The Persistent Power of the State in the Global Economy

The 20th century witnessed the inexorable rise of the state as the pre-eminent player in economic life. By standard metrics — state spending as a percentage of GDP, regulation of economic activity — governments exercised increasing influence over their national markets as the century progressed. To be clear, states often did this in response to popular demands, and as Edward Glaeser observed last month’s Cato Unbound, “The coercive power of the state is useful when it protects our lives and property from outside harm.” The point is, this was a secular trend observed across all governments.

For many scholars and commentators, the 21st century was supposed to be different, because of the myriad actors and factors unleashed by globalization (because this word means very different things to different people, here’s my definition: the cluster of political, economic, technological changes that reduce barriers to exchange of goods, services, and ideas across borders). For good or ill, the globalization of markets was expected to constrain state power in a variety of ways. Indeed, the dominant strands of globalization research share a common assumption – the decline of state autonomy relative to other factors and actors. Structuralists of many stripes agree that globalization undercuts state sovereignty, weakens the ability of governments to effectively regulate its domestic affairs, and ultimately deprives states of their autonomy and agency.

A particular fear — or hope, depending on one’s ideological proclivities — was that globalization would encourage a “race to the bottom.” According to this model, capital has become increasingly footloose, to the point where states could not halt capital mobility even if they tried. In such a world, capital will seek the location where it can earn the highest rate of return. High rates of corporate taxation, strict labor laws, or rigorous environmental protection lower profit rates by raising the costs of production. Capital will therefore engage in regulatory arbitrage, moving to (or importing from) countries with the fewest and lowest regulatory standards. Nation-states eager to attract capital – and fearful of losing their tax base – lower their regulatory standards so as to raise the rate of return for corporate investment. The end result is a world where regulatory standards are at the lowest common denominator. For anti-globalization activists, this vision was Gotterdammerung, the crystallization of Karl Polanyi’s market-run-amok. For many libertarians, the hope was that “jurisdictional competition” would act as the ultimate constraint on the state. Also fitting into this category is Thomas Friedman’s magnificent oeuvre of hyperkinetic Electronic-Herd/Golden Straightjacket/Flat World metaphors.

For others, the rising power of voluntary associations is even more important in constraining the state’s role in the global economy. Enthusiasts and scholars who study global civil society posit that globalization empowers a new set of nonstate actors — particularly nongovernmental organizations (NGOs). The growth of NGOs, epistemic communities, public policy networks, transnational social movements, and even private orders amounts to the creation of a global civic society that is too ideationally powerful for states to ignore. In an Internet age, these groups have agenda-setting powers that compel states to take (or cease) action in areas like intellectual property rights or agricultural subsidies. As the dynamic density of global civic society actors increases, so does their effect on outcomes. Some writers go further, arguing that these groups are now powerful enough to bypass the state entirely, leading to a “world civic politics.”

These are not the only arguments put forward about how globalization affects the state. Lawyers and sociologists look at the ever-increasing web of laws, rules, treaties, and international institutions, and see the state cosseted by global norms. Some theorists go so far as to assert that globalization requires a wholesale rejection of existing theoretical paradigms in international relations. Indeed, if there is a recurring theme that runs through the literature on globalization and global governance, it is that economic globalization attenuates state power.

It was this kind of ideational environment that prompted me to write All Politics Is Global: Explaining International Regulatory Regimes. In the book, I conclude that globalization has been responsible for a lot of bad predictions about international relations. This is not because globalization is an unimportant phenomenon. The reduction of tariffs, quotas, and capital controls has introduced a bevy of new conflicts over the residual impediments to global economic integration — the differences among domestic rules and regulatory standards. Regulatory regimes strike a political chord because they symbolize a shift in the locus of politics. For many issues that comprise the daily substance of our lives — what can be accessed on the Internet, how much medicine will cost, how to treat workers, how much to pollute, what can go into our food, — the politics have gone global. They strike an economic chord because the Organization for Economic Cooperation and Development estimates that these standards and regulations affect approximately $4 trillion in traded goods.

The theoretical response to the globalization phenomenon, however, has been all out of proportion to how globalization actually affects world politics. The trouble with many of the arguments put forward by globalization theorists is the lack of variation in the independent variable and the presence of variation in the dependent variable. According to these narratives, globalization inexorably promotes policy convergence by stripping states of their ability to act autonomously from either market forces or civic society pressures. The problem with this scenario is that there are a number of regulatory issue areas – data privacy, stem cell research, global warming, genetically modified foods — where regulatory convergence has been limited at best. These approaches lack the capacity to explain variation in outcomes.

For the past century, the standard approaches to international relations — realism and liberalism — have focused on the role that state power and national interest play in determining outcomes in world politics. All Politics Is Global argues that globalization does little to reduce the salience of these factors. One of the basic measures of aggregate power has been relative market size. The current era of globalization, if anything, reinforces that metric of power. Governments that regulate large markets — at present, the United States and European Union — will establish the rules that other actors will follow. A great power concert is a necessary and sufficient condition for effective global governance over any transnational issue. Without such a concert, international efforts at regulatory coordination will be incomplete.

