In the same way that the virtual corporation has become the
new model for global commercial enterprises, the virtual nation
will become the model for emerging nations like Panama.
Less developed countries that focus on production derived
from land (e.g. Iraq) may still desire territory; however, in the
new global economic order, economic inputs have become mobile.
The new virtual nation would rather conquer the world market
than acquire territory. The virtual state that has downsized its
territorially-based production capability is the logical
consequence of this freedom.
The economic equivalent of the virtual state, the virtual
corporation, has discovered the advantages of locating its
production facilities wherever it is most profitable.
Increasingly, this is not in the same location as corporate
headquarters. Parts of a virtual corporation are dispersed
globally according to their specialties. The virtual state is
the political counterpart of the virtual corporation.
For example, a company can have its headquarters in
Santiago, Chile, its banking operations in El Centro Financerio
de Panama, its manufacturing facility in Costa Rica, its
distribution from Zona Libre de Panama; its Panamanian flagged
shipping operations out of Aruba; and its customers in North
America, Europe, and Asia.
The predecessor to the virtual nation was the trading state.
After World War II, Japan shifted its efforts from acquiring
territory to increasing its share of world trade. At that time,
exports became a priority. In much the same way, Panama has
never focused on acquiring territory militarily, but focused its
efforts on importing and re-exporting its way to wealth.
As capital has become increasingly mobile, more advanced
nations have come to recognize that exporting is no longer the
only means to economic success. Alternatively, nations can
produce goods overseas for other foreign markets. For example, a
Panamanian headquartered company can produce its goods in
Colombia and re-distribute those goods via the Zona Libre de
Panama to Spain.
As more production by domestic industries takes place abroad
and land becomes less valuable than technology, knowledge, and
direct investment, the function of government will be redefined.
In the case of Panama, the government will negotiate with foreign
and domestic capital and labor to motivate potential investors to
base their operations in Panama for international trade in
products and services. Panama's offices of trade promotion and
foreign investment combined with a current administration that
has the foresight to see Panama as a virtual nation have gone the
distance in creating an environment where international business
is welcome.
For virtual nations, a national economic strategy is
probably more important than a military one. Panama has taken a
major lead in this trend by converting its ambassadors into
foreign trade and investment representatives with a specific
mission to promote conducting business in Panama.
The old methods of increasing national power and wealth are
no longer effective. Like the headquarters of a virtual
corporation, the virtual state determines overall strategy and
invests in its people rather than amassing expensive production
capacity. Panama's recent focus on the quality of both its
elementary and higher level education systems has been a major
step in creating the proper base for the virtual nation of the
future. The continued development of an internationally
recognized university system will only add to the foundation
necessary to create such a state.
The new virtual nations will also contract out other
functions to states that specialize in or need them. For
example, previously state owned sectors in Costa Rica have been
privatized, maintaining their production facilities there while
transferring part of their international distribution operations
to Panama.
Britain may have been the model for the 19th century, but
Hong Kong and Panama could be the model for the 21st.
The virtual state is a country whose economy is reliant on
mobile factors of production. The new virtual nation houses
virtual corporations and presides over foreign direct investment
by its enterprises. But more than this, it encourages,
stimulates, and to a degree even coordinates such activities. In
formulating economic strategy, the virtual state recognizes that
its own production does not have to take place at home; equally,
it may play host to the capital and labor of other nations.
The new virtual state does not seek to confine or excel in
all economic functions, from mining and agriculture to production
and distribution. The virtual state specializes in modern
technical and research services and derives its income not just
from high-value manufacturing, but from product design,
marketing, and financing. The rationale for its economy is
efficiency attained through productive downsizing. Size no
longer determines economic potential. Virtual nations hold the
competitive key to greater wealth in the 21st century. They will
likely supersede the continent-sized and self-sufficient units
that prevailed in the past. Productive specialization will
dominate internationally.
Panama could become the ultimate virtual state via the
following processes:
- Panama imports raw materials and conducts light assembly
activities for re-export of these goods via Zona Libre de
Colon.
- ARI (Inter-Oceanic Regional Authority, i.e. the successor
to the former Canal Zone) will become the largest real
estate company in the world. Size will not be the
determinant of its value, but its use in international
commerce.
- Given the plans developed by ARI, development of those
reverted areas could bring Panama an initial windfall
followed by years of sustained economic development.
