The return of the state: recovering state efficacy for global solutions.

Grewal, David Singh

If there is one important trend that seems likely to shape world order over the coming decades, it is the "return of the state." This may be an unfashionable thing to claim because the state is not an important new idea, but rather an important old one. And what has been in vogue in discussions of globalization has been to claim that something excitingly new has replaced or sidelined the state and its traditional role in the international system: novel networked technologies, cross-border financial flows, transnational regulatory regimes, or non-state terrorist violence. All these dynamics not only challenge the administrative capacity of the state itself but also pose an intellectual rebuff to the idea of the global order as a necessarily state-led one.

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Globalization is alleged to present new problems and opportunities, in the face of which the interstate system of the mid-century proves outdated. What is meant by "globalization" in this narrative of state-decline is the spread of global relations of civil society outside organized politics; importantly, globalization (conceived broadly) can take many different forms, including new forms of international organization. Yet in the wake of ongoing security crises and the dramatic financial meltdown and subsequent bailout--and with climate change at last at the forefront of public concern--it seems increasingly obvious that the state will not, and cannot, go away. We should be relieved as well as unsurprised. The most serious problems we face can only be addressed by a new kind of global order: a form of globalization that takes politics seriously, meaning one that is mediated through the state system. Indeed, the failure of organized politics to cohere at either the supranational or subnational level is on vivid display in those lands where "failed states" and warring factions daily and tragically confirm Thomas Hobbes's vision of non-political life as "poor, nasty, brutish, and short."

What would a globalization that took politics seriously look like? In important respects, at least, it would look very much like the old international order that followed World War II and introduced widespread interstate regulation of global activities, particularly commerce. Curiously, it is not the first time that we have required the "return of the state" as the underwriter of global order. The postwar regime of "embedded liberalism" involved precisely this kind of state-centered international politics, put in place to tame a previous episode of runaway globalization. The most important question facing the reform of globalization is the relationship between national politics and international commerce, especially finance. While the mid-century system made commercial relations across borders subject to political oversight and scrutiny, the "globalization" of the past few decades has generally reversed that trend, with consequences we are only now beginning fully to register.

What the " return of the state" will likely require is a new regulation and re-regulation of domestic and global affairs. More specifically, a politically managed globalization will require the regulation of "transnational" civil society through renewed governmental oversight at the domestic level and the global coordination of these domestic activities through new international agreements and re-energized multilateral organizations. Students of international politics may also expect to see a renewed focus on the state as the central concept in the analysis of globalization.

The Double-Wave of Globalization

Much of the celebration of globalization over the last two decades has been based on the idea that the global order is made not through politics and states, but through the entrepreneurial energies and border-crossing ambitions of private individuals and companies. Globalization thus presents an ideology of what we might call "transnational civil society." It is transnational because the global flows of ideas and money in an increasingly liberal international order take place outside or beyond the immediate purview of states. It is a domain of civil society because it depends not on organized politics but on the interests of citizens in their private capacities: making money and converts, spreading ideas and technologies, and running businesses and charities.

Over the last few years--and most dramatically after the financial crisis of 2008--it has become clear that this kind of globalization does not provide sufficient governance. Even many of its former boosters are now admitting that the experiment with an untrammeled globalization was a failure; over the past year, the Financial Times editorial pages have resounded with shocked half-apologies from commentators such as Martin Wolf and Lawrence Summers, all of whom are now stressing the requirement of a sound regulatory environment to support globalization. Against this verdict, a few will protest that the experiment was not pushed to the hilt, but these protests are silly. After all, the experiment with an unmanaged globalization was conducted not once, but twice: though the common use of the word "globalization" dates back only to the late 1960s, it is widely thought that the period from the later half of the nineteenth century through to World War I presents an earlier episode of "globalization," given the considerable economic integration across countries.

This earlier era was characterized by massive and unregulated flows of ideas, money, and--in an important difference from today--people across national borders and within the large expanses of the European empires.

This earlier era of globalization came to a dramatic end with World War I and the Great Depression. To govern this globalization, a historical turn to the state took place alongside a withdrawal from too tight an international integration, all for the sake of preserving what we now call the "policy space" available to national governments, particularly in order to intervene in the economy. In the liberal democracies of the era, this withdrawal developed into the postwar order of "embedded liberalism," based on Keynesian ideas that elevated national politics above international markets and used regulation to tame them.

