Wednesday, February 11, 2009

Could this be the beginning of the end of nation-states?

Dani Rodrik is right in saying that the next phase in capitalism will entail a major change, and the change will mainly account for the increase of globalization.

In my view, that change, more than anything else, will be labor mobility.

Everything else in the world is mobile – capital, technology, products, entire businesses. But one crucial aspect of enterprise isn’t, and that’s people. This has resulted in a severely lopsided globalization process.

Myriad financial arbitrage are currently possible because any globalization initiative potentially increases prosperity in a particular country or sector, while causing social upheaval in another. Inequality arises because while businesses can take their money and technology anywhere in the world, their workers cannot follow suit, or counter with similar moves of their own. And not least, because the politics of nation-states are where the people’s will and sentiment are heard and played out, national politics has the potential to evolve into a force for counter-globalization and anti-international business sentiment.

Think about it. Much of economic policies formed at the national level could be interpreted as “beggar-thy-neighbor” at some level. A loose monetary policy in one country affects the capital allocation in another, and a tight policy determines trade policy in others. An aggressive fiscal program can trigger similar moves in others, or have unintended consequences on those unable to do so. Currency controls in one country affects consumption patterns in trading partners, while inflation targets in other countries affects employment and purchasing parity in still others.

All this is true because people cannot mitigate the effects of a relatively-more benign policy in one region by migrating to it, or mute the harsh consequences of a neighbour country’s (competing or trading partner) actions, by piling on to that country.

Countries currently compete to attract capital and technology, but not a lot also compete to attract labor.

Countries try to increase their earnings by increasing net exports. But taken on the whole, an increase in one country will have to result in a balancing increase in another’s imports. The country increasing its earnings will theoretically have more kitty that be divided among its populace, while the other country that loses will have less. The improved country meanwhile, does not have to worry about foreign people suddenly surging toward its borders seeking to join in its successful earnings initiative.

So we either start to see less globalization, or we will gradually start seeing borders coming down over the coming decades. The twenty first century could well go down in history as the era of decline of the nation-state.

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