They've isolated their internal network (hard to call it an Internet) very well.
Other nations are considering it as well. I think it was Australia that recently proposed a similar thing. China's working towards that end-goal as well... hell, every country is seeing a "risk" in letting their populace have access to other nations, other cultures, other sources of information than "the motherland".
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Thus destroying the purpose of the internet... Any country that actually manages to isolate themselves this way is taking a step backwards. In fact, what do you even call this? It's like part intranet part internet.
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It's a national intranet. And, as you say, it is bad. Satellite wireless is going to be the only thing that I forsee breaking this trend. A mesh and a ton of, low orbit networked access points. It's the only way to overcome borders and firewalls at the cables. If the "free world" wants to do something that benefits all of the planet? That's not a bad thing for them to undertake. The trick would be how to throttle/prevent bandwidth hogs that would undermine the "free access and exchange of information" that the system would be there to encourage. For example, it should be limited to web, messaging, and light video. Running Netflix or gaming networks on it would subvert the ideals behind the network.