Has state power diminished?

Transcription

1 Has state power diminished? 4. The most prominent feature of the contemporary global political economy is the constant and unequivocal diminution of state power. How far is this statement a convincing depiction of the contemporary international political economy? Answer with reference to concrete aspects of the international political economy and theories covered in the course. Cecilie Smedegaard Madsen XXXXXX-XXXX Tutorial Class: XA International Political Economy Final Exam Fall 2014 International Business and Politics Copenhagen Business School STU-count: 22,614 Word count: 3,432 Number of pages: 10 1

2 Introduction This paper answers question 4 in an attempt to assess whether the following statement gives a convincing depiction of the contemporary international political economy: The most prominent feature of the contemporary global political economy is the constant and unequivocal diminution of state power. Thus, it seeks to examine the evolvement of state power in a contemporary setting. Is power of the state being subjugated? This is what this paper will ask and answer. Following the Washington Consensus of the 1980s, the world has seen a shift towards deregulation of the market and the increase in influence of non-state actors on international, as well as national, economic policies. Could this development pose a threat to power of the state? This paper argues that state power has gradually diminished in the event of the increasing predominance of the financial sector creating a capitalist hegemon. The argument will be structured as follows: first, notions of state and power will be defined in order to avoid misconceptions of the concept of state power. Adding to this, the process of financialization will be addressed for the purpose of the scope of the theoretical approaches. This is followed by a presentation of these approaches. The neo-gramscian perception of the transnational capitalist class formation will be assessed in order to understand the processes behind the evolution of the contemporary global political economy. Neorealism will be addressed as it claims that states still constitute the dominant actors in shaping the international system. Following the theoretical perspective, the paper will build around the empirical events taking place from the breakdown of Bretton Woods up until today in the context of the offshore world and the financial crisis. From these events it will be argued that the state has lost a significant amount of power to the financial actors in shaping global political economy. Key concepts In order to address the potential diminution of state power it is relevant to define the perceptions of state and power used throughout the assignment. This is important as these concepts are the basis of the discussion of this paper. The state can be defined as a political association that establishes sovereign jurisdiction within defined territorial borders, [ ] they (the institutions of the state, ed.) are responsible for the collective organization of communal life, and are funded at the public s expense. (Heywood, 2013: 57) This definition is the organizational view of the state which recognizes the state as being responsible for the common good within the bounds of its territory. Power can be defined as anything that establishes and maintains the control of man over 2

3 man. (Morgenthau, 1993: 11) This is followed by the ability to make actors act in certain ways that it would not have done otherwise. Thus, power is, in the context of international political economy, the ability and the capability to control the actions of other entities on the international scene. When addressing the global political economy, the concept of state power must therefore be defined as the capability of the state to exercise control of other entities provided that they influence the realm of state territory, physically, economically, and socially. Financialization is one of the results from an evermore globalized world economy. Following the post-war period, the financial world have become more integrated as a consequence of increasing global trade and financial transactions, growing financial markets, and altogether increasing capital mobility. This came together in a revised framework of economic policy, called the neoliberal straitjacket, including the principles of globalization, small government, labour market flexibility, and abandonment of full employment (Lecture 10, slide 11). Financialization is the process of the financial sector constituting an increasingly important role in shaping international politics. Money control is one of the aspects of this phenomenon. After Bretton Woods, the American government promoted privatisation and liberalisation and thus capital flows moved from being publicly managed to being privately handled by international corporations, such as banks. This enabled the financial sector to influence economic policies. Adding to this, the continuous increase in global trade made the world economy more integrated and the financial sector became globalised. Thus, the capacity of the financial sector has throughout the years outgrown national economies by far, subordinating states economic power to the financial sector. This created a shift from to the financial sector shaping politics (Lecture 9, slides 38-42). In addition to this, the rising use and importance of offshore markets has subjugated state power to financial capacities. Offshore markets will be addressed later in depth, but briefly they constitute financial markets outside of the jurisdictional realms of highly regulated states. This attracts financial capital and thus creates competition among states, lowering regulation in order to draw financial investors. (Broome, 2014b) Theoretical approaches In explaining how and why state power has diminished since the Washington Consensus, neo-gramscianism constitutes a rather qualified perspective on the development of the transnational system beyond the behaviour of the state. Its emphasis on the role of non-state actors is crucial and therefore, this paper will take the perspective of neo-gramscianism. In the development of the globalised economic system, international economic organizations, such as banks and TNCs, extends the class formation to the international realm creating transnational social relations. This 3

