THE SHIELD OF ACHILLES (124 page)

In the uncertain economic environment following the American recession, a new destabilizing element appeared: the shift in the ratio between young and old. In 2003, Italy's population of persons sixty-five years of age and over passed 20 percent of the total; Japan followed in 2005 and Germany
in 2006. France and Britain arrived at this figure in 2015. At the same time, global life expectancy was rapidly growing. As life spans increased, fertility rates in the developed world plummeted. As recently as the 1960s, the worldwide fertility rate (the average number of lifetime births per woman) was at 5.0. By 2000 it stood at 2.7—a figure fast approaching the replacement rate of 2.1. In the developed world, the average fertility rate declined to 1.6. By 2000, Japan was projecting a population decline of 20 percent in the ensuing two and a half decades. In Germany, where the rate had fallen to 1.3 by 2000, fewer babies had been born each year in the 1990s than in Nepal. In the United States this development had been masked by large numbers of immigrants, who included families with higher fertility rates than those of native-born Americans. The looming demographic crisis pitted young unemployed persons against taxpaying workers against pensioners. As a result of this tricornered struggle, by 2010 the politics of social security reform became effectively paralyzed. Governments were forced to make severe cuts in defense spending, infrastructure maintenance, and finally in health benefits.

These developments—unemployment, social tensions among groups, and a recession that followed government cutbacks—brought to power a number of reform-minded governments determined to protect the youth who had elected them. To invigorate their economies—and mindful that falling population rates could not be made up by productivity gains—
states in the developed world followed the U.S. example and began loosening their immigration rules
. These immigrants brought with them higher fertility rates and lower labor costs, forcing a revision of state-regulated employment practices that had stifled growth. In Germany, foreign workers rose to 40 percent of the workforce by 2025 and dominated cities like Munich and Frankfurt. At the same time,
governments began encouraging higher fertility rates and investing more in the education and the productivity of future workers
. In the high-tax states that followed the managerial market-state model
tax credits were offered for taking intergenerational responsibility within families, including home day care for the young and residence care for the elderly
. Because these popular measures directly attacked the existing social contract and affronted entrenched ideologies and interests, they opened up the politics of these states to reform; and because such policies brought youth into the reform camp, the parties of the past with their addiction to state ownership withered away.

The economic turmoil leading up to this revision and the demographic crisis that brought it to a head were certainly critical factors; so also was the growth in knowledge about how other people live and how other social systems function, which fueled immigration. The core E.U. was now powered by two late twentieth century developments that had appeared to be a
drain on the E.U.: the takeover of East Germany, bringing a well-educated workforce into the capital system, and the proximity of Poland, Hungary, the Czech Republic, Slovenia, the Baltic states, and Ukraine, which enlarged the E.U. and provided cheaper labor and a vast new market for consumer goods once they were assured that their national cultures would be respected. Indeed it was the ability of the managerial market-states to recognize the rights of cultural minorities—including the United States with its decentralized constitutional system of federalism—that ultimately provided a key to success.

One important constitutional tool in the institutionalization of this respect for minorities was the relative ease with which devolved partial states were created.
Regions in Italy (the northern industrialized region centering on Milan and Lombardy), Spain (Catalonia and the Basque region), Canada (Quebec and the city-state of Vancouver), and the United Kingdom (Wales and Scotland) all “devolved” into new states
with varying defense and trade relations to their parent states or, like the
two partial states that emerged from the breakup of Belgium, sheltered within the economic and defense community of the E. U
. The results were generally positive: the new states retained the role of reinforcing the historic culture of their peoples (something the market-state had been in danger of losing as it became more meritocratic, more multicultural, and more secular). As one observer noted:

In the United States, cultural groups were allowed, by constitutional amendments that altered the application of the 14th Amendment, to transform states to their own liking
. This led to considerable migration within the United States as its citizens sought congenial states that catered to religious, ethnic, and political preferences.
All these new “states” retained an open trade relation with the rest of the United States much like the one that prevailed in Europe within the E. U., and all adhered to a common defense policy with the rest of the United States under a much-shrunken defense establishment. Only their state constitutions were radically different: some permitted a union of church and state; some allowed the prosecution of
“hate speech” and forbade books and movies that reinforced racial or gender stereotypes; some reintroduced corporal punishment, while others forbade capital punishment. There were feminist states where women were given certain affirmative benefits, including requirements that a certain number of officeholders and corporate board members be women; there were religious fundamentalist states that forbade commercial transactions on the Sabbath, required prayer in schools, and outlawed the sale of alcohol; there were ethnic states where English was a second language
; and so on. In short, the new states permitted a closer match between the values of a certain polity and its legal rules—a reaction, it may be said, to the market-state's indifference to cultural values.

