The Rise of Business and the Decline of the Nation State
by Viven A. Schmidt
WHEN GEORGE BUSH ANNOUNCED the beginning of a new world order, he had in mind a world in which democratic governments would together keep peace in the world and make it possible for everyone to be free to prosper in a liberalizing international economy. Peace, as we quickly came to see, was a pipe dream, as has been global prosperity. The only part of the agenda that has been continuing on schedule is the liberalizing. Capital has become increasingly mobile and business increasingly international as borders that act as barriers to trade fall and as regulations that constrain commerce are lifted.This has largely been the product of the concerted efforts of nation-states that, through international trade organizations such as the General Agreement on Tariffs and Trade (GATT), international financial entities such as the International Monetary Fund (IMF) and the World Bank, and regional bodies such as the European Union (EU) and the North American Free Trade Agreement (NAFTA), have sacrificed their own independence as they have increased that of business. It has also resulted from the political and economic reforms internal to nation-states, such as privatization, deregulation, and decentralization, which have diminished central governments' powers at the same time that they have freed business even more.
What are the consequences of this liberalized new world order for the nation-state? In this essay I argue that however beneficial it may be for global prosperity and business, the jury is still out regarding its effects on global democracy and government generally. Because the international and regional organizations in no way constitute supranational governments, and because they quite narrowly focus on trade, they are freeing business from the traditional constraints imposed by national governments and societal interests without substituting some equivalent at the supranational level. The result is a strengthening of business, with transnational corporations less tied to nations and national interests, and a weakening of the nation-state overall, in particular of the voice of the people through legislatures and nonbusiness, societal interests.
Some would counter that the rise of regional and international trade organizations will have strengthened the nation-state by reinforcing executive power and reinvigorating the rule of law;(1) and that business will always be subject to national regulation, whatever the origin of that regulation. This is, no doubt, true, but it suggests a partial view of what constitutes strength for the executive and implies a limited definition of the nation-state, since it ignores the role of legislatures and societal interests. Moreover, it entirely overlooks the potential impact of all of this on the state-society relationship, and it denies the effect on nations of multinational corporations that put global profits before community interests.
To begin with, while the power of the executive may be enhanced, autonomy will be diminished, as governments must negotiate with others on the formulation of policies that in the past had been their purview alone. Moreover, the strengthening of the executive and the judiciary refers primarily to powers over legislative and societal interests, not to state capacity, which will in many cases be weakened. By liberalizing their trade policies, by deregulating their economies, and by privatizing their enterprises, national governments have much less control over what goes on in their own territory or what their own multinationals do elsewhere, and they no longer have the resources they had in the past to solve social problems. At the same time, multinational corporations are less bound economically, politically, and morally to nation-states, while supranational bodies such as GATT, NAFTA, and the EU, by concentrating on trade, have given scant attention to the social spillovers.
Most importantly for issues of democracy in the nation-state is the fact that at the same time that the executive may very well have been strengthened, the legislature is likely to be weakened, to say nothing of the societal interests that will have increasing difficulty gaining a voice in decisions made at the supranational level that cannot be modified at the nation-state or local levels. In other words, deliberative democracy may also suffer as a result of this new economic world order. But it will suffer differently, depending upon the nation's particular characteristics as well as the extent to which it had to change in order to meet the competitive challenges created by the new international economic environment. Within Europe, the smaller European countries and France have suffered more disruption than Germany, Great Britain, and Italy. The two most powerful economies in the world, the United States and Japan, have so far felt very little of all this, although they are likely to feel the effects increasingly over the next few years, as regional trade bodies such as NAFTA or the Asia-Pacific Economic Cooperation gather momentum, and as the World Trade Organization (WTO) develops.
Thus, nation-states are experiencing the disruptive effects of the new economic world order at different rates, and although many will undergo a weakening of the nation-state and of the voice of the people, a few may find one or the other strengthened--Italy and Japan being cases in point. Overall, however, democracy is at risk.
None of this is to suggest that we should turn back the clock and abandon the international and regional attempts at coordinating economic policy. It is, rather, to point to the dangers inherent in these attempts and to recommend that governments begin thinking of ways to overcome the greatest threats to national democracy and, by extension, to global stability. The real challenge is not so much to establish supranational bodies capable of ruling on the whole panoply of social and economic problems involved in the internationalization of trade as to ensure that nation-states provide new vehicles for democratic expression at the national level that also provide national democratic access to supranational decision making.
INTERNATIONAL PRESSURES ON THE NATION-STATE
In recent years, the editorial pages of newspapers have been covered with impassioned accounts of the problems confronting nation-states. Some have been concerned that the internationalization of the financial markets has left governments with minimal influence and little to do other than stabilize prices and government spending in order to avoid pressures on their currency and to attract investment. Others have expressed alarm over the growing power and concentration of multinational business (the top five hundred of which control two-thirds of world trade). Yet others have warned of the potential labor adjustment difficulties and the threat to national labor and environmental standards resulting from the efforts of international and regional trade organizations, in particular with regard to NAFTA. And some have even linked the internationalization of trade to the breakup of the nation-state, not only by reference to the relatively benign cases of separatist movements in places such as Quebec, Catalonia, and the Basque region, but also in terms of fundamentalist religious and communitarian movements.
In response to many of these problems have come increasing calls for the creation of supranational political institutions to deal with the social spillovers resulting from the decisions of supranational economic institutions. So far, such calls have fallen on deaf ears. No one wants to meddle with the markets.