4 improves the range of the ruling class and constructs a hegemony constituted in a non-state actor, namely the transnational ruling class. The evolution of the class formation stems from the basis of the capitalist market, The world market itself generated transnational commercial and financial networks enabling the formation of transnational social forces. (Van Apeldoorn, 2004: 157) Thus, the transnationalization of the ruling elite is a result of the expansion of the capitalist market into the global economy. The process becomes institutionalized through international mediums subjugating state power to the capitalist class. (Cohn, 2012a) This paper argues that the capitalist hegemon has made itself independent of state power. The evolution of international politics constitutes a system in which states become subordinate to the capitalist hegemon. Following this system, states find themselves in a situation where they strive for the attraction of the hegemon s greatest strength: capital mobility. The mobility of capital enables the capitalist class to expand into the international realm. Following this, states will begin to compete in order to gain from the inflow of mobile capital. This creates an anarchic system of states lowering their amount of regulation domestically in order to attract capital. (Palan, 2003: 20-25) Neorealism claims that states are competing against each other in an anarchic international system in the attempt of maintaining sovereign power. States are rational egotists that act in the pursuit of their interests and they are, according to neorealists, therefore still the most important actors in shaping the contemporary global political economy. (Keohane, 1984: 7) However, this paper argues, that states are not capable of acting in the pursuit of their own interests due to the capitalist hegemon imposing constraints on state power. The evolution of the contemporary international political economy In the following sections, this paper endeavours to present the evolution of the contemporary global political economy in order to show how the financial sectors have formed itself into a capitalist hegemon undermining state power. The revival of neoliberalism was prominent in the 1980s during the Reagan and Thatcher government in the US and UK, respectively. The Washington Consensus encompasses this development, referred to as the neoliberal straitjacket (Lecture 10, slide 11). It was an economic course focused on the liberalisation of the market and when the foreign debt crisis struck the developing world it had a chance to expand beyond the Western world. The IMF and the World Bank provided Structural Adjustment Loans (SALs) in order for developing countries to revive their economy. They were available provided that states were willing to restructure their economic poli- 4

5 cies. The modifications included among other decrease in government spending, deregulation of financial markets, liberalizing trade, and privatization of state-owned enterprises. (Cohn, 2012b) Through these adjustments, central governments of the 1980s promoted the process towards economic policies being influenced by the financial sector. The Washington Consensus is a turning point in the development of state power. The capitalist hegemony had the possibility of expanding itself beyond the Western world and into the developing countries. (Cohn, 2012b) One could argue that the states of the developing countries imposed the structural changes on behalf of their own interests. They were given the option of loans from the IMF and the Bank and they introduced economic changes because they are rational actors. This, however, does not include the sovereignty that the states had to give up in order to receive help from the two organizations. The states that accepted the SALs gave up their economic state power and let the IMF and the Bank impose neoliberal economic adjustments onto their state systems. The Washington Consensus and the implications of the foreign debt crisis in the 1980s represent one of the first moves towards a transnational social formation of the capitalist hegemon. The offshore market is another example of the expansion of the hegemon. The contemporary global political economy is greatly affected by the offshore world. The offshore world is a term that emerged during the 1971 to describe the Euromarket. It is used to denote juridical areas that are subject to little or no state regulation. This market is made up of states that are dividing their territory into juridical realms in which they create negligible regulations through their sovereignty in order to attract international capital. States once wanted to expand their territories over which they could exercise power but now they use their sovereignty to deregulate their territories instead. (Palan, 2003) Offshore markets have been used greatly by international corporations to place their operations in order to avoid taxes in heavily taxed countries. The British government initially promoted the Euromarket in order to recreate a financial centre in London after World War 2. This would bring a large amount of financial activity to the UK and domestic banks would benefit from it. However, as the Euromarket has grown in size and complexity, attempts to re-regulate it have become increasingly dangerous as they risk disrupting the entire international financial system. (Palan, 2003: 32) Thus, even though the British government knows that it could close down the financial offshore centre in London, they avoid doing so. Though the offshore market enables corporations to escape state regulations it moves a large amount of capital into the UK and therefore the government is unwilling to close it. Furthermore, the financial market could face 5

