Globalization, Weak States and Failed States

by Michael Nicholson
http://www.comm.ucsb.edu/faculty/mstohl/failed_states/1999/papers/Nicholson.html

Globalization, the international environment and weak states

Globalization has become part of the rhetoric of the discipline of International
Relations, to be found somewhere or another in every issue of every Internation
al Relations journal. More controversially it is also part of the reality. The i
nternational system certainly seems to have gone through some very significant c
hanges as far as global interactions are concerned, though whether globalization
is quite as far-reaching as some of its more ardent proponents claim is less ce
rtain. These proponents are divided between those who think globalization is a g
reat liberating force, leading to greater wealth and prosperity for all, and tho
se who think it an abomination. In both camps, most seem to be believe it is ine
vitable. A common claim is that the state is withering before the relentless adv
ance of globalization, and the control of governments over those activities usua
lly regarded as the perquisite of the state is receding. Markets now rule at the
global level whether we like it or not, though many who follow the neo-classica
l agenda are quite happy with this arrangement.
This is the environment which faces both strong and weak states. The governments
even of strong states find themselves without the degree of control that they u
sed to have, particularly over economic issues. States which are weak and ruled
by weak governments find themselves in an external environment which is not cond
ucive to asserting any sort of control. This is in part because of the process o
f globalization itself though in part because of the passionate belief in free m
arkets which seems to have accompanied it. The two are not necessarily so intert
wined as conventional wisdom has it.
Even in advanced economies, the control of the economy is a comparatively new fi
eld of endeavour for the state. More than the detailed theories of the economy w
hich lead to the particular form of the prescriptions this is the true Keynsiani
sm - that the government had a responsibility of the macro variables of economic
life such as employment, economic growth and inflation. To a nineteenth or earl
y twentieth century finance minister, this would have seemed a strange concept.
As Roy Jenkins makes clear in The Chancellors, it would never have occurred to t
he nineteenth century holders of that office that they had any responsibility or
power over the general state of the economy Nor would it have occurred to their
opponents to blame them for any short comings in this regard. Their job was to
collect the revenues for the necessary government expenditure with as little imp
act on the economy as possible. They were judged on this and this alone. Even fo
r those states where the economy was seen as subservient to the needs of the pow
er of the state in military matters, inflation and employment and so on were not
regarded as issues of policy. In fact most capitalist states apart form Britain
and arguably the United States, fell into this latter category. It was only aft
er the Second World War that the view that governments could control such matter
s became dominant. This, in its turn lead to the view that they should do so, an
d for twenty five years such policies were followed with considerable success. W
e now are less certain as the economy seems to behave in curious ways, slipping
capriciously between different theories to the confusions of the poor economists
who, lacking theories, resort to dogmatics to recommend their policies. However
, all are agreed that the more are national economies merged into a global econo
my, the less is the possible degree of control a government has over its operati
ons. Most, though not all, regard such merging as both inevitable and desirable.
The outline of my argument is that the greater degree of international interacti
on over the last few decades has altered the power of states to control some cru
cial aspects of their economies and, partly as a result of this, of their whole
political structure. Whether this can properly be described as globalization is
something is less clear, though I shall deal with this issue later and only brie
fly. However, this situation has particular importance for those states which ar
e already weak and have difficulty in carrying out their duties to their citizen
s. They can push the weak state to becoming weaker and the weakest but still fun
ctioning state to become a failing state. For all the rhetoric that this increas
es wealth, it is not clear that for the failing state there are many benefits.
