The Rise of the Virtual state Richard Rosecrance TERRITORY BECOMES PASSE AMID THE supposed clamor of contending cultures and civiliza- tions,a new reality is emerging.The nation-state is becoming a tighter,more vigorous unit capable of sustaining the pressures of worldwide competition.Developed states are putting aside military, political,and territorial ambitions as they struggle not for cultural dominance but for a greater share of world output.Countries are not uniting as civilizations and girding for conflict with one another. Instead,they are downsizingin function if not in geographic form.Today and for the foreseeable future,the only international civilization worthy of the name is the governing economic culture of the world market.Despite the view of some contemporary ob- servers,the forces of globalization have successfully resisted partition into cultural camps. Yet the world's attention continues to be mistakenly focused on military and political struggles for territory.In beleaguered Bosnia, Serbian leaders sought to create an independent province with an al- legiance to Belgrade.A few years ago Iraqi leader Saddam Hussein aimed to corner the world oil market through military aggression against Kuwait and,in all probability,Saudi Arabia;oil,a product of land,represented the supreme embodiment of his ambitions.In Kashmir,India and Pakistan are vying for territorial dominance over RICHARD RosECRANCE is Professor of Political Science and Director of the Center for International Relations at the University of California, Los Angeles. [45] Copyright 2001.All Rights Reseved
Richard Rosecrance a population that neither may be fully able to control.Similar rival- ries beset Rwanda and Burundi and the factions in Liberia These examples,however,look to the past.Less developed coun- tries,still producing goods that are derived from land,continue to covet territory.In economies where capital,labor,and information are mobile and have risen to predominance,no land fetish remains. Developed countries would rather plumb the world market than ac- quire territory.The virtual state-a state that has downsized its terri- torially based production capability-is the logical consequence of this emancipation from the land. In recent years the rise of the economic analogue of the virtual state-the virtual corporation-has been widely discussed.Firms have discovered the advantages of locating their production facilities wherever it is most profitable.Increasingly,this is not in the same lo- cation as corporate headquarters.Parts of a corporation are dispersed globally according to their specialties.But the more important devel- opment is the political one,the rise of the virtual state,the political counterpart of the virtual corporation. The ascent of the trading state preceded that of the virtual state. After World War II,led by Japan and Germany,the most advanced nations shifted their efforts from controlling territory to augmenting their share of world trade.In that period,goods were more mobile than capital or labor,and selling abroad became the name of the game.As capital has become increasingly mobile,advanced nations have come to recognize that exporting is no longer the only means to economic growth;one can instead produce goods overseas for the foreign market. As more production by domestic industries takes place abroad and land becomes less valuable than technology,knowledge,and direct investment,the function of the state is being further redefined.The state no longer commands resources as it did in mercantilist yester- year;it negotiates with foreign and domestic capital and labor to lure them into its own economic sphere and stimulate its growth.A na- tion's economic strategy is now at least as important as its military strategy;its ambassadors have become foreign trade and investment representatives.Major foreign trade and investment deals command executive attention as political and military issues did two decades [46] FOREIGN AFFAIRS Volume 75 No.4
The Rise of the Virtual State ago.The frantic two weeks in December 1994 when the White House outmaneuvered the French to secure for Raytheon Company a deal worth over $1 billion for the management of rainforests and air traffic in Brazil exemplifies the new international crisis. Timeworn methods of augmenting national power and wealth are no longer effective.Like the headquarters of a virtual corpora- tion,the virtual state determines overall strategy and invests in its people rather than amassing expensive production capacity.It con- tracts out other functions to states that specialize in or need them.Imperial Great Rather than amass Britain may have been the model for the nineteenth century,but Hong Kong will land,capital,and labor, be the model for the zist. virtual states set strategy The virtual state is a country whose economy is reliant on mobile factors of and invest in people. production.Of course it houses virtual corporations and presides over foreign direct investment by its enter- prises.But more than this,it encourages,stimulates,and to a degree even coordinates such activities.In formulating economic strategy, the virtual state recognizes that its own production does not have to take place at home;equally,it may play host to the capital and labor of other nations.Unlike imperial Germany,czarist Russia,and the United States of the Gilded Age-which aimed at nineteenth-century omnicompetence-it does not seek to combine or excel in all eco- nomic functions,from mining and agriculture to production and distribution.The virtual state specializes in modern technical and research services and derives its income not just from high-value manufacturing,but from product design,marketing,and financing. The rationale for its economy is efficiency attained through produc- tive downsizing.Size no longer determines economic potential. Virtual nations hold the competitive key to greater wealth in the 2ist century.They will likely supersede the continent-sized and self-sufficient units that prevailed in the past.Productive special- ization will dominate internationally just as the reduced instruction set,or"RIsc,"computer chip has outmoded its more versatile but slower predecessors. FOREIGN AFFAIRS July/August 1996 [47] Copyright 2001.All Rights Reseved
