International Political Economy

International Political Economy Question 2: Globalisation has not entailed any significant changes in the role of the state in the international political economy. Critically discuss this assertion. CPR-number: XXX Tutorial Class: XX Semester: Fall 2015 Study Programme: International Business & Politics Institution: Hand-in-date: January 6th 2016 STU-count: 22,749 Word-count: 3,428 Number of pages (excl. Front page and literature list): 9

Introduction The question addresses the issue if globalisation has entailed any changes in the role of the state. The answer to this question has various answers depending on which theory from IPE you use, however, in reality it can be argued that both globalisation and the state itself has facilitated a changing role of the state. Due to the limit of the assignment, the economic globalisation is assessed, since this part of the globalisation process is seen intrinsically important in IPE. The question is highly important because it addresses the seemingly indefinite and inevitable discussion of whether markets are subordinated states or vice versa, and which role the state has in the international political economy in the contemporary era. By assessing the question from a critical approach, it is through this paper argued that: The economic globalisation, originally initiated by the state, has enabled a transnational capitalist hegemon to change the role of the state from a superior financial regulator of the market into a competition state subject to the market. This paper therefore argues that prior to economic globalisation, in the Bretton Woods era, the state was seen as superior to the market as the financial regulator, however, as this paper will show, economic globalisation has changed the role of the state to becoming subject to the market actors an agent in the market structures. However, it is important to keep in mind that the states facilitated and promoted the globalisation themselves, which is key to why they are seen to have lost control of the capitalist hegemon, which leaves them as subjugated competition states, dominated and constrained by the capitalist hegemon. The paper is structured by firstly defining the role of the state prior to globalisation in order to assess how it has changed in its role as a financial regulator during the paper this will be done from a neorealist perspective. Secondly, the concept of economic globalisation will be defined and also theorised in the perspective of the Neo-Gramscian approach. These concepts and theoretical approaches will frame the scope and will be drawn upon throughout the paper. Thirdly, sub-arguments supporting the main thesis of the assignment will be presented in each paragraph. Together these will depict how the state due to neoliberal policies and capital mobility is positioned in an anti-regu-! 1

latory gridlock, which has increased international trade and the number of transnational corporations (TNCs). In turn this has changed the role of the state from a policy-making welfare state into a policy-taking competition state trying to satisfy the needs of the financial market actors in order to attract revenues through FDI. It will through the paper be argued that freeing the capitalist hegemon has set off an avalanche, figuratively speaking, which result in it being uncontrollable for the state as a financial regulator. It will therefore be concluded, that the states through pursuing national neoliberal policies and promoting globalisation unknowingly have lost control over the capitalist hegemon, which has changed the role of the state from a welfare state into a competition state subordinated to the capitalist hegemon. Theories and Concepts The following definition of the state has been chosen because it comprises many constitutive concepts into the definition of the state, which are useful in this paper: The state is a political association that establishes sovereign jurisdiction within defined territorial borders ( ) they are funded through taxation ( ) a state is characterised by four features: a defined territory, a permanent population, an effective government and sovereignty (Heywood, The State and Foreign Policy in a Global Age, 2014). Prior to globalisation, the Bretton Woods System (BWS), which was characterised by fixed exchange rates and national capital controls, facilitated national political autonomy and was meant to develop the welfare state (Broome, Global Money and National Currencies, 2014). Thus, the role of the state in this Keynesian, BWS era was to manage the economy and strengthen social protection meaning that the state was superior to the market (Heywood, The State and Foreign Policy in a Global Age, 2014) In the international perspective, the state has: the power to determine policy and shape the international realm (Hobson, The State and International Relations p. 6, 2000 in (Broome, 4. State Actors, 2014)). From the above, it can be assessed that the state prior to globalisation was a sovereign territorially defined entity funded by taxes, which had the national role of economic control and welfare of its people and the international role of influencing politics in the international realm. The role of the state can further be examined from neorealist theories, which see the state as the central actor in IPE and find that international policies are shaped by states, which pursue their na-! 2