Globalization has many meanings but is usually used to characterise the greater
interactions around the world and the decreasing importance of geographical dist
ance. Thus, near instantaneous communication (the papers for the conference were
mainly sent instantaneously electronically), easy and inexpensive travel over l
arge distances (again many conference members have come thousands of miles) and,
of course, there is the greater interdependence of the world economy. Some writ
ers, notably Scholte (1997), distinguish between internationalization which is t
he process of greater degrees of interaction between different parts of the worl
d but where the geographical positioning of things is important and globalizatio
n where territoriality is irrelevant or at least could be made so. Thus increase
d trade based on comparative costs is part of a process of internationalization
as the comparative costs arise because of the differences in economioc condition
s in difference places. However, a world stock market is globalization as it cou
ld be anywhere, geography being irrelevant or nearly so. It is a minor issue as
to whether it is in Tokyo, Frankfurt, London or New York (it would be perfectly
possible to have it in West Lafayette). However, these distinctions are not very
important as far as the present discussion is concerned. All that I am concerne
d with is that global interactions have increased greatly and that this is parti
cularly true of economic interactions.
This has come about at a time when the dominant view of economics is that of the
neo-classical school, or rather a somewhat selective version of the neo-classic
al school. Broadly, this is interpreted to mean that markets are the most effici
ent way of running the economy (on a rather restricted definition of 'efficiency
' as I show below) and that in order to maximise economic efficiency, any restra
ints on economic activity are to be deplored unless there is some very special r
eason for it. Thus globalization has become identified with economic liberalism
and in some views seems to become more or less the same thing. However, there is
no particular reason for this and some of the aspects of globalization which ar
e particularly difficult for all states and in particular weak states do not cor
respond to the neo-classical model. Thus, one can have globalization without sup
posing that there should be no control of markets.
I suggest four aspects of globalization, broadly construed which are particularl
y difficult for weak states to cope with. First, non-state actors, particularly
multinational corporations (MNCs) are very significant actors and, as far as eco
nomic factors are concerned, are very powerful. Secondly, there is the volatilit
y of speculative markets which can be very damaging to any economy but particula
rly a weak one. Thirdly there is the vast arms trade from light weapons to at le
ast the threat of trade in nuclear weapons. Fourthly, the flexible regimes induc
ed at least in part by the advances in electronic control of funds means that ta
xation many economic activities, particularly those of the multinationals very d
ifficult. This ranges from legal tax avoidance as with Rupert Murdoch to crimina
l avoidance as with the Mafia. (the illegal tax avoidance in Russia is more a do
mestic failure and only peripherally related to globalization).
I shall deal with these factors in turn after discussing the neo-classical argum
ent in a little more detail to understand the background over which I shall make
my argument.
Globalization and the neo-classical argument.
The general argument for the liberalisation of economic transactions follows fro
m considerations of economic efficiency. If lampshades are best made in Argentin
a, resources should flow there, while the erstwhile lampshade makers of, say Fra
nce, produce Citroen cars or whatever they are good at. What matters is relative
cost not absolute cost. That is, trade is trade whether it is conducted interna
lly within a state or externally between the residents of different states. The
conditions for fruitful trade are the same, namely that there are differences in
comparitive costs. This sensitivity to comparitive costs is brought about in a
competitive economy in which entrepreneurs seek to maximise profits.
However, it is important to see what 'economic efficiency' means in this context
. An economically efficient position in this sense is one where it is impossible
to increase one person's well-being without decreasing another's. This is known
as 'Pareto Optimality'. There are clearly innumerable positions which are Paret
o Optimal and thus efficient in this sense. It can be looked at as a position wh
ere there is no waste. However, a position can be efficient without being fair.
There is nothing in Pareto Optimality which has anything to do with fairness. As
it stands, it is a very abstract concept of efficiency where, as new resources
become available, they are used where they can produce goods most cheaply.
The arguments for trade and the arguments for capital flows are similar in that
it is argued that capital should go where the returns are highest, though bearin
g in mind risk which is particularly important in international capital movement
s. However, there is one major aspect of this model which needs stressing. What
is most profitable to produce depends on the income distribution of the buyers.
Rich people, and hence rich groups, have much more influence over what is produc
ed than poor ones. Hence, though this might result in an efficient distribution
of resources, there is no reason to suppose that it produces a fair distribution
of resources. Nevertheless, it is this principle which lies behind the general
notion that free markets are the best economic arrangement. This is now a widesp
read ideology within governments. No doubt it has been strengthened by the abysm
al performance of the planned economies of the former Soviet Union and other com
munist countries, most of whom managed to be inefficient by any criterion, as we
ll as unfair.
