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Westphalia II:
The Real Millennium Challenge

Kimon Valaskakis Ph.D.
Former Ambassador of Canada to the OECD
December 2000

The author is the former Canadian Ambassador to the OECD. He is currently professor of economics at the University of Montreal and Senior Fellow at Group Futuribles International in Paris, a futures oriented think-tank. He was previously president of the Gamma Institute, a Canadian forecasting and planning research center and chairman of ISOGROUP Consultants an international strategy firm. He is the author of eight books and over a hundred articles. An earlier version of this paper was presented at the OECD Forum on 21st Century Governance in Hanover Germany in March 2000.

The Real "Millennium Round" may turn out to be not further trade liberalisation by the WTO, but a fundamental restructuring of global governance to meet the complex challenges of the 21st century. The present system of international relations is known to legal scholars as the "Westphalian World Order". In 1648 the Treaty of Westphalia ended the long and bloody Thirty Years War in Europe. A new equilibrium was born based on the acquired "sovereignty" of 300 German princes and the corresponding contraction of the authority of the Holy Roman Emperor now reduced to a much smaller role. The Treaty was initially of interest only in the context of the organisation of power within Europe itself. However as Europe expanded in the next three centuries to encompass the whole world, the European Order became the World Order. Its basic organising principle was the sovereignty of individual nation-states, sovereignty being defined as supreme power against which there is no possible appeal. The Westphalian World Order (WWO) probably reached its zenith in 1945 when national governments exerted maximum power in global affairs.

It is our contention that the acceleration of "globalisation" in the late twentieth century has severely destabilised the Westphalian Order by weakening the authority of national governments. An increasing number of human activities are now escaping national regulation and spinning out of control. The emerging cracks in the global governance superstructure are deepening to the point where the whole system could break down within the next ten years.

What are the options? The dogged defence of the status quo may prove an impossible task in the face of the overwhelming tidal wave of technological and economic change. Yet to watch helplessly the disintegration of the present order, with no ready alternative, may be even worse. Our proposed solution is to begin thinking systematically about an in-depth restructuring of the present system by eliminating its anachronisms while retaining its strong points. This objective could be metaphorically called "Westphalia II." The case for such a fundamental restructuring is outlined in the following pages.

The Rise And Decline Of The Westphalian World Order 1648-2000

From European Treaty to World Order1648-1945

Pre-Westphalian Europe was a mixture of declining empires, retreating feudal lords and an emerging class of traders and capitalist entrepreneurs with the Church remaining very influential as an instrument of European governance. The Treaty of Westphalia of 1648, brought to an end the Thirty Years' War, the first pan-European war in history. Under the terms of the peace settlement, a number of countries were confirmed in their sovereignty over territories. They were empowered to contract treaties with one another and with foreign powers. In a nutshell the central authority of the empire was replaced almost entirely by the sovereignty of about 300 princes. The Peace Treaty was a turning point in the mutual recognition of sovereignty rights. Although the signatories of the treaty had only the peace of Europe as their ultimate objective, the unintended consequence of their efforts was to create a global order based on a "State System."

The First Phase of the Westphalian Order lasted from 1648 to about 1815 and was characterized by the emergence of Mercantilism as a political-economic system. Accompanying the rise of the nation-states and the overseas expansion of Europe, Mercantilism became a tool of advanced statism. The State would intervene in all areas of economic life. It would protect national industry with high tariffs, ensure a favourable balance of payments by subsidising exports, promote population growth, augment the money supply by accumulating gold and silver and above all use state monopolies, such as the East India Company, Hudson Bay Company etc., to promote the national interest. Under mercantilism the alliance of State and Business was, first and foremost, in the interest of the State.

The Second Phase of the Westphalian World Order spans the period from 1815 to 1914. A balance of power system was put in place through the peace settlement at the Congress of Vienna. The Great Powers would periodically meet and settle their differences diplomatically. But what really stabilized the European Order in the nineteenth century was the fact that it was guaranteed by the pre-eminent colonial power Great Britain, willing to intervene on the weaker side, whenever the balance of power was in peril. However, he system did not manage to avoid war since there were a number of regional conflicts such as the Crimean War, the Austro-Prussian, Franco-Austrian and Franco-Prussian wars. After the Franco-Prussian war of 1870-71 and the cession by France of Alsace Lorraine to Germany the balance of power was seriously endangered. To restore it, an elaborate system of alliances was developed ultimately opposing in 1914 the Triple Alliance of Germany Austria and Italy to the Triple Entente of France Russia and Britain.

From a Westphalian point of view the period 1815-1914 was a century of peace in spite of the limited local duels. But this balance broke down in 1914 and the First World War ushered a Third Phase of the Westphalian Order characterised by years of armed military confrontation which only ended in 1945 at the conclusion of the Second World War. In some senses this third period marks the apex of the Westphalian System where sovereignties reigned supreme and governments intervened massively in the economy. After the collapse of the stock market in 1929, the laissez-faire assumptions of the nineteenth century were replaced by forceful state action. In Germany, Italy, Japan, Spain and the USSR the national government became the leading economic player. Businesses were allied to the Government but the latter called the shots and created direct jobs through infrastructure and rearmament programs. Even in the Western Democracies, Keynesianism in Britain, dirigisme in France and the New Deal in the United States justified strong state intervention to alleviate the economic disasters brought about by the Depression.

