EAGLE St.- to Index

Jonathan Michie:

IS THE STATE LOSING ITS ROLE AS AN ECONOMIC AGENT?

One of our research projects show that there is very different economic relations between Finland and Britain. The economic activities and performances of countries do differ quite a bit. So apart from the question of sovereignty of states which is also the main theme, there is also the fact that the increasing of globalisation economy has not meant that the countries have become more similar in the way that they actually organise their economic activities. There are still very big differences.

Firstly, we should consider what role the state has played as an economic agent in the past, what is it we are talking about, what have we lost or are loosing -- if that is a conclusion. Secondly, we should consider why it should be thought that perhaps there is no longer a role for the state, that the role which the states played in the past is withering away or that the states haven’t been able to react to the changes that have occurred. Then we could go on to the idea of globalisation, the powerlessness of nation-states in front of global markets.

I’ll start with the first question, what role the state does or has played in the past as an economic agent. It is striking that obviously the role is massive and has been massive certainly in the past. Certainly in the economic literature there are various schools which thought that the nation state and governments must intervene and must play some role in providing. Left to itself the free market was thought to be an inappropriate mechanism. Most obvious text book examples are so-called public goods, light houses or public parks which are costless for us. Even if it was possible to charge people for these services there are all sorts of difficulties in actually doing this. The state is the obvious economic agent to provide these services.

There are problems connected with natural monopolies like railways, telecommunications or electricity if they are left unregulated. If left to itself the market would be likely to end up with a single monopoly because of the economy of scale. Monopolies would tend to charge higher prices and therefore provide a lower level of goods and services than would be desireable. The fact that the economy is a whole is a fundamental reason in economists’ eyes why most of those industries have been in public ownership in most countries of the world. The most obvious exeption is the United States where these industries were not taken into public ownership basically for ideologocal reasons, because of commitment to free entreprise.

Capitalism in a sense proves a rule because extensive regulatory systems had to be build up over the years to deal with basically same sorts of problems. That is illustrated quite nicely in Britain where there has obviously been a blast of privatisation programmes since 1979. Privatisation was not even mentioned in the election manifesto in 1979. The claim was that they where going to deregulate, reduce the degree of regulation, abolish the so-called quango regulatory bodies and so on.

Now what has happened since, of course, has been the biggest increase in regulations, the most numbers of new regulatory bodies ever set out probably in almost every country in world history. As a result of privatising these industries there are the problems of natural monopoly. Beyond that and much more generally they are all industries and activities where there are thought to be gains to the economy beyond what is useful for any particular firm, examples being education, training, research and development and so on. It is basically in economic interest to subsidise if not provide those goods. So-called new growth theory emphasises how research and development, education and training feed back to the economy and play a large part in explaining why some countries have been more succesful and grown more rapidly than others.

So very briefly these are the main categories of explanation why states have played a role as an economic agent and should continue to play some sort of role. This is a rather limited view concetrating on economic terms. Obviously the role has been historically a much broader, including military role, political role and so on. The shape of the world economy has clearly been determined by nation-states, world wars and so on.

But the most explicit economic agenda in terms of shaping the world economy was established after the Second World War, the so-called Bretton Woods system. It was an attempt to set up a world economic system with currency controls and exchange rates which International Monetary Fund and the World Bank managed. They increasingly looked after the development of the Third World and so on. After the Second World War it was thought that the economists had solved the problems of unemployment and recession which had dogged the world and led to the rise of fascism. After the war it was generally believed that the technical problems had been solved so that the states at a global level were able to prevent the system ever slipping back to recession. Keynes who obviously was very much involved in that. To be fair to him he was actually dubious at the time as to whether the system set up would actually manage to sustain full employment internationally.

The whole Bretton Woods agreement was shaped very much in the interests of the United States. Keynes said that the strong countries with balance of payments surpluses should be obliged to expand faster. This would bring in more imports and keep the whole show on the road. Now that was obviously meant that America would be obliged to do something about it if the world economy began to stall. Understandably America did not want to do that and thought the exact opposite that the weak countries with balance of payments deficits would have to sort out the imbalances in trade. In fact on the way to Washington to negotiate the agreement Keynes was told by the rest of the British delegation that the proposals Keynes had drawn out were not going to be put in negotiations because America would not accept them. That is when Keynes made the famous quote saying that because America was not listening to sense he proposed to go and talk nonsense, in any case that was how the American agenda was agreed. Obviously the whole Bretton Woods system has broken down. I don’t think Keynes would have surprised by this.