tional interests. Therefore, neorealists see the international system as hierarchical and a competition between rational states actors wanting to maximise their own interests (Broome, Theoretical Perspectives in International Political Economy, 2014) As the neorealist, Robert Gilpin, puts it:...national governments still make the primary decisions regarding economic matters; they continue to set the rules within which other actors function, and they use their considerable power to influence economic outcomes (Gilpin, 2001). In other words, neorealists agree with the question stating that the role of the state has not been altered by the globalisation. However, this paper argues that the states have acted irrationally or unknowingly by pursuing their own interests whereby the capitalist hegemon facilitated by economic globalisation and neoliberal policy initiatives has been freed and developed beyond the financial control of the state. The concept of economic globalisation needs highlighting of several factors, which have increased the interdependency between different actors within the realm of IPE. O Brien and Williams describes this as an internationalization of finance, which is the result of three factors: i) technological innovation, which has produced reductions in cross-border transactions costs and facilitated private international capital transactions ii) removal of governmental, legal and technical barriers to the movement of capital [ed. and] iii) growth of innovation in financial instruments (Williams, 2010). The start of economic globalisation is hard to pin down, since the process is constantly evolving and increasing the interdependency and interconnectedness of the global economic actors. However, it is clear that after the breakdown of the Bretton Woods System in 1971 and with the ideological shift away from Keynesianism towards the neo-liberally inspired Washington Consensus, the forces of economic globalisation increased. International organisations such as GATT (later OECD), IMF and the World Bank are all institutions, which have induced the increasing liberalisation of the markets and given room to economic globalisation (Heywood, World Order and Global Governance, 2013). The economic globalisation has, according to critically-oriented, Neo-Gramscian theorists, given rise to a capitalist hegemon, which is highlighted in the following quote: the world of international relations has from the start been inextricably bound up with the expanding capitalist world economy and thus embedded within and shaped by transnational social relations growing out of that globalizing capitalism (Apeldoorn, 2004). The international political economy is, according to this! 3

theoretical approach, ruled by the transnational capitalist class, which is constituted by financial institutions, international organisations, and transnational corporations (TNCs) among others. The argument that this paper will develop is that the state-created globalisation has enabled the transnational capitalist hegemon, which in several ways undermines the state as a financial regulator, and it all started with neoliberal politics, which will be shown in the following paragraph. The Impact of the Economic Globalisation on the Role of the State in IPE The revival of neoliberalism including deregulation, market economy, privatisation, capital mobility and lower welfare, has promoted globalisation and simultaneously reduced the role of the state as a financial regulator. Following the breakdown of the BWS by President Nixon in 1971 and a period of stagflation (Broome, Global Money and National Currencies, 2014), the US moved away from Keynesian economic state control towards the competition state. In order to rid the economy from this crisis, neoliberal policies were pursued; promoting the free market economy and competition, and through increased privatisation, capital mobility and deregulation it decreased the role of the state as the regulator of the market economy (Kwan, 2010). On the contrary, neorealists argue that the increasing neoliberal globalisation and economic integration has happened because powerful states have pursued their national interests of avoiding the contemporary stagflation and, as Gilpin is quoted above, the national governments use their power to influence economic outcomes. However, even though neoliberal policies originally were pursued in the interests of the states in the beginning of the 1970s, this paper will argue that the economic globalisation, which neoliberalism facilitated, has resulted in a financial market avalanche a capitalist hegemon completely incontrollable for the state as a financial regulator. A vital part of this decline of the state s role as a financial regulator of the market is due to the loosening of capital control, which will be assessed in the following paragraph. An important element of the neoliberal globalisation was an expansion of capital mobility, which paradoxically has been facilitated by the state and now constrains the role of the state as a financial regulator. The first attempts on freeing international financial markets were made by Britain who encouraged the growth of the euromarket where investors could trade US-dollars in an unregulated market. This developed into dismantled capital controls by the US and the UK in 1974 and! 4

1979, respectively, and, as the neoliberal globalisation spread, many countries followed on the advice of the IOs, OECD and the IMF (Helleiner, 2011). Neorealists would argue that it is in the interests of the states to pursue a competitive strategy in order to attract mobile financial business and capital to their national territory (Cerny 1994) in (Helleiner, 2011)). However, the paradox is that even though states have had a pivotal role in delimiting capital, it seems to have outgrown the role of the state as a financial regulator: since capital mobility enables FDI and simultaneously opens up for capital flight. Nationally, states have tried to reregulate in order to avoid capital flight, which had fatal consequences for e.g. the Malaysian economy (Broome, Global Capital Mobility, 2014). Internationally, the capitalist hegemon effectively escapes regulation because states are unwilling to give up more sovereignty to IOs, which are the only actors able to regulate in the international realm (McGrew). Thus, the capital mobility, which originally was enabled by states, captures the states in what one might call an anti-regulatory gridlock unwilling to give up sovereignty to constrain and thereby unable to restrict the capitalist hegemon. The capital mobility has massively compounded international trade into sizes that dwarfs many national economies; its implications on the role of the state will be seen in the following paragraph. Alongside with the neoliberal globalisation, capital mobility has increased international trade, which due to its economic size has forced the state commodify its financial sovereignty and take on the role as a competition state instead of a welfare state. Trade in terms of merchandise exports has almost had a positive growth rate and it has gone hand in hand with the neoliberal market liberalisation and reduction barriers to trade set forth by the WTO and GATT agreement (Dollar, 2013). As the free market ideologies spread to some countries, they were able to attract FDI and capital, which entailed a wave of neoliberal deregulation in order for states to engage in the international trade flows i.e. states decision-making power was constrain and they could either follow this trend or miss out on FDI and international trade flows. Opposing this constraint, neorealists would argue that international trade has empowered the Western states since globalisation and the neoliberal policies were put in motion to advance and enhance their dominance (Heywood, Introducing Global Politics, 2014). However, as international trade has increased, the states role has changed from a welfare enhancing, tax-funded financial regulator into a competition state; states are inherently competing against each other to attract FDI by lowering corporate taxes and deregulating they commodify their sovereignty to the capitalist hegemon. This capitalist hegemon of the Neo-! 5

