World 3.0

by Pankaj Ghemawat

  We also need to reconsider the distances between locations—and, in particular, to account for more than just miles or kilometers. While there are often similarities among geographic neighbors, the CAGE framework reminds us of the need to go beyond geographic distance to an expanded conception of spatiality that also accounts for cultural, administrative, and economic differences or distances. And it is important to keep in mind both unilateral aspects of difference, such as GDP per capita (which can be measured against a common yardstick), and bilateral ones, such as linguistic differences or geographic distance (which are relational in nature). Accounting for all these aspects of distance greatly enriches mental maps of the world: ranking schemes and uniform depictions of countries in geographic space give way to networks in which countries of varying sizes are subject to different degrees of separation depending on the dimension of distance being considered.

  Table 12-2: Policy levers for integration within countries

  Cultural

  Administrative

  Geographic

  Economic

  Exploit language bridges

  Encourage interregional networks/exchanges students

  Promotional efforts

  Harmonize:

  foreign investment promotion to avoid races to the bottom

  public procurement processes

  health, safety, environmental standards

  Simplify cross-border regulations and paperwork

  Bilateral/multilateral summits

  share best practices in government operations

  review regional institutions

  Improve regional transportation/communications infrastructure

  Create an efficient energy network

  Coordinate infrastructural investment

  Improve interregional market linkages

  employee mobility

  capital markets

  information about interregional flows

  Exploit scale/scope

  business networks/events

  joint embassies

  process for upgrading cross-border clusters

  Collect and disseminate information about interregional flows

  Source: Pankaj Ghemawat, “The House of Growth: A Tale of Two Sectors,” in Competitiveness in Catalonia, report prepared for Foment del Treball (with X. Vives), May 2009.

  Having emphasized the importance of stretching things out in space, I should add that the nonlinearity of many distance effects makes them hard to account for precisely. So for many purposes, it may make sense to think in terms of basic scope categories rather than specific distance calculations. One common expedient is to distinguish between local, regional, and global spatial scales and to model their effects at that discretized level instead of trying to trace out distance effects as continuous functions of distance. Nongeographic groupings based, for example, on linguistic similarities or on whether countries are part of the same regional trading bloc can also be used in the same way.

  Once you have a good sense of the real distances between countries, it's important to think through how particular kinds of international linkages or flows are affected by particular kinds of distance. Take a simple example: the sensitivity to, say, a thousand miles of geographic distance is obviously much greater when traveling by car than by airplane. Distance sensitivity—best thought of at the level of particular dimensions or subdimensions of distance—has to be calibrated for different types of cross-border activity. And for purposes of public and especially business policy, the analysis usually has to drill down to the industry level to be useful.

  Finally, don't forget about internal distance. The bulk of life in our semiglobalized world still takes place within national borders, and there are large gains to be achieved in many countries from increasing levels of integration between provinces, ethnic groups, language communities, and so on. In addition, faced with the same external realities, countries, companies, or individuals differ greatly in how well they engage with them. So internal distance is relevant at each of these levels, although it takes different forms.

  To summarize, uncovering and taking advantage of the opportunities afforded by World 3.0 requires recognizing what is different about your situation, remapping the world from your own perspective, understanding the CAGE factors that underlie observed patterns, calibrating distance sensitivity (whether on a discrete or a continuous basis), and remembering internal as well as external distance. As these recommendations imply, World 3.0 is a complex place. But it's that diverse and messy reality that also gives rise to the enormous opportunities associated with crossing borders. You should, at this point, have a broad view of these possibilities and, I hope, a bit less irrational fear about them. Now, it's time to continue elaborating the path toward World 3.0 from the perspectives of countries, companies, and ordinary people—perspectives that will allow further customization of the broad recommendations in this section.

  Chapter Thirteen

  Countries in World 3.0

  THE PREVIOUS CHAPTER explained that World 3.0 typically affords policy makers broad discretion in the choices they can make and the paths they can pursue toward prosperity. It also articulated six propositions to help policy makers continue to open up while addressing market failures and fears. This chapter pushes further with the part of this agenda that involves opening up or integrating across borders—and leans particularly heavily on the CAGE framework and the law of distance to do so.

  While cross-border integration could be looked at from the perspective of any polity with well-defined borders, this chapter takes a country-level perspective, that is, it focuses on national borders. As discussed in chapter 3, national borders are much more of an impediment to cross-border flows than provincial borders—although the latter should not be ignored (see table 12-2). And while there is much interest in “global cities” that are supposed to be getting increasingly connected to each other and detached from everything else, the data suggest that isn't really happening: national ties, in particular, continue to matter a great deal.1 In any case, the principles for country-level analysis developed in this chapter also apply to larger and smaller geographic units. And in actual applications, analysis at more than one level may be warranted.