Although the period 1914-1945 was dominated by war, the unsuccessful attempt by President Wilson at the end of the First World War to introduce a peaceful and stable global order deserves special mention. He attempted to rally the people of the world in a peace settlement designed to remove the causes of future wars and establish machinery to maintain peace. He called for freedom of the seas, an impartial settlement of colonial claims, general disarmament, removal of artificial trade barriers, and, most important, a league of nations to promote peace and protect the territorial integrity and independence of its members. A new international order based upon peace and justice. The League of Nations did eventually emerge but the United States, its initiator was unable to participate because of a congressional veto. Deprived of the leading superpower, the League of Nations revealed itself ineffectual and weak and did not prevent the deterioration on international relations which eventually led to the Second World War

The Five Pillars Of The Westphalian System

The viability of the WWO depended on certain underlying assumptions so important in our view, that their invalidation could make the system dysfunctional. These "systemic pillars" so to speak were not actually signed into the Treaty by the plenipotentiary ambassadors, but developed slowly over three and a half centuries. Some were strengthened by additional treaties but never consolidated in one single document. They are therefore subject to interpretation and debate between learned scholars. But our reading of the evolution of the WWO allows to identify the following five structural pillars which singly and collectively allowed the system to function efficiently:

1 - National governments are the sole holders of (legal) sovereignty.

Originally, derived from the Latin term superanus through the French term souveraineté, sovereignty came to mean the equivalent of supreme power. It was used by Jean Bodin in France to provide legitimacy and strengthen the power of the French King in his battle with rebellious feudal lords, The doctrine of the divine right of kings according to which kings are only answerable to God and cannot be challenged by human beings, is a close cousin of the concept of sovereignty. It led Louis XIVth to utter his famous L'Etat c'est moi boast. The King and the State were indeed indistinguishable in his time. Therefore next to God, the King could exercise absolute power in complete legitimacy.

From its origins as the prerogative of the King, Sovereignty slowly evolved, in some countries at least, as the reflection of the unchallengeable will of the people, sometimes referred to as the doctrine of popular sovereignty. The interpretations given by John Locke in the 17th century and Jean-Jacques Rousseau in the 18th linked sovereignty to democracy, via the doctrine of the social compact according to which the "People" are the ultimate owners of sovereignty. They may delegate to government's strong powers to be exercised in their name but they are the ultimate masters and may withdraw that delegation by voting governments out of office. The French Constitution of 1791 declared that "Sovereignty is one, indivisible, inalienable and imprescriptible." But whether based on the divine right of kings or the unchallengable will of the people, sovereignty became the absolute reference point in global relations, the ultimate principle upon which all notions of global order should be based. It was to international relations what the Speed of Light was to Einsteinian physics: an absolute. The only rightful owners of this sovereignty were the governments of recognized states.

2 - Sovereignty is exercised over physical territory

In the Westphalian System, the sovereignty of nations expresses itself through the control of geographical territory. This was a legacy of the feudal principle "nul terre sans seigneur." Land was the principal factor of production in the feudal world and its control yielded both economic and political power. This "real estate" bias, so to speak, was an essential ingredient of the Westphalian System. Although by the nineteenth and certainly the twentieth century, industry became more important than land, the territorial focus in the exercise of authority remained strong. Land was the ultimate stake in the Westphalian Paradigm and nations were quite willing to sacrifice millions of lives over it.

3 - National governments are not only legally sovereign but are also the most powerful players of the world system.

The emergence of central governments possessing absolute power accelerated the demise of the Pre-Westphalian players. The biggest losers were the feudal lords, who had lost the invulnerability of their castles after the invention of gunpowder, and the Holy Roman Emperors, who were specifically marginalised by the Westphalian Settlement. Other losers were the Pope and the Catholic Church who lost much of their political influence. By ending the wars of religion the Treaty of Westphalia gradually introduced the concept of secular authority and the separation of Church and State which became embedded later in democratic constitutions. The threat of excommunication by decision of the Pope used to be a terrifying weapon in Feudal Europe. By the eighteenth century excommunication became a much weaker instrument of influence.

As the Pre-Westphalian players receded to backstage the new stars occupying center stage were the nation-state governments themselves. As European economic development in the 17th, 18th and 19th century eventually led to greater international trade and colonial expansion, major corporations became more prominent. However economics remained subordinated to politics, at least in the non Anglo-Saxon countries. Jean-Baptiste Colbert in Louis XIVth reign developed the techniques of state coordination of economic activity into a fine art. Corporations were likened to armies attacking foreign interests and conquering foreign markets in the name of the king. Economics was seen as an extension of policy by other means. Unpatriotic corporations were stripped of their state monopoly.

