The End of the Nation State: The Rise of Regional Economies

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9780029233412: The End of the Nation State: The Rise of Regional Economies

The author argues that nation states have lost their ability to control exchange-rates and protect their currencies, and have consequently forfeited their role as critical participants in the global economy. Once efficient engines of wealth creation, nation states have become inefficient engines of wealth distribution, whose fates are increasingly determined by economic choices made elsewhere.

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About the Author:

Kenichi Ohmae, a former Senior Partner of McKinsey & Company, has counseled major corporations and governments on their international strategies and operations for 20 years. Widely recognized as one of today's top business gurus, he is the author of the highly acclaimed Triad Power (The Free Press, 1985) and The Borderless World (1990). He lives in Tokyo.

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Chapter 1

THE CARTOGRAPHIC ILLUSION

A funny -- and, to many observers, a very troubling -- thing has happened on the way to former U.S. President Bush's so-called "new world order": the old world has fallen apart. Most visibly, with the ending of the Cold War, the long-familiar pattern of alliances and oppositions among industrialized nations has fractured beyond repair. Less visibly, but arguably far more important, the modern nation state itself -- that artifact of the 18th and 19th centuries -- has begun to crumble.

For many observers, this erosion of the long-familiar building blocks of the political world has been a source of discomfort at least and, far more likely, of genuine distress. They used to be confident that they could tell with certainty where the boundary lines ran. These are our people; those are not. These are our interests; those are not. These are our industries; those are not. It did not matter that little economic activity remained truly domestic in any sense that an Adam Smith or a David Ricardo would understand. Nor did it matter that the people served or the interests protected represented a small and diminishing fraction of the complex social universe within each set of established political borders.

The point, after all, was that everyone knew -- or could talk and act as if he or she knew -- where the boundary lines ran. Everyone's dealings could rest, with comfortable assurance, on the certain knowledge, as Robert Reich has put it, of who was "us" and who was "them." The inconvenient fact that most of the guns pointed in anger during the past two decades were pointed by national governments at some segment of the people those governments would define as "us" -- well, that really did not matter, either. Boundaries are boundaries.

Politics, runs the time-worn adage, is the art of the possible. Translated, that means it is also the art of ignoring or overlooking discordant facts: guns pointed the wrong way, democratic institutions clogged to the point of paralysis by minority interests defended in the name of the majority -- and, perhaps most important, domestic economies in an increasingly borderless world of economic activity. So what if average GNP per capita in China is $317 but, in Shenzhen, whose economy is closely linked with that of Hong Kong, it is $5,695? Boundaries are boundaries, and political dividing lines mean far more than demonstrable communities of economic interest.

No, they don't. Public debate may still be hostage to the outdated vocabulary of political borders, but the daily realities facing most people in the developed and developing worlds -- both as citizens and as consumers -- speak a vastly different idiom. Theirs is the language of an increasingly borderless economy, a true global marketplace. But the references we have -- the maps and guides -- to this new terrain are still largely drawn in political terms. Moreover, as the primary features on this landscape -- the traditional nation states -- begin to come apart at the seams, the overwhelming temptation is to redraw obsolete, U.N.-style maps to reflect the shifting borders of those states. The temptation is understandable, but the result is pure illusion. No more than the work of early cartographers do these new efforts show the boundaries and linkages that matter in the world now emerging. They are the product of illusion, and they are faithful to their roots.

This, too, is understandable. Much of the current awareness of the decay of the modern nation state has been driven by the wrenching experiences of the former Soviet Union and Czechoslovakia, which have formally ceased to exist as single national entities. Perhaps even more frightening, of course, is the noxious brew of ancient hatred, more recent antagonism, and unbridled ambition in what used to be Yugoslavia. These are extremes, to be sure, but they are deeply representative of the kind of erosion that has at last begun to capture an important share of public attention.

