ~t a h~lp of Av0n products. could easily & as attractiVe as Hong Kong gWs. With the right makeup and. perhaps. the right (suita.bly shon) outfit, a happy
79
80 The End of die Nadon' State
world.of dubs and muSic and dancing and romance was rheus for the
ta.kirt& .
The~ result: mere are now more than 30,000 Avon ladies seDmg prodUGts door-to-door in Guangdong alone: in shanghai, where openmons nave just started, there are another 6;,000. 'Ihese salespeople. no less than the girls eagerly snatching up' their wares. probably·do not remember how to ~U"cQmmunism" any more. Their minds are on the pa;sibili.ties suddenly open 00" them through the: glo.bal n:uuket, not on the backwaid-looking concerns of the nation stite ro·Which they belPng.
By contrssr, the ~erritdrial dividing lines that do make ~ bclo~ (0. what I call "region States"--geographical units like nordtem Italy:
Baden-Wi1nembetg (or me l:Ipper Rhine);l 'MIles; San Diego!f~uana; Hong Kong/southern China; the Silicon Valky/Bay Area in Califortria~ and ~ Car: the, southern ltip of the KQ~ peninsula) and the cities of fukuoka and Kitakyushu in the no.rm of dle Japanese island of Kyushu. Other such areas indude the Growth JtiangI!e of SingaPO·{e. johore (the southemmost stare of Malaysia), and the ne1ghOOring Riau Islands of Indonesia (including Sawn. a large wc.-free zone); Research Triangle Park in North Carolma; [he Rhone-Aips region of france, centered on lyons, with its tight b~eSs and cultural ties t~ Italy; ~e I...anguedoc'-Roussillon region, centered on Touiouse, wiIh i,ts tight linkages With Catalonia; Tokyo and its outlying areas; Osaka and the Kansai region; the Malaysian island of Penug C&ee A.ppencfuc: C); and even the newly emerging· Greater Growth Triangle, unveiled in 1992 across.the stnrit of Matocca, cOMec£illg Pemmg. Medan (an ,indone-
sian tit)' in SurnattW, and Plmket in Thailand. .
In a bordeness Wo.rld •. 1Jb~ are tEe natural eeonomic zones, Though 'limited! in geographical size. they are ottm huge. in their economic influence. As Exhibit. 8-2 Indicates. for example, japan's 9huu:'keri region-Tokyo and me three immediately neighboring p~ a cumulative GNP diat, were it a full-bJown nation Slate, would rank it third Worldwide after the United States and Germany. Similarly. Japan's Kansai ·regi:oJ"l.-Osaka. Kobe, and Kyour-would rank Sixth, just,after the U,K Instead of being able to Join me Cr7. b~ Kansai's Il'lJY"' at'S and governors must commute weekly to lbkyo. hat in hand. to get: approval andpennis$ion andresources for whateYer they want to do. Not oniy do regional leaders in Japan not get to take the seat at the
glo.baI: rable to. which their economies ought to entitle them. mey, do not even enjoy the same regional freedoms that leaders of the stlU€s in the. Unired Sones and of the Linder in Germany do.
These region states may or lQaY not fall within the borders ofa paIticular nation. Whether they do is purely an accident of history. In practical terms, it really does not l1)aua like Singapore, many are, in effeer, city states, which have willittgly--and expUctrly~n up some of the napping; of nation states in return fur the. <relatively) unieuered ability to tap enensively into the four 1's of the global economy
Regien statesare not, however; the same thing-althouglHhey may be the same size-e-asa megadty like Calcutta or Mexico City. Unlike region states, these immense human ~gations euher do. not or cannot Ilook to theglobaleconomy for solutions to their problems or for fhe resources to make those solutions work. They look. instead, (0 the central governments of the nation states in which they reside.
By virtue ,of their political sUbordination. megscities are immune to global logic. neitheaseektng it out nor able to harness it when available. Absent these global linkages. however, they are, as a rule, unable to. bootsaap themselves back onto a beahhy uajectory of growth. In effect, deference to sovereignty isolates them and robs them of the only workable means for improvement. At the same time, deference to sovereignty imposes a. huge. often unsupportable burden on their central governments, whlch=-cchsistenrwuh the dvil mrniJi1l1!lRl-must potU endless resources into their bottomless .pits of need. Thus. as with dediQing indusoies,the economic dynamics of megacmes graph a downward spirai from. which there is no self-contained escape. Region states are differem in mat they gladly sidestep the bunting and hoopla of sovereignty in rerum for the ability to harness the global I's to their own needs.
Population. then, is not the key issue. What matters most Is that each region state possesses, in one' or another combination, the essential iogrediems for successful participation in the global economy, With only 2.5 million people (70 percent Chinese. 20 percent Malay. and IO percent Indian) and virtually no natural resources, Singapore-'by natural endowment, a kind of Costa Rica in As~imply could not ha,ye prospered without inviosng tn the global economy 1 [S sister island of Penang has learned-rhe lesson well. (See Appendix C, reprinted from a recent issue of the Wall Street Journal, about the development of
82 The &Jd of du Nation State
Penang. MaJaysia. It is broadly typical of a growiDg number of stOries about regional development effortS.> Bom have bad, the wisdom and me will--and the detennin.ation-tO put global1o.rJc first.
A FLOWERING OF REGIONS Jiust look for example, at what is happening in Southeast Asia as the Hong Kong economy reaches out to embrace first Shenzhen and then other pans of the Pearl River Delta. Hong Kong. where GNP pet capita is roughly US $12.000. is now me driving economic force in the lives of the people in Shenzhen, whose GNP per capita has already beeaboosted to US $5.695 by the radiating eifects of rhese linkages. (for China as a whole. the comparable ~figufe is US $317.) Even roday. these linkages ae not limited to Shenth.en" but reach out to include Zhuhai, Amoy, and, Gwmgzhou as weD (see lE:xhiQit 7-1). ay me year
EXHJB1l1-1
The SouCture of a Region State. (Pu capita GNP; US $
Sowra: Cbina Annual,SWisQcs; Bank of japan.
Tht fmtlgmct of ~g;on Statts 83
EXHJBrt7-2
The Dynamism of Hong Kong and NeighOOring Areas
Per capita GNP ($ 'Thou.saAd8~
25 11I- II"IoI ... " _-,g .... _Kong __ - __
D,2000 L ~11990
20
I I
15 .
5 1 I,
4
6
8 10 12
POpulation, ,(MllrlOn')
• SpecWI CQlDOIl1ic- ZOIV' Only.
Note: The projecttd amolmts assume !hat each area will cQntinue growing at 11980-89 rares,
Soura: China Statistic Annual; Asian ~t ~; &orwmist; flnJl,1e Ginot OWT· SaIs, Chung-Hsun 1\1; McKipsey~.
2000, as Exhibit 7-2 indicates, this cross-border region Slate win-have raised the standard of living of more than 11 mil1ion people over me us $5000 'level.
Chinese officials seem to have gonen [he message. at least in pan.
They Rave al;ready expanded [he special economic zone concept" which has worked-so wen for-Sheazhen and Shanghai, to 14 other areas, many of them inland. One such. project. at'Yannan, will become a cross-bordereconormc zone encompassing Laos' and Vlemam.ln Viemam irsel!f. Ho Chi Minh City has launched a similar efron, Sep. zone, to attract foreign capital,
84 The .End of the Nation.Sf(Ut
As Exhibit 7-3 indicates, stiil other initiatives are in the' works. In northern Asia, for example, the cwmuly stalled lUmen Delta project, if it materializes, will CUt across China, North Korea, and 'Russia. In Japan, mere is much interest in a Sea of Japan Economic Zone or a Nonheastem Asia Economlc Zone, which wouldconnect the RussUm cities of Nakhodka, Khabarovsk, and. VladivostOk With the Japamese city of Niigaa There is alsO an idea 10 create an Integrared Nonheesi Asia Economic Zone that, were it to come to fruition, would link the Turnen Delta project With,~ Nostheasrera Asia project.
Though still in the concept stagf!" these usdenakmgs have a.Ireacl¥ begento change die old Cold WM mentality sepatatmg Russian and JaPanese ollida1s. There .. is already a regular ferry service across the Sea 0'( Japan. as well as acnvediscusston about establishing. a ferry between VJ.J.kkan.ai on Hokkaidoand Yurlmo~Sakha1lnsk on Sakhalin. If this were to hm?Pen. the et)y of 'Wnino. across the Strait of Mamiya: from Sakhal'in, would become the best pen for loading Japanese
EXHIBIT 7-3 '
Emerging Regional Couplings
/J'~$t:~~--:~""'~'~~'~~~ ~ ~ol"'·1!'- .... 'O!IIi.,..t_._,.. ; 4ji!1aj1Q..~.~··t~-~ , ~ sEZ"~~.,,~~""'_'to:
,._... - ... -._-- ~.J
· _ -ILMI----·
· ~
· ~ :-& ... , ..r't ,'., '0' « C (f( t' < c.t c', r <,. '"
1111_- - !
i ...,....-=- .
i ~_!CIII.-;
~ .~ J. -'" .!
i ~ -~ . ..;I~~,
i .. i -. '.
I -- -__.., -,~ ,
11----· ,
~ .. _;".- .. -,,-.---., • ..:.; .• -;;~--=-' ... =<
1!1IJ-_"""" :
lAPD __ "'~"""'" I
!--_ ..... _._,
! (t'ioiW, ... -~" i ~~:::~.~~.:=~;::-.:--~ ... .,.~ ... !--- -~
!:Mj l~. ~
,.- - ..... -~~- :
L~'~ _ ". .. _ _.",,__~_ .. _ ... ~_J
,rcil!~ii"_'!"tC_"""t" .,.""~ ... ;: ~O!!---- O)OO_..,~av.
~, , ~ __ T"'" ,
:" .. ,,~~# ,,~rl~~*''''#~''/
1M ~ cfRtgWrl States 85
goods bound for Europe on the Siberian Railway and for off-loading European goods bound for Japan.
On China's Uaodong Peninsu,'1a, Ihe city of Dalian. together with its hinrerland around Shenyang, is host to more than 3,500 activecorpora~earlY 2,500 ofwbich are foreign~affiliared, including 250 or so tha~ are Japanese. ll!ecause'me Chinese ~ent still haS .nOE officially forg!:Yen Japan for irs wartime ar.:tions, Japanese songs, books, and movies are, if not exactly prohibited, strOngly disco~ed. In Da1i.ln, however, the second most popular foreign language chosen by high school students is japanese, and the attifacts of itS atlrure are readily available.
This ,is because Bo XiIai, the mayor of Dalian, knows perfectly well that continued eoenomk growth depends on providing an amactive home for [oreigninvestDietU .. He also knows that me tegi'on!s l~ers . cannot ~BSibly ignore the needs .of these (ortigp operations. in favor of proreai:ng tbe many stare-owned enterprises, that are losing money. Dahan, its people. and i~ hopes ,for a brighter economic fu~ rure simply cannot afford it
As Exhibit 7-4 iHusttateS, Dalian is 'Widly becoming a pan of me global economy m. its own tight. Capital and corporadons from littralIyall over dIe world are flowing to its new industrial development area,whicb ts adjacenf 'to,me old dry. By me year 2000, ~ new development will bold more than ItwO' million people, bringing Da1iari's total to over 7.2 nilllion. With the highway lmking it (0 the inland dry of Shenyang now complete, the. emergent region state of liaoning Province. mduding Dahan. has access to an extremely talented and hardworking northern Chinese bbor force. If the central powers in Beijing do' not intervene, this Will give it a sound basis for participating in-and pulling in resources from--ilie global economy. Given this, situauon, it is only natural mar people in Dahan now fed mat prosperiry is created from without. not nom the national centet Much the same is mIe in other pans of C~lianjin. Qmgdao, and WUhan. fOJ: example. Indeed, some of the, nonheastem provinces have already reached a steeper leaming curve thanJapanr-with h[gher productivity and only 2~3 perctnt of cO!Dpambte ~f! levels-in :the manufacmre both of printed cirouit boards fe.t laptop computers and of cy.tinder heads for videocassetre recorders,
lOO:fiBIT l'--+
roreign lnvesttnent inDalian lnd,usmal Developme'nt.ZO~ (Cumu1ativt iii' '$ millions; ·Ottnber 198+-.Da:.dnber 1993)
No.
Toul 1bmI. paid.in
Inwstmmtcapiw
1 2 )
J~. Hooggong Os.A.
4 Taiw.m
:; Sot!.th ·Korea
6 S~
7 M.acao
8 Thailand
9 ~
}O Canada:
11 Russia
12 .IIM'
u Fnn!te
1"4 BOliVia
1'5 Ausmilia
16 UJ(
17 AJ:gentina
18 New Zealand
19 Nonh Kotta
207 1.388.9 705.7
388 2,113.4 1,062.5
U7 695;4 426.l
76 H9.l 128.4
39 71.0 48.9
21 80.2 tin
16 93.:7 653
15 42.4 28.8
12. 31.9 2U
9 56.2 42.8
7 45.,7 42,S
7 ~~p 0.7
.. 151.4 20M
7 5,5,0 26.1
J 3:2 2.3
3 3.3 2.6
2 13.1 5.5
2 5.5 3.0
2 3,0 i~.1 538.5 455.8 202.3··
58,8 28.7 17,8 15.:.6 11.4 U.9'
6.5 7.7 7.2
fl.3 9'.2 U 0.6 U 15 1.3
It is from. rer)onallybowlded, afeasSJiiro as these d:w ~ tiQn's share of future economic growd:l will.come .. Nation states will'not drive it. They cannot. In a borderiess economy, as we ·have seen, too rnu"dt a£CUQlulated·~~ weighs them. down. Even in Asia; ·Where the: ,postWar "miracle" ofJapari'~a, more recentlY, me Four T~'--eqjlosiYe development provides a much studied mOOd OfSMccess. orhercoun,Dies will Md it m~ diffi~tdt to follow the same course, There is no 'lortger any.Single head bUd in the flock of A.$n "flying~. n The situation is diffeftnt nO,W. There are various possible ~. to fOllow. Thailand, no[japan. roar dwtthe course ,for Myanmar and Viemam.
One reason for this is thateOOflOmiC compedtion ,is IlO'W' far more. immediate as well as far more glbbal. Another is that. dteconrest for a f1nhe poe:! ,of inward investment is more intense, and the advanta.F. conferred bylow~cost label' is mote·fleeting, At each stage of irs groWlh, [or cxartllple, Japan had to compete with only a limited num-
1bt·~ol~ States 87
EXHIBtT7....:5
Number of Countries in the Dcvdopmtnt ~e ~
1~1'36 ~36 135 .143 144-
l'
1 , T 1:--< f1 I", .. 10111-:
". 7 ~>'\ 14 US$ 15.000-
13 -, ti. . ":,1 7 I' 11 1:0,OQQ-
.....
~ "" <~a~ "'_ h._
1·\ '18 t:J ~:>4 7 II 5,000-
1
I 23- 3.000-
I: II '\. 'Z1
1 1 ". 28 1,OCl(h
·1 I
.. ...".
78 1 , .....
64 ,I il
52 46
42 <1,000
1971 1975 1980 11985. 1990 Note This ~ rdm· to ·nadons 'IIfbo5c..GNP d:lta art ava:tIable ~ 11ie' \\bnd&mk mtmbm;.
5owu=.~ Hilts 1993 .• ~'Bagk. .
ber of countries in the "developmem queue~." Today, however, (he emetging econOmi~ rhQS€l in the critical, "takeoff" range of us $1,000 to $3.JlOO per capita-are far from- alone (see Exfiibit 7-5). [n addition. Japan was able [0 leverage ~he benefltsof irs lowCOSt labrn: for seVeial decades,' Molt recemly, South Korea and Singapore, by conaasr, enj.oyed comparable bene,firs (or i much shorter perlo(i-oftim,e. AI. p~n[. me coasW reg!<JrtsofChlna. wIiich hav.ere,. at?' j~tgouen 01iI the devdopmemmap, ~. ah-ea:tfy beginning' to p~ce themselves out of the rutuiing, com~ With inJai1d areas and WIm countries llkt VIetnam and, before- loc;,.long; Myarutla1:
Moreover; as 'Exhibit 7-6 iUusmnes (see also Exhibit 7-n. the ~ solute ~ in GNP per' capita between developed and developing econorwes has .substantially widened. In other words, the ro.ad has' gotten tougher at au: same tlm£ ~t tAe- 'hwdle has gotten ~et And
EXtIlBlT7-f,
~ of Economic Development (US $ thou.sandS)
201
..,..IOOIN co ... - (OECDJ' ·~ICOIM WOOi:an-
10· ,
\
5
Soma; \\&rid.1izbIt.s 1993, \\bdd BaDk.
at the same time that politiCal resistance to low-cost impons is riSing in nadimonal imponing counui.es. Encumbered as they are. d1e region's nation states willi not be able to close d1is gap. NorwUl they be able to generate the additionali US $2 trillion or so~r yea_r-the equivalenr of about 20 .addiaonal Hong I<ongs-needed to ~nng the overall Asian economy to a par wim, that of NAFfA or the EU.
If, hQWeYeI, these nation states do not try to do everything th~~ but allow. literally. me creation of 20 additional Hong Kongs-that IS, if they suppon and·encmuage the development of region ~~ wiihinand across their bordem=the US $2 aillion goal is wen WIthin reach. And
that, in tum •. means Mting a total of some 213 million people over the us ··$5;000 GNP per capita level by the end of me c:ltcade--a number that com~ quite favorably with the 1lilcely end-of..d1ecdecade Situation in NAFIA (i7S rnillion):anchhe·EU (361 miDion).
PORTS OF ENTRY
"All pol:itics," as TIp O'Neill. former Speaker of me U.S. House o£ Representatives, was wont. to say, "is local." Region ssates, howeve~ are
The~t~~S~ 89 economic not PQliD<:al unitS, and they am anything but local in focus. ntey may lie ~ the borders o~ an establisqed nation State, but they are such powuful'env}nes of devdOpmen[ because thar primary orientation is roward-and their primary linkage is with-the global economy. lhey are, in fact. among its most reliable pons of may..
R£gion States wdcOme IOreigninvesmlent. 1heywdConle:~ ~ ership~ They welcome ~ ~. In fact, they wdcome wharever will help employ dD p00p1e pnxi1lcrivdy, improve their qua,lity of life, and give them access to ,the best and cheapest products !ibm anywhere in the wod:l And d1ey have l!tamed mat sucA ~ is often best and: easiest when dle: products are IlOI produced at home. (Singaporeans, for exam.. pie. enjoy better and cheaper agriculn.ua1 products than do d1eJapanese, although Stnppore has no ~ no f.ums.-.of its own.) Region stateS also welcome the chance ,[0 use wbatcwer surplus these activities generate to tatthet up rheir people's quality of life. still Wet; not to fund the ciVil: minimum or su~ outmoded b\dU5oies. Their lleadets do not showup ~ in the world ~ to attract f3ct0ries.and investment and then appear on ]V back home VOWing to proteCt ,local companiesno matter what. In a word, they consistently· put glOOal.logic first,
R£gion·swes make such effective.ports of entry to £be global economy because me very characteristics that ddine them. are shaped by rhe elimands of that economy. They mUst. for example, be ~ etiough. to provide an atm1Otive. madctl for tht,brnod deeelopmenr of Jeading consumer products .. Hence, they tend to be between 5 and 20 million people in size, The rnnge is broad, but the. eXtIemes3re dear: not half a rililIion, not 50 or '100 11lilfioFl. That is because .they must be smail enoush for their citizens to share inrerestS as consumers, bo.tStill of sufficient size to justify economies not of scale (which, after aU, can be leve.niged from a base of any u through exports to me rest of the worltD, but.Of service-that. is, the infuI:stn..Icnl.o{ Communications. transponariDn, and: professional services essential to panicipatiOI} m ,the global econorny. (They must have, for ~pIe, at least one intematWnal airpon and. IOOre ~ l:ikely, one good harbor wilh. mtemanonaklass &eighl~handling faq}ities.)
As the reach of 1V expands, advertiSing: becomes efficient. Aithough aying:to achieve penenadon or 3! consumer brand' duoughmu aU of japan Of mdonesia.may be prohibitively expensive, establishing it firmly in the 0s3ka~ or Jakarta regions is far moreaffordable-and
1
,Ii ,hll
. 1. :1.',1. I:~ !I z t ifIJ
111\11 II
I
I I
I
I
,
IldJJ'
I j,t
1;11..
I,
CD
I
, :Q.
,
" ,
I' ~: I
i
~ ~~ oj Region 5wra 93
far mo~ likdy t08'memte handsomeretums: Much the same is true with. and serviCe netwodcs. CUStomer ~on Pl'pgrams., market S1.lI"VefS. and n:umagemeru information systemS: efficient Scale is to be found at the regional DOt the national. level. This matters because, on "balance, it is ni<_)dcm marke,(ing tecbniques that. shape the ecoRODliesof region states. For individual cOmpani~, polin6d borders are liMe more than ~ .anifi¢ial. ext~ imposed source of ineffidency. What counts, instead. is me geographica}' clUstering of bn;lad
similanties bit tas~e and preference; .
In order to sell branded COIlSUmeF goods, foJ example. 1'Vadwrm,. ing is esS,elltW. Some.thing like I OO,OO() gro$S. ~ting points '(GRP) are needed to establish a ~nable level of brand recognition. But the cost' of such advertising is sufficienlly high that it can be justified only when it)"taChes a ~ .eooughaudience-say, several millUm potential conswners. Atrer the. brand is established, the nat step is to get all the other eSsenDaJ pktts in place: shelf coneol in rerail outlets, justin-tirne delivery, after-sales service, cooperative promotions with 104Jl re~> and the like. ~ means setting up a logistics and Dilal'keting operation dedicated to theregion-again an expensive undenaking justified only by the porentW ~ of the market. Thus, if the market is
too small. it cannot get over the threshold 10 qualify as a stand-alone _ region state. ConveJSdy. if it is so large--eithtr in population or geographical ,caen,t-. ,that Sf;VeJ3.} pamlel operatiens systems are required
to semce it, it lacks the focused coherence eo qualify as a regiqn state.
Where we economies of service exist, religious, ethnic, and racial distinctiOns are not imponant---or at least. they are of as liale importance as human nature allows. SiQgapore is 10 percent ethnic Chi. nese, Qul irs 30 percent min.orily is no problem because commercial prosperity crea~es sufficient a8luence [0 keep them. contented. Nor are ethnic differences a source of eoncem for potential investors. In Indonesia. howeveI; with irs 250 or so dUferent ~ groU,pS, 18',000 islands.and 188 million people, no otganizab.en theory known to man can define a mode of pOlitical ordet secure or stable enough to calm all investots' feaIS.
Still. Indonesia has 'traditionally attempted [0 impose a single form of politti~ order from the C@,Iller by applying fictional avetageS. They do not \\'Ot:k;31bu ,if the counoy's leaders allowed economies of set:-
94 The EM of rht Nation Stale
vice to define~ within lnd~nesUl, twO or ,three Stngapote-siZed regi,on states, ,t:h~ a».4d be managed. A recent (1991) don: to make 'B;u.am, Island an open eoonomy Uaked wilih Sirigapore has aJreadyattracted mare than 50 foreign corporstioas, mostly :fromJ~.1\ cOmparable errOR in Meda.n is now under way. Ifsuctessful, these initiatives spearheaded by Bresident-Suhano, would.work ~t, ,rath.~ thaD~:..
bate, die COl!.U)try'~ manilbld.social divisions. .,
Indeed" because, the o{1je1'lraEion of region ~tates is toward the global economy. not toward meir host nations, they help breed an intematio~m of outlook that defuses many of the usual kin:dS of SOCial tensions, In the United States, for example. the Japanese have already established about 120 "transplant" auto indUstry-f~lat~d factories thr9ughout the Mississippi. '~ey. More are on the way; As their share of the domestic indUstry's production grows" people in me region, wIlo look tQ these .plan ts for-their livelihoods and for the 'taX rev:eriut=S to suppontheir local communities, win stop caring whether the plants belong to U.S,- or Japan-headquartered companies. All mey will care about are the economic bene.tiJiS of haVing' them there---4n the Valley Region State.
The mere existence of relevant service economies does not, of COUISe, moon mat a region will, always act~r' even aspire to ac;r_.as a local outp0St ofthe global economy: As already noted briefly in· Chapter'S, Anrutlee Saxenianhas shown that,· lor much ofits hiStory, Silicon 'klley in California, that great engine or much of the microelectronics Industry in the United,5taEe5, proSpe,red~y by comparison wid\-iliat other regional.center of microelectromcs, ROute 128 jR ~ .sad111Seus----be~use' its laid-back. 'freewqeefihg styl~ 3ttracted '. top" ;iiigh; people: ideilS, aft~ v(nture eapiraliSts. and 'allowed them to combiite'andrecombine in a "netwOrked" iridUstlrial model. By: pr0viding an oPen" local point of connecnon to the fast-moving. woddwfde UIDVme of technolOgy and leChnologists, it quickly outpaced irs Massa.dluseus riv3l (see Exhibit 7--$).
By contraSt. Route UB, went to washington as it . were, turned lobbyist. studied ~c;ompetitiveness" as a 'Way to get more fedenll funding for R&D. and grew protec.tionis.t It. has also begun to discQurage., ewn bat, foreign investments as well as fore~gn ,t.akeovers. The ine'Wrable result: Japan is now developinge SiI'ioon lsl,aRd on K~y;TaiwaJil .
EXHIBIT 7:-8
Ernpr~ent -in Elecaonic COtnpdl'lenrs and Semi~nduotor 'funls (Silicon \.&llt)"and RDUte 128. J959-1980). .
