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The Economy'sStaying Power as a Political Issue

To the extent thateconomic policy shapes the distribution of wealth and power within society, theeconomy will always be a political issue. While setting economic policy is afunction of the state, states are by no means in a position to control thedistribution of wealth and power, only to influence it with varying degrees ofsuccess. Nevertheless, individual citizens expect their governments toexercise this influence in a manner consistent with their domestic economic andsocial considerations, which is only part of the picture state governments mustconsider in setting economic policy.

Citizens may haveunreasonable expectations as to the capabilities of governments to control theeconomy, which nonetheless translate to political standards by whichrepresentatives of states understand that they will be judged. Additionally,citizens have varying expectations as to how government influence should beexerted and in pursuit of what outcomes. To the extent that state governmentsdo have the capability to influence the economic outcomes through policy,economic policy is a very political issue indeed. Additionally, the tensionbetween citizens' expectations of the state's ability to control the economyand thus the distribution of wealth and power and limitations on stategovernments' actual ability to achieve such expectations virtually guaranteesthat the economy is and will continue to be a political issue.

Changes in theState's Ability to Control or Influence the Economy

Under theWestphalian model of international relations, in which states are autonomous,unified, rational actors, they are indeed in a position to control thedistribution of wealth and power, to truly manage the economy. As increased economic globalizationhas eroded that model, states' power over the distribution of wealth and powerhas been slowly waning. States' ability to control their economies has beensubstantially usurped by the global markets. Stephen Krasner argues that whilethe Westphalian model is an analytic assumption for neo-liberalinstitutionalism, it never provided a complete and accurate model of the waythat states actually functioned or related to one another. Breaches to the Westphalianmodel have been an enduring characteristic of the international environmentbecause there is nothing to prevent them. Rulers have chosen or been forced toaccept other principles, including human rights, minority rights, democracy,communism, and fiscal responsibility.Krasner argues that the increased globalization of economies in the pasthalf-century, while it does undermine the ability of states to control theireconomies, does not represent the dramatic departure from an idyllic, stablepast model of international relations that neo-liberal critics contend.

In any case, it isclear that international markets have shifted the paradigm of internationalrelations and are shaping a new world order. As Susan Strange writes in The Global Transformations Reader Where states were once the masters ofmarkets, now it is the markets which are masters over the governments ofstates. The economy has shifted a tremendous amount since 1960, with the newtechnologies exponentially increasing the pace of change. While the worldeconomy has undergone fundamental shifts of this nature before, the changeshave taken place over the course of two to three-hundred years. The currentsshifts are on the same scale in terms of the fundamental nature of the change,and on a tremendously compressed timeline.

No governmentcould control or even powerfully manage the changes wrought by globalization; suchpower is simply beyond the reach of states. Of course states do control theirresponses and reactions to such change and they can implement policies toexpose more or less of their economies to market forces and manage theconsequences of such exposure. Increasingly, the outcomes of state actionswith regard to the state economy are determined not by the states themselvesbut by the external market forces. While correcting the tendency of marketeconomies to cyclical booms and busts has been (a) major responsibilityassigned to the state, and accepted from the 1930s onwards by the governmentsof many developed countries, the ability of any one state to effect suchcorrections began to falter in early 1970s.By the early 1980s, Keynesian counter-cyclical measures no longer worked atthe national level, and at the global level, the agreement necessary to effectchange on the scale required was lacking with regard to the amount, methods,and funding sources of any such market intervention.

The State'sAbility to Influence the Economy through Policy

RecognizingKramer's contention that states never have been equally autonomous orindependent, it is reasonable to assert that the stronger, more independentstates traditionally had the capability to at their economies through carefuland considered economic policies. The most autonomous states had thecapability of balancing expansionism and protectionism, managing these throughfiscal and monetary policy, thereby effectively managing the state economy.

The ability ofeven the strongest, most independent states to direct the economy by tweakingeconomic policy has been vastly reduced; economic outcomes now depend oninternational markets' response to such policy changes. In three majorstructures of the international political economy - the production structure,the financial structure, and the knowledge structure - actors other than states will often play more decisive roles, argues Strange; states may provide aframework of legal rights and duties within which other actors may influenceoutcomes.The state's ability is increasingly limited to setting the stage.

While on the onehand globalization have reduced the role of the state in choreographing theeconomy, the shifts in authority that globalization has created in the forcesthat shape the economy have at the same time created economic pressures towhich state governments, in their role as protectorate of the citizenry, mustrespond in order to maintain legitimacy as rulers. Michael Mann argues thatthe capitalist transformation wrought by globalization seems to be somewhatweakening the most advanced nation-states of the north yet successful economicdevelopment would strengthen nation-states elsewhere.

As the need moredeveloped states to manage their economies in order to maintain their worldpositions increases, they are least able to do so. Their increasing need anddecreasing ability are both results of the same increasing globalization, ofthe fact that international markets have evolved to function independent of individualstates. The domain of state authority in society and economy is shrinking;what were once domains of authority exclusive to the state are now being sharedwith other loci or sources of authority.

