A Future Perfect: The Challenge and Promise of Globalization

by John Micklethwait

  The thickness of any particular border provides an immediate metaphor for the distance a particular state wants to keep between itself and the outside world. Anybody caring to find out about Enver Hoxha’s Albania needed only to know that border guards occasionally took potshots at Italian bathers. More generally, the average thickness of borders around the world is a good guide to the strength of the nation-state in general. Ever since the Roman empire, with its detailed delineation between civitas, provincia, and regio, the ability to maintain a border has been a test of political power and will. One of the first signs of the rebirth of European nation-states during the Renaissance and the Enlightenment was the introduction of borders. Since then, the nation-state has been the basic unit not only of modern politics but also of identity and culture.

  Now globalization stands accused of destroying the nation-state, not to mention national identity, the power of governments to set policy and protect their citizens, high culture, and the Barcelona Football Club. In our next three chapters, we will show that this is not so. Yes, globalization is wearing away at the edges of these things. Yes, it does restrict the power of governments to do some things. Yes, it imports “foreign” ideas and “foreign” soccer players, and not all of them are welcome. Yes, most definitely, it is changing our world and us. But globalization is fundamentally a democratic process, driven by individual choices, and what most people still want are senses of culture, place, and nationality. National politicians are not powerless, history is not ending, and the basic substance of foreign policy is, for better or worse, little different from what it was a century ago.

  The Great Debate

  p. 144 Once again, the debate about the nation-state itself shows some of these differences between nations. Although millions of Americans died in faraway places throughout the twentieth century because of disagreements about lines on maps, there is still a surprising lack of interest in the United States in the theory that those lines might not mean much any more. In most of the rest of the world, it is at the forefront of political debate.

  Some groups have always hated nation-states. Religions tend to be against temporal borders; the papacy once disliked nationalism just as much as official Islam does today. So are classical economists and, in principle, communists. Nowadays, the idea that the nation-state is facing its Götterdämmerung is pretty common. Academics like to point out that the nation-state has not been with us forever. Eric Hobsbawm, the doyen of Marxist historians, has argued that it is a legacy of the French Revolution and a peculiarly bloody one at that.[2] Ernest Gellner, a British anthropologist, argues that it is the invention of self-serving elites. Benedict Anderson, an American cultural critic, insists that it is nothing more than an “imagined community.”[3] Others are keen on showing that it is incompatible with today’s androgynous, multicultural, postpatriotic society. “The old model of nationality is outmoded in this globalizing world,” says Aiwa Ong, an anthropologist at the University of California at Berkeley. Kenichi Ohmae, a management guru, argues that the natural engines of growth are not “dysfunctional” states but cross-border regions such as Tijuana–San Diego and Hong Kong–Shenzhen.

  The general notion behind these arguments is that the nation-state is both too small to deal with the vast forces of the global economy and too big to connect with the lives of ordinary people. According to its critics, the nation-state is a little like a badly wounded lion: Rendered powerless by hunters’ spears, it now has to watch other beasts gradually steal its territory. The hunters are the different forms of global capitalism—pimply currency traders, subversive technologists, arrogant businessmen, and so on. The beasts come from two different directions: from above, where a whole alphabet of acronyms from APEC to the UN and the WTO are gradually sucking sovereignty out of the nation-state; and from below, where cities, counties, and tribes, such as the Scots and the Quebecois, see no need to keep up their loyalties to arbitrary centers, such as London and Ottawa.

  The devastating thing about the lion’s predicament is that its assailants compliment each other. Each time the money markets humiliate a national government, there are more calls for regional cooperation. Each time power p. 145 is ceded to a body like the European Union, it increases the separatists’ case that “their” people can look after themselves.

  In general, the people who herald the end of the nation-state do so in tones of triumph. However, even as they celebrate the removal of the old order, many, particularly on the left, are struck by a nasty second thought: The end of the nation-state could mean the end of the welfare state. Governments will have no choice but to cut taxes, reduce social benefits, and lighten regulations if they are to have any chance of attracting mobile capital. Globalization is threatening not just the nation-state but also the benefits that it provides.

  The Running Dogs of Capitalism

  The conclusion that globalization is destroying the nation-state is an awesome one. But is it true? Consider first the idea that the nation-state has been fatally wounded by the slings and arrows of outrageous capitalism.

  Some of the ways in which commerce eats away at political divisions are as old as the hills. While Greek Cypriot guards in Nicosia helpfully point out that to the north lies a land of murderers and rapists, and while Turks over the border have painted a Turkish Cypriot flag hundreds of meters across on a mountainside simply to irritate their Greek neighbors, one of the worst-kept secrets in Cyprus is that Greek and Turkish farmers meet regularly along deserted parts of the Green Line to trade goats and other animals. Governments have lived with such casual treachery for centuries. The difference now is that rather than merely cheating the state, capitalism seems to be intent on usurping it.

