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The Net Effect

on the Nation State

Charles J. Doyle, Glover T. Ferguson, and Hugh F. Morris, Andersen Consulting, Bangkok

"A 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…

The Electronic Economy Will Force Change within Nation States.

The 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 of citizens?


In 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.


The 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.

Completely New

While 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 fiscal burden.

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 regulation.

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 their property.

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 reinvention.

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."

What Is eCommerce?

eEnterprises conduct eCommerce in the eEconomy. New forms of capital — primarily the information and knowledge created through the flow of value through the global electronic network — are driving fundamental economic transformation.

An eEnterprise is an enterprise prepared to conduct commerce in this new economy.  This means it has created and embraced a business strategy informed by changing economics, new opportunities, and new threats.  It has laid down the necessary technology infrastructure to support new business processes.  It has used information technology to hone internal processes such as human resources, work flow management, and training.

Thus prepared, the enterprise is able to conduct eCommerce:  "the commercial exchange of value (money, goods, services, or information) between an enterprise and an external entity (an upstream supplier, a partner, or a down-stream customer) over a universal, ubiquitous electronic medium."

To conduct eCommerce, enterprises must achieve a new level of openness, connectivity, and integration. Few executives set out to buy eCommerce. Instead, most are seeking the kind of new results, strategies, business processes, and organizations that eCommerce capabilities enable. Likewise, no business will realize these goals by simply acquiring new technology capability.

Creating value through eCommerce also entails:

  • Opening the enterprise to encompass partners, suppliers, and customers.
  • Connecting the new, expanded enterprise through a universal electronic medium.
  • Aligning and integrating technology, strategic intent, processes, and human performance.

In other words, most commerce will soon be eCommerce. At current projections, the electronic economy will overtake the industrial economy by the year 2003. Several factors are responsible for this phenomenon; each factor reinforces the above three:

  • The technology infrastructure is in place and expanding. Consumers are increasingly open to conducting business electronically.
  • The regulatory environment has become cooperative and encouraging.
  • The business value is compelling.
  • eCommerce is a pervasive, global force.
  • Electronic commerce transcends geographic boundaries, cultural biases, and political differences.
  • eCommerce is an inevitable, irresistible force.

— Andersen Consulting

Ten Ways Nation States Can Participate in the Electronic Economy

  1. Educate government officials, top civil servants, and voters on the nature of the electronic economy.
  2. Cooperate internationally to regulate consumer protection and develop a priority list of network crimes and agreed punishments.
  3. Invest or encourage investment in the physical infrastructure of the electronic economy, such as interactive networks and terminal access equipment.
  4. Equip citizens with the means to log on to the global network of wealth, information, and power, recognizing that there will be a direct relationship between network access and the wealth of nations.
  5. Replace the measures and statistics of the industrial economy with the measures and statistics of the electronic economy. Official statistics, which form the basis of trade negotiations, are derived from an outdated data collection model.
  6. Provide individual consumer and citizen access to information networks as a right rather than a privilege.
  7. Appoint a chief public information officer empowered to act as a champion of public information used to support consumers' and citizens' rights.
  8. Use electronic tools to support government processes such as social pro-vision, education services, and public procurement.
  9. Develop inward investment programs to attract and develop knowledge industries based on electronic networks. Make location-bound resources (connectivity, network infrastructure, taxation regime, price of bandwidth, education and information services, etc.) attractive to these enterprises.
  10. Intervene directly to guarantee and regulate the digital exchange of money.

— Charles J. Doyle, Glover T. Ferguson, and
 Hugh F. Morris, Andersen Consulting


Source: IFC.ORG


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