In a newly unified Germany, for example, unprecedented amounts of power have been ceded to the individual Lšnder. In Canada, before the recent elections in Quebec and even before the failure of the Meech Lake accords, the French-speaking province had been moving to cut its constitutional ties with the other, English-speaking provinces. In Spain, an explicit program of devolution is transferring much of the apparatus of independent statehood to the country's 17 "autonomous communities," especially 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 north to be a real and growing factor on the political scene. Even in dirigiste France, the prefects of Mitterrand's government can no longer unilaterally veto local decisions in the country's 22 provinces.

Developments as striking as these clearly merit the attention they have received in the media and in the regular comments of opinion makers and public officials. Nearly a half century of Cold War cannot end without dramatic -- and eminently noteworthy -- changes on both sides. Relaxation of the long-entrenched bipolar discipline imposed by the United States and the former USSR cannot help but allow even older fault lines to spread. Equally striking, however, is the way in 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 just as a challenge to this or that current policy or set of leaders), they have been interpreted for the most part in political terms. Whatever their root, the centrifugal forces now at work have been seen to be meaningful, first and foremost, as statements about the inadequacies of established modes and processes of political order -- that is, as evidence of troubling realignments within previously established borders.

Thus, as today's public debate would have it, the fission represented by local autonomy and by ethnic or racial or even tribal irredentism, no less than the proposed fusion represented by Maastricht, shows clearly that the postwar writ of central governments no longer holds with anything like the power it enjoyed even a generation ago. And as that debate would also have it, this failure of the political center is a legitimate cause for concern. When no one seems to know where we are -- or should be -- going, initiative stagnates, special interests reduce each other to paralysis, and the consensus necessary for effective policy moves still further out of reach. In tones of despair, the more literary pundits like to cite Yeats: "Things fall apart; The center cannot hold." But the truer message comes from Matthew Arnold: we are "wandering between two worlds,/One dead, the other unable to be born."

These lamentations at least have the virtue of taking the erosion of nation states seriously. But they view it almost entirely as the result of long-repressed political aspirations bursting into the open once the various imposed restraints of the Cold War era have been relaxed. No matter how deeply rooted, however, these aspirations are not the only -- or arguably, even the primary -- forces now at work. Something else is going on. The battle and the battlefield have shifted.

A QUESTION OF CULTURE?

In a recent, highly influential article, "The Clash of Civilizations?" Samuel Huntington offers an interpretation of what that "something else" is. According to Huntington, the fault lines in our new, post-Cold War world do not flow from politics or ideology, but from culture. From now on, when large masses of people join in common purpose, the primary link between them will increasingly be their shared heritage of language, history, tradition, and religion -- that is, civilization. And when they stonily face each other across a divide, the unbridgeable gap between them will be the lack of just such a shared civilization. Groupings based on culture will become -- in fact, have already become -- the most powerful actors in world affairs.

For all the truth of these observations, Huntington's argument ignores the fact that, even within the same civilization, people have often fought against each other. From the outside, the differences between Catholics and Protestants in Northern Ireland do not seem like a good reason for intense hatred. But for political leaders and mass agitators, they are good enough. Again, from outside, it is awfully difficult to tell the Hutu from the Tutsi in Rwanda. But they have mutually created, during the past decade, one of the bloodiest clashes in the world. People usually fight when their political and/or military leaders inflate minute differences so as to stir up latent hatred -- not when "civilizations" clash. If leaders are enlightened, they can make their people believe in the power of working together. This is the case today with the multiple races and cultures linked peacefully by Lee Kwan Yew in Singapore and Dr. Mahathir in Malaysia (and was true in the Yugoslavia of Josip Broz Tito and the India of Mahatma Gandhi and Jawaharlal Nehru after World War II). It is not civilizations that promote clashes. They occur when old-fashioned leaders look for old-fashioned ways to solve problems by rousing their people to armed confrontation.

Such skirmishes confuse the ground of geopolitical interpretation. But they confuse the ground of economic interpretation as well. The glue holding together older constellations of nation-based political interests has visibly begun to wear thin. In economics as in politics, the older patterns of nation-to-nation linkage have begun to lose their dominance. What is emerging in their place, however, is not a set of new channels based on culture instead of nations. Nor is it a simple realignment of previous flows of nation-based trade or investment.

