The demise of the Nation State?
Vito Tanzi

In all aspects, globalization and accompanying technological developments are generating a gradual but major revolution in economic activities and economic policies. Economic activities that in the past had, often, characteristics that linked them to specific places (for example, through the use of local inputs such as coal or energy or through other factors) and that, over the years, might have progressively become national in character, are becoming global. So far, this change is more apparent in some areas, such as financial markets, and less so in other areas, such as labor markets but, to some extent, it is affecting most areas.

Economists continue to use traditional concepts such as “traded” and “nontraded” goods although, to some extent, all goods are now traded. If the goods or services do not go to the places where the buyers are, then the buyers go where the goods or services are. For example, in the past health services were mostly nontraded. Now they are becoming traded goods because, with increasing frequency, patients from many countries are going to hospitals and doctors in foreign countries to receive specialized medical treatment. An increasing number of hospitals are specifically aiming their services at distant, rich customers. In time, the market of highly specialized medical services may become truly global. In such a case, the regulations imposed on medical treatment by the authorities of the countries from which the patients come will have little effects on the treatment that the patients receive. Already, medicines not authorized in one country, can easily be obtained in other countries The same is happening in education. Some of the best schools are attracting students from all over the world. A large proportion of the students in the U.S. graduate schools is made up of foreign students. This process will accelerate when education and medicine come to rely more on available modern technologies.2

The revolution in information technology, which has dramatically reduced the cost of transmitting or accessing information and has increased the speed at which information can be transmitted, has eliminated or is eliminating the importance of location for many activities.3 The computer and the Internet network have given enormous freedom to economic operators as to the locations from which they operate. For example, financial market operators no longer need to live in major financial centers such as New York London, Frankfurt, or Tokyo. They can and do now operate from almost anywhere.

The physical content of much of what is produced and sold in the market is also changing. An increasing share of the currently “produced” value (such as software) does not have significant physical or tangible properties. Or putting it differently, the value of the unprocessed physical input for many of the commodities or services produced is now often a small or insignificant share of the market value of these commodities or services. In part, this is a consequence of the growing role that knowledge and information play in the modern world. Ideas and knowledge have replaced tangible resources.4 Now, more than in the past, the well being of a given area depends far more on the human capital of the individuals that live in that area than was the case in the past when natural resources were far more important. Knowledge and information now contribute a significant part of the value of many traded goods. Even when these goods have tangible characteristics, transportation costs have fallen so much that location has become much less important than it used to be in determining the places where they are produced.

Enterprises have been adapting to and exploiting this new environment. Some enterprises whose activities had initially been tied to specific cities and, as they grew, had become national are now truly multinational.5

They may acquire raw material in country A, process it in country B, and produce a final product in country C. The management of the enterprises may be located in yet another country, D. The capital and the know-how may come from still other countries. Research and development may be carried out in various other places, and accounting and data processing work may be done elsewhere.6

As a result of the developments described above, there is a growing divergence between the political areas represented by the nation states and the economic areas of particular markets. The latter are progressively less identified with specific nation states. When enterprises operated only or mostly in one country, that country's policies were of overwhelming importance for the enterprises. When enterprises become multinational, the policies of specific countries become less important. This, of course, was not so when most countries were relatively close and when markets and nations largely coincided. See Ohmae (1995).

Many new markets are no longer constrained by political frontiers and have developed in economic areas that encompass regions from different countries. Some economic regions may have more in common with a particular market area in another country than with the country to which they legally belong.7 In some cases, the relevant market is fast becoming the whole world.

Globalization and technological developments have brought many benefits to mankind. Because of it:
(a) world resources, including savings, are better allocated, therefore, leading to increases in world standards of living;
(b) individuals enjoy a much greater range of goods and services at lower prices than they did in the past;
(c) many individuals can now travel to faraway places because of the opening of frontiers and the fall in the cost of travel;
(d) the amount and the range of information available to them has increased enormously, and the cost of getting information has fallen dramatically. Thus, the stock of knowledge of the world is more easily available to all those who can access it.

