The Digitized Nation

The agenda of he digital transformation (DT) is omnipresent in the business of our days. The media is full of buzzwords, like ‘platforms and ecosystems’, ‘uberization’, ‘unicorns’, ‘disintermediation’, etc., which describe the effects of modern digital technologies on industries, corporations, and value chains. Surprisingly, less is written on how these technologies affect the states and their relations. Can it be that the key institute of society of our times – the one that organizes and governs our lives in some most fundamental ways, providing security, guar­ding the commonwealth, and directly running or regulating some of the essential systems like education, health care, or finance – is immune to the challenges brought by the digital transformation?

Far from it. The forces of digital transformation indeed penetrate every aspect of the functioning of the modern state and are capable of disrupting some of its foundational concepts. Take the one example of Bitcoin, which is effectively a global privately and uncontrollably issued currency¹ – something unheard of in the theory of finance and money. It definitely will have a profound impact on international finance, triggering a chain of reactions from national financial regulators.

The states like to think of themselves as being solidly founded and thus immutable. I would argue, however, that we most probably are in the beginning of the major paradigmatic shift in the operations, if not the foundations of a modern state. The key attributes of the digital transformation are in several important ways very poorly compatible with the way the states work. This is like a sea storm – as a great sailor of modern times, Bruno Peyron, wrote, you never pass through one without being changed.

Firstly, DT is happening by itself, not as part of some centrally managed master plan. The technology base of the digital transformation – networks with multiple modes of access, data storage and processing capacities, cloud computing devices, and, finally, countless software applications, which provide front-end to the customers – were developed by numerous private actors who fiercely compete with each other. Secondly, most of these actors have founded their market strategies on deliberately challenging the status quo of business and social models. That makes DT disruptive almost by the nature. And, finally, everybody who is affected by DT is more or less at the same distance to the frontier of innovations, meaning that there are no proven cases (neither of success or failure) or safe passes to follow.

These three features of digital transformation – happening by itself, disruptive nature and absence of proven tracks – make uncomfortable even the most adventurous of business corporations. The states, in turn, are much more conservative in nature; they were built to preserve, protect, and regulate in the most predictable and reliable way. Can one imagine – save promote – the idea of a state that is disruptively innovative with no proven end result? Yet, this is precisely what the states are forcefully pushed into in many areas.

The state as we know it was dependent in its functions on a number of monopolies. The most obvious one was outlined by Max Weber, who centered his definition of state on the concept of monopoly on force within a given territory. Yet, this monopoly was supplemented and partly supported by two others. First, there was a monopoly on information in certain areas – maintained either de jure (like in the case of formal criminal investigation) or de facto (like in vital economic statistics). And, second the state had a monopoly in what could be called ‘mobilization of resources’, which was vitally important for the independent functioning of smaller countries. This monopoly meant that the state has the means to collect the biggest power within its territory – pooling human resources through, say, military draft or nationalizing financial and industrial assets in case of necessity. Thus – while some of the states are obviously more limited in resource than international private actors, including major corporations – they have the means to ensure that within the birders of a given country, there are all legal means for the state to remain the most powerful player.

Now, we see these monopolies effectively challenged by the modern digital technologies. The information becomes instantly and universally accessible. The state still has the power to have some of its internal data ‘classified’, but this instrument is of diminishing effectiveness. Even putting aside the numerous leaks through direct data breaches (like in the case of Wikileaks), there is a growing number of instruments open to the public that allow independent private actors to get the quality of knowledge previously available only to the state. An example is the independent investigation into the tragedy of Flight MH17, which reconstructed some essential facts by mere analysis of the data available on the Internet, first of all on the social media. There is a big question egarding the criteria and instruments of verification of such investigations – e.g., how and when a court can rely on data modelling as evidence. Yet, in most cases, we can safely assume that the private actors increasingly have the means to collect and use the knowledge even in the most sensitive areas within the traditional domain of the state.