Gramscian theorists explains that the capitalist market actors control the economic agenda, and thus subjugates the state, which turns into a market actor as will be argued in the following paragraphs. The market actor, TNCs, are seen as winners of the neoliberal straitjacket policies and their increased economic power has subjugated the state into a market actor. The number TNCs have increased fivefold since the 1970s and their economic power contributes to 70 % of the world trade (Heywood, The Economy in a Global Age, 2014). TNCs subjugate state power because they are transnational meaning that they can exploit financial, environmental, political and legal arbitrage between different states they are profit-maximising capitalists moving their production around opportunistically. States are therefore subjugated by TNCs, especially when in comes to financial regulation by adopting market-oriented, competitive policies making them attractive for the TNCs to settle and provide FDI there. Contrasting this line of argument, neorealists would argue that states do not cooperate internationally they compete; i.e. the states pursue competitive strategies in order to increase their own revenues and enhance their power over other states. However, the capitalist hegemony constituted by TNCs among others can coerce the states to adopt profit-friendly policies due to their relational and economic power, which reduce the role of the state as a financial regulator magnificently into becoming a market actor subject to the demand of the market (Broome, Market Actors, 2014). Thereby, the states role as a financial regulator has been changed from a policy-maker into a policy-taker; a market actor subject to the demand of the TNCs. As briefly touched upon in this paragraph, states compete in attracting the TNCs, which has changed states from welfare states to competition states as will be illuminated during the next paragraph. The role of the state as a competition state has entailed offshore economy, legalised tax havens and EPZs in order to satisfy and attract TNCs, which has ultimately facilitated more power to the capitalist hegemon. As an example of this, the British government affected by the Bank of England established the offshore Euromarket in 1957, which ever since has gradually expanded and allows investors to trade foreign currency in an unregulated market (Palan, 2003). Incorporated in the offshore economy are also EPZs and tax havens, which were created by states to attract FDI (Williams, 2010), and enabled the capitalist hegemon to exploit this regulatory arbitrage and settle where it was most advantageous. Neorealists would claim that the states are still in control of the offshore markets and that they have promoted this development in their own interest. However, as Palan sta-! 6

tes about the Euromarket: attempts to re-regulate it have become increasingly dangerous as they risk disrupting the entire international financial system (Palan, 2003), which means that even if the states wanted to financially regulate the offshore markets, they cannot do so. Furthermore, by offshore markets it means that they are neither subject to national or international legislation and this has changed their role as a financial regulator substantially. Moreover, the EPZs and tax havens enable states to attract FDI but not fully utilise it as it comes with a cost of lowering corporate taxes and poor labour conditions (Williams, 2010), i.e. the states role as a tax-funded welfare state securing social protection for its inhabitants has changed into competition states, caught in the aforementioned anti-regulatory gridlock, and competing to attract the capitalist hegemon. But what advantages do the capitalist hegemon have over the states and do the states have abilities, which are still superior to the hegemon? This will be highlighted in the next paragraph. The transnational character of the capitalist hegemon limits states role as a financial regulator because they are bound economically and territorially. The strongest weapon towards the state is the capital mobility of the capitalist hegemons; on the contrary, states are bound economically and territorially. The states are constrained by financial market actors in attempts on extracting FDI, which means that the benefits deriving from this attempt will be negligible leaving the states impotent as a financial regulator (Palan, 2003). Opposing this, neorealists would argue that states have legislative and policy-making sovereignty, enabling them to be the financial regulator despite them being bound territorially and economically. However, since many of the financial activities of the capitalist hegemon take place either in cross-border activities or offshore, the role of the state as a financial regulator becomes hollowed out; states cannot unilaterally legislate in other territories than their own, and offshore activities are characterised by being out of scope from both national and international law (Williams, 2010). Rather than being policy-makers, as neorealists would claim, the states role is reduced to policy-makers subject to the needs of the capitalist hegemon (which they paradoxically have created themselves), as Neo-Gramscians would claim. Therefore, states may have legislative power, but they are unable to enforce it in the transnational realm and thereby unable to constrain the capitalist hegemon, which they, ironically, have created themselves. Thus, it is shown that as competition states are bound economically and territorially, they can no longer act as financial regulators of the market in the international realm. All the above factors lead to the fact states have lost control over the capitalist hegemon, and this was indisputably reaffirmed by the financial! 7