The 20th century thus exhibits a double experiment with globalization. The first globalization from the middle of the nineteenth century to World War I presents an initial Foray into transnational civil society. When that first globalization proved unsustainable, it was replaced with a new regime, explicitly international rather than transnational, regulated by new, multilateral treaty organizations that enabled the incorporation of politics into a state-led global order. But a transnational economic order then roared back in today's era of globalization, beginning with problems in the postwar Keynesian order in the late 1960s and the final breakdown of the Bretton Woods system in the early 1970s.

This second great wave of globalization has now crested, and it is in its wake that we will see the "return of the state." The re-regulation of globalization will follow out much of the same logic as the mid-century turn to politics, but with different content since a much broader range of countries will participate in any new process. Additionally, while the first globalization occurred because national activities stretched into unregulated international space, the second globalization was the product of a deliberate evacuation: the ideology of neoliberalism led states to withdraw from the international governance they had assumed since the mid-century. Thus, the re-regulation of today's globalization will not need to produce institutions from scratch; in many cases, the formal shell of a governance structure remains intact, with the oversight and enforcement mechanisms needing to be updated and strengthened. New forms of global regulation could be achieved through a number of distinct (though not incompatible) routes, such as better funding and clearer mandates for UN agencies or a new, radicalized agenda for the Bretton Woods institutions, which otherwise risk obsolescence in the face of globalized private finance.

Global Interdependence: The Outsourcing of US Debt

Top 15 Foreign Holders of U.S. Treasury Securities, as of October 2009

China                         27%
Japan                         25%
United Kingdom                 8%
Oil Exporters *                6%
Caribbean Banking Centers **   6%
Brazil                         5%
Hong Kong                      5%
Russia                         4%
Luxembourg                     3%
Taiwan                         3%
Switzerland                    2%
Germany                        2%
Korea, South                   2%
Canada                         1%
All Other                      1%

* Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran,
Iran, Iran, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab
Emirates, Algeria, Gabon, Lobya, and Nigeria.

** Caribbean Banking Centers include Bahamas, Bermuda, Cayman Islands,
Netherlands Antilles and Panama. Beginning with new series for June
2006, also includes British Virgin Islands.
U.S. Department of the Treasury

Note: Table made from pie chart.

Thus, it is as much an intellectual about-face as an institutional revamp that is needed in managing the fall-out of the second globalization. It is striking to read john Maynard Keynes today, not just because of the parallels and differences between today's financial crisis and those of his day but also because he was a thoughtful critic of unregulated globalization. He and his generation faced a similar set of questions as we do today concerning the state, international trade, and the reform of the global order. We have much to learn from their basic contention that the global order needs to be managed through an assertion of national sovereignty coordinated through international agreements.

Commerce and Conflict

Perhaps the most important activity to re-regulate is global commerce, which is the most conspicuous aspect of contemporary globalization. In the era of postwar Keynesianism, global commerce was subject to international political oversight, managed through the Bretton Woods system of fixed, regulated exchange rates. The overall aim--imperfectly realized, of course--was to make economic production congruent with national regulatory oversight while allowing international trade.

The liquidation of this Keynesian system was the victory following several decades of effort by Wall Street and the City, joined by a host of neoliberal think tanks. It was ultimately ratified in the Washington Consensus, which pushed governmental and intergovernmental organizations toward privatization, deregulation, and market-mimicry. According to the ideology of this second globalization, politics had to be withdrawn from production. Against postwar Keynesianism, advocates of the Washington Consensus sought to create an economic space purified of political interference, especially in the developing world. Markets, on this account, could be trusted to generate the right outcomes; states ought to defer to the "magic of the market," as the financial journalist Martin Wolf called it. The neoliberal ideal of a "world without walls"--in the words Mike Moore, a former Director of the World Trade Organization--presents the fullest realization of this untrammeled globalization, in which commerce is freed from regulatory oversight.

So much has been said on behalf of this "world without walls" that it may be hard to remember why it was ever thought useful to regulate commerce in the first place. John Maynard Keynes, at least, thought the most pressing reason was international peace: he feared that unregulated commercial interaction between different countries brought out frictions and tensions that could be managed only through a political process. "The age of economic internationalism," Keynes argued in dramatic understatement, referring to what we have called the first globalization, "was not particularly successful in avoiding war."