Iw, SilICon Valley mRoute 128 '
-.r . _
1959'
65
70
~ to .~te a 5~n JSLmd.of irs @WD; and Ko~ is nurtw'irtg a SilIcon Renirisub. This IS dIe wolSt of all possjblC OUtcomes: less new money in Massachuset.ts and ahosr of newly ene.rgized and WeU-fund~ ed competitive areas. ' ,
S~ defensiVeness is tbe detritus of old SUspicions. It very much gers in ,the ~. _ BIJ[ it clQeS nor have [o~ When, for e:xam.ple, Holl~~ood~d mat;it \WS about ~? fi¥;e a severe capital shortage, it ~ n~t mEOW up Protectionist barriers ·against foreign mOAey. Instead, It mvned Rupert Murdoch into 2'OtJb-Ceruu:IY-~ C. ~toh and Toshiba intO t'une~~~ny intoColumbta,and MatsUShita i6tO MCA. The result: ~~15 ~illiom infusion of new ~ital~d, equally impor~u', $15 billi~n less for Japan or anyone else to set up a. competing Hollywood of Its QWn.
Th,ese. .~ri~nces _~o ,Illot _~~ for entrusting all ef[ollS to forge pmdpctlVe.iinkages WIth the glOOa1 econom¥ tQm.ei'rJgJ:nented, idio.-'
96 Tht End ofdac Nation St4tt
synaatic choices of indMdual companies. They certainly do not argue. for getting government. at any level, involved in picking those industries or technologies mat Should be so linked. Berween the exatmes of cen~ directed industrial policy and hands-off free marlo!ts. however, there is room for regional pelicy. Done well, ,this can easily - ma1se me difference between local prosperity and local versions of Q$_uon" state-type pandySiS. The nick. as Saxenian notes, is to develop policies dult "help companies to learn and respond. quickly to c:ha:qging condil(ions--:-railier' than policies mat either protect or isolate them from competition or exremal change. " The goal, in other words, is to foSter me development of flexible communities of interest through local netwalks. These networks provide multiple forums for. collaboranoaand the.exchange of opinioos. But, ill ~te, they also make possible the economies of service mat legitimize regio~ infrasmIClUre for communicating wi~d cenaecnng to--megiobal.economy.
The heart of thechallenge, l'eI1lernber; is nOlto solveall problems locaBy, btn rather to make it possible to solVe them by harnessing global. resources. The .effectiveness of region states depends on ,their abi,lity to tap glohaJI SQlutiotlS. When nation states were the domirumt actors in economic -affairs, a potential infusion of new resources or new talent was not always welcome: there might, be vested interests (0 protect or suspicions of foreign. influence to gratify for politieal. ends. Region states, by cosrrast, carry virma1ly none of this 'bagpge. The implicit :goal of their policies and their actions is not to defer to SGJIle outdated insistence o~ self--suOiciency\ [0 buy off some we~~ constituency, to satisfy some emotional ~g for the trappings of sovereignty, to tia. up SO"m~ bloc of ' votes, to feed some vocal demand for prot~tion,or to.keep some current 'goYenunent in ~ It is to improve ,the quality of their pec1ple's lives ~ atlttacting and harnessing, me talents and.resources of me global economy. not by.~ that economy off so that special interests can floW'iSh.
No wonder, then. that when me people in Guangihou tell meir leaders in Beijing that they need to be joined with Hong Kong eeonomically. if not 'wUtically, me laner's response is to say. let's I¥)t get too ~ away here. let's not move too fast. Let's not create a model ~ miglu not want other regio~ eo emulate. We want to control Ibis. Greater openness may be necf$.sar}',,"btu we want to decide
The ~ tt/Rtabt St4Ics 97
when and how,fastand how fat More to the point. we \Wn[ ro be suR dw ~ ~ revenue such openness geneJates can be identified, capam:d.:and PUl [0 use funding, d'le civil minimums of'less advanced ~. ~ haYeall of China to WOO')' abqut, and we do wony. It is po-
. Ii.t:icallf mtolerable for 'us to let- dleeconomic fommes of different _regions get,..--and, WOISe, be seen to get-too far out 0'£ balance:
To which. narmally. me people in Guangzhou respond, You still dOn'lt get it. }iIU may be worned about 'providjng ciVil minimums, but we have to worry about how to become more'lib-as well as haw to compe.te witb-the Hong l<ong5. and Sifi~ and Taiwa:ns of this world.. \\\:. have to convince foreign ~[Ors that we are prefer.d>le to these other regions as a subject for their energies. They don'e have to come here. Jihey don~t have to bring meir money or their technology or ltheir skills ht;re. They em easily tab them ~1sewhere. Press these golden geese 100 hard or make their laying house too unanractive, and ,they will vvork their magic in a competitor's backyard. .
At the same time, of course, the peQ.ple of Guangzhou know mat mer cannot deny a significant. ongOing relauonship with the rest of mamland China. That COQ.Rection is md--and is pan of their s~ and appeal. What they cannot afford is to be victims of tight, centralized CO~lDDI. 'But they can produCtivdy be-in fact. they would do well to be,.-part"of a lOOKgfouping of Chinese regional slates, a kind of Chinese fedeflition er commonWeidlil. This would well serve both sets of interests. The ironic lesson ,of history, howeveI; ,is that when strong. eentrally controlled nation stateS-the former Soviet Union, for example~ unwilling to give up'the musion of power.in order to enhance the quality of life of their people. the realiti of that power
erodes." ..
Old habits die hard. and the, habits of power die hardest of all.
EVeq--pemaps espectaUy-when there has been a history of loose federanoa, as in the Unired States under the Articles of Confederration, there is often great reluctance to re-embrace either its Iogtc orIts ideals, All too ofte.n, what is remembered ef those rro.ubled.~ between the Treaty of Paris and the Cons.rttuoon is the image of a feeble central govemmem ugable to do much of anything, let alone. intervene effectively on theeoonomic front. Bpt it is precisely, those:protec-
98 Tht&d<fdle'Nadoft Stat(
·tion-m.inded. interYmlilons thati a mumro federation is designed to ptr.'mt.
- - Iiowever so(uhb)g'dtc illusion of comrol or.of the. benditial dIecrs
of' t6p-c!own 'im~tUm. the reeerd shows that pitifully few stJC!1. ac .. IDons have OD resmred hard·hit ind~or regiOns to health e • lben: are. of' C()Ut5e, rilany ,kinds of poliCy actions by gqvemments that are bothusefi.tl aDd necessary. JUSt thjrtk, fpr example. of me financial regulation established d~ the' ~ da)'S of the New Oeat in the u.s. But mese are usually not the kinds of dungs' that rabid defenders of
cenaal powerhaYein mind -
Nation States. [or the most ~- opt forsollniQos that. however wasmfut-or ineflictent, maintain at least-the illusion .ofoonrrol. ~ ·Iibe ~ ten~., £or e:xa$plt. the United Stales hoi; dell13J,ldedmo~ and more lbudly mat Japan open up irs ~c rnarltet to rice."]he RiGe Millers Association ,of AmeriCa Qas played an itrlluerItiall ~ role in vhshingt0n. After frusttatmg bilateral wks, lh~ issue ~ brought into the Uruguay "RQund and, by;:,extet'15ion.. under the ausipices of the new World I~Organitation. Japan 'h:aS_ ~d ~ 10 'a .gtadUal openQ1g of irs marion,. stamng WltA 300.00a tons in 1993 and increasing by ann:ua'l mcremenlS of 100,000 tODS. ln rennri: Japan will Urithdly be able [0 assess a very_stiII umf£. which will:slowly decrease over time. ~ such nation state-based ntgoaaoons go--,iS 3resoJInding Victo,ry.
However, what if JaPall's 11 regional do-shu or nanmtl business areas. had been clwged wilh handling the iSsue in place of the cenmd goYmpmenl in lOlo/D? The negotiarolS would' ~.~ the'~ ~ . pie, w;bo have· to compete "With adlo'Jo..shus for-their eeonormc surVival rather than dlose who fJlCe demands ~m 'loeal' farm~ @d prei~twal 9f1iciais' f~r more than, US $10 billion a ~ in subsidies QuStto impOrt riCe~· onf.y -$300 million'!). Rtpresentativts:fro.m 10- hola:t~o', then, at, the northeastemend'of Honshu. might haW: 'ch~1 [0 visit rice~g areas alOng, ,the Missbsippiin the UniJ.ed States .and offer l~ fan.nas a deal: let as invest in your operations to ,~ duce hlgh..quality and fow-cosr nee' and-then ~t us'sell some perqentage of il m Japan. _U.S.farme,rs would then have bad accessro Japanes¢ money and markets, and Thhoku-do farmers··Wotdd have had .~ loa gpod b~ deal and to CMq>. rice for their people.
_ Noone wo~d ~~ to ~ markets dosed. Mo~ il'aDdle dosh~ ~ m a. similar ~ lUld structUred oomparable deals Vrirh .. vanety: ·of partneI$ inlhaWmd. Aust:mlia., or wherevet; Japanese con::
~ wou~ld stand [~'save more than US $40 billion ann~ fro~ the grossly inl:Iiired pnces they now have. ropay.Everybody would ~t die Ioebyisrs, ~o m,iW!:t find themselves,ol;1.t of ajob, By conrrast, ,~ the issue ,[0 centtaJ;,govm:un~ts means ,(hal Japanese
famte:r.; scream ·OU[ against opening ~Il.dle market and exton an additional US $12 billiQll from lOkyo m "permit" i[, Japanese consumm have· no access to inexpensive. nee, and U.s. fmmers have no access [0 J3PUI,ese money'and on4'; a ,tiny bit of acoessto their market EveryiboQyloses--except me l0bbyisrs. who Flaw enjoy even greater job .se~
Bemuse of the p~~ operating on them, the. predictable focus of nation states is on rn.echarusms for propping up rroubled indus~. This goes nowhere. 1be-end1ess-,trade negotiations, IS fot example, bet\\!OO'n J~ .and the United States. may have playe(ji:well [0 voters back nome. but dteactions_w·which they led have rescued ne Indusny;- reWlOO no sector of the economy, and been of advanl8ge to no consumen;., 1eniles. semicQnductors, au [omobiles, consumer electfO~ese industries do not develop acw~ to. the whims of pol1qmakers, bur only ~ respcnse to the definjEg logic of the. competitive inadceliplace. If U5.share in an tn;dllSt;ry '~ fallen, it is not hecaU$e policy: £ailed but because ,i,ndiyjdual consumers decided [0 buy from other suppliers. But even when govemm¢~t poUey sue. ceeds--as~; for example, did Japan"s reluctant agreement to .aUow domestic sales of 'US-made mobile phones---:lhe home country does not benefit; dle company does.Jn tJ1JS ease; the chips foF the "U.S." handsets sold iR jiapan weremade---and me handsets assembl~
Malaysia ,
This. c:ena.inly. is not welcome. news in. established seatS of po,>Net Celt~rs shudder armeimplieanons of region st,ates or federatiOns. of region. stales because tliey haVe come to look upon the. ~tem of centro[.they know best as if it. were gWen in Ute. very.nature of~. But It is not, It ,is just an aaiaem ofhiS.rory, nothing more, ldial modem economic . theory' ciySWlized at. about the same rune as the modem nation state. md Adam Sm,ith Wri(tenone <:emury earIi~i;t 'oogtlt -be
100 Tht End of tilt Nation Start
much easier for us now to view the conneedons berweenecenomic activiJy ,and nation states in quite a diferent light. So, (00. if John. MajJ'Uurl'l<eynes had wri(lel) half a ,cennrry.later.I:ii~~ for muCh of histOry, as Jane Jacobs reminds us in Otits and the Wealfh €!f NQtWns. the. meamngfUl units of economic life Were-intact,. still are-url>art aggregations and their respective hinterlands. It is c.entr.ilizedpower' over eeonomit affairs hit is the latecotner here. fora limited histol'icit moment, it best suited the l1eeds. of development. nuu moment has now passed.
'Wh~- prosperlo/existS;it is regiOn-based. And when a region Pro.spers, its good fonunespills over into adjacent territories .inside, and eucside 'thepotitic311 Iederatton of whkhins a pain. Economic progress in and around Bangkok. .for example, has prompted invest01S Ito ~lore options elseWhere ~~d. Much the same is tnI,e of Kuala Lumpur in Malaysia, of Jakana in Indonesia, and, of course., of Singapore, which is rapkJily hemming dIe unofficial' capital of MEAN. It could also be true of sao Paulo in. BraziI---;if, tltat is, me central B~ government learns to ·£real it as a" genuine region state and! pemUts'it to join meglobateconomy;,U irdoe$, at least one.region in Btazil could we)) join the. OECD wi'thin ten years Oft so. If it does. not~use or concerns for the civil minimum or feaIS mat Ja:im.ess ·among regions would be sacrificed-then the, cmmtry as a whole may weUtaIl·off the roster or NIEs ..
Regio~. stares are not~d need not be-the enemies ofcenmll gove.mment. Handled gently, by federation, these ports of entry to me global economy may' well prgve to be their very best friends,
Chapter Eight
ZEBRA STRATEGy
~YOU . .me seIlJng ~jet copiers, the product you develop Cor the dry climate Of Arizona Is probably not suitable for the damp.and humid area around. Nov Odeans. If you are selling gear for siding, southern ~ .is a 'lot more like Swit:urland and other areas along the Upper' Rhine maR· it is,1ike' Hamburg. If you are selling home fQmiture •. w.ouldn': you rather the isJand of K~hu be linkeddirectlyvnm PuSan. U1 Korea. wjth its,4.5 million people and only 25-minute disI~ away by plane, rather than with aJa~.c09ncry manager based .~ 1hl,<ye. Who Will '!average~ l(yusbu data so that it all sounds lOkyolike b(fore<~J:ting it back Ito headquaners in New York Qrlandon or R(I[I~e?On fact, 210 percent aCUte people on Kyushu who buy furnirure (Qr.t:herr n~ homes already buy,it from Taiwan or Korea~) If you are selling sneakers for outdoor use in \Vinte,!; wouldn't it make more sense fbr you to ,bundle Milwaukee With'Toronto than with Dallas?
Wharever: you are seU'ipg in a borcfedessecQJilomy, it is- bet~ to do
it ~t through aU. N ._-styie<amaJgam or nation-based organizations. but mrough ~a ~on s~te-[ocused network or 'l.l~bili[f and compes renee ~ter .aU., the "~ tes't for region states is not whether they sound nice In tbeary or whether the hype 'sUITOuncUngthem has reached fever pitch, It is v.memtrrea1 managers i'nreal companies with r,
101
-' .. I· mab act in a fashion
real dollars to invest and mal COmJ'Dlonen,ts 0 -
consistmtwilh rheir cxisW1ce-and their ~nanoe. . _. ;.
- even te:n yeats ago, mey did not. Their v.leW, at the
Fiftetn yews ago. . 1 •• • r their .. . -pa--
" '. fhowbest to arrange the inremanuwu acttVltl£S 0." com
nme, o. .' _...I' .. .:I,. • . f the
• L_~_.l im . plio·"" on a UtutQ.l, Nanons-s.,.e Vlewp .•.
mes was DiIXU. ' . ~l' .. h
world. Each eeuntry had a. place at the econcmtic rabIe, and eacn
place at me table bad a name card with ~in~ual ~'s name. Back then •. as a m.an.ageJ; if you decided to ~ moo France, you went into France-not BliIgundy or Provence or AU:veIgne. but Franceand once there, you set IUP a french clone of the o~tion you ~. already built in Genruiny or the U.K or wherevet Even if .your ~. ties acruaIly covered-and were intended to cover~rdy a fracnon of that nation's geQgrapby .. yoUr Strategy waS still a country strategy. and
me organization you bui[t was a country 'OJg3IIizaliion. . .
Today. by contrast, what does it mean fora company to gQ moo China? With an office. or [wo in GuaJigdong. is .it possible to Mcover" the cowury or even to delude yomself that you are doing so? Is coeering the counO)t; til fact, what you should ,really be .~iring to ~~? There am: ~t disparities of wealth from ~ to 'rewan (see Exhibit -B-1). some of which haVe percapita GDPs greater than those of:many freestanding ASian countries (see Exhibit 8-2). The disparities are equally great from qty to citywiynn a reglon (see Exhibit 8-3). .
Mo~ gj:ven the limited. state oftranspanation and eommumeations ii'Ibasm.lcwt(. yOu would do well to be able to cover a .few parts of just G1.Wlgdong,itse~ which has more than 60 million people and '20 fair-sized..autonolIlOus cities. Add to that' both the 20 million overseas' Chinese Who think of Guangdong as home and the neighboring populaOon of Hong Kong. which is Part of me coastal area's region state, and the 'resulting population of 85 inillion or so is roughly equiValent [0 ,that. of dle largest European economy; the reutli;fied Germany.
The only reasoI12ble approach, therefore. is, to plan a srmegyand build an organization for Guangdong alone. but to do so in ways that
, are "plug-compatIble" -that is, that ~l nsefal, working linkages to be fo-rmuh--wirh what you are now doing Of. may in the future decide to do in me. 2 7 ~ Beijing-designated. "offiCial" regions of d'le. ~try. This. or course. is what u.s. firms.1:lavt done for years as Itbey
EXHIBIir 8-1
aDP Per Capila.in China, 1991 (lJS.$)
I
~
Note· ..... cIIl6c:W,...."..,. die for 1991 is 5:5l YUan per USS.
Sc.tc au- ~ lb:atooIr 1993. .
~.~~ dIe' EUrape8n marke[~ They did not "enter" Europe by Cry_ mg to build an integlated. con$lmt~wide operation with a sing!.e flu~ ropean h~ at Brussels'or Amsterdam, They went ooumry'by country. Only ill rteenr}alS. ascooriHnamon problems.among these separate ~ns 'have grown and as Ithe ecOnomic g(ography of_ ~ European Union bas come. at laSt. closer ee ~ty.' are they movmg to 00IlStrua:. me institutional basis for a genuine. pan-European presence.
Thus~ with China lOdayas with Europe. a generation or [We agq. the real Choi¢e 'l11aDageJs fact ts not wnetl;ler to enter, but which region(s} to role[ But the 0PJi'Onum~ to .tit ,their decision to regional, 'rather than national. considemliollS is, if aJ:Iything. greater than it was .~ tbe ~ heady days of European' expansiOn. The game is Qifferent now
~ because rhe_ in~')ar$ have- Witnessed me rapid evolution of a globa) economy. As a result. local clusters of activity do not need to look, in the firs.t instance. for "external''' markets. panner.; in trade.
1 (}\t . 11k z:nd ., me N@on Smte EXHIBIt' 8-1
GNP Qanlcing of Japanese ~Shu (US s biJIions)
technical and managerial skills: or sources of capital in neighboring areas within me same nation state. They can look, instead. to strike arrangemert[S with economic actors anywhere in me world.
Beijing. for instance. has agreed ItO permit dtt IWion's official:rn,. gions.--each an "island of opponumty" in its o~ righ.t---{o negotiate independently with foreign providerS of capitai· and infrastrucmre~related ~. Why; then, build costly. ,t~lecom networks to send messages to a sparsely populated interior w,hen you om put a satellite dish'on the ~ bounce signals ,off theheavens, and communicate direedy witlfllondon and New 'lQrk and Tokyo?
Even local developments in China are now global in orientation. Xu ~3Qgdi. :forexampLe, the former professor of metallurgy, who is now executive vice-mayo,r of Shanghai, leads the committee that oversees
., aU new infrasauctUfii: projects in bom Shapgbapmd Pudong .. dile dty's. special economic development zone. By late 1994. me committee's' expenditure on roads. bridges, ru~els. and the like came [0 more than US 56 billion. But that'S just a beginning. By me end of dte decade, the committee plans to hamess.the effortS of foreign pattneIS .. to invest more dun $lOo. billion in such projec·lS. Helpiitg Xu. in. these
EXHlB1J g..;3
Per capita' GOP by City, 1992-~OOO
CUSS)
~1_
~ /11/
1111' 1I11 /1 1III1
Notr, Figun:s hM bun pn:¥aed, usiJIi. 9.1 % Chinese. CAGR. f« l~ Soun;e; C1ama Stalisticdl ~ 1993; McI<imty~; tl.7.8.
effoItSis the old boys' ne,twork of fonner-5hangltai officials, including Chiang l.etning and·ZhI!1 Rongji. who now n:umage the coenrry's vast but ·fragkeconomy.
For gl0bill c~ger.;, the briiht1 anraative-and manageablespots on today's development maps are not countries but bounded regions like ShangbW'Podong. which are appeafutg in themselves a5 a marlcet. as a base: from wIiUch to provide boeh manufactured goods and services. and at; a funclioniog link to the bordedess economy. Shanghai with irs hinterland, induding the neighboring provinces of jiangsu and Zhejang. has a total ,pop~tion.or some l25 million-= roughly equal to an of Japan. Thus, a monolithic strate&Y for "ent6l'irlg Greater Shang~" is almosr as nonsensical as ene for "entering Japan." A foothoM in the Pudon_g region nngnt be reasonable. however, as might a beachhead. in me Kansai are3 around Osaka. But o:yillg to swall~ a difficult new market of 125 millio~ people aU in one COD-
__ .1-:..- tftlr... .
VP01~ 6UOP'lS not.
Much me same is true, of CQUJSe. of India. Entering the regionS cen-
106 TkEnd ~tltt NtUion Stale
tered on Bc>Jnbty or Macbas or Bangalore is a p1ausibk IJl8ll¥1ial task. Entering "Jndja"is I10L So. too, with Jakarta in Indooe:sia. And so, too. with northern Califomia. or the Pacific Northwest or New Engtand in ,the Unii:.ed Stares, Up close and '9Il1he ground. the managerial tasks of bui1ding a business in any one ,of ,these areas an: substantially dUIerent from those inanothet: From a·great distance.h~ there is an cM!rwheIming impulse to generalize and hmlp rogetheI: I no Imlger bod1erto 'count the times a Enmpeart or American executive caHsme in lOkyo Ito see iI we ~ get together While he is visiting "my region." Tr.mslateci, what chis really means is that he intends to ~ to Sydney or Jabna. which areeigbt or Dine bouts from k>kyo by ail:
Itt one. such conversation, a manager rold me that he had lined up mree proCessioDals in Beijing,J1one a M3riaarin speaker; and several "qualified salesmen," whe had been identified through a newspaper ad. to launch a building materials business in China. true. he was a little sheepish about the "qualifying" process. but feltreasona:b~ good about the morale of the group and abouc the ambitiousness of their initial proposals. There was absolutely no awareness on his pan that his plans Were the logical equivalem of sticking three French speaker.i in 'MIshington. D.C., in order to sell bricks all across the Uuited States. Or that, even if he were able to-hire .suitable Mandarin speakus, the. dilife~ces among Chinese dialect:s are so huge as tolJ'l8ke them murually unintelligible. Conditioned to think only in terms of nadon states, 'he had. no ready way to see that the geQgn1pbica1 reach of his ceuntry-based planning was at an entirely wrong-an. impossible-levd of scale. He should have been looking at regions instead.
RegionsrNtter; . in part, because the scale of efiOnthey imply is managerially doable. But they also matter because they so readily lend dlemselves as pons of entry to, the global economy. None of the regions now ftounshing or beginning to flourish has gotten that way by cirdling its, ~ons around a protected base of narund resources, dribbling those reseurces out to 'clamorous buyers at artifictallf maintained prices. and ~hen PasSi,rigtheir revenues on to a central govmuneru eager to lund the civil minimum elsewhere. nus is certainly net what Shanghai is doing. It is ,certainly not what Singapore or Silicon Valley or Wales· or Penang or Caralonia has done.
libra StnIttgy 107
The ,lesson is paipfuJly clem; but in man}':.quarteJs rhere is. often &Teat relucomce w,at!CqX iL Nalional gowmmenrs still ttnd to'v1cw ~ rates or pauems ofgrowth I1C'CS regions as destabilizing Problems to be soIwd tather tDan 2i opponunitits to be, bamessed. They worry ;not about how 'to help successful areas prosper ~ but about how best to extract I'noney from mem so as to fund the civil minimum. They WDny about the adequacy of dieir pelky imtnun.ents for controlling dustels of ~nomk' activity on mdicaIly different aajcaories of growdl. And they. worry about proteaing.those aaivitie,s from die ~ dCecnof b311Sborder flows of ilibmanon and c:apitaland expertise.
These are Ithe wrong lcinds of UUngs to WOJlY ~t. They have to do- priInati)y With, maintaining centralized COntrol, even at the expense of dragging aD .pans of the cowury down. They do not have to do with letting mdMdual regions .flourisb $id so pnMde the energy, stimulus. and. suppon to bring dte rest along, Multinationa)_ corporaOpIl$ (MNCs) C8l'uead these ~ Widlperfect clarity. and mey Slay away.
In the fonaer Soviet Union, for ,example, the race is on to see Whether it is- possible to arrest and reverse the damage done by year.; of such ~ ,cena3:l control to nanmd economic n:gions like Baku, me capital of Azerbaijan, or Irlwrsk, Nakhodka, ~ and V1ad:ivoswk in Siberia. «all~ to create. their own linkages' wim the global economy and to .strike their own deals With the managers of global tl1terpIises, each of these regions .maY still prosper and so gWe Moscow one less problem to worry about. But. if such pennission is denied, the- global economy will be' scared away. The managers of MNCs will, quite understandably, focus their <UIention elsewhere and leave these n:gions to inescapable de<;ay.
THE ZEBIVlS STJUPES
The economies of nation stares are not monolithic .. tn me real world, remem~ there is ''110 such .: Ihmg ~ an "average" Imly or Fnmce or Japan or Unired' States. fur manage.rs. such averages are useless $WiSti-
cal absttactions-ar misleading ab.$1laCtions at that. They seem to'
. imply that it is meaningful, even desiraI1le, to make critical deoisions
about Sllategy and invesoneru on a tnmtry-by-oountry basis. "'Its. the
108 The EniJ'Of~ Ncldot:t St4k
A1'neriatn.madcet is large .. and growing; let'S entet No~ theriskof~atiI1g ill Thailand.makes us unComfortable;. ~'$ wait:_ ~ is nonsense.