crisis, which will be illuminated in the next paragraph. The financial crisis highlights that financial markets due to the globalisation, the freeing of the markets, capital mobility of the market actors, the offshore activities have developed beyond control of the state as a financial regulator. Starting off with the Basel I and II, legislative deregulation of the financial activity of banks enabled a boom in financial speculation and securitisation transforming non-tradable debt into asset-backed securities (Broome, Market Actors, 2014). Furthermore, the credit rating agencies (CRAs) were constituted as guarantors of the market s integrity by the Basel Accords, which meant that: in effect a rating allows derivatives and structured finance to appear in the same guise as underlying primitives. The agencies have thus been central to the production of the market and the power to produce crisis. (Wigan, 2010). The private US-mortgage crisis developed into a systemic financial crisis due to interdependency of financial markets, which led to public sovereign debt for many economies in the developed world, and had the implication that the states role as a pre-crisis financial regulator vanished; instead the state became a post-crisis financial saviour. From a neorealist perspective, states are not forced to bailout the capitalist hegemon but do so because it is in their national interest. However, in reality many states were caught between bailing out financial institutions, which were too big to fail and going bankrupt, thus the bailouts were the only option. The financial crisis shows that the increasing neoliberal economic globalisation of financial markets has led to a situation, which the states could not control. It has reaffirmed that the role of the states is no longer a financial regulator of the market, but instead a market actor, which is subjugated to the markets (Wigan, 2010).! 8

Conclusion The financial crisis illuminates that the role of the state as a financial regulator has been hollowed out and changed into a market actor, which is subjugated to the markets. Through revival of neoliberalism, capital mobility and increased international trade, the state s role has changed from controlling capital and enhancing tax-funded welfare in the BWS era into a state caught in an antiregulatory gridlock; re-regulating will have enormous financial consequences for the states, and regulating through IOs capable of legislating in the transnational realm would cost the states sovereignty thus, the states can choose from either giving up sovereignty or leave the Neo-Gramscian term the capitalist hegemon unconstrained, which also undermines their sovereignty either way, the states role as financial regulator is diminished. Moreover, the role of the welfare state has been replaced by a competition state enabling tax havens, offshore markets and EPZs, which thereby commodifies its sovereignty and the health and wealth of its population to the financial hegemon in order to attract FDI and TNCs. And even the prerogative of legislative power does not make states superior to the transnational hegemon because the states are economically and territorially bound. Thus, it is argued that the economic globalisation, originally initiated by the state, has enabled a transnational capitalist hegemon to change the role of the state from a superior financial regulator of the market into a competition state subject to the market. This critically constructed argument thus proves neo-realists wrong when they argue that globalisation not has changed the role of the state.! 9

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Chapter 5: The State and Foreign Policy in a Global Age (p. 115-139) Chapter 18: International Organization and the United Nations (p. 439-459) Kwan, S. K. (2010). The Neoliberal Straitjacket and Public Education in the United States: Understanding Contemporary Education Reform and its Urban Implications. Urban Geography 31(2), s. 194-210. McGrew, D. H. (u.d.). politybooks.com. read: 04. 01 2016 fra Globalization The Global Transformations Website - Polity: https://www.polity.co.uk/global/globalization-oxford.asp Palan, R. (2003). The Offshore World in Its Contemporary Settings, Chapter 1. Cornell University Press, s. 17-62. Wigan, D. (2010). Credit Risk Transfer and Crunches: Global Finance Victorious or Vanquished? New Political Economy Vol. 15, No. 1, s. 109-125. Williams, M. O'Brien R. (2010). Chapter 7, Transnational Production. I R. O. Williams, Global Political Economy (s. 132-153). Basingstoke: Palgrave macmillan.! 11