At the same time, the global nature of the digital networks and the boom in so-called ‘cloud computing’ (computer servers and data storage facilities being accessed from any place in the world) allow private actors to mobilize computational power that may surpass the capabilities of a certain nation. A few of bigger countries – like the US, China, Russia, and Germany – are more or less immune to the threat due to their size, though even in their case, there is the probability of very mighty local attacks on government offices or pieces of critical public infrastructure. Smaller countries have the risk of being completely overwhelmed by the power of private actors in cyberspace. As a result, a country like Estonia, which is making very rapid and interesting progress in the area of e-government, has to hedge the risk by placing reserve copies of all its critical systems in the facilities of bigger EU countries. This is hardly a problem in itself in the context of the European Union, yet a country of comparable size on another continent, in less friendly surroundings, can face the unwanted necessity of actually delegating its ‘digital sovereignty’ to a big nation.

With the challenged state monopolies on information and mobilization, can the monopoly on force stand untouched? What was said earlier on the cases of smaller countries means effectively that they are not capable of regulating and policing their cyberspace on their own. Private actors, both within the national borders and outside of them, can be more powerful in their actions, and not necessarily in an explicitly illegal way (as everybody is on the frontier, it is impossible to create ex ante legislation for each possible future situation). The recent controversy of alleged Russian-backed interference in the presidential elections in the US illustrate the case. Imagine, however, if a powerful private actor or group of actors would seek to implement the techniques in a smaller country, bringing in the desired political result.

What does this mean for a modern state? There are two approaches to immediate actions, either to start the transformation of the institution itself or to try to impose the power of state ‘as is’ in the digital space. The first route is followed by some European countries like Iceland or Estonia, which embrace enthusiastically the idea of state ‘divesting’ from many of its legacy activities that can now be delegated to private actors. The result could be a very compact ‘state as a platform’ that keeps the essential minimum of direct operational functions, creates the rules for independent private actors, and facilitates the development of public services by them through instruments like open data.

On the other end of the spectrum, countries like China or Iran follow the route of establishing a perimeter of digital systems that are subject to certain control from the state, with a sort of ‘cyberborder’ around them, managing the connectedness to the outer word. The challenge here is that digital now really penetrates life, politics, and business, and does not differentiate much between them. An attempt to control the ‘political digital’ and restrict the access of the nationals to the outer cyberworld can create the impression of inferior life opportunities compared to their peers abroad. It can also adversely impact the local and global competitiveness of national companies. The side effects like these are obviously undesirable, yet are virtually unavoidable.

On the other hand, even the states that are enthusiastic about being digitally transformed have to create special taskforces to counter the illegal or semi-legal actions in the national digital space. However, here is a major problem: What is illegal in one country can be a perfectly acceptable activity in another. The global nature of digital systems allow what is called ‘regulatory arbitrage’, the deliberate choice of residencies with the most favorable legal environment for a specific set of actions. With further progress in the means of communications, including the boom in private communication satellites, it will be possible to create fully exterritorial digital centers on stateless vessels in international waters.

Obviously, the situation calls for consorted international actions in the development of regulation and its enforcement. However, current discussions on the issue show that creating some sort of comprehensive international law on cyberspace would be probably the biggest legal effort humanity has ever undertaken. One of the problems exposed by the attempts to internationally regulate – or even just coordinate – the forces of digital transformation is the degree of differences between the states of the modern world in foundations, ambitions, and operational modes. Those differences were in no way created by DT; their roots are deeply in history and culture. They were made manifest at times – actually, in every attempt at global cooperation, like WTO, ICC, and anti-terror military actions – yet the frequency of the clashes was relatively low.

The digital era is different in that it creates a space that is global in the 24/7 mode. The problems of, say, the Chinese government with international social media, of European Central Bank with Bitcoin, or of Russian authorities with foreign e-commerce storing the personal data of Russian customers, are the problems of ‘undesired’ instances constantly happening in infinite numbers. This is a very uneasy experience for the governments.

It appears that up to that moment, the globe was acting more or less on the assumption that law should be somewhere in the class of mathematics: There is to be but one right solution to every problem. Probably, there were variations in approaches to punishment – whether a theft should be prosecuted by an amputation of a hand or a few months spent in a relatively comfortable prison – yet the very classification of theft seemed universal enough. Certain practices, like capital punishment for blasphemy, were disturbing, but could be labelled peripheral. Important was the notion that a state – which is a legal construct, after all – should be as universal an idea as a mathematical function.