In my view, what is really at stake is not really which party or policy agenda dominates the apparatus of a nation state's central government. Nor is it the number of new, independent units into which that old center, which has held through the upheavals of industrialization and the agonies of two world wars, is likely to decompose. Nor is it the cultural fault lines along which it is likely to fragment.

Instead, what we are witnessing is the cumulative effect of fundamental changes in the currents of economic activity around the globe. So powerful have these currents become that they have carved out entirely new channels for themselves -- channels that owe nothing to the lines of demarcation on traditional political maps. Put simply, in terms of real flows of economic activity, nation states have already lost their role as meaningful units of participation in the global economy of today's borderless world.

In the first place, these long-established, politically defined units have much less to contribute -- and much less freedom to make contributions. The painful irony is that, driven by a concern to boost overall economic well-being, their efforts to assert traditional forms of economic sovereignty over the peoples and regions lying within their borders are now having precisely the opposite effect. Reflexive twinges of sovereignty make the desired economic success impossible, because the global economy punishes twinging countries by diverting investment and information elsewhere.

The uncomfortable truth is that, in terms of the global economy, nation states have become little more than bit actors. They may originally have been, in their mercantilist phase, independent, powerfully efficient engines of wealth creation. More recently, however, as the downward-ratcheting logic of electoral politics has placed a death grip on their economies, they have become -- first and foremost -- remarkably inefficient engines of wealth distribution. Elected political leaders gain and keep power by giving voters what they want, and what they want rarely entails a substantial decrease in the benefits, services, or subsidies handed out by the state.

Moreover, as the workings of genuinely global capital markets dwarf their ability to control exchange rates or protect their currency, nation states have become inescapably vulnerable to the discipline imposed by economic choices made elsewhere by people and institutions over which they have no practical control. Witness, for example, the recent, Maastricht-related bout of speculation against the franc, the pound, and the kronor. Witness, also, the unsustainable but self-imposed burden of Europe's various social programs. Finally, witness the complete absence of any economic value creation, save for those around the world who stand to benefit from pork-barrel excesses, in such decisions as the Japanese Diet's commitment -- copied from the New Deal policies of Franklin Roosevelt -- to build unnecessary highways and bridges on the remote islands of Hokkaido and Okinawa.

Second, and more to the point, the nation state is increasingly a nostalgic fiction. It makes even less sense today, for example, than it did a few years ago to speak of Italy or Russia or China as a single economic unit. Each is a motley combination of territories with vastly different needs and vastly different abilities to contribute. For a private sector manager or a public sector official to treat them as if they represented a single economic entity is to operate on the basis of demonstrably false, implausible, and nonexistent averages. This may still be a political necessity, but it is a bald-faced economic lie.

Third, when you look closely at the goods and services now produced and traded around the world, as well as at the companies responsible for them, it is no easy matter to attach to them an accurate national label. Is an automobile sold under an American marque really a U.S. product when a large percentage of its components comes from abroad? Is the performance of IBM's foreign subsidiaries or the performance of its R&D operations in Europe and Japan really a measure of U.S. excellence in technology? For that matter, are the jobs created by Japanese plants and factories in the Mississippi Valley really a measure of the health of the Japanese, and not the U.S., economy? The barbershop on the comer may indisputably be a part of the domestic American economy. But it is just not possible to make the same claim, with the same degree of confidence, about the firms active on the global stage.

Finally, when economic activity aggressively wears a national label these days, that tag is usually present neither for the sake of accuracy nor out of concern for the economic well-being of individual consumers. It is there primarily as a mini-flag of cheap nationalism -- that is, as a jingoistic celebration of nationhood that places far more value on emotion-grabbing symbols than on real, concrete improvements in quality of life. By contrast, we don't hear much about feverish waves of Hong Kong nationalism, but the people in Hong Kong seem to live rather well. With much fanfare, Ukraine and the Baltic states have now become independent, but do their people have more food to eat or more energy to keep them warm during the winter or more electricity for light to see by?

An arresting, if often overlooked, fact about today's borderless economy is that people often have better access to low-cost, high-quality products when they are not produced "at home." Singaporeans, for example, enjoy better and cheaper agricultural products than do the Japanese, although ...

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