Feature

The Rise of Complex Terrorism

Modern societies face a cruel paradox: Fast-paced technological and economic innovations may deliver unrivalled prosperity, but they also render rich nations vulnerable to crippling, unanticipated attacks. By relying on intricate networks and concentrating vital assets in small geographic clusters, advanced Western nations only amplify the destructive power of terrorists -- and the psychological and financial damage they can inflict.

It's 4 a.m. on a sweltering summer night in July 2003. Across much of the United States, power plants are working full tilt to generate electricity for millions of air conditioners that are keeping a ferocious heat wave at bay. The electricity grid in California has repeatedly buckled under the strain, with rotating blackouts from San Diego to Santa Rosa.

In different parts of the state, half a dozen small groups of men and women gather. Each travels in a rented minivan to its prearranged destination -- for some, a location outside one of the hundreds of electrical substations dotting the state; for others, a spot upwind from key, high-voltage transmission lines. The groups unload their equipment from the vans. Those outside the substations put together simple mortars made from materials bought at local hardware stores, while those near the transmission lines use helium to inflate weather balloons with long silvery tails. At a precisely coordinated moment, the homemade mortars are fired, sending showers of aluminum chaff over the substations. The balloons are released and drift into the transmission lines.

Simultaneously, other groups are doing the same thing along the Eastern Seaboard and in the South and Southwest. A national electrical system already under immense strain is massively short-circuited, causing a cascade of power failures across the country. Traffic lights shut off. Water and sewage systems are disabled. Communications systems break down. The financial system and national economy come screeching to a halt.

Sound far-fetched? Perhaps it would have before September 11, 2001, but certainly not now. We've realized, belatedly, that our societies are wide-open targets for terrorists. We're easy prey because of two key trends: First, the growing technological capacity of small groups and individuals to destroy things and people; and, second, the increasing vulnerability of our economic and technological systems to carefully aimed attacks. While commentators have devoted considerable ink and airtime to the first of these trends, they've paid far less attention to the second, and they've virtually ignored their combined effect. Together, these two trends facilitate a new and sinister kind of mass violence -- a "complex terrorism" that threatens modern, high-tech societies in the world's most developed nations.

Our fevered, Hollywood-conditioned imaginations encourage us to focus on the sensational possibility of nuclear or biological attacks -- attacks that might kill tens of thousands of people in a single strike. These threats certainly deserve attention, but not to the neglect of the likelier and ultimately deadlier disruptions that could result from the clever exploitation by terrorists of our societies' new and growing complexities.

WEAPONS OF MASS DISRUPTION

The steady increase in the destructive capacity of small groups and individuals is driven largely by three technological advances: more powerful weapons, the dramatic progress in communications and information processing, and more abundant opportunities to divert non-weapon technologies to destructive ends.

Consider first the advances in weapons technology. Over the last century, progress in materials engineering, the chemistry of explosives, and miniaturization of electronics has brought steady improvement in all key weapons characteristics, including accuracy, destructive power, range, portability, ruggedness, ease-of-use, and affordability. Improvements in light weapons are particularly relevant to trends in terrorism and violence by small groups, where the devices of choice include rocket-propelled grenade launchers, machine guns, light mortars, land mines, and cheap assault rifles such as the famed ak-47. The effects of improvements in these weapons are particularly noticeable in developing countries. A few decades ago, a small band of terrorists or insurgents attacking a rural village might have used bolt-action rifles, which take precious time to reload. Today, cheap assault rifles multiply the possible casualties resulting from such an attack. As technological change makes it easier to kill, societies are more likely to become locked into perpetual cycles of attack and counterattack that render any normal trajectory of political and economic development impossible.

Meanwhile, new communications technologies -- from satellite phones to the Internet -- allow violent groups to marshal resources and coordinate activities around the planet. Transnational terrorist organizations can use the Internet to share information on weapons and recruiting tactics, arrange surreptitious fund transfers across borders, and plan attacks. These new technologies can also dramatically enhance the reach and power of age-old procedures. Take the ancient hawala system of moving money between countries, widely used in Middle Eastern and Asian societies. The system, which relies on brokers linked together by clan-based networks of trust, has become faster and more effective through the use of the Internet.

Information-processing technologies have also boosted the power of terrorists by allowing them to hide or encrypt their messages. The power of a modern laptop computer today is comparable to the computational power available in the entire U.S. Defense Department in the mid-1960s. Terrorists can use this power to run widely available state-of-the-art encryption software. Sometimes less advanced computer technologies are just as effective. For instance, individuals can use a method called steganography ("hidden writing") to embed messages into digital photographs or music clips. Posted on publicly available Web sites, the photos or clips are downloaded by collaborators as necessary. (This technique was reportedly used by recently arrested terrorists when they planned to blow up the U.S. Embassy in Paris.) At latest count, 140 easy-to-use steganography tools were available on the Internet. Many other off-the-shelf technologies -- such as "spread-spectrum" radios that randomly switch their broadcasting and receiving signals -- allow terrorists to obscure their messages and make themselves invisible.

The Web also provides access to critical information. The September 11 terrorists could have found there all the details they needed about the floor plans and design characteristics of the World Trade Center and about how demolition experts use progressive collapse to destroy large buildings. The Web also makes available sets of instructions -- or "technical ingenuity" -- needed to combine readily available materials in destructive ways. Practically anything an extremist wants to know about kidnapping, bomb making, and assassination is now available online. One somewhat facetious example: It's possible to convert everyday materials into potentially destructive devices like the "potato cannon." With a barrel and combustion chamber fashioned from common plastic pipe, and with propane as an explosive propellant, a well-made cannon can hurl a homely spud hundreds of meters -- or throw chaff onto electrical substations. A quick search of the Web reveals dozens of sites giving instructions on how to make one.