However, let us consider the way in which the world economy is becoming more int
ernationalised or globalized. Trade barriers are lower than ever before and will
probably get lower. This story is often told so I will not tell it again. There
are also some technological factors which increased the volume of trade in rece
nt years. First, the vast amounts of data which can be kept on computers and com
municated instantly mean that the knowledge of traders of what is available at w
hat prices around the world is widespread. It is unlikely, fifty years ago, that
the seller of lampshades in Europe or the US would have known the price of Arge
ntinean lampshades and trade would not have taken place. Not only is the flow of
information much greater than it used to be, but the ability to handle and proc
ess the large amounts of information provided is much greater, courtesy of the c
omputer. A global market-place in this sense can be a reality. Secondly, the wei
ght to value ratio of many goods is probably much lower than it was. Computers a
re rather expensive per kilo. This is not very relevant for the user of a comput
er but it is very relevant for the transporter. Thus, the value added to a compu
ter because of transportation costs is a small fraction of the overall costs so
the other costs become dominant in determining the location of its manufacture.
Thirdly, cheap air transport means that perishable commodities like strawberries
and flowers can be carried quickly and, again because of a low weight/value rat
io are worth transporting all around the globe. Daffodils in Jersey and daffodil
s in Chile are in direct competition on the European market in a way which would
have been inconceivable until recently when the daffodil market was narrow both
regionally and in time. Fourthly, even the trading of heavy commodities is much
cheaper than it was due to containerisation. This makes it cheaper to transport
 things by sea. Most importantly, the shifting of goods from ships to lorries to
trains and so on which is a very expensive aspect of transportation, is vastly
simplified. Finally, the instantaneous movement of information makes it possible
to trade services between countries which would have simply been untradeable be
fore. The often quoted case of airline booking in Britain being done by workers
in India is a classic example of this. The transport costs are almost zero. Thus
for these technological reasons trade would be more extensive than it was even
if there had been no increase in the liberalisation of international markets.
Now let us turn to capital movements. We can usefully distinguish three sorts of
capital movements which are rather different. First are movements of capital ac
ross state boundaries which are for 'real investment'. Second are exports of cap
ital goods where the commodities used to make further commodities are exported.
Third are speculative moves of capital. The first two need not be particularly c
losely correlated. In a competitive market, however, both are directed by the ra
te of profit. The higher the profits (adjusted for risk) the more capital will m
ove to the area. The profit rate, however, indicates where capital is most neede
d and can be most effectively used. Capital goods may be purchased with money pr
ovided internally or by a third party. Conversely loans might be made by one cou
ntry (that is, capital exports) which are used for consumption purchases in anot
her. Notoriously loans can be used for military purposes which are not, of cours
e, expanding the productive capacity of the recipient country.
Both capital movements and the movement of capital goods are likely to be increa
sed rather than decreased by the same factors as related to trade in general. Th
e wider the knowledge of opportunities, which is very wide today, the more tradi
ng is likely to take place. In addition, the nature of capital goods is altering
such that, like consumer goods, they are easier to transport. Thus, the machine
s in light engineering are fairly easy to move making the location of such facto
ries much more dependent on factors such as relative labour costs and regulatory
regimes.
Speculative markets are rather different and I shall deal with them below. There
is no movement of physical resources and they are purely monetary phenomena.
This is a very simplified outline of the neo-classical theory. A defence of putt
ing up such as simplified picture is that this is what everyone does and all too
often policy makers think this is the end of the story rather than a crude prec
is. There is obviously nothing in it which is inherently reprihensible. On the s
urface, poor countries as well as rich can take advantage of a widespread trade
regime; indeed they need to do so if they are to grow economically. Unfortunatel
y there are some difficulties in the argument when we come to interpret in terms
of the real world.