  Improving international integration involves businesses—which do much of the heavy lifting—and individuals as well as national governments and international institutions. As a result, the ideas presented in this chapter should also be of interest to leaders in the business and nonprofit sectors as they think through how to leverage the unique potential of particular places to further the aims of their stakeholders. And individuals will probably want to apply these ideas to the countries or country relationships of particular interest to them.

  This chapter brings country analysis in World 3.0 to life by looking at three cases in some detail: the tiny, rich European principality of Andorra; the poor West African giant of Nigeria; and the pairing of the world's largest and second-largest economies, the United States and China. The diversity of these cases helps illustrate a range of possible country strategies in response to very different circumstances. At the same time, though, one broad approach can be used across them to think about country strategy and, specifically, country integration. This robust approach is summarized after the individual case studies.

  Anxious in Andorra

  Landlocked Andorra, surrounded by Spain and France but separated even from them by the Pyrenees, is, roughly speaking, the world's tenth smallest country—and its tenth-richest. Yet there was a great deal of anxiety in Andorra in 2010, when I did a review of the country's competitiveness for the local business association. Tourism and related business drive 80 percent of Andorra's economy, and overnight tourist arrivals had declined every year for seven years.2 Andorra's financial services industry (16 percent of GDP) was under pressure as a result of Andorra's being forced to comply with OECD guidelines for tax havens.3 And while unemployment was still in the single digits, it had been zero only a few yea
rs earlier, when contract labor had to be imported to meet requirements.4

  To understand what to do about these anxieties, it is useful to begin by understanding what is distinctive about Andorra apart from its very small size. Andorra's trade to GDP ratio of roughly 100 percent is not remarkably high for a very small country. What is remarkable is that its merchandise imports are almost twenty times as large as its merchandise exports, resulting in a merchandise deficit in excess of 40 percent of GDP.5 Merchandise is shipped into Andorra to take advantage of the country's low tax rates, which attract shoppers, particularly from Spain and to a lesser extent France, who carry the merchandise back to their home countries—with the purchases counting as service rather than merchandise exports on that last leg. As a result of such shopping tourism and, to a lesser extent, its ski resorts, Andorra attracts more than a hundred times as many international tourists annually as it has residents, which amounts to several hundred times the average intensity of international tourist arrivals around the world.6 Furthermore, financial patterns also suggest relatively heavy cross-border integration. Andorra is widely regarded as a tax haven and offshore banking center, which increases the volume of such activity relative to the domestic economy, and which has been the locus of the most pressure from the European Union on Andorra to bring its tax and other regulations more in line with EU norms.7

  Keeping those distinctive features of Andorra in mind, remap the world from an Andorran perspective. Figure 13-1 presents such a map in which all other countries are drawn with areas proportionate to Andorra's imports from them. As one looks at this map, one of the things that stands out is the extreme regionalization and even localization of the Andorran economy. Put quantitatively, the intensity of Andorra's merchandise trade with the EU relative to the rest of the world is twenty-nine times, with France and Spain relative to the EU it is another sixteen times, with Spain relative to France it is five times, and with Catalonia (the region of Spain that abuts and shares the Catalan language with Andorra) relative to the rest of Spain, it is another five times.8

  A similar pattern of localization is apparent when one looks at tourist arrivals. The intensity of overnight tourists from Spain and France relative to the rest of the world is nearly fifteen hundred times. And the intensity of day-trippers from those two countries relative to the rest of the world is, of course, even greater, at nearly three thousand times.9 It is worth noting that, once again, Spanish visitors are several times as numerous as French visitors in terms of intensities, and Catalan visitors are several times as numerous as visitors from the rest of Spain. So again, there is a pattern of extreme localization.

  Figure 13-1: Andorra's imports by trade partner, 2008

  Source: Generated based on data from Chamber of Commerce, Industry, and Services of Andorra, “Economic Report, 2008,” 106–108.

  When one looks to explain these patterns of localization, it becomes clear that historically what Andorra has done is emphasize a few aspects of administrative difference as its basis for succeeding at international competition: differences around tax rates, banking secrecy laws, and so forth, while otherwise concentrating on regions that are very, very close to home culturally, administratively, geographically, and economically.

  But that is all retrospective. Where should Andorra go from here? One important decision relates to where to compete. While the localization of Andorra's trade with France and particularly Spain is qualitatively consistent with what the CAGE framework would lead us to expect, quantitative analysis using a CAGE-based model can yield additional insight by comparing Andorra's actual trade versus what the model predicts. A rough analysis of this type suggests that Andorra's trade is overly biased toward Spain and underweighted toward France and the rest of Europe. A more rigorous analysis would be required to support a policy recommendation, but given the pressures Andorra is experiencing, it is more useful to consider a broad set of target markets rather than a narrow one.