While the distribution of power determines who has a seat at the regulating table, the distribution of interests within and among the great powers determines whether there will be effective global governance. In large-market economies, globalization increases the rewards for policy coordination but has a negligible impact on the attendant adjustment costs that come with altering pre-existing rules and regulations. When the adjustment costs are sufficiently high, not even globalization’s powerful dynamics can push states into cooperation.

The more that domestic interests within the great powers have invested in the status quo, the greater the adjustment costs of change. As Hirschman pointed out in Exit, Voice, and Loyalty, when interest groups face barriers to exiting their chosen profession, they will choose to invest more in political voice. This implies that coordination will be least likely when the regulatory issue in question affects relatively immobile or mature sectors or markets — the regulation of land, labor, or consumer products. Ironically, the least globalized elements of great power polities will exert the strongest effect on the likelihood of global regulatory coordination.

In All Politics Is Global, I examined four issue areas in depth — Internet governance, financial codes and standards, the treatment of genetically modified organisms, and the regulation of life-saving pharmaceuticals. The first two cases were chosen as arenas where the forces of globalization were assumed to be at their strongest; in the latter two cases, global civil society has claimed notable victories. However, contrary to assumptions that globalization weakens state power, the pattern of global regulatory coordination was consistent with my “revisionist” model.

In the case of the Internet, when the United States and the European Union saw significant benefits and low adjustment costs from coordination, the effective global governance of Internet-related issues was achieved — even if the great powers voluntarily delegated the management of these regulatory regimes to private actors. When Internet issues intersected with larger public policy questions — such as privacy or speech rights — the adjustment costs for governments dramatically increased. In the absence of a great power concert, governments used all of the tools of statecraft at their disposal to protect their preferred set of regulatory standards — even if such a decision heavily restricted Internet use.

The case of financial codes and standards also supported the revisionist model. In the aftermath of the financial crises of the 1990s, both the United States and European Union preferred to see a ratcheting up of financial regulation. The great powers, as developed economies, anticipated significant public goods benefits from coordination at a stringent level of regulation. In contrast, the domestic financial sectors in developing countries faced high adjustment costs at the prospect of stringent standards. Because of this distribution of interests, great powers chose to use club IGOs like the Financial Stability Forum as the primary fora to establish global financial regulations. Even with their weighted voting schemes, the U.S. and EU encountered difficulties managing the international financial institutions, because of their strong norms of consensus decision-making. These standards were created despite the fact that financial sectors in the developed world were hardly overjoyed at the prospect of stringent, transparent regulatory standards.

The United States and the European Union promulgated different regulatory standards to govern the production and consumption of genetically modified organisms (GMOs). These regulations governing GMOs affect groups with extremely high barriers to exit — agricultural producers, biotechnology firms and consumer groups. The initial divergence of preferences between Americans and Europeans on this issue, combined with the high adjustment costs of regulatory harmonization, ensured the absence of a bargaining core between the two governments and led to a rival standards outcome. Both great powers pushed to legitimize their preferred standards in friendly international fora. Because of the large market size of both of these countries, the result has been an uneasy stalemate. Despite America’s hegemonic position in the production of GM products, and despite Europe’s constant ratcheting up of its standards, neither great power has had a demonstrable effect on the other government’s preference ordering. The rest of the world split between the American and European set of rules regarding GM products.

The public health exemption to the intellectual property rights regime represents a potentially deviant case for my model. Global civil society groups like OxFam International and Médecins Sans Frontières waged a sustained campaign to force the great powers to allow public health “flexibilities” in the enforcement of the TRIPS regime for intellectual property — and appeared to succeed with the 2001 Doha Declaration. Over time, however, this case suggests that such campaigns have only an ephemeral effect. After the Doha Declaration, the United States and European Union acted to ensure that the carve-out for public health was narrowed in accordance with their preferences — as opposed to the more generous exception that activists wanted. The U.S. in particular shifted the status quo by signing a series of bilateral free-trade agreements that contained “TRIPS-plus” provisions. As time passed, great power governments appropriated the normative frame of improving public health to advance their own policy aims.

Like any theory, mine leaves a large cast of characters at the margins of the stage. For example, smaller states and nonstate actors in the international system do not affect governance outcomes – but they do affect the processes through which governance is attempted. Weaker actors can block action at “universal” organizations like the United Nations, International Labor Organization or International Telecommunications Union (ITU). This process effect, however, is marginal because at the global level, governance structures are substitutable. Powerful states engage in forum-shopping within a complex of international regimes. If the ITU poses a problem for Internet governance, the U.S. and EU simply create the Internet Corporation of Assigned Names and Numbers to handle the problem. If the developing countries get the WTO to agree to a public health exception to intellectual property rights, the United States responds by signing a web of bilateral trade deals with even more stringent protections. To get what they want, the great powers can and will delegate regime management to non-state actors; create international regimes with strong enforcement capabilities; generate rival regimes to protect their interests; and exercise unilateral, extraterritorial measures to establish regional spheres of influence.

