The Arbitrage of the Nation-State
Michael Lind offers a bracing critique of the political fantasies of "cosmopolitanism" -- the postreligious idea of a transcendent humanity that is bound to discover some sort of institutional form that can supersede the nation-state as the primary mode of political organization. In the face of utopian dreams -- from a single world government to more negotiated forms of intergovernmental governance networks -- Lind is no doubt right to reassert the ongoing "preference for the nation-state as the unit of legitimate government," which he rightly points out "remains the most powerful force in global politics for the third century in a row."
Alas, his defense of the salience of the nation-state against the straw man of cosmopolitanism, while elegant and true, is mainly notable for being completely beside the point. For the primary role he accords the imagined enemy of cosmopolitanism obscures the reality of the forces stealthily degrading both the capacity and legitimacy of nation-states, without necessarily replacing it with any functional alternatives.
The real threat to national sovereignty is not cosmopolitan aggregation of power into a higher form by supranational state actors, but rather the increasing impotence and fragmentation of nation-states in the face of threats from subnational non-state actors. Specifically, nation-states are being undermined simultaneously (1) from below, by transnational criminal organizations (TCOs), and (2) from above, by transnational financiers who have innovated means to capture or to evade national regulatory apparatuses. Unlike the cosmopolitans, these actors do not have as a goal the usurping of the nation-state either individually or as some form of conspiratorial group. Rather, degrading the capacity and legitimacy of their "host" nation-states is simply an emergent, unintended, and indeed unwanted byproduct of their activities.
What both these classes of actors are doing is exactly what legitimate international businesses have always done, namely engaging in arbitrage. Their businesses are built on taking advantage of differences in regulatory arrangements and prices for land, labor, capital, and technology in different locations: buy cheap in one place, sell dear in another. The technologies that underpin the ability to engage in this arbitrage -- synchronized logistics and transportation, telecommunications and the Internet, instant electronic payment systems -- are the underlying drivers of what we today refer to as globalization.
We're familiar with how this works for legitimate businesses. Take the world's most valuable public corporation, Apple. Its products are famously stamped "designed in California," where tightly enforced intellectual property protections allow it to develop and patent elegant computers, tablets, music devices, and so on. The actual manufacture of its products, however, takes place at factories in China, where much lower wages and much laxer environmental regulations (to say nothing of enforcement) enables production at a fraction of US costs. Globalization in this sense is nothing more than the macro-label we put on a million acts of arbitrage by individual business people.
This well-known example also points to a stark contrast between the reality of the globalized world and Lind's theory of enduring nation-state power. Having outsourced all the manufacturing of its highly designed products, Apple is a poster-child for the deindustrialization of the US economy. Lind however claims that, "in a world in which nation-states are likely to continue to retain sovereignty and in which economic nationalism continues to reign, trade and investment policies that presuppose a borderless world make no sense at all." Yet it is these policies that are not only the mantra of the global corporate lobby in the United States as well as elsewhere, but are also enshrined in the one supranational body with real power, the World Trade Organization.
If the question of how sovereign states can deal with the domestic problems caused by outsourced manufacturing is vexing, it is even less clear how governments may be able to restrain the activities of either TCOs or international financial actors.
Consider first TCOs, whose scale, profits, and power have exploded over the last two decades.1 Like mainstream transnational corporations, these criminal organizations are also engaged in arbitrage, in this case on the basis of both moral differences in attitudes toward different sort of activities such a drug consumption, prostitution, human trafficking, and wildlife harvesting, as well as the varied capacity of different governments to enforce prohibition or regulation.
For example, consider US efforts to ban drug consumption on its soil. While the goal has been to stop drug consumption by Americans, the practical result of this policy has been not to end consumption but merely to increase the price of both producing and consuming drugs inside the United States. That, in turn, has created a huge arbitrage opportunity for criminal entrepreneurs, who produce the drugs in South and Central America (where counternarcotics enforcement remains spotty at best) and then use the infrastructure of globalization to transport the drugs to the United States, where their value typically jumps by an order of magnitude as soon as they cross the border. In other words, America's exercise of its "sovereignty" has merely increased the global profit opportunities for TCOs. And the same logic applies to every state and globalized illicit industry: when states attempt to assert their sovereign right to impose their norms, it merely increases the arbitrage opportunities (and hence incomes) of transnational criminal entrepreneurs.
