Wednesday, November 26, 2014

What Role for the State?

WASHINGTON, DC – The financial crisis of 2008 has spurred a global debate on how much government regulation of markets – and what kind – is appropriate. In the United States, it is a key theme in the upcoming presidential election, and it is shaping politics in Europe and emerging markets as well.

For starters, China’s impressive growth performance over the last three decades has given the world an economically successful example of what many call “state capitalism.” Brazil’s development policies have also accorded a strong role to the state.

Questions concerning the state’s size and the sustainable role of government are central to the debate over the eurozone’s fate as well. Many critics of Europe, particularly in the US, link the euro crisis to the outsize role of government there, though the Scandinavian countries are doing well, despite high public spending. In France, the new center-left government faces the challenge of delivering on its promise of strengthening social solidarity while substantially reducing the budget deficit.

Alongside the mostly economic arguments about the role of government, many countries are experiencing widespread disillusionment with politics and a growing distance between citizens and government (particularly national government). In many countries, participation rates in national elections are falling, and new parties and movements, such as the Pirate Party in Germany and the Five Star Movement in Italy, reflect strong discontent with existing governance.

In the US, the approval rating of Congress is at a record-low of 14%. Many there, such as my colleague Bruce Katz at the Brookings Institution, believe that the only solution is to bring a larger share of governance and policy initiation to the state and municipal level, in close partnership with the private sector and civil society.

But that approach, too, might have a downside. Consider Spain, where too much fiscal decentralization to regional governments contributed significantly to weakening otherwise strong public finances.

A crucial problem for this global debate is that, despite the realities of twenty-first-century technology and globalization, it is still conducted largely as if governance and public policy were almost exclusively the domain of the nation-state. To adapt the debate to the real challenges that we face, we should focus on four levels of governance and identify the most appropriate allocation of public-policy functions to them.

First, many policies – including support for local infrastructure, land zoning, facilitation of industrial production and training, traffic ordinances, and environmental regulations – can largely be determined at the local or metropolitan level and reflect the wishes of a local electorate.

Of course, defense and foreign policy will continue to be conducted primarily at the second level – the nation-state. Most nation-states maintain national currencies, and must therefore pursue fiscal and economic policies that support a monetary union. As the eurozone crisis has starkly reminded us, decentralization cannot extend too far into the budgetary sphere, lest it threaten the common currency’s survival.

The US system is manageable, because the American states are largely constrained to running balanced budgets, while the federal government accounts for most fiscal policy. Moreover, banking regulation and deposit insurance are centralized in the US, as they must be in a monetary union. The eurozone has finally recognized this.

So, governance at the nation-state level remains hugely important and is intimately linked to monetary sovereignty. The key problem in Europe today is whether eurozone members will advance towards something resembling a federal nation-state. Unless they do, it is difficult to see how the common currency can survive.

There is also a third, regional or continental, level of governance, which is most advanced in the European Union (and is being tested in Latin America, Africa, and Asia) and can be very useful. Customs unions, free-trade areas, or a single market, as in Europe, allow greater mobility of goods and services, which can lead to benefits from economies of scale that remaining trade impediments at the global level do not permit. Europe’s borderless Schengen Area is another example of regional supra-national governance. There are also aspects of infrastructure that can best be addressed at the continental level.

Finally, there is the global level. The spread of infectious disease, global trade and finance, climate change, nuclear non-proliferation, counterterrorism, and cyber security are just some of the issues that require broad international cooperation and global governance.

In today’s interdependent world, the debate about the role of public policy, the size and functions of government, and the legitimacy of public decision-making should be conducted with the four levels of governance much more clearly in focus. The levels often will overlap (infrastructure and clean energy issues, for example), but democracy could be greatly strengthened if the issues were linked to the levels at which decisions can best be taken.

As Pascal Lamy, the director of the World Trade Organization, has said, it is not only the “local” that has to be brought to the “global”; the inherently “local” political sphere has to internalize the global or regional context. That is a huge challenge for political leadership and communication, but, if it is not met, democracy and globalization will be difficult to reconcile. How to conduct democratic debate with reference to these local, national, continental, and global levels, and to structure a political space that better reflects economic and social space, will be the great challenge of the decades ahead.

Read more from our "The Clash of the Capitalisms" Focal Point.

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    1. CommentedJeff Surtees

      I agree with much of what you say, save one thing. While some environmental regulation about small things may be appropriate at a local level, regulation of the big things is more consistent when done at a state or national level.

    2. CommentedS vd Niet

      Problems need to be dealt with at the level which is most effective, and from this perspective it indeed seems that nation states are sometimes an idle wheel between micro and macro. Yet I feel this is all too pragmatic.

      The sovereign state embodies rule of law and does so with democratic legitimacy. This combination is unique.

      Local governments are close to the people but have negligible powers when it comes to rule of law, whereas higher forms of government lack democratic legitimation. Even so, disputes, for instance breach of contract, are mostly still settled with appeal to a nation state's rule of law of a sovereign, even though the parties involved are based in different countries.

      Also, there aren't just governments out here. Don't forget the people and companies that make things happen. Yet, the relations they enter into are more and more set in judicial terms (again Habermas: 'juridification').