This subordination of economic interests to national goals remained a dominant feature of international relations for most of the countries of Western Europe in the eighteenth, nineteenth and twentieth century. Napoleon, Bismark, Hitler Stalin and perhaps even De Gaulle, Mitterand, Adenauer and Kohl all saw the national interest as taking precedence over individual economic interests.

4 - The only enforceable international law is that based on treaties between sovereign countries.

As international relations intensified in the eighteenth and nineteenth century a body of international law slowly began to emerge emanating from two sources. The principal and only truly enforceable law was the body of agreements resulting from treaties between sovereign countries and applying only to the signatories. International Law was a form of delegated authority which could be taken back by repealing the treaty which transferred that authority. This type of international law merely reaffirmed the primacy of sovereignty since no sovereign country could be forced to accept what it had not consented to. It could be coerced into acceptance through defeat in war but it is only after the capitulation or peace treaty that it would be legally bound not before. Capitulation was tantamount to a voluntary transfer of sovereignty from the vanquished to the victor

Scholars developed the second source of international law, more as an intellectual pursuit with no automatic implementation procedures. This was known as "natural law" as Hugo Grotius and others put it. Based on assumed universal values it was occasionally acknowledged in the first three centuries of the WWO as a justification for international action. But it never gained sufficient momentum to override the principle of state sovereignty and to form the legal basis for international intervention into the affairs of another state. The only real international law was that derived from treaties.
5 - War Is A Legitimate Instrument of International Relations
One of the surprising by-products of the Westphalian World Order was its implicit retention of war between sovereign states as a legitimate instrument of external policy. Clausewitz famous words, "War is an extension of policy by other means" was in retrospect, very Westphalian in form and content. The use of force to settle conflicts has always existed but the innovation brought by Westphalia was the introduction of the concept of war with rules. Although not explicitly present in the Treaty itself, the legitimate possibility of war between states was a logical extension of the primacy of sovereignty. If two sovereign states disagree and there is no power greater than sovereignty, the conflict resolution must come through war. In the same way that dueling between gentlemen became, in the eighteenth century, the proper way of settling an aristocratic quarrel, war between states also was considered acceptable, as long as certain rules were followed.

There were implicit rules of engagement, limitations on types of weapons, rules of victory and defeat and a recommendation of gentlemanly behaviour throughout. For instance, in the eighteenth century battle of Fontenoy, the French were reputed to have invited their British adversaries to tirer les premiers in an emulation of a courteous duel. One eighteenth century strategist even argued that battles could be decided with practically no bloodshed but by pure manoeuver. When one army was obviously outmanoeuvered by the other, its general, as a gentleman, should have the courtesy to surrender, in the same way that a chess grandmaster will resign long before the checkmate, when it becomes obvious that the game is lost.

In the nineteenth and twentieth century elaborate rules of war were further systematised including proper ways of declaring war, diplomatic immunity, the treatment of prisoners, methods of capitulation etc. The Geneva Convention is a good example of the Westphalian concept of War with its precise rules. So is the Charter of the United Nations, which recognizes the legitimacy of war in certain circumstances. In a Westphalian War unconditional surrender or capitulation is the proper way of legally transferring sovereignty from the vanquished to the victor.

The Impact of Globalisation on The Five Pillars

The acceleration of "Globalisation" since 1945 has severely tested the Westphalian System. Globalisation itself may be broadly defined as the migration of human activities from the narrow confines of the nation-state to the much larger theatre of Planet Earth itself. "All the World's the Stage" as Shakespeare put it. Although, in a technical sense globalisation may be traced back to earlier historical periods the acceleration and sweeping nature of contemporary change is of such a magnitude as to signify a real qualitative shift. The historical antecedents were merely small introductions of things to come. True, by 1900, the World was already a single market for some products and capital moved freely across international borders. True also, the Voyages of Discovery between the 13th and 17th century were precursors to modern globalisation. But the period 1945-2000 witnessed the rise of multinational corporations bringing with them not just the globalisation of trade but of production itself. The new global division of labor was marked by high transnational mobility of productive factors, including entrepreneurs, unskilled labor through mass migrations, financial capital, real capital and above all technology. The old theories of fixed comparative advantage based on immobile factors of production had to give way to new theories of dynamic competitive advantage, flexible, shifting and policy sensitive.

An important feature of contemporary globalisation has been its asymmetrical and uneven character. Had all sectors of human activity globalised at the same pace, the process itself would have been trivial. On the contrary what happened was that globalisation proceeded at breakneck speeds in some sectors (finance, technology transfer, spread of epidemics, organised crime, international terrorism) and very slowly in others (government policies, social attitudes, international regulation, the fight against crime, terrorism or disease). These asymmetries have created winners and losers and have threatened the social fabric of many countries undergoing rapid and often unwanted social and economic change. They have also managed to challenge each one of the five pillars of the Westphalian System as follows.

Impact On Pillar 1 : Legal sovereignty is now no longer the monopoly of national governments.

