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THE STATE AND THE NOTION OF GOVERNANCE
Introduction
In our discussion focusing on the market we also paid some attention to the role of the state. We
stressed the fact that markets are institutions that rest upon the existence and operations of other
institutions. Of particular relevance is the legal framework that is necessary for the establishment
of rules that are imperative for markets to function, and is required to settle disputes. The market
focus, within the context of mixed economy capitalist system, is not strictly one of laissez faire
but one where the role of the government is both extensive and important. In effect, it is the
government that deals, or ought to deal, with the problems that arise from the division of labour
that results from globalization and the expansion of markets beyond national borders,
particularly in terms of reconciling winners and losers in the process and dealing with what
Rodrik identifies as tensions. While other entities may also exert some degree of power and
authority, it is unlikely that these can replace governments.
The Role of Government in the Economy
The government has traditionally played an important role in carrying out specific economic
functions that can be summarized as follows:
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allocation
stabilization
redistribution
sustainability
The allocation function relates to the provision of goods and services that the market cannot
provide or cannot provide in adequate amounts (particularly in the case of public goods). The
stabilization function relates to employment, inflation, growth and the like. In principle
governments are concerned about the achievement of full employment, low inflation and a
socially desirable rate of growth. To the extent that equity is seem as an important goal in a
society, governments are called upon to both implement and sustain a social safety net, which in
addition to promoting greater equity, also reduces risk, particularly in the face of rapid and
unpredictable changes. Generally, people form certain expectations of what they want the
government to provide and, in a democratic system, communicate these expectations through
those whom they elect (by casting their ballots).
An additional consideration revolves around the whole question of sustainability. Indeed,
environmental, technical and other factors, that are important components of sustainability,
require an active role by governments, particularly in the areas of legislation and redistribution.
In order to carry out these functions, governments need to have both authority and resources. In
effect, they need policy space.
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Factors Leading to a Weakening of the Nation State
The underlying forces that may be weakening the role of the state are generally linked to the
following:
 The emergence of the global market aided by the new technology which connects people
from different parts of the world and cannot be controlled by national entities. In effect the
government or nation state is no longer necessary to the process of establishing linkages with
the rest of the world.
 The driving force of technology which on the one hand promotes the spread of globalization
while on the other, given that it originates in the private sector and is driven by the profit
motive, it promotes the strengthening of the market forces.
 The expansion of global finance and its importance in financing large scale investments,
especially in the development of new technologies that are required by enterprises to remain
“competitive” and hence profitable. Since, arguably, the same factors that allow enterprises
to be profitable also allow countries to grow, then countries need to become allied (forming
what can be labeled as strategic partnerships) with large enterprises. In effect, the enterprises
need the government less than the government needs them. It is precisely this factor that
allows the financial markets to “discipline” governments who pursue policies that are not to
their liking.
 Trade liberalization which in effect has allowed the global market to actually emerge.
Governments are becoming weaker in terms of their ability to manage their economies and
promote the achievement of desired outcomes. As a result their legitimacy and authority is being
eroded. The extreme case is that embodied in Ohmae’s notion of a borderless world Yet, others
argue that in fact the whole process actually requires strong governments to carry it forward
otherwise it may face imminent collapse.
The Role of Governance
As we saw before, national governments have traditionally played the role of regulators in the
market. In fact, firms themselves (including MNCs) constitute legal entities with rights and
responsibilities established by law (by the government). The role of governance of course
extends beyond the economic sphere. In particular, it provides the framework that has both the
power and the legitimacy to foster the national interest or common good and to deal with
fundamental contradictions (or conflicts) that arise. The issue of conflict resolution is of
fundamental importance in both the economic and the non-economic sphere. Of particular
importance here is the fact that the state (or more specifically the government) is, at least in
principle, charged with the representation of the interests of all those who fall within its
jurisdiction and not simply specific subgroups. Thus, the resolution of conflicts requires some
sort of balance between all legitimate interests. In a democratic system this also acts as a
constraint to what the government can actually do as well as being a source of legitimacy.