Finally, modern, high-tech societies are filled with supercharged devices packed with energy, combustibles, and poisons, giving terrorists ample opportunities to divert such non-weapon technologies to destructive ends. To cause horrendous damage, all terrorists must do is figure out how to release this power and let it run wild or, as they did on September 11, take control of this power and retarget it. Indeed, the assaults on New York City and the Pentagon were not low-tech affairs, as is often argued. True, the terrorists used simple box cutters to hijack the planes, but the box cutters were no more than the "keys" that allowed the terrorists to convert a high-tech means of transport into a high-tech weapon of mass destruction. Once the hijackers had used these keys to access and turn on their weapon, they were able to deliver a kiloton of explosive power into the World Trade Center with deadly accuracy.

HIGH-TECH HUBRIS

The vulnerability of advanced nations stems not only from the greater destructive capacities of terrorists, but also from the increased vulnerability of the West's economic and technological systems. This additional vulnerability is the product of two key social and technological developments: first, the growing complexity and interconnectedness of our modern societies; and second, the increasing geographic concentration of wealth, human capital, knowledge, and communication links.

Consider the first of these developments. All human societies encompass a multitude of economic and technological systems. We can think of these systems as networks -- that is, as sets of nodes and links among those nodes. The U.S. economy consists of numerous nodes, including corporations, factories, and urban centers; it also consists of links among these nodes, such as highways, rail lines, electrical grids, and fiber-optic cables. As societies modernize and become richer, their networks become more complex and interconnected. The number of nodes increases, as does the density of links among the nodes and the speed at which materials, energy, and information are pushed along these links. Moreover, the nodes themselves become more complex as the people who create, operate, and manage them strive for better performance. (For instance, a manufacturing company might improve efficiency by adopting more intricate inventory-control methods.)

Complex and interconnected networks sometimes have features that make their behavior unstable and unpredictable. In particular, they can have feedback loops that produce vicious cycles. A good example is a stock market crash, in which selling drives down prices, which begets more selling. Networks can also be tightly coupled, which means that links among the nodes are short, therefore making it more likely that problems with one node will spread to others. When drivers tailgate at high speeds on freeways, they create a tightly coupled system: A mistake by one driver, or a sudden shock coming from outside the system, such as a deer running across the road, can cause a chain reaction of cars piling onto each other. We've seen such knock-on effects in the U.S. electrical, telephone, and air traffic systems, when a failure in one part of the network has sometimes produced a cascade of failures across the country. Finally, in part because of feedbacks and tight coupling, networks often exhibit nonlinear behavior, meaning that a small shock or perturbation to the network produces a disproportionately large disruption.

Terrorists and other malicious individuals can magnify their own disruptive power by exploiting these features of complex and interconnected networks. Consider the archetypal lone, nerdy high-school kid hacking away at his computer in his parents' basement who can create a computer virus that produces chaos in global communications and data systems. But there's much more to worry about than just the proliferation of computer viruses. A special investigative commission set up in 1997 by then U.S. President Bill Clinton reported that "growing complexity and interdependence, especially in the energy and communications infrastructures, create an increased possibility that a rather minor and routine disturbance can cascade into a regional outage." The commission continued: "We are convinced that our vulnerabilities are increasing steadily, that the means to exploit those weaknesses are readily available and that the costs [of launching an attack] continue to drop."

Terrorists must be clever to exploit these weaknesses. They must attack the right nodes in the right networks. If they don't, the damage will remain isolated and the overall network will be resilient. Much depends upon the network's level of redundancy -- that is, on the degree to which the damaged node's functions can be offloaded to undamaged nodes. As terrorists come to recognize the importance of redundancy, their ability to disable complex networks will improve. Langdon Winner, a theorist of politics and technology, provides the first rule of modern terrorism: "Find the critical but nonredundant parts of the system and sabotage … them according to your purposes." Winner concludes that "the science of complexity awaits a Machiavelli or Clausewitz to make the full range of possibilities clear."

The range of possible terrorist attacks has expanded due to a second source of organizational vulnerability in modern economies -- the rising concentration of high-value assets in geographically small locations. Advanced societies concentrate valuable things and people in order to achieve economies of scale. Companies in capital-intensive industries can usually reduce the per-unit cost of their goods by building larger production facilities. Moreover, placing expensive equipment and highly skilled people in a single location provides easier access, more efficiencies, and synergies that constitute an important source of wealth. That is why we build places like the World Trade Center.

In so doing, however, we also create extraordinarily attractive targets for terrorists, who realize they can cause a huge amount of damage in a single strike. On September 11, a building complex that took seven years to construct collapsed in 90 minutes, obliterating 10 million square feet of office space and exacting at least $30 billion in direct costs. A major telephone switching office was destroyed, another heavily damaged, and important cellular antennas on top of the towers were lost. Key transit lines through southern Manhattan were buried under rubble. Ironically, even a secret office of the U.S. Central Intelligence Agency was destroyed in the attack, temporarily disrupting normal intelligence operations.

Yet despite the horrific damage to the area's infrastructure and New York City's economy, the attack did not cause catastrophic failures in U.S. financial, economic, or communications networks. As it turned out, the World Trade Center was not a critical, nonredundant node. At least it wasn't critical in the way most people (including, probably, the terrorists) would have thought. Many of the financial firms in the destroyed buildings had made contingency plans for disaster by setting up alternate facilities for data, information, and computer equipment in remote locations. Though the NASDAQ headquarters was demolished, for instance, the exchange's data centers in Connecticut and Maryland remained linked to trading companies through two separate connections that passed through 20 switching centers. NASDAQ officials later claimed that their system was so robust that they could have restarted trading only a few hours after the attack. Some World Trade Center firms had made advanced arrangements with companies specializing in providing emergency relocation facilities in New Jersey and elsewhere. Because of all this proactive planning -- and the network redundancy it produced -- the September 11 attacks caused remarkably little direct disruption to the U.S. financial system (despite the unprecedented closure of the stock market for several days).