Contemporary central governments have responded to globalisation by voluntarily shifting power upwards to supranational institutions, downwards to sub-national governments and sideways to market forces. The emergence of the European Union is the best example of the upward shift. As authority shifts from national capitals to Brussels, Europe is experiencing a sort of "Reverse Westphalia" with the European Commission metaphorically assuming the role of a new Holy Roman Emperor. European law takes precedence over national law. European "supranationality" is extra-Westphalian especially given the fact that the Treaty of Rome, which is the juridical basis for European integration has no provisions for its own repeal and is legally a one-way street.

At the global level the United Nations, a body involving most but not all sovereign countries in the world, although based on Westphalian principles, also includes significant departures from them. First, its resolutions are binding on its members even if they have not accepted them. Second, some Security Council resolutions are supposed to be enforceable even against non-members, a clear breach of the sovereignty principle. Other intergovernmental organisations such as the WTO are also picking up powers which may involve a transfer of sovereignty. Overall, the upward power shift from governments to supranational bodies remains under a cloud of ambiguity.

The downward shift has led to the emergence of powerful subnational governments, regional and municipal power particularly in federal states like the United States, Canada, Switzerland and Australia. The Canadian Confederation, for instance is a system of shared sovereignty: some areas are within the sole responsibility of the federal governments others are under the sole control of the provincial governments and still others are in common jurisdiction. The distinctions become blurred as new sectors are born (telecommunications, environmental protection) and the power sharing is fuzzy. The same is true to some extent in the United States and Australia. Even unitary states such as France and the UK are decentralizing their power structure. The overall consequence of the downward shift is that subnational governments now play an increasing role in international affairs, attracting investments by incentive policies and sometimes even restricting national governments' ability to sign treaties. For instance, the Kyoto Protocol on climate change, signed by the Canadian Federal Government was challenged by a Canadian province on the grounds that environmental regulation was a joint federal-provincial responsibility. The signature by the Australian Federal Government of the OECD Anti-Corruption Convention in 1998 was delayed by constitutional challenges asserting that criminalisation of corrupt practices was a state responsibility.

The lateral shift has involved a transfer of power from the public to the private sector. National governments have transferred power to market forces via, deregulation, privatisation and budget cuts. Deregulation has delegated considerable economic decision making to the interplay of supply and demand. Privatisation has turned over large sectors of previously nationalized state activity to privately owned corporations. Budget cuts have reduced the procurement power of governments previously an important policy tool.

Impact On Pillar 2 : The control of physical territory is much less meaningful today both as a source and domain of power.

Perhaps the most important impact of globalisation on the exercise of power has been the downgrading of the importance of physical territory. Improvements in transportation and telecommunication technologies have led to what some have called the "death of distance" The world of the Internet of global finance, of acid rain and of epidemics does not respect national borders and sovereign jurisdictions. Even the authority of the United States as the only superpower does not legally extend beyond its geographical borders. An Internet terrorist hacker in Afghanistan can wreak havoc in the United States beyond the reach of US law. The power of Bill Gates, George Soros, the Catholic Church, Islamic Jihad etc. is not based on physical territory but on the control and management of information. Yet the structure of government legislation and regulation is still territorially based. This discrepancy severely reduces the ability of national governments to deal with global challenges.

Impact On Pillar 3 : Non-state actors are emerging as the new stars of the global order

The WWO developed as an inter-national system, with the emphasis on national. National governments were the star players. Key issues were decided between external affairs ministers. Generals would wage war and ministers would sign peace treaties. Today the Non-State actors have moved to central stage and we have a global system which is much less inter-national. Who are these new actors?

First and foremost are the large multinational corporations wielding considerable economic (and therefore political) clout. Today's OECD, for instance, is a grouping of the leading industrial countries. Only governments are members. However if a new OECD would assemble the first 100 major economic players, governments or corporations alike, 52 would be national governments and 48 corporations. It must be noted that 70 of the 200 odd countries in the world today have less than 4 million population. They exercise sovereignty in name only, displaying the pomp and pageantry of power but with no real clout associated with it. On the other hand, multinational corporations can exert, through their economic size and their transnational mobility, considerable influence in world affairs including on national governance itself --both via the financing of elections in democratic countries and in influencing the agenda of international negotiations.

Second are the militant Special Interest Groups which include organized religions, special lobbies, secret societies, and other pressure groups which exercise influence in a more covert fashion. Within this category one must also include outlaw elements, mafias etc. who have been much quicker in harnessing the potential of globalisation than legitimate groups.

Third are the NGOs (Non Governmental Organisations claiming to represent Civil Society) and who have, via street demonstrations and persuasive communication through the Internet, shown considerable ability to block or delay the signing of agreements on globalisation. The increase in the influence of the NGOs is directly related to the decrease in the influence of national governments whose legitimacy is now in question. Rightly or wrongly many reasonable citizens around the world do not feel adequately represented by their governments in international organisations.