Some problems for weak states
I have suggested that there are two problems in accepting the neo-liberal agenda
too whole-heartedly. First, the definition of efficiency is a narrow and techni
cal one. There is no reason to assume that their is any tendency for a liberal s
ystem to produce equality or anything like it. Secondly, it is not at all clear
that the assumptions on which the model works hold in the modern international s
ystem. It is an a-political model which assumes that markets work because the ac
tors are only interested in working within the context of a market. In fact, eve
n those actors whose domain is primarily economic are only too ready to act poli
tically when their interests are threatened. I elaborate some of these points be
low.
Powerful non-state actors
The power of the large MNCs is partly through their political interventions in b
ig states which by and large determine the international economic agenda and par
tly directly. As far as the second is concerned, the sheer size of large corpora
tions is an important factor in determining their power even with respect to rel
atively large economies such as Nigeria. They are also in a position to suborn t
he political authorities and bribe their way to political influence. Though not
cases of failed states, the conservative Gulf States have weapons in abundance w
hose nature and quantity are more determined by the nature of the 'commissions'
paid than any remotely rational consideration of military policy. The large corp
orations also have great influence with the larger states and the international
bodies in determining the economic agenda. The failed Multilateral Agreement on
Investment (MAI) was an instance of the economic agenda being developed partly f
or the influence of the powerful states but partly by the economic actors themse
lves. This would have benefited large corporations and been of dubious benefit t
o the smaller and less powerful states as I shall argue below. The MAI failed, b
ut I would have little faith that a successor will not arrive on the scene in du
e course. However, though ostensibly part of the neo-liberal economic agenda, th
e influence of the MNCs is by no means consistent with the neo-liberal model. Th
e neo-liberal model suppose there is a competitive market where no single actor
has much significant influence on its own. This is not true in the case of many
commodities including many which are dominant on the world market such as armame
nts. Secondly, the political influence of firms is ignored. Firms are supposed t
o play according to the rules of the game which permit open competition and so o
n. However, large corporations are forever trying to write the rules of the game
and do so in their own interests. Even if one accepts the notion of efficiency
as written into the neo-classical agenda, it does not follow, and indeed is deni
ed by that agenda that monopolies will provide such efficiency and only with som
e difficulty can oligopolies be fitted into such a model .
The non-state actors can influence the world economy in a number of ways. First
there is the direct influence on the poor countries themselves ranging from sele
ctive inducements to outright bribery. Secondly, there is the pressure placed on
richer and powerful countries to introduce regimes which are favourable to powe
rful corporations and which also favour the richer countries. As Hurrell and Woo
ds argue (1995), the rich and powerful countries come out ahead under liberal re
gimes sponsored by (oddly enough) the rich and powerful countries and the poorer
countries lag behind. The 'banana war' is one recent incident of this sort wher
e Neo-classical economics is rather dubiously enlisted to fight on the side of t
he big battalions. Unfortunately poorer countries can rapidly become failing cou
ntries and it is not clear that a few slightly cheaper bananas are worth it.
Speculative markets
The liberalisation of capital markets in the 1980s has led to vast flows of capi
tal around the world. The ratio of capital movements to 'real' movements of eith
er capital or current trade is around 20 to 1. That is, only about 5 per cent of
financial transactions are to finance real movements of resources whether capit
al or consumption (Gray 1998). The arguments which can be used to justify free t
rade and free movements of 'real' capital (which themselves ignore the equity is
sue) do not apply to speculative movements of capital. They are purely monetary
phenomena and are not guided by rates of profit in the real economy. A justifica
tion of speculative markets is that they induce stability by ironing out peaks a
nd troughs unjustified by the underlying economic circumstances. It is hard to s
ee how this argument can be applied to the speculative moves in the financial ma
rkets of the last decade or so. One would not expect such a low proportion of re
al transactions to speculative ones in a stabilising market. It seems much more
plausible that the masses of speculative capital have increased the volatility o
f the markets in which, of course, the real transactions have to operate. The un
certainty caused by the volatile international financial markets may be one reas
on why the rate of growth of the world economy has not been impressive during th
e days of liberalism which was supposed to be so good for our economies. This de
gree of uncertainty is likely to be more damaging to weak states than strong one
as they lack even rudimentary institutions for trying to cope with high degrees
of uncertainty.