Now, it becomes increasingly clear that this is not the case. Law in general and the idea of state in particular is defined by a culture. The world is destined to have states of differing foundations and operations as much as it has multiple languages, musical styles, and dressing habits. Specifically, there are two poles of approaches: one putting the state fully at the service of citizens, and another proclaiming that state is the leading force of a nation, which is responsible for its qualitative development. These approaches can be applied independently to ideas and values, and economics. We see cases when a state would not interfere with opinions, but play strong in economy (like in Korea), or – vice versa – the instances of tighter control on ideology with a liberal approach to business matters (like in some Gulf countries). The classic Western notion is that state is, in the end, merely a service – definitely with no say in the space of ideology, and with a strictly limited space of legitimate economic actions. On the contrary, there are the ‘superstates’ that would take it as their responsibility to tell their citizens what is right and wrong both in ideology and business. There is a common platform of recognized human rights, but this platform proves to be very thin, due to the wide variation in interpretations of what constitutes the domain of vital public interest, a legitimate area of state interference.

The idea that all these approaches are of equivalent right to existence² is somewhat disturbing to the modern political philosophy. On the pragmatic side, the problem is that there is no apparent international mechanism that would mediate the existing differences to the necessary degree of consort in international actions. In the offline world, this was little of a problem. The 19th-century concept of sovereignty could be distilled down to the idea that states do not bother with motives and mode of operations of each other as long as they can somehow coordinate the actions on the global arena. Yet, this does not work in the interconnectedness of the digital world. There is a need for a significant degree of harmony among all national regulations, and this can be achieved only through the similarity of views on what are the legitimate motives and deeds of a state. As we have just found out, there is a universe of possible answers that bring the international situation to a stalemate.

There seems to be no unified solution to the question of whether a state should be ‘big’ or ‘small’ in the scale of its presence in the life of a nation, more so we can expect further divergence on the issue. Those states that are already comfortable with having a very compact role will go enthusiastically through the path of digital transformation toward being some sort of open service platform. They will be meeting in the international arena and in cyberspace with states that will seek the instruments to be ‘big’ and controlling in digital like elsewhere.

Most probably, there will be growing misunderstanding and mistrust between the two camps. A logical consequence would be the ‘regionalization’ of the cyberspace through creation of alliances of like-minded countries. Importantly, in digital, one does not need to have a physical proximity to take joint actions; theoretically, we can imagine a common zone between, say, Swaziland and Paraguay. As a consequence, a 19th-century concept of ‘major’ and ‘minor’ powers may return, the countries that will feel vulnerable to the threats of mighty international private actors will seek protection from bigger allies. Then, we should keep in mind that it was precisely the system of alliances granting protection from major powers to minor ones that triggered World War I. A scenario of world cyberwar is not at all unlikely; the question is, how far it will go into the physical space? Shutting down an enemy’s media portal is one thing, and doing the same with a major power station is another in terms of consequence. One of the fiercely debated international questions is whether the physical force can be used in retaliation for cyberattack. Disturbingly it increasingly goes into the area of, “In what precise circumstances?” and “In what amount?” It looks like in the coming decade, we will see the elimination of difference between ‘cyber’ and ‘physical’ in terms of action – both will be equally ‘real’.

In the modern world, internal problems of a state easily become regional, and regional problems go global, as was demonstrated by a number of cases, including Syria. Digital is definitely playing a role in this. As this article is written, the world is following with horror the tragedy of East Aleppo – not just in real time online but through hundreds of private accounts from the participants of the events. The experience is truly painful. At the same time, it builds the new understanding of the actual smallness of our world and the closeness of all the people within it.

This sense of closeness hopefully is a major step forward to bringing more peace and development through understanding and appreciation. The digital systems do disrupt the established institutions, forcing them to evolve. At the same time, these systems usually work to bring together the people and provide them opportunities for cooperation. These opportunities can be embraced by the states of the future when – regardless of their foundations and mandates – they will seek ways to be of more effective service to their citizens.

¹ The European Central Bank has issued reports and legal opinions on the phenomenon (the latest came on Oct. 12, 2016), stating among other things, that “‘virtual currencies’ do not qualify as currencies from a Union perspective”. While technically correct, these statements are often reminiscent of the criticism of iPhone at the time of its 2007 launch, like “a phone without a physical keyboard would never penetrate the business audience”.

² Provided, of course, that there is non-violent internal consensus of the society that supports the approach.