Two fundamental facts characterize the political and economic structure of thc world at the end of the 20th century. First, the world is, and for the foreseeable future will be, organized politically into nation-states with sovereign governments. Second, increasing economic integration among nations has been eroding the differences among national economies and undermining the antonomy of national governments, a trend that also shows no sign of stopping.
International economic interdependence has significantly improved standards of living for most nations and promises further sizable benefits. Yet the heightened competition between national political sovereignty and increased cross-border economic integration could cause major trouble if national policies and international cooperation are poorly managed.
Increasing World Economic Integration
Profound technological, social, and cultural changes have bound the world's nations more closely together by reducing the effective economic distances among them. The same transportation and communication wizardry that makes it easier and cheaper for companies in Ohio to ship goods to California, for residents of Marseilles to visit relatives in Paris, and for investors in Hokkaido to buy and sell shares on the Tokyo Stock Exchange also speeds trade, migration, and capital movements among nations and continents. Technology has, in effect, shrunk the planet.
Consumers and producers are increasingly aware of potentially profitable international exchanges and of economic opportunities abroad. Foreign goods, foreign vacations, and foreign financial investments were once exotic but are now virtually commonplace.
Communications technology has especially boosted financial activity. Computers, switching devices, and telecommunications satellites have slashed the cost of transmitting information internationally, of confirming transactions, and of paying for transactions. Forty years ago foreign exchange could be bought and sold only during business hours in the initiating party's time zone. Now large banks pass the management of their worldwide foreign-exchange positions around the globe from one branch to another, staying continuously ahead of the setting sun.
Government policies have reinforced the effects of technology. Before World War II nations routinely erected "separation fences" at their borders--taxing goods moving in international trade, directly restricting imports and exports, and curbing financial exchanges between domestic and foreign residents. The effect was to reduce cross-border transactions, sometimes even to eliminate them. The particularly zealous use of these policies during the 1930s is now believed to have deepened and lengthened the Great Depression.
After the war, most national governments began, sometimes unilaterally, more often collaboratively, to lower these fences, to poke holes in them, or sometimes even to jettison parts of them altogether. The international negotiations under the auspices of the General Agreement on Trade and Tariffs (GATT)--for example, the Kennedy Round in the 1960s, the Tokyo Round in the 1970s, and most recently the protracted negotiations of the Uruguay Round, formally signed only last April--stand out as the most prominent examples of fence lowering for trade in goods. Though contentious and only partially successful, the GATT negotiations sharply reduced at-the-border restrictions on trade in goods and services.
The fences barring financial transactions were lowered later and to less dramatic effect. Nonetheless, by the 1990s curbs on capital flows, especially among the industrial countries, were much less important and widespread than they had been during the 1950s.
The recent strides in technology alone would have substantially integrated the world economy--as would the lower trade fences alone. But together, the two have reinforced each other and profoundly transformed the world economy. …