Tuesday, May 23, 2006

Has Globalization Resulted In The Retreat Of The Nation-State?

Research Discipline - International Political Economy


As the web of financial, technological and production structures is constantly moving across national borders and economic activity becomes more fundamentally global, ‘it has become a cliché to say that we live in the age of globalization’.[1] Economic interdependence has become a fact of life and the relevance of the nation-state has been put under constant attack, at least at a theoretical level. This paper will analyse the polemic between two scholarly opposing views on the role of the state in a highly globalized world market. The main concern will be given to the nature of the international economic order and its true effects upon the role of the state over its national affairs. Taking into account key components of globalization such as technological change, capital movement, international trade, labour migration and societal security while making use of empirical evidence, it will conclude that although its nature of operation has changed, the nation-state is necessary and still the primary actor holding the monopoly to hard power and regulating the functioning of the global market.


The tension between the state and the global markets has been the centre theme of many books and articles in the field of international political economy. Scholars like Susan Strange have written about the “Retreat of the State” while others like Robert Gilpin argue that ‘the nation-state continues to be the major actor in both domestic and international affairs’.[2] Do states still determine the nature of the market or does the global economic order constrain the state and dictate its national policies? This is the central question to this debate. In Strange’s view ‘the impersonal forces of world markets, integrated over the post war period more by private enterprise in finance, industry and trade than by the cooperative decisions of governments, are now more powerful than the states to whom ultimate political authority over society and economy is supposed to belong’.[3] Gilpin disagrees by noting that ‘even though its role may have diminished somewhat, the nation-state remains preeminent in both domestic and international economic affairs’.[4] Others are convinced that ‘globalization is largely a myth’.[5]


The 20th Century has seen some of the most advanced technological changes in the whole history of human kind. From horses to cars, from letters to telegraphs, then to telephones and now the internet, the world certainly seems smaller. During the past decades, the rapid advance of technological capability has shifted the state-market balance and has raised serious questions about the true authority governing the structures of the world markets. The telecommunications revolution has made it easier to move information around the world and transfer large amounts of capital across borders. However, as David Balaam explains, ‘to gain the maximum advantage, one needs to control access to new knowledge and technology – to keep others from using the products or research and innovation without paying in full for the right’.[6] This might explain why the US government holds key technological pieces of information as a matter of national security. Within private markets too, governments continue to interfere and regulate. Take ICANN, the Internet Corporation for Assigned Names and Numbers which at first sight is a private corporation overseeing the distribution of unique IP addresses and domain names over the internet. However, this private corporation was the creation of the US government in 1998.[7] Another good example of government regulation would be the anti-trust case against Microsoft, the biggest computer maker in the world. In 2001, the US Justice Department imposed “behavioural remedies” and in 2004, the EU fined the corporation for €500m ordering it to change its behaviour. Such cases clearly demonstrate that although MNC’s can hold the monopoly of one sector of the technology market, national governments can and do regulate their behaviour, thus restricting their authority.


Globalization is very much about the increasing economic activity across borders and the integration of national markets into one international economic order. If transnational corporations are increasingly moving capital across borders then it would be hard to see the state benefiting from territorial control. In this borderless world the realist model of the state is questionable. Indeed, as Peter Evans notes, ‘in a global economy where there is a surplus of labour, control over large amounts of territory and population can be more of a burden than an asset’.[8] When the system of states used to operate in a fixed exchange rate environment, industrialized countries were in control of capital flows. But ‘by the end of the 1980’s, by contrast, capital controls had been dismantled and the value of currencies was left more to markets than to states’.[9] Based on the above assumption, any state policies that go against the international trade and financial markets will logically harm the value of its currency and damage its prospective capital gains. In such an economic environment, states are not the unitary players determining the markets. If this were true, one of the major effects of globalization is the increase of state dependency upon international trade thus declining state authority over the society it governs. However, this perceived decline is contradicted by Geoffrey Garrett’s data from OECD countries which suggests that ‘exposure to trade, FDI flows, and left-labour power were all associated with greater (government) spending after 1985’.[10] Furthermore, the growth of East Asian economies over the past decades goes against the argument that globalization reduces state power. In the case of China, the government has partially liberalized trade while still manipulating the country’s exchange rate. Despite tight government control, the Chinese economy grew by 9.5% last year, its fastest clip in eight years.[11] Indeed, a higher degree of openness exposes the national economy to greater shocks thus demanding stronger regulatory policies. The striking cases of Japan, South Korea and China today, offer strong proof that international trade and openness can go hand in hand with a high degree of state centrality.