      So these trends go against each other: ongoing juridification while legitimatized rule of law resides at an ever less evident playing field. No solutions yet...

    3. CommentedBrian Holmes

      These four levels of governance are real. But the larger ones offer no substantial opportunity to experience the very foundation of governmental legitimacy: namely, democratic participation. How can ordinary citizens face the continental and global scales with any sentiment other than those of disempowerment and alienation?

      In a collection of essays entitled "The Postnational Constellation," the late Jurgen Habermas raised the question of solidarity beyond the confines of the nation-state. As he wrote with incredible prescience: "The Danes must learn to see a Spaniard, the Germans a Greek, as 'one of us'... There is no form of collective political life in which the necessary equalization of different interest positions and living conditions could arise solely from the cool calculation of individual advantage." Habermas understood grassroots activism, with all the conflict it entails, as the necessary bridge between the national scale and its postnational successors. Only through shared struggle across national boundaries can citizens recognize each other as members of a cosmopolitan community. As he continued in another essay: "The first addressees for this 'project' are not governments. They are social movements and non-governmental organizations; the active members of a civil society that stretches beyond national borders."

      I find it supremely ironic that the EU negotiator to the WTO, Pascal Lamy, should be the one to formulate the necessity for the local scale to internalize the global one. Never did transnational social movements show the depth and breadth of their aspirations to democratic participation as powerfully as they did in the global justice movements of the century's turn, whose chief antagonist was the WTO. And never did globalizing bureaucrats like Lamy so clearly show their disdain for citizens' hopes and dreams. Thus the world lost a crucial chance for the creation of democratic institutions at the continental and global scales.

      Today, some ten years later, we can only watch as world society is restructured to match the dictates of the corporations and the banks. The betrayal of the transnational elites lies at the heart of this bitter spectacle.

    4. CommentedFrank O'Callaghan

      The State is the crucial instrument for society to manage it's world. The 'capture' of the State by minority groups such as the business lobby is a root cause of the current crises.

      Our society is at a point of departure to the future. This is always the case. We have decisions to make and implement. These can only be done through the mechanism of the State and perhaps supranationally. Democratic re-engagement and a radical restructuring of our economies and our rapidly degrading environment are necessary.

      There is no alternative to the State and it is too important to be left to the 'elites'.

        CommentedProcyon Mukherjee

        The U.S. engine of growth is still the world's best option, but it is unfortunate that partisanship and political rhetoric is directed towards questions on State, which America had long concluded as a dynamic arm of restitution and rectitude, while doing precious good for those who are not covered under the benefits derived from "free markets". It would have done better if the Republicans and Democrats converged on this topic that the Role of the State is non-negotiable (like the role of corporate is) and differences could be evened out on the focus and allocation of resources. It is regrettable that that these debates not only undermine, but actually denudes whatever good that came of the state intervention in creating the host of opportunities that could not have happened without building of institutions and infrastructure in areas where trade and commerce could do little to create ( I am not undermining the role played by non-State actors and entrepreneurs but); the concert of state and non-state is the crucial success factor, that cannot be missed.

        Procyon Mukherjee

    5. CommentedZsolt Hermann

      This is a very important overview article about governance in the global world.
      First of all what politicians argue about, especially before elections, usually has nothing to do with reality, those debates simply serve their personal agendas, and most politicians immediately abandon their pre-election views as soon they were elected.
      The last paragraph of the article is the crucial one:
      "...As Pascal Lamy, the director of the World Trade Organization, has said, it is not only the “local” that has to be brought to the “global”; the inherently “local” political sphere has to internalize the global or regional context. That is a huge challenge for political leadership and communication, but, if it is not met, democracy and globalization will be difficult to reconcile. How to conduct democratic debate with reference to these local, national, continental, and global levels, and to structure a political space that better reflects economic and social space, will be the great challenge of the decades ahead..."
      In today's global, interdependent world the importance is not truly about how many levels of governance exists, that should be decided by the practicality of the matter. It is much more important what agenda, purpose, "software" operates and motivates the different levels of governance.
      At the moment the way we conduct governance contradicts reality. While in reality we already live in a single, interconnected system, where each action, even planning effects all the included elements which in our case encompasses the whole of humanity, when we talk about governance or usually any other issue we still think from national or even individual point of view.
      It is similar to a living body, where the different organs, cells would think they can operate, exist individually, making decision disconnected from the other organs, cells and only connect when they think it is good for them. We can imagine how long such a body would be healthy or would survive.
      Thus in a global system each and every level of governing organization, decision making body should be run by the same "software", they should follow the same plan, purpose, and the apply those same principles to their locality, culture.
      The global crisis shows us very clearly that the way we presently run our life, our world is unsustainable, self-destructive, and the more we try to push on with this mentality the deeper we sink into the crisis making a swift and "painless" recovery increasingly more difficult.
      Instead we should stop and recognize, study the global, integral system we evolved into, take on its conditions and laws, and start building a totally new human system that is adapted to the present reality, conditions, as any other living creature would do in order to survive evolution.