International Political Economy - The Tension between the State and the Market

The University of the West Indies Cave Hill Campus Barbados Faculty of Social Sciences Department of Government, Sociology and Social Work GOVT 3015: International Politics & Political Economy Question: One of the characteristics of the global political economy is the tension between the state and the market. Critically discuss: (a) the factors that account for this tension; and (b) ways to resolve it, utilizing at least three contending theories from the field of IPE along with supporting evidence from the global political economy. Date: March 31st, 2014. The tension between the state and the market has proven over the course of history, to be inevitable by nature. This is made possible because of the rapid evolution of globalization, and the way in which it has changed the molded and shaped the global political economy. The relationship between the state and the market is one that is between power and wealth respectively. The government acts as an administrator of the state, whilst, the market is driven by private individuals who own institutions, organizations and so on. The state’s job is to provide a security framework in which rules are made for the economy to function in it. The market is not concerned with fulfilling that of social goods, but rather it is there to be the most productive and the most profitable. On the other hand, the state’s job is to mainly capture and control the entire process of economic growth and capital accumulation. In order to fully understand what accounts for this tension between the state and the market, we must first take a look through the lens of the various world perspectives that has painted a very descriptive picture for us to grapple the realities of what causes such tension. For the purposes of putting forward an accurate point, I will be explaining this question firstly, through the lens of the Marxist’s perspective, secondly the Realist Mercantilism’s perspective and thirdly the Liberal’s perspective. This tension between the state and the market is mostly observed through the activities of multinational corporations, this is so because the interest of the interest of making revenue is no longer that of the state, but additionally the private firms and companies that are now competing as well. (Gilpin, 278; 2001) stated that, “ the importance of the multinational corporation (MNC) is a key feature of globalization of the world economy. However, opinions differ greatly over the significance for domestic and international economic affairs of the globalization of corporate activities. Some commentators believe that the multinational corporation has broken free from its home economy and has become a powerful independent force determining both international economic and political affairs. Others reject this position and believe that the multinational corporation remains a creature of its home economy.” These multinational corporations on the face of it have a prima facie approach to countries when they are deciding to establish their company in a foreign country. One example is that of Jamaica; although the thought of having mass employment for its people to a company such as Nike or Polo Ralph Lauren, the other side to the agreement is gross underpay which is driven by the urge to make profit. (Gilpin, 2001; 278) continues to make this point by saying, “tens of thousands of MNCs with numerous subsidiaries conduct business around the world. Such firms expand overseas primarily through foreign direct investment (FDI), whose purpose is to achieve partial or complete control over marketing, production, or other facilities in another economy; such investments may be in services, manufacturing, or commodities. Foreign direct investment can entail either the purchase of existing businesses or the building of new facilities called “Greenfield” investment. Mergers, takeovers, or inter-corporate alliances frequently accompany overseas expansion, with firms of other nationalities. Whereas the purpose of portfolio investment is to obtain a financial return on the investment, foreign direct investment, as well as alliances, mergers, and similar ventures, are usually part of an international corporate strategy to establish a permanent position in another economy.” The tension here is inevitable because the interest of these footloose firms, are in confliction with the interest of the local government. www.economist.com reiterated that, in talking about these multinational corporations, saying that, “they have no commitment either to the countries in which they are based or to those in which they invest. They move jobs from one country to another purely on the basis of cold calculation, seeking lavish subsidies to persuade them to invest or to stay.” There is no emphasis placed on the socio-economic implications that can negatively affect a society. It is common knowledge to know that the Marxist perspective focuses on the political and economic spheres in society, and they see the concept of class struggle as the main link that plays a central role in understanding the way in which the world operates, they speculate heavily on the proletariat being oppressed by the more powerful and wealthier bourgeois class. The global political economy is seen in the Marxist perspective as an uneven playing field all states involved, and the internationalization of the political economy is tantamount to the internationalization of neo-colonialism. (Burnham, 1999; 107) said, “it was not trade that transformed production relations, but the contradictions of feudal and post-feudal production relations that led to transformations both of the world market and the form of the state. By viewing national states as political nodes in the global flow of capital it is possible to avoid both the Smithonian bias introduced by focusing uncritically on the market as independent variables. In this light, class relations do not impinge on the state; they do not exist in ‘domestic’ society and make their presence felt by influencing the state, which operates in the international realm. Rather the state s a form of the class relation which constitutes global capitalist relations.” One of the views which the Marxist perspective acknowledges is that the global system shapes and influences the nature as well as the behavior of states, firms and that it even trickles down to the individuals, they see this structure as being oppressive due to the hands of capitalism. The Marxist perspective speaks of a “transition” that changes from one mode to another, (Gill & Law, 1988; 55) explained that, “the class relations of one mode of production my become an obstacle to the further development of the ‘forces of production’, so that the replacement of one mode by another is made possible by it’s productive superiority. The new mode grows within the old, but ultimately this growth requires a change in social and political institutions to develop to its fullest potential. Thus for capitalism to become the dominant mode, and to supplant feudalism, the factory system replaced the guild system, which had in turn, which had in turn been undermined by the putting-out system of merchant capitalism. In order for the factory to operate