Fourth are the IGOs (Intergovernmental Organisations) created by sovereign governments and now imbued with increasing power, at least on paper. These include the IMF, World Bank, WTO, OECD European Commission etc. and the United Nations. There are literally hundred of such organisations collectively described as the Multilateral System with varying degrees of power and influence. Some of these IGOs may invalidate the decisions of national governments although their enforcement mechanisms are doubtful.

Impact On Pillar 4: International law is beginning to challenge the supremacy of state sovereignty .

The second source of international law, "natural law" in Hugo Grotius terms is beginning to take hold in global affairs. From philosophical principles it is now emerging as the reflection of common sense and human decency. Concepts such as human rights, environmental protection, ethnic self-determination, sustainable development are beginning to trump state sovereignty in the court of public opinion and are invoked to justify interventions in the affairs of sovereign states. For example, the creation of war crimes tribunal since the Second World War is a clear challenge to the Westphalian principle of the primacy of sovereignty. No longer can "acts of sovereignty" be a valid defense in cases of "crimes against humanity." Humanitarian interventions or taking sides in a civil war as in the Kosovo episode of 1998, are also examples of extra-Westphalian actions. In the pure Westphalian philosophy, outsiders have no business intervening in a civil war. Even if obvious atrocities occur, outsiders are only allowed to watch as long as the violations take place within the jurisdiction of a recognized sovereign country.

The principle of non-interference in the internal affairs of another country is much more difficult to defend today, in the age of CNN, of Amnesty International of Medecins Sans Frontieres and Greenpeace. 19th century atrocities such as the 1916 Armenian Genocide in Turkey went largely unnoticed. Today's attempted genocides are on the 6 o'clock news and cannot be ignored. Therefore interventions overriding national sovereignty are now approved by world opinion although the exact criteria and legal basis for such interventions have never been clarified. The breaching of sovereignty is now more acceptable, yet the rules for doing so are still very vague.

Impact On Pillar 5 : "Westphalian" wars are in decline. Non-Westphalian conflicts are on the rise.

Most wars which have taken place since 1945 have not been "Westphalian" either in form or content. A Westphalian War is a clash of sovereign countries according to certain rules such as formal declarations of wars, treatment of prisoners etc. The post-war conflicts have been largely, either subnational civil wars or global struggles between special interest groups. There have been notable exceptions such as the India-Pakistan, Iraq-Iran, Britain-Argentina and Arab-Israeli wars. But, on the whole waging war to change geographical borders is out of fashion in the rich countries although still present in the Third World. In addition, the legitimacy of war between sovereign countries as a method of settling disputes is much more in question now than at other periods of history. Most countries disguise their war ministries under tamer names such as "defense" or even "self-defense" as in the Japanese case. The new forms of confrontation are economic and informational. This does not mean that millions have not been killed at the subnational level in attempted genocides, wars of religion or of ethnic rivalry. But the game has changed and the protagonists are no longer national governments but corporations, special interest groups, drug cartels, ethnic mafias etc. all belonging to the group of non-state actors. In some senses war has been "privatized" further reducing the influence of national governments.

It is interesting to note in passing that the elaborate Westphalian rituals involved in declaring or ending a state of belligerency are now very rare. Few if any of the post World War II conflicts have been accompanied by formal declarations of war or have ended with peace treaties. In most cases hostilities start spontaneously with a sudden surprise attack and end with UN sponsored cease fires. The conflicts themselves often ignore the Geneva Convention and other rules of war specific to the Westphalian system. The use of "illegal" weapons, selective assassinations of political leaders and the torture of prisoners to exact information have been widespread and used by many contemporary belligerents in disregard for the so-called rules of war.

Is Anyone in Charge ? An Emerging Governance Vacuum?

The weakening of the five pillars of the Westphalian System, is creating a growing governance vacuum. Globalisation is making political borders irrelevant and this borderless world is also becoming a ruleless world. The transnational mobility of factors of production (such as corporations, entrepreneurs, investors and inventors) is accompanied by a parallel mobility of the factors of destruction (malcontents, terrorists, organized crime etc.). Both groups are now in a position to escape national regulation by pitting one jurisdiction against the others in order to obtain maximum advantage. Whatever international rules exist take the form of voluntary guidelines with doubtful enforcement capability by national governments. As a result an increasing number of sectors of human activity are now escaping any form of control such that a visiting Martian may well conclude that on Planet Earth, no one's in charge! Here are some illustrative examples:

  • Global commerce is becoming a free for all. Although the WTO was created to consolidate global trade rules and achieve the proverbial "level playing field" the thrust of its action so far has been to disallow national policies considered to be protectionist without replacing them by common international rules. There is no competition law at the global level and no anti-trust legislation. Mergers and acquisitions can occur at will at the global level. For instance, there is nothing to prevent Microsoft Corporation, if split up in the US to reconstitute itself elsewhere. As to "corporate governance" which describes the internal accountability of corporations to their shareholders and stakeholders, it varies from country to country. There are no global bankruptcy laws; no enforceable property protection or deterrence against corrupt practices beyond "voluntary guidelines." In addition there is no globally enforceable legislation to protect consumers. Overall the global economy is beginning to resemble the Olympic Games but with a twist : there are high rewards for the medalists and very little for the also-rans but, in the economic olympics there are no rules and no referees with true clout.
  • Global finance is increasingly chaotic. The sheer volume of short-term speculative capital seeking quick profits tends to decouple the financial from the real economy. As the financier George Soros has pointed out the global financial system is in structural disequilibrium. Feedback loops create self-fulfilling prophecies. Decisions are made in the financial economy, which defy traditional macroconomic theory. Countries with heavy balance of payments deficits like the United States paradoxically see their currency appreciate rather than depreciate. Exaggerated price earnings ratios create overvalued corporations vulnerable to bursting bubbles etc. Exchange rates are very far from their purchasing power parities. Yet no central bank, acting on its own, is powerful enough to resist speculative attacks on its currency. The collective action by the G-7 central banks to shore up a currency is a step in the right direction, but overall there is no global overseeing financial institution comparable to what exists within nation-states.
  • The ability of governments to choose and implement their own social and cultural policies is now limited by the constraints of "competitiveness." Competition across different social spaces is becoming very difficult. Assume two identical countries competing with each other for footloose investment. The first one offers its labor force shorter hours and high wages while the second one imposes long hours and low wages what is likely to happen? The threat of corporate relocation will force the generous country to lower its social standards to compete with the less generous one. Shorter workweeks with higher pay in France are tempting corporations to move elsewhere. German firms are relocating to Eastern Europe to avoid the heavy burden of social charges in Germany itself. The absence of enforceable social clauses in international trade agreements is accelerating this race for the bottom, as it is now called, thus increasing inequalities and widening the gaps between rich and poor.
    · The Internet is a global technology par excellence. This means that attempts to regulate it will either have to be global or totally ineffective. The Internet's overall impact of governance is likely to be enormous because of its inherent ability to frustrate national rules. Privacy protection, intellectual property protection, the exclusion of pornographic or hate mail, even the prevention of premature publication of election results in a country with many time zones like the United States can only be achieved through global regulation of the Internet. Otherwise national rules can easily be circumvented extra-territorially. Anything short of a concerted effort by all the governments in the world to declare certain practices illegal is unlikely to succeed because the Internet has no fixed geographical base. It is in some senses the ultimate global challenge to national governance.
  • Environmental problems are in most cases beyond national control. Global warming, acid rain, transborder pollution flows all reflect increasing global interdependence. Collective action is required to manage that interdependence. At present there are very few universal agreements on environmental issues and even when a vague consensus exists there are no clear enforcement provisions. The Global Warming issue is the foremost example. In the first place the national governments of the world cannot agree on what to do about global warning. In the second place, even if they were to agree the implementation of that agreement would involve a considerable degree of intergovernmental cooperation and concerted action which is not envisionable given today's institutions.
  • Finally, the control of epidemics, the spread of viruses, (biological or electronic) and the potential for mass destruction coming from foreign terrorists or malcontents underscores the point that we are living in a very small planet where no man is an island and no country a fortress. Whether it is mad cow disease or the I love you internet virus, the spread of destructive forces is no longer limited by national borders. We are all on the same Spaceship Earth . Yet there is no captain on board. Victims of mounting interdependence we have yet to devise a practical system to manage that interdependence.

In the final analysis, the emerging governance vacuum is essentially the result of two opposite trends. On the one hand economic and technological trends are eliminating borders and abolishing distance. On the other, the global political system still continues to consider chunks of territory as appropriate domains for the exercise of power, ignoring the death of distance and the high mobility of factors of production and destruction. As a result we have, in the World Public Sector a proliferation of national and subnational governments with decreasing and fragemented policy capacity while in the World Private Sector giant mergers and alliances wield immense power and play one jurisdiction against the other. This resulting imbalance of power is the final nail in the coffin of the Old Westphalian System. The Old Westphalian players are reduced to bit players while the new non-state actors are grabbing center stage.

What are the Options?

If our analysis of the potential collapse of the Westphalian System is correct, 21st century governance will evolve in one of two directions (1) Privatisation of governance i.e. the assumption of governance responsibilities by the non-state actors or (2) Rejuvenation of the inter-national system to allow it to deal more effectively with the present and future challenges of globalisation (what we have called Westphalia II). Let us examine each in turn.

Governance by Non-State Actors

The Status Quo if left unattended will progressively transfer most governance functions to the non-state actors. As we have seen, the present world stage is made up of a motley group of players some advancing and some in full flight. In retreat are the 200 odd nation-state governments especially when they act individually. In that group we have one superpower, a dozen or so "great powers" another 50 countries with a certain degree of real internal autonomy and the rest who exercise sovereignty in name only. The only superpower, the United States is strong enough to impact upon all areas of the global system yet not powerful enough to impose a hegemonic pax romana (and not particularly interested in doing so even if it could). Torn by the opposing forces of globalism and isolationism, the United States has yet to offer a coherent global view beyond the liberalisation of markets (which is itself challenged internally within the United States, both by the extreme Left and the extreme Right).