But when we look back years from now, we may recognize that the attacks had a critical effect on another kind of network that we've created among ourselves: a tightly coupled, very unstable, and highly nonlinear psychological network. We're all nodes in this particular network, and the links among us consist of Internet connections, satellite signals, fiber-optic cables, talk radio, and 24-hour television news. In the minutes following the attack, coverage of the story flashed across this network. People then stayed in front of their televisions for hours on end; they viewed and reviewed the awful video clips on the CNN Web site; they plugged phone lines checking on friends and relatives; and they sent each other millions upon millions of e-mail messages -- so many, in fact, that the Internet was noticeably slower for days afterwards.

Along these links, from TV and radio stations to their audiences, and especially from person to person through the Internet, flowed raw emotion: grief, anger, horror, disbelief, fear, and hatred. It was as if we'd all been wired into one immense, convulsing, and reverberating neural network. Indeed, the biggest impact of the September 11 attacks wasn't the direct disruption of financial, economic, communications, or transportation networks -- physical stuff, all. Rather, by working through the network we've created within and among our heads, the attacks had their biggest impact on our collective psychology and our subjective feelings of security and safety. This network acts like a huge megaphone, vastly amplifying the emotional impact of terrorism.

To maximize this impact, the perpetrators of complex terrorism will carry out their attacks in audacious, unexpected, and even bizarre manners -- using methods that are, ideally, unimaginably cruel. By so doing, they will create the impression that anything is possible, which further magnifies fear. From this perspective, the World Trade Center represented an ideal target, because the Twin Towers were an icon of the magnificence and boldness of American capitalism. When they collapsed like a house of cards, in about 15 seconds each, it suggested that American capitalism was a house of cards, too. How could anything so solid and powerful and so much a part of American identity vanish so quickly? And the use of passenger airplanes made matters worse by exploiting our worst fears of flying.

Unfortunately, this emotional response has had huge, real-world consequences. Scared, insecure, grief-stricken people aren't ebullient consumers. They behave cautiously and save more. Consumer demand drops, corporate investment falls, and economic growth slows. In the end, via the multiplier effect of our technology-amplified emotional response, the September 11 terrorists may have achieved an economic impact far greater than they ever dreamed possible. The total cost of lost economic growth and decreased equity value around the world could exceed a trillion dollars. Since the cost of carrying out the attack itself was probably only a few hundred thousand dollars, we're looking at an economic multiplier of over a millionfold.

THE WEAKEST LINKS

Complex terrorism operates like jujitsu -- it redirects the energies of our intricate societies against us. Once the basic logic of complex terrorism is understood (and the events of September 11 prove that terrorists are beginning to understand it), we can quickly identify dozens of relatively simple ways to bring modern, high-tech societies to their knees.

How would a Clausewitz of terrorism proceed? He would pinpoint the critical complex networks upon which modern societies depend. They include networks for producing and distributing energy, information, water, and food; the highways, railways, and airports that make up our transportation grid; and our healthcare system. Of these, the vulnerability of the food system is particularly alarming. However, terrorism experts have paid the most attention to the energy and information networks, mainly because they so clearly underpin the vitality of modern economies.

The energy system -- which comprises everything from the national network of gas pipelines to the electricity grid -- is replete with high-value nodes like oil refineries, tank farms, and electrical substations. At times of peak energy demand, this network (and in particular, the electricity grid) is very tightly coupled. The loss of one link in the grid means that the electricity it carries must be offloaded to other links. If other links are already operating near capacity, the additional load can cause them to fail, too, thus displacing their energy to yet other links. We saw this kind of breakdown in August 1996, when the failure of the Big Eddy transmission line in northern Oregon caused overloading on a string of transmission lines down the West Coast of the United States, triggering blackouts that affected 4 million people in nine states.

Substations are clear targets because they represent key nodes linked to many other parts of the electrical network. Substations and high-voltage transmission lines are also "soft" targets, since they can be fairly easily disabled or destroyed. Tens of thousands of miles of transmission lines are strung across North America, often in locations so remote that the lines are almost impossible to protect, but they are nonetheless accessible by four-wheel drive. Transmission towers can be brought down with well-placed explosive charges. Imagine a carefully planned sequence of attacks on these lines, with emergency crews and investigators dashing from one remote attack site to another, constantly off-balance and unable to regain control. Detailed maps of locations of substations and transmission lines for much of North America are easily available on the Web. Not even all the police and military personnel in the United States would suffice to provide even rudimentary protection to this immense network.

The energy system also provides countless opportunities for turning supposedly benign technology to destructive ends. For instance, large gas pipelines, many of which run near or even through urban areas, have huge explosive potential; attacks on them could have the twin effect of producing great local damage and wider disruptions in energy supply. And the radioactive waste pools associated with most nuclear reactors are perhaps the most lethal targets in the national energy-supply system. If the waste in these facilities were dispersed into the environment, the results could be catastrophic. Fortunately, such attacks would be technically difficult.