6 severe consequences if the government imposed constraints on an offshore market as significant as London. The British government is thus acting in the interests of attracting capital and the interests of the financial market instead of regulating it and creating revenues for domestic interests. This implies that the financial system have grown to such a capacity that no state will constrain the offshore markets as they are aware of the consequences of such actions. (Palan, 2003) Thus, states are subordinated to the interests of the capitalist hegemon. One might argue that the British state is acting as a rational egotist and therefore voluntarily chooses not to regulate the London offshore market. However, as presented earlier, the state is constituted in order to act in accordance with social domestic purposes. Therefore, the state should endeavour attracting more revenue for government purposes through taxes instead of making way for corporations to avoid regulations. The capitalist hegemon is thus forcing the state to act in contradiction with its main purpose. The striving towards attracting capital creates a competitive environment between states. The contemporary setting that the offshore world creates is one in which sovereign states compete in order to attract capital generated from financial corporations. The so-called tax havens are thus created. Tax havens are conditioned by state sovereignty and geographical demarcation. As states are aware that they benefit from attraction of capital, they create tax havens using the principles of sovereignty within own territory. Thus, states impose laws that enable large corporations to place their financial activities in the country and thereby sever the connection to the country of origin. This is rather attractive for large corporations originating from countries that are heavily taxed and a significant amount of these corporations will therefore move their legal entities to these tax havens (Lecture 11, slide 12). Tax havens are often small sovereign states like the Cayman Islands, Bahamas, or Bermuda. (Palan, 2003: 36) There are certain conditions that make up the most optimal tax haven. These include bank, professional, and commercial secrecy, company and trust laws with loose disclosure requirements, easy company establishment, political stability, adequate information exchange facilities, avoidance of double taxation, and low taxation. These are some of the prerequisites that tax havens need to satisfy in order to be competitive in attracting mobile capital. (Palan, 2003: 40-41) The fact that states attribute themselves to certain conditions show that the financial market has power over states. The offshore world creates an anarchic system in which states compete to attract capital inflows, generating a race-to-the-bottom of tax regulation among states, forcing countries to deregulate their financial market in order to remain competitive within the offshore world. (Palan, 2003) This illustrates that states have become dependent on business corporations and not reversely. This is a direct effect from the close to complete capital mobili- 6

7 ty that contemporary international political economy is conditioned by. Building on capital mobility, which is one of the greatest strengths of the capitalist hegemon, another threat is imposed on the regulatory powers of the state. As previously mentioned, the capacities of the transnational corporations have far exceeded the economic capacities of states. This implies that attempts to cope with tax avoidance and evasion can become excessively expensive and force states to moderate their effort in preventing tax avoidance. Capital mobility combined with offshore markets and tax havens compose the main cause of the high expenses. Capital mobility allows for corporations to move around their operations taking advantage of the several options in choosing which tax haven to utilize. As capital is highly mobile, regulations in the respective countries are close to none, and secrecy policies are widely obtained, corporations can move around their operations and avoid confrontation with their heavily taxed states of origin. (Broome, 2014b) Therefore, states are left with the option of spending a large amount of money pursuing tax administration internationally or focusing on spending money domestically for public purposes. The state is bound territorially and economically where the capitalist hegemon is neither bound to a geographic area nor is it constrained by its economic capacities. (Broome, 2014b) One could argue that when states choose to minimize attempts to regulate corporations internationally due to the large expenses, they act rationally and independently of the capitalist hegemon. However, this is not accurate because as corporations actually had obligations to pay taxes in the country of origin but are avoiding doing so through tax havens, the states of origin are being undermined by the capacities of the international corporations to move around their operations. Thus, states are not just choosing not to act, they are incapable of acting. The financial expansion being beyond the control of states is evident in the offshore world as well as in the development of the financial crisis in 2008 where states missed capacity to control or influence the processes and consequences of the crisis. The global financial crisis evolved in 2008 from the subprime crisis in the US in In the 1990s and 2000s, subprime mortgages were popularly obtained for financing property purchases by borrowers with low credit rating. The mortgages were, however, conditioned by a greater risk of default. The increasing popularity emerged due to the confidence in the ever-increasing house prices. (Broome, 2014a) The originate to distribute was one of the key features of the system of borrowing created by the banks. Following the revision of Basel 1 in 1996, risk management was privatized and the creditworthiness of banks borrowers was no longer at the core of their 7