Even if stategovernments cannot control the economy, the citizenry of most developedcountries increasingly demands government intervention in the economy toprotect their interests in the face of the effects of globalization. Statesmay no longer determine economic results, but their policy decisions do impactlabor, environment, taxation and other regulatory areas, and the increasingpressure from citizens makes such action all the more necessary on the domesticpolitical front. Action to satisfy domestic constituents may be directly theopposite of what is needed to compete in the world economy, and yet governmentshave to satisfy the citizenry in order to retain power and remain actors in theinternational arena. Governments in the developed world are rarely if everrewarded with continued power for making decisions that favor internationalrelations and trade at the expense of domestic social considerations.

Regulatory Policy

States do have theauthority to set regulatory policies including labor and environmentalstandards. International trade organizations such as the World TradeOrganization and other regional trading bodies establish rules and minimumstandards for members, and while the more powerful states have more bargainingpower in negotiating the rules that govern such agreements, all members arebound by the rules, voluntarily ceding further authority to internationalorganizations. States evaluate the costs and benefits of participating in suchtrade organizations, and in many cases determine that access to new importand/or export markets and the trading legitimacy or preferred status that suchmembership carries are worth the corresponding compromise in autonomy. Yetunder these trade agreements states even cede some authority with regard toregulatory policy: imposition of minimum environmental and labor standards isnot uncommon in international trade agreements. To reap the benefits ofinternational trade and to stay competitive with other countries eager to doso, states voluntarily surrender subject substantial amounts of their remainingauthority to set policy, to parameters established by internationalorganizations.

Health/WelfarePolicy

Additionally, states have thepower to establish health and welfare policy domestically - to establish asafety net for those least able to survive successfully in a market economy -the old and the young, the sick and disabled, and the unemployed. States can opt to do awaywith such safety nets as public functions, to transfer them wholesale to theprivate sector or to limit the protection provided by the state and transfersome responsibilities to individuals and the private sector. Where a stateestablishes strong safety nets in terms of pensions, welfare, and universalhealth care, these must be financed by the state, and this is usuallyaccomplished by taxation.

Taxation

The state'sability to tax corporations and individual citizens is a core source of power,and a critical tool for managing the economy. However, with increased globalcompetition for industry and employment, the ability of individual states toincrease taxation rates is increasingly limited. In fact the competition amongvarious states creates a downward pressure on corporate taxation.Multinational corporations consider the tax rate as an important factor intheir ongoing assessments of the relative and costs and benefits of locatingproduction and operations for optimum profitability. Location is one factoramong many that affects profitability for corporations, and states are at aconsiderable disadvantage in bargaining with corporations to establish ormaintain facilities in-state when the corporation can relocate to a competingstate and increase profitability. As Susan Strange argues in The Retreat ofthe State, tax paid by corporations is the consequence of ad hoc bargaining between the firm and the two or more tax authorities claiming ashare of its profits. Their rivalry ensures that governments cannot increasethe amount of spending financed by taxing business.

While states cancontrol the rate at which they tax corporations and independent citizens, theresulting outcomes are beyond their control. States must balance the competingneeds of taxing corporations to finance government expenses and maintaining asufficient corporate presence to sustain employment and a financial base tosupport social programs that are increasingly the most visible realm of statesin the developed world.

The state'sauthority to tax citizens is increasingly limited as well. Political partiesparticularly among the highest income increasingly have the capability ofestablishing accounts and financial relationships in other states.

Citizens'Expectations

In the face ofsuch shifting economic realities people want some sense of control. They wantpoliticians to be accountable, to manage the economy and look out for theinterests of the citizenry. The state's policy decisions in the monetary arenadirectly impact the ability of citizens to secure and maintain employment,homes, and retirement funds and to maintain the value of their assets.Politics is local, and people expect accountability at the local level.

Applying economicgame theory to state behavior in the international setting, Strange maintains thatat the very least governments may be playing two-level games at the sametime. They are bargaining to get their way with other governments and, at thesame time, bargaining domestically with their social constituents, or withother political parties to remain in power.If they are indeed rational actors in each game, playing multiple gamessimultaneously places governments the tenuous and sometimes even absurdpositions, as what is rational in one relationship may reflect exactlyopposite preferences to what seems rational in another relationship.

Conclusion

As the effects of globalization continueto spread through the world economy, decreasing the power of state governmentsto influence their own economies to the extent that they choose and/or areforced to participate in the world economy, the corresponding increasedpressure on citizens of developed states in particular creates tension.Citizens demand that the government deliver on visible social services whilemaintaining low levels of unemployment. The tension between the sometimesconflicting outcomes that citizens expect their governments to deliver in orderto stay in power, and the economic policy measures that are within the state'sability to influence, guarantees that economic policy will continue to be apolitical issue.

References

Held, David and McGraw, Anthony.(2002) The Global Transformations Reader. Cambridge: Polity Press

Strange, Susan.(1996) The Retreat of the State: The Diffusion of Power in the New WorldEconomy. New York: Cambridge University Press

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