Even beyond energy networks, opportunities to release the destructive power of benign technologies abound. Chemical plants are especially tempting targets, because they are packed with toxins and flammable, even explosive, materials. Security at such facilities is often lax: An April 1999 study of chemical plants in Nevada and West Virginia by the U.S. Agency for Toxic Substances and Disease Registry concluded that security ranged from "fair to very poor" and that oversights were linked to "complacency and lack of awareness of the threat." And every day, trains carrying tens of thousands of tons of toxic material course along transport corridors throughout the United States. All a terrorist needs is inside knowledge that a chemical-laden train is traveling through an urban area at a specific time, and a well-placed object (like a piece of rail) on the track could cause a wreck, a chemical release, and a mass evacuation. A derailment of such a train at a nonredundant link in the transport system -- such as an important tunnel or bridge -- could be particularly potent. (In fact, when the U.S. bombing campaign in Afghanistan began on October 7, 2001, the U.S. railroad industry declared a three-day moratorium on transporting dangerous chemicals.) Recent accidents in Switzerland and Baltimore, Maryland, make clear that rail and highway tunnels are vulnerable because they are choke points for transportation networks and because it's extraordinarily hard to extinguish explosions and fires inside them.

Modern communications networks also are susceptible to terrorist attacks. Although the Internet was originally designed to keep working even if large chunks of the network were lost (as might happen in a nuclear war, for instance), today's Internet displays some striking vulnerabilities. One of the most significant is the system of computers -- called "routers" and "root servers" -- that directs traffic around the Net. Routers represent critical nodes in the network and depend on each other for details on where to send packets of information. A software error in one router, or its malicious reprogramming by a hacker, can lead to errors throughout the Internet. Hackers could also exploit new peer-to-peer software (such as the information-transfer tool Gnutella) to distribute throughout the Internet millions of "sleeper" viruses programmed to attack specific machines or the network itself at a predetermined date.

The U.S. government is aware of many of these threats and of the specific vulnerability of complex networks, especially information networks. President George W. Bush has appointed Richard Clarke, a career civil servant and senior advisor to the National Security Council on counterterrorism, as his cyberspace security czar, reporting both to Director of Homeland Security Tom Ridge and National Security Advisor Condoleezza Rice. In addition, the U.S. Senate recently considered new legislation (the Critical Infrastructure Information Security Act) addressing a major obstacle to improved security of critical networks: the understandable reluctance of firms to share proprietary information about networks they have built or manage. The act would enable the sharing of sensitive infrastructure information between the federal government and private sector and within the private sector itself. In his opening remarks to introduce the act on September 25, 2001, Republican Sen. Bob Bennett of Utah clearly recognized that we face a new kind of threat. "The American economy is a highly interdependent system of systems, with physical and cyber components," he declared. "Security in a networked world must be a shared responsibility."

PREPARING FOR THE UNKNOWN

Shortly following the September 11 attacks, the U.S. Army enlisted the help of some of Hollywood's top action screenwriters and directors -- including the writers of Die Hard and McGyver -- to conjure up possible scenarios for future terrorist attacks. Yet no one can possibly imagine in advance all the novel opportunities for terrorism provided by our technological and economic systems. We've made these critical systems so complex that they are replete with vulnerabilities that are very hard to anticipate, because we don't even know how to ask the right questions. We can think of these possibilities as "exploitable unknown unknowns." Terrorists can make connections between components of complex systems -- such as between passenger airliners and skyscrapers -- that few, if any, people have anticipated. Complex terrorism is particularly effective if its goal is not a specific strategic or political end, but simply the creation of widespread fear, panic, and economic disruption. This more general objective grants terrorists much more latitude in their choice of targets. More likely than not, the next major attack will come in a form as unexpected as we witnessed on September 11.

What should we do to lessen the risk of complex terrorism, beyond the conventional counterterrorism strategies already being implemented by the United States and other nations? First, we must acknowledge our own limitations. Little can be done, for instance, about terrorists' inexorably rising capacity for violence. This trend results from deep technological forces that can't be stopped without producing major disruptions elsewhere in our economies and societies. However, we can take steps to reduce the vulnerabilities related to our complex economies and technologies. We can do so by loosening the couplings in our economic and technological networks, building into these networks various buffering capacities, introducing "circuit breakers" that interrupt dangerous feedbacks, and dispersing high-value assets so that they are less concentrated and thus less inviting targets.

These prescriptions will mean different things for different networks. In the energy sector, loosening coupling might mean greater use of decentralized, local energy production and alternative energy sources (like small-scale solar power) that make individual users more independent of the electricity grid. Similarly, in food production, loosening coupling could entail increased autonomy of local and regional food-production networks so that when one network is attacked the damage doesn't cascade into others. In many industries, increasing buffering would involve moving away from just-in-time production processes. Firms would need to increase inventories of feedstocks and parts so production can continue even when the supply of these essential inputs is interrupted. Clearly this policy would reduce economic efficiency, but the extra security of more stable and resilient production networks could far outweigh this cost.

Circuit breakers would prove particularly useful in situations where crowd behavior and panic can get out of control. They have already been implemented on the New York Stock Exchange: Trading halts if the market plunges more than a certain percentage in a particular period of time. In the case of terrorism, one of the factors heightening public anxiety is the incessant barrage of sensational reporting and commentary by 24-hour news TV. As is true for the stock exchange, there might be a role for an independent, industry-based monitoring body here, a body that could intervene with broadcasters at critical moments, or at least provide vital counsel, to manage the flow and content of information. In an emergency, for instance, all broadcasters might present exactly the same information (vetted by the monitoring body and stated deliberately and calmly) so that competition among broadcasters doesn't encourage sensationalized treatment. If the monitoring body were under the strict authority of the broadcasters themselves, the broadcasters would -- collectively -- retain complete control over the content of the message, and the procedure would not involve government encroachment on freedom of speech.

