Q: You have been investigating what might be described as the rise of the virtual state -- the political counterpart to the virtual corporation. For instance, you suggest that developed nations are now putting aside military, political and territorial ambitions and are downsizing -- becoming tighter, more vigorous units capable of sustaining the pressures of worldwide competition. Can you explain how you came to this conclusion?

A: It really goes back to the Cold War period and changes that took place then. Fundamentally, what happened there was that many states began to move in a virtual direction by concentrating on international trade and by setting up production based outside their own countries. These states found this was a very efficient way of doing well economically. This was a lesson that finally got through to the major powers, particularly to the Soviet Union, who looked at South Korea and said, "Gee, it would be nice if we could even be as good as South Korea." They weren't even trying to be as good as Japan.

So if you look at the early Gorbachev, he is talking about the "uskorine" -- the Russian word for acceleration. The notion was that everything in Russia had slowed down. Their gross national product was only growing 1 or 2 percent per year, and later, even less than that. So they wanted to find another way of doing things, a more successful example to emulate. The trading state began to have a lot of credence. Countries that were, in essence, trading states -- rather than manufacturing states -- were doing extraordinarily well. On the other hand, the political military states, like America and the Soviet Union, which had huge military expenditures, were using up their investment capital and were spending too much in terms of government deficits. Therefore, their rates of return on investment and their rates of growth were lower than of many of the east Asian states. In the Korean case, they were spending 6 or 7 percent of GDP, relatively high for Asia, but still manageable. But in the Japanese case, it was less than 2 percent, barely over 1 percent. And in most of the other east Asian cases it was very low as well. So those countries started to do extremely well because the investment capital that might have been put into the military was instead put into civilian investment. And the returns, as everyone knows, have been just fantastic. The inputs just led to very high rates of growth. So I think this is when the whole thing started.

Since then, a subsequent switch has occurred, where the emphasis has not only been on international trade as a stimulus, but also on international production. In other words, you don't necessarily want to produce everything at home for a variety of reasons, including labor costs and access to another market. You want to produce abroad. It was this that started the notion of the virtual state -- a country which has diversified most of it production abroad and is now concentrating on high-level international services. The classic and most obvious case is Hong Kong. And even though it is now technically part of China, I think it is still continuing in the same vein. And other countries are moving in the same direction.

I have been collecting a tremendous amount of data on the role of services in GDP -- trade-in service in GDP -- and it is rising dramatically. In the U.S., it is over 70 percent of GDP and manufacturing is now less than 20 percent. And in most other countries, you have similar trends. In Europe, East Asia, Japan, all are moving in the same direction. These countries are doing something very different from what they did in the past. Their reliance upon international trade is very great. And not just trade, but international finance and capital

Blake Harris  |  Editor