The text book case for rational state intervention has not worked well in reality because the economically powerful countries have always shaped the agenda along their own lines. Nevertheless, the conclusion from both these dicussions is that the role of the state in economic terms is decisive and certainly has been decisive. In fact I would go a bit further and actually against the text book economic agenda. Although there are these arguments for economic intervention from governments in economic text book terms, nevertheless that intervention is very limited. The example of international trade is a good one because there the orthodoxy is very much that free trade alone is best for everybody, including those who are weak in international trade terms. The theory around that is that a weak country should just concentrate on its comparative advantages which are determined by weather or climate or whatever.

The example of Japan is illustrates the weakness of this argument. If it had been and accepted by the Japanese they would still be basically a rice growing economy, with textiles and so on. But the Japanese after the World War followed a very different agenda. Also Korea and some other countries were deliberately looking for new growth industries and invested heavily in them. They also used public investment and the Japanese established MITI, the National Bureau of Trade and Industry. The Koreans actually opted for public ownership of the whole banking system and directed finances where they thought growth sectors would be.

There is a whole seperate literature written on these questions. It was largely launched by Professor Chris Freeman. He launched a science policy research unit in Sussex around national systems of innovation. The reason why some countries have been much more successful in terms of innovation and growth has been the different national systems across the whole spectrum of education, training, institutions like MITI and so on. And there is still a seperate debate on whether national innovation has been replaced now by the globalisation of technology. Briefly the conclusions coming out of that are very much that that is not the case. The globalisation of technology is not replacing the sub-national systems of innovation. If anything it seems to be making them more crucial. It is even more important to have a successful national system of innovation in the face of increasing globalisation.

Given the important role of the state as an economic agent historically and still today, we should ask why the question about the weakening of the state has been raised. I think that the main reason is globalisation. But first I think it is important to acknowledge that there are other reasons why the previous role I have been describing is no longer valid and obviously there is the whole political climate of the desire to roll back the frontiers of the state, made explicit in those terms by a number of governments, for example when returning publicly owned industries to private ownership. The fact that that is not a clear case of the state withdrawing as an economic agent but rather changing roles as an economic agent because it has led to very detailed public regulation required of those industries and is quite at odds of what was expected certainly by the advisors and governments certainly in Britain at the time. For example, in Britain, the first major privatisation was telecommunications. The fairly explicit idea was that the new regulatory body for the telecommunications would be comparable to a removal company. It would move the industry from the public to private sector after which it could operate like any other private sector industry. The transition was believed to last a lot less than ten years. Now that simply has not happened . In a number of ways the degree of regulation has increased. There are many activities on which the regulator is now laying down the law. There seems no sign of later regulatory bodies withering away, either.

Now that regulation is very much of a national character in most countries. On top of that there is of course all sorts of international regulatory bodies for these and other industries, but I think that it is important to remember as well that the international regulation is made up very much from national governments and national regulatory bodies. It is not something that just sort of emergers spontaneously and at a global level.

On the more general issue, let us turn to the globalisation of the economy. How can the international economy be anyhing other than global, by definition it always has been. But there obviously has been an increase in the degree to which the international nature of the economy inpacts on individual countries. When I say that that has happened it is important to recognise that I am not just talking about the last few years or few decades. Historically what has happened has been that increasing globalisation has been followed by a reduction in globalisationand this again has been followed by a new increase in globalisation and so on. I think it is very important to keep an historical view on these processes but certainly since the Second World War all the measures by which you might try to trace the globalised economy have increased. Obviously there has been a continuing increase in trade which has been faster than the growth of national income. There has been an obvious globalisation of the financial markets over the last few years, quite explicitly as a result of policy. There has been an increase in the operation of multinational corporations, foreign direct investments and so on. There has been a lot of writing on this and this is all quite well documented and I think that the conclusion is that certainly these all do show an increase in the degree to which individual economies are impacted by international economic forces. But this is not the first time in history that this has happened.

I think it is important to bear in mind that just because there has been an increase in globalisation does not mean that that is not irreversable. I am not saying that it would be a good or a bad thing to be revised but it is certainly very possible that it will be revised and it is important not to be complacent that things would all move in one direction. There are dangers. Unless appropriate new mechanisms and institutions at international level are found, some of these processes maby revised in a quite unfortunate sort of nationalistic ways.