The biggest implication of All Politics Is Global is that the global political economy of this century will look only slightly different from that of the 20th century. The state will not intervene in the same crude fashion it did in the past (tariffs, quotas, capital controls) but it will intervene. Governments that regulate large domestic markets will continue to be the primary actors writing the global rules of the game. NGOs and other activists will capture media headlines and occasional moral victories, but have little long-term influence on outcomes. The proliferation of international rules, laws, and organizational forms will not limit state sovereignty — if anything, it will enhance the ability of the great powers to go forum-shopping at will. Even if more issues are negotiated on the global stage, the sources of government power and preferences remain local — giving renewed meaning to Tip O’Neill’s aphorism

What is taking place today in the theoretical debates about globalization and global governance echoes similar debates from three decades ago. During the early seventies the global economy seemed to be buffeted by one shock after another — the first oil crisis, the end of the Bretton Woods era, etc. This triggered a surge of research into the ways in which complex transnational interdependence could alter the behavior of states. This research emphasized the ways in which non-state actors and the global economy constrained states. A few years later, another wave of scholarship arose asking how the political externalities of interdependence would be regulated in an anarchic world. The result was the literature on international regimes, which pointed out the ways in which states remained the primary actors in establishing the rules of the game, while other actors and factors were “intervening variables.”

A similar yin and yang is taking place in the current theoretical debates about how economic globalization affects world politics. The first wave of this literature arrived in the nineties, highlighting the ways in which the globalization phenomenon placed added constraints on the state. All Politics Is Global belongs to a small but growing literature that looks at globalization and global governance from a state-centric perspective. By giving states pride of place, it is easier to discern the precise effects of new actors and factors. Much like the prior wave of scholarship, All Politics Is Global concludes that they matter as an intervening variable. Globalization is not irrelevant to global governance, but it is not transformative either.

Daniel W. Drezner is associate professor of international politics at the Fletcher School at Tufts University. Princeton University Press published his book, All Politics Is Global: Explaining International Regulatory Regimes, this March.

Also from this issue

Lead Essay

  • Drawing from his recent book, All Politics is Global: Explaining International Regulatory Regimes, Tufts University’s Daniel Drezner explains that “for many issues that comprise the daily substance of our lives … the politics have gone global.” However, he argues, the intellectual response to this development has been out of proportion to its real extent. When great powers coordinate on regulatory standards, that may be enough to shift the rest of the globe. But, as Drezner illustrates from examples ranging from the Internet to genetically modified foods, when the costs of adjustment are too high for states with economic heft, global regulatory coordination tends not to be forthcoming. In the end, we get neither a “race to the bottom,” nor liberation from the state through jurisdictional competition. “Globalization is not irrelevant to global governance,” Drezner concludes, “but it is not transformative either.”

Response Essays

  • Ann Florini, director of the Centre on Asia and Globalisation at the National University of Singapore and senior fellow at the Brookings Institutions disagrees with Daniel Drezner’s claim that global governance remains dominated by a few great state powers. “We’re heading for a multi-polar system where very different kinds of states, at very different levels of development, will matter,” Florini argues. And, she maintains, “ ‘regulation’ is no longer done only by governments.” For example, corporations, not states, put international protection of intellectual property rights on the table, but it was small states and pressure from civil society groups that eventually determined effective policy. Florini suggests Drezner’s analysis is confused by an over-simple idea of the interests of great states. “How states define what their interests are is one of the most important ways globalization is affecting outcomes in global rule-making.”

  • Jeremy A. Rabkin, professor of law at George Mason, writes, “one can accept almost everything [Drezner] says in his essay and still think the challenges we face now are different, in important ways, from the patterns we had become accustomed to in the past.” The collapse of communism and the discrediting of socialism has led to a world in which “states now are so entangled in international regimes — because so entangled in international exchange — that the accepted rules of international economic conduct are now recognized to be very important.” Though the U.S. can in principle block international rules contrary to its overall interests, domestic interests jump at the chance to push their narrow agendas, it is often easier to go along than to fight, and some marginal changes occur simply through neglect. But “marginal changes can add up to sizable effects in the aggregate.”

  • “In the main [Drezner’s] argument is persuasive,” writes Kal Raustiala, director of UCLA’s Ronald W. Burkle Center for International Relations. However, the continued preeminence of states on the world stage “is a bit more ambiguous and complex than Drezner suggests.” Raustiala argues that critics of globalization increasingly “expect more openness, more transparency, more accountability; in other words, a process more like domestic governance.” Raustiala contends that can learn something important by looking to domestic politics: powerful lobbyists and special interests did not emerge because the state was getting weaker. “The rise of interdependence and NGOs in American society didn’t signal the end of the state; it signaled the growth of the state.”