The Net Effect
on the Nation
Electronic Economy Will Force Change within Nation States
Ways Nation States Can Participate in the Electronic Economy
J. Doyle, Glover T. Ferguson, and Hugh F. Morris, Andersen
quantum shift in commerce and the human condition." That's
what US Vice President Al Gore calls the coming of Internet-based
business. 1998 was the year this electronic commerce, (eCommerce)
took off, linking products and markets with a 24-hour ease never
before imagined. The industry estimates that the volume of global
transactions on the Web climbed from $8 billion to $80 billion in
the past year, and by 2003 could reach $3.4 trillion, changing
traditional distribution channels forever.
"In this emerging digital marketplace,
nearly anyone with a good idea and a little software can set up
shop and become the corner store for the entire planet," Gore
told a White House eCommerce forum this fall. Anyone, he
said, like the Peruvian village that quintupled its income by
partnering on-line with an exporter who shipped its vegetables for
sale in New York.
Mere hype, given the high costs of Net
connections and Web page start-ups in the developing world? Gore
doesn't think so. If enough countries capitalize on this
opportunity, he said, "by the year 2010 we can triple the
number of people who can support their families."
Can we? Will we? The challenge is formidable…
Electronic Economy Will Force Change within Nation States.
modern nation state remains the most prevalent unit of governance
in the developed and the developing world. The concept has, in the
last 50 years, been extended rather than retracted. There are now
more than 200 hugely different nation states, with different legal
and regulatory systems, existing in the world. In this context, we
define a nation state as a coherent territory circumscribed by
defined borders over which the single national government has
legitimate jurisdiction. During its 200-year history, the nation
state has endured many changes. However, the advent of the
electronic economy is confronting the nation state, with
intimations of a future in which its relevance to its citizens and
enterprises will be challenged.
The apparatus of economic regulation and
taxation through which nation states operate was developed to
support and facilitate an industrial economy. That economy
produces tangible goods and location-bound services that are sold
and distributed within and between fixed borders. In that familiar
world of national and international trade, nation states have a
variety of tools at their disposal to achieve their economic ends:
They can levy tariffs on imports, raise taxes, protect consumers'
rights, punish economic criminals, set commercial standards, and
provide guarantees of monetary payment. Until recently, these
tools were supported by governments' majority control over
communications networks and information dissemination.
Because of the emergence of global
communications networks, the nation state is gradually losing
monopoly control of information and financial flows. Private
individuals and enterprises and groups now have the ability to
source, package, and transmit information in compressed time and
space. Through "digitization," currency, services, and
even some goods can be conveyed immediately, transacted invisibly
across the globe. Interactive networks are creating a new,
network-linked world without borders, in which many commercial
transactions are beyond the reach of national jurisdictions, laws,
and taxation systems. As a result, many of the economic
instruments and processes of the nation state need to be
reexamined in the light of these new challenges.
Is the nation state powerless before this new
global economic system? As electronic commerce grows, there is
some risk that those nation states that have not fully embraced
the changes could become marginal to the creation of economic
value and irrelevant to their citizens and enterprises. Is the
nation state threatened by the electronic economy? Could the
changes erode the individual's sense of national belonging,
undermine tax bases, bypass national laws and undermine the rights
answer to these questions, there is a "dark side"
scenario, which foresees an unregulated, electronic economy
promoting a wild and lawless frontier where electronic crime is
rife, government regulation of markets is inconsequential,
intellectual property rights are disregarded, and consumers are
left without effective protection. In this scenario, the nation
state is dead.
But there is also a "bright side"
scenario, which foresees vast opportunities for wealth and job
creation, individual learning, and international cooperation.
Legislators and regulators who seek the benefits of this
optimistic scenario need to develop appropriate policies and
invest resources in their implementation. In this scenario, the
nation state adds value.
Despite the undoubted challenges that the
nation state will face in navigating toward the future, we would
argue that it has a central role to play in the technological
revolution that is transforming the world economy. Indeed, many
nation states have formulated strategies and concrete policies to
embrace and to exploit the potential of the electronic economy.
They (often in concert with other nation states or multiple
groupings) have assumed that the advent of the electronic economy
is inevitable, and are starting to develop the means, tools, and
frameworks to exploit it for the benefit of their citizens.
Nation states have a responsibility for
assuring a balance of peace, prosperity, and liberty for their
citizens. If they are to continue to meet these time-honored
obligations in the next century, they cannot afford to be
bystanders at the birth of the electronic economy. They need to
find ways, as many are, to exert some degree of productive
influence that underwrites and supports the electronic economy.
Failure to do so will impair economic growth and, in the historic
sense, their "national interests." For example, if their
consumers and enterprises are unable to trust interactive
commercial networks, which will continue to offer them a
bewildering array of complex choices, they will be loath to use
them, and their full potential will remain unfulfilled.
No nation state has either the means or the
jurisdictional rights to regulate fully the complex global nexus
of commercial transactions. Each nation has different laws
governing taxation, electronic commerce, privacy, consumer and
individual citizen protection, crime, and intellectual property.
Each has numerous regulatory and enforcement authorities. Each has
different cultural perspectives and interests. If each nation
state attempted to impose its own unilateral frameworks, the
result would either be electronic balkanization or, more likely, a
migration of business toward those nations with the weakest
regulatory regimes. Flight of digital enterprises and services
from one nation to another can be immediate and undetectable.
As interactive networks have a global presence,
they require a global, rather than a national, response. Workable
regulatory systems can only be imposed through a multilateral
framework of appropriate laws and enforcement structures. These
laws should have provisions for international dispute resolution
as well as regulatory enforcement. We believe that this would
provide a balanced regime within which electronic trade, commerce,
education, and creative communities could flourish without harming
the consumer of digital services.
