From Nation-States to Network States

Technological advances are rendering geography-based governments obsolete, and states must adapt to an increasingly digital world

By Benedict Macon-Cooney

Throughout history, the concept of the state has been in flux. Power has been centralized and decentralized, often in an oscillating manner. Borders have been redrawn, micronations and start-up cities created. World powers and monopolies have risen and fallen, all to be replaced by more dynamic and enterprising powers.

Considering this notion of the world as an ongoing process, which sometimes finds periods of stasis but is primarily governed by a law of change, can be a disorienting experience. And for the past couple of decades, as our technological capabilities have expanded, many have been trying to hold onto an old operating model. Yet the physical world is no longer the only place in which laws are written and wars are fought. The digital world is in the ascendancy, creating new connected communities that transcend the confines of geography. It has the potential to be a hegemonic authority that could rival nation-states. And as Balaji Srinivasan and Parag Khanna wrote in Foreign Policy recently, this era of “great protocol politics”—shaped by the internet and decentralized technologies such as cryptocurrency—means that we are “transitioning from an age of geopolitics to one of techno-politics.”

Countries wanting to remain competitive must fundamentally rethink the theory of the state in the 21st century. As things stand, the institutions we created from the Industrial Revolution onward have proved robust, organizing government around hierarchical and rigid structures. This system ushered in great prosperity for many around the world, but as most have felt during the pandemic, durability has turned into inertia, and these sclerotic and overly bureaucratic systems can no longer meet the challenges of the modern economy. To the contrary, in a reimagined nation-state, code is law, and governments embrace technology to meet new challenges. Also, individuals have far more autonomy and freedom than ever before, as personalized healthcare and other services allow them greater control over their own futures.

Technology vs. Traditional Structures

Achieving this new type of state requires reversing the creep of recent decades, when parts of the regulatory state have iteratively compounded, adding on layer after layer to minimize risk and maintain an overly centralized semblance of control. Policy solutions are often overly focused on managing scarcity and adding to the number and complexity of institutions. Because technology has driven down the cost of goods and information, removing frictions, creating new forms of abundance and allowing greater power and freedom to the individual, these older types of governance models are an ill fit today.

As a result, most nations have failed to keep pace with the technological revolution happening around them, often acting as barriers to, rather than platforms for, progress. The more protective elements of government also either misdiagnose or willfully misrepresent the nature of the technological revolution so that the tech policy debate is dominated by Big Tech regulation, squeezing out all the other opportunities to discuss tradeoffs among scale, quality and cost.

The success of mRNA vaccines is evidence that some of policymakers’ highest-priority problems can be solved, at least in part, through technology, but that’s not where the conversation is. But we need to move in this direction. If we don’t, the growing disconnect between our scientific and technological capabilities and our systems of delivery (not least in healthcare), as well as an increasingly asymmetric sense of accountability, will continue to stoke the discontent that many feel for governments today.

This whole new theory of the state, in which government is a liberalizing platform, requires a far more open, connected and flexible form of government than the current system of nation-states possesses. But creating this new form of government will require answering fundamental questions about the architecture of government and how software can help countries to deliver, evaluate and iterate services in real time. States will have to think of data as a competitive asset. This may involve curating valuable public datasets to improve education; making legislation machine readable to increase the ease of doing business; and ensuring that all cities, towns and villages have digital twins to aid planning.

Governments that treat data in this way and build AI systems can also innovate in ways that affect and improve the physical world. For example, some physical innovations might scale and drive down the costs of energy, infrastructure and many of the elements that tend to rise in cost when the costs of most goods and services go down. Altogether, achieving this type of innovation requires nations to become network states, able to operate as one node in a system of platforms, some of which are public and others private.

Creating Network States

Tests of the state’s ability to adapt to the modern world are everywhere around us, and COVID-19 has accelerated some of the tensions between traditional institutions and new technologies in profound ways. But the concept of a nation as a network state is perhaps most immediately evident in remote work, and the methods countries use to attract labor could generate a fully flexible digital labor market.

To start with, geographic areas that want to successfully market themselves as locations for multinational companies and workers will need to reject the mindset of state-as-omnipotent. This is the approach that Mayor Francis Suarez took in Miami. His strategy was in many ways simple: asking how he could help technologists wanting to relocate, engaging with his citizens (mostly via Twitter) and rapidly prototyping. His use of cryptocurrency—and CityCoins, to give people a stake in Miami—is an example for other cities and a bold experiment in civic engagement. But the ability to pursue and execute such a course is apparently rare, even if the success is there to see. In a matter of months, Miami built an unparalleled reputation as a new hub for emerging tech, but few other localities have followed its example.

Nation-states also need to have a greater willingness to embrace new technologies. Regulatory sandboxes are one tool governments have tried to use in cryptocurrency, among other areas; these sandboxes exempt companies from certain regulations, which allows them to experiment with new products without fear of being penalized. Examples of such sandboxes include the Bank of Lithuania’s LBChain and Malta’s focus on virtual financial assets. Hawaii has even exempted sandbox participants from rules that require crypto companies to hold cash reserves equivalent to their digital currency holdings. A wider mindset shift away from designing by consensus and toward experimentation will also be critical.

However, the competition for talent requires states to go further. They will need to create the right incentives to attract talented individuals into their borders. For example, in the hunt for digital nomads, Portugal introduced a flat 20% tax rate for “high-value” residents, while “nomad visas” have already been launched by more than 30 governments, including those of Barbados, Bermuda, Croatia, Iceland and Thailand. Many of these visas grant temporary citizenship, thus removing barriers to employment.

But the disaggregation of personal and business locations, especially in the COVID-19 era, requires jurisdictions to push the boundaries of state and citizenship. Estonia was the first mover on this concept with its e-residency program. It offers entrepreneurs access to the EU market without the need for a physical base or residence in the country. Part of Estonia’s motivation is an exercise of soft power, but more than 85,000 people have signed up for the program, adding more than 18,000 businesses to the economy and tens of millions of euros in state revenues. And as more and more of the world’s activity goes online, with people becoming avatars and digital citizens potentially doing business in the metaverse, citizens’ economic activity can be anywhere, all the time.

To succeed in the internet age against the backdrop of dissolved geographical boundaries, states must become similarly liquid, adopting new structures to maximize the benefits of science and technology. This will require a whole new model of governing, in which power is derived not from centralization but from connecting labor, capital and ideas through the power of new online communities. This might challenge the notion of a national identity, but it will be the way to preserve states’ relevance as the world continues to change.