If terrorist attacks continue, economic forces alone will likely encourage the dispersal of high-value assets. Insurance costs could become unsupportable for businesses and industries located in vulnerable zones. In 20 to 30 years, we may be astonished at the folly of housing so much value in the exquisitely fragile buildings of the World Trade Center. Again, dispersal may entail substantial economic costs, because we'll lose economies of scale and opportunities for synergy.

Yet we have to recognize that we face new circumstances. Past policies are inadequate. The advantage in this war has shifted toward terrorists. Our increased vulnerability -- and our newfound recognition of that vulnerability -- makes us more risk-averse, while terrorists have become more powerful and more tolerant of risk. (The September 11 attackers, for instance, had an extremely high tolerance for risk, because they were ready and willing to die.) As a result, terrorists have significant leverage to hurt us. Their capacity to exploit this leverage depends on their ability to understand the complex systems that we depend on so critically. Our capacity to defend ourselves depends on that same understanding.

Feature

Globalization's Last Hurrah?

The shock of terrorist attacks and a worldwide economic slowdown have prompted many observers to declare globalization's end. But any recent reversals in global integration must be measured against the remarkable advances of 2000. The second annual A.T. Kearney/Foreign Policy Magazine Globalization Index, which ranks the 20 most global nations, also sheds light on a crucial question: Has globalization hit a bump in the road, or is it on the verge of a fundamental shift?

"The era of globalization is over," declared John Gray, a professor of European thought at the London School of Economics and Political Science, less than two weeks after the terrorist attacks upon the United States. Gray had been a staunch critic of globalization, so it might be tempting to dismiss his musings as ideological triumphalism. But longtime proponents of globalization also had their faith shaken by the events of the past year. Even before terrorism, anthrax, and war dominated the headlines, other forces threatened to transform the process of global integration into one of disintegration.

Beginning in spring 2000, the tech bubble burst, prompting a free fall in stock markets worldwide. The United States, Japan, and Europe faced simultaneous economic slumps for the first time since the oil shocks of the 1970s, with the United States experiencing its longest decline in industrial production since World War II. Argentina teetered on the brink of default, portending a Latin American replay of the financial crises that swept Asian markets and Russia in 1998. Turkey faced its worst economic crisis in decades, and the value of the lira plunged by nearly 50 percent. At the outset of 2001, the Bush administration's unilateralist rejection of treaties on arms control and climate change renewed tensions with Russia and China while engendering bitter disputes between the United States and Europe.

Just as success in the stock market is ultimately measured by long-term gains instead of year-to-year returns, so too might it be premature to proclaim that 2001 sounded the death knell of globalization. After all, those countries that find themselves enmeshed in a global slowdown are measuring their losses against an unprecedented surge of economic growth and global integration in the preceding years. And at the moment, the world that has grown more integrated also seems to be more volatile. As Nobel laureate and former World Bank Chief Economist Joseph Stiglitz recently observed, "The borderless world through which goods and services flow is also a borderless world through which other things can flow that are less positive." The very forces that drove global integration over the past decade -- the free flow of capital, immigration, airline travel, the Internet, and the global media -- can be used by terrorist networks as well as businesses.

In our own attempt to make sense of this borderless world, we present the second edition of the annual A.T. Kearney/Foreign Policy Magazine Globalization Index. We created this index to quantify what has arguably become the new century's most abused buzzword. Advocates and detractors alike bend the definition of "globalization" to fit their arguments. In truth, globalization entails a dense web of cross-border relationships that range from the very evident (the spread of disease) to the very subtle (the spread of ideas).

One aspect frequently missed in the debates about globalization is its measurement: How extensive is globalization? Which countries are the most globalized? The least? And why? Those rare instances in which anyone attempts to gauge globalization typically rely on data concerning international trade and investment flows, to the exclusion of other aspects of global integration. To fill this gap, Foreign Policy teamed up with management consulting firm A.T. Kearney to create an index that employs indicators spanning information technology, finance, trade, politics, travel, and personal communication to evaluate levels of global integration in dozens of advanced economies and key emerging markets worldwide.

Last year's Globalization Index yielded many surprising revelations about the shape of global integration through 1998. We found that the world's most global countries boast greater income equality than their less global counterparts -- a counterpoint to the common argument that developing countries are poor and unequal because of globalization, suggesting instead that history, economic policies, welfare programs, and education policies may play an important role in shaping income distribution. Moreover, we learned that the most global economies tend to be small nations for which openness allows access to goods, services, and capital not readily available at home. Last year, tiny Singapore ranked as the world's most global nation, with the Netherlands, Sweden, and Switzerland not far behind. By contrast, the United States came in 12th place.

Also, with few exceptions, countries that scored high on the Globalization Index enjoyed greater political freedom, as measured by the annual Freedom House survey of civil liberties and political rights. And a comparison of our index rankings with Transparency International's survey of perceived corruption suggested that public officials in the most global countries are less corrupt than their counterparts in closed economies. Moreover, various indicators of Internet use and access indicated that significant gaps exist within the global digital divide, with the United States, Canada, and Scandinavian countries like Finland and Sweden far outpacing other advanced countries in the diffusion of new information technologies.

The second iteration of the Globalization Index examines global integration through the end of 2000, with several important changes that provide a greater degree of focus than ever before possible. First, we have expanded our coverage by adding a dozen new countries to the 50 covered previously. The index now accounts for nearly 85 percent of the world's population and more than 90 percent of its economic output, with enhanced coverage of Africa, Central and Eastern Europe, and South Asia. Second, the revised index incorporates new political variables that help assess the level of a country's engagement in matters concerning diplomacy and international security by measuring membership in international organizations, commitments to international peacekeeping missions, and diplomatic representations hosted from abroad. Third, the index makes use of the latest available forecasts to make better sense of the world we are about to enter, as well as the one we are leaving behind.