  In part, it is a matter of style. Business heroes command respect that modern politicians only dream about. When Bill Gates visits Davos, the crowds gather around him, not the prime ministers. But it is also, many politicians complain, a matter of raw power. During the past two decades, there has been a fairly dramatic change in the balance of power between national governments and international markets. The most extreme example of this is Russia, where the state has shrunk from almost monopolizing economic activity to controlling barely a quarter of the GDP; a centrally planned economy has given way to anarcho-capitalism or even raw theft.[4] But in much of the rest of the world, governments have divested themselves of responsibilities and gradually accepted the rule of the market.

  Naturally, some of this power has been given up voluntarily, through privatization and deregulation, but not all of it. When the currency markets won their battle with the British government over sterling’s membership in p. 146 the European exchange-rate mechanism in 1992, they not only destroyed a particular government’s credibility but also challenged the credibility of any government that took on the world’s trading rooms. When Asia’s governments fell foul of the same process in 1997, plenty of people complained about the result, but nobody considered the defeat unusual. And even the United States has to bend its knee: When asked in what form he would want to be reincarnated, James Carville, Bill Clinton’s sidekick, said he wanted to be reincarnated as the bond market because it was more powerful than God.

  Nor is it just a question of money markets. Politicians complain that industrial policy is now a meaningless term. Governments no longer drive growth. In the 1960s, government spending accounted for about 15 percent of America’s growth, almost the same as private-sector fixed investment; but in the 1990s boom private investment contributed more than 30 percent of the growth, while government spending accounted for only 2 percent.[5]

  Rather than taking their orders from governments, multinational companies, according to their critics, have begun to treat their homes as hotels—places where they stay by choice and can leave if they don’t like the view. Ericsson has threatened to leave Sweden if the government fails to lighten its onerous tax burdens. Foreign firms hold American state governments to ransom, only locating their factories where they are offered irresistible
tax breaks. Companies such as Rover and Chrysler were once national champions that had to be kept British or American; now they are both German. Meanwhile, smaller entrepreneurs publicly thumb their noses at the whole system. What, one wonders, would Jean-Baptiste Colbert, the grandpère of dirigisme, make of Oliver Cadic, a young French entrepreneur who not only moved his own computer company, InfoElec, to Britain because it offered lighter taxes and regulations but also founded a pressure group to encourage other French people to do likewise?[6]

  The information age has added another challenge. Until the 1980s, governments around the world controlled a good proportion of radio and television bandwidth; outside America, there were relatively few commercial channels, and most of them were heavily regulated by the state and tended to model themselves on the public channels. Now, technology has multiplied the number of commercial channels to a point where they are making public-sector channels such as the BBC nearly irrelevant. Media entrepreneurs such as Rupert Murdoch now have power in a plethora of national markets. The Internet seems almost impossible to police. When the French government tried to ban a book that revealed that François Mitterrand had suffered from prostate cancer for the last fourteen years of his life, curious citizens simply read the offending text via the Internet.[7] And just as Europ. 147peans can buy books from American booksellers, they can also invest in the Chilean stock market, gamble in Antigua-based casinos, or patronize South American art dealers—all beyond the purview of their political masters.

  Remember Sherman McCoy?

  Certainly, some think that forcing governments to cede ground on industrial policy and censorship is no bad thing at all. But regardless of one’s ideological bent, there are fairly good factual reasons to question the idea that the state is in headlong retreat. Yes, it may have ceded ground in some areas, but its capacity to maul businesspeople remains pretty much unchecked. Rupert Murdoch, for instance, may frighten some politicians, but he is also plainly frightened by others: Witness his attempts to keep the Chinese government happy. Like those of most media barons, Murdoch’s empire is defined not just by his ambitions but also by rules about where he can own television stations, where he can own newspapers, and what he can show to his customers. The “global citizen” still had to become an American one to own Fox.

  Or consider Joel Klein. At times when talking to the slender, balding lawyer during his stint as the boss of the Department of Justice’s antitrust division under Bill Clinton, you were reminded of another (albeit fictional) litigator from the Bronx: Larry Kramer, the hardworking and underpaid district attorney who brought down Sherman McCoy in Tom Wolfe’s Bonfire of the Vanities. Although Klein was a classier, more upright act than Kramer, he plainly lived a completely different life from the global business leaders whom he policed. The musty corridors of the Department of Justice are as far from the average executive suite as Kramer’s cardboard-walled apartment was from McCoy’s Park Avenue co-op. All the same, the list of corporate titans that Klein brought crashing to the ground is a long one. Northrop Grumman and Lockheed Martin assumed that their merger would get the go-ahead from Klein: so did KPMG and Ernst & Young. In both cases, Klein demanded savage concessions, and what would have been the world’s biggest defense and accounting firms never came into being.

