The nation state has become a dysfunctional unit for understanding and managing the flows of economic activity that dominate today's borderless world. Policymakers, politicians and corporate managers would benefit from looking at "region states"--the globe's natural economic zones--whether they happen to fall within or across traditional political boundaries. With their efficient scales of consumption, infrastructure and professional services, region states make ideal entryways into the global economy. If allowed to pursue their own economic interests without jealous government interference, the prosperity of these areas will eventually spill over.
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The view that nations compete against each other like big corporations has become pervasive among Western elites, many of whom are in the Clinton administration. As a practical matter, however, the doctrine of "competitiveness" is flatly wrong. The world's leading nations are not, to any important degree, in economic competition with each other. Nor can their major economic woes be attributed to "losing" on world markets. This is particularly true in the case of the United States. Yet Clinton's theorists of competitiveness, from Laura D. Andrea Tyson to Robert Reich to Ira Magaziner, make seemingly sophisticated arguments, most of which are supported by careless arithmetic and sloppy research. Competitiveness is a seductive idea, promising easy answers to complex problems. But the result of this obsession is misallocated resources, trade frictions and bad domestic economic policies.
Not long ago, the expansion of free trade worldwide seemed inevitable. Over the last few years, however, economic barriers have started to rise once more. The forecast for the future looks mixed: some integration will probably continue even as a new economic nationalism takes hold. Managing this new, muddled world will take deft handling, in Washington, Brussels, and Beijing.
After the Cold War, everyone believed the world was going capitalist in a hurry. Developing countries followed America's advice to them--"free your markets and strengthen your money." In fact, the gains from both free trade and sound money were overstated. But the force of conventional wisdom ostracized cautious voices. The result was a speculative binge in emerging markets. With the Mexican crisis, the bubble has burst. Politicians in developing countries could continue their reforms only so long as investment poured in. Sooner or later, a reality check was inevitable. Disappointing growth and statist retrenchment may lie ahead.