The Consequences of Globalization on The Nation State – Economics Essay

The Consequences of Globalization on The Nation State – Economics Essay
In order to answer this question, I will first explore the main theories regarding the role of the nation state within today’s global economic order, to gain an

understanding of the academically accepted view regarding the question. I will then go on to identify what is meant by the term ‘political power’, and investigate how each part of this is affected by the process of globalization. It is important to note that each nation state has been affected by the process in different ways, dependent upon the strength of the state. For the purposes of this essay I will use two examples, placing them in the loose categories of ‘Western European’ and ‘Newly Industrialising Countries’.

Firstly then, let us look at two of the main hypotheses surrounding the question of the power of nation states in a global age. Some commentators argue that the process of globalization is nothing new, indeed it is a continuation of the period pre-1914, which had it self been an accumulation of progress for several centuries. Some upholders of this view believe that since the end of the cold war, alliances and oppositions between industrialised states is obsolete, and therefore erases the need and validity of the nation state. As Gray points out, though, their are major differences between today’s economic order and that of the pre-1914 world, and these differences discredit nation state power disappearing as a stage of an evolution. The international market before the outbreak of the First World War was relatively ordered, with goods mostly flowing from colonies to the western powers, yet today the balance of advantage has swung to a number of different areas of economic activity. Also, today’s economy cannot be managed as efficiently, or indeed as predictably, under the risks and uncertainties of a global economic and finance network, as was able under the Gold Standard. National States still have their place, yet their job becomes more difficult.

A rival school of thought recognises the novelty of the global market, yet also hold that the phenomenon has rendered the nation state irrelevant. ‘Hyper globalization’ theories see the transnational corporation becoming rootless, and as such able to move freely around the world in order to maximise profits, thus eclipsing the nation state.
“ Like a mothball, which goes from solid to gas directly, I expect the nation state to evaporate… without question, the role of the nation state will change dramatically and there will be no more room for nationalism than there is for smallpox.”
Such companies, it is argued, act out of self interest determining such things as interest rates, exchange rates and the allocation of capital. From this stand point transnational companies (TNC’s) take political power into their own hands, and increasingly citizen’s wishes are subjugated to the wishes of ‘big business.’ Gray also argues against this theory, by explaining the still present relationship of TNC’s and their ‘home’ countries. Most TNC’s retain strong links in their country of origin, even whilst dividing production globally. Ownership and executive boards are based in the country of origin, and a large percentage of sales are made in the ‘home’ country.

With these ‘all encompassing’ theories discredited, we must now look at more discreet ways in which globalization is effecting the political power of the nation state. In order to do this coherently, it is first important to understand what exactly is meant by the ‘political power of the nation state’. Beck gives us a good definition to work with:
“The central task of politics…is to define the basic legal, social and ecological conditions under which economic activity first becomes possible and legitimate.”
I will argue that globalization has the effect of reversing this equation by subjugating the needs of law, society and ecology to those of the economy. Nation states are in competition with each other to secure investment, and only the state which offers the lowest costs will secure the interest of the company. There are three ways in which states offer competitiveness, through low taxes (law), deregulation (all three areas) and by shrinking the welfare state (social). The promise of investment, or the threat of withdrawal means that TNC’s now have “significant leverage on the policy options of the national government.” These companies can now “limit the politics of state”

An example of how the needs of the economy take priority over a nations law is the tax demands made by TNC’s. As Beck points out, the principle of levying taxes is the main principle underlying the nation state. It gives the government of said state authority to organise the economic activity of the country. The power of TNC’s and the extent of globalization means that a company can produce goods in one country, pay taxes in another, and demand infrastructural improvement in yet another. The effect this has is to create large profits for companies, but of which nothing is paid back into the national economy, thus the rise in wealth of companies becomes grossly disproportionate to the rise in wealth of the ‘home’ country. Beck gives us some examples of this based on Germany. From 1997-2000 corporate profits rose 90%, whereas wages rose by only 6%. Between 1990 and 2000 income tax revenue has doubled, whereas corporate tax has fallen by 50%. “The gladiators of economic growth who are so courted by politicians erode the authority of the state by demanding its services whilst denying it tax revenue.”