These changes not only broaden our understanding of last year's findings, they also reveal important new details of the changing geography of the digital divide, the status of emerging markets, the impact of globalization on government spending, and even whether globalization relates to perceptions of personal happiness. The consequences of September 11, 2001, and the events that have followed remain uncertain, but the data presented in this index will make it easier to assess whether global integration has hit a temporary roadblock or whether it is about to make a fundamental shift in direction.

GLOBALIZATION'S BEST YEAR?

Spurred by robust economic growth, global integration deepened substantially in 2000, a year that saw record gains in most indicators of international exchange. The value of world merchandise exports, for instance, surged by more than 12 percent in 2000, while trade in services jumped by 6.1 percent -- both more than triple the previous year's growth rate. Similarly, foreign direct investment (FDI) marked a spectacular increase in 2000, growing from $1.08 trillion in 1999 to $1.27 trillion in 2000, compared with only $203 billion in 1990. Much of this investment was driven by corporations buying or merging with companies in other countries, contributing to increasingly global multinational firms. In but one example of the results, top French firms earned more than two times more revenue from their foreign affiliates than from their domestic sales in 2000, double the level early in the 1990s. And foreign sales, on average, nearly equaled domestic sales for leading firms in the United Kingdom, Germany, and Italy.

The strong global economy and a host of events tied to the millennium also prompted the most extensive growth in global tourism in at least a decade. Worldwide, travelers made an additional 50 million trips across national borders in 2000 to reach 698.8 million international arrivals, up from 457.2 million a decade before. Asia and the Pacific saw the most substantial growth, but virtually all regions experienced considerable new flows of visitors from abroad. Other aspects of personal connectedness also grew. Cross-border telephone traffic, for example, saw a steady growth of roughly 10 billion minutes in 2000, driven primarily by rapidly declining costs.

At the same time, the number of Internet hosts (computers that allow users to communicate with one another along the Internet) continued to climb, growing by 44 percent in 2000. Yet this expansion was substantially slower than in earlier years and about one-third less than the explosive growth in 1999, a boom year for Internet-related businesses. In part, this slowdown reflects the downturn in the dot-com economy, but it may also have to do with saturation in some key markets, with growth in Internet users also cooling in 2000 to its lowest rate since the Internet's emergence as a mass communications medium in the mid-1990s. Even so, 80 million new users logged on to the Internet for the first time in 2000. And as a sign of changes to come, 2000 may well have been the first year in which English was no longer the majority language on the Web. Estimates show that 192 million English speakers had regular access to the Internet, compared with 211 million non-English speakers. Although English remained the single most dominant language, Japanese, Chinese, and German were gaining ground, with the population of Spanish speakers set to experience substantial growth in coming years.

Moreover, political engagement has shown signs of slow but steady growth. Between 1995 and 2000, the advanced economies and key emerging markets tracked in the Globalization Index established 344 new embassies around the world. Only a handful of countries -- including Bangladesh, Senegal, Turkey, and Venezuela -- experienced a decline in the number of diplomatic representations they hosted from abroad. At the same time, 342 new memberships in international organizations were extended to the nations in our index, including new seats for Peru, Russia, and Vietnam in the Asia-Pacific Economic Cooperation forum. And while the number of active peacekeeping and nation-building missions approved by the U.N. Security Council declined slightly (from 20 in 1995 to 18 in 2000), the number of participating countries increased. By 2000, some 66 nations were contributing military and civilian police personnel, money, medicine, or other equipment. Of these, a diverse group of 11 countries -- Austria, Bangladesh, Canada, Denmark, Finland, France, Ireland, Italy, Poland, Russia, and Sweden -- made direct contributions to more than half the active missions that year, ranging from the U.N. Organization Mission in the Democratic Republic of the Congo to the U.N. Transitional Authority in East Timor.

In short, levels of global integration reached new highs in 2000, capping a decade of dramatic expansion in global economic flows and political engagement as well as the increased mobility of people, information, and ideas. While such free movement is likely to remain a defining characteristic of our suddenly smaller world, its persistence in the coming years cannot be taken for granted. Indeed, many of the countries that score high on the index are the ones most likely to bear the brunt of globalization's unwinding.

WINNERS AND LOSERS

The Celtic Tiger Roars | As was true in last year's index, small trading nations tend to show higher levels of integration with other countries than their larger neighbors, although the relationship between size and globalization remains complex. Last year, the A.T. Kearney/Foreign Policy Magazine Globalization Index revealed that Singapore was the "most global" nation. Topping this year's list is Ireland, a country whose levels of economic integration have boomed since 1998, the end of our previous survey, in which Ireland ranked sixth.

Ireland's strong pro-business policies and English-speaking population have long drawn interest from overseas business, helping to transform the island into a highly attractive location for foreign investors. Yet in the past two years, the Celtic Tiger has really begun to roar. In a bid to attract more international capital and technology investments, the country has cut corporate tax rates (already among Europe's lowest) and adopted a National Development Plan designed to improve infrastructure and government efficiency. Privatization of state assets in telecommunications and banking have created positive signals for investment, while Ireland's decision to join the euro currency zone has dramatically reduced barriers against financial flows to and from other euro zone countries.