I do not mean that there are no~rdewnt differences,m ~.reguIabxy.
legal. or ~. nwbt environInent fumt coumry [0 cowmy. Of ~ there are, and MNC managets MUSt pay' _attention to dlellit ~ pow.1S thai: the vaSLInajority·Of ~ reaI, hands-on .dedsi6m that these ~ confront ~ to be made ataneruiidy~t<~of~.
the Japanese companies \Vim ",inch. I ~ woiked fOr years. haVe never deYiserl smuegies or built QIW"izatiQns to enter the u.s, ~ as a whole, as if inve;J'e a·-single W1ifiiOO, area. It isn't. and, they·knew benet Instead, rheywoUld ~ and choose their spots: Califomia, pedIaps, and maybe New.Er1glantl. the Great 1~ area, and, at'least initially, very limit else. A.ItlIDugh, (rom. a distanCe, dte whole of me United States
. might look gray, they understocd that the markets for their products were not Muydisiribu:ted, coast to coast; there were fXXlIa:ts o(intense interest here and there.'Mth great swatehes of "White space" betwa:n.
They also understood ·thatthe isobars of demand on me tJ $, con-
. sumer truqJ varied signifieantly from. product toproducr. Consumer taste in eIotbmg or automobile accessories might be rela.tivelycon;. stant WQughout California, noOO (0 SQ1:uih, but mighl' vary considerably when it' came to pae~ foods or €Qnsum~ eleetronies, And even when overall growth tares ,in .a single product market were at X percent, some parts df the, country· would 00 boeIiJli~ along a~' x+ y and orhess I:agging behind. at x:.Z. The m~table result: $ll'3.tegy maps that, when seen up dose. looked like the hide .of a. ·ze:~t. grny. but darJdy shaded areas of activity separated by. whi_te space.
In economlc terms, atthe level of granularity rellMlIlt to managers, all nation stares are zebras. Media vary, .growth rates vary. intIasmJe· ture varies, tastes and preferences vary .. There is infor:mation..:clriven convergence. to be sure. but it does not proceed everywhere atan equal pace, Indeed, pan of what m.aktsregion states s.uchamacave economic units is the fact tbat~a1Gng these 'axes--their intenud variance ts far less dum mat between them and other regions in a zebr. striped economy. Though linked by common adherence to die same cemer.defimed macroeconomic policies, such regions may have re1atively ltule' in common. Around their immed.iateperipnery,. however; there is efrena steadily oq>a:nding "gray" hinteriand" walch sHares
Zthra~ 109
their. pani~1m ~ of attitUdes and tastes, p in ~. de
throUgh a kind of ~over effect. gree,
ulf}W~,a ~ sit.in ~ )'PUmay.not be able to _- WiIh pit daiUy ~l that IS P1g on eIsewhere~in 1hPJand. lht ~
too ~ ~ Mai:~ <1liaIlg~ oodtintbe. ~ ~ have qwre a different cuIrure from rhat of; ~ .Phuket. off the ~ coast ~t )UJ may be able to "$«" what is going on in' the ldat~ zone of int1ueRce"spteaJbJg out from Bangkok, !:Qat ~,a(lO.!iSltht Domer to Laos, ~ and.even Myamnar and Viemam. U.N_~ ~ ~ .pciicy m,ay be inrentiGmHy blInd tp ~ ~;, ~ afrer an. is off mmr.s.and GambOOia is deeply suspect. Btu Thai ~ has,~ regular ~t to Rangoon, infonnal oade moves con~
~the ~., River. ~ iJ1iaiIariij and M~ and SUndry ~~ with. Kltymer inreresrs, are 6u: more mil and JQgihIe than the dfs:tmt.~ towhich the \.\tir; Iisrens so cklsdy, of Presi-
dent Sihanoukfmm his ~'in BeijU)g.' . .. '- .," ~ ,
htmUch. tllesame ~ if ypusit in lOkyo Qr-~ you will ~, al best, an ann's-Ie:qgdt view of devd9pmemlS in! China ThiiJ is why a CQmpimJ like ~ has reIoated its first execu~ vice p.l;esidem from Osabto Dafia:n. He om see nO~·ehina much better from there. SimiJarly. if yoq sjt in Singapore or Kuala. LwnpW; with their ~ of ethnic Malays.; Chinese, and Indians, you are 3t We de facto center of a Im~ commW:liCatiolilS network joiniog stveral of 'me. ~ ~oomiesin W:e werlcl. )bu are, ineUect, at a crossroads of infonna..
~ as you would have been a.,~eration ago if yo~ had ~ up an eastern bloc "listening pest" in Viennaor MelsW:ci.1bese spors might nor .make idea) opeguional cet1leIS" but ,they have imlnense.VaIu~ asa 00- ~,pm:h.~m Wbith ,to layOUt snaregy and clo>dop people. -'
~ me past, you might -~ been atnacted to these ilocations by their loW raees ofwcaaon or by their I~'Y [0 r;lW materials or cheaplabot 1OOay, the attraciion is mereasmgIy the inr;imacy of meir knowledge- and culhiJte .. rooted connection 'with Several of the most apPe,aling regions of grDWrh in the wQddlbe white spaces in between do mot IUaRer. I\u"haps, for ~-based decision makers me ~ in M~or Cambodia orthe n~:>ncoastal puts of Ch~'may sunply be too ~t to see and"ctiSeSS direqJy. But dl-ete will: ibt lhai or Malaysian. OF Sinppoream partners 'and ~idd.lemen who tan. And
110 TIle End'Cjtftt Nadon State
who consistently do. Hunan Air .. regulir flightS to Bangkok. From KuaJa ).AmlpUr to BOmbay it is less than' four bows. And there are 25,
shuttle flightS daily between ~ingapOre and ~ lp~pur operated! jointly by MAS and SIA .. Believe it or not, these are the most frequent
cross-botder fliglns in the entire world.
EQU1DlSfANCE
Zebras exist. Their most active smpes--and die ~ hinterlands surrounding them~(Wt fall across the bOrders of nation states. This' creates no end.of problems for MNGs. In the, organizations that m9St now have in place, there is room fur corporate headquaite1S. regional headquarters. and country.;levelmanagemenE. as well as crosscutting worldwide 'product dNisions. Adding to this mix a separate strUctUre for the major region states.--6f which there. may now be 30 or so to which. a typital MNC would want to pay attention~would boost ~e . number of organizationallevds. whiCh most MNCs have been trymg
to cut down for years. .
But even. if this renewed romplcd,ry were deemed worthwhile, .
adding a level would not fix matters, •. because the economic realities of 'region states would still not be clearly visible to managers. at the cenli!r. No matter how noble their intentions. the inrervemng layer of country management wotdd" inevitably. filter the data ~d avi!ragt it. Experience shows that this is not the way for global GEQ; tao beco~ genuin~ly .. equicWimnt" in their diinlmlg fi;om all the places m whiCh
rh~r companies operate. -
Not; howeVel; caR the probletn be ~ by having region stateS re-
port in directly to the group at the cenrer. 1he resulting span of conttOl would be much too big. worse still" while nation states have dear borders, region states do IlOt. The solid lines ~ sunound ~Qies alsO cifC'Umscribe re1aP'rely discrete bodies of data on flbws· of in£orrnation. uade. capiU1l. people, and thelila:. nue.. most conventional statistics, about these Dows are deeply flawed. but able country management reams krtaw how to crease numbels that dO ~ ,realleYds and pat~~ of activity. fur region states.. ~ whose botdas do not follow the d~ lines of Euclidean. geometry but the bb:ured dais and splotd'IcS of an Impressionist painting. building accumte dam is a farlwder taSk.
Ztbra.Stnzkgy 111
Region ~ are DO[ neat I:xac£s into wlUch neat sets of facts can be packI!d. They are. instead, much more iIike magnets h~, over a field of ~~ mew scraps. bending, and ·twisting the flows as they go.
the usual otgaIUzational selunons, therefore. do not work Sometbing:e1se is needed. One pOssibility.is to stay with a country manager system, li:rut-Slfppon it wiman info.nnaOOlil system geared! (0 these regional flows' of activity. Anomer is to create. across a whole region li:kI! &ia-Pacmc, a nonsymmeaical matrix, Country erganizanons and their attendanr infomwion systems would remain whel:t the critical need is to deal withamtral ~mmentson policy matters (airline pri~ vatizaOOn, [or example. or telecoms policy), but the rest would be Ofganized, horizon.taIlY aE:IOSS nation states, by Issue: procurement. R&D, infonnation tedmolagy, and so OR. Especially where the business in question is informaaon-mreastve, the horizontal cut by issue holds the greatest promise [or ensuring equidisWlce.
ThUtk, [or example, o[.an aWnec:ring business based in Singapore, but relying on producr design and programrningskills in India, design integratiOn in Kuala lumpur, 6nancihl services in Hong ~ng, outsourced manufaawing in several regions of China drtvm by ~mnons in Bangalore and Ku'a,la lumpur, component assembly in Penang, and sales in the United States. The company's work' is not an aggregation or country-level activities, but a disaggregawrl business system NFl as a ae[\Y()dcedi process, controlled by shared infonnation, and o~ hOrizontally by issue.
This is not some improbable. fUnuistic vision. I am working with half·a dozen leading compaRies ln Asia-Pacific dial; are doing p~ly this kind of thing right now. Even their most intensely "local" activities. like customer.satisfaction. can-be delivered locally but managed from elsewhere as part of the netWOrk. With the appropriate database, IT syStemS. and communications in place. [or instance. there is no reason why Japan.ese~ customerservice ,~resentati.ws cannot sit in Hong Kong or Singapore or ,wherever the telecom bUlsare the cheapest aiul take care of the needs of the 6OCl,OOO JiIp8I1esebusinessmen working around me. world Qutside)apan.
MNQ;, therefore. no longer need to build a series of U.N ,-style clone OIganizations, countty by ceuntry, which they then oversee from me great distaace of some corporate Mount Olympus.' Such. or-
112 Jhe &ti,flcJ:dtt N~ Statt
~tions art cumberSo.me. at best, and they tend 00 miss or filter out the realities of region States ... Instead, for most purposes, MNCs can create a horizontal network. me nodes of whi~t, from· the ctnter-are not arbittary geographical units but real issue- or ~ flows Of economic activity,- many of wbi€b involve participation by external parmClS and vendors. Again. me cn:aQon of such botderiess O;>m~ for a borderless wmti is notamtchair theorizing. It is, already happening.
One of the prime difficulties of mganjmlg a company forglobal operations is the ,psyChology of ~ who are used to thinki1ig by q)unny-baseci line or authority rather than by line of opportunity. Lots of creative ideas for gepmting value are 9veriooked because such m·an.agers are captive to nation stare-condinoned habits o( .mind. Once ,that constraint is t:e~ and mose habits are broken. however, a nearly infinite range of new oppornmides comes intO focus: building cross-border alliances or joint veanrres, esrablisbing vinuat companies. arbitraging diIf~nBal costs of labor or evenservices _(posmge. S3)r. or utilitieS or phone biUs). In fact,giveD me porentiaJ to redesign business S)'StetnS impiidt in ,toci4IY'S information technOlogy and Intemet~like networks, regional "solutions" will be increasingly powerlul tools for outflanking the competition. I strongly" believe ~, liS head-to-head battles within established geagraphies yield less and. less incremental value, cbanging the battl~tlnd £rpm narion to cross-border region will be arthe core of 21st-<len.rury corporate sttategy.
This kind of shift in focus bas to happen. A leading Western consumer product firm has long organized (or itS global maRcets Iqy'movtngvirtually all production OUt of its home country and into maRufi(:tuJing "hubs" in Asia and Latin America, which then coordtnate networks of operations tlm>ughout the neighboring lregion. Its Mount Olympus-li~ headquaneIS remains, in the home country, where aU the' functional and wofldwide product diviSion heads are alSo located.
The firm's regional headquarters for Asia-Pacific, which is 'in H()ng Kong,- has all of the regi.on's coumry-based national sales companies reporting to if. The onlY tasklorthese eompames i$ exeaulon. All key dements of strategy-product planning, design, local variatiions--are
Zdlnr Stratep 1 U
decided. somewhere back on the home mountain. When there are'differences m opinion ~ in-oountry and home lllOtIIWIin dwellers. the fonner' have a very ham time being taken seriouslY; BKause ~ .~ at me center8re so expm and~, the lack of ~ don at the counuy ml mabs opinions from the periphery reWiwcly' easy to ignore or diScredit.
When the Olympim;, were finaUy convinced Utili. they had to subswuially boost the mix of skiDs in each counrry marltet, their initial impulse was to .repliatethe full mix of Olympus-style capabilities at the various .nal head~ and then to add some more capabil_ ity at the CO\!Iotry level as needed. The inevitable result: more-and more eIabQra~nallevds. a head count QCplosion, and a dramatic rise in SG&:A:costs., When even these ammgerpents did not boost local .per{oIlJUlllCe. the o,nly .ren1aining choice was to remove a country's management reant and replace it..
AI. the same time. h~ the long:.established busiaess system of the industry in whiCh me company participated was coming unglued. .~ Ii\eW infurmation technology. playm in the industry's remil channel quiCkly gained sumgtb.. Able. to iQentifythe best and cheapest SOUICeS of prodUct from mound the globe; they could now arbitrage product opportunrries wherever they exist. A Florida-based automobile tire disaib1:llto~ for instanoe, could "find and source good quality tires made in Ohina for US $.l2 and then make them avail~ ab1e~( only a tilly madcup--ro a retailer in KYUShu. ~ with.~ action and logistics COSts added in. this· is a great deal: J~panese prodacees cannot eeen get meir hands on the raw material. needed to make a tire for US $12.
In such a globaDy linked environment, being the proud owner of an expensive, multihlyer, rouniry-focused corporate organization is, at besca recipe for ~on. If a French customer em get a better price for yom product by soureing it through a discount disaibutor based in the U.K. thereby bypassing your multiple levels of COSt" you---,as country manager for nance-are plain out of luck. Put simpl}r. when suCh cross-border axbiu:age is possible, the only urangement that 'makes sense is to run your operaaon, in effect, as a "virtual" company-that is, as a flat., fi~Iked otganization \Vim a ~ted ability to manage an ever-shiftmg, network of functions and services.
ll·4 :rht ind qfthe.Nadon ,Statt
Conwntional Wisdom has it that ~ sales. fu.AC1ion; fOr ,example. is SO ~ ~ in nanu:ethat it makes'no ~ fact, it is.~ countcrproductiw-to Olganize' it in any 'other way than as a senes ef :local actMty dusters. Bu,. Cor many: consumer products. if .)_'O\lluft. access to information about poteruw· OUSlQme:I5 aroWld the workl; yo~ ~.build a sales operation to reach rhein mal has ~ no
. local Presence. ¥au ean printcaralogues and .Plke lists ~ you wain and make tbpn awilable by mail. , phone. fax, or pa;sonaI compurer (through Inremet), Then, since it is Ukdy ~t must ~le in the ~tS you ~t to reach ba;ve credit cams. wbich~ attaeAedto one or 'anoliher £Om o[inteR1ationai pa)II1lCJ!t,~ sysgm. your customers can ~ ~ ~~, by phone" fax, mail,Qf per~ sonal com,puter-c~ it to dleiJ cremt card; arid ~,it ddiYertd duough a ~ parcdservice like Federal Express or UPS, 1be«sult
equidisw1t 'local semce, but no local ,presence. .
"Much the same is true, of~. By dint ofslwing gr0upware. databps, and dedicated private- networks. there is no ~. fot a eompaqy's manufacnuing loainons to be sited near irs engirieering, cente£ The: relevant in(onnaU9D can be ttaFISf~, in real-time. :&om ~ywhere U;; anywhereharound jhe world. EquaIly ;mport8nt, today's. soplristicated ~e tools, assembly machines, insen:ibn machines, and me ·lib are "sman" enough that they; can be ron from mgular PGs .onvorlcswions ~g the appropriate saftwan!. not just from unit..speMe continllers. That means it is now possible t.o· set up in China, ~ load wolkersnained em new worlcstatiOIlS .• aworld-class .operation fer IJ)al:ang VCR qIir1der headS. By eonnast, it would .haw been
"strictly impossible ten, or even five, yt:aliS ~ to tranSfer such qualitysensitive o;peratieru!i. which require subm;icron accutacy. ~ the highly skilled W0Wm ·of Germany/and j'apanto their less ~uained
OO\mwpans in me t;nited Salles _or ASEAN. ,
Flmhermore; since the rea1 value added in 'suCh operatioJls COMe$ from tht "inteWgtmce" embedded iIi dte design. fabrication, and as-sembly insbUQD.Ons Shared by these machines, lVIUling the netwolk 'IIltami staying ~idistandy informed about those firms. that, no, matter where they are locared, are able tosupp}y relevant components in the right places, at the right'times, Il 'the right level of quality, and at the .right price. Manufi'Cwnng I1'lallagtment 'is no (onger a. ~k of
Ztbro"StTategy 115
bendmg mew and Joining t!hi:np together in one or . another nation state, bu.t of overseeing a hQrizontal, global networl;t of infoni1ation.
'Thus, the~etilt ·chall~e represented jointily by meaner.gence of region -states and the availability of new .. infol'ma:tiop-driven enabling te.chnolpgies ,is· not most effectiYely met du:ough' country units, even when set in a matrix with worl~e, product units. These two new rea1ilEies: have combin~ to change whal, It is that a emporate organizari.on needs to be in a genuintdy borderless World.
No lbnger is the goa! to btrlld~a mini-U. N. of nation srate-based op-elJting units, N'Of'i$ it (0 buiM a product-fOCused StnIcNre that outs across these U.N.~tyle divides. Instead. as much of me. best new ~ on sttategy has 'it; it is eo ·create and oversee a global network of disaggrega.ted skills.. competefo1cies, and capab,ili.ties~me of which get bundled with the' piQducrs and services normally available [or sale and some of which get sold as products or shv'ices in dleir ~right. In smuegic terms. orco~. this represents a disaggrega_ tion ot;._,.and·8 reeombinanon amon~e discrete elements of the 'familiar b~ system:in aadacross ·iridusoies. B,ut it also represents the core. :logic on which organizations fit for a wodel of region sra.~ those ~ets shaping and skewing the OQW of economic actiVitymust be built
In the past. MNCs were Willing tc accept die burden 'Of an acldition~ al hiera,rchical' l~e counay manager.-..tn order eo get the benefit of dealing'effectively..vim unevenaess across nt'u:kets. They do nOt need to rIia:ke' that tracie-off any longer Counuy managers,remem~ IIU9' be needed eo deal with .local goYeIlUllent leaders on policy quesnens, bu.t th:ey do not represent teal.markets'. By definition, dusters of taste and. prefet:ence. together wUh m_eaningful economies of service (advenising "reach," TV cha6mel "reach," distribt:toon COSt,5~ and the lib)", exist instead- at the region sfate ,level. People in v.mCQ~Wati:ll Seattle 1V channels; people in Guangdong, Hpng Kong channels. Only ffoIn a disUnce does a zebra seem gray. Up close, its variousregions havt a life and a ·chmcter of ,thcitawn.
Chapter Nine
THE NATION STATE'SRESPOl"lSE
When meSecmtary GenernJ of me United' Nations calls ,me c;ieneml J\$sembly (0 order, the delegateS in the chamber-alll84 of themeach have. I'sirigle vote in Uw' assembly's deliberations. lli0' represent nation s~ ~ in size &om .China. With i.tS 1,2 billion people. and Russia, -with its 65 tn:iIIion square miles o[ ~etritot:y stretching 3Cn1SS 11 time: zones, i[() Nauru. with not qUite 8~QOO people on an island atOn barely eight square miles in extent: Major world eeononUe$ are not directlY ~plesemed--chlefamong them, of course, being Tai.wan. and lHong Kong,. The region amuna Th)<yo. me thitd~recoAomy in the world mot couruirlgj'apan irseffi. is there only l>Y pro~ So is California. So is Catalonia. Major peoples are nOI\>d.irecdy represent. ed--dte Kurds, Cdr example; and the ZUlu. and Palestinians. And major clusters of interest. are .nOt directly re.presente.d-NAFfA, say. and the ro,and APEC.
Because the only frui·tie8 offictatly "\risible" to me U, N.are traditional ~tioo States. whe~ their d~l~gates annennce, with the kind. of sm.ug modestyenfirely suitable to sound-bite news coverage. that "all is quiet <Yilt file Western from,'" there is no ch.oice hut to .honor their verdict-urdess,. of course, there are questions about the rule hOOk legitimacy €If 1the govemtnellts mat. sent them. In practice, dUs means that issues not f.al1ing into tie. neat box of country versus CO\U1,tr,y USY-
U7
118 1"bt End of 1M Nation Slak
ally cannot get on the U.N.'s agenda until they have reached such eat-
. L_:_ .... "'_ a ...J-..._ a I"dnP1l'n of asnophic proportions-;-a 'WllUle. a "---""" .r"'t!I--' . r---_" .
gcnocide-dw even international bureaUcrats can no l'onger avert
!heir~, me _ces requin!Ig die __ ~ die .md community do not conVeniently follow the borders oflWl~ states or the remit of the multilateFalor global instiJurions that bridge ~" They are, for the mostpan, problems ~ to do not with.~ or the balance.ofpower. but' With the daily lives--and the dally ~~ of liIe......of ordinary people in Ordinary ~. The lensassoda~ with nation stares rends tol filter such problems_out. As a ,~tical ~, people do not live' and 'YOrk in countries. Day to day, their rel-
evantsphere of life is local ouegional. . ........, _
As the locus of economic actiMty, counmes, after all, are ~.
Wes~ Australia. for example." has. growing linkages with S~re and Indonesia; New South Wales with Hong.KoRg:~d ~;
Qu .. Ian d WI.' ·.L JBlMIn'and Victoria ~ ....... m" M.ellioum .. , e. WIth
eens ~,' cU'l ir-_.... "" '-:r--"'1CU.l J
Greece. The perceRbigeof the p<>pUlation sf New South w.ues that, is of Asian·clesc(nt is now weD-into the dOuble digits. and there are daily fligJjtS from six different Japanese airports to Aus~'~ east coast. SimilaJ:ty, except for power genenuion" telecoms, ~d airlines. the 27 separate regions ,of China are largely fme to go ~m. own _~ aoco~ ing to the regional' apthorl,ties, in'develOping melT .mdusaW base with wharever foreign panicipatlion tJ1ey ~r choose w-attract .. Rx me most pan. the: southem regions have fOCUSed,~n ~ttocll~micaIs and processed foods; thearees around the 'feb Sea, Iike·Dalian ana
Tl3lljin~ on e1ecrmni.cs. . .. . •
J1here is no·way mat China,as a single 'nation state, coUld'~ 111
die necesSary resources from MNCs. mull1i.1aterallending ~ces, ~ the taxation of ilSOYm citizens,. Nor is these any way tI;1a~lt could edter fund or maQage the needed levels. aotmtryWide.; of infras~ develcipment on irS, own. As a, federation of separate:deaI"-~ regions, 'however. it can--andis. A reg1oMpeci6c BOTo,>uil~ ate-transferrscheme . for mssarrce, is already hamessmg fo_' resources and skills to build a crititalffighway &om ~he8zheD IIJ Guangdtou and me Three·Gorges dam along the Yangue. River . Jiang.
'I'f¥ NClt10n State's ,Rap:rnst U9
InViting in private tO~ capital to help bUildinfrasw.cWR:.as Chinaris dOing. is, an iElea nOw Ibtmg seriously considemd by COUnl!ies, like the PhilippiDcs, Viemam, alId India. In the past. infrasttuclUl'e building was aJatgeiy .. ~" acBvity. lfdte e:enttal governmmtaf a developing CO,Wltty neededfinandai assistance. it turned coth'e World Bank 'OF to deveIopment9Wiits from mOR ~ ceunmes, this was ,me- kind of anangemem that central g!Zlvemmenrs maae amomg the~r with II very.SnudI nwnJJef of mwriIateriU agen .. des .. There"" was SOme disdpune ·,exened on govemmept, bUt not much. The tIJi1s,oGuangdong ~. ~is,being built pmate,. ly by HoPewell. led by Gonion Wu of Hong Kong. in. return fOr the carefully bounded priViItge of keeping aD toO revenues for lit specffie number 0fyears.Becausedte gIdbaI eConomy has been. invited in, real discipline ~.fS exerted and everyone benefits·;, mvestors, t8xpayers (whose money is fi"eed, up' for>oiher uses): and those wIw will use me road once. iris finished.
ZONES OF INOJJ\SION
The ten'lptration for old"fashioned gEJVemment policymakers is to view such a disaggre~m:on of efforr as.a necessary ev:iI .that has. eo be toIerar.: ed, To some eJqent, ,this is am entirely predictable response to the less of control .by people used. to- control-ell; at l~r. to the illu,sion of control. But, it also reflOCES their suspicion about the [fU;e ends toward which such 'centt:ifugal forces are being directed.
It is one tbmg fQr factiorud leaders in N~tthem b-e1and. say. to call fuli independence as a means of 'ensuring less cumbersome linkages with the global econemy.. But it. isqmoo: another iftherr Wlderlying; motive is tousetbat greater independence to drive Um:mgh t.herr, OWO, highly sectarian agendl:is_ 'Regional aUlonoIllf ,is a ~t-~ essen'.~ for 'taking advantage of me global economy to the benefit of all citizens and residents. But it am, als9 Qe.~ as ,a plausible and ptlblic rati6naIe, WIder the cover of whiCh reJigie.us. racial, ethnic. or tlibaI groups privately' aspire to advance only their own. sdJ:"inteJ£stf!d
endS. .