8 strength and power. In 1999, Basel 2 was introduced with its approaches to managing risk and capital reserves. It created an incentive for large banks to widen their use of credit risk transfer in form of asset-backed securities or CDSs. (Wigan, 2010: ) With the use of ABSs, such as CDOs, and the model of originate to distribute, the incentive for banks to evaluate their potential borrowers was gone. (Broome, 2014a) Furthermore, the role of the credit rating agencies increased as their incentives for rating the tranches as AAA increased due to the transaction fees they received (Lecture 10, slides 52-53). This increasing importance of credit rating agencies was also a result from the revision of Basel 1 and 2. (Wigan, 2010) A process of treating accuracy and transparency with less priority began and at the same time the mortgage system became more complex as synthesized CDOs were taken into use through CDSs and SPVs. (Wigan, 2010: ) As this system was highly dependent on the increasing house prices in the US, those financial institutions highly leveraged in subprime mortgages suffered losses when the house prices began to fall in the mid-2000s. This resulted in financial investors being unable to sell their investments, credit rating agencies being less loose in their ratings, and finally stock prices fell as investors tried to sell at the same time. The subprime crisis evolved into a global financial crisis: the growth of financial securitization and the liberalization of controls on financial institutions activities over the 1990s and 2000s created network effects because many banks acted simultaneously as both borrowers and lenders in the mortgage market. (Broome, 2014a: 190) The embeddedness of financial institutions and the risks of their investments led to the major bailout programmes that Western governments introduced following the collapse of Lehman Brothers in The Troubled Asset Recovery Programme allowed the US Treasury to buy illiquid assets preventing the major financial banks from collapsing and creating an even larger collapse of the financial market. (Wigan, 2010: 120) Throughout the development of the financial crisis, states have not been present. The financial institutions developed an opaque system of mortgages, securities and risk without the states having any influence or regulatory power. Through the Basel 1 and 2 the financial institutions only gained more autonomy. Banks and other financial organizations expanded financial innovation in a risky manner and the states were left with the inevitable decision of buying illiquid assets from the major corporations: "While this collapse reflects the self-defeating pathology of financial innovation such an understanding misses how, and how far, innovation and related regulation pushed private imperatives onto public authorities." (Wigan, 2010: 118) Thus, states are forced to accept the financial productions of the major financial actors as well as forced to offer bailout programmes afterwards. Resulting from this, the state adopts the role of handling the crisis instead of the role of 8

9 preventing a crisis. One might argue that this role is rationally taken on by the state in the pursuit of its interests, as they are not forced to provide bailout programmes. However, the global financial crisis was an effect of the financial innovations culminating with unforeseen economic changes revealing the instability at the core of the innovations. As the crisis took form, the governments could do nothing but introduce major bailouts for the most prominent financial actors. Thus, the state has lost its ability to regulate and control the market and this is shown through its subordination to the financial markets revealed by the global financial crisis of (Wigan, 2010: ) Conclusion This paper argues that state power is subject to diminution in contemporary global political economy due to the increasing predominance of the financial sector. Since the Washington Consensus in the 1980s, liberalization and privatization of the market has been prominent in economic development causing financial corporations to expand transnationally and eventually shape international politics. A capitalist hegemon is subordinating state power. The offshore world is one of the outcomes of this expansion. It is posing a severe threat to state power as it combines the strengths of the financial corporations, namely capital mobility, financial capacity, and independence of state of origin. Moreover, the financial crisis is an obvious illustration of how states have lost control and ability to regulate the major financial corporations. The financial innovations are beyond their capacities and their function becomes merely a matter of crisis management. For further analysis, one might address whether the capitalist hegemon has the capacity to completely replace the functions of states. However due to limitations, this paper will not address this issue. 9

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