Ireland was also among the world's largest beneficiaries of the global boom in high tech and information technologies. Its success in attracting it investments in earlier years gave it a "first mover" advantage when these industries began to experience truly global growth. By 2000, technology giants such as Microsoft, Intel, Gateway, and Global Crossing were calling the "Silicon Isle" their European home. These high-tech investments help explain Ireland's steadily growing fdi inflows, which rose from an average of close to $3 billion per year throughout the mid-1990s to $20.5 billion in 2000, or nearly $5,500 per resident (three times more than the $1,653 per resident in Finland).

Even more dramatic has been the increase in portfolio capital flows, marking Ireland's rise as an important center for international financial transactions. These inflows and outflows totaled a scant 1.6 percent of the national economy in 1996, on par with countries like Chile, the Czech Republic, and Israel. By 2000, however, portfolio flows had grown to the world's largest when measured as a share of gross domestic product, owing largely to the growth of Dublin's International Financial Services Center, a leading location for international banking, investment funds, corporate treasury, and insurance activities.

Ireland also scores high in other indicators. Its growing tourist industry and advanced telecommunications infrastructure, for example, place the country atop the ranking for personal connections across international borders, and its rapidly growing online population places it among Europe's Internet leaders.

Singapore slipped to third place in this year's Globalization Index, largely as a result of its performance in certain economic indicators. While the island economy remained the world's top trading nation, it struggled to take full advantage of the rising tide of global portfolio capital flows. A reorganization of its primary stock exchange helped to pull in some additional capital and position the country as a future financial center, but the country evidently proved less attractive than others with larger or more dynamic economic hinterlands, including the combined euro zone. Thus, while portfolio inflows to Ireland grew by some $26 billion between 1998 and 2000, Singapore saw only $1.3 billion in additional inflows.

Yet Singapore continued to score well in a variety of other categories, most notably in terms of personal connectedness. Although already leading the world in international telephone traffic per capita, for example, residents increased average call times in 2000 by another 2.5 percent, bringing the total to nearly 400 minutes per person in outgoing international calls alone (with another 317 minutes per person in incoming calls).

Up From Down Under | The United States and Canada remain the leaders in Internet penetration. Nearly 35 percent of the U.S. population and 41 percent of the Canadian population were online by January 2001, putting the two countries well within the world's top 10, if slightly behind the competition in Scandinavia. The United States excels in levels of it infrastructure development, with one Internet host for every three residents -- more than triple the number in Sweden, Norway, and Finland and more than 10 times the number in the United Kingdom. The United States also maintains some 77,000 of the world's 118,000 secure servers (computers capable of supporting encryption and other advanced functions necessary for e-commerce transactions). And the vast majority of worldwide Internet content is physically housed in the United States, which helps to explain why 95 percent of the bandwidth that ties together world regions flows to and from the country.

Last year's Globalization Index revealed that, in terms of Internet use and development, Scandinavian countries had far outpaced their continental neighbors in the closing years of the 1990s. By 2000, however, Oceania (comprising Australia and New Zealand) began to emerge as a new regional center, with higher average levels of connectedness than even the Scandinavian countries [see chart on page 50]. In Australia, the online population topped 35 percent in 2000, surpassing the United States, while New Zealand ranked fourth in the number of Internet hosts per resident. Both countries also ranked within the world's top five in providing secure servers per capita. As in Scandinavia, this dramatic growth may have as much to do with a combination of economic prosperity and a sense of geographic isolation -- along with the convenience of Internet communication across the vast distances of sparsely populated countries -- as it does with supportive policy environments.

Taxes Stay Intact | One of the most heated debates about globalization today is whether competition between countries forces them to cut taxation -- as well as social spending -- in order to attract foreign investors and other international business interests. Some observers have argued that, in this way, globalization generates a race to the bottom in which local populations lose out as their governments curtail spending on the jobs, education, and social safety nets that higher taxation levels might support.

To test this hypothesis, we looked closely at World Bank statistics on each country's level of taxation as well as government expenditures on the full range of public goods and then compared each against Globalization Index scores. Our findings show that taxation levels and spending levels go hand-in-hand but that neither correlates well with levels of globalization. In fact, some of the highest levels of taxation are in countries that are also highly globalized, and levels of spending vary across the board. Israel and the Czech Republic, for example, rank among the most global of emerging markets, yet collect taxes totaling more than 40 percent of national economic output. Those levels are far above tax collection rates in such countries as Colombia, Indonesia, and Pakistan, which rank much lower on the Globalization Index. By the same token, Sweden and Finland, which rank among the world's most global countries, boast levels of social spending that are among the most generous in the world -- all supported by relatively high tax rates. And with Scandinavian countries attracting record levels of FDI in recent years, there is little evidence that high tax rates are driving away investors, who appear more concerned about economic prospects, available infrastructure, education levels, and other fundamentals.

Don't Worry, Be Happy | Since 1995, an international network of social scientists has collaborated on a global investigation of sociocultural and political change known as the World Values Survey. These researchers conduct national surveys in more than 65 societies, accounting for almost 80 percent of the world population. Each survey features hundreds of questions, ranging from assessments of personal satisfaction and financial security to views on whether local governments are capable of coping with environmental decay or runaway crime.

What happened when we examined the World Values Survey's measure of "subjective well-being" -- the share of people in each country who describe themselves as "very happy" or "happy" and the share indicating high satisfaction with life as a whole -- with each country's Globalization Index score? The results [see chart on facing page] did not necessarily prove that globalization brings happiness, but they clearly showed that people in highly globalized countries (including Ireland, Denmark, and the United Kingdom) tend to have higher levels of perceived well-being than do people in societies that are not as well connected to the outside world.

Although most of the highly globalized countries tend also to be wealthy, the correlations among globalization, wealth, and happiness are fuzzy at best. Researchers from the World Values Survey, for example, have found that per capita income correlates well with happiness levels up to a certain level of economic development, beyond which happiness becomes a much more subjective phenomenon.

