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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.