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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: 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. 1 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: 2 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: 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. 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. 3 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: 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. 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. 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 4 sphere – something that was always there - but without undermining the role of the state. 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. 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. 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. 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 5 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: 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. 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. 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. 6 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. 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. 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” 7 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 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. 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. 8