The Pressures from the Rise of Business
There is little new in the argument that the increasing internationalization of business has freed it from the constraints of national governments. In the 1960s and 1970s, a vast literature developed on multinationals that saw the increasing economic interdependence and technological advances in communications and transportation as contributing to the escape of large corporations from nation-state control, and even to the rise of a new transnational corporation that would lose all national identification.(2) Very quickly, however, scholars found that the view of the overarching power of the multinational corporation and the concomitant decline of the nation-state, whether seen in a positive or negative light,(3) was overstated. Much of it overestimated the power of the multinational corporation and underestimated that of the nation-state.(4)
The predictions of the 1970s appear more relevant today, as home and host countries have been giving up their traditional controls over business in a wide range of areas in the context of international and regional trade agreements. As a result, multinationals have been coming closer to the "stateless" ideal that in recent years has come to symbolize the escape of business from nation-state control, where companies aspiring to status as global corporations seek to dissociate themselves from their countries of origin, with their operations scattered around the world and their subsidiaries lobbying as members of whatever country in which they are located.(5)
The statelessness of the multinational manifests itself in a variety of ways: the dispersion of operations; the loss of loyalty to home or host country when it comes to jobs and operations; and the ability to avoid burdensome taxes. As US Secretary of Labor Robert Reich has argued, the dispersion of operations through the growing numbers of joint ventures, the increasing importance of capital markets for financing, the multinational character of production, and so forth, make corporations part of a "global web" that increasingly defies categorization by national origin.(6) Moreover, along with this dispersion of operations, multinationals have increasingly lost any sense of obligation to stay in communities in which they have invested. Even multinationals from countries such as Germany, where corporations have traditionally felt a social obligation to the community in which they operate, have increasingly been relocating with an eye to lower taxes and lower wages. And whether they stay or move, multinationals successfully use their mobility to pressure workers and to gain wage concessions. Finally, multinationals have also been quite adept at minimizing their tax liabilities through transfer pricing, setting profits or losses in countries where tax laws are beneficial to the company, despite the best efforts by countries such as Japan and the United States to limit this practice.
Multinational business' independence from the nation-state is growing not only as a result of its increasing economic freedom but also because of its growing political clout. Business has access to supranational negotiations not only through national governments, but also directly. And it also has influence, as in the case of the NAFTA negotiations with regard to the automotive market,(7) or in the EU, where the influence of business lobbies varies from sector to sector.(8) Although agency capture of the kind found in the United States is infrequent, given the range of interests seeking influence in each policy area,(9) and while clientelism of the Italian variety is also rare, given the bureaucratic culture that places more value on technical arguments than on political influence,(10) Eurocrats nevertheless risk falling into quasi-clientelistic relationships, given their reliance on industry experts and their need to make quick decisions.(11) But even short of this, business' privileged access to supranational decision-making ensures that policy interactions have shifted from an almost exclusive reliance on national government bargaining to one that includes, if it is not dominated by, business actors in the transnational private sector.(12)
Few have questioned the newfound freedom and influence of the multinationals. Those who have been concerned with detailing the characteristics of the new stateless corporation have tended to be charitable, arguing that multinationals are no longer of serious concern because they are bound for reduction to their smaller parts as a conglomeration of companies(13) or as part of a "global web" that denies significance to their bigness as well as to their country origin.(14)
Operations are one thing, control another. There is no doubt that global corporations have operations scattered everywhere. But suggesting that the country origin of large corporations no longer matters, or that their size does not count because of their decentralized organization, is a big leap of faith. Even if the conventional wisdom is correct in assuming that national governments today can do little more than invest in infrastructure, training, and education in order to make their countries more attractive to investors, there continue to be other ways in which governments make a difference to large corporations. For example, incorporation laws and tax laws continue to affect how corporations operate (e.g., Japan's high tax on profits that leads Japanese firms to concentrate on gaining market share or America's tax laws that favor debt over equity). Furthermore, the corporation generally has a special relationship with the home country, being able to count on the government to come to its aid, to protect existing markets, and to help it penetrate new ones. In addition, the culture of the multinational company, as much as its control, tends to remain identified with nationals of the company's country of origin.
Control of the multinational, in short, remains in the hands of relatively few individuals, who, by virtue of their nationality and position, have special access to power in nation-states, and who, by virtue of the global nature of their responsibilities, have the ability to avoid national control. Concern with this aspect of the increasing power of the multinational has generated only sporadic articles in the popular press. However, the honeymoon of the 1980s, when CEOs were depicted as heroes in the press, is over. In the United States, top management greed is now the focus of attention, as news magazines detail the astronomical compensation packages that, in 1993, provided CEOs with salaries that topped $200 million. In other advanced industrialized nations, the press has focused more on the corruption of CEOs, the insider trading scandals and illegal political campaign contributions in France, banking improprieties in Spain, and bribes and illegal campaign contributions in exchange for favors and contracts in Italy and Japan, among others.
Although CEOs remain the focus of criticism because of their ability to exploit their positions for personal or professional gain, that focus may shift to their power over the enormous economic organizations that they head that increasingly seem to escape political and, therefore, popular control. This may generate a new set of radical critiques that revivify the older theories and that concentrate on the inherent political dangers of multinationals controlled by a small elite of professional, capitalist managers with seemingly unchecked economic power and national loyalties only when it suits them.
The concern with business power and those who wield it is likely only to grow as trade liberalization progresses. This constitutes a major challenge to the independent powers of the nation-state. But this is not the only challenge.
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