Global Neoliberalism, Policy Autonomy, and International Competitive Dynamics

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How has global economic integration affected the ability of national governments to sustain social democratic regimes in order to ensure economic security and some measure of equality? This question is particularly important today because of the apparent economic difficulties facing many European countries that have historically pursued social democratic policies. But it has become even more immediately relevant over the past year or so, as national elections have returned social democratic and/or labor parties to power in most Western European countries. What possibilities lie before social democrats in the new global economy?

To explore this matter, we first need to be clear about the nature of contemporary international economic integration. While many nations have had close economic ties for centuries, the present period is unique in the degree to which international economic relations are market-based. The linkages that bound the economies of Britain and India during Britain's colonial empire, or that bound Eastern Europe under the aegis of the Soviet Union, are very different from the linkages that increasingly bind nations today. In place of state-directed flows of goods, services, and capital, we find dramatic shifts toward what I will call global neoliberalism, or market-directed flows and outcomes. Today the decisions of private economic actors - particularly multinational corporations (MNCs) - increasingly determine the flow of goods and services and capital across national borders and thereby affect employment levels and income. As just one indicator of this trend, we should take note of capital flows from the North to the South: today, private flows between these regions in the form of foreign direct investment (FDI) and portfolio investment (PI) are many times larger than North-South public aid flows.(1)

The question before us, then, is how does the shift toward neoliberalism at the international level affect the state's ability to sustain social democratic institutions and policies at the domestic level? To answer this, we need to distinguish between three distinct concepts that tend to be conflated in the literature on the impact of globalization on the state. By "state capacity," I refer to the ability of a state to achieve some objective that it sets for itself, such as economic growth, equality, or security. By "policy autonomy," I refer to a state's ability to implement and sustain a policy of its own choosing, independent of the policy choices of other nations, in order to achieve its objectives. Finally, by "sovereignty" I refer to the state's formal right to pursue and sustain a certain policy, separate from its ability to do so.

Let me demonstrate the importance of this distinction by way of a simple example. Let us assume that a country intends to address the problem of high unemployment through expansionary monetary policy. If it has the formal right to pursue this policy, then we say that it has sovereignty in this policy area. If it also has the ability to sustain this policy, independent of the policy choices of other nations, then we also say that it has policy autonomy in this area. And if it can indeed improve its employment performance via this policy choice, then we also say that it has state capacity in this area.

But now consider the following cases. First, the state may very well have the right to pursue expansionary monetary policy but not be able to sustain it. In the absence of coordination with other countries, it may find its expansionary policy sabotaged by capital flight and a collapsing currency, which together induce a political crisis and force the government to reverse its policy. In this case, we say that the state enjoys sovereignty but lacks policy autonomy. Alternatively and less dramatically, the state may be able to sustain the policy but find that it generates a trade deficit and inflation, rather than improved employment. In this case, we can conclude that it enjoys sovereignty and policy autonomy but lacks state capacity in this policy domain. …