The advancing players are the non-state actors. A first group has emerged from the market system itself: multinational corporations, nouveaux riches entrepreneurs, inventors and investors. A second group has emanated from more traditional special-interest groups, labor, consumer groups, religious organisations etc. The third group, composed of NGOs, purports to represent the elusive Civil Society. These non-state actors are now able to exert pressure and assume de facto governance functions either implicitly or explicitly

What form could the full privatisation of governance take? The most probable initial scenario would be governance by markets where the forces of supply and demand will make the political decisions as well as the economic. Political democracy is normally based on the principle of "one-person one vote." Markets function under the rule of "one dollar one vote" expressed through the price mechanism. In highly competitive markets "consumer sovereignty" gives some power to solvent consumers who can back their needs with effective demand and dollar votes. However when global markets are monopolistic we end up having "producer sovereignty" where the sole or principal producer makes the rules. Most corporations dream of becoming monopolists. In the absence of global anti-trust legislation, the move towards monopoly power is enhanced by the ease of mergers and acquisitions. As one CEO put it, "why try and beat them when you can buy them - or be bought by them." When profits and market control are at stake, a strategy of cooperation and alliance is more rational than cutthroat competition. If governance is left to monopolistic markets, then serious democratic deficits will arise with a handful of oligarchs making crucial decisions affecting everybody. This is a clearly undesirable scenario for all except perhaps the putative monopolist.

Can the other non-state actors check the power of monopolistic markets in the absence of governments? In our view the influence of Group 3 the NGOs would decrease while that of Group 2, the covert Special Interest Groups would increase. The NGOs principal weapon is appeal to public opinion. But public opinion is itself only relevant if decisions are made on the "one-person-one-vote" system. If democracy is no longer in the picture with decisions being taken exclusively via dollar votes, the NGOs' relevance and the power of Civil Society itself would diminish. Civil Society needs receptive ears. The most receptive ears are those of democratic governments seeking to be re-elected. As governments lose their power, so in the long run will the NGOs.

The opposite is true for the militant SIGs (Special Interest Groups) especially those willing to use force. If there are no longer any rule makers or rule enforcers, who will prevent cheating and criminal activities? The very notion of crime will have to be redefined. The economic analysis of organized crime suggests that as legitimate power weakens, "mafias" i.e. structured gangs, develop and thrive. In the absence of strong ethical constraints, if it is determined that it is cheaper to take rather than to sell or intimidate rather than market, strong arm techniques will replace normal commercial practices. The Market System would then become a Mafia System with warlords competing for economic territory. Even legitimate corporations will have to arm themselves to protect their property and their profits. In failed states such as some of the republics of the ex Soviet Union and in some countries of Africa and Asia, conditions are already rife for mafia economies.

It must be noted that mafias must be seen not only as outlaw corporations with a CEO at their head but also as primitive governance structures establishing a new order. In fact many of the existing legitimate power structures began as primitive clans, establishing military superiority and then stabilizing into orderly dynasties. The legitimation of military dynasties has been a recurring feature of human history. The contemporary danger is that, as globalisation proceeds unchecked and unregulated, the breakdown of the rule of law will lead to a global mafia economy - which will presumably bring a new order but not one that is particularly desirable or stable.

Westphalia II?

The dangers associated with a global governance entirely in the hands of non-state actors is the best argument in favour of reforming the present international system which, on analysis suggests is based on an antequated system of distribution of sovereignty. To abandon sovereignty altogether would be a mistake because behind sovereignty lies democracy. By neutralizing sovereignty one also neutralizes democracy. But since national sovereignty, in its Westphalia I form is becoming obsolete, the task of the negotiators of a Westphalia II will be to redefine and redistribute sovereignty to make it both efficient and legitimate.

The ultimate contours of Westphalia II cannot be guessed at this early stage but what can already be identified are the broad objectives of the negotiation:

1. Promote a more Human-centered Globalisation. Design systems and tools which will promote the spreading of prosperity in a win-win fashion. This will involve reducing the gaps between winners and losers to acceptable levels and inventing compensation mechanisms to allow the benefits of economic expansion to accrue to all, in varying degrees.

2. Establish an optimum balance between market-based decisions (one-dollar-one vote) and political decisions (in the noble sense of political). A determination will have to be made as to which activities should be decided by dollar votes (one dollar=one vote) by democratic election (one-person = one vote), inter-state agreements (one state= one vote) and by the Old Westphalian criterion (one-state = one-veto).

3. Redesign the notion of "sovereignty" itself in terms of (a) its sources and legitimacy and (b) the actual distribution of power between levels of government from the lowest (municipal) all the way to the highest (global) via the intermediate levels of regional, national and continental levels

4. Define new principles of enforceable international law which could be based on a minimum set of globally accepted values, such as democracy, human rights, the management of interdependence, the maintenance of cultural specificity etc. One of the most important consequences of this new international law could be the prevention of war as a means of settling disputes.