- By focusing on its comparative advantages as an
international trading center, Panama will avoid the costs
associated with environmentally unattractive manufacturing
industries.
- Through the modernization of its financial services laws
and the development of Panaclear, Panama could become an
even more important international financial services center.
- Based on the government and the private sector's continued
focus on education, Panama's youthful population could
become the model of an educated and integrated workforce for
the rest of Latin America.
In the past, states were obsessed with land. The
international system with its intermittent wars was founded on
the assumption that land was the major factor in both production
and power.
Land can still be physically captured, but labor, capital,
and information resources can easily slip away in the
contemporary world of cyber-commerce.
In a setting where the economic functions of the trading
state have displaced the territorial functions of the
expansionist nation, the newly pruned corporation has led to the
merging phenomenon of the virtual state.
Downsizing has become an index of corporate efficiency and
productivity gains. Now the national economy is also being
downsized. Among the most efficient economies are those that
possess limited production capacity.
The best model of this structure will most likely be Panama.
Panama's current international trading and financial center will
capitalize on its takeover of the reverted areas and the Canal to
become the ultimate virtual state. This new virtual nation will
allow Panama to be a central hub for distribution, finance,
trade, and international management.
One could almost imagine a day where Panama will not only
govern its own national territory, but direct businesses
internationally. The virtual state is in this sense a
negotiating entity. It depends as much or more on economic
access abroad as it does on economic control at home.
A reflection of how far these tendencies have gone is the
growing proportion of Panama's gross domestic product consisting
of high-value-added services. As a proportion of foreign direct
investment, service exports will become an increasingly important
Panamanian export.
If services productivity increases as much as it has in
recent years, it will greatly strengthen Panamanian
competitiveness abroad. But it can no longer be assumed that
services face no international competition. Efficient high-value
services will be as important to a nation as manufacturing was in
previous times.
The implications for Panama are exciting. As capital,
labor, and knowledge become more important than land in charting
economic success, Panama can influence and possibly even reshape
its pattern of comparative advantage.
Panamanian educational institutions will play an
increasingly important role in positioning Panama as its model
virtual state.
Despite productivity studies showing its long-term
importance to growth and innovation, numerous nations and
business have under-invested in education. For many years,
education was undervalued, socially and economically speaking;
however, substantial improvements in both elementary and higher
education will provide the foundation of Panama's future.
Given that probably more than 60 percent of the world's
wealth consists of human capital, nations will increasingly turn
to the cultivation of human capital.
Production for one company or country can now take place in
many parts of the world. In the process of downsizing,
corporations and nation-states will have to get used to reliance
on others. Virtual corporations need other corporations'
production facilities. Virtual nations need other states'
production capabilities. As a result, economic relations between
states will come to resemble nerve centers. Naturally, producer
nations will be working quickly to become the brains behind
emerging industries elsewhere. But in time, few nations will
have within their borders all the components of a technically
advanced economic existence.
Like Hong Kong, Panama's current trading strategy could be
emulated by many other countries. Its lack of territorial
ambitions combined with a dependence on world markets for key raw
materials supplies have engendered greater economic cooperation
between Panama and other countries.
Diminishing their command of real estate and productive
assets, they are downsizing, to functional if not in geographic
terms. Small states have attained peak efficiency and
competitiveness, and even nations have begun to think small.
If durable access to assets elsewhere is assured, the need
to physically possess them diminishes. Free movement of capital
and goods, substantial international and domestic investment, and
high levels of technical education have been the recipe for
success in the industrial world of the late twentieth century.
Those who depended on others did better than those who depended
only on themselves.
Panama must continue to encourage foreign capital to enter
its domain. To keep such investment, the local authorities will
need to continue to maintain low inflation, rising productivity,
a strong currency, and a flexible and trained labor force. Those
demands will sometimes conflict with shorter term domestic
interests, but over the long term Panama will be a greater nation
and its populace much wealthier.
About the author:
Marc M. Harris is the President of
The Harris Organisation, a financial planning and investment management firm
with a staff of 150 people in Panama. Reprinted from
The Marc M Harris Analysis, a publication of
The Harris Organisation. The Libertarian Library has reprinted this article with the permission of
The Marc M Harris Analysis.
Copyright © 1996 by Marc M. Harris