A final argument for speculative markets is that if governments try and control
them, they will make an even greater mess than the markets will make themselves.
This is a tempting argument. However, there are methods such as a 'Tobin Tax' o
n transactions which would not require much discretionary policy and therefore g
ive little opportunity for government mistakes. This would reduce the profit on
speculation without eliminating it and would therefore slow the whole process do
wn. It is arguable that the lack of friction in the global speculative markets m
akes them so frenetic that the destabilizing factors become more important than
any stabilizing effects of speculation.
Arms trade.
Trading in arms is nothing new, though it does seem to have reached a peak in re
cent years. I shall not say much about it, as there are others in this group who
are much more knowledgeable. I shall merely comment that of all commodities arm
s are the most serious as far as weak states are concerned as they provide the t
ools for the overthrow of governments. It seems that the vast supply of arms in
the present world means that no conflict is hampered through lack of the arms an
d ammunition required to conduct a violent war.
Problems for the state: taxation
The new liberal economic order has made it harder for the state to carry out its
activities. This is true of the activities which traditionally have been associ
ated with states, even with the pared down 'night-watchman' state of the classic
al liberal. It is even more true of the activities which states running mixed ec
onomies did quite well in the decades after the second world war. Poor economies
may have a less ambitious view than rich ones but a basis of collective provisi
on in terms of education and health, quite apart from infrastructure such as roa
ds are the necessary prerequisites of a successful state. The willingness of cap
ital to move makes the taxation which is necessary to finance such activities ve
ry difficult. As the capital is largely in the control of people who are averse
to collective goods anyway, as they are well enough provided with private ones,
the whole situation is very difficult. I shall look at the problem of taxation i
n particular.
Taxation is central for the provision of collective goods. This includes the col
lective good of military defence which is of course central in the realist pictu
re of international relations and is thought of more fondly by conservative econ
omic liberals than are self-indulgent matters such as health and education. Taxa
tion is more difficult to raise in connection with capital than it is in connect
ion with personal taxation. Though there is a lot of international labour moveme
nt, not many people move because of taxes. Pop stars, tennis stars, possibly som
e business people and other very rich people may do so, but few of even the mode
rately wealthy follow them. However, when it comes to taxes on capital or busine
ss, the reasons for worrying about the consequences of high tax rates are more s
erious simply because capital is more mobile. These issues are well known. Tax r
ates are one reason why businesses may locate in one place rather than another w
hich can lead to low tax competitions between states, tax holidays, the provisio
n of 'off-shore' facilities and the like. Poor countries, anxious for capital im
ports to get the economy growing, are faced with effective auctions to keep the
tax rates down. Even where firms are in supposedly high tax countries, any compe
tent accountant employed by a multinational can make sure that profits are alloc
ated to low tax countries rather than high tax countries. There are several noto
rious examples of this. Electronic movement of money and information make transa
ctions very difficult for tax authorities to monitor. Successful monitoring of t
ransactions is, of course, central to any tax collecting programme. The present
Russian government is finding this acutely where tax avoidance is widespread, th
ough this is due more to internal state failure than because of its role in the
global system.
Without the ability to tax, governments are unable to do anything very much. The
problems of the provision of collective goods are obvious. Issues such as redis
tribution in an unequal society are others. I am not suggesting that governments
are helpless but they do have much less control over their economies than they
used to and not just with respect to taxation issues. This is true both at the m
icro and the macro level. At the micro-level, it is not just low wage rates and
other costs which the entrepreneur will seek out. It is also weak regulatory reg
imes from safety and environmental points of view which they will look for. A ni
cely disciplined labour force with a pliant police force to guard against unfore
seen agitators is much to be preferred to a unionised and aggressive labour forc
e. This means that a government concerned with health and safety regulations and
other such impediments to change might find capital moving away and be unable t
o attract foreign investment.