Thirdly in spite of what I just said, a lot of the writing is exaggerated. It is undoubtedly the case that the nation state is across the world still the most important actor in international economic arena. Obviously some states are more important than others. Basically it is America, Japan and Germany and so on calling the shots but the degree to which those nation states have lost their powers as agents of economic change has been exaggerated. One reason for this exaggeration is that a lot of what has been categorised as simple globalisation, that nation states no longer matter, that economic activity is a truly global, when looked at in more detail is actually regionalisation with the European integration proceeding, with the North American Free Trade Area, NAFTA, and similar sorts of processes, although less institutionalised in Japan and the Pacific Rim.

For example, when I said that there has been a big increase in foreign direct investments and multinational operations throughout the globe, the overwhelming majority of those investments, 85%, is within the so called triad, within those three blocks. Similar sort of picture is found in the globalisation of technology. Most of the actual research still takes place in the home base of the multinational corporations. There is some joint work across countries but that is insignificant in comparison.

The aspect of globalisation which actually impacts most directly on the nation state in Britain and Finland is European integration.

Firstly I think it is important to bear in mind that European integration itself is not something which has been purely driven by economic forces. It has been very much a result of national governments perceiving an economic threat from other countries, from the so-called Japanese threat, the fact that the American government were pursuing the North American free trade agenda and so on. Although there has been some loss of national decision-making power, it has been very much a self- imposed loss of sovereignty which I think mostly is illustrated in the Maastrich Treaty which actually specifies that monetary policy can be pursued on the European level not just by the European Bank but a European bank very strictly independent of national governments. Also there are the restrictions put on national governments’ fiscal deficits and so on.

It was quite an explicit decision to include those aspects in the treaty. It is not some sort of inevitable process and the Exchange Rate Mechanism is not irreversable. These processes are not irreversable. On the contrary they can undermine themselves if pushed in an inappropriate way. The Exchange Rate Mechanism, in effect did collapse. It still exists on paper and there are attempts to reinstitute it. One of the main reasons why it collapsed was precisely the attempt to turn it from what it had been previously: a relatively modest attempt to reduce the exchange rate fluctuations and limit realignments over time. That was changed to become the first stage of the abolition of all the currencies and the adoption of a single currency where by definition no more realliances would ever be possible because currencies simply would not exist. Far from being an irreversable process, that attempt to change its character was actually part of the reason why it broke down.

The conclusion, I think, going through all this in terms of the process of economic globalisation and the specific forms it takes, if you look at it in terms of technological globalisation and the specific form that it has taken in the European context, all point to the fact that the state is very much still and for the foreseeable future looks like remaining a key agent in economic processes. It is true, I think, that there has been some reduction in the state's economic options. Constitutionally, that has taken the form in the Europen Union of what the Maastricht treaty would allow and globally through similar sorts of limitations and the new line of GATT and that of World Trade Organisation which for example means that the state facilitated the economic development in Japan, Korea and so on.

Those methods would be no longer allowable to other countries trying to follow that route. Whether that is a sustainable position would depend much on whether the new Koreas, new Japans and so on are able to develop their economies without the sorts of interventionist measures that Japan and Korea etc took. If not, then it will create tensions and so these countries will enevitabely decide to just pursue that or those sort of policies regardless of wether they are alligned under international treaties or not. The whole question is a key issue. The role of the state has been changing but a lot of the writing on that has been rather exaggerated. Even the international action which has taken place in economic terms has been very much driven by independent individual and national governements. The truth is that nation-states do matter and national differences remain very important. That is illustrated by the huge differencies you come to when you look at this question depending on which country you have in mind.

Britain is a very peculiar economy in a whole number of respects created by historical circumstances. Finland is in a very specific economic historical position. So the answer is that states do have a key role and that role will differ from country to country. The increased power of multinational corporations does require some response on a multinational level, European level and global level. It remains to be seen whether that response in the future will need to come in part, at least, from national governments operating on their own or in collaboration internationally.

Dr Jonathan Michie is a Lecturer at the Judge Institute of Management Studies, and a Fellow of Robinson College, Cambridge. He has recently edited "Creating Industrial Capacity: Towards Full Employment", published by Oxford University Press, 1996.

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