A critical question involves whether national government maintain their power of regulation over
the economy, particularly the market, under globalization. There are three alternate positions that
can be identified in this context. These can be summarized as follows:
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1. National governments remain the natural regulators under globalization just as they have
done in the past. While some authority may have been transferred to international
institutions, they are still the ones that can undertake the bulk of required regulation and
supervision;
2. National governments will have to adapt to the changing circumstances. While they will still
have power over certain things, they will have to defer to regional or international bodies on
others. Nevertheless, they can still pursue their national interest, to some extent through the
formation of strategic alliances, partnership and the like. The process of governance,
however, becomes much more complex. In effect, we can envision a continuum of
government levels (local, provincial, national, regional, global) with each having a
substantive role. To the extent that the regional and global systems are themselves their
creation, national governments will still play a pivotal and central role in the global system.
3. Under globalization, since economic activities are not constrained by national borders, they
cannot be regulated by national governments and must look to international institutions to do
so. Thus, the load will shift to international organizations such as WTO, IMF, World Bank
and others. Eventually there would be the establishment of a world government that would
take over many of these functions. Alternatively, the governance functions (or a substantial
number of them) could be left up to the markets – and hence transferred to producers and
consumers.
Governance and National Governments
The argument that governments are still relevant as regulators of economic activity rests not only
on the perception of the nature and extent of globalization or the globalizing process but also,
and more importantly, on the limits of the markets themselves.
Some argue that national governments remain highly relevant, event though in some instances
and where it is advantageous to do so, they may give up some power to international, regional,
bilateral and other institutions. The arguments that are relevant here include the following:
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Economic activities still need to take place somewhere – within a geographical area and
national boundary. Thus, governments can still regulate activities that take place within their
national boundaries.
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Usually, enterprises operate in a certain location because it is profitable and superior to other
locations. To maintain their operations and continue to thrive, they are likely to follow local
rules and regulations. This can be seen, for example in the recent case of Unisys – an Indian
company with operations in the U.S. having to comply with American sexual harassment
rulings. The importance of the American market to the company, of course, serves to provide
greater leverage for the Americans and there is some doubt as to whether other countries,
especially smaller LDCs would have had the same leverage. Also, there is the argument that
even large MNCs have strong links to the nations where they are headquartered and are not
easily dislodged, even by policies that may not be entirely to their liking.
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An additional factor that is of some relevance in this context is the fact that despite trade and
capital flows, the bulk of economic activity (including investment) still takes place within
national boundaries. This is evident in the case of Canada where trade between provinces is
greater than trade with the outside world – including states and regions South of the border.
Thus, for example, Ontario’s trade with British Columbia is about seven times larger than its
trade with the state of Washington – both BC and Washington are similarly distant from
Ontario while Washington constitutes a larger economy with greater purchasing power. In
effect, the mobility, particularly in the case of physical capital, may be greatly exaggerated
(and hence so it the notion of a borderless world). Some of the factors that contribute to this
may include the following:
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The existence of barriers to trade (tariff and non-tariff barriers, different rules and
regulations, etc.)
Transportation and other costs
Historical factors (such as Canada’s national policy)
Costs of trading due to different currencies and the risks that that entails (risks associated
with exchange rate changes)
Home bias by consumers linked to a wide range of things including ignorance and lack of
information about the goods and services of other countries, differences in tastes and
preferences, cultural factors, etc.
Despite the communications and transportation improvements, National economies have
remained remarkably isolated from none another and are heavily dependent on local
resources as well as markets. The implication of this is that governments are not nearly as
constrained in what they can actually do as some suggest.
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While more power has been transferred to international institutions (such as those linked to
the Bretton Woods institutions – IMF, World Bank and also GATT/WTO) we also need to
also consider the following:
 These institutions are themselves creations of national governments and hence (at least in
principle) under their collective control. In effect, these institutions are instruments of
national states, especially the more powerful ones, promoting and fostering their
interests;
 The smooth working of the world economic system requires the cooperation of the more
powerful countries, particularly the US and as well as the G7 (or G8) countries. Thus, the
larger countries are likely to have even greater power, perhaps to the detriment of already
weaker ones.
