Globalist Analysis

Are States Still Relevant?

How important is the state in the modern era of globalization?

Takeaways


  • There is no question that the state is in a rough spot. Intuition suggests, however, that it only grows more relevant in times of uncertainty.
  • Approximately $50 trillion in wealth — equal to 71% of last year's world output — has been eliminated in the past 18 months.
  • The value of derivatives transactions far exceeds that of global output — by a factor of seven according to one estimate.

Scholars have been discussing the state's destiny for a long time.

John Herz argued in 1957 that the state would become irrelevant because of its inability to defend against nuclear attack. Johan Galtung predicted ten years later that it would disappear as individuals began to develop identities at levels below and beyond that of the state.

The Economist countered in 1995 that the state "may have more durability than people realize, because it is still the sole possessor of what is needed to be that basic unit."

Where such discussion was once largely confined to political economists, the emergence of globalization as the principal paradigm for examining geopolitics has made it a theme of mainstream discourse.

For the period spanning 1990-1999, for example, Google Scholar returns 77,500 items that contain the word "globalization." For the period spanning 2000-2009, it returns more than three times as many results.

A rough dichotomy has emerged amidst this surge of interest. There are those who see the world as "flat," "borderless" and "weightless," to cite but a few of the familiar formulations. They argue that the state is irrelevant because it cannot keep pace with economic forces. Then there are the critics who assert that the state is relevant because it can influence the direction that those forces take.

The problem with this debate is that both camps get the causation wrong.

The source of a state's legitimacy is not how effectively it can handle globalization, but rather, how effectively it can provision public goods vis-à-vis other actorsgiven that globalization is occurring. There are certainly cases where non-state actors have undertaken that responsibility in the face of government incompetence — witness Hizbollah in Lebanon and Islamic charities in many East African countries.

Those cases, however, are exceptions. Until and unless some other category of actors can perform that service better on a macro scale — whether powerful foundations, innovative start-ups, or international economic institutions — the state will remain the fundamental building block.

Few, of course, would dispute that it is more difficult for the state to determine its own economic course today than it was 20 or 30 years earlier. The proliferation of sophisticated financial instruments has created what some call a "shadow world" — shadowy in that it operates outside of the purview of those actors that are charged with shaping economic policy.

The value of derivatives transactions far exceeds that of global output — by a factor of seven according to one estimate. Such transactions can, and increasingly do, cause tremendous market instability.

In an April 2008 report, the International Monetary Fund (IMF) noted that, "The highest likelihood of a single default and the likely number of defaults in the event of a single default in the group — a measure of contagion risk within the global banking system — have both risen significantly [between 2007 and 2008]."

Today's financial crisis does little to inspire confidence in the state's ability. It has resulted in the destruction of over $50 trillion in wealth — equal to 71% of last year's world output. The economic powerhouses seem distraught as they try to resuscitate the world economy with trillions of dollars in stimulus spending.

Compounding the state's woes is that this crisis has challenged the underpinnings of "decoupling," the notion that emerging economies had by and large developed domestic growth bases that were wide enough to free them from oscillations of developed-world consumer demand. After all, although the subprime mortgage bubble burst in the United States, it is developing countries that are bearing the brunt of the fallout.

There is no question, then, that the state is in a rough spot. Intuition suggests, however, that it only grows more relevant in times of uncertainty.

A classic Aesop's fable tells the story of the sun and the wind, each of which argues that it is stronger. They see a man on the street below them who happens to be wearing a coat. Determined to prove its power, the wind begins to unleash its fury on the unsuspecting man.

The harder it blows, however, the more closely the man clutches his coat. The wind is a useful metaphor for economic turmoil, the man for the average citizen, and the coat for the weakened state.

Individuals rely on the state to generate employment and provide social safety nets. Whatever its failings, and whatever the compensatory virtues of the private sector, there is no alternative structure that can provision these fundamental public goods as effectively as the state.

Still, as the decline in the world economy continues (it is forecast to shrink for the first time since the WWII), making states at once more vulnerable and more instrumental in helping to reverse the tide, the debate over the state's durability is not going to disappear anytime soon.

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