This ability to decentralize not only liberated the political evolution of the highly developed states; it also led to a recognition of the economic, social, and environmental interdependence of states.
Green tariffs
—which penalized imports from states that did not obey Kyoto standards for environmental protection—date from this period. States in The Park were well-positioned to create the
World Environmental Organization
in 2008 as a follow-up to the Rio de Janeiro initiatives of the late 1990s. States were able to agree, as they were not at Rio, on principles of allocating environmental property rights.
The WEO administered these rights, sometimes arbitrating, sometimes auctioning off rights. The largest step forward occurred in 2012 when the WEO won agreement on rules for tradable licenses to water, fishing, and emissions rights. The introduction of fungible carbon dioxide emission rights had come somewhat earlier.
Thus different regions were able to achieve environmental targets in differ-ent ways, while bartering development and pollution rights globally.

The creation of other multinational institutions followed: the World Commission on Biotechnology in 2010 and the World Commission on Internet Privacy in 2013
. In some quarters, these commissions were viewed as high-handed and stifling of innovation, but the general view was that the society of states was better able to manage a new generation of multinational institutions in The Park than under other global approaches.

Finally, though total wages grew more slowly than in The Meadow, wage disparities within the states of The Park were far less. Indeed, the relatively high wages in the developed world tended to encourage growth in the developing world. The Asian Industrial Prosperity Conference and the North American Free Trade Association were able to raise wages to such a degree that
multinational corporations looked to Africa to reduce their labor costs.
This resulted in a slowing of migration to African cities as
factory complexes were sited beyond the supercities
. This allowed Africa to avoid the flight to the coastal cities that plagued The Meadow, with the consequence that hygiene and sanitation were sufficient to mitigate the health threats that had haunted Africa.

The Park was characterized by three great blocs of states whose leading members had chosen some form of the
Soziale Marktwirtschaft
. The decisive step had been taken in 2005 by the
United States when it rejected a British proposal for a “virtual” regional free trade alliance that would have included Japan, and decided instead to pursue a larger NAFTA
. The result was a hardening of regional lines and a surge of regional protectionism.

Within three blocs—led by Germany, Japan, and the United States respectively—trade flourished. By the year 2025, market-states within these groupings were exporting 50 percent of their production, even though most of this product was, at some point, made in other states. By adding value at the high end, and
by erecting a forbidding tariff wall around the trading bloc
, individual member states were able to maintain a large share of global profits through repatriation. At the same time, the protectionism of the regional blocs tended to retard the advance and diffusion of technology, and to reduce economies of scale. Conflicts over market openings for high technology became endemic, with charges of pirating and predatory pricing being frequently and acrimoniously exchanged.

Unemployment was relatively high within these blocs, usually above 10 percent in the years between 2000 and 2025 in the Americas, almost 20 percent in Europe—but a jobless worker with a family could draw benefits equal to almost 70 percent of his former net earnings (somewhat less in the Asian countries). There were generous child allowances, substantially larger for poorer families, to the age of seventeen—or twenty-one if the child elected to go to college or state-sponsored vocational training. Parents drew child-rearing benefits for up to two years if they chose to take work leaves in order to stay home with children; job rights for those taking parental leaves were protected for three years.
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Periodic efforts to change provisions like these in order to curtail government expenditure collided with the fundamental sense of fairness that pervaded states in The Park. True, innovations like domestic robots were more expensive than they might otherwise have been and the most efficient hybrid fuel vehicles were beyond the reach of most—a painful fact as governments began to enforce more and more stringent air-quality controls—but the price of these items eventually came down. Innovation occurred, but at a far slower pace and with more expensive development costs than would otherwise have been the case.