The Divides Deepen | Although 2000 saw an unprecedented surge in global integration, a closer look at the data reveals a more mixed picture for the developing world. For instance, although emerging markets have seen Internet access grow at remarkable rates (on average twice the rate in the developed world in recent years), those same markets are still dwarfed by the industrialized countries. The Organization for Economic Co-operation and Development (OECD) estimates that 95.6 percent of the world's Internet hosts in 2000 were located in its member countries. Hong Kong, Singapore, and Taiwan accounted for more than half of the remainder, leaving little for the rest of the world. By the end of 2001, OECD countries are likely to have had more than 100 Internet hosts for every 1,000 inhabitants, while the rest of the world may be lucky to average 1 for every 1,000.

This digital abyss only made it more difficult for many emerging markets to expand their integration with the rest of the world in 2000 (although emerging markets might make up ground in 2001). While no region experienced net "de-globalization," several individual countries -- including Botswana, Egypt, Peru, and Saudi Arabia -- saw their levels of integration decline relative to the rest of the world, suggesting an inability to keep pace with the increased movement of goods, capital, people, and ideas (as well as technological developments) at a global level. Even as emerging markets attracted $265 billion of new FDI, for example, their share of total flows declined for the fourth year in a row -- from 43 percent in 1997, followed in each year by 30 percent, 23 percent, and 21 percent. Meanwhile, African countries attracted several million new tourists but saw their combined share of the booming global tourism market hover at 4 percent of the global total.

Moreover, evidence suggests that some regions are becoming relatively less integrated within the world economy. The African countries, for example, saw their average level of economic integration fall, then rise, then fall again over the past six years, a reflection of variable economic performance and the rise and fall of prices for oil and commodity exports, their main connection to global economic markets.

COLLATERAL DAMAGE

By now, we've all seen the before-and-after photos of the New York City skyline, perhaps forever altered by terrorism. In a similar vein, this year's A.T. Kearney/Foreign Policy Magazine Globalization Index presents a "before" photo on a worldwide scale -- a snapshot of global integration in the period before September 11, 2001. We are not yet certain to what extent the globalization skyline has been damaged by recent events, but we can make some educated guesses.

Even before the terrorist attacks, a number of globalization's key components showed signs of setting a slower pace. International Monetary Fund projections showed global economic growth slowing from 4.7 percent in 2000 to a mere 2.4 percent in 2001, just below levels considered to be recessionary. Similarly, global trade growth in 2001 was expected to remain nearly flat, while predictions showed FDI flows dropping more than 40 percent from the record highs in 2000.

In the aftermath of the attacks, however, even these dire predictions appear optimistic, as heightened security concerns compel nations to tighten their borders. Rising public anxiety and new travel restrictions, for example, appear likely to curtail travel between countries, perhaps leading to a decline in global tourism for the first time in the last 50 years. And with global investors skittish about all but the safest opportunities, developed markets may see slow growth in equities, and emerging markets may see portfolio investment from abroad draining away more rapidly than at any time since the mid-1980s.

These trends are likely to affect disproportionately those countries that are closely integrated into the world economy. The global downturn in the it sector and tourism has hit Ireland particularly hard, and some forecasts see its growth slowing to 3 percent in 2002, compared with 11 percent in 2000. Singapore, with its small domestic economy and heavy reliance on trade, has already begun to feel the pain of globalization's downturn, with exports and imports alike plummeting more rapidly than at any time since the country's independence in 1965. Other countries in which trade accounts for the lion's share of integration with global markets -- including Malaysia, Slovakia, Panama, Thailand, and the Philippines -- may also see globalization levels affected over the coming year. Others that are heavily exposed to international portfolio capital and fdi flows -- including Ireland, the Netherlands, Finland, Spain, and even the United States -- could likewise struggle to maintain their overall globalization scores.

Yet even as the global economy retrenches, other aspects of globalization are likely to sustain their forward momentum. These include personal contact across borders, which has become an indelible part of an increasingly globalized world. Telephone calls and Internet messages may well come to substitute for "being there" at a time when travel has grown more difficult. With the International Telecommunications Union estimating that call rates are falling 20 percent per year, on average, there is no reason that international telephone traffic -- which has maintained a steady growth of roughly 10 billion minutes per year since 1997 -- would be reversed because of the events of September 11. In fact, international calls to the United States now average less than $0.50 per minute, no more than domestic long distance rates in many countries. The Internet, too, will continue its impressive expansion, particularly in developing countries like China and India, where penetration remains low. And the new global emphasis on fighting terrorism on military, diplomatic, and economic fronts could serve to increase levels of international political engagement over the coming years.

Nor can forward momentum in the global economy be ruled out. Even as nations are struggling to pull themselves out of recession, they are continuing to strengthen the mechanisms for global integration. Two years after WTO negotiations broke down amidst tear gas and rioting in Seattle, the delegates in Qatar agreed to launch a new round of talks to cut trade barriers on a wide range of industrial and agricultural goods. After 15 years of tortuous negotiations, China has finally acceded to the World Trade Organization, and Russia -- enjoying a second honeymoon in East-West relations following the September 11 attacks -- is optimistic about joining the global trading body by the end of 2002.

Next year's Globalization Index will begin to assess whether these predictions will come to pass. But even our most pessimistic scenarios do not portend the end of global integration. They merely highlight the extent to which global integration has made us more vulnerable, even as it has made us more prosperous. Perhaps the most profound ideological casualty of the September 11 attacks was the belief that a more globalized world would necessarily be a safer one.