However, globalization and related technological developments have also brought some costs and problems. For example:
(a) it has been argued that globalization has reduced the relative wage of unskilled workers in industrial countries, thus leading to more uneven income distributions in these countries. See, inter alia, Rodrik (1997) and Wood (1995);
(b) the tremendous increase in the volume of trade has made it more difficult for border authorities to scrutinize it for illegal imports, such as illicit drugs and weapons,8
(c) globalization has reduced the discretion that countries have in imposing the tax burden and the tax structure that they wish. See Tanzi (1995 and 1996),
(d) it has increased the likelihood that negative externalities (i.e., costs) will spill over to other countries. Think of the potential for exporting products with potential health hazards, including nuclear materials;9
(e) unrestrained movements by individuals and goods, and penetration by large numbers of individual into previously virgin areas (rainforests, etc.) have increased the chance that unknown and dangerous viruses or bacteria could move out of these closed areas and contaminate the rest of the world. The Ebola outbreak and the potential effect of that outbreak on the world are cases in point;
(f) globalization has increased the likelihood of international financial crises through “herd” and “contagion” effects; 10
(g) it has also made possible an acceleration of the rate of growth of poor countries by allowing them to exploit the stock of knowledge available to advanced countries and the markets that these countries provide. Without globalization, there could not have been an East Asian miracle growth. While growth is a desirable objective, poorer countries are likely to be less concerned about environmental spillovers that, in the absence of corrective measures, tend to accompany growth. Some of these problems are purely domestic so that the countries' choices between faster growth and cleaner environment are their concern.

Others, however, are international in nature (e.g., acid rain, global warming). Thus, in a globalizing world, fast growth by developing countries may aggravate some of these problems. Just imagine the effect on the environment if two billion Chinese and Indians bought cars and refrigerators,11

The important point of the above examples is that in all its ramifications including technological developments globalization is contributing to the transformation of some national problems into international ones. Actions that in the past had mostly domestic effects, now tend to have larger effects on other countries. These problems may bring frictions, and eventually even open conflict, between countries unless they are somehow contained.

Pigouvian economics taught us that externalities may justify public intervention.12 If successful, this intervention would reduce the negative externalities or, at least, would make those who generate them bear the cost. This is, for example, the aim of the “polluter pays principle” which could be applied within a country or across countries. Public intervention uses instruments such as taxes, subsidies, and regulations to achieve the above objective. However, these actions can be taken only by a government within its national territory. When externalities or spillovers cross frontiers, there is no world government that can deal with them. And, it is often difficult for independent countries to work out solutions which are acceptable to all and enforced by all. A conflict can be seen developing over time between the increasing internationalization of markets and of many externalities and spillovers and the lack of a political body with the mandate and the power to deal with them in a satisfactory manner.

A keen observer must have noticed the growing role that international institutions (such as the IMF, the OECD, the WTO, the WHO, the World Bank, the BIS, the United Nations, and so on) are playing in connection with some issues with international ramifications. For example, the IMF attempts to reduce the international effects generated by poor macroeconomic policies on the part of particular countries. The WTO attempts to reduce the international effects associated with particular actions linked to trade. The EU and the OECD are trying to reduce some of the international effects associated with unfair tax competition. This ongoing process is somewhat messy, random, and, at times, confused. It continues to be opposed by groups who feel that these institutions are inefficient; or that national sovereignty is being eroded by them; or, even, that the existence of these institutions produces moral hazards. European countries have created a supranational political institution, the European Union, which in many areas (such as regulations and monetary policy) will operate as a genuine supranational government.

These international institutions do not have the same legal power as national governments so that their ability to deal with cross-frontier spillovers is constrained and limited. However, their actions may still be effective in influencing the behavior of particular countries and in reducing the cross-frontier spillovers mentioned above. One should think of these institutions as clubs which are joined at the discretion of the members. On balance, most countries find it difficult or disadvantageous not to join these institutions and, once they are in, they become subject to increasing education and pressures to behave according to the agreed norms.13

2 The University of Phoenix is now one of the largest American universities, is fully accredited, and relies almost exclusively on instruction provided through the Internet. Oxford has just announced that it will start giving some degrees through the Internet. It is conceivable that in the future some medical treatment may be received from foreign doctors through the use of specialized communication channels.
3 However, for some activities clustering in a specific area may have become more important. This is the phenomenon of Silicon Valley in California or of Biella for textiles in Italy.
4 Probably the total weight of each million dollars of GDP produced in advanced countries has been falling especially if inputs in the form of energy products are excluded. This may be a reason why the prices of many commodities have been falling.
5 See, for instance, Parmalat and Benetton in Italy.
6 The data processing work regarding scheduling and reservations of some U.S. airlines in now done routinely in India.
7 See, for example, the border region between Mexico and the United States. In many cases, almost 100 percent of the output of that region crosses the frontier. See also the market for Nokia products in Finland.
8 Trade has been growing at about twice the rate of growth of world GDP.
9 The experience with the mad cow disease is a case in point.
10 See the experiences with the Mexican and the East Asian economic crises.
11 Also imagine many relatively poor countries getting access to the technology and the materials that would allow them to make atomic bombs.
12 But see Coase (1960).
13 It is interesting that with all the criticisms of the IMF in recent years, practically all countries have found it convenient to join that institution and none has threatened to leave it.