  But the person Klein will always be associated with is somebody whom most people would have picked as the modern master of the universe: Bill Gates. Leave aside the rights and wrongs of the antitrust case against Microsoft, and two things are already apparent, both of which make nonsense of the idea that capitalism can run roughshod over government. First, by the time he left Justice, Klein had done more damage to Gates than any mere businessman could. Only the government could force Gates to give hours of cripplingly embarrassing video testimony and thus speed his transformation p. 148 from guileless geek to Rockefelleresque ogre. Indeed, Klein changed the whole company. The difference is tangible to any regular visitor to Microsoft: Despite a warmer response from the Bush administration, there is a touch of defensiveness about everyone at the firm, even Gates.

  The second point is that Klein did this by expanding the scope of antitrust actions. Until the Microsoft case, competition policy was founded on existing abuses rather than potential ones. But Klein maintained that the measure of competition in technology industries should be not just market share (at the time he launched his case, Microsoft’s browser share was much smaller than Netscape’s) or price increases (Microsoft had consistently reduced prices and was giving away its browser) but also the whole industry’s ability to innovate. He launched the case against Gates to protect not just Netscape but also a host of Netscapes as yet unborn. This was in line with fashionable economic thinking about “network effects” in high-tech markets. But it was also plainly new territory—an example of government expanding its reach rather than retreating.

  The Microsoft case also indirectly proves another point: Companies are much less mobile than people believe. One reason why the federal government can harass Microsoft is because it knows that the computer company will not move elsewhere. Microsoft’s fixed assets may be modest and its workforce small, but it cannot afford to divorce itself from American universities and other American computer companies. Removing itself from America’s high-tech cluster would be suicidal.

  Further, there is always a lag between government mistreatment and any sign of resistance from businesspeople. Despite France’s habit of loading taxes onto its employers, rebels who are prepared to vote with their feet like Cadic are few. Similarly, Ericsson is still in Sweden. Given a choice between putting up with a tax hike and abandoning a multimillion-dollar factory, most sensible companies tolerate the tax hike, at least for some time. It takes a great deal for a large company to uproot itself, and both businesspeople and their regulators know that.

  Globalization Is Good for Governments

  If globalization is supposed to be killing big government, it is doing a remarkably slow job of it. In 1900, government spending in today’s industrial countries accounted for less than one tenth of national income. In the United States, it accounted for less than 3 percent. Today, in the same countries, it accounts for an average of one half. Even relatively restrained countries such p. 149 as the United States and Japan devote a third of their GDP to public spending. Bill Clinton’s proclamation that “the age of big government is over” was no more truthful than his finger wagging about Monica Lewinsky. While the number of Department of Defense workers has been cut since the cold war, if you exclude them America’s civil service is twice the size it was in 1960.[8]

  Individual attempts to slow down spending have barely scratched the surface. Between 1979 and 1997, a succession of British Conservative governments labored mightily to tame the leviathan and endured a relentless stream of complaints that they were “cutting” essential services and “persecuting the poor” in the process. They succeeded in reducing public spending from 43 percent of GDP to 42 percent. Since 1994, most European countries have tried hard to reduce their budget deficits in order to meet the Maastricht criteria for setting up the Euro, but they succeeded in reducing public spending only from an average of 51 percent of GDP to 50 percent, and even this fall owed more to accounting tricks than to fiscal restraint. The only dramatic example of a state reducing spending is provided by Sweden, which succeeded in reducing its share from an absurd 71 percent in 1993 to a merely preposterous 65 percent three years later.

  Cutting the state in any significant way is not likely to get any easier in the future for at least three reasons. The first is that the middle classes do remarkably well on account of public spending (far better than the poor, who are supposed to be its main beneficiaries). Julian Le Grand, an economist based at the London School of Economics, has studied the way that public spending was distributed between the rich and the poor in Britain in the 1980s. In health care, the wealthiest fifth of the population received 40 percent more public spending than the poorest fifth did; in secondary education, th
ey received 80 percent more; in university education, five times more; and in rail subsidies, ten times more. Second, public-sector workers make up a powerful force within the electorate. They not only command a lot of votes in their own right but are exceedingly good at identifying themselves with the public interest, not least because so many of them are involved in delivering services that command universal approval, such as health care and education.

  The third constituency is probably the most powerful. The aging of the population in most rich countries is both pushing the cost of pensions relentlessly upward and also providing a voting bloc to defend the larger state needed to dish out that money. Some form of social-security reform is necessary in virtually every country, but the vast constituency of elderly voters that will do anything to hang on to “their” money means that dramatic p. 150 change is unlikely. Rootless capitalism can trample over many sorts of people, but a retired couple of registered Democrats in Florida is not one of them.

  This is not to say that globalization is doing nothing to change the state’s role, only that it is changing it less dramatically than many people imagine. States may not be surrendering many of their core functions to the markets, but they undoubtedly have to rethink most of those functions in the light of globalization. Is it better to try to pick industrial winners or to put more money into education and training? Is there a way to tax the relatively mobile rich without scaring them away? How should it restructure social insurance? Should it try to establish a monopoly over social services (including education and training), or should it contract out some services to the private sector? These are questions that we will return to in chapter 15. All that needs to be stressed for now is that they are questions, not ultimatums made to a dying form of government.