Keynes's worry ran up against a powerful contrary idea: that economic interdependence leads to international peace. Theorists of doux commerce from the time of Montesquieu--and continuing into our own day with "flat worlders" such as journalists Thomas Friedman and Martin Wolf--have long held that commerce would pacify international relations. Alas, the optimism of doux commerce is hard to square with the historical facts. While Keynes argued the opposite position following his experience of World War I, Sir Norman Angell, a famous commentator at the time, had argued on the very eve of the war that Germany would never attack Britain, given the interconnections between the two economies. At the time, Germany was Britain's second largest trading partner. War had become impossible among modern commercial nations, Angell claimed: those who thought it might occur were under a "great illusion" since "military and political power give a nation no commercial advantage" and "it is an economic impossibility for one nation to seize or destroy the wealth of another, or for one nation to enrich itself by subjugating another."

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Perhaps the chief reason why markets cannot do what we were told they would is that market action presupposes--rather than solves--the crucial problem of security for which states have proven indispensable. The problem of security is not simply a domestic issue. International security, too, depends on a functioning state system. And rather than commerce pacifying international relations, something like the opposite has now occurred often enough that it is time to acknowledge it. Markets presuppose background conditions they cannot themselves bring: most importantly, security for the agents involved in commerce.

What was genuinely an illusion was the idea that economic globalization would lead to peace. That fantasy rested on the assumption that rival countries necessarily put economic prosperity above other values, such as national honor or complex geopolitical commitments. World War I revealed otherwise: economically interdependent countries were not immunce from violence and, on a different account of why violence happens, might even be particularly prone to it. As Keynes argued, because globalization allows economic relationships to form above and outside the state, there is no obvious route to a solution if things go awry--as might be expected--in complex chains of production and investment that cross national borders.

Globalization and US Debt

One of the more pressing (and generally overlooked) consequences of the unmanaged globalization of the last few decades has been the potentially explosive accumulation of US debt by foreign governments, a massive failure of Keynes' ideal of "national self-sufficiency." US debt has been a problem for several decades, ever since the collapse of the Bretton Woods system of regulated currencies made the US dollar the reserve currency, giving Americans the ability to consume from abroad by borrowing from abroad. US debt issuance has increased dramatically in the current financial crisis. Critically, however, the money now being used to bail out the large financial institutions is not money that US citizens are borrowing from themselves, and will one day back (or fail to pay back) to future generations of US citizens. Rather, the deficit-spending now under way depends disproportionately on money that Americans are borrowing from abroad and will one pay back (or fail to pay back) to future generations of foreign citizens, particularly Chinese citizens.

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As a result of the breakdown of Bretton Woods, China is now the largest holder of US Treasury bonds; China held at least US$768 billion worth in March 2009 though some estimated put its total dollar-denominated assets at twice that. Together, China and Japan are the major foreign investors in US public debt, half of which is held outside the United States. In the current crisis, the United States is depending on its creditors not just to maintain their existing dollar-denominated debt but also to soak up the new Treasury bills being printed in Washington. In June of 2009, US Treasury Secretary Timothy Geithner visited Beijing to reassure the Chinese government that its dollar holdings remain a sound investment despite massive new US borrowing. After his opening speech at Beijing University, Geithner responded to a question about the soundness of the US dollar by declaring, "Chinese assets are very safe." The comment provoked loud laughter from the assembled students: they knew perfectly well that the IOUs they will inherit are of deeply uncertain value.

The Nobel Prize-winning economist Paul Krugman has jokingly described the US relationship with China in recent decades as a swap of toxic debt for toxic toys: "They sold us poison toys and tainted seafood; we sold them fraudulent securities." Joking aside, what this means is that vast numbers of Chinese peasants-turned-factory workers have spent their lives producing goods for consumption in the United States in exchange for US debt. Now, if this debt were held domestically, there might one day come a reckoning between different generations or different classes of Americans--between those who hold the massive debt and those who owe it. The political procedures of the United States would probably be resilient enough to contain the process. But instead, the average US citizen is now in debt not just to other, richer citizens (who could be squeezed politically for debt-relief or redistribution) but also to people far away and mostly far, far poorer, who do not share an overall political system in which to work out their disputes. It seems unwise to be too sanguine about this situation or to assume that the reckoning the parties will choose to pursue will be an exclusively economic one--as Norman Angell, not Keynes, would have supposed.

