A major chaos!

 

Faced with increasing international competition, in the late 80s, companies, both public and private, opted to downsize. In some cases, productivity increases resulted in cutting the workforce, in others in increasing production while maintaining the existing employee roster. These improvements have been highly effective from a business perspective, so the most efficient corporations became those that maintain or increase production, decreasing the number of workers or keeping their workforce fixed, respectively, and thus being able to grow worldwide.

 

Meanwhile, corporations in Silicon Valley recognized that cost reduction, increased productivity, and competitiveness could be further enhanced by using production lines from other companies, as maintaining a comprehensive structure is costly to operate. This led to different firms beginning to use the production line of another company to significantly reduce their costs. Thus, land and machinery no longer needed to be purchased, labor contracted, and medical benefits provided by the interested company. That is, a company can outsource its production to other firms as a service provision. This started the trend of ghost or unbranded factories, which produce whatever one requests, ensuring continuous operation by offering their infrastructure to other companies. This gave rise to the Virtual Corporation, an entity focused on research, development, design, marketing, financing, legal matters, and other managerial functions, but with few or no manufacturing facilities, being a company with a head but no body. This represents the latest achievement in corporate restructuring and resizing, and the model is rapidly expanding from firm to firm. Need an example? Apple. Apple outsources the manufacturing and assembly of its cell phones to Foxconn, a company based in China. Foxconn, valued at billions of dollars, plans to incorporate over a million robots into its production line to cut costs and increase efficiency[140].

 

The Virtual State model suggests that economic strategy pushes corporations towards downsizing and relocating their production capabilities. The Virtual State is, in that sense, a negotiating entity that relies more on external economic access than on domestic economic control. Risky, to say the least, but if we think about the global production of most mass consumer goods, China comes to mind. In recent decades, this has been the case due to its low labor costs; however, in the era of automation, this remains so—why? Because the main components of products are still manufactured there, accelerating the integration of the value chain.

 

In Europe, for example, Switzerland is the leading virtual nation with 98% of Nestlé’s revenue generated outside its country of origin[141]. A reflection of how far these trends have gone is the growing proportion of Gross Domestic Product (GDP) consisting of high value-added services, such as design, consulting, and financial services. Services now make up 70% of the US gross product, with 63% of the total in the high value-added category[142]. Of course, manufacturing production still matters, but much less than before.

 

Since 1959, service prices have increased three times faster than industrial prices, implying that many nations will be able to prosper without possessing large manufacturing capacities, thus skipping a stage in their development. Australia and Israel are cases that represent this well. As a result of these trends, the world may begin to divide between “head” nations and “body” nations, or nations that represent a combination of the two functions. Or well, it will be so for a while until the advance of AI and robotics in the manufacturing industry leaves these peripheral countries without the opportunity to use their cheap labor as a mechanism to integrate into the international arena.

 

AI, along with the advance of robotics, will revolutionize the manufacturing industry, removing poorly paid workers from their workshops. This will strip away the possibility of advancement from those at the bottom of the economic-social pyramid. It will take away the opportunity for poorer countries to integrate into the world thanks to their low production costs, as countries like South Korea, Singapore, or China did in the past before escaping poverty. By saying this, I am not promoting that any country becomes a maquiladora or global factory with poorly paid labor; I am merely pointing out that even that possibility will be erased from the map for many economically poor countries.
 

Those large populations of young workers that were once a country’s greatest advantage can now become a highly destabilizing risk if the rulers do not meet their demands for a better life. Without an event that starts the development process, the poorest countries will stagnate while the AI superpowers will pull further away. This is the real danger that every country will face, including ours.

 

Latin American countries will not necessarily have to continue relying on the export of raw materials or agricultural products; instead, through education, we have the opportunity to capitalize on the advantages of an educated workforce, but to achieve this, we must act immediately. Investment in human capital can replace the inherent risk of changing commodity markets and thus avoid the constant danger of overproduction.
 

Corporations have sought to raise standards of teaching and learning in their regions, but states have moved very slowly in this regard. Outdated academic programs and poorly paid teachers, while in reality, primary, secondary, and university teachers should be better rewarded as patient creators of high value-added capital wherever they may be.

 

Economic relations between states will resemble nerves connecting heads in one place and bodies in another. Naturally, producing nations will quickly work to become the brains; but over time, few nations will contain within their borders all the components of the new economy.