The recent rolling back of social welfare programmes in much of western Europe is another consequence of the global economy, and the erosion of political power of nation states. As mentioned above, in order for a country to be competitive on a global scale, it must offer a company low costs, and this includes labour costs, as well as such programmes such as pensions and insurance. Since 1973 there has been a downturn in the international economy which has resulted in a stagnation/recovery cycle, and therefore instability. Yet there has not been a 1944 style conference to deal with the problem, instead there has been a drive to oust the welfare state, due to its uncompetitive nature . Gray argues that countries with social democratic ideologies are incompatible with globalization, as they install too many responsibilities upon TNC’s, (this, coincidentally, is why firms from the USA have the advantage) but they also rely on the assumption of a closed economy in order to survive. By policies of social democracy, Gray is referring to policies of full employment, a comprehensive welfare state and egalitarian tax policies, as well ideals of equality. In a practical sense, he argues, in an open economy it is impossible to regulate the implementation, or to enforce, programmes of equality and justice.

The final sector of political power to examine then is that of creating favourable ecological conditions. This again takes us to the issue of deregulation, and nations competing for investment. Even in this era of increased environmental damage, nations cannot afford to impose policies which add the cost of such damage to the companies creating it. These extra costs will be reflected in prices, whilst companies incurring the costs are competing on a global stage with enterprises who do not. The only possible consequence is that capital will migrate to less regulated areas of the world. Pollution will still occur, yet the regulating country loses the investment.

We can see from all of these examples that economic pressure causes by the globalization of industry forces national governments to place the priorities of the economy above those of other policies intended to protect citizens. These examples though show only the effects within developed countries, where regulation was already in place, allowing deregulation to occur. Let us now turn our attention to the effect of globalization on political power in newly industrialising countries.

The International Monetary Fund (IMF) and the World Bank were created at the 1944 Bretton Woods conference, and were intended to avert another 1930’s style depression. From the 1980’s, any credit from the World Bank, intended for development, had conditions of IMF ‘structural adjustment programmes’ attached. Countries accepting such loans are forced to implement changes in their own economies which reflect the free market ideology of neo-liberalism, namely capital and trade liberalisation. In 1985 debt-stricken Bolivia accepted the IMF conditions on World Bank debt relief, and in doing so were forced open up its markets to foreign corporations, massively reduce public spending and privatise all national industry. This policy resulted in a 300% increase in domestic water prices, and Bolivia remains today the poorest country in Latin America. Here we can see that governments in developing countries have even less scope to create economic policy than those in the ‘west.’

For the past fifty years, economic growth has been organised and managed by the state. This has been weakened by a number of reasons. Firstly the internationalisation of the finance markets, in particular the floating foreign exchange mechanism has reduced the efficiency of national macroeconomics. For governments acting macro-economically, there are too many risks and uncertainties, due to the unpredictability of the global market. The role of government now resides in the microeconomic realm, by promoting flexibility in labour and production. Secondly, the percentage of economic activity now organised by TNC’s, and the growing interdependence within trade, investment and technology has taken economic power out of the hands of the nation state, thus undermining its authority and legitimacy. Finally the prevailing ideology that market freedom is an essential tool in attracting investment has led to deregulation, and therefore further powers taken from the state. As we have seen above, such deregulation has led to the rolling back of the welfare state, significant environmental compromises and the loss of tax revenue from the state. In less developed countries we have seen that an even greater loss of power has taken place.

The consequence of globalization upon the political power of the nation state is the reduced power within the economic sphere. With a global finance market, single state changes in economic policy are unpredictable. With a global industry market, such changes become dictated by business and by the free market ethos.