Restoring a measure of self-sufficiency, especially in finance, will require a renewal of politics at the domestic level, linked globally through new forms of international coordination. Politics is required because economic globalization will not, in itself, bring about a self-correction to this situation--at least, not without risking international peace. So far, the international will to undertake such bold measures at reform seems lacking: the crisis of 2008 has not produced any significant new governance of the world financial system. However, at the level of domestic policy, at least, it has become painfully clear that in areas from environmental protection to security to finance, we require governmental regulation and oversight. Markets and market-mimicking policies have not confirmed the great expectations their boosters formerly claimed for them. There are a few shared responses to this failure: a turn to non-profit civil society organizations and forms of local self-help but, most importantly, the return to political (rather than private) decision-making about crucial resources, including through international negotiation.

Democracy and Security

There are two persistent fantasies about the relationship between domestic politics and the foundations of global order. The first imagines the universalization of the state, the construction of a world-spanning Leviathan. The second supposes that we can do without the politics of the state system altogether by relying on transnational networks of private agents. It is this latter fantasy--the Utopia of neoliberal globalization--that has been my main concern here. The fantasy of a world-state is nowhere on the agenda.

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We are left with the need for a collective political response to our most urgent problems and the recognition that this political response will be mediated through something like our existing state system. However, recognizing the necessity of politics tells us nothing about the nature of how national sovereignty is to be reasserted. Indeed, the most obvious route for the "return of the state" in the context of a fading globalization is through top-down sovereign responses to crises. An emergency politics of this kind usually has counter-democratic consequences through the concentration of power in the hands of executive agencies, military command, and intelligence experts. Notably, this pattern is not restricted to military problems: both the Bush and Obama administrations have reacted to the financial crisis by privileging an elite cadre of experts operating behind closed-doors, often supervening or sidelining the ordinary democratic process.

Emergencies need not be fatal to democratic political practice. However, it will be a complicated and continuing struggle to ensure that the return of the state supports rather than undermines domestic democratic politics and participatory international governance. Indeed, when we reflect on what the "return of the state" often entails, it is not hard to understand why an ideology of transnational civil society recurs in our thinking about globalization. It is not simply a convenient argument for those poised to make money in deregulated markets. It is also that, if we were able to construct our shared social life without requiring recourse to politics, we could avoid the messy, imperfect, and uphill struggle for the sort of politics we want to have. Unsurprisingly, the fantasy we can find freedom outside (rather than through) politics is particularly persistent in thinking about the global order. We have cherished this illusion not once in this century, but twice--and neither time with happy consequences. The task of building a system of international governance for our era of globalization gone awry remains before us still.

DAVID SINGH GREWAL is a junior Fellow in Harvard University's Society of Fellows and a member of the Biobricks Foundation's board. He is the author of Network Power: the Social Dynamics of Globalization.

RELATED ARTICLE: Spotlight on David Singh Grewal

David Singh Grewal's book, Network Power The Social Dynamics of Globalization, was widely praised He is a Junior Fellow in the Harvard Society of Fellows, an affiliated fellow of the Yale Law School Information Society Project, and a member of the board of the Biobricks Foundation. He is currently completing his Ph.D. in the Harvard Government department, finishing his second book, The invention of the Economy. He is a graduate of Yale Law School and Harvard College.

What has been the most challenging part of your career thus far?

It can be tough to navigate graduate school when you want to do big projects, but are expected to conform to a narrow disciplinary agenda. I was lucky to have advisors who encouraged me to develop in multiple directions.

What projects are you seeking to pursue next?

I am currently working on two new book projects: the first is one that comes out of my dissertation, The Invention of the Economy, which presents a history of economic thought. The second is another look at globalization, focused on America's role in world affairs, tentatively titled The Red Queen's Empire.

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Where do you envision your career taking you over the course of the next two decades?

I have several book projects in my head, and a few that I'm already drafting, Whatever institutional context I end up in will have to be one where I can complete this intellectual work. The Society of Fellows is just perfect because it provides three years of free time to do my own research alongside bright and genial colleagues.

What advice can you offer current students looking to pursue careers in your field?

Academia has a lot of downsides, and there are more fun ways to spend your twenties (and early thirties). But if you feel sure that you can't do anything else, remember to read widely, learn languages, think big, and keep curious--even when you're advised to do just the opposite.