The huge increase in profitability of the North American drug trade has in turn spawned sanguinary turf wars among rival TCOs of such unprecedented scale that they are fundamentally undermining the legitimacy of regional governments not only in Mexico but across Central America. In short, criminal exploitation of the infrastructure of globalization has created a fundamental dilemma for states attempting to combat TCOs: like an animal stuck in a tar pit, the harder an individual nation-state thrashes about attempting to exercise its sovereignty against such criminal organizations, the deeper it sinks either itself or its neighbors into the postsovereignty mire.
International finance's challenge to the nation-state system, on the other hand, is somewhat different. Liberal internationalism in fact presumes a shared nationalistic interest on the part of financial and governmental elites in the continuation of state sovereignty and agency, which historically underpinned norms against an excessively predatory approach to policy influence on the part of financiers. Alas, this set of norms has been replaced by a politically entrepreneurial "what have you done for me lately?" mentality among financiers, whose international mobility and personal wealth has left them largely detached from the consequences of destroying even their own host nation-states. As with the TCOs, arbitrage has been at the core of the dynamic. Global financial elites from the 1970s forward have used the threat of taking their baubles elsewhere to convince national financial regulators to eliminate rules that inhibit their freedom of action. If national regulators didn't accede to the deregulatory demands of the bankers, the bankers threatened to take their business elsewhere. As regulators incrementally gave in to these demands, the result was an orgy of credit creation and risk-taking by too-big-to-fail institutions, setting the stage for the worst global financial calamity in several generations. In other words, the threat of regulatory arbitrage set the stage for the regulatory capture that underpinned the recent global financial crisis.
As former IMF chief economist Simon Johnson has pointed out, the bottom line is that "crony capitalism," once considered a pathology of the developing world, has become normalized across the entire global order. Lind's argument that "major global banks turned to their national governments for bailouts following the 2008 financial crisis" therefore proves the opposite of what he suggests: the governments of the nation-states hosting these banks presented themselves (not inaccurately) as having no choice -- which is to say no sovereignty -- in the face of bailout demands from bankers and international financial markets. (The exceptions, like Iceland, are trivial.) Furthermore, the bailouts in many cases have bankrupted the states and delegitimated those very governments, while allowing the bankers to continue to prosper. If the course of financial crisis has been an example of the sovereign nation-state in action, one must wonder what the opposite would look like.
Here, then, are the true threats to the viability of the liberal international order of nation-states. While Lind is right that governments needn't worry about having their sovereignty usurped any time soon by some supranational global public-goods providing institutions, they do face a long term existential threat from TCOs like the Chinese Triads or the Mexican cartels, on the one hand, and the private equity and bond market vigilantes, on the other -- that is, on non-state actors who are focused on enriching themselves and who have little solidarity with their host states. The current national and international political order means that there is little prospect for either of these sorts of decentralized and disaggregated bad actors getting reined in by states -- and advancing technology of global finance and communications technologies are only making it less possible.
Which brings us to the final irony about Lind's argument. If the only real way to stop the dynamic we've described here is to eliminate the arbitrage opportunities that global businesses -- legitimate, criminal, and somewhat shadowy -- are using to enrich themselves, how is this to be accomplished? It appears this can only take place through careful transnational coordination and organization across governments, underpinned by a democratic shift in citizen values away from instinctive nationalism that empowers governments to enter into such agreements. In sum, saving the liberal internationalism that Lind celebrates may well require just what Lind dismisses: a new kind of cosmopolitan political order. Whether any such order is likely to emerge, however, is a question about which we and Lind probably concur.
Nils Gilman is a consultant with Monitor 360 and author of the forthcoming Deviant Globalization.
Michael Costigan is a consultant with the Global Business Network.
1. Nils Gilman, Jesse Goldhammer, and Steven Weber. Deviant Globalization: Black Market Economy in the 21st Century. New York: Continuum, 2011. (back)
When the eurozone was on the brink last fall, Michael Lind's summer Breakthrough Journal essay, "Against Cosmopolitanism," appeared prescient. What just a few years ago seemed to be the permanent alignment of interests between the radically different economies of Germany and Greece was replaced by an awareness of the currency union's fragility and contingency. Economic integration had outpaced political integration. The nation-state wasn't giving way to global governance. It was prevailing everywhere.
Not so fast, say Ulrich Beck, one of the world's most influential living sociologists and author of the landmark 1986 tome, Risk Society, and Nils Gilman of Monitor 360 and Michael Costigan of Global Business Network. Cosmopolitanism may not be up to snuff but the nation-state isn't doing so hot either, they argue in a new Breakthrough Forum we publish today.