effectively, labour markets had to be created, which implied significant changes in social institutions.” The main idea of this view is that the Marxist perspective believes that the state is the actor controlling the economy. They equally believe that all of the prices in which they set are done so through state officials and leaders who have a major emphasis on setting the agenda and coordinating state planning. The Realist- Mercantilists on the other hand, believes that the global political economy operates in a different way to the Marxists. The Realist-Mercantilist believe that the state is always acting in their own interest and they play an integral role in the economy that is often proactive and it’s primary duties are to protect the state and their major industries in which there interest lies. This is expounded by (Gill & Law, 1988; 25) which they stated that, “Realist-mercantilism starts from the assumption that international life is inherently contentious, with anarchy the rule, order, stability and justice the exceptions. In this world of conflict, power is the ultimate arbitrator of politics, and the distribution of national power resources determines the pattern of relations between rival states in the inter-state system. By anarchy is meant the absence of a global force, such as that which would be provided by a world state, which can impose order on nation-states.” The Realist-Mercantilist’s perspective on state-market relations are mainly about national security and that the economy should be state managed. The problem arises here when these corporations whom have originated from the states with larger economies, act as an extension of the state, and subsequently the state represents its corporations in the international arena, when facing other economies, for example former President Clinton along with other countries such as Honduras and Mexico brought forward the argument to the World Trade organization that their corporations were not being offered the same treatment, this can be seen as the state working as an extension to help push the interest of the market. This is turn can at times have negative effects on other weaker states, but as the realist would agree, it is about state security and state power. (Gilpin, 2001; 294) stated in his book that,“ Powerful corporations, their far-flung subsidiaries, and their global alliances, as John Stopford and Susan Strange have demonstrated in their book Rival States, Rival Firms (1991), have, for more than a decade, been recognized as major features of contemporary international affairs. However, arguments continue regarding the extent to which these corporate giants have affected the nature and organization of the international economy and the relative significance of the nation-state in its functioning.” The well known assumption from the realists is that in the global political arena, state are in conflict with each other, this is due to fact that states are seen as rational actors and they value power for its own gain and their emphasis is on the security and status of the state. An example in which the state is seen insuring that firms perform properly for the sake of national interest is given with the Integrated Circuit industry that was controlled by Japan and the United States, but the United States was heavily assisted by the government, (Schawartz, 2010; 294-295) stated that, “bio- and nanotechnologies are parallel ‘information processing’ and transformation industries based on small team production of new content that is then commercialized and marketed by larger states. US firms made the major innovations in this cluster, but with considerable state help. Defense and space contracts funded much of the research effort prior to innovation, and government contracts help push IC production far enough down the learning curve during the 1960s to make ICs commercially viable for civilian uses. With the largest collection of innovating and end-use firms, as well as the worlds largest final market for computing, the United States naturally dominated this cluster well into the 1970s.” The implications for the state comes in where interests lies, these corporations that control the market have no obligation to the state to perform any social good, the market is there for corporations to make profit, some are footloose, meaning that they can go anywhere in the world where taxes, if any at all are to their ‘liking’, the market is profit driven at its very base, and the primary obligation they have is to pay their share holders. This comes at a price, a detrimental price to say the least, to the state who has to deal with grossly under-paid citizens who cannot agitate for higher wages, as corporations are able to leave and establish themselves elsewhere. The liberal’s perspective on the tension between the state and the economy are diametrically opposed to that of the realist view. (O’Brien & Williams: 2007; 18) stated that, “liberals focus either upon the individual or a wide range of actors from the state to the corporation to interest groups. The do not see the state as a unitary actor, but as influenced by numerous factors…liberals see the world system as one of interdependence rather than anarchy. States and peoples can cooperate for mutual benefit in the liberal view.” They also criticize the idea of trade barriers and emphasizes on trade liberalization, as trades to barriers only prevents the deepening of interconnectedness and furthered interdependence amongst states. This is one of the issues in which the liberals spoke about. (Gill & Law, 1988; 30) spoke to some of the implications of the realist perspective, the said, “Realist-Mercantilist domestic and international aspects of the global political economy as linked in that view ‘’national capital’ operating internationally. The central concern to the state is the ability to control the movement of goods, technology and capital and to channel such economic power resources for rational purposes.” This is a problem because it allows for the corporations to have control over the market because they have the ability to financially do anything. The most effective way in which they will control all of these assets are because of national consensus, and this is based the premise of strong nationalism within the state itself, also the state has a large market in which it can be used to gain things such as concessions from other foreign companies. Realist-Mercantilists do not subscribe to the liberal economic notion of economic integration. They believe that compromise amongst states are difficult to achieve as they are all acting as self determining entities, and are viewed as rational actors. (Gilpin, 2001; 356) explained that, “states, for example, are unlikely to willingly compromise their national security for economic gains in a regional arrangement; thus far, the European Union has experienced little progress in reaching agreement on common security or foreign policies. In addition, the economic concessions required to achieve regional integration may be granted to allies but certainly not to potential adversaries. Therefore, economic and political integration may require a powerful leader that has an interest in and a capacity to promote a regional arrangement. Ready