II

Globalization's Impact
on States
Colin Hay

Chapter contents
• Introduction 288
• The Globalization of Politics and the Politics of Globalization