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Governments have made and are likely to make additional changes and adjustment in the
face of the spread of globalization. While in some instances these have reduced the power of
governments in certain areas, nevertheless national governments have remained central to the
governance of the global economy. An important area of activity has been to address
required reforms in the international institutions, particularly those that are part of the Bretton
Woods system and have real decision making powers in the economic and, by extension, in
political and social spheres. In this view, the liberalization and expansion of trade and capital
flows have served to highlight the weaknesses of national governments in the economic
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sphere – something that was always there - but without undermining the role of the state.
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Governments have formed alliances and in so doing have strengthened their ability to pursue
separate internal policies (and internal trade-offs). In effect, while these often result in greater
policy harmonization, it also leads to greater control over trade and to some extent reduce the
impact of capital flows.
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While the movement is towards market capitalism, arguably, within a mixed economy
mould, different versions of it can co-exist. Thus, globalization, and especially the
dependence on international financial flows:
 does not necessarily limit or prevent countries from pursuing policies that promote
greater equity, greater social protection and/or the establishment and maintenance of a
generous welfare state
 does not necessarily lead to a convergence between national policies, strategies and
institutions
Indeed, some argue that government involvement programs add certainty and hence serve to
attract economic activity. Enterprises by their very nature favour stable environments that are
able to protect property rights, provide adequate infrastructure and human capital, ensure
social stability and the like. Thus rather than undermining such efforts they may reward it.
Thus, there is the possibility of a virtuous circle linking government involvement and
international economic activity and social relations. Indeed, greater openness itself, if it is to
be accepted, requires that the dislocations and inequalities that may arise need to be dealt
with.
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The role of the nation state cannot be replaced by any international institutions and moreover,
the whole notion of globalization rests on the existence of such entities. In this context we
can posit a number of arguments that may be relevant, such as the following:
 Historically, international trade and finance (and hence the movement towards
globalization) have moved hand in hand with the emergence of strong and stable nation
states
 The enforcement of rules to ensure that markets work effectively cannot be done at the
global level. In effect, without strong national governments that are able to enforce
common sets of rules locally, efficient world markets may be impossible. Thus, the
notion that national governments can be done away with and that everything can be
enforced at a distance by international institutions in conjunction with domestic interests
is not a credible one. Cheating, collusion, violation of rules and standards are most likely
to become rampant
 Given the nature of the market in fostering inequality and in generating both winners and
losers, which are not likely to be the same across the globe, some effective redistributive
mechanism (which requires government intervention) is necessary. These cannot
effectively be dealt with at the global level, even in the presence of a legitimate global
government.
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International institutions and even a world government based solely on regulating market
activities will not allow for the efficient provision of non-market goods and services. As a
result there would be an increase in inefficiency and a reduction in welfare-enhancing
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economic activity. As well, instability and strife would increase in the absence of effective
entities that are able to carry out fundamental stabilization functions dealing with
employment, inflation, growth and the like.
While these and other issues are subject to debate, they do form a strong basis for the view that
globalization may not do away with the role and importance of national governments, although,
these may be somewhat different compared to their present form.
Governance and International Institutions
On the other side, there are those who argue that national governments will play an increasingly
smaller role for a number of reasons including the following:
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Economic activities are increasingly exceeding the regulatory reach of national governments.
In effect, then the role of government would be reduced as it would no longer be able to
either regulate economic activity or implement policies designed to generate desired
outcomes. Such is particularly the case for the technology driven information economy.
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Given the mobility of capital (and hence the ability of production to shift very quickly from
one country or region to another), the ability of countries to manage their economies is
reduced as economic activity can simply shift to where conditions are more in tune with their
interests (most likely to maximize profits). The result would include the following:
 The adoption of policies similar to those adopted by other countries that are consistent
with the needs and requirements of essentially the MNCs. These would include keeping
government involvement in the economy to a minimum. In some cases, the very notion of
political boundaries would be undermined so that the very existence of countries (or of
certain countries) would come into question
 The transformation of national governments into mere “platform builders” to attract
economic activity (essentially by being subservient to commercial interests rather than
looking after the wellbeing of the people). Thus, as Thurow, Strange and others have
argued, government activity would be geared to satisfy the requirements of businesses
providing them with an educated labour force, adequate infrastructure, help with the
financing of R & D, etc. Not doing so would do even greater harm to the welfare of the
population.