. These are. legitimate concerns. Elective fegiOn,. stares.are incll!.lSiYe. Their scale makes rinclUsion easier They welCome an~ne who tOn:'
lelO 'The End ~'dtt NInian SUItt
ttibure;s. And they welcome any contribuwon, for¢gn or dome$l:ic, duo: adds tome common good. 1hey need everyone's bdp fqr eeonomic, sucCess. UnfOlrunatdy, h~ the historfual·recoN is littered with regions as well as nations that ignored cliejr $haIpd eamomicinterests and succumbed, inS£¢ad,. E9 the passion,s of etbnidty, .reIigion, race and tribe.
n~ is, then. no mTe guarantee dlat Jegions will be inclusive. ~ there will alWays be those at the censer ~o pobu to that upcenamty as jUstifi:cation fOf maintaining tigt\lt control of economic and social poUcy at me nationallevel .. .ln the United Stares, they will point out that it was legislation coming out of washington and not the-states dwl, 100 ~,after the end of me Civil \\3J!; firially broughr som;e measure of social justice and economic opponunity to Southern blacks. nus is true as far as it .gees, but lit does not, go far enol;lgJil. \\3slUngmn-based action did. indeed. pur the laws on the book;;. But it was thdoc;illy driven, ground-level, day.;to-day economic reallty .oCa growing Southern I economy- rhar provided the wherewiilial to make
them real. _
Nation states and their governments do, of course, have a vital in .. terest in pmpaga:ting and enfonmg the values of inclUSivenesstbat hold their societies, toge.the[ But. especial!lyin t~'s ool'd.crless economy, it is the economic engine of region states that ties these' absaact coneepts to very tangible pqcketboo)(s and embeds' Qte_m in !:he quality of the 'lives people actually lead ..
•
FROM. MAlAY"DILfMMA 1'0 MAlAY l1J·ELJGHf
In this context, review With me the successes to date ofMala~'s "look East' strategy of econormc cle:Velopment.1 Prior eQ1980. Maiaysia was priInatilY an exporter of commodity raw ma~, and its fortunes fluctuated wiJIdly up and dewn with eaeh change in the prices of those commodities., ' over which-the government had little if' any control. As a s-mall country-with a population thea Qfon1y 13 million or ~iliere was li,tae iie could do (0 limpIOYt irs fo~ across the board. by investing !heavi}yin the fuHrange of manufactup
ing industries. . '.
Wisely, under the leadership of Prime Minister Mahatlm:. Malaysia
~Nati€m StQte~s ~ 121
opted .instead to locus on building wond<lass "venieal" capabiliAe;s in JUSt a few ind1!.lStries: semicond:uctors, autornohtles" ans:l consumer 'patkagdlgoods. MorOO~ it did so with the fuD eXpectation that us lQIlg'tenn advan~' the like" emergenoe cif ~ China, and ~er e:xtreme,ly low~wage Asian nations--did: :1'l0t Ue in its 'ctmrendy 10;W labor costs but. rame~in itS porential mastery of eacH 'industry's fuD value:-ad,ded cham. MalaySia' WOUcfdROt just assemble .semfixlncluctors; it: would also learn to do waf~ fabri~mQn. It would not jusl assemble,automolJi!es; it would manufacture compenems a,sweU.
This strategy, brilliant_ly eKeCllJ;ted, against com!pelfitor rutfiollSat roughly ehe same revel of aevelQpmen~ such as Indonesia. am:f [he Pb:ilipPin,es. has now broughe the country [0 an ~rage GNP per <:api" fa afU~ $3.000 .. ~ut,get$g from there to, say, US f5,ooQ by the end of 'the decade will be a much harder task, A good. POroOD of the' growth to clare has been the di,Fect result of the· effectiven~ with which ".inpu~" like capital and an educated work fOFGe kivebeen brought to bear in a ~ema[jc fasht()Fi oncare£ully ~e:lecred economic priorities. It is simply rioe posslbteto,repe3r these effects;a~ the same order of magni,mde:. forever;
E(JualJy imponam. the identity-of competitor nations. ~ chcniged and. with it .. the naruredcom}:lefiDon. In economicitenns; aib:uund ln~ are, at last, e,merging: 0'0. die wprld scene and' both have fat I&ger populations, much sll1lllfer (and. thus .. capable of much, faster growthl percapka GNPs, and much lower, labor costs. In ite Chinese dry 'of Dahan, fOTeXample. grear numbers of talented e1eclronks, fadory workers are avatlableat only one,seventh of the Malaysian wage.
In. this kind. of changed env:irorunem,a. strategy based on iraditio~ a1, bbot-based. manufacIDring value-added is, no longer enough. It should Rot be premarureJy ;iliandoned. but itIs ROt IJkeI:YEo be endlessly sustalnaPte. As a result, M~ Will. have to' fu1d an ~ovatiYe' new ,way to ouild on its s~ngths'. It does not have to warty'aboUt its' smaIl·$ize~ Uits stra[~ makes sense, the whore w9rld will be its J1l3J:~ ~t Nor does it ~ to ,wonyaooU[ having enou.gh money or the light: EOOhn0logy. Again, n irs strategy is right, the globall economy will ProVIde rhem.
Aft Malaysia has to worry abo"uis p~perly delinmg a' strategy fhal leverages its strengths as a oentridly p!8ced. successfully multirac:iaJ »
122 Tht: E.nd oJ!ht: Nation StaU
.. . that will by the rum of dlecenrury, be home to four
ciezy: in a regton .. , ." ". '. .• - I ._ • ,
or five of me ten iargeste,onorrucs ill the world .. ~ m~ 1t m~~ find away to effect mettanSiti011 from Inanmfact:Unng- '00 ~~~based value added-~d it must do so in a fashion that distinctively ~itions it as providmg the-core hub-and-spokes of the- Asia-Pacific
region's rapidly developing information, ~ono~y.2 . ' .
Malaysia can, fot' example, follow Sltl~pore s 'lea~ and d~n 1£S ties widi'SO£twa.re-basOO, high-tech tndusl1ies'~ mdia. It acraally has ant advantage, here in that it has among its pe:pulariQl\. ten times. more ethnic Indians ,than Singapore do/S: Again; li__ke Singapore, It can deepen -ilIS des with knowledge-intensive industries in Chinar--a:n,~, ag;nn, irhas a people~~d advantage: twice the numt:>er.o£ e~c Chinese that Silngapon; has. And it.can forge comparable links With Indonesia because ccmmunication between the two counmes isrela-
£Nel}' easy in the ~y ~ge. -... ,
No other counory in me world. sits so cotnforta~ly m [he middle
, o:f~F is so well plac~d eo ccmmantcare wim..,-chese-three girol,t economies. Meanwhile! me focus of :the past decade's' "Look East" program. has deeply familiarized the Malaysian people wirll the ~ nomiC policies and management. 'styles of 1~P!\n ,and Korea. Equ~ important, as the most industrially advanced Islamic natio~ in the world. M~ has a special opponunity to playa central role m help-, ing other Islamic nations inr~grate wim the global econQm~. lts potential! netwol'kof knowledge-based influence in. rapidly groWu1g pans of the world is thus bosh ~ensive and unique.
Iv. me conceptual level. theanractiveness of this Stli3t®, is dear.
What makes it praclicaJ, however. is Malaysia's 'qalanceq success as a nmhirndal ~~ety"-dla:t is, Its theory, and practice of indlllSion. It still, to be sure., has many of Its own Internal development needs to ad~ dress. And in addressing them it, must ruake sure duu, maddinon to' ~la Lumpur and Penang, region States Uke lohore ha?le whatever communica'rions in.ftastrucrure they Will need to participate acmrety in these cross-borde! networl<:s., These, however; are resources for snaregy irnpIemen:tati.on. What enabtes that snategy in the first; place is Malaysia' s self~fulfilling vision as' a ZOAe of indU$ion.,
ReHecoog on the accomplishments of his "took Ea$t" po1icy.Brime Minister Mahathir recently {old me that the secret to its. suCCtSS'YIaS
A ROLE FOR mE CEN1ER
Ar~me, in Japan, I have proposed :that me:' nation Slate be dMd(d, foteco00mlc pwposes, into 11 indepmderu dcFshu, or regieJlS, so that the. rest or dte CPWlOy can ,make a connecribn. with .me global economy .free of :the distorr:ing and c~ntrolling influence of the, bureaucmliS andIXlIi~cians' in 1Okyo. Byirselt 'the' iSland ofKyushu, rernembet; has an economy ~F than that of Korea, HoUand. Mexic0, or Austnilia; Kansai, the region around Osaka, an economy larger than
EXHmTf9-1
~. per Capit'l GNiP (Us $)
124 1M End.oj ~ N(Ujon Slat(
that of Russia, Spatn, or Canada as previously shown in Exhibit 8-2.Bm neither of them will.-Of can-develop sound pol1cies or a self~ sufficientindusnial base until the lion's share of the mcome ilt receives stops cOming. by, way of redisttibu~n. from the cent:ral government
in TOkyo.
This kind 0,£ planned economy-me worlOng basis fOf the much
discussed "J~ lnc." -may have made sense at an earlier stage of the country's development. But now, with the yen so ~nsive and with the competitive fortunes of its various indusmes so wi~e1y dsspersed, coaunued direction from the center can mean only evergreater subsidies to the areas and tndasmes ieft behind.
_ Politically, however, redismbunon is an addictive process, It does work. powerluM.y 50-' 1t does buy' votes. Butthe more it works. me greater the appetite is f01 it <to continue at higher and higher levels. Under a democratic form of gpvernment, this process can reach a point of no rerum, beyond which a subsidized and civil minimum~ majority will have nenher the need nor the incentive wallow a more sustainable balance 'to be struck.
Having ,established undlispu~ed 'ownership and tide to the golden
goose. SNch a majority is not about <to let it .slip from its grasp. l~ may be convinced to relaxus grip when confronted, say" by the kind (i)f economic paralysis mat results when GNP becomes more than 75 percent dominated by the government sector, as in Sweden. But there is no guarantee even then. Aomori City-with ies annual' budget of US $1.8 billion on a local tax base of US $300 mi1lion---l'ws gotten used to its indoor baseball 'stadiums and public swiinmingpools and miles of paved highway on whioh virnullly no one navels.
When local governments are so generously provided for, they rarely take the initiati~e to build an industrial! base for me furore. Why bother? why make the effort? The money; after aU, willcom~ in one way er another, Over time, however, this flow of resources leads not to a strengdlening of the local economic base but to a thoroughly dependent. consumption-oriented society. Moreover. it i$ a society that. progressively organizeS itself around this easy moneyintc a nearly feodal. parronage-based hierarchy, of local oUidalis, mayors. and govemol'S. This dependency on public sector handouts does not remain constant over rime: it grows worse. The longer autonomy and responsibiU~ for
The Ni:UJon SLate's Raponst .125
'f](HIBIT ~l
An Exantple o(Japan's lOCali&oDomty (199-t)~
_Aomori Gty·
~ ArtnUIi~
,,$1 :z ¥roo
Number ,a( ~
1,501,037 S7.,558 mIIbao
296,939 11,858 mlIIioa
6,500 (.a tbc,~ ~
3,281 <- tIX ~ ~t)
~ol
SIIes ~
-
S MiIliioos
1,017 791
818 1,$jJ
877 1,890
461 160
U~
261
3,59-4 S"tJ6, 1;362 3,171
NlIIQbcrof
lb:tUsuy SiJIa ~
_
$MilIiom
1. WboIes*, 386 521
2. l'IIchinIIo 379 B64
3. ~I 382 500
~
4.N~ U8 4M
5. ~ 87 720 I. SIuI
wbDIescE
2. lbCaI'bmk, 3.l.oclIl~
4. Akoholr wholESale 5.~ ,dtc:uonics
me -(uone are delayOO,me mQlledee,ply reotedthe addiction becomes. Today.,fOF precisd}rthis, reason, more man 90 percen! of Japan's local rownships and cities face a bleak economic future: they have lost an independent wiIipowe:r~ the UIge to feed their addiction.
look, for a moment, at Exhibit 9-2. whichsketclles tht fairly typical eronomicsiruaJion ob\omori Gtyand,ADmori Prefecrure ,in 1m. Note. tim. mat me .prefecture'~ annual budget is much huger tbari the c0mbined tlD'llO'ltr of the top BYe :loca1 companies., Much the same is true of its. roster of employees. lhe public sector is the only growth iridusuy ,there. Extept for the local subsid_iary of a large Japanese consumer ekeb:'OI1ics company. the vast majority ,ofnonpublic--seaor worl<'eIs are in, service-It)ared. indusuie;S, notmanufactw:ing, in !.\OmOli City itself. on the manufacfuring side, there is a miso (fmnerued beaa) producer wim. US $67 million im sales and 254 employees, and a 6sh cannery with US $53 tnillion and 182 .peopIe---;mcl not much eIse,.Ewn so, Aomori aty has aspimtioos to get OIl the gl9bal map: it is, for eJaIDlple; a candidate to hOSt the 2002 World Cup soccer emlt But irs plans do not rest on
126 Tlie End oftltt Nation. State
building avibnmdocal irKiustrial base linked with me rest ·of dle ~. They rest. ~ on the assumption·that the central ~ WiD contmue to drop mto the city's lap endless resources for expanding hxa1 infrasDUc~. bullet trains, sup&bighways, and the lilG:.
AddictiQIl of the magnitude d.emonsttated by Aomori 'melycures itself by exposure (0 rational argwnem. How, men, to get there from here? Going "cold tllrkey"-· that is, suddenly clOslng the the sp\gOt and keeping ,it closed-is RQt a workable proposition. If the gt;,al is to move from a 70 percent or so red:istribuaon of income cross-regionto . something on the order of Gennany's 2 to 3 percent, we are talking
about at least a ten-year process. of inframucture deregulation and privatii.anon coupled with a consistent, . annual decrease from the national till of 7 perceu.or so. Emorcingthat steadily Qghtetiil1g discipline is a role that the center in Tokyo can usefully play:
And must play. TheIe is no benefit in swinging from the extreme ·of centFalcontrol (0 the extreme-of deoentratized~haos, There is no virtue in having autonomous regi.oruU rai1lrQadS build networks Qfuack different in. gauge from those in adJoining regi;ons, as ~ppem.ed in bildia and Australia. Or in haNing regionail power grids that·vary, one
from the next, in cunent and vohage.
The idea, -after all, is to purge the national system, steadily and remOISelesstY, of its addiction without creating side 'effects WOISe than the oFigina1 disease. What dlis means, in practice, is that dle center must not only keep aghtening the spigot; it must als():(naintain common .SW1~ banking. infrastrucnu'e, and the like-.wh~ they .already exist and establiSh them where they: do not. (In Kansai, for e:!tample, teflecting U.S. influence, elecmc current n~ runs at ,60 cy~ des;·m the lhkyo area, reflecting British influence, it runs at 50.) AI. the same time, in its international dealings, the center must remove me barriers that keep the global economy at bay. Breaking the current addiction is only half Ih~e battle. The other baJif is ,establishing a healthy, sustainable regime. which cannot be done without inViting that economy in and leveraging its resources.
fur Japan. there is no time to lose. All me wa:mi1lg signs are cleady in sight. rnst. me cennal control ami coordination that ,malq: sense up to a GNP per capilah=vet of US $5;000 01 so quickly become problemaDc above it. The intetVid between. that levdand OECO statUS at US $10,000
Tht Nadon St.ak·Sr~ 127
~ very ~ Japan did it in less, man len )'t8I$; Taiwan, ijong Kong. lEd Singaporem about &it. The gtoQal.~ pushes Us Wfrj in, and tl1ae·is ~ litde time tEl get ~~ ¢lnuaDY. administa~ organRationally. AltholJgh, by a kind of fhlke,japan never redy &ad to malE all these acIj1Nmems at the time, its own economic prob1ems and pressure from theglohaleconomy ~ dw it do so now.
Second, the balance between wealth genetationand' wealth disDibutioo .i,s OUt of kilter. wclJl more dun 90 percent of the cotmny receives rather than creates. And third, irs economic S)IS!em is ~ at odds ~th gIoballogk .. 1i:ade is not open; !:he value put on land is> insuppoliabty~, the priaieamings multiples of cerporsre equity reflect these inf1ated-and by now thoroughly unttal--propeny prices. not. the ~ ~g capacity 0( the businesses themselVes; the cenual govemtnent. fearful of a stOCk. mat:ktt crash, pumps in pension funds and postal savings funds to ~ up the price of the Nildi;ei; and the products and servi:ces diese businesses. deliver ~ consumers no longer provkie the value they seek.
This lastwamin$.stgn is pamcuIarly troubling. The ptpt7lience of regionstates, bY- Yirtue ofrlieir greater openness (0 ·the borderlessworld, reveals with stark clarity the lines along which globalflows ofeconomic activi:ty nowproceed. No economic system incompatible with thesn can 1<>1ilg"continue to prospet thUS. to the extent that the central governments of nation states still have a 'key role to M in economic affairs, ijt is 00 "help. break dQWI1 dun incompatibih~ whe$'ef i( exists.
~ the center's role in this way implies gWing far more econom .. ic aUtooomy to regions ... At at minimum. mey have· to be free [0 raise capital, build inftaslIUcruI'e, and attracr investmenc. In the United States, fo .. example, mere is. ample piecedeot for trus. When a .city. or country decides, that it needs an airporr, i( raises, the necessary funds through bends mat jt issues and guarantees. In Japan. by contmslj modif¥ing a highway on HQkkaido requites pennission that cam be
._..11 ",'lu' - t..._
gtanUN 0, ... , UllO ... ,~.
The middle course that coonmes like China have found flCooprable is to aI10w greater economic.autonomy while. keeping the political sys-
128 Thc£lt&<frk Nation Stare
tern unChanged. ~,has. more or less. ~~ ~ far. ~I'it has' worked muck better than the aWkward, mOOTISIStent movement ~o-ward both pOlitical and economic liberalization. in the ~onner ~£ Union. Even so, it is an inherently unstable oomprormse." Kn~ mat, you canaot eat your cake and have ~t tOO" C~ has left half of It on the plate" Neither hunger nor ~PmttiQn is sar:isfled, . "
lIt is haRJ to let, the gJobal system in only partway. The reglQns'rp.ost
eager .£0 link 1:11' with it will resenrall the more ·an~~tte~~t t~ ~~ resources from th,em to be used in ,funcli.ng the civil nnmnlUq;Ji e~~ere. The eyes of Dafum: are on competitors in Singapore aIld T~"
, . . I ._-,,"-,= "...., l'O' H' lunan·· Q'r- HU:bel.
'wan, not on,plOppmg up' OSS-UUUUHgenteq:> ' ' " '
And there, will be tnany more such Ioss-~ ent~, As ~.th Chma, ana the former East Ge,rmany have discovered, when you '~mne the~ght ofWOfb;i~iass eempennenon enteIl?rise,.hNeI socialist accounting, you do see plenty of red-s-eed w.c Being ~Ie to ~ .a~vanrage ,of the global system means milking ,the Imema:lchang~~ necessary to' harness t,ts resources and expertise~'~d:the:e)chang~, In rum, require a degree of ,t.oca1 ~om ~~ a~tion ~t m~uably collides with a determination to retrain firm potitical control a£:,the,cen:ter
The rush to li:berallz£ simlJhaneously on bam sides of the equation, as in the f~Ime~ SGMet Union, can easily become a \J'ecipe for chaos, The ef:. fOR-'~ do things m series; fast in the-ecenermc-sphere and only l3terin the political, as in Qrina, is a more workable but still u1't:irfia!eJy ~rable compromise. What" dIen, should the remer do? Is ~6re, a sus~le.---and tolerable-middle course? If so, it would certainly depen~, m the fuSt.~~~, on removmg.all discussions of 1deologyfrum the tabIe.
This is not an eccasion.fordebadng' [he theoretical melits cf'commltu\ism versus democracy or of stale control yelBS. free nlarkets. It is a time for focusing on What works. on. what has shown i(Se}f .best able to improve a people's quality of,l}jfe~. The need at ~e ce~terlS not for theorj; but Jor leadership-in panicular. for the 'alticuiatlon both of a countty-5pecmc vision of what success would look li'ke 10 or l S. or 20 years from now'--Malaysia's "look, East" pmgnun.~or example......-and or' ,3 p~ustble road map (crr uhe tl'3ll$Jrion PWCe5S. ~ rh~ ~~. of born road map,andvision, no one ,really knows the direction in which dungs are supposed to head or thekirids of behavior that ate aceeprable-or the kinds of obligations that are expected 10 he, mitt-along
Tht Nation Sl4lt's, ~ 129
the way. And in the ~nce of suchknawfedge. order Ollmbles, ga;ngsterism Gourishes, and pressure: buflds tOreassen centtal control
m a global etonOInf. the visions of success' that· v.ioJik sranfrom a fuD and open admission of the value ,ahegion stateS and of their, need for considerable freedom of aGtio,n., They-also stan from a clear appJe_ dation ofltRelkinds of value that oruy a centtal govenun:ent.can app!'lr priiuely Provide----nillitaty security, fer instance, a ,soUlfUj currency,
inIrasttuctu:restandalids, and the like. '
This admiSsion 'and appreciauon lead mexerahly to one ~ anbthrt form offedmlion as the .. ohly type o( '!ullllixdb" Pohtica1 otgallial!U!m UliIder Which multiple region ~m£es ,am independently flourish ill,the conlfX1 of a gIobat econtlmy'and )'@t still be linked with the broader national ~. With"tlOsucb ~ jn: place, either the ~w of itIdMdual region stIteS wiltbe ~ (wbidr, €If 00UlSe, defws the whole pwpose of me exercise) or the behaviors ~ by,thei:rsepamre'achiewmentd each l~ lUng Oltbe GNP per aqira ladder will allOw, pJ;'eCiOus resources to lnow to ~ oppomm.ities e&ewhere in the world. If Shanghai's concern is only Cot ,Me gOod t'omme of s~ investoiS
there may be ~. in" 'say, Vietnam. that,·offer unbearably ;mac~ t::fve telUins 00 their investment €If money and sklll.
Ifa strong fedeml centeF'exists" howeve~ it cangmde this transition process and, m_ an 0m~y fasJuDD,remx either die degree or the nature or itscontrol as each Flew GNP plateal!l is reached and ,the externally imposed disdpilirre ofgIOOal logic' takes hold. The tempration for thecenter; eenainly .: WiJ1 be [0 hola ON too lONg and to substirute us own priorities or preferences fbi that discipline. Bot:b responses are predlk,tabl'e" ad both have pliedieuable resUJI.LS': .they will scare ,th.B global economy away. It may be a new feelmg for those at the center but me proper response. to a federated fegiom's d~er-and CiNP leve:t-ca:Irb~ted-mtegJratiol11 with the global economy oUght ~.; Won~ derfuiJ, anorhef problem W& don't have ,to Wo.iTy aObut. In that way-
and only in that way--willihere be cake enough" for everyone. .
lliE "HOllOWlNGOUT" 'OFSEIMCES
In me. past year OF SO, IIt'emg up regions. under a fedezal umbrella, to achieve a suitable. division ofbakec:i goods has taken on a Sudden 'new
130 The End of me NalibrI"5wl:t'
urgency. Several decades before, when jatmt and the Iour TJgeJS first began to assert their compendeeness in the mamlfacrurtng sectoe the mdustrl3hed nation states began to worry that many of their domestic: manufacruring industries would begin to "hollow out" -that is, eo migrate, piece of business system by pi,ec~ of business-system--to lower-wage or h~e[-skill-enw.onme:rus offshore,.
.AI. home. the first thing to go would he the rradidonal blue-collar jobs in production and assembly that had long been me mainst:ay of these countries' economies. Sooner or later. however. engineering woul<l follow manufacturing only to be (oUpwed. in rum. by ~D. The ini.tial slow, if noisy. leak would steadily grow larger: and louder until it reached.the intolerable level of the "giant sucking,sound" that, according to Ross Perot. would characterize the southward plunge of manufacrurtngjobs from the tJ~ited Stares if NAFTA were approved.
Feats over this hollowing out process could be offset, to some ex: tent, by me recognition ma.t such migrations were, after aU, a natural pan of an ind:usay'slife ~le in a given national environment. If the economy were resilient in the face of such pressuees, two things wm.l'ld happen. First, ["here would be a general reviwization of the manufactUring sector that would restore-c-or, perhaps, improveVaiue-added competitiveness, even if it did not replace all the low-end jobs that had been lost. And second. the economy as: a whole would migrate' toward ever-greater reliance-both for new jobs and for future growm--:Qn the knowl,edge-mtensive se-rvice sector
.After all, these nations had had many years in which to enjoy the benefits. of their vibrant indusmal sectors. Moreover, as they migrated up the Jadde.r ofdevelopment, a steadily larger share of GNP and' employmem would inevitably come &:om services. This was a perlectly natural process of transformation, Heightened compendon merely hastened it along.
Even so" addicted as they are roche civil minimum and politicallY vulnerable [0 calls for sul;>sidy and protection. the .g0vemments of 08- non stales have had great difficulty wim this 'son of transformanon. It doen't come cheap, and it doesn't COrrie without a great.deal of pain. But it is una:vofdable. And, at the end of [he road. is a high valueadded. knewledge-mtenstve, 21st-ce.!1tury service economy. So the game is wonh the candle.
I1I£ Nalitm Sl4k's Raponse 131
_ But what if. ~o~ me ~, after only a few yeats of development, even these service indusmes ,began to boDow OUt-tha~ is. what if the C:OJlStt3UUS of deve'loping them under the umbrella of traditional nanon states began [0 drive them [0 more hospi·ta:ble environments? This would not be a natural pan of the transformation process. It would come much too soon. It would sban-circuit the ~de of ~. ~d it would raise fundamen,tal questions abo~:u the lol)gterm VUlbility of these states as political, as well as economic, units. Th~ ~tions now have to be asked because the hoUowing OUt of
5el"Vlces hrui already begun. .