However, the scope of the government in protecting us is much less than it was,
partly due to the lack of control but also, as is becoming increasingly clear, w
ith the lack of will of governments, even those supposedly of the political left
. In an uncertain, internationalised economy, we need stronger, not weaker gover
nments in both the strong and rich states as well as the poor and weak. The natu
re of an insecure society is that there are more casualties and hence a greater
need for secure social defences. These reductions in the powers of government ar
e not necessarily because they have been ceded to anyone else. The Multinational
Corporations (MNCs) who have great power in the directing economic flows nevert
heless are not particularly interested in taking over the issues of governance w
hich the state can no longer cope with. Susan Strange (1998) argues that the pro
cesses of globalization and internationalization has produced not just a shift i
n governance but a decline in governance.
Conclusion
As far as globalization is concerned, many of its characteristics are determined
by the development of technology and in particular computers and electronic com
munication. Future developments in technology are likely to increase this tenden
cy rather than otherwise. Whether one likes them or loathes them, internationali
zation and globalization are likely to continue. This is a development of what h
as characterised most of human history - the continuous expansion from the local
.
All other things being equal, the growth of interactions, whether called globali
zation or internationalization, is to be commended for all states. Being rich is
better than being poor and, broadly speaking, trade makes people richer as do c
apital flows. In themselves these are processes which should help weak states an
d might strengthen rather than weaken them. Unfortunately this has been done in
the context of an extreme and selective interpretation of neo-classical economic
s which is used to justify any economic activity carried on by privately owned f
irms no matter how much the precepts of the neo-classical model are violated in
the process. One gets the feeling that those policy makers, including those purp
ortedly of the political left, who fall adoringly before the market have only re
ad chapter 1 of an economics text book and never moved on to learn about the qua
lifications.
However, there are three serious issues about the way in which both globalizatio
n and internationalization are going on today, particularly as they effect poore
r states. First is the high levels of uncertainty brought about by the financial
markets. Some of this is a likely consequence of speculative markets divorced f
rom any real economic processes. It is also partly due to the corruption of some
of the financial organisations. However such enormous opportunities for vast we
alth are likely to bring corruption with them so we should not be too surprised.
Secondly, the increases in efficiency in the economic sense, assuming that they
exist, say nothing about the distribution of wealth. Within a state which is no
t too exposed to the world economy, such redistribution can take place. However,
in the world as a whole there is no mechanism except the benevolence of the ric
h which will ensure such redistribution. Such benevolence should not be relied o
n. There is nothing in the free market mechanism which will automatically bring
redistribution about. Thirdly, economic actors have great power and their relati
ve power over states it increasing. Lord Acton's aphorism applies to economic ac
tors as well as any other: 'Power corrupts and absolute power corrupts absolutel
y'. One weakness of the classical economic liberal position is its neglect of po
wer in its analysis of economic actors.
These difficulties come because, though we have a high level of internationaliza
tion and globalization, international governance is weak. This is, of course, a
classical problem of international relations. It has particularly severe consequ
ences on weak states as they have to withstand the MNCs, the powerful states and
the various international economic bodies all justifying their activities in te
rms of an ideology which is claimed to be both beneficial and inevitable. The wi
llingness of many governments to abandon the idea of international economic gove
rnance is worrying. An uncritical acceptance of the free market, without a consc
iousness of its deficiencies, is disturbing. Thus, while some aspects of globali
zation and internationalization are nearly inevitable and probably desirable, th
e perversions of the processes and the extreme laissez-faire ideology which seem
s to have accompanied them are open to objection. However, governments acting in
concert are not powerless. A more pragmatic attitude to both markets and the ac
companying internationalization and globalization can have great merits and weak
states can be substantially helped not hindered by some of the internationalizi
ng processes. Thus, I do not want to decry globalization but, in a way abominate
d by the Critical Theorists, I want to tinker with the system and solve problems
which would release the benefits of globalization while minimising its drawback
s.
Bibliography
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