Nor can the economic state count on coercive solutions to counteract
this trend. It cannot tax what it cannot see. One of the products of
cheap, ubiquitous computing has been the growing, worldwide
availability of strong programs for encrypting data on personal
computers. With such programs, individuals and companies can
communicate and trade beyond the easy ability of governments to
intercept or, if proper precautions are taken, even to be aware that
the transactions exist.
States that cling unrealistically to the models of the past will find
their economies becoming more like that of Italy, where a very
substantial portion of GDP (over 50 percent by common estimates) is
thought to be off the books and beyond the view (and reach) of the
state. This becomes a vicious circle, as the declining collections
force the state to cut services or raise the rates on those who still
pay taxes--usually both at once. Cutting services causes taxpayers to
question the value of their relationship with the government, and
raising rates pushes more taxpayers further into tax avoidance. Both
courses of action further reduce the ability of the state to command
the sort of revenue stream it previously enjoyed.
The reduction of the effective available percentage of GDP to
taxation authorities will accelerate the existing trend toward the
decline of economic states. An economic state's support rests
primarily on its ability to transfer resources from one sector of
society to another. Such states will be subject to stronger pressures
to break apart, as the ability to shift wealth declines and the
social compacts they support grow weaker. Pay-as-you-go services,
such as Social Security in the United States, will be placed under
ever-increasing fiscal pressure. To the extent that loyalty to states
depends on the delivery of such elaborate benefits, economic states
will become decreasingly cohesive.
Some politicians believe that immigration of enough young
wage-earners will make cuts from the retired generation's benefits
needless. This contains a hidden assumption: that young immigrants,
often poorer and from different cultures, will feel sufficient
solidarity with the retirees to continue to support the necessary
high levels of taxation. Without assimilation, this is a dubious
The decline of the economic state will mostly be a quiet and gradual
affair, a revolution made of many individual decisions that, when
taken together and augmented by technical developments like
high-speed air travel and satellite communications, have a cumulative
effect. A Canadian executive may take a job in the United States
because the income tax burden is so much lower. Continental Europeans
might move to London to start a company in order to escape the
"social burden" of regulation in France or Germany. And a company
could outsource software development to India, where the workers
speak English well and are cost-competitive. These are the sort of
individual decisions that will shape the emerging world.
What Lies Ahead
a group of people, the self-described "cryptoanarchists", maintains
that the availability of cyberspace transactions beyond the ability
of the state to monitor or control will destroy the ability of the
state to maintain itself. Those who adhere to this school of thought
foresee an era of essentially chaotic social organization, in which
market forms predominate in both the economy and other relationships.
Although many of the individual premises of that argument have some
validity, the results will not be as extreme as envisioned. Rather
than ending the state, it is more likely that these changes will
substantially transform its nature. Most states will either adapt to
those changes, decline in wealth and importance or, in extreme cases,
split apart. The ongoing technological revolutions mean that states
will depend increasingly on voluntary forms for cohesion. Successful
states are likely to have one or more of the following
*Small populations with a relatively confined geographical spread.
Consensus and coherence are easier to achieve among a limited number
of people in territorially-compact areas. This will favor small
jurisdictions ranging from Caribbean island states to what Kenichi
Ohmae terms "region-states." Jurisdictions larger than that will
probably be structured as federations of civic states.
*Ethnic or religious homogeneity. Religious or ethnic ties form a
strong bond for cohesion. Israelis put up with the inordinate fiscal
and regulatory interventions of their state because to leave Israel
is to leave the community that supports their identity.
*Visible success. Singaporeans put up with their intrusive
government, even when few have any ideological, ethnic or religious
reason to do so, because it has delivered visible prosperity and
security to its inhabitants over their lifetimes.
*Market-ordered economies with scope for individual enterprise.
