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Global macro & geopolitics from a small economy perspective

On the fluidity of borders

David Skilling
17 February 2012

Globalisation is placing substantial pressures on many advanced economies on issues from growth and competitiveness to the income distribution. But globalisation will also impact the shape of countries and regional groupings, as countries seek to respond to these dynamics. My view is that the coming years will be characterised by a surprising fluidity in national and regional boundaries. So this week’s Observer offers some thoughts on how the current process of globalisation will impact the borders and functioning of nations and regional groupings.

It’s the economics
Although we think of national borders as relatively fixed, this is not really true. The number of UN member states has increased from 51 to 193 since 1945, as colonial empires fragmented, the Soviet Union and Yugoslavia disintegrated, and as others sought independence. And history records the coming and going of countries; 150 years ago, Germany was a collection of fragmented units, Italy was only unified in 1861, and the country in which I’m writing, Singapore, became independent from Malaysia only in 1965. So although borders often seem settled, this can change quickly – as we observed after 1989 with the fall of the Iron Curtain. And even now, there is debate about Scottish independence and where the boundaries of the eurozone are likely to lie after the crisis is resolved.

Many of these decisions are, of course, driven by political considerations. But a key reason for the growth in the number of independent countries over the past several decades has been the external economic environment. Reduced barriers to trade and investment have made it easier for small countries to access larger foreign markets. Countries that may have been too small to be feasible economic units became viable. But increasingly, my sense is that these political decisions will be driven by – not just facilitated by – economic forces. The structural changes in the global economic environment are creating substantial pressures, and confronting countries with serious choices. Metaphors of tectonic movements are often used to describe the global environment, but seismological events can lead to landmarks moving and the same may be true for national and regional borders.

Centrifugal forces
To start with, an increasingly competitive global economic environment is likely to create centrifugal pressure within countries and regional groupings. Countries, and sometimes parts of countries, may want the autonomy to make policy choices that they think are needed to get ahead, and to respond to a changing world. This desire for independence will be reinforced by pre-existing variation within countries (and groupings) in terms of their ability to compete successfully; high-performing countries, regions, and cities may not want to be held back by others that are moving more slowly. And in some cases, the changes required to compete may be easier to implement in smaller political units in which there is a sense of shared purpose and an enhanced ability to make decisions. Rather than the future belonging to the big powers, as is commonly suggested, there seems to be increasing pressure to devolve power; this can be seen both in large developing countries like China and India where cities and provinces are influential, but also in developed countries in Europe where there has been devolution of power to cities (e.g. London) and regions.

This logic also applies in regional groupings. Even well-established regional groupings like the EU are facing substantial pressures. Although a fundamental fracturing seems unlikely, the centre of gravity in EU decision-making is changing as countries pursue their national interests in a changing global economy (for example, Germany is now exercising greater influence). In times of economic stress, centrifugal pressure in these groupings is likely to increase as countries assess how to position themselves most advantageously. It is easier to share sovereignty in good times than in more challenging circumstances. For most countries, the issue is less about exit from these groupings that have provided substantial benefits, than about how to balance integration and independence; the UK, for example, wants to remain out of the euro but is committed to market integration. These centrifugal forces suggest that multi-speed regional arrangements are likely, in which a subset of countries are in the core.

Bulking up
But the centrifugal forces are offset by the incentives facing countries to ‘bulk up’ to respond to two emerging challenges. First, the weakening of multilateralism and the emergence of big power politics, which mean that smaller countries will need to work harder to get access to markets and advance their interests. The risk is that small countries get marginalised, both economically and in terms of their broader interests. And second, small countries are more exposed to the likelihood of increased economic turbulence because they tend to be more open to the global economy and to be less diversified. Although many small countries are well-placed to adapt to new global realities, being a small, isolated country in a turbulent environment may be an uncomfortable place to be. Nimble and responsive is good, but exposed and marginalised is not.

In response, smaller countries will seek to assemble a structured portfolio of external relationships to ensure they can continue to obtain market access and to strengthen their resilience. This process of bulking up is unlikely to be through formal consolidation of countries, but through creative forms of diplomacy. Indeed, active efforts are underway to strengthen regional institutions (e.g. the ASEAN + arrangements), to agree bilateral and regional FTAs, to formalise agreements on capital account issues, as well as various policy collaboration initiatives to achieve scale economies (e.g. research and science). And despite the current eurozone problems, several countries are still wanting to join the euro to manage exchange rate volatility. The combination of these centrifugal and agglomeration forces means that there is likely to be a fluidity in borders as countries and sub-national units figure out how best to position themselves in a global economic and political order that is changing in disruptive ways. Times of great economic pressure are likely to lead to political changes as well. Cartographers may be busy.