The decline of nations

By Francisco Dao , written on December 18, 2012

From The News Desk

Over the past 35 years, globalization has become an accepted and irreversible economic reality. While most of the debates have centered around the pain of transferring manufacturing jobs overseas versus the benefits of cheaper goods, the effects of globalization on the health of nations are rarely considered.

Viewed strictly from the standpoint of expanding the overall economic pie, economists are in near universal agreement that globalization produces a net positive. But as companies increasingly operate with an eye toward leveraging markets and labor on an international scale, the shift toward a global focus has resulted in the declining importance and economic security of individual countries.

At its core, globalization is really a matter of access; access to new sources of labor and access to foreign markets. The two primary drivers of access are capital mobility and technological reach. Capital mobility can best be understood as the ability to build a factory wherever the labor or tax environment is most advantageous. For example, Nike can build a shoe factory anywhere they can get the best deal on labor assuming the other logistical factors don’t outweigh the benefits. Technological reach is most easily described as using the internet to access labor and markets that would otherwise be inaccessible. Those whose work or products can be delivered via the internet can access workers and reach customers all over the world.

The success of those who benefit from these two forces of globalization, whether we’re talking about a multinational Fortune 100 company or a small online company using offshore developers and selling a Web service worldwide, is not tied to the well being of any individual nation.

GE can build and sell products in any country, regardless of what happens to the United States. The same applies to Volkswagen and Germany, Shell and the Netherlands, and any other large multinational corporation. These companies will survive no matter what happens to their home countries. Since internet companies are largely served from the cloud and can be run from anywhere there is a serviceable connection, here too we see that Web companies selling to global markets have limited reliance on the health of their respective national economy.

If you’re a member of either of these two groups, the future looks great. You’re a global player, the world is your oyster, and regardless of what happens in your home country, it isn’t likely to have a catastrophic impact on your success. But therein lies the problem.

Since global players are not beholden to any one nation, they have little incentive to engage in matters of national well being. For example, when Vivek Wadhwa warns us that America is losing its competitive advantage because of anti-immigration brain drain, why would a global player really care? Their factories and development centers are worldwide. If you’re French and your workers go on strike, why bother with them? Fire all the French workers and get new ones in Bangladesh. If you’re a Japanese car company and a tsunami swamps Japan, no matter, there’s plenty of opportunity to sell cars in emerging markets. In the most extreme cases, such as Wall Street, global players can actually profit from national decline through arbitrage and short selling.

As global players disassociate themselves from individual countries, it results in a bifurcated global economy made up of a global class that is able to leverage international labor and markets, and national classes who are more reliant on the well being of their respective nation. Countries are left to compete for relevance in an economic world that has no respect for national borders. In this scenario, nations have two choices both of which lead to their eventual ruin.

The first option is to hold the line on taxes and regulations and watch their global players depart (or obfuscate profits) for countries offering a more favorable environment. The second option is to offer incentives to keep global players within their tax base. However, this ultimately produces a race to the bottom, as nations bend over backwards to the demands of global players who have no reason to be loyal to any individual country. Either way, nations are faced with eventual decline.

The optimistic might point to the decline of nations as a sign that we are moving toward a single borderless planet and a world of plenty. While I don’t disagree that the overall economic pie will increase, I suspect the disassociation of the global class from the health of nations will contribute to greater instability for those unable to directly leverage the benefits of the global economy.

The decline of nations will be replaced by a purely economic world order dominated by multinational corporations and, to a lesser degree, those who have leveraged technology to access the fruits of globalization. In this world, the global class will hardly blink when nations fail, while the national classes, who are more closely tied to their local and national economies, will face greater uncertainty.

[Illustration by Hallie Bateman]