The principal external effect of the dominance of these three great groups of states was to restrict growth in the Third World by shifting the terms of trade sharply against raw-materials producers, though wages did rise in the developing world as corporations fled the high-wage blocs.
Within the blocs, the main result was to delay innovation and increase costs to the consumer. Both internally and externally, the Park encouraged state fragmentation within the umbrellas of its larger groups and beneath the sheltering international institutions that it excelled at creating and maintaining.

While many persons feared a Y2K crisis over New Year's Day 2000, this never materialized. What came later, however, was an infrastructure overload that cascaded through interconnected systems, apparently coincidentally, on New Year's Day 2005. Many analysts now believe this event triggered the stock market crash in 2005. The flight to the euro resulted in a 40 percent appreciation against the dollar, effectively destroying European exports. When the world recession struck in 2006, growth in The Park, which had been sluggish, turned sharply negative.

The Park was hampered in its recovery by a problem that, though hardly unique to this particular society of states, was characteristic of it. This was the phenomenon of “moral hazard”—overaggressive risk taking pursued in the confidence that market-state governments would not permit truly large enterprises—or interest groups—to fail. It was evident, for example, that the
Federal Deposit Insurance Corporation provisions in the United States induced many savers to make deposits in bankrupt banks and savings institutions
because these desperate enterprises were offering the highest rates on short-term deposits. American savers correctly calculated that the government would bail them out when the crash came. Similarly, the difficulty for states in The Park was that, by removing risk from some investments, these states crippled the ability of the market to discipline investment and brought about costly misallocations. Although the hardest hit economies in The Park were India, Nigeria, and Brazil, all economies suffered from this phenomenon because the social safety nets of The Park created perverse incentives by distorting true market risks. Furthermore, the high trading walls of the three great blocs prevented the development of a truly global system of reinsurance that would have cushioned the setbacks of this decade.

Instead, states of The Park turned to the creation of new international financial institutions. In 2006,
a conference in Paris resulted in the transfer of the functions of the IMF to new institutions
, more market-state than nation-state in their orientation (and located outside of Washington). First, the
Commission on Monetary Stability was given authority to combat speculation not by trying to outbid speculators, but by negotiating complicated baskets
that bundled various currencies together and stabilized Third World monies by tying them to the dollar, the yen, or the euro. This commission was sometimes referred to as a New Bretton Woods, but its methods were decidedly those of the market-state. Second,
the International Banking Board was created in order to oversee the capital adequacy of
banks
and their provisions for bad loans—not by mandating certain ratios but by publicizing the prevailing ratios and permitting shareholders to do the enforcing—and to prevent money laundering by much the same methods of transparency and public revelation. Third,
the Agency on International Transactions attempted to prevent e-commerce from evading national value-added and sales taxes
by licensing only certain firms on the Internet. It also aimed to create exceptions to sovereignty in order to prevent tax havens in the Caribbean, the Pacific, and elsewhere and to employ electronic monitoring to track liquid capital. It must be said that these efforts were not entirely successful, owing in part to corruption within some of the agencies created. Finally,
the mission of the World Bank was changed from a lender-for-development to the Third World to a lender-of-last-resort
for countries who could persuade the bank that avoiding default was to the economic benefit of the entire society of states, and not simply for the sake of the potentially defaulting state.

These institutional measures were of some benefit to the northern-tier blocs, but they did little to cushion the main effect of The Park, which was the rupture of North-South economic relations. Writing in 2020 and looking back on this period, one commentator observed:

Without growth in the underdeveloped states, the northern-tier economies stagnated for a lack of new markets. With their aging populations, savings rates in these countries plummeted and, along with them, the rate of new investment. In each of the principal states of the former First World, government deficits burgeoned as older populations demanded more and more services that had become more and more expensive (including costly anti-aging genomic treatments). The fragmentation of the polities of these states along cultural and ideological lines—the creation of interest groups willing and able to block legislation that did not buy off their constituents—paralyzed the adoption of the fiscal policies necessary
to cope with these demands. This paralysis was worsened by
the adoption, first in the United Kingdom, but later in the United States and elsewhere, of a system of proportional representation in parliament and Congress
. The revenue base of governments eroded as capital moved abroad beyond the reach of tax collection. Many wealthy persons ceased to think of themselves in national terms and adopted tax residences in state havens abroad where their income could be sheltered.

