Notes on Richard Rosecrance, "The Rise of the Virtual State"

I. Main argument

A. Countries are downsizing in function

1. Capital, labor, and information are mobile; land is no longer important.

2. Focus now is on share of the world market.

3. So, like corporations which have dispersed their production globally, now states need to "downsize" (reduce) territorially-based production.

B. New role for the state

1. Not command resources

2. Rather, negotiate with foreign and domestic capital and labor to get them into our economic sphere, in order to stimulate growth.

3. Like multinational corporation headquarters, determines overall strategy, invests in its own people; does not amass production capability

4. Contracts out functions.

C. Economy reliant on mobile factors of production.

1. coordinate, stimulate and direct foreign investment by its enterprises

2. production doesn't have to take place at home

3. plays host to capital and labor of other countries

4. focus on: high value manufactured goods, design, marketing, finance

II. How did the virtual state come about? Rise of the trading state

A. Industrial revolution means land not so important

1. capital and labor are key; and they are mobile

2. Post WWII, rise in prices of international services outpaced rise in prices for manufactured goods

B. 1970s-80s: Trade becomes fundamental purpose of states, not territorial expansion (Japan, Germany, East Asia, small European states)

C. 1980s-1990s: International competition increases

1. Result: corporate downsizing. Leads to increased efficiency, more output for less labor.

2. Rise of virtual corporation

a) research, development, marketing, finance as Headquarters functions

b) little if any manufacturing capacity (contracted out)

"Head but no body": Ultimate in corporate downsizing

III. Virtual state

A. Downsizing as index of corporate efficiency and productivity gains

1. The most efficient economies are those with minimal production (for example Hong Kong)

B. Political and economic strategies should be:

1. downsizing: limited production capacity

2. relocation of production. For example

a) Switzerland: 98% of Nestle's production is abroad;

b) Holland, most goods are produced abroad;

c) US: 20% of US corporations' production is abroad.

3. focus on high-value-added-services;

a) services make up 70% of US GDP, 63% of high value category

(services = banking, software, media, telecommunications, accounting, insurance, education, lawyers, entertainment, etc.)

C. World is increasingly made up of "head" and "body" countries

1. Australia, Canada: "head" countries

2. China, India, Russia: future "Body" countries, production, manufacturing

But financed from outside (foreign investment)

IV. Vestiges of Serfdom: How to improve comparative advantage

A. Strategy to develop is to improve comparative advantage through Education: develop highly skilled labor force: "Human capital"

1. Third World: way to overcome comparative advantage limits of past (raw materials, low-tech manufactures)

2. US: Can influence/ reshape comparative advantage: Focus on first 12 years of education.

a) upgrade teaching standards

b) raise pay for teachers

V. Reduced danger of international conflict

A. Interdependence / interconnectedness of production means less likelihood of war

B. In international arena with no overarching government, economic substructure becomes very important to determine war/peace.

1. If elements of production are less tangible, war for territory doesn't pay

2. But: Population increases make territory more important?

a) technological development will resolve problems of scarcity

VI. Civic crisis

A. Rise of virtual state leads to crisis of democracy

1. Political solutions of past (political reform, economic restructuring) don't work

2. State doesn't have powers it had in past, can't deal with global problems

B. State only one of many players in international marketplace

1. Will have to negotiate, attract foreign capital/investment

2. To attract foreign investment, must have:

a) low inflation

b) rising productivity

c) flexible and trained labor force

3. This will conflict with domestic interests, who would block correct strategy, demand more government spending, more benefits

4. But: domestic policies can't solve these problems. More government spending would lead to insecurity over jobs, welfare, medical care

C. Need Internationalization

1. US citizens need to know more about world

2. Middle managers and workers expect too much, learn too little

3. Displaced workers and businesspeople must be willing to look abroad for opportunities.