Some of this migranon of service activities· is the resuk of the Iifesl}'je choices made by d~ highly skilled knpWfedge workers most critical to them, In the United States. forex.amp1e, the migration of software development to Santa Clara, Colorado. and the Pacific Northwest is the res1tllt of the fact that leadin:g-.edge companies have set up programRiing sh,!ps there, and these areas make a convenient g;ueway to Asia-Pacilic,. much asG~ow has becom.@agareway[Osingle-mar_ ker Europe. But it also derives from the oIMous preference of w.orldclass professionals fot the kind of outdoor lifeS,ryie that such regions otfet In fac[, a recent Business Wed( survey found that, among American executives, the city of Seaule is now the favorecllocation in which to live and work. .
But this migr-rti.on is also being driven by powerful economic and teChnological fooces-espeoially so in. those indl:lSnies that are most inherently borderless. Nearly a third of the maj~r Italian corporations that issue equity for pubijc sale do so in London, not in Italy. The market-and the mechanics-at hO!"fle are not sufficiently atnactive. Similady. in 1993 and 1994, more Ehan 2,0 percent of Ehe transactions involving companies listed on the Tokyo Stock Exchange took place in London (and another litde bu in Hong Keng and Sill~pore), and more than. 90 percent of new japanese corpoeate 'bonds were issued in Europe.
Using modem technology; compemes based in tpdy or japan can access various london or New York rrwke;ts With increasingly transparent ease. Why shouldn't they? After aU. U.S. firms' have for years had ready access not just (0 !:he NYSE, but also to "Wi6~ regional exchanges, furores markets. commodities markets in Chicago, NAS-
J 32 The End oj !:ht Nation! State
DAQ. me American Stock exchallge,rn.e EurQdaDannarketS~~d ~e offshore fi:nancialsetVice5 provided by '~udaL,the Gayman Islands.
and the Bahamas. .
- -Traditional Ration states 3Fe tOOnmlely porous to mignltioQS ohbis
sort. The ;roorprlnts of sarelliue,.based 'IV broadcasting do run respect politipal borders. Nor eto the lOgistiCS i1>f computer diagnosis and mairntenamce, wnicbcan now be provided frolliremote locations through the Internet .and diarged agaillst VISa and MasterCard. Nor does the teleeom network capacity made available by. global telecom players. For consumers l~g even in still:'prQte.cu;:d marketS like Japan. several Iwmpanies based in Golorado are ahtady offering lowest-cost routing (lem services for internatio-nal pho~e calls at sometlmJg like half the. establish.ed rate, NQr do the wiShes of jap;mese consumerS to avoid the canel-Jile pricing strucmre ~t:'so inflates the OOSt Qf theirintemation.a! airline ~ts. ClO<Uly, more than half the international tickets used by japanese citi%ens are bought either overseas or "~hrough the RetWoik in. dollars. The government does. bowevet have.rutes against buying. say. aSeeul to{.dS An,gdes ticket. with a ~~9P' in fo'ky~because It is mudi cheaper than a TokyotLos Angelesticke,[~d then never using the Seoul poItiOll.) Not do the banking needs of Japanese consumeFS, who find eYen the- ATMs of their oomestic banks closed between 7 p.m, and 8 am., as well as over the weekend~irt oilier words. just WheN they need them mbst. With 1-8e0 access; h()weve~ they can 'now use: the auto.mated sys:-. tems of American banks at any hour of ·the day for the majority of their non-cash-in-hand transactions.
Nor; for that matter; do the d.isrnihution systems for many consumer products. People anywhere Can- now select Itemsfrom prlllted cata1.Pgs. CD-ROM dislfs. or on-line listin~;, order them th1wugh phone or fax or computet and make. payment through· ,the international setdemem function of major credit buds .. In fact, 'my rewnn movement in Japan, the Refoml of Heisei,) has estahl.i5hed a meinbeFSjdu~the To.NBO CllIh----for just this purpose. Tonbo in Japanese means draganfly. But its imtillls also stand for TeChnology Obsoletes National. Bordms.
1his is a self,.,reinfomg process. Given dlese~bilitieS', demand for locally' generated st:rvi.ces'wiU inevitably lloUo:w OUt. But. in a bordedess economy; supply-dle provision of these strvice;s--...will hol-
The ~~ SWs~~ 133 lqw out .. as_ well. It~: sooner. or late~ Mov,e away from. ~hiad ~ I~~ UDpose u~due. n:sU'aU1~:_Unless ~ is dmrnatic ~in me PO~ of~apan s ~lID5ay oC i~,~a~on •. for ~ dUo; is ~dy what Wi.IJ happen to the country s airline industry AI. d1e m0- meat, virtUally ~erythjng is stiU, tighcly regu1aced: the number or japan-basedintemationhl a.irlinespermiued to operate,the pails ~r times between which service is pennitted, the. airpo~ (there are Dew 15 of·dle.m) from which imernatiorial'~ts are permitJte.d to particuIar de:Sl;inations, passenger-loads, flight sehedu~~ and even what kind of (bod can be sewed OR die plane to d.if{,rem classes of passengers.
In economic terms, this is m.eUkient, cosdy, and uncompetitive nonsense: j'apan;snatiorial carriers hav.~ a COSt base, per passenger mile. twice ~t of their. leading competitors. Not ·smprisingIy. their shale of the global market is faUmg. and they are simply unahle to, provide the range of services from the range of ai§*>nsWat their Customers want In p.r3Ctice,even with yen-denommted ocker prices 4:0 to SO percent higher r:han,t:heir d~ffiu:-d.enominated equivalents, they cannot take.advan~ of me 'gJiC3t oppormnities for grQ:wth so abundandy available in the booming Asia-:P3dfiC region. Indeed, ~y all of ,me recently added serviees between different regions in japan and a .. host of new destinations in Asia we being provided by Asiana AirIin~. Singapore Airlines., Dragonait: Chiaa Airlines'. and so on. JAL and AN~ just limp along.
Worse, to ease the pain caused by so noticeable a limp. the; govern..
IDelU hascbosen ta subsidize 1&. and ANA's losses.in international op~tioQS by allowing dlem to keep domestic ticket prtces ludicrously. high. It now ~ more to make a. round trip between lhlqlQ and Okinawa than between 1Pk)io arid Los Angdes or Chicago. Moreover; for an Osaka resident. a Vi.lCation in Guam or 5aipap-hotel and' airfare iFIclucl~ ed--is Iless than half me Cost of a comparable stay on Okinawa. This means; of course, that fewer touristS wiU go [0 O~ me island's economy will stiffer. _and me centmJ government wru have lOF}OUt':'irryer more money to fund me civil minimum. Ft is cheaper (ora 1bkyo UmPJY to go to Whisdet British Columbia, to sl9 ,than K> go to Hokkaido, if the stay is longer than ffve .days. This'is worse than nonsense; it' is Id1OC}1; Everybody loses: citizens, consumers, rraveJers. ent_.repre:neurs, investors, ,taxpayers" potential entrants. and die establkhed murtes them-
jl
134 1M End oJ the NIUWn SIQU
selves. Due, me fig leaf of central control remains in place. But all it is c:owring is an amme sector tha.t is rapidly .hollOwing OUt.
How much more sensible it would be to relax that control. If the I<a:rIsai area around Osaka wanted to buy.-or stan u~ts own airIin'e to facilitate regi.on~ intemaJi,o~ uavel, why oOtlet itl'Kansai's, economy, after aU; is larger than mat of.Canada, and Canada has two airlines of its ·own. Or why nOt allow Kansai to buyinto--or initiate a joint venWJe with-a major international camer like British AIrways or United Airlines and run its Asian operations out of the Rgional hub in Osaka? EveJyone would be better served. It would be to everyone's aclvantage----eXCept, of COUISe, the bureaucrats.
Much the same is true in financial servi.ces,~, aJapan€Se aadonaJi cannot have an 'overseas bank: account, unless he or she is remporarily living abroad. That is whatL mae rule says-a rule made decades ago, long before me japanese, financial m.arlcetS were liberalized. Why, then, is it that the Ministry of Finance keeps ·this old rule? To maintain control; of COUISe.
Even so, 'the vast majority of credit card tI'3I:ISOOtions are processed by AmeIign companies. So are moSt other cross-border aansactions.. Product-by-producr regulation, which is. the-norm in Japan, ,makes tilde sense in a. world where money can instantaneously transform itself. chameleon-:like,intoooundess diflerendomlS .. It will only drive .those services away. It hasbeen doingjust mat. Meanwhile. we could have an active Asian bond market on- Kyushu. And regional development bonds. like those issued by Kansai, could be made far more attractive if they weren't bought primarily by the postal savings S)'Slem. A stand,ing arrangement whereby one pan of the government buys another pm of the ~eDt's paper is fundamentally uninteresting to outside investors. They will take their. mon.ey andthea business elsewhere.
Coastdee still another example: the gevemmern-owned and -managed poslal service inJapan. h, moo, is.an \U1competitilve relic. Wt unchanged, the services i( provides will inevitably hollow out. AS' of April 199+, the domestic surface rare went up from 62 yen to 80 yen--that is'; roughly 80 cents per first-class lenei; compared to 32 cents in the United States, a country ~ times its -physical size. To calibrate, re-
I«'Nation StQk's ~ 135
member duu'airmail from the United States [o)~ is g, a.IiIr.s and from Hong Kong to' lOltyo, 50 cents.
.Thus, £01'3 directmalicere:r injapan, i( is significantly, cheaper [nair~ in bulk from the United States than from the nexE block in Tokyo. ~ goes bqond e\'m idiocy; dUs.is insanity. If il happens, the printmg, layout, and. design work will ~ follbw--4f they have not already doae SQ, 1iue.(o its herttage, the government ,has responded to this threat ,of a postal-based hollOWing. OUt of services not by fuQng the problems wilb the country's mail system, put by passing a law to make illegal the bulk mailing of direc[~marketing 'materials iruo japaJl by japanese finns, It thinks the solution is' arrest. 1 think its, solution is arrested development But in the Internet society, the passage of such a law is to no avail Direct maili can be "file B'all5ferred" mo Hong Kong or the' United Ssates ,eIecrronicaUyandthe.n individually mailed to japanese consumers. Hence, the-new law-is VOOlally meaningless.
, ,fur the pas.t'decade or two, US. managers and policymakers alike have been visibly and vocally worried about me hollowipg out of the nation's manufacwriAg sector. On an sides, the fear has been that work that used to be done in domestic plants and factories would migrate to lower-wage locations in Latin America or Asia-Pacilic. About a comparable h,oUowing out of the service sector; however; there has been virtUally no sign--due; in laIge pan, to the unpasdleled compet{Itive strength. of many U.S. ser'Vice-ba,sedindUSmies. FOr Europe, J.~pan,and even the Asian tigers, .howevo; the siruation is altogether different. Unless their governments move quickly to deregulate key service sectors so ,duit sheltered domestic players can grow strong from more intense competition, these activttie;s,....-by ,far the largest segment of .their ecoRomies-will migra.te cross-border in a very shon period of time.
In the 19th century, the primary fonn of cross-border economic 00- granon was the rnovemenr of huge numbers of people across the ocean from one country [0 another In the late 20th century; it has ~ the mevement 9[ corponuiions in- search of low-cost production Sites, In the eariy 21st cenrury, by contraSt, it willi be the movement of knowledge.intensive services ;through global digital networks. Unlike the movement of people: and even of pr:OOJaction, both or Which are
136 Yht.End Cfthe Naffdn Start
slow processes measmed,in"years and perhaps decades, the 'umisJtni.. gradoD of these servieesean litetaDY.~·oveRiighL
- This isa sobering Jact for ctnm:d govemmentsro deal Wicll, It tannot help, but discipline rhem, :After aft, in Japan. nearly 65 -p,acent of the wprking; popu4tion is engaged in the seMce sector, and, maw .0£ the jobs offitiany listed as belongins ~ the manufiicn.uing ~tor...:.engineerlng. and marketing •. fOr ~ple-are really service. jobS. Bedluse all,dtis woIt is v:u1h.enilile to mremely fast· cross-OOMer migtatIDn .on the digital aetwork, thegowmments of 19th-cenrury;;style nation .states m.USt incmJSin.gly hear the'powetful and msistent v:oice of global logic, Th~ open question. of eourse, is.,whetha diey have lost the ability to ,listen.
FROM PRIME. MOVER TO CATAll'ST
so Jong as nation .states continue' to vieW themselves as me .e5$enual prime movers m.eeonormc affairs, so long as they resiSt-in the name of national inteR:St-anyerosion of cenaalcenrrolas a.thRa( to'sovtr~gnty. neither they nor their people will be able to hamessthe run resources of dle global ~nqtny. this is not the road ro prosperity and an improved quality of life. It is an admission ,mar>me- cancer-of pr&tecdo~"subsiilx, and ·the civil minium has grown so ~ and spread; so widely that it has become inoperable, There is, of course, <mother, mttcn happier choice: ro embrace the. global .econmny" to react w1;t pleasure tC!:1 ttili developm,eRt of local pons of entry to tnateconomy, and to do everything possible to encourag¢ and nunurethe.successful operatton of IthO$f pons--lbose 'region states, In other words, there is;. ihdeed, a healthy and vi~ role for nation states: to be an effective catalyst forthe aCtMDes of regions,
In the United States,aggressiVemeves (0 deregub.re the economy ana a Ilong history of sr:ateJlevel decenti!'alizatign under a federal umbrella . are excellent preparatien for this )dnd of ca~t" role, funyseven of i,[S 50 states, for ¢xample. 'ROW ha¥e their own re,pn:sentatives in:Ja~. Even 5O,the voices coming OUt afW!sh.ingtrin, ilUluen.ced as they are by politically influen.rialpleas fot help from depressed regions, ana distiessed industries, stiU tendto sing a different tune, The so. is extremely costly,: each job 'saved through. gi:wemmehtaction ,in the
The' Nmion "Slott's Response 1] 7 dQmf$n.c_atuo~~~ in~usoy has COSt ~r,; ro~ghly $80,000,
'M,OISe." if It oonnnue5, dus ·ProtectioniSt ,,,,-,,", .. , • .:1>1 00"· '. . '."
" . '.' ., _. . . 1,;11"...... W.W . ve even lead-
Ino-......A':'e knowl..4"'e-,,,,,,t .. n,,,, ... comeames '., . " d
--o~"'B ' ... ~u:._W~y... . I"ir-_ Ul ~l'Vlce 111, usmes to the
more .frwo~le envm:mmem of coutllri~ Ii~ Malaysia and Sih· re:
TL,_ "o·n .... u d "'ffi· :~'" "_n f gapo
rrn::,lfCS .'''' a l~ •. e·. 0 Clal. ~lulueflce er d~is chorus is Particularly
.' tra~g, mven dle gre,aJ stndes the U.S, ~onomy has made at the ;n?fficial:~[S __ lever to ~Pl itself to the _new global realities, , hirty mil1'ion. Amencens now work from thetn homes, many for
lifestyle and even tax reasons d '1:._1._.1'. :
. " - . - '. ., ~l are I-UUOCU to ~tomers.,amd 'em-
ployers by phone and fax and modem. Among th~m are thousands
upon thousan~ of managers and tec~Qlogisrs who left the ,payrolls of lrug_e: 'establIShed c0mn_anies as the.)' wenr through ambitio~s d~ng.p~ during me past decade or so. These newly indepen(;furu ~rofessI~naJS h;itVe brQught to meir current areas of activity . ~t:h_ capital and aR unprecedented level of elCpenJse. They ate not Uippmg ham,bu.rgers for low wages; mey are buildingtomon-ew's network:hased b~~d crealing rQ.aI1:y new jobs in. ehe proc~.
, ~e ~Iln:RtatlO~, of CQUlSe" is toronto ~hingtbn for help. For
certain kinds of lSSUes-f"'-'gn- - , ...... ....1 resm - IL' . ;;,1_~
_ -;- , '." ,.,. v..... Llaue .... ,.cnoIlS, nUmcaFl.e Udlllage
U1 Floll~, geofogical and social eaFfhquakes in lOs Angeles-this
rnabs,pe:rfeet sense. MoSt of me time, howeve,:. it, does trot, Whatever real "501 ti ." . '., be C ,'. ',' ..
.. ,., U oms ('}QSt.c:m lound, tlilthe global economy through
po~ of en~ at the ~gwnallevel. Is the MassachusetlrS economy suf~ ~ng fro~ defense cu~ks? Why not work to m~ New England a . windO\V for, Euro~ in\leStment in America. ·in. the same way that G~ Provid~ ~ ~ndow for reseurces flowing the other way? Is farm Uiloome hultUlg,m Arkansas or leuisiana? Why not band [ ..• L_
-th ili . . ... ogeUI
~r WI _. I e same type of humid gn5.Wing ~_.in adjacent·states, invite' mJapan' iese- '. '.~I . do, "
','. Ciq)1l<lL, an I mmare a rice-crop joint ventUre wjmJapanese
growers? If Slates and locaiines compete against OOGh other for invest. m~t1 as th~ usually' do, oumfders can always play off boih ends agamsr the 'lnId~e, Bur if they act On behalf 'Of their <shared regional in:res_ts--and. J'egIO_DS, rem,ember. ~ moe .right I~el of aggregatipn for
ppmg global logIC and for generallDg 'eeonormes of service~tv.
one bene,fiis. ',To
In ~~a,the conten~'Ou.s debate over the SUltUS of Quebec has made it difficult to rhink-'le~ alone talk:-abom regional issues in a.
138 T1lt End c! tile NalWn SUIlL
constructive way. )et the clear message of dle niost recent elections is dlat national policy is disaggreganng along stmngly re,giOnallincs. Cmc.ks and fisSures are already beginning to sHow .~ the coon .. try's horirontallines of stress, the dUn band of tite country within. say. 1.00 miles of the 0'.5. borde; nowlooks south to N,AFI'A. Quebec. of course; looks"east to Fnmce. OnWio is eff'ectiVcly:Pan of ,the American Midwest. And the Far West looks to ~Pacific. Not surprisingly. in Britisn Columbia, large numbers of parents want the schools to teach their children Chinese. J~, and. Kottan. But the national consnmnon. demands that ihey aD be taugh.t French and EngliSh. What. then, 1l01ds Gm:ada together as a country? If it has no .mission to catalyze these regional economies, What mission does it have?
Australia is aJlQmer delidl~ sil'lation. True, it has a long hiStbty of - regional-mat' is" federal state-based-aU'lOnomy. but me dividing lines between these ~hical units have linle to do with aChieving better access \0 ~. fom I's, There is. for example; a·genume riva1ry between Sydney and'MeIboume----<J\'a the selection of host city [or the Olympic Games, for ~pJe. BUt it is a parochial, inward-rooking rivalry. What me two should. be thinking about, instead. is the other-regiOFlS in Asia..:Pacinc with which each should be forging close economic linkages. New Zealand, leng characterized by protectionist policies, has at .losr woken up, to the gl~ economy and learned a great deal, not from Austtalia or the United Kingdom. but from Sin~ pore. Its popu~aon of 304 million is'a good size for the country to operate effectivcly·asa region state in a glObal economy.
In Europe .. for nearly four decades. the continent's leaders Jhave been trying to implement Ute Treaty of Rome .. BUI they have. been outrun by events, By·the time they made significant headway in linking up 12 natiionai eronomies, the glObal migfation of the four l's had made nanonal, as opposed to regj.ona1!, economies far less relevant to movement up the ladder of development. Thus, just when nation states began to lose their primacy as economic-actors, Brussels created a supematimi state. This is ironic. It is also tragic. Of ~ the develOped world. Eurqpe has me richest and densest hisrory of regionalism. Europe, after all. is where regional interests fust combined '[0 create the modem nation state. In a bordericss world. \[ could draw upon and
Tht!' Nation Sta:t.tl ~ 139
I~e ~t berttagJ: With immense profit. Instead, it bas ' .
o~ itself to Stamp dun heritage out, P!Qposely
Even. before enlargement. the ami defined by the shared ..
..L . EU' 12 ..... 1 - lIUen:sI5 of
Ute 1 .s eenear governmems is narrowenough, But wbm ...
small pat~ is ~duced fu,~~l' to reflect just th~ areas or ~ among regIonal! U1te;~ts, what s len as. the basis :for a common E . ' pean economic policy is a miniscule lowest common denominamr~ deed. It is silly to" .presume that the same polities will bring prospedgr to all parts of Spam or Italy. Demo~IY. they do not-and cannot. What they will db, howeVe~ is lock inropIace a cascadmg series. of ~vernrn~~w ~cls, aU of which are inemicably committed to provid- 109 the civil rmmrmim to various sets ofdaimants.
~. by comrast, is the pan of the world where currem levels of prosperity are most. obviously region-based. In Indonesia, per capira GNP WFi:es. by as much as a.(a:C(OF of six between regions; in China, .by as. ml,l~ as a factor of 2:0. That is whyA$ian leaders are proving so responswe [0 the establishment of cross-lxnciereconomic zones, They know they cannot hope to drive every pan of their countries in lockstep-and at a constant speed-smro the global economy. But they can support and encourage a host of separate, region-based initiatives to join the g1bbal economy, at least seqventially.
In pracnce, this has meant accepting the Iact that the overwhelmingly center-driven model represented by postwar Japan is no kmger relevant to the~ence of Asia's lle:w'ly ernergingeconomies_ The limits of Japan:s approach are clearer now; the .four I's are much further devdoP1!4: culmraJand ethnic linkages playa more impertanr "enablmg" role: and local needs are much more visible to-and much more able [0 aI[ta<;t~upport from rhe global economy. Central governtnent, as well.ascentral govemmem-mediatedaccess EO multwuet:at agencies:is no longer the on.lygame in town .. As a result" there is no lo~er a single head bird in dile flock of Asian "flyiJ}g geese. "
China. of_ course, is the massive quesdonmark, Is the current wamuh of its economy the ma:rl< of a late ~ring 'or of an Indian summer JUSt before the frost? At the moment, regional initiatives flOUrish. but the gQVemm.enl has not yeu proven that it has learned its lesson about int:er\lening with a heavy hand-{)r aboUl how disruptive it is to change course every 50 often on tax policy or other fonns of regula-
nen. N~ for that ~ have-otUside investOIs learned not to I~ tiInate the nue atent to' which dUngs ,have been libeiaJizcd. The sighs
, ,
are inconsistent.
They are mconsistent, too. in 'Taiwan. which -sbould reaDy be eperating as two or- three '~l ,separate region states, e.g .• Taipei, !ai,chung. an~ Kaobsi\Ulg l.IDder the umbrdJa of a Chinese eemmoawealth. And in India, wh~ there has been a'lfSS explicit commmaenr man in China to iregion-~ development. and where both the'Potitical and me m.acroeoonomic envirorunent are pot entiIcly stable. And
in, Brazil. where the cenltal govemment~s refusal to move toward a , commonwealth form of organiZation ts holding sao Paulo back from joining the OECD-and so helping to bring prosperity to theresr of the coun.t;ry,
There is sliM time for central gavemments toembraee their new ro_le as'regiorial caml¥sts, but i.t is growing short. In South Korea, for example, with its strong centralist naditiQn, Ime new 1aw On regional! auton- - omy that came into elect on January 1, 1995, did not gO far enough. individUal n;gions are still not free to make. their own ammge-ments
with the global eoonc;>my.. ' -
Iv. the moment, "this represents only an opportUnity lost. But when, sooner or lat.e~ South l<£>rea has to deal with economic uuegnuion with the north, it win have the choice of following the German route. and absorbing all costs itself or of inviting in Ithe globa1 economy and
so sharing the burden. The sheerraagsuude of the burden implied by following the GernUm route is sobermg. But that burden cannot be avoided if everything is left to the last minute. TIle global economy will want to' see a coherent. regiOn-based plan $Olidly in place before it jumps in with suppon. wau too lbng. as Getmahy did. and gIobat logic will find desperate. afrer-the-fact. jUIy-rigged cases forsupport thoroughly unconvincing.
In .. today's borderless world, the lesson for central governments is cfear: hold onto economic connoltoo long, and it becomes wo.~ Bl:lrdens - increase, and no one' will pay fOF them but you. Give lit up early. however, OF better. nnstnute U into one or mother form of catalysis, and the global economy will rush in to help.
Epilogue
A SWING OF THE PENDULUM
In the ~ sweep of history, nation Slates have been a, transitional faI1J1 of organization for ~g economic aft'aUs_ Their tight-their prerogative-:ro manage ,them grew. in pan, out of me control of milltaty strength,but such :strength is now an uncomfonably great bur .. den to maintain. (:It has also hugely been exposed as a means to preserve.the positions of those, in power, not to advance the quality-oflife interests of their people) Their right grew out of the control of natural resources and colonies, but the fust is relatiVely unimportant .~ a source of value. ina lmowledge-intensive economy. and the second is less a source of low-cost resources than a bottomless drain on the home .government's 1reaSUIy. It grew out of the control of land, but prosperous economies can spread their influence through neighooTling ren:itorles with9~t my need for adjusunent in- fonnal divisions of sovereignty~ And it w:ew out 9f the control of political independence, but such independence is ofdirninishing tmponance in a global economy that has. less ad less respect fornational borders.
Moreover, as it grew, the nation stare's organwuional1right to manage economic affaiIS· fell victim to an inescapable cycle of decay. This should occasion no surprise. It comes as close to being a natural law as the messy univetse .of pohncal eqmomy allows. WhateVer the rOmi of government in power anq whatever ·the political ideology that
141
142 ~ End oftbe NadonSt.ate
shapes it, demands fOrme-- civil mimmUDl,- for" the support of special interests. and for the.suhsidizatiOn and pro~ of those left behind inexora.blyrise. In dilferentcircumStarn:(S,under different regimes. and durimg different ms, the speed ~ escalat!i~:m varies. Good poliq can. slow the pace. bad policy can accdemte it Bu.t)'lO policy can stop it a1togedure Nation stares are politkal 0JgaIlimLs. and in ,their ~ nomic bloodstreamS eholesterol steadly bUilds up. Over time,- arteries harden and the organism~svitality decays.