examples are Germany in Western Europe (EU), the United States in North America (NAFTA), Japan in Pacific Asia, and Brazil in South America (Mercosur).” This is not to say that economic integration is unachievable, but rather that it is extremely difficult as requires states to not act in their own interest, but act in the interest of the collective group. The liberals have spoken about some of the specific benefits of trade liberalization, (Gilpin, 2001; 198) stated that, “In the first place, trade liberalization increases competition in domestic markets, and thereby undermines anticompetitive practices, lowers prices, increases consumer choice, and in- creases national efficiency. In addition, free trade increases both national and global wealth by enabling countries to specialize and to export those goods and services in which they have a comparative advantage while importing those goods and services in which they lack comparative advantage. Free trade also encourages the international spread of technology and know-how around the globe and thus provides developing economies with the opportunity to catch up in income and productivity with more advanced economies. Last, but not least, free trade and the international cooperation that it entails increase the prospects of world peace.” It is abundantly clear to observe the amount of emphasis, which is placed on the concept of free trade. There is a high level of political interest involved and intertwined with economic liberalism. States have now made a turn towards transnational corporations in an effort to control the flow of capital. One of the important tasks for a state in the international political economy is to effectively regulate the flow of capital. (O’Brien & Williams, 2007; 205) stated that, “the impact of transnational corporations on states and societies, and the difficulty that individual government face in controlling these firms have led for greater international regulation of the activities of international business. While civil society actors call for the regulation of international business both government and private sector interest have been increasingly hesitant to such demands. Corporate interests are oriented to promoting forms of international regulation conducive to the accumulation of profits.” The state is trying effortlessly to impose taxation on firms as they try to evade taxes. States are constantly trying to impose their sovereignty on firms by working together with foreign governments to oversee and the processes in which these firms operate. In addition, the relation between the state and the market has been strained further because firms have now moved far past the state financially, and has gained independence and influence without the assistance of the state. This was stated by (O’Brien & Williams, 2007; 200) when they said, “transnational corporations act as producers of wealth within the international political economy, and as such have increased their ability to influence political systems. When firms were generally confined within national orders, they relied on the state to represent their interest at the international level. Now, however, transnational corporations are becoming important actors within the global political economy (Stopford and Strange, 1991), and it is arguable that at times their influence can be greater than that of states. States are increasingly involved in bargaining with transnational corporations in order to attract foreign direct investment (Strange, 1994). Increasingly states have to cooperate with transnational corporations to achieve economic, political and social goods. Trying to control the activities of many large firms through regulatory policies can be difficult and risky considering that the opportunities offered by foreign investment can be an important part of economic planning and growth.” The challenge for states is to try to control the flow of capital in which these firms make. The approach that states are now making to build greater cooperation between itself and the market is changing; this change is desperately needed in order to fully gain from some of the benefits of foreign direct investment. They have started to do so by focusing more on companies that are ‘homegrown’ and operate in the domestic sphere while simultaneously limiting the action of those foreign firms and companies. Some of the reasons as to why states are now being more cooperative with firms and changing their attitudes, are explained further by (O’Brien & William, 2007; 201) they stated that, “the first is the triumph of neoliberal economic ideology and the resort to neoliberal economic policies by most governments. The renewed faith of most countries in workings of the market economy is demonstrated, for example, in the wholesale of privatization of state-owned assets and the deregulation and liberalization of markets since the mid 1980s. The second explanation is the increasing globalization of economic activity and integration of international production and cross-border markets by TNCs. The third reason is that the key ingredients of contemporary economic growth of created assets, such as technology, intellectual capital, learning experience and organizational competence, are not only becoming more mobile across notional borders, but becoming increasingly housed as TNC systems. The fourth reason is the successful industrialization of a number of countries particularly in East Asia. The fifth reason is the economic structure of the industrialized countries are converging, one result of which is that competition between firms from these nations is becoming more intra-industry and more pronounced. The sixth explanation is that criterion for judging the success of FDI by host governments has changed over the years, and changed in a way which has made for a less confrontational and more cooperative stance between themselves and foreign investors.” Provided the level of independence and wealth that firms and companies are now able to yield, the tension that exist between the state and the market can only be lessened through cooperation. This can be made possible when there is state planning rather than market planning to allocate state resources. It is of immense importance for the state to keep its sovereignty and autonomy intact, this autonomy is under threat due to the aforementioned economic independence of firms, which does not need to be guided by political authority per se. There is no doubt that the state should play the role as regulator, this is what creates the inherency in the GPE, because the market recognizes that anyone can make profits and that some people will gain wealth while others will remain poor, the problem arises and creates tension between the state and the market when government’s decision making to redistribute the profits made by the market are implemented and subsequently undermines the agenda of the market. All of the perspectives mentioned in the essay all put forward a very valid explanation for the way we should view the global political economy, but the liberalist perspective can be the one viewpoint, in which it can be the closest to resolving the tension between the state and the market. 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