Historical precedent, however, does not inspire
great optimism. Nation states have enjoyed only limited success at
creating global treaties and frameworks that are universally
applied in practice. Moreover, multinational treaties and accords
are notoriously slow to negotiate and complete. Given the pace of
current technological change, it is possible that such a
regulatory framework would forever limp behind economic reality.
least workable approach would be to impose unreformed national
laws and regulatory protection in defense of national economic
interests. Inevitably, this would provoke constant litigation
between nation states, the cost of which would be a heavy burden
on enterprises and consumers.
The most practical approach, perhaps, would be
for nation states to adapt national legal and regulatory regimes
on an ad hoc basis to meet the new challenges as they arise,
constantly negotiating with other nation states through the
multiple international bodies and frameworks that already have an
interest in these matters. This would be a practical approach and
would encourage cooperation among nation states. Rather than
creating a whole new generation of laws, it would also facilitate
the sharing and adoption of best practices.
However, this approach, while superficially
attractive, does not create arbitration and dispute resolution
mechanisms with global legitimacy, nor does it provide a framework
for dealing with law enforcement across multiple jurisdictions.
The fundamental problem of legal incompatibility between nations
could remain, and transnational cooperation easily could be
undermined by nations choosing to opt out.
While a few nation states have started to
address these large choices in terms of legality, regulation,
autonomy, and authority, very real problems are now proliferating.
They reach deep into every aspect of economic life, and their
resolution must become a priority for all nation states if the
full benefits of the electronic economy are to be realized.
Tariffs and taxes are an area of disjunction
and complexity. In cyberspace there are no customs posts or
tax-collecting services. On the surface, it would seem reasonable
for nation states to attempt to regulate and tax trade flows over
interactive networks in an effort to stanch the loss of receipts
from digitized goods and services.
However, the problems of tax and tariff
collection in cyberspace are legion and growing, given the
difficulty of identifying the exact geographic location at which
value has been added or a transaction conducted. To appreciate the
scale of the problem, one only has to consider the case of a
commercial Web site whose owner is registered in one country,
whose server is physically located in a second country, and whose
customer transactions are conducted in a third. Current commercial
laws are useless in the face of such a multidimensional scenario.
nation states have had to contend with offshore-registered
corporations with myriad national
representatives for decades, never before have they had to address
companies being able to separate and "digitize" the
various components of a product or means of payment, or try to
trace a product's transmission down multiple digital lines and its
reassembly in a single location (as they will be able to do when
selling, for instance, digitized music or artistic works).
In creating an international framework to
address the issue of taxes and tariffs on eCommerce, national
governments should adopt a positive position that focuses on the
commercial benefits that accrue from mass use of interactive
networks, rather than showing undue concern for potential losses
within the traditional economic model.
Some advocates of laissez faire would go
further, urging nation states to declare by treaty that the
Internet is a completely tariff-free environment for the buying
and selling of all goods and services that can be delivered
digitally. This, however, fails to meet the criterion of fairness.
Citizens may well ask why those who trade digitally operate
tax-free, while those who trade physically bear the nation state's
Whether nation states choose intervention or
laissez faire, the inescapable reality is that workable tax
systems appropriate to electronic trade can only be imposed
through a negotiated, multilateral framework of laws and
The lack of such a multilateral framework
carries significant risks for individual security and intellectual
property. These dangers could undermine one of the nation state's
most fundamental guarantees: the protection of its citizens and
Currently, there is no internationally agreed
framework for the detection and prosecution of crime facilitated
by computers and interactive networks. Nor are there any
mechanisms for the creation of internationally agreed standards
and guarantees about the security of financial payment systems
operating over digital networks. In the absence of such standards
and guarantees backed by national governments, the growth of
digital networks is likely to be inhibited by consumer anxiety.
The absence of any effective internationally agreed protection of
intellectual property rights, trademarks, and consumer rights
represents a further barrier to development.
Nation states can indeed prosper in the
interactive age, as we have already seen, if they have the
foresight and courage to change. We should remember that it was
the nation state that brought the enabling networks of the
electronic economy (global telecommunications networks and the
Internet) into being. Just as many businesses have had to
transform their operations in order to survive and prosper in
global markets, so also must nation states undergo a process of
In a global, increasingly electronic, economy,
the stakes are high. Groups of nation states that successfully
evolve international laws and regulations appropriate to the
electronic economy will realize large economic returns and other
benefits for their citizens. Those nation states that opt for more
short-term or shortsighted approaches will be treated like an
outage in the Internet: Economic activity will find an alternative
route around them, or worse, relegate them perpetually to the
margins. The starting point for nation states must be education.
Within every government, there are those with the vision to see
that the future world will be interconnected, digital, and
borderless. Work can start with them on evolving and aligning the
nation states' processes and instruments with the new economic
reality, while developing that which is enduring and valuable from
the nation state's historic legacy.
Above all else, the challenges of eCommerce
will require nation states to cooperate more closely and more
creatively than ever before. In pursuit of gains in which all
could share, the loss of economic autonomy is inevitable. The risk
is increasing marginalization; the reward is contributing in an
integral way in the electronic economy.
Andersen Consulting is a global management
and technology consulting organization with $6.6 billion in annual
revenues whose mission is to help its clients change to be more
successful. With more than 59,000 people in 46 countries, it helps
clients from a wide range of industries to link their people,
processes, and technologies to their strategies.
Charles J. Doyle directs AC's Global Image
Development team from London. Glover T. Ferguson, who works out of
Chicago, is codirector of its Worldwide eCommerce Program, while
Hugh F. Morris, based in London, is responsible for global
capability in the company's Business Process Management group.
This article represents the views of the individual authors. It is
reprinted with permission from Outlook, Andersen Consulting's
"magazine on changing to be more successful."