5. Redesign the Multilateral System of IGOs to reflect these changes and be much more inclusive and representative that it is now. The hundreds of IGOs should be rationalized and restructured to reflect the new realities. In addition the creation of a coordinating IGO involving heads of government could be envisioned. At this stage the only effective IGO functioning at the summit level of heads of governments is the G-7. A much larger G-7 type organisation could be explored.

Who is likely to negotiate Westphalia II? Ultimately of course the existing legitimate holders of power, i.e. the Westphalian national governments will have to sign an eventual Westphalia II. But we believe that it would be a mistake to attempt such negotiation in the existing IGOs without careful prior preparation through one or more pre-negotiating forums. Intergovernmental organisations are not designed to support meaningful debate for the following reasons.
First, their present architecture is haphazard and messy. There is no clear division of labor and significant overlaps. Sectoral interdependence means that trade ministers at the WTO, environmental ministers at the Climate Change meetings, central bankers at the IMF and World Bank meetings etc. tend to deal with linked issues. Trade has an impact on environment, investment codes on social policies, competitiveness on culture etc. As we have seen there is no summit level IGO other than the G-8 to deal with and arbitrate on questions of sectoral interdependence.

Second even if a summit meeting of all the world's leaders were scheduled, the assembly would likely meet with failure. The absence (or at least the unsatisfactory representation) of the non-state actors would undermine the credibility and legitimacy of such a meeting. Since the WTO Seattle meetings in 1999 every intergovernmental conference on globalisation has met with considerable dissent by the non-state actors purporting to represent civil society. The pre-negotiation forums should include, in some form or other, all the relevant payers not just the governmental ones.

Third, the very structure of the IGOs makes meaningful negotiation very difficult. Decision making in the IGOs is based on the Westphalian "sovereign equality" principle giving each state the same vote whether big or small, rich or poor. But sovereign equality not only means that Togo and the United States, Costa Rica and Japan have the same voting weight, it also means that they have the same veto. Since no sovereign country can be legally forced to accept decisions it has not consented to, the principal decision making procedure in the IGOs is "consensus" which means that any dissident state can impose a veto. This tends to make any radical restructuring almost impossible since the forces of inertia favor the status quo.

Much more likely to succeed are pre-negotiating forums of a semi-formal nature. What we mean by "semi-formal" is a flexible structure which will bring together thinkers and actors. The thinkers coming from universities and leading edge think tanks could confront their views with actors from governments, corporations and civil society in a "club" type formula. One such initiative is the proposed "Club of Athens" piloted by the author and a group of Canadian, European, American and Japanese opinion leaders. The Club would convene meetings of former heads of government and international organisations, CEOs of leading global corporations, labor leaders and representatives of Civil Society, supported by a permanent think-tank of world class academics. The purpose of the Club would be to concoct scenarios for better 21st century global governance which would satisfy the double criterion of desirability and feasibility. The Think Tank would really be an "Action Tank" with the blue ribbon panel of actors giving realpotitik validation to innovative thinking. The results of this or other similar pre-negotiating forums could then be communicated to the world community and serve as an appropriate starting point for the negotiation of Westphalia II. The reference to Athens, in that particular initiative is an allusion to Plato's Republic which used Fifth Century Athens as its model. In a metaphorical sense, what we need to design is "Cosmopolis" or the Global Athens. Whether it is through a club or other formats a preparatory forum is obviously the first step in the fundamental reform of the world system. It is a necessary but by no means sufficient condition for ultimate success.

Concluding Remarks

The US presidential election of 2000 revealed the dangers of relying on an electoral system designed in the eighteenth century to designate a president in 2001. At the heart of that crisis was the potential discrepancies between popular and electoral votes, the strengths and limitations of technology in counting votes and the influential role of media in influencing and distorting electoral results. The crisis also exposed the complexity in the distribution of power between state and federal authorities and between the legislative, executive and judicial branches of government. It also exposed the dangers of excessive decentralization of authority where no common standards exist and where the vagaries of vote counting in some local precincts could determine who would be President of the United States and the leader of the only global superpower.

If it is anachronistic to elect presidents in 2001 using a system designed in the 1790s it is even more anachronistic to try and govern the world with a system conceived in 1648. In the 21st century the power of national governments to impose the rule of law is inversely proportional to transnational factor mobility. The more corporations, entrepreneurs and technology are geographically mobile, the smaller the influence of territory bound legislators in attempting to regulate them. As that mobility is likely to increase with the improvements of technology the nation-based rules based system will wither and decline. It must be gradually replaced by something else. Obviously, we are not yet ready for a world government. But more effective and legitimate global governance, especially in the face of mounting interdependence is an urgent imperative. The search for such a system before painful and uncontrolled crises occur, is, in our view, the real millennium challenge. Let us just hope that it won't take a millennium to meet it!

 

 
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