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Governments would no longer be able to provide existing social welfare safety net programs,
In fact, the pressure would likely be on their dismantling so that:
 Wages and other labour related costs would be reduced and profits increased. This is
further reinforced by a drop in taxes, etc.
 The cost competitiveness of domestic business would be increased. In the process
foreign direct investment (or inflows of capital) would be promoted.
 More profit making opportunities are generated for private sector, profit driven
enterprises by taking over functions previously undertaken by the public sector. This
becomes more likely as specific tasks are better defined so that it becomes possible for
purchase by individual consumers and their migration to the private sector – e.g., the
privatization of specific medical procedures and functions.
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There would be increased pressure to reduce or even remove the social welfare safety nets
that are in place. This pressure would be seen as arising from a myriad of factors including
the following:
 The decline in the ability to tax (as well as borrow, etc.), due to the mobility of capital
and the fact that the government has more need for the firms than the firms have of the
government. In particular, the government needs to attract or keep firm in order to
maintain people employed, etc. while firms can go where they can earn the greatest
profits.
 The loss in social cohesion and solidarity so that the support for a safety net, to protect
those who lose as part of the process, becomes weaker. This becomes increasingly the
case as consumerism progresses and individuals envision themselves to be part of
transnational groups with similar interests and aspirations, increasingly more divorced
from the national economy and broader national objectives and vision.
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The dismantling of the social welfare safety net is likely tie give rise to the following:
 Governments, even if they so wish, can no longer provide the things that the public
expects from them
 Since the government can no longer deliver on what it promises, there is a loss in
people’s willingness to support it and/or to participate in the political process. Thus, the
government becomes less relevant so that even the importance of democracy is
undermined
Given the above, it then follows that governance of the new World or Global economy would
have to be done by other entities. In effect, this calls for at least some degree of global
governance. In this context, a number of alternatives can be identified, ranging from an extension
of existing frameworks, to reliance on existing international institutions and to the establishment
of a world government. The alternative to find a satisfactory method of global governance is that
global markets could escape political regulation altogether. In effect, rather than nations or
governments there could only be markets. This notion itself, however, is based on a lack of
understanding about what markets are and what it takes for them to function.
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One possibility is to rely on International or Multilateral Institutions – especially the IMF,
World Bank and WTO. Indeed, in the case of the WTO, there is a basis for such a function.
Nevertheless some see problems with these institutions as they currently exist:
 They lack adequate authority for the job. Since they are creations of national
governments it is these governments that need to provide such authority and national
governments are unwilling to do so. Even the WTO falls far short of any notion of World
government;
 These institutions are also designed more for the propagation of the market economy and
the liberalization of trade and financial markets than for the purpose of governance and
this is particularly the case for the IMF and the World Bank (their structural adjustment
policies have played a major role in promoting globalization in Third World countries).
They serve to “nurture and reproduce the forces of economic globalization”
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An alternative view is that these institutions have substantial autonomy from global capital
and/or the G7 (the main industrial countries). Thus, they can provide fora for weaker states
and civil society to contest economic globalization or some of its effects. Also, the mode of
decision making – such as by consensus as in the case of the WTO– may act to
counterbalance the power of dominant states and special interests. To this are added other
decision making layers provided by regional groupings. In addition, the emergence of an
international civil society also has an impact in contesting or promoting certain positions and
in forcing accountability on the part of international institutions. Global and regional
institutions exert a great deal of independent authority. Moreover, there has been a
significant internationalization of political authority as well as the globalization of political
activity
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An alternative, which is suggested by the massive regionalization process that seems to be
proceeding along with the globalization process, is to rely on the authority of regional
hegemons to take case of governance.
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Finally, the ultimate alternative would involve the movement towards a World Government
that would encompass the entire globe. The problems associated with this are too great for
us to spend much time debating it. Some, however, envisage something along the lines of an
expanded and effective United Nations, while others point to the model of the United States
or the European Union.
Summary
Regardless of what we perceive about the role of the state, there is no doubt that the globalization
has brought about some fundamental changes. The extension of social and economic interactions
across boundaries does suggest that the traditional nation state can no longer manage all
economic activities – especially those that take place in the international realm. International
Institutions are required to ensure that these can be properly and equitably managed. However, to
a large extent, these institutions remain to be built.
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