As today’s world is increasingly determined by global activities, the nature of production has changed mainly due to the technological revolution and has produced a labour vacuum which has been filled by economic migrants. This is more typical of the EU and the USA where farm and heavy industry jobs have been filled by workers from developing countries. However, increasing evidence suggests that governments are intervening against mass migration in order to protect the welfare system offered to their citizens. This is evident through tougher migration policies in the UK, Denmark, the Netherlands, the USA and even Australia. The rise of far right parties across Europe and the popular support for strict policies indicates the high expectations that a society has towards its government. The above is what Joanne van Selm calls “Societal Security”. Her argument is that as European states’ main concerns have shifted away from the conventional protection of territorial sovereignty, one suggestion in IR literature is ‘that the facet of the state which needs protecting is its identity, and that the threat to that identity is immigration’.[12] The identity factor in here is important because of its direct connection with the necessity of the state in a highly globalized market. If the state is declining in the face of uncontrollable international markets, up to what degree can its capacity be reduced? If transnational companies become more powerful than state actors, they would maximize the risk element to such extend that ‘societal security’ would be disturbed. This is more obvious among EU countries where citizens expect the state to be the sole guarantor of their social rights, from health care to unemployment benefits, public transport and national pension schemes. Even where parts of these services are provided by private entities such as private universities or clinics, the state acts as a regulator of teaching and health standards. Trading the above with a financial theatre where the state has retreated and multinationals rule the markets, thus owning the individual’s fate, would be unthinkable in any EU member state. The importance of the state-society relationship is also illustrated by the weak financial infrastructure in developing countries. The collapse of pyramid schemes in Albania in 1997, where most citizens had invested their life savings, resulted in popular anger and civil unrest which in turn collapsed the government itself. Such lack of state centrality killed the prospects of any FDI’s over the following years. Common political logic suggests that a solid and stable state is needed in order to provide the orderly infrastructure for foreign direct investment and a stable financial market.[13]


As the above brief analysis and empirical evidence suggests, we are not witnessing the retreat of the state but rather a transformation of its role from provider to regulator. Serious rethinking of the state’s role ‘would legitimize new efforts to turn states into effective instruments for the achievement of collective goals’.[14] While much of the contemporary rhetoric suggests that the globalization of markets is constraining state policies, evidence suggests that governments still control the legal infrastructure of transnational markets. The post cold war world has created a different kind of environment where states are not the unitary players determining the markets. However, macroeconomic policies are extremely effective in constraining the economic activity of non-state actors. The US Federal Reserve or the ECB can determine the evolution of economic activity by controlling interest rates. The result of statelessness would be total anarchy where MNC’s would behave like armed gangs around the dark streets of a city. Furthermore, strong markets need strong and responsible states which can guarantee order and enforce laws within an anarchic financial system. Finally, if evidence suggests that the state is a kind of regulator policing the infrastructure of the current global economic order, then it would not make sense to speak of state retreat but of state transformation.


Block, Fred (1997), The Vampire State: And Other Myths and Fallacies About the U.S. Economy,

(New York: New Press)

Evans, Peter (1997) ‘The Eclipse of the State? Reflections on Stateness in an Era of

Globalization’, World Politics, Vol. 50, No. 1, pp. 62-87

Garrett, Geoffrey (1998) ‘Global Markets and National Politics: Collision Course or Virtuous

Circle?’, International Organization, Vol. 52, No. 4, pp. 787-824

Gilpin, Robert (2001), Global Political Economy: Understanding the International Economic

Order, 2nd ed. (Princeton, NJ: Princeton University Press)

Hirst, Paul, and Thompson, Grahame (1999), Globalization in Question: The International

Economy and the Possibilities of Governance, 2nd ed. (Cambridge: Polity Press)

Oatley, Thomas (2004), International Political Economy: Interests and Institutions in the Global

Economy, (New York: Pearson Education, Inc)

Strange, Susan (1996), The Retreat of the State: The Diffusion of Power in the World Economy,

(Cambridge: Cambridge University Press)

Van Selm, Joanne, ed. (2000), Kosovo’s Refugees in the European Union (New York: Pinter)

Online Sources

The Economist (Mar 23rd 2004) ‘Another Attempt to Tame the Monopolist’

The Economist (Jan 27th 2005) ‘No Sign of Landing’

European Union (EU): http://www.europa.eu.int

The Organization for Economic Co-operation and Development (OECD): http://www.oecd.org

The International Monetary Fund (IMF): http://www.imf.org

[1] Balaam (2001), p. 444.

[2] Gilpin (2001), p. 362.

[3] Strange (1996), p. 4.

[4] Gilpin (2001), p. 362.

[5] Hirst & Thompson (1999), p. 2.

[6] Balaam (2001), p. 214.

[7] Look at http://www.icann.org for more information.

[8] Evans (1997), p. 66.

[9] Block (1997).

[10] Garrett (1995), p. 816.

[11] The Economist, No sign of a landing, Jan 27th 2005

[12] Van Selm (2000), p. 11.

[13] Personal conversation with Col. Steven Bucci, US Military Attachee in Albania during the 1990’s.

[14] Evans (1997), p. 83.

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