Citizens will tolerate state interventions in a market economy so
long as they are not visibly harmful, leave room for individual
enterprise, and allow the state to perform more reasonably the
services people require. Citizens have stayed in social democracies
with state-protected corporations and heavy taxation and regulation,
but they tend to flee state-socialist regimes in droves whenever
possible. Swedes have always been free to leave their country, while
East Germans were not. Yet the latter fled in great numbers when the
opportunity arose (to the ultimate demise of their state), while
relatively few Swedes have exiled themselves.
*Low transaction costs for leaving. It is far easier to maintain
cohesion if unhappy persons are permitted and even encouraged to
leave, rather than facing heavy penalties for doing so. Exit taxes
are signs of a loser state. The Soviet Union was rightfully despised
for levying one, and the United States should reconsider its plans to
follow in its wake. Many malcontents will leave; more than a few will
decide to return. And, having returned, they will be less
discontented. Even permanent expatriates should be encouraged to
maintain family and social ties with the home country. Expatriates
can deliver useful business and political contacts even when they are
not paying taxes.
*Serving as the home base for a diaspora. A diaspora provides an
environment for useful commercial relationshipsworldwide. Having even
minuscule territory with sovereign characteristics (such as the
ability to issue passports) makes life far easier for members of a
diaspora. The Internet facilitates personal ties and continued access
to one's home culture.
*Maintaining enough international associations to enjoy the security,
economic and cooperative ties formerly enjoyed only by large states.
Iceland maintains a unique culture and language in a prosperous civil
society with a population of only 270,000 people. As such, it would
seem to be an advertisement for the viability of very small states.
It is not at all clear, however, that it would be nearly as
prosperous, secure or independent if not for its active memberships
in nato, the European Economic Area and the Nordic Council.
*Sharing a positive, self-affirming narrative. Many such narratives
are provided by religious, national or ethnic identity. Israel has a
simple and effective narrative--exemplified in phrases such as "Hear,
O Israel, the Lord thy God, He is One", and "Never Again." Political
entities that do not have ethnic or religious cohesion need a
sophisticated and equally compelling narrative. The United States has
a complex and compelling narrative--exemplified in the phrases, "We
hold these truths to be self-evident" and "the wretched refuse of
your teeming shores." Both have worked. Nations that lose the ability
to sustain a positive narrative, on the other hand, lose coherence
and identity, and thus voluntary citizen support. In the new
environment, such nations will find it difficult to maintain revenue
bases, enforce regulation or defend their citizens.
In this world, civic states that are able to generate an essentially
voluntary adherence on the part of their populations will dominate.
The things of value that civic states provide for their
citizens--principles, identity and a sense of community--are
fundamentally intangible things that, unlike the economic aspects of
sovereignty, cannot become commodities in the world marketplace.
Such civic states are not likely to be able (or want) to form or
sustain large-area organizations with tightly integrated populations
that generate a consensus to pay for and share an elaborate structure
of state-provided and state-mediated benefits consuming high (33 to
60 percent) proportions of the state's GDP. The decline,
decentralization and, in some cases, destruction of economic states
will strengthen civic states by providing impetus to the search for
newer, more flexible and less centralized mechanisms linking
Do larger-scale economic areas like the European Union offer a
potential solution to this perfect storm of the economic state? To
the extent that such unions concentrate on the positive
accomplishments of the Union, the answer is a qualified yes. The EU
has had some success in promoting free movement of people, capital
and ideas throughout its internal area, and facilitating cooperation
in all areas where existing commonalities permit greater cooperation
between similar cultures. A union that would seek to create a common
economic, informational, and residency space for the citizens of its
member-nations could be of benefit.
However, to the extent that the EU has ended up dictating the social
policies of its member-nations, attempted (with some success) to
relocate executive power from national bodies under democratic
scrutiny to unscrutinized bodies on Union-wide levels, and maintained
large cross-regional subsidies to buy assent, it is not only not a
solution, but becomes a new type of problem in itself. The EU has
become to international cooperative organizations what the economic
state has become to the nation-state. By trying to become an economic
state on a wider scale, the EU has increased the amount of
bureaucracy, top-down planning and intervention.