Concern about the environment led to costly regulations, which had the effect of imposing ever higher barriers on the products of the undeveloped world.
States like China and India that refused to reduce emissions
found their products barred from entry to lucrative First World markets. Agreement to reduce emissions, however, meant imposing lower standards of living on local populations and immense capital costs on producers. Either way, the effect was to close the markets of the developed world, just as
concern about genetically engineered foods had closed the E. U. to American exports, or concern about child labor had closed the United States to Asian exports
. Interest groups in the Park struck alliances that invariably proved costly to economic vitality.

With export-driven growth cut off and without investment inflows from the developed states, the economic situation of the underdeveloped states grew worse. Overpopulation led to resource scarcity; resource scarcity led to deforestation and desertification, which led in turn to water shortages and migrations to cities that were plagued with disease, crime, and a breakdown in political authority. Except in search of lower wages multinational corporations were reluctant to be lured to these countries, even when enticed with large tax incentives. The other such incentive—relaxed regulations—had backfired in the face of so-called
green tariffs imposed at the behest of an alliance between environmental groups and First World companies
saddled with expensive environmental regulations. These provisions kept the products of poorer countries without environmental safeguards out of First World markets. Thus the opportunity to garner capital for infrastructure from exports wilted.

The effects of these policies can be seen in India's experience in The Park at this period. Owing to resistance from various interest groups—civil servants, workers in long-protected domestic industries, political allies of the ruling government, even religious and ethnic groups that had been subsidized—it was difficult for reform regimes to modernize the Indian economy. The socialist policies of the Indian nation-state were largely dismantled and domestic competition thrived, but truly radical reforms that would make products export-worthy were harder to bring about. Secessionist movements not only in Kashmir and Punjab but in literally dozens of smaller areas were a constant threat to the central government.

The consequences of falling water tables served as the flash point between the Muslim and Hindu populations relying on irrigation in the Indus River Basin. Pakistan had not participated in the growth experienced by India. With 65 percent of its land dependent on intensive irrigation, with widespread deforestation and a yearly population growth of 2.7 percent, Pakistan had no margin for failure when crop yields began to plummet in 2015.
Neither the Indian nor the Pakistani government was strong enough to enforce restrictions on water use
; neither had the legitimacy among its starving citizens to get them to refrain from attempting to drive away their neighbors in order to cultivate more land. The Water Wars of the Indus that began in 2017 lasted ten years. By the end of this period, 140 million people had starved or been driven from their homes by violence. (This dwarfed the 1960 famine in China, in which thirty million are supposed to have died.)
International attempts at mediation—even the supply of emergency food relief—were rebuffed by officials on grounds of “Indian dignity
.” The arrival of partial laser-fusion eventually would reverse the draining of the water supply by providing power to tap freshwater sources in the Himalayas, but this technology required capital investments on such a huge scale that only very large, wealthy states could afford it, and there were no such states remaining on the subcontinent. Pakistan had devolved into a patchwork of ethnic states of which Pakhtunistan was the largest and throughout which a strict Islamic code prevailed; India had fragmented into a loose congress of more than fifty states—largely organized along linguistic and religious lines. If these devolved states were too weak to enforce population growth control or environmental protection, and too contentious to ally in order to accumulate capital, they were also too feeble to wage war on a continental scale. One of the remarkable facts about
the Water Wars is that neither side used nuclear weapons
, though both possessed them, perhaps, one may speculate, because the small size of their respective arsenals encouraged them to husband such weapons. As a result, the soils of the subcontinent, though depleted, were not irradiated, and began slowly to recover as new genetically modified grains came into being, and population rates leveled off and then fell.

The lesson learned by the states of The Park was that regional protectionism tended to lock in high unemployment rates and slow growth in part because it locked out global capital flows and the rapid diffusion of new technology. Coping with these problems gave a new lease on life to government agencies that might otherwise have died with the nation-state but that remained and further hampered economic efficiency.