 

However, there are those who understand that the resource of land will become important again because the supply of oil will run out, as will the amount of fertile land and drinking water decline while the population continues to grow, thus driving shortages of food, energy, and various natural resources. Technically speaking, natural resources may run out someday, but before that, they will very likely be substituted. In the 21st century, it seems very unlikely that the macro process we have been discussing will suddenly reverse, and that land will offer better returns than knowledge. As oil reserves run out, every day we are more efficient at capturing more energy through renewable sources like the sun or wind at an ever-lower cost, which will positively impact food production, an industry undergoing its own revolution through plant-based foods that, through technology, offer alternatives to meat products. An example of this is the Chilean company, NotCo, which recently raised a new round of capital for $235 million, bringing the company’s valuation above $1 billion, thus becoming Chile’s first unicorn[143], after receiving strong investments from Jeff Bezos, founder of Amazon, and Danny Meyer, former CEO of McDonald’s, among other heavyweights[144].
 

Undoubtedly, in the current international scenario, those states that depend on others and work together have done better than those that depend or try to depend only on themselves. But can the result be different in the future? Virtual States, corporate alliances, and essential trade relations forecast peaceful times, but as we saw at the beginning of the book, there are no magical periods of 20 years, nor effective peace plans that do not suffer ups and downs. State negotiations and private capital will not solve domestic problems entirely, but the economic ties that bind virtual nations with others will help alleviate their security concerns, as a cut in the nerves that bind the head to its body is something that favors neither party, a situation we saw at the beginning of the covid-19 pandemic when global production and supply chains were affected. Even so, this does not prevent the future rise of new nationalist leaders challenging the new status quo, and we will see why.

 

Although peaceful in its international implications, the rise of the Virtual State foretells a crisis for democratic politics at the domestic level. Change in domestic politics will not suffice because it will be an insufficient jurisdiction to handle global problems. Members of a particular state cannot determine international production through an election. Economic restructuring of a state will be difficult, as the state shrinks due to the inability to increase its revenues to support a battered society, worker discontent will spread as employment fluctuates and declines.

 

The economy may be temporarily prosperous, but this does not guarantee that favorable conditions will continue indefinitely. The state will continue to be one of many players in the international market and will have to negotiate directly with internal and external production factors to solve its economic problems. Countries will have to induce capital to enter and not leave their domains. To generate such investments, companies will seek countries with flexible and trained workforces, regardless of the strength or stability of those countries’ currencies, as inflationary contexts would real-term reduce their production costs due to the exchange rate mismatches of a market used only for production and not consumption. These demands will conflict with domestic interests demanding more government spending, producing a greater budget deficit, as they attempt to provide more benefits for a society hit by AI’s takeover of the labor market. This conflict will result in continued domestic insecurity regarding available jobs, the welfare system, and medical care. Unlike the recipes that were applied in the past’s isolated and partially closed economies, purely domestic policies will no longer solve these problems as the external context will strongly influence states.

 

The Virtual State is an agile entity operating in two jurisdictions, abroad and at home, and preparing to gain both from the outside and its domestic market. The management of large companies has begun to reformulate their horizons, but unfortunately, our government decision-makers have not yet.

 


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[140] Statt, N. (2016). Foxconn cuts 60,000 factory jobs and replaces them with robots. The Verge. Visto el 17 de julio del 2022, en https://www.theverge.com/2016/5/25/11772222/foxconn-automation-robots-apple-samsung-smartphones.

[141] Is Nestlé a Swiss company? (2019). Nestlé Global. Visto el 1° de febrero del 2023, en https://www.nestle.com/ask-nestle/our-company/answers/is-nestle-a-swiss-company.

[142] Buckley, P., & Majumdar, D. (2018). The services powerhouse: Increasingly vital to world economic growth. Deloitte. Visto el 29 de agosto del 2021, en https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/trade-in-services-economy-growth.html.

[143] The term “unicorn” refers to those tech companies valued at over one billion dollars according to their market valuation.

[144] Hall, C. (2021). NotCo gets its horn following $235M round to expand plant-based food products. TechCrunch. Visto el 29 de agosto del 2021, en https://techcrunch.com/2021/07/26/notco-gets-its-horn-following-235m-round-to-expand-plant-based-food-products.