  First of all, Andorra's single largest trading partner by far is the Spanish region of Catalonia, with which it shares huge historic and linguistic commonalities as well as a land border, and whose capital, Barcelona, effectively serves as a hub for Andorra commercially and in other respects: Barcelona is where Andorrans tend to go for specialized hospital services, for example. My specific proposal to the Andorrans in this regard: instead of putting up an embassy in an additional country (they already have six), why not set up a consulate in Barcelona to help manage Catalan affairs?

  The rest of Spain is Andorra's second-largest trading partner, but it appears that trading links could be deepened with a more granular approach that more explicitly recognizes the greater cultural and geographic distance to be bridged from Andorra to the rest of Spain.

  Third, France seems to be underweighted in Andorra's merchandise imports and tourist arrivals. This is particularly striking in light of the “colonial link” between France and Andorra: the French president is the titular cohead of the Andorran state, along with a Spanish bishop. Of course, one can also point to geographic reasons why French-Andorran trade isn't bigger, but the fact that France was Andorra's largest trading partner twenty years ago suggests that these reasons may not be decisive. At any rate, it seems to make sense to figure out whether to expand links with France, and if so, how. This requires, once again, a rather different sort of outreach.

  Fourth, there is the rest of the European Union, again apparently underweighted in Andorra's trade. That said, these countries generally do exhibit much larger CAGE distance from Andorra than do Spain and France, so additional care needs to be taken in figuring out how to pursue them, if at all. And then there is the rest of the world beyond the EU, to which the same points apply a fortiori, with one difference: the rest of the world is the part of the world that is expected to grow, while the EU share of world GDP, as well as world population, is expected to fall continuously over the next few decades. Exploration of new domains makes comparatively more sense under such conditions.

  In terms of how to compete rather than where to compete, recall that Andorra has historically competed on administrative arbitrage, centered on tax policy and financial regulation; however, those arbitrage advantages have been eroded by external pressure to tighten up regulation as well as liberalization of the surrounding shopping environment. Nevertheless, it seemed premature to conclude from that that Andorra should abandon arbitrage, for a variety of reasons.

  First, new arbitrage opportunities often arise as old ones come under pressure. Thus, as tax rates rise in the rest of the EU, as inevitably they will given the crisis in public finances, some of the inducements to an arbitrage strategy may rise again, even as compliance efforts strain to keep those inducements within bounds.

  Second, there is some untapped potential to existing arbitrage strategies. For example, given the country's focus on tourism, the fact that its minimum wage is higher than Spain's might be reconsidered. Bringing in cheaper labor might help not just with budget accommodations but with providing the kinds of high-end services that Andorra has been targeting. Andorra's beautiful scenery could also offer new bases for geographic arbitrage that are unrelated to either skiing or shopping.

  Third, arbitrage isn't just an on-off choice. Luxembourg, for instance, manages to use administrative arbitrage in the financial sector to support what is reported to be the world's highest per capita income—more than twice Andorra's!—while remaining within the EU and in compliance with EU and OECD tax haven legislation. So clearly there is room to consider continuing with arbitrage strategies.

  Consequently, while administrative arbitrage may continue to be an important part of the strategy for Andorra going forward, I should add that Andorra clearly also needs to do a better job of reaching out across cultural, geographic, and economic differences. Different ideas for doing this include granularity—for example, distinguishing between Catalonia, the rest of Spain, France, and the rest of the EU as key markets; the use of natural bridges such as the Catalan
language in Catalonia and the euro in the euro zone; emphasis on partnerships when scale is important or distances loom large; and so on. The broader idea is that, for a variety of reasons, including growth forecasts in adjoining areas, it seems advisable to at least think of looking beyond Spain and France for certain purposes, if for no other reason than to try to shrink the supply chain from the ultimate supplier to the Andorran importer.

  And finally, although this is not much talked about within Andorra, there is probably a need to reduce internal distance through internal integration as well, because Andorra is listed as the country that has the fifth-highest level of immigrants to citizens of any country in the world.10 Foreign citizens constitute the majority of its residents, in fact.

  Not Only Oil for Nigeria

  Nigeria is almost the mirror image of Andorra in certain respects. Instead of being one of the richest countries in the world, it falls at about the seventy-fifth percentile in income rankings. And it is roughly two thousand times as large as Andorra in terms of both land area and population. Nigeria is actually the eighth most populous country today and is projected to rank fifth by 2050.11

  In addition to its size, what is most remarkable about Nigeria is its dependence on natural resources, particularly oil. Estimates of oil's contribution to Nigeria's GDP range from one quarter to more than one half; it provides about 80 percent of the government's revenues and accounts for 90 percent of the country's export earnings.12 Oil is also responsible for Nigeria's often being cited as an example of the “resource curse”: the idea that countries with an abundance of nonrenewable natural resources tend to have stunted growth patterns and generally worse development outcomes than countries that lack such resources.