Richard Rosecrance THE TRADING STATE IN THE PAST,states were obsessed with land.The international sys- tem with its intermittent wars was founded on the assumption that land was the major factor in both production and power.States could improve their position by building empires or invading other nations to seize territory.To acquire land was a boon:a conquered province contained peasants and grain supplies,and its inhabitants rendered tribute to the new sovereign.Before the age of nationalism,a cap- tured principality willingly obeyed its new ruler.Hence the Hapsburg monarchy,Spain,France,and Russia could become major powers through territorial expansion in Europe between the sixteenth and nineteenth centuries. With the Industrial Revolution,however,capital and labor assumed new importance.Unlike land,they were mobile ingredients of pro- ductive strength.Great Britain innovated in discovering sophisticated uses for the new factors.Natural resources-especially coal,iron,and, later,oil-were still economically vital.Agricultural and mineral re- sources were critical to the development of the United States and other fledgling industrial nations like Australia,Canada,South Africa,and New Zealand in the nineteenth century.Not until late in the twenti- eth century did mobile factors of production become paramount. By that time,land had declined in relative value and become harder for nations to hold.Colonial revolutions in the Third World since World War II have shown that nationalist mobilization of the population in developing societies impedes an imperialist or invader trying to extract resources.A nation may expend the effort to occupy new territory without gaining proportionate economic benefits. In time,nationalist resistance and the shift in the basis of produc- tion should have an impact on the frequency of war.Land,which is fixed,can be physically captured,but labor,capital,and information are mobile and cannot be definitively seized;after an attack,these resources can slip away like quicksilver.Saddam Hussein ransacked the computers in downtown Kuwait City in August 199o only to find that the cash in bank accounts had already been electronically transferred. Even though it had abandoned its territory,the Kuwaiti government could continue to spend billions of dollars to resist Hussein's conquest. [48] FOREIGN AFFAIRS Volume 75 No.4
The Rise of the Virtual State Today,for the wealthiest industrial countries such as Germany,the United States,and Japan,investment in land no longer pays the same dividends.Since mid-century,commodity prices have fallen nearly 40 percent relative to prices of manufactured goods.1 The returns from the manufacturing trade greatly exceed those from agricultural exports.As a result,the terms of trade for many developing nations have been deteriorating,and in recent years the rise in prices of in- ternational services has outpaced that for manufactured products. Land prices have been steeply discounted. Amid this decline,the 197os and 198os Before downsizing,the brought a new political prototype:the trading state.Rather than territorial ex- typical American firm pansion,the trading state held trade to be had headquarters, its fundamental purpose.This shift in na- tional strategy was driven by the declining factories,and land. value of fixed productive assets.Smaller states-those for which,initially at any rate,a military-territorial strategy was not feasible-also adopted trade-oriented strategies. Along with small European and East Asian states,Japan and West Germany moved strongly in a trading direction after World War II. Countries tend to imitate those that are most powerful.Many states followed in the wake of Great Britain in the nineteenth century; in recent decades,numerous states seeking to improve their lot in the world have emulated Japan.Under Mikhail Gorbachev in the 198os, even the Soviet Union sought to move away from its emphasis on mil- itary spending and territorial expansion. In recent years,however,a further stimulus has hastened this change.Faced with enhanced international competition in the late 198os and early 199os,corporations have opted for pervasive downsiz- ing.They have trimmed the ratio of production workers to output, saving on costs.In some cases productivity increases resulted from prun- ing of the work force;in others output increased.These improvements have been highly effective;according to economist Stephen Roach in a See,for example,Enzo R.Grilliand Maw Cheng Yang,"Primary Commodity Prices, Manufactured Goods Prices,and the Terms of Trade of Developing Countries:What the Long Run Shows,"The World Bank Economic Review,1988,Vol.2,No.1,pp.1-47. FOREIGN AFFAIRS July/August 1996 [49] Copyright 2001.All Rights Reseved