HistofY. of co.me, also tem1ids die kinds of C3laStrophic" ~ um-busting ewJu.s·dw can stop or even revm;e this aging'~. w.us can do it,ascanJl8-rural disasteIs liIct ~. earm~. and volcanic: eruptions. They have" cenainly done sa in the past. But even for the most cold-blooded practiti~ of~. these are haIdly, credible ,as-pmposefW instmmtmts of economic policy.
Thus" in -today's bordelle5S ecenomy, with irs -mpidcmss-boFder migrarion of die -Colli: I's, rhere 'is reallY-only onesnaregic. degree of freedom mat -cen:md gavenunents '.have to counteract thiS remoIseless buildUp - of economic cholesterol. only one I~timate insa:umeru of . pdlicy to restoresustainable'and Self-reihfortiD& Vitality, ofi1y one :practical as wdl as morillly acrepmbJeway to ~t their people'snear-temt needs without mo~ the long.-tenh ~ of their -children and. g.uicJ;chikhen. And thatis to cf.de'meaningful opemnonidautonomy to the wealth-generating region states that lie withm or ac:toss their homers. to ca~ the dfuns of those regiOn states to seek out global solutions, and to harness ,their-distinctiVe abilifY to p\it global Iogi;c fil'st and to function as portS of en~ (0 die, global economy. The only hope ~ to reversethe'postfeudal, cen.mdizing tendencies of the modern era and aJI~r'~ enoourage-the ecenomtc pendulum to swblg away from nations and back toward regions.
THE COMING lEST
Many Will find thiS swing of thepeadulam unoolllforiableand uriwelcome. It ~th.e, established netwOrks of powel'3liI.d influence within nation states. ItchaHenges the establi:sliedquestlonsabo\lt whicb ,ole cilizens of those states are asbd to VOte. It ~ the uSual W'!'fY ill which dIe leaders of ,thOse s~' tty to manage ~~
. ... .•.
1 +4 1'11£ End cI rht NaJ:k1n State
_." . _~11 tho _" . ~l.. __ .- rateS associatedl
derflOWS of a.;1lY1ty. as WQ.l as e C\Ul£tlCY ....... ,-'6" .
with those .flows. Amd i.t ch311enges the (uru:lamentall8ti.OOa1e of the
mu1!:ilareral instituUons in whicll natiOn states participate--the U.N., tor example, and the OECD. and new grou~ like the EU, NAf!A. andAPEC.
In fact, even where mere ~ relatively·few vested interestStG tbreat~
en, as with those constituencies ~onately wonied about the most. economically backwani areas of the worl~ abject ~. overpopulation. and moughdess pollution ~f ~b-~ ~ .for example-it challenges the established tool kit ol remedial ppliClfS. But here, too, country-focused 'Solutions have amply· demonstrated their inadequacies. As me- philosoph.er WtI1iaIp James might .. have said, wealth. -I]ke lmowledge, grows in spots and spreads out from there. Today •. in the developing as In dle~loped 'wodd, the natural business unit for tapping} the glb~ economy to produce.wealth is the
region. not the nation.· _ _
Much rideS on how WeD these challenges are met After Hong l<ong rr;Verts to China in 1997. for example., policies that respect ancl,try to. leverage gIoba,\logic will! hdp spread its r.ect_pe for economic success to me rest of the country. But policies ,that. ignore that logic in £awr or & forts to maintain heavy-handed control by the ceanal government will,just ~ easily. crush ¥long Kong's prosperity and, in so doing, deprive the rest of China of its best examp~ most powerful locomotive-of economic progress, It is by no means clear that Beijing has gotten the message. In the present. pollti,callyunstable environment. die overwhelming temptation for those at the center is to defend aggressively. every last bi,t of political sovereignty" .and thl!lS to treat ~Q~ Kong very much. as an "internal" problem and not as an Opponulllty
to harness outward-looking global logic.
NQ matter how politically appealing. hQWeVef, such inward- or nalion state-focused solutions are, in economic terms, simply n~t susminable. As the economist Paul'Krugman has recendy-.argued, for example. the ~ Asian success stories of the past few decades--Singapore, Hong Kong. and so on-were largely lthe result of massive, one-oi. and unrepealable improvements in factor inputs. Mlilch 1ilct the forgotten- success stories of Eas~em Europe during the l'9·jOs, huge levels of inveson~nt. made possible by high ·savings rates, tUnda-
AS~gtlthcJao......&...._ .. ··
&-.uIII 145
ment3lly changed the ~ctivity of IaIXn: AI. the .same time numbels of people WeJe bJ:ougllt. into the worlc: fbtce \VhQ J.i huge
been in the work fon:e bef~. and huge increases in ed~ = boosted iheecon,?oUc value these new wcrkets could ctMe.
By definition, these massive changes in inputs do not repus .. ut p0licy choices ·that can be jmplemented over and over again. Renee;. ac.. ootdmg to' Krngm.an:,. the Asian "mirnde," though impressive, cannot 'be sustained. Now, Krugman~s facts are exactlY righl-but they are facts about the economies ·of ,naliion states, 1)0t region states. If you average these one.-ol chan~ in factor inputs across the whole of a national economy, they are, not repeaqilile. But if you loca1ite them to the relevan.t .• 05 Within'or across dlat nation's borders, there will be many other regions in which anlple pmgress $till can be made,
Equally tmportant, :Krugman's -argument assumes that such progress is to be measured against onlY one generic model of Asia-Pacific .economk development: Japan. But the idea. that the Whole regionis; in effect, like a Rock of flying geese, alltrailmg along on me same course. at ope or another distaric;;e behind the head goose of Japan, is badly out of date. There are now many different head geese, each leading the'way along a unique and distinctive course .. And each of these. geese has" over ~he years. changed its COllR nimy times-------in Singapore's case. for example, £n;,m labor value ... added to service valueadded, and then to infoimation value:.added. Thus. (0 argue ,that past improvements must. of necessity, run out of steam is to ignore these variations between and widlin different models of development.
HOW AR1E1U£S HARDEN
On-a recent flight from Tokyo, to POrtland. Oregon, I sat next to a )'OWlg anomey from Uvingston, Moncana, a small city Utat was the site of Robert Redford's fly-fiShing mOvie, "A River R1.ms Through It." She ~ on her wq bade home·after visi~g livingston's sister city. NaganohaJa. in Gunma Prefecture. !be differences between these twO cities, as she summed them up. were ,quite inStructive. Both had p0p:ulations or about 7 .. 000 and collected about the same amount of annual 'tax revenue. Uvingston, hoW'eveF;. had a yearly budget of US $2 million, no fun-rune represemalives, and a part-time mayor (who was
146 The End oJk NatWn S~
also a sawmill worker). By contraSt, N.aganohara h~ ~ budget of. ~S .$38.7 million, 16 fun~time repres:entaaves,. and a fuU.-nme ~or WIth. an annual salary of more than US $12.5,000. Much the same is true of all the 3,300 towns and municipalities inJapan: me appara~ ~nooU adminisnation, which is Wildly out of propomofi to the ~W:UCJ:~ taX base. is made possible only by funds dismbured fro~ ~o--m exchange, of course. for smct leeal adherence to me ~lia.es and! proce-
dures of the central govenlmmt. . , ' . .
And! what.do each ofJapan~s 3,300 towns and cities do wah this
- ." P' t, wh ether ihey need them or not, they ,build bridges money! lIS. ,. Ul. . , , -"1
and roads and schools and public auditoriums. But why sto~ lh~re.
Whatever their climate. they build indoor baseball fields, nbranes. museums, and concert halls, But there is still mote to' spend. So they bu.ildl darns and irrigatiGn facllilOes, slap ugly ~oncrete s~crures on aU available hillsides to prevent theorencally possible avalanches, and slap even uglier concrete barriers along the banks of sneams and riven; [0 prevent theoretically possible floods .. As a result, titde sand or gravel washes down to the sea to replace the e~ing shoreline (the country Ioses 1 percent of i,tsnatunil shoreline each year). This means, of course, still more money ~.to.be spent slapping still ugHer ,strucrures-terraPQds ,that look hke Imme~e concrete grenades-all along the coastline. ·More than half ofJapan s
coastbne tJoday is manmade.
Taken tqgethe~ this orgy of construction, most' of it unnecessary and little of ·it devoted to producing the affordable housing that our cinzens do' need, eats up some 'US $850 billion a year-roughly half of dte country's natiorutl budget. When Japan was recovering from ~e war. construction activity of thts magnirode made plausible economic sense. Today, it does not. lt does, however, make peIfect political sense: the entrenched Japanese political S}1item is highly depen4ent on the votes of-atld, far -more imponant, on monetary contributions
_Eroro __ the nation's 530,000 construction companies. In all qf this, me people's bueresl in a better quality ,of life is both ~ and. invisible. The "bureau.;tatorship" in Tokyo, however, 15, extremely well served. w, them, even the harsh 'detrumds of l:1'.S. trade negotiatoIS 'that Japan spcandy boost i,ts domestic consumption soond \ike a narcotic fanUsy. The LOP and the bureau-tators would like nothing
A Sw!nsoJ the PmCIulIDl1 14"7
better ·man to use the United States as yet anomer excuse 10 sprihlde stlD more concrete structureS, throughout me COW1tty.
AI: the same ·time, ~ the yenldollar ~ rate is in the neighborhood of95,.l3merthan ISO OJ so---dle level~tified by the ym's purchasing power parity, according «>both the World Bank and me OECD. This difference of :nearly a factor of two is a pretty good measure of the suocessof die government,'s aplictt policy to place the interests oUts ciBzenlamsumers second tome those of its favored ,industries, wbich. are expected to drtYe thecounrry's wealth creation. AI a much earlier stage of economic dewlop.;Inent, ·this may have been legitimate policy. But today, at US $30~OOO GNP per capita. it is not.
A consllilctipIrfocused'political system, tOgelliUwi[b the legal and regulatory mechanistM that en3bleciazed levels of land speculatlon, pUts me interests ot }apan"s' bli1lt3U-tators, not itS. q,.OZms, first An economic policy dw favOrs ind'usqies 'OYer censumers does the ~e. 1Ogethet;they ~d the same message: if the es&tblished powers that be prosper; the' coantry prospers and, ultimately, so do its citizens. By now, however, me jury is in and me verdict is cleae it dOes DOt. and they db not. land is ,nOl affbrclabTe, housing Is not available. and the real, daily ,quality of life '~ well behind where it should be given the counuy's oYeuill to>Mmk performance_.
In a 'IYOm. Japan~s economic arteries have hardened, and its gridlock of vested mrereSlS is nearly impossible to untangle from the centes As a pT3Ctical matter. the ()ountry'~ Fair Trade Commission cannot begin to teach the cartel in cement or 'the oligopoly among suppliers of eonslil:llCtiOO materials or a1mninum window sashes or barhroom fixtures or sheet glass. How C9uld it, when. the arteries are almost completely clogged? In 199i. for example. when the general contractor and Sagawa. scandals snook the we the heads of an the major economie forums in lOkyo represented rtgulated and protected indus-tries: me head of !he Keidanren was the cbainnan of Tokyo Elecnic Company, the largest utility monopo}yin the world; the head of the Chamber of Commerce was 'the chaimlan ofJ~'s largest general contrattor; and the head .of. the Nikkeiren was the chairman of Japan's leading cement company. Moreove~ two ·of the three top members' of the Doyukai came from die ,Bank of Japan and a cement company;
This, is, perhaps. an extreme case, but it illUstrates a general ,point.:
148 The End of die Nation Start
even political §}'Stems mat. begm.by Itrying nJ serve the ~nomic interests of aU of their citizens become paralyzed overnme by" me buildup of c,hol~rerol representi!d by .~ interests. subsi~y. protecdon and'dle civil minimwn. this buildup can take many .different ro~the social p~ of d1e scanflih.avian economies, the "social contract' of Gemtan. labor unions, me cartel-rtdden economy of Switzerland I. ,the farm lobby in rnnce-, the COfiS1fi1ction industry and the rice ':famteISID Japan, or the defense indusny in the United States. Whatever its Conn, ~nce it has prggresseli. beyond a cenain limited threshold, -it becomes weJil.,nigh im~le to reYeISf!.
So long 'as they limi[ themselves to the norma1 policy (oo'ls and PIQCeSSe.S, the governments of nation states .u:e powerless [0 break up the masses dogging their economic ,aneri~.They tan, however ~ook to region States to do the job fOF ,them. Much as corporations. which are also vulnerable-to such unhealthy bmIdups. can srutke themselves up £rpm ,clme to time. by ieorganiZiogJn' a dil'ferent fashion-from functional organization to diVisiona'lization. from counny.:based to worldwid,e produCt groups---countri~ ~ also shake dlemselves up by choosin~ to foHow a new kind of O~izationallogi:c~ is,. ?y redefining their role :fr0m that of cenmai provide.rto'that of regIon state catalyst.
Does such a change-s-such a· swin~ of ~he pe'nd1}lu~lve all probltU'flS?O£ course not BOl it does free UP. energies that woulp. otherwise be unavailable. Will the new reg1me, in ume, create problems or its OWll? Of course it will, But these can be 3.ttaCkedby Furthe,r o~ ni.utjonal shakeups dOWFl [he road. And that. isexacdy the point: these. are. at oot[Qm, Q~izarionat prable:rns driven by human nature, and they-can be soNed. or at least ameliorated. by organizational soll1tiQn5 mat take hlll1han nature intO account, TH~ are npt fundamental! questions of .idealogy· tha.£ CD: be. resolved only by imposinl an ideolqgical answer-liberal democracy .. sociatisrlJDarKe[ eC'onomy, communism" or wharever=-on the territories of sovereign nation states. The goat, after all; is not to legitimize this or dult political establishment or powerammgemeI).t. It is to improve [he qil,alizy of life of PSOple. regular people-us. RO matter where they Uve.Peollle came flrst; borders came afterwards~ 1'[ is time for ecoaomlc policy to remember [his simple fact
t\5wingoJMe-~ 1i9
Just as [he ·cummt paralysis of natiiQn stites .now shows them. to ~ been 2.nnsitiomij mode of o~n fOr managi:Qg ecOl;1ti1mic affairs. rqJ.bn States may Well outIM: their usefulness. SOI11~ time in the fuwre. Nodiing is foreYeJ: AI dre momint, ~ .diey m ju$[ what the doctor o~" Q:ven .suitable -autOnomy; region states-by vittue of ilieit_ unique' ,ability [0 put gJohallOgU; fust~_ provide precisely dIe kmd 0fchuge ~t the times require;eIfective.~ ofpto;sperify and improved quality of life for dle peopleQ[ the.global economy.
WHAT MOVES EXCHANGE RATES?
New Dynamics Ch4lllnge Traditional Thearies by Kenichi Ohmae
Since Japan liberaJited .its foreign exchange (FX) laws in 1980, the yen has joined lhe West~'A' basket of currency trading. What this means is ,tJliat about two-thirds of the world's economy is how (ather ffeety interlin'led through, currency trading. Traditional economic J)1Jlicies based on a closed-country model, spell as tihO$e, of the Keynesians and the monetarists, ale 'being seriously cl1aUe,nged. For example, the eXisting models cannot explain simple and now not-se-uncemmon ph~oomena, such as these;
• EmplOyment is created in South Korea when the American economy picks up.
'. Money appears in the United States overnight when the Japan~ money supply is too great.
• The economy recovers whi.le unemploYment goes UP" due to
robots tak;ingover human jobs. ,
• CUlTency rates fluctuate more' than 40 percent a year when the fundamentals- of the two, economies ~ lapan and (he U.S. ~ F,eaJJy haven't cbanged, muCh.
RcpMted in r.csimUe from Imc}apprl TIIIla, July 1~. 1987 (~ December 1989). Ul!cd with ,perIIIbsioO ..
152
Ibave u.ade some aUemptS. ro dcvelQP a model to explain ,t!'e globally interUnked economy. At this s'a~e, lt1iink I ~ave~ ItO,te-resting model for the currency portion, of the Interhnked eeenomv, w.hiCb merits critical appraisal ~ro01 scholars and students of CllIrrency trading. Let me describe my basic ,understanding of the currene situation, the assurnpt,ion in censtructing our modc'l. and. theresuhs of our initial testing.
The FX Market BegIns (0 Have Its, Own, Ritson d'Etre
A SUnley conducted by central banks at ,the end of March 1986 indicates that the trading' volume of FX in the thr~ key fI1ar~ets of London, New Yort, and Tokyo was in tbe order of $200 billion a day. London was the largest of tli~ three at $90 billion. followed by N.V. at5S0 billion to 55,8 billion and Toikyo at ,$4'8 billion to '5S0
billion. .
FOJeign exchange. trading, a'iong with futures and options. was designed to assist ,in s'moothing internatIonal transact,ions. such .as trade and investment. Such acti1vities amount. at the most, to on'y about 520 biUion daily among the U.S., Europe and Japan. 1:1 cannot possibly ex'plain the current size of the FX masket, ~hidh is 10 times larger than the volume of real transactions. What bas happened is that the fX market has started to have its own rais,on (j'etre. and has developed unique behavioral patterns that ".lust be treated with care and interpreted with a' newperspectjvc. for exam-
ple, the FX market has been pf9ven to: .
• Dwarf government intervention. Again$t the decUning dollar,
the Ban:kor' Japan (80J) injected some 516 billl0n to areest the dollar's free fall from M~rch 19. 1986, through Jan. 29. 1987. During the two-and .: a-half weeks at the beguming of 1987, the BOJ injected as much as $it!i 'billion ,to support' the dollar. to no avail. The FX market has become an empire'orit~ own, or the,Thjrd! Empire; which seemsoompletelyindependent of the Group of Five or, for that matter ,any government.
• Nol reflect purd~sing power, A5 F:igure 1 indica~, thCR is no major item which can justify the current exchan.ge rate of 1140 to the doUar. In fact, a more reasonable conversion rate is certail\ly above 1180, in order (oequoalae It he prices of day~to-.day com-
modities. .
-There are several reascns for this seemin&lY perplexing issue.
One' and the most obvious, is that the Japanese distribution syst~m is much more extended and less efficient than that of the U.S. Thus, a Japanese-made C8tnC![:8 can be purchased at. a. Pluc,h
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lower price at the 47th Street Photo Shop in New York City than at Yodobastai camera .• a Tokyo discount store. A typical camera or color TV ·is priced at four [,imes -its (Il~u!facturing cost. So, purchasing power, whicb was be.lieVed to innuence [he currency exchangerate i~ equalizing ItRces. needs to be redefined u~ing a produa's cost to the importing decision-maker.
Ifltcfpational itrade, oeeurs based on the Competitiveness' of a produc('s deUvered (lost (i.c .• manufacturing plus logistics cost), as ,opPosed to sales price, In order for Japan to iDerease imports. as (be dollar and other cul'lfenciesgain ,rei alive advantage, distribution must M sutamlined. The so-called price elasticity due to change in the exchange rate does not occur jf the lower Or higher price is not passed 0", to the (,eat purchasing deciSion-maker.' For example, if the delivered price of an American. manufacturer's scientifit: in$truments is lowered as af~ult ofa weaker dollar ,it may gain a shsre of the market from Its Japanese competitors, and the American export may c1im~. showing clear sips of elasticity. Likewise, j,f conen Oil became more competitive than sesame seeds and/or coconut oil, tbe :U.S.,.made cotton oij :mi&ht displace other types of oil as seurees, e.g .. , for making $alad oU. So. while the end-user price may not go down. as ~h.e middleman podcets the additional profit,. elasticity is observed as the el'change rate'ch~es. Rowever. in most cases. a simple redudl'on in the lrnpert price at the cost-insUfance.and-fteiaht (OIF) or E£ee-on-bOa~d(FOB) levels
does not result in increased imports, as ltttle is passed on to the consumers. Indeed, consumers of both West Germany and Japan have not reaUy benefited . from the decrease in import ,prices as"thei.r currencies have strengthened, as shown in Figure 2. Thus, Japanese imports have 'not increased, despite tAe strong yen.
• Yield much lseuer performance than otbe» financial instruments available in the rea! world. In aU but two months over the past nine years, the FX market has [luctuated more than 1 percent per month, or 55 percent per year for acons1isteflt winner in the. F}( market. Quileonen, opportunities appear to make more than 6 percent per month. Similar higb yield opportunities may exist in n;af estate, stocks. gold and, in the case of Japan, golf club memberships. Howev,er, sucheapital gains-are usuaUy taxed to effectively' halve the yield, while the EX market is unlimited and unreg,ulated in size, frequency of exchange. gainslfosses and taxes.
What this means is that the fX market. has become ~)Oe of the largest investment instruments in 11self, and is ,interchangeable with other instruments. At the root of this problem ,is the worldwide super:.liquidity problem. In Japan alone" some $1.1 billion ,is generated daily from the private and corporate sectors to be invested. Since there are not many opportunities to substantively absorb such an 'amount of money in real consumption. the exc~ money ends up in theavailable lnstrumerus .• or ·'buClh:ts .. '· For institutional Investor.s, it does nOt make any dinefence in which bucket the money is, put, so ,long as they are Interchangeable and 'tra:dablc.
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Tokyo's stock ~arket .bas alre~dy ~bsQrbed as mUCh _let (Doney)a~ any 10S1~almmd can, I~~me. at a PER ur 80, Tbo("~~ estate bucket. also has been ml~. ~. real estate p,",* in eenmd Tokyo have nsen th~c:e to nvc nmes In the Iast three Yeah. It does not mean that t~e'un.hty of real estate has gTown threefoJ~. It limply means' that It has absorbed as much money 8$ it can. 11Ie payback period of an average office building is now over 100 yeats:
Such a phenome_fton can be understoed only with the expectation of continuing appreCiation in.selected: real estete properties. TA.e $2 million membership (lee for the Kasumigaseki Country Club is also reconcilable only when one discovers that these golf club memberships a,r:e tmded in Tokyo. Even in Japan, the price of untradable prope.rties,such as real estate: in .remote and rural locations, is going down, indica.ting thal tradabil.ity is Ihe key prerequisite for
qualifying as a bucket for eash overflow. .
Ch.llengelo the TndnJ.onai Understandlnl of Economics
This new pf1enomenon suggests thaJ severalmajor changes are taking place, which:·wou.ld challenge the traditional understanding of economics.
(I) The traditional measure of inl1ation, the use of consumer and wholesale price Indlces (CPl and WPl), is obsolete. Until recently. overliquidity resulted j,n inllation. as a result of excess money bu.ying up inventory in expectation of higher prices. Today, in an era of wor.ldwide oversupply, excess money is ~ontaincd j,n tradable buckelS,and has not harmed'the greiner publk by increasing inflation. This is because higher prices are certain to discourage demand, When supply is lightened, there. is always a high probability of inJliati"on. We aFC living with a zebr'a·'llkc inflation today, where CPl and WPI are stable', white real estate and stock prkes are sky high. In a way, the.creatlon'and dtscovery of these liquidity buckets, and the successful. cenrainmem of excess money therein, have been the key ingredients in curbing inflation, Governments can take Ilitde of the credit for this success. Their sugar-seated 11l0net.ary .policies wouM have creat~ unmanageable ihnation across theboard, were it not for the invention oft"'e globally interiJinked buckets and the occasionat "leaky" buckets which act as "black holes" (Figure 3).
(2) The W'orld;s moncysupplly has gone beyond the control of any single govemment. Through interlinkage and the- active FX empire. money can nQW travel across national oollders,el«tronical-
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Iy in miDi seconds. Even if the 80J li'ghtens the money supply,a Japanese banker can borrow an impact l~instantaneously from abroad.
. ell Moneta.ry interlinkage has created dollilf-based markets in Japan and yen-based markets elsewhere. In fact .• ,the_ U.S. has created an opportunity to invite a S50 billion investment by the Japanese' throqgh its, trade deficit with Japan. The dollar-b;ased tFade deficil is Rotlti,ng but. a:n' acsounts receivable for ,the U.S .. ,·as greenbacks must ,eventuaUy be used to buy something American. They may make a detour via OPEC or Brazil, but U.S. trade payments are. bound to come back to the U.S .. In the long rerm, the trade lba'lance must equal the capital-account balance, unless the country goes default or bankrupt.
(4) The notion of interest has become obsolete. Such attractive prafi,t-maki.ng opPQrtunities as speculalive buckets lure ,financial institutions to 51ay within the non-interest-beering Fx rnar~et, stocks and real estate,.,ratber than seeking investment opportunities, in the ~Ireali" world ... Lately. the American government has perslsrently asked Japanand West Germany to lower i.ntc:rest r~es in order to keep the large spread with tne U.S. Recently, as the U.S. interest rate has gone up, ttie spread has widened to somet,hlni Uk'e 6 percent per year. That is still far teo smaU to-aUract money from Japan or West Germany, whose currencies have ap~reciated against the dollar by over 40 percent in a year. The FX empiFC's
157
PFOfit-ma~ing opportunities on the exchange itself could reach over" SO percent per year. making any interest-bearing instruments 'look rarher boring.
• Be ineffecrive in, correcting the tl!Qde ilJlbaJance.. Despite the currency ad.~ustmCJlt of 40 pp'cent to 50 percent, the U.S. tradedeficit with Japan, and most countfi~ in' EUrope, has not come cJc?wn, at least in doUarterms.This suggests, on the one hand, that the use of We dollar to measure the imbalance isa futile effort when its value, relatiy:e to otn,er currencies, is dwindling. It also. s~gg~ts, on the other band. that the exchange rate-is a poor instrument by Which to adjust the t'rade imbalance. Unlike the days of David Ricardo and Adam Smith, when internationally traded 8,OOds were primarily commodnles the leading exporters today a.r~ mtK~ more s.~alized in manufacturjng. The imp.act of the labor rate and raw mateliia,is is far Iess important today tban in the past,
Industries lend (0 cluster to g,ain competi-tlveness and Ilourish as a whole, as in the case of aerospace irn&e U.S" chemicals in West Germany, ana cameras anct consumer electronics in Japan. It 'takes decades to build up the infra5t,ructure 'heeded to excel in any industry worldwide. Once built, it again takes a long time to relocate. Currency rates are too temporary _t~() affect corporate decisions to relocate. Currencies fluctua,te. 'They seem to hit highs (or lows) e,ver), two yean. Plants can't be. movwaround at this pace. As a ,RSu~t" higher prices, may be ,pa.ss~on tp the market. as inrhe case of German cars in the U.S ... or costs ((fIa¥ be reduced significantly so as not to pass on the fuH impact of Uilc,exctlange rate fluctuation to the Customer i as· in the case of Japanese consumer electronics.
It isa lot easier to -absorb. the impact of FX rate fluetuations with.in the existing industrial cluster, or cascade of old vendors/subcontractors, rather than relecate tbe plant to. -~y. the U.S .• and start with brand-new vendors and subcontractors who are at the staFling (high) point,of the learning curve. These dusters have more resilience against ehanges in FX than might beindic~ted by a strajghtforwa,rd c,omparison of wage rates undera new exchange rate. The Grou,p of F'liVc; h-ere 'again', wrongly a$Surned that a correction in exchange rates would correct the problem of U.S. ,indu:strial competittvencss, and thereby rectify its huge trade imbalance.
• Be extremely sensluve to meeroeeonomic results and govemment officialS' announcements, If FX were reflective of the fundamenrals of the etonomy, then such extreme moves. creating
peaks and valleys, would not result. This is because economies - tbat of Japan or, for that matter. of the U.S. ~ do not nuctuate so vigorously, daily or monthly. As far as lean see from Tokyo, the J,apanese economy Is changing only slowly and consistently. and I believe the same. is true with the Ameriean economy.
From a detailed analysis of the Reilterp;nd ttie TeJet';ate services (information 'te:rminaJl which, 1Ihnost all traders, wo(ldwiderdy ,on today.). it. is, clear that the daily and' even. w~kly fates are sevdely affected by' American officials'pubtic and implicdstatemeDts. Figure 4 is an example or such an analysis' or exchange-rate change. with indications of captions from the Telerete news as they appe8licd on the screen. Traders watch these screens not so much with a g,reat knowledge of the world economy. but with curiosity as to how their fenow traders win interpret the same infonnation. IRead]ng the mind of the traders is often more profitable than maYAng the, fundamentals. U is thus the announcement of the fundamentals that drives the FX marlc.et. as opposed to the.fundamentals th,emsel,ve5'.
• Change in a .silrge from one extrrm~ to another. For example, ,the yen-dollar ratechangcd' from a low of 259 'in February of 1985 to a high of 137 ·in May of J987. or almost SO percent --far 'rom the notion of currency ad~U$tment. 'Though drastic, this was not the first time that the exchange rate had moved so ·sig.nifK:aQtly. In fact, the history o.fthe pound-dollar relationship before and during. the pre-Great Depression era is almost as 'wild' as the recent doUar-yen ,relationship. In fact, one icould cenclude that the ex-
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change rate does not hesitate at a artain level, but.winp somewhat Uke a pendulum in about a two- to three-year tY'de. The rate of change is particularly fast at the cycle's ~ or bottom poinr.
The PoUlb::aI Paradigm
The two countries' fundamentals obviously do not switch pesition so·dramatical}y in such a short term. What has cl1anged 180 degrees during recent times is the American government's fundainent.aI: belief. Several years ago, the. U.s. wanted to adopt a , "strong ~ollar, 'strong America" Wlicy known as Reaganomics, This poUcy has resulted in the twin deficits of the. government budget and fOFeign trade. TIle U.S. recipe was to deat with the latter lint by reversing its belief to' that of weaJk dollars, The t~o countries' f:ulilda,menlaU h~,ve cbanged con:sistentty over the decade at aboqt Jpe.rcent per annum, reflec;:ting the differences in, e .. g., productivity, rate of inflation and the interest rate. This suggests that therigl:it exchange rate would have been 11'70-1180 to the dollar at the end of l'98,7, or 116().1170 at the endef 1989, instead of the current range of '140.
As we analyze the cur'Jiency market, we need to incorporate this force at work, which can 'be described as the political paradigm. This pafadigm is severely affected. by American government officials, since they voice their beliefs. whatever t:hey may be, more strongly and more aggressively than anybQdy else, particularly at turning points, or peaks and valleys, The. Reuters of this world carry' basically Eilgt:ish lnformanon, and hence lend to overrefleet the American, father lhan the Japanese Or the German, point of. view, particularly in the minds of money traders.
The paradigm is !be weighted psycho'IQgy of the traders' readiJilg as to which way the exchange rate goes, For example, a lot of Japanese money traders know that 1140/511 is too high and personally feel t!hat the rateshoufd bounce back. However. they also know that ~heir fellow traders around the world hear much more about U,S. TreasulY Secret'aJ:}' James Baker's point of view than that of our Fi:nance Ministt;r KiiChi Miyarza,wa.
People dealing with consumer-packaged goods are normally stfl~ sitiveto the share of shelf space. They De,liev:e that it one can take up a larger area on the supermarket shelf for a given p~odu,t. it can get a higher share of the market. A similar attitude p.rev.ails in the FX market. A higher share o'f the screen, parUCH,larly w.ith the
Reuter News and Telerates, width over 90 per~ent of lhe.currency traders around the world watch. tends to domanate the mmd share of the traders, hence impacting substantially on the exdlange rate.
As$UmpUons. in the Currency Modrl
From theseebservatlons, we can ~onstruet a set of IJSwnptions about the currency market. For the sake of simplici.ty and clarit>:_ I will use the d:onar~)'en relationship and the Japan-U.S. ~noml~ as key drivers. This docs not mean that such is the .case all the real world. But I do believe that the Simplified model IS '8 useful first step in constructing a mathematical. modeJ to explain, and hopefully prc;di~ .•. :the unus.ual behavior ohhe existing ~rre~cy~afkel. I have identified five fundament ill forces at work which mfluence collectively, to come up with one number, i .. e., the currency ex· change rate:
t Trading flOwer for g(K)ds lrp.nsfer
2., Financial fundamentals for capital transfer
3. Asset ,purchasing equUibrium
4. Political paradigms or commonly .. held beliefs S. Mopey traders' desire to make profits
The lraditionalfundamental{ indudedl suchtlilings as relative ,prod~ctiv.ity gains and interest rates, I have tried to separate the factors affecting the competitiveness of the goods, such as productivIty, from other~ which affecttlhe now of money,jn financial fu~damentals, and have included them In trading power. In thIS Cashion. we can more clearly understand the impact of the wn:ency exchange 'rate on trade, and tbe flow of capital invesun~t as a separat(: pheuomenen, Let me explain each of these forces In more detail:
I.. TradlngPowe ... for Goods Transfer
If. for example, the delivered cost of color TVsequiUbrat.es between the U.S~ and !Japan at Yl40 1.0 the dollar,aul,omoblles at Vl80, scientific instruments at 1200 and bed at 1400, the exchange rate is set as the weighted average of~uilibrium. costs of aggregate tradab~e goods. Since not every 'tradable imJu5try win try aggressively 10 ,eXrport., however. some dominant products will act as standards for dlt: rate setting. Automobiles from Japan, and lumber and wheat from the U.S., ,then, may overrepresent the pro-
What Mows ~ •. Ratts? 161
cess of exchange rate setting. Bet:ore J apan and the U.S. exchanged a jot Qf capita'. flow t this ,relQtive trQding power was the dominant factor ,in setting the exchan8~rate. In the long term, the c~rrency exchange rate ,is influenced predQ.minantly by the relative compMitivcness of manufactured gOOCh.
HOWever, produCli~t,! impmyemenl is a functionof the induslry an" capital intensity, and it is difficult to 'weight all industries. SQ, we have tested many relative indices to examine 'the long-term fit with the yen/dollar exchange rate, and found the wholesale price index to have the best cOrreralion. If productivity 'gain is hish, one can assume thatlhe manufacturers do not have to pass .,he price increase to (he end user, hence WP'I may stay relatively Oat. Figure S shows the correlation between the. real currency exc~angerate and ,the trading pOwer adjusted fOf the relative change<in WPl since 197],. We have pegged the latter at 126, to the dollar as 1973 was tbe year just before tlile energy crisis, when the two COuntries' trade was balanced; and also it corresponds to the period dght beyond the initial adjustment phase atter the floal started.
This 'I.ong-term trendUneindicates lha't thelrading-power-bastd exchan~ rate would. still be around 1180-1200 at the beginning 'of 1981. According to this theory of relative u·ading power. the potential
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162 WMt Mows Edangr: Rdtts?
for a certain exchange rate wiU have a r~erse OausSiab distribution. Since theexcbaQSC rale is sing~larly set, any pr,oducts ~hi~ ~ ~tJlt the stable saddle point, or the bottom of this. potentiat diJlnbuuon. will be either too artificially competiti,ye (left of center .. as viewed from Japan) to export to' the U.S .• or too bapdicapped (right of center). For exampl.e, when automobiles became ~bc:, do~nantexport item from Jap~. tQtUes ,sunered •. but ohlp~ ~d a lo_t of b~eathin8 room, Japanese chip producer~ did not take .thlS ~n as a heaven sent profit, but instead used it to Jeduce their Prices In the U.S., only to be accused of dumping. ~e dots on ~igure 6 ~JTe iIJustrativeofthelright exchangeratc fOf'8glven'pr~ud J.D exportmg to the U.S. from JapaQ. The white circles schematically indicate the right r~e for U.S."exportuo Japan;
1. fln.iJd.1 Fuadamealals for Capita. TranSfer
A second strong faotor affecting the exchaJAgc rate ~' the fi~ancialfulIdamenlals. Fundamentals usuany ~rive mon_ey 1~ ~ne~hfection or another, as opposed: to the tradmg power dnvmg g0nd3 across nationai borjkrs. The exchange rate, 'according to the financial fimd~l1iIent8ls. is set primarily so as to CHJualize the rdu~n ~n LDvestment. As such, it is influenced by relative differences In mterest rases, inflal.iQn rates and the risks of invesement. It acts as a
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two,. to thlicc-year, OF midterm, counterpoint Ito the 19nger-term treadline set by ,the I !lading' power. As shown i'n Figure 7, the difference in the real. (i.e., ioOation-adj"usted) interest rate gives a pretty good.correlation with the deviation from the exchange- rate
. predicted by the]ong-term trading power shown in Figure 5. Over the peast W years; the period with a' hi'gheli real interest rate in
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Japan has resulted i,n higher yen than the ,trend'l'ine, and vice versa.
The only excepuon has been the most recent period, when even the 6 pereenr .interestspread has not produced stronger dollars. This unusual period IS due to the effeet of the polj'ti~a'l paradigm described bclow.tr is expected, therefore, lhaC with the removal of such political and pyscfio'iogical prCSSUFCS, the currency adjusts itself to a more normal trendline .
J. Asset Puldlasing EqUilibrium
An asset-based economy is a bubble, When y'OI:l say (hat the Tokyo'Stock Exchange is a 4 'ri),lion dollar market, itis calculated On th,e"assumptionthat all the stock's arevat1:1ed at 'he lateSt psiee, However, if everyone rushed to the market and tried to cash in, it would crash, and ,the entire market would be worth a lot less than 4 trillion,pcrhaps.·a third of it.
Real estate has thee same cha'racle'fistics as the stock market.
Ho,wever, the asset-based CCQ)'jonily, sustained over a period of time, has a funny way or beooming a real ec.onomy.
You can borrow against your assets as collateral. Fotexampl'e, if
yO'ur apanment house in T~kYO has ~p~)fedated ~rom Sl million to SS miUion, your debt may be SO.~ million, aJlOWIJll. you to borrow up to 80 percent of the market, or 53-.6 miUron. ,Using this capadW. you can build! a mO'untain, house for SI minion. buy a aailboal for $0;,5 milliO'n.and IravellWl.uriously for SO. 1 mUlion.
you are creating rea I 'demand, .er the real.eoon_omy. Th~ are not bul)b]'es. So. bubbles can creaie Teal economy. Japan and Taiwa,n 8fe now enjoyiJ;lg aburSl of dO'tn¢sti~ consumption ,created Iby the bubbl:es of the asset·based economy.
Furtbennore, if you wne ,to' use the borrowing capacity to' purchase a house in Newport. California. and a condominium on the Gol~ Coast of Australia. you' WO'uld be buying asSets acress national borders. using your' asset base in J,apao. If you have an idle warehouse in TokyO' producing absalutely no value_;, you could put it down as call,atera] and borrow $100 million. Witb this money, you could buy an office buiJding in Los Angeles or in MaJilbattan, produCing an. !tonua] return of 7-8pepcent. This makes sense because the dead asset is now producing a healthy return, and even if T.okyo·s real estate market collapsed, the V.S. asset~ would be intact. So. even if the Japanese bank. wanted l1ile lendi.pg margin 10 be ldjusted, the U.S. asset could then be collateralized to generate cash to meet the Japanese bank's margin call.
J,{ costs approximately SSO millionto develep a golf course in japan. Recently. a very nice golf course along the Thames nearl.ondon. cameup for sale, at. f.7 mil.lion. This looks like a bargain in the eyes of many Japanese developers. While currencies are ad~us~ed to' eql,lali~e the competitiveness of tradeable goods, th~y are no(refile<:tLing the rtelativeprOduc11vilY and value of assets, which are often all "tradeable" across natioaal borders tbrough the mechanisms described above. In fact, the more central bankers react to the statisticallrade imbalance and try to' adj ust the cu rrencyacoordingly. the'peate.rthe gap becomes for the fair conversion of assets, Cheaper dollars ,to make American goods competitive also make American
assets cheaper. and Ihe as~ts are unfairly tr4d_¢. .
Most macro-economists, scholars and politicians have neglected thiS8$seltradeabiUty, and made the assets 8 .. ~eal bargain. The cur,rene)' exchange rate should be delermined to rerleer the relative imponance of all three tradeable commodities: goods, ~nancial in~ struments and assets.
. This is a natural consequence of a border less worJd and financial del'egulalion~ If the lattertwe factors were i,ncorporated. the doUar could be a Igt stronger than it has been re<;ently, and the Japanese
wO'uldn't have been able to convert their domeslic "bubbty" asset. based eeonoPlY into the' purchase of precious Ame,dcan assets.
4. PoUticil Paradigms or o,mmonly-Held Bellers?
The paradigm in currency mar.kets is like the Delphi method of predicting the '~u.ture which no one knows for sure. For example, by asking a large enough number of well-informed penons, you would bet that, for example, a material,that would exhibit superconductivity at room temperature win be discovered by 1992.
So, e'(en if Professor Lester Thurow is completely off base, if a large enough number of influential persons like him say that she right exchange rate should be 1100 yen/dollar and that it would ~ve down 1.0 180 in two years' time, then the paradigm valley gets deeper, and people start actually bctdng on it. As more and more people buy .the yen to enjoy fl:le appreciation, it will actually happen tlilat the: yen will climb up to. f 100 to the dO'lIar.
Onlhe other hand, a brave man with great credibility might say "No, the right rate is actually 1200, since the Japanese economy is' destroyed" and after: aU, the U.S'. economy is much stronger than. people tRought." At that point, when the major upward move stops, and ,the rate of exchange"fate change. becomes smaller than the interest spread between the two countries,inv~ti~g in tlile doltar would become more attractive. As people'move in the other dircCtion, they start making exchange gains as well as interest gains. It becomes much more profitable' to be buying dollars and investing them in higher interest':beari'ng :instruments; the U.S. economy begins to enjO'y an influx of eapltaland investments. NO'W most pec)ple would say". "after an, the right exchange rate is 1200 ..
which becomes (he new paradigm. . ,
In the reaJ world, however, theschotars and the Kaufmans have seldom influenced the critical. turning points, As shown in Figure 8 (previous page), powerful, .and exclusively American, politicians and high.rankinggO'vernment officers have made, the tamsand accelerations. Thus, I have named tbis force ",poHtical paradigms." The paradigms have been the major reason why the actual ex-' change rate has deviated so erratically from the more stable ex. change rate expected from three other fundamental forces at work: tr,adiog powcr,financial fundan{cnlal~, a.nd asset cqumbriu~.
Ordinarily, the politjcal paradigm is a rather weak force. or a shallow potential to represent It.s shaky foundation. When a politi. ciansays, that the rightexchahge rate is Y94 to the doUar, he is- u_sing
."'...... Oration ot PHIl. ,nil V .. ..,. In v....oou. Exchllp ..... (1177-1"7)
simple-minded linear thinking to generate tbe J-curve ~(fed to balance Japan-U .5. trade. This is fundamentally wrong because the currency market has no such tbing as the "right" exchange rate.
A paradigm does not have to be true. It only serves on aggregate to offer currency dealers fairly good opportuniHes to make money, and a cnmfortable feeling that where they are .isn't too'ar off after all. The cunent p:aradigrn seems to be around tl40 to the dollar, as Me~srs. Reagan' and Baker have expressed their strong po~nt of view that, "This is where it shoul'd be, .and we don't want It (the dollar) to go clown further. II It was not so ·long back that tbe same government created a tot~ly different kind of atmosphere. w~e "a strong America through a strong doUar" was the governang thought. h is aliso basically the: same Bovernmerit (Bush/Baker)as In mid-1989. l.O now admit that a slightly stronger dollar is probabl,yacceptable.
5. Money Traden' Desire ,to Make Profits
The IrQders' desire to make money may be endless. I 'Originally thought that the currency traders needed ItO see the market fluetuate in order to make' trading gai,ns.
However. gi:ven the enormous short-term volatility, their needs are mor~ than met through the dai1y .• weekly and monthly hhxups
~hi~h are n~t necessarily reflective of the JOD8er.~ Deeds to adJUst ecenoeue ~undamentaJs betWeen t~e two countries in question. These. flUctuations occur as the fOreJID exchange II18rket's sclfcorrecti,vc adion from the basiet'rendline. which Is set as the compounded effect of the four more fundamental forces described adlu'.
FialKe 9 (next pqe) shows the monthly fluctuation relative to th~ average of lbe previQus month. What this nte8115 is that. even: dUring a period of general decline. there ate opportunities within a month to clear a 'rader's position witbout a large loss and 10 take. advantage of 'gcoeral trmdliilcs. While the farge s,urges biSeCt on the poli1iCaf par~di&m$ have liven money tr,_ders OPlM>rtuqjties to make mqney., the ~ and valleyS are n'c)t neces.saiily created by the tradel'S. It would beArer to: assume th. the traders.have bad the, "joy ride" with the paradigms. but they could be happy Without the surses. so·long as thMh9rt-t.erm fluctuations yleld'4-S percent moves per month, or a SO puoent per annum for aCOfistant winner.
CurrNe)' Eldlaqe MOdel Uslnc Pota.tiaIs
Using the analogy of the non-equilibrium theory of physics. as in phase transformation, we have tried to synthesize the different fotc:es· at work to expl'ain the c~p in the adual currency eJtchange rate.
A( this stage, we assume that dif,ferent forces form independ.erlt and different potential curves:
I. TrrJdingpower as the long-term and strongest potential;
2. FinQlfCio/ fundlltnefllais as the,· medium .. term, strong
poteatiil; -
3. Po/ilb/ pt;UQdigm as the t,ransiertt. weak. potential, moving as a function of limes, as the prevailing beliefs change. .
AI we have seen, the traderS' money-making desires are more than~t by dany,. weekly and monthly fiuetuadons, and t.herefore we did not inc:orporate tbe four.th force in our: model, A criticaJ point to note is that these pot,entiars suggest different optimal and stable qchanae rates.
The result of our c:aJculation shows that:
• A ,nuher stable bahd of most likely yen/dollar ,exchange rate emeraes as a result of the composite effect of trading power and ftnandal fondaqlen~als.
Mln.-A'II.
A'll.. (%)
Ja",. '""(7
7.8(0c1. '85)
DeC. '86
Jan. '77
,Max.:t.4u.lmum of It)e month Min.; Mlnlmll!'n of the month
A'll.: A..,. 6f, preY.loue month-
• When the third force, political paradisms: is added to this. we begin to see multiple-stable answea, or the saddles in the potential curve.
• Renecdng the hysterisis, Le., multiple solutions dependina, on histoQ'. weeome up with totally differQll solutions dcpenqing 00
169
w. here we start '. A cuttency demands only one cxc:henIe not .
. . Th' ·L_o .I.·1e h - -_e 81 a
11~ ume. . ' . ~ means u __ W .. ul t. ~ rate may be _ '" the
rmoutest factor IQ h'8nsidOD. people, Uvma in. ·the feal world _ must pay dearly 'for i~.
• The excbange fate is affected by ,tM chanse in PIl'adiams, bewmingambivalent when the prevailillg belief chanaes ffrom 'Il20/dollar to 1140. However, tbe r81e..could quickly bounce back to the 'US-I187 ""ge as soon 'asthe paradigm swJnp back toward 1220 ..
The probability distributions over time show a rem8rltab1e resemblaDteto the real life flUetuatioo of the curreDcy. While the two principal forces create a rather stable band 01 rate claapge. the poUtiC.8l paradisms can create eurane pejlts and vaJ.ley$ that. can deviate' rat from the stable ZQIlCS.
10 sum" Yft have been able, to demonstrate tbat:
• Long-.tertD late correlates With. uading power.
• Medium-term rate is affectClj! .byfinan~aI tundamentalS.
• Paradtsm~ though possessing a weak potenlial, caR swing the Cl.change rate when,.it is unsure and moved over time.
• Indeed. multiple answers are po$Sj.bJe in the excllange rate as diffCRnt and in~dent fOfCeS inreract te determine a single rate.
• A probability distribution t>est correlates with the exchange rate fIuetuationsin featUfe.
• Wbeit the pat,adigm. is removed, or' cbanged, th¢ rate canapprcm:b a mOR nOfmal one set by the two principal fences .
.... plkalJoa of tile Po.altal MtHId
Admittedly, our model at this, stage is to' a large extent intuitive~ althou&h we bave made our best effort to plug in a'<lailable numbers. While we are still trying to develop more CIl1piritai 8ridl'or theoretical, methods ito come ·up with the shape of eadl
< pOtential, we believe this approach :merits wide criticism and stud,y. 'for unless our apptoacl1 is fundamenlally w,FcnS. tbe implicaticns we can dJ'aw frQDl these. s'imulatiQDS are quite silllificant:
• We have observed dial the short-term profit~making OppOr~ tunities in _he fX market ~ much, more attractive than an·y iDter~-bearing instruments. This means that the governments. ~ lto.adjustthe flow of goods and money tbrou~ adjustment. of interest rates. are outdated, or are not 10ing to be effective. to say the least. However. as we have seen, ~he acral spread between the two countries can affect lhe medium-tam Row of funds.
and hence the exchange rate. However, wben there 'is a strong political paradigm to push the doUa(value down while at the same time trying 10 accomplish ,the- influx of foreign money into the U.S .• this <is an infenUe effort.
To . ma'ke (tie interest-based policy effective, the ,political pa;',digms must be removed, or be realisned to be in concert with th.e direction of the two prin,ipal forces at work. Government should recognize that long-term competitiveness can r:es~h only through curbing innation, as evidenced in WP'I, which in tum is accomplished through. real, inddStriaE productivity improvements. It should also ~gnjze that in the med'ium.term. i.e •• two to three years, it can adjust theourrency exchange rate by the interest r,ale. However. there is a certain ·:limit to this ability, because tbe changes in the ,interest rate are going'to affect the WPI andlor productivity gains. This is one of the reasons why the ciJrrency is non-linear. However, we have not. ~ully .d1evclo.ped dienon:·Hneartreatise in our model at thls stage,
Back to Tradinl Power and FluDda. Fundamentals
• Poiicymilkers and -renowned scholars should be silent on where the "tight" exchange rate is. This ·eliminates·that ,impact of an unstabfe paradigm and allows the rate to be set by tbetwo principal for~ ,only: ttadingpower and fmlricial fundamentals. That sets a much stabler and stower mcvemenr.and removes unnecess.ary volatiUty in the market. Although 5peculati~e mar,ket part'idpants 'm.ystill want to 'coj:oy ,profit-maldng oppoJitunities, such needs are satisfied completely by the short-term nuctuations, amounting 1.0 4 pecrcent·S percent per month. ThcSe "bic:cups" will center around the fundamental trendline, and will not dare deviate from it too far. Thc money traders are basically cowardly people by virtue of ,the rad th~t it is a high-risk .• ~ro-sum pme. They can be likened to a seved swimmer whose toe must touch the bouom of the river bed. However. if experts and authorities say ,that he can go deeper and enJoy a faster flow without fear. hc'd ·be tempted. The lack of such, advice, on ,the othcr hand .• win give him an enormous fright, and he, as well as his colleagues. will tend to swim back to the shoreline,
- -. A trade imbalance, per se, does not challie the exehanae rate. A .bilateral trade imbalance 11 tbe result of the two countries' tF~dinl power. If Country A keeps. buyinl goods from 'Country B. it wilt run out of money' and stop. How~er. the money left in COuntry B must be u~. If it is used to improve productivity and
Whca Aba ~1at07 171
social ,inf~cture, then lbe tr&dinl ~er and fUndamentals of Country ~ ~ improve, and then, and only then. will the exduu;Il~ we tJum In B s favor. U, on the other hand. Country B could not find a use fOF the excess rno:ney and.~ it to Country A (hen
. Ithe nel position is u.ncbanaed. In the iolll:tenn. trade defICit· mUll
equal capilalaccount. -
The exdianae rate 'cbanaes. as 'a result of IraCle imbaJaoccs, only because of Itbe paradiam that hi8her (or Ia.wer) rates reduce the irnbalance. Oftcm in toda,y's devcloped world. trade imbalance is the result of industrial spcciatizatiOIJ. rath;er tban internation81 ~mpctitivateSS'. So 10111 as there is a commensurate recyclill8 of money. ,it sbouldf not fu.ndamentaJly' affect 'tlk excbange rate ~ se:
• Govenuneo,t ,intervention, in the mar,ka. tends ro make money traders more aapess1ve. When the 80J 0, New York's Fed in'terven~·. it tends, to cteale statistically more winners ,than Josen'in the, maJka. l'he nOl,ion 0.( a zero-sum pme, is the only· built-in stabilizer in tJtis already unstable market. It iSlhe fear of Io.sin8 that ,makes tbemarket recover its sense of baJaiu:e. If the government is ready Ito buy dollan wben fVem>nc wants to sell. it acts as a. voluntea: to Jose. "Leave tbem ·alone and give them no hint" is the best way to make use of Ute two stronger forces. i'.e .• tradina power and fllUlllCiai ,fundamcotals.
NEW ZEAlAND1S MAIeQVER OU;rSHINES AUS~S
by PeteI' Osborne
~
~GtON--Ih a bmiIhtakmglyshon time, New Zealand has become
arnabmaarR::mned. 1he,~ mil CWeated· society of 19&1. the year that madItd ~begilirtingof a dooade ofgreat maricet: rebms~.salfteQ with the .dea:ioo ofirhe I...ange labOr goyemment.llas vanished
One of me most ,protectio.nist economies has become one of me most open and productive. In soon, New Zealanders are back ill charge of their own destiny.
. Nc..v Zealand beplby.bllowing me pam. ~ by Aus~ where·microeconop1ic refonnand eoonomk ~on, with the float of the Au.~ doIJaras the GeRteqliece, ~ m.l983. Bttt·ifAus_ Ptmid: ,00 lthelJ¥:ltkl and the ~ New Zealand went much fmther and deepm:
lIioome tax had. been ~. So haslheprice oca television set-..aJl' advantage of:redudng protectionism .. And ~tion has also made it possible fo.j';New ~m re tune into more television channels, wellington has also done bener than 'Canbemi.in rac1dmg foreign debt. freeing. ~e labor market and misingoompetiaveness, through
prodUctMty.
173
.$inc::e the advent of the Employment O:mDaCfS N:t, New zealand Aasexpenenoed :aansfOrtnations in lemployer~ attitUdes·and
quanwm leaps in labor ~t¥ ~.
The ECA came into' force in 1991. Natiob:ll awards ceased 00 aist, and. the pnnecredpoSition. Of unions was mrnoved. AU wodteI:s became employed. under contFat1s (ither mdividu8l or: collective. ~ustness. Confidence is RoW at its I;tighest in 20 years.
New Zealander:s have fuRher to go than ~ before livingSWIdcmis rerum. tothe top 10 in world. ~, but they haw faced their task well. Austtalia. has not.
- .,.!:. -
Both eeeaomies are coming out of prolonged recessions and are now romptn.g along. with annual growth of around .6 peromt. But ANSmilia is heading fot·a-hard, tanding; SZ; many analysts, with a dose af refonn fatigue. New Zealand. they algUe, tan. reasQnahly .expect growth., akhougbsomewbat less than 6 percent,
The difference is ,iil the way New Zealand has focused an many of its economic ~~enta1s over 10 yeais.
lnNew Zealanc(, a. ~mt budget surplus haS been acbitNed, Whictt is likely to be'2 to j percent of gross domestic produc; tlUs fi .. nancial·~ compared with Anstralian'budget deficits of 3 percent.
Because of that swplus as well as arefonned RestNe Bank ·of ex·: ceplionat credibility. a-current account approaching balance and an indust1i.al.&)'5remmat really does relate·~ rises in productivity gainS, the KIwis arevery much less likely than Ausmdia. [a have [0. jedpatditt their MCovery with .hfgh. mterest rafCS.
. In New Zealand, employment groMh. is die most obvious measUre o[ labor IlllUcket suecess. Employment is growing by 4 percent a year:-' its highest level in nearlY .. sevenyeaIS'-Com~ to 3 pereeat in Al:lsualiil.
Unemployment was 1.8 'peocmt Sf the end of September--cotn,~ with Australia's 9.2.percelu-amLis expected to reach 6.4 percent by me: end of next ~
~ the runaway GOP growm of 6.1 percent fires gp the economy. jobs and wages are incieasing in nearly all of New ~·s secto1S. Ald\ough the bOQming manufacturing sector bas :procmced nearly half of the new jobs" soong growth in employment aI$o cam.e ou~oragfi-
Ntw~s,~", ..... ~-:- .. __ • 5'-
.... lOQfIlIla~s 17
cW. ," 'lure. bu:i1dinl'and·cons.c 11l.\l·C·tioIl, wholesale and _'1 ~~ .
l.. • ...:-..& __ ..I' l:_~ . .-!._II - &'"""'" ~. and the
~ ~IU;. u.Ui:UI~ seams.' '
Intoday"s New Ztaland., fndusttial disputeS are tare and kaJized and dme is"oo ~t 'to Ausualia!s ~ ~ breakout.
While AUsmIlia!s cwmt1t accoun~ (Idiot is likely to Widen. substantially and irs net fbreign debt position ·co.uld blow ,OUt in the short reun, New ZealatKt's CURalt acColUlt deficit isaIOWld 1.4 percent of GD:P, oompared with~ts 4.3 ~t
. New ZealaQcfs aoownulattd public deb~ whWh remains PtIaCCepl_ ~ high. is biIF ~ AusttaJia's. }'It bom. coWltries'~ent outlays are around 39 ~t·of the economy. But a s~ campaign !by New Zealand to create eorponuimls, and, 1n 'nuiJJ;y instances, prlVa-: 'tile swe-owncd erttaprises, ,is ~red to 'improve me level afc;ld>t.
New Zealand's· r;ax $ystemJ 'has been cleaned up attd,the top mm:gin.al tax rare isnaw 33 pe,mmt.; iI).liti~ :vwththe company tax rate. Unlikt'.
.4 •.• ......_.k... .1:. ... v......;._ :1.. .. ~.' o-.....L.--..J'
~~ UK: "'WQ·"ui~ ~,WJlU.l mu..usUu;U a goods ana services tax.
New Zeabnd ~ has its infl.aqcm roore 6mIly under 00ntr01 dum AiIstraIia. Since 1991,the KiWis have held inflation to within the 1 percent to 2 percent. 'l'ange. Inflation wa$ 1.3 ~t last yeat
In short. the economic recomies 01 the two TaSman n~ are
fi ndamen .... n.. "..l.:a.:..__. .
II~.;_." wut:JQlt. _
NeW ~'s is ~ eruire1y on iInprovementS in. competitive'" 'ness derived from improVed pnxbu;tiVity.lts uiflation is low and steaidy~d its budget going into surplus. There is no a:rtifiCi2l s'timu,Ius. lil centraS.l, AuStra1iaj~ inflation is ~g and irs budgerds in substantial (lefictt.
l.t would be fuliletoarg,Ae ,that New Zealarid's refolJ1lS have Rot been associated win, pain. Mos[ of the people mq>enenced fAJS ,in their· living standatds and 'many 'Woikm lost th~ jobs. as a result of the stnJCruraI ctiahges.
But the economic lbenefits flowing from the radical ovedJau1·af the basiC structUreS of rhe counr:ry'seconomy and public fina:nd!s will continue for·many years. In.shan, tbday's.dizzym.g ~are sustain,. able. More' so ~. that the New ~ economy is undeJgoil1grapid AsJanization :after decades of investment from .~ ~n countties.
II
176 ~cw Zalland's MaJawr~~'s
OOicwfigures '~ that Asians, who .are ·espe~ acrive bJ 'toWism and property. are buying far more stnmgly UUO dle eooru>my than IlWlY tI3ditional imvtstors.
Already. New Zealand i$ fifth among Singapore's t~ inYestment destinations, Wim $15 bdllonlneested cum~tively at the, end of 199J,
Recent ,~~ from the'Overseas, lmestment Comrnissi:en. iE.di€att diat betweelf them, SiIlgapOre an~ Hong Kong inveSted more than NZ $700 rn.illion ($447 million). Austtalia invested only II percent more in New Zealand in, the last calendar yea!
Add all the Asian money togeeher, including Japan, Taiwan, ~. and even Brunei, and the total-comes to nearly NZ $1 billfun ($640 million), almost 21 ~em of total ~ .()Vf4'Se8S .invest .. ment,
ASian. and p8nicularly SingapOtt$l. bUWS~· taken considerable stakes in.'hotds~and mo~1md NZ '$l.25 billlion.
Alriiost 36 percent of New Zealand's espons now go to Asia, compared with, 14 percent in.-1970. led by dairy products, fruit, vegetables, seafood, meat produces, oonip\lttr software and legal. banking, and consulting services.
,
Pmang Narrows GQp in Race ,to Lure Tw.nology Jobs
by Dan Him
~G, ~HiStbiy dealt mUch the same €aIds to PeruuJg and :ShJg:apore~ 'two tiny islands off the Malay peniriSUla. Bomwere colonized ht. the lB~lish and became th.rMDS trade· centers populated IbY ~du:sttious' e;hi~ immigrants:
It was Singapore. suategically located at' the top of the 'peninsula wi.th a Qlagrlifi~l POrt. that long *' left ~ behind inm.e deYelopment stabs. WUhshrewd econcmie planning, me city-state be~e _South~t ~·s undisputed center of many soph.iBticate~ man~ and service' indus,bies ..
Pe:naqg, mough, is catching up. When it comes to new high-tech;. nology opemdons., more and mo;w multinationalS these cJaysare heading for ,the ~ swe, Whete o~Mg costs aR; low compared with Singapore. Once known as the .Pearl of the, East. ~ now ~
motes irself as the Siliqon ~ ohile East, .
",''1'7' . ... ' S' t~
were gr.r:mg ·lIlgaliJOre.2 run ror ,its money," decIares ~n1et
Rqlr'a ..... by ~ Qf1fw~ _ Som}9IIrMI. C 191M Dow~ &: ~ 'IDc.AJt~'Rac:Iwd~
H7
176 ~,Sibling
Somcbit. cxa-utive director of the Penang SlCills Dcvelopmmt Center. . which offelS people the teclmical training needed for working at ,me
majo): multinatiotWs. -
Still, SingapOre's economy mi\ai:ns by far the larger of the tWQroughly 13· mncs me size of Penang's---with less than thrtt times the population. And it remains attractive rotnvestors; fuced·as-set invest~ ments in manufactul'ing hit 'a record 5$3.9 billion (US $2.65 billion) last ~ and a, funher increase is espected this yeat
The ~ also continues. to be animpoll3l1t world ~ base for'high.urll indUstries sooh as semironductors, COO1P':llelS, and their pelipbeta1s. lS~ it accOunted tOr 42%0£ the wor~j'~routpUt of disk drives, and just twO months ago' U .S . ..based Inremational B\.I.Sine$ Machines Corp. announced it was setting, up its fUst manufacnningpbnt on die island to make disk drives, which srore irIfcmwion m compU,re.tS.
But drive along, the palm.ilined warerfrotn of Perumg Island's Bayaa Lepas Free Trade milt and you '.11 ((Wcldy pass a row of new or expandi'ilg factories dlat,house some df the biggest names in the global computer disk-drive industry: Hewlett~Padwd, Seagate, and Quan. tum. All told, d:u:re;are 20 factories '~ ~~ chives and ibm components in "Penaqg state, which also includes a chunk of the adjacent
mainland.
A 'recent arrival is 'Komag USA eM) Sdn., which plans to spend more than 500 millionringgi[~5 $195 million) over four ~ on its Penang factory that opened -in 1993 to make the diSks for the drives.
Even after production began in PenaBg. says.1: H. ral'" Ko~'s \. ~ director. nw1 Singapore "sent missions here to find out why we didn't go [mere] and if there were any secondthoughts,"
1he SiIlgapoteans "can set the synergy" developing among diskcmye factories in Penang. he says. "Once you commit to come to a place 'like this', ypu're going to' be h~ £o,r a long. long time."
Both Singapore and: Ptnang were fin3Jists for' a new gfobal service center for Quanntn1 Corp .. the big CaJifomia-based disl driVe manufaCrurer. "In the C()St of doing bUsiness" PenaQ.g has ,the edge." says lim HengJin, who manages the ~-old facility.
Because 'bodt SingaPOle and Penang boast good. in&asaucwre,. pemmenr invtsttnent incentives, and support indusmes for high-teCh
SinppoR SIblIng 179 com~ COSt can be a deciding ,factot fur insumce, the basic salary of a profesSional eqgineer in SiRgapi:>re is equivalent to about US $36,000, or more thaD 80 percent ~er' duqt Penang levels, acc0rding to Hay·Management Consultants (S) Pte. Ird., whiCh has offices in both Malaysia and Singapore.
Managing direc:totS Of m,w:tinational manufacrums in Penang also ssess the high quality of locallabol; saying workels generally speak at least some English and can-be tnlined to operate the sophisticated machine that .fi1Js :many factory floors.
Ko~'s Mi: Tan, a Fenang na~, quiddy rattles off the names of ·seYerallocal high schools established during the colonial eJi$! that he says mainraina record of exceI1ence. "They produce some of the top scholars of this island." and of,dlle ~tion. he ~. adding that many Komag employees come from those schools,
Strolling through his ,fast..expanding plant on a recent day, 'FU1ilOthy Harris, managing 4itecror of Penang Seagate lndusnies (M) Sdn .. Bhd .• points to wo~ operating sophistiCared l11achinery that etches c&kdrive heads Widl molecular precision. ''If soMeone screws up," Mt Harris says. "it can cost US;$10,QOO."
Govemnrent ,and corporate officials alike in Penang:- publicly deny that the state's large ethnic Chinese POPWatiOft (Perumg is the Qnly Mala}$n Slate dJat is :predomiwuuly Chinese) helps djaw'1ndusay to the island.
But ethnic Chinese are' found. in almost aU the managj.ng director sears at major u.s. multinationals that aren'r filled by expatriates. They ~ hold many of dle other top management and engineeting p05lS. "In some ways," confides a Western company' executive" "th.ey're more like Americans in that they live to work. ..
Indeed, Penang is considered to be so attractive by some corporate exeoorives that a managing director of a U.S.-owned factory initiaJly was reluctmt to be interviewed abo~Jt his company's decision to 10- cate here, dungconcern that his comments might helppersuade
competitors no follow. .
While oI;Mously pIea$ed with, A:nang's booming industry. b:al gpvemment officiab pbyCbNn suggesOons that they'are in a cuahroat 6gbt with Singapore tOr foreign inYesImcnt in higtHech mdmtties.
180 Stn~ SiblIng
l<oh Tsu Kocm', falang's chief minist£r. concedts there is "healthy COJQpetidou." bet"ReeIlme, two Ioc:ations 1n some ~, but be ~ Pemang vieWS SingapOre "not as a rtva1 but as a ,partner in prugtess.
The Singapore' Economic Development BOard sounds the 'same theme, saying in a written n:sponse to ~ about Penang: "1M: believe diat the economic pie is large enoughfor' everyone in 'me Itg\on. "The boaId'says its coJIl~ isn't built ,on COSt factors but depends ~ OIl "ecoonomic and social intmgibks,~ ... nat1Qnal ~ maBpoweI' quality. crtaDvily and inten;UUional on-
entaIion."
Pmang offidals believe mat Singapore's statUS'as a ~ :naIion
. also pit an impoRant competitive advantage. "WhateVer they WIIU: to do, they do it~" $IlYS I!. J. ~ nwutger 0( the inc:lusni:al and u.ade dmsion of Ptnang DeYelopment Gorp. :And S~ is ~ fat ahqd in such __ as devdoping tqtiafy ooucatipn an,d,
w_1.._ ..... L...v...l, . '. . faciliaes.
~UlU~ tra1IUllg
6:homg od'teIs ~. Ms. "Eang says Si¥POreis some~ of a
-big btother." Whose development strategies' provide 'impor:tant ltssons for Pmang. &ir example, Pe:nang lbdked at S~·s~tronics lnduSttieS liaining 'Center before creating. the private in<!ustty.. suppomed rtnang skiDS ~t Center Smce 1989, the Penang facility has trafued about 10,()()() people in computers.propmmable automation. and, other areas.
,"'We have a lot to learn from S~." says Dt KOh. the Penang chief ~ who regularly visirs the d~rate. "We'd like to learn ,their ~nt~; they are highly efficient and. effectiVe;"
Still, Penang itself gers most of the credit for irs tranSfonnadon from
.~ sleceY backwa~ ItO indUstrial dynamo over the past 25 ~. In 1969. a time of w:eat ethnic Ul1I'eSl in Malaysia. unemployment was runnil1g at 16% in Penang md the locatgovemment ~ despera.JC to ~te jobs. An ,Ametican-based oooodwu was oommi.Ssioned '[0 fOfmuJare a master plan and recommended creating an ilidustriai base to help get Ithe state's .ecqnomy back on its feet.
Seeking labor-intenSive, expon-driven tndusmesi PeI\aDg tatgeted ·eIectronics.ln 1970, it set up its ovm e~nics facrory;rwo}aJS huer it created, a ,fn=e industriSl zone to lure rri.ubinatiooalsthat were seekins offshore planrs.
Sm~S~g 181
AcccIdmg_ to an anecdote told, by Ptnang Development Corp.' oBi .. cials, when Hewlett-I'aclwd Co. co-founder Bill Hewitt viSited in 1912 to assess d!e' isbmd's potential" He·was gready ~ when a waitress Whipped OUt a pOCket c;dculatQr to'tOtal me bill for his dinner with govem.ment oflicials. Noting the ease with ~b sb¢ usadfue new gadget, be turned to the Penal1g.chief minister and said. ~iI; if this is ~ indication of how ,the people of Penang would react to an electto,nics environmfm.. then our decision is clear as to where we should invest. "
Apocryphal or not, HeWlen~Paclcard. was among the first of the electtonks companies to set up operations in Perumg. Multinationals in other fi:el& also anived., indudmg T~rayIndustrtes. Inc. of Japan, which began making textiles in 19n, and Mat-tel Inc" which hiis made tQyS such as Barbie, dolls and HOl Wheels here since 1980.
Growth his been parti~ brisk in recent yems, witb the number of factories in Penang's indUStirial parks and zones iI1q:easifig by nearly 50 percent last ftaJ oompare.d with f989. Enquiries to the. development authority in the msl three· ~ of 1994 more than doubled the amount from all of 1993: Unemployment fell to a meager 2.9pd"cent last ~and 'factory managersrepon they are scoliUing northern Malaysia for wal'kets to opemre the lines.
That success is creating some growth problems •. most notably a tight laborl1l3lket that. has sent w¥s spiraling. MatteI stopped making Iabor-intenstve Batbics in Penang thts year, and tnaIly ~tories have had to automalt funher 'to stay competi~.
Dt Koh. ~'schief ministeJ; now raiks about enteriRg a second Stage of indt1sll'ializalion in which multinational companies in Penang would do research and develoPlQent and be responsible for global sales and~ting of locally- made 'products rather than just ,their manufacrure. Intel Corp. is kading theJ wwf in setting up such integrated openuions by,having i·rs Penang opemtions desigJl future chips.
HeR, tOO, Pel1ang apPQltS to be following Sin.gapore, which offers incentives for muhinationaJs to set up regional and operational headquarters iliat petfonn similar lTl8iIcl:tiIlg arii:I research .functions.
Pmang_'s local ppli.tiaans taDc about sustaining econop1k growth of 10 percent amluaUy" which is about. 1.5 percen. ... poinrs;above the current national pact. The stale'S per capita gross domestic prodvctis
·182 SIriJ2portSIbling
about 1" peroent higher than tilt 'national.m;adt. but Dt ,KObsays ~e dQesrj't see' any political ,nsks ,in ~~ faster ,than the rest Qf the Matayodomjnated, nation. 8\bu QIMOl be loc)sttp fat the whole' ~m~ .. he says. no,tiIlg that ~boringswes will benefu as.1aboMnteR .. ~ f'acrories move &om ,dae isbmd'in search eflower operatingrostS.
, Andrw mattet how rouen mort success Penang bas, S~ wiD always be big bnJthe1:"Wc datit think we will rtach asUige where we ' wi11 catch up with: thmn. ",58)'5' the develOpment authonty's, Ms. ~. Bu~ she addS. ~y.re will narrow Ithegap."
. ,
Ii '4
INTROOO010l\l
1. ~ 0b:ID.ae, "1iadie' barrias.," New v.tr T.rmcs, April 17 , 1983.
2. Kc:nichiOhmae. "The IDiJI:ed 'scon:cud of J~ese ~t· ilblOl1d:
Baddasb is ~ attroOg:!:olQP.!DJies thoU query bow exportable ~ J .... est ways,- ltutmationdt~ July '1983.
3. KdIidli QbxruIe, "mny ~ u.s.-Japan ttade im~. 'PaId: OutJJlOCkd statistics ~J~.purdlases of u.s. products," }QpcDi,'&onoMit:
Jo¥mcd,JUDe 18. 1985.
4. KaUdd ~ "Big 3: No ~ sOlelY' ~ .. Demift New$, April 21, 1985.
5. lCaucbHJhmae:, "I)e6dl myths," Wilt Stmt'lOlmUd. JUly 30, 1985.
I. ktnidU dtunat, -nu: ,mal .pmbIem is that ~ doesn',1mow its 0Ml SQl!Dgth,"}aptm T~dUDe 2, 1987"
2. Katidli ~L ... r.:J _.Au sJ:IOoNsJ .·Iike ''''--1'_' --i.. made"
, . vauu.::,. ~.~ -1 " .. 1p8De5C. . "..lIa'_. ~ '. .. m
Japsn,"}t.rpttII ~,~ 13, 1981.
3. Kmicbi 01unae. "tntuest ceases fa ~ With, the ri$e of ,the l?< EtnpfR," .~ Tant.s,June. J6,l987 .. 4.~~,~'I11OYCS~·~:.New~lI't~
~'~,":/Gp,ln llMts.July29, 1987. '
$, SamudHuntington. '1bedashofctvilizaacins? ... FomgttA#Dn.'~ 1993. 6. Kmkhi Ohmae. jqan feels ~:"'Newswtdr. ~ n, 1987.
183
CHAPTER 2. THE LIDDER OF DEVEI..OP'M£r'lI .
I. Ktnk:hi,Ohmae, 1& Mmd tI the Scrrittgis(; 1hc An oj ~ ~ ~ hie McGraw-KilJ, 1982; papabadc.. 19;91; ~ New"Qk Pmguin
Books, 19M). ," bItdIP
1. J~ Fallows; "Japan's 'ricesubsidXs costly lIB them, and us. ·Posr
3. =.r. ~!~~o:m clouds ower Japan's ec;onomy," New .. liMa,.JU1Y
29.1981. . .
.... lCaIidU Olurtae, "Unfidr1hldel"lJIdIJIcss 'Wyo,,}muary 1987.
Notes 185
CHAPIER 3. DIE NEW "MEIllNG P01""
I. Kt:nicbi 0b:mIe, 1FW IbIe- (New ~ me Pn:ss, 198".
2. KmIdli Ohmaie, BgIoftd ~ JIorrkn ~ m: Dow Jooa irwin,
1987; lOIlyo ~ Newbk: JCodansba'ImanadonaI, 1987" 1988).
3< KGuctu Phmae; n.e ~ \\brief <Nc:wb'k; ~, 1990}. -t. karldti Obmae,lHad IbMe- (New tile IUc Pras, 198".'
,. Ka:ddU OImiae, .1Dde burim," New lfJd: J'biJtes; April.l7~ 1983.
6. Kemdd 0Iirue, -The fi'aidous J ......... U.S. imbllance." )apJn &ho, Novan-
ba:2.1986. .,
7. 'KC:nidti Obmae. "Japanese obsaver ~ lJ.s. Yiew·or bade ..... USA ~ Aprils, 198';.
8. Kcnichi. Obmar, "SpedaI «'OUoUlic 1q)Ott: Japan-The ~ bdUnd tnIde imtUoce,'''~HeraW~~16,11985"
9. KmidD Obmae, .~ How to tacfi the]apanese~" Einan(iaI rlll'lc:5, Marth 9, 1983.
I. lCaUd:U Obmar, ·U.s.'"l1apm bade. rensioas DJask dOse pdvare des," Asiaa \WIll StIut./DUrillll. Nomnbcr 3, 1983.
2.Kmicbi Obme. "Dditit~ .. \\fdl StrM}oumal, July 30, 1985 ..
3. Jmw:s hIIPws, 1apan's rice 511hsidir$ 4'OSdy ,10 tbmt" and .us," Ibst lnldli-gmar. tday11,.,1981 .
.... KeQlCh.iO&m.e, "fully or U;S.Yap;an trade imbmana:. Pan D: MaJly u.s . • find japan: a ~ madca., but dley 'don1t ~ IhIt openly;" ~·~}oumal.June 25. 198,.
5. Katicbi Ohmae, "A spccialrtpoft ~DJapin: Some fordgn finm too busy mak" ~··ID'''''''''''_;'''' r~'_""' __ "ffDrIId lHbune March 19 1986.
IDII"' ....... ~ . .• ,
6 .. ~ otuu.e. ·;"unf.e 1i1Idcr Businas ~.JIIWUy 1987.
7. 'Robert L BIr:dq., .Sa>m.lm.~ How to I?o ltApn (New VJrk: 1m 'Pft$s. 1992).
8. Kdiicbi:Obmae. "Foreign goods made at home: It is popular to 'URJ'JpUl'S $39 billim cum:nl.:coum SUlpIus in me ~ ~as oi~ chaftbeJapm. ese JNII'Ica is dosed to fixeign FOds," ~ July 6,', 198,5,.
9. Kcnidli Ohmae, "New smdy sOOwsJapanese like ~'FQds. made in" Japm, "}crpm Tames. January 13, 1987.
10. Iiabctt A Ht:nzier.. &npmain: 1M.Mat, Who ~ SMpfag EIuvpe. 9'lew bicBanaan ~. 199+).
11 ... ~ Row to RaCh theJapmese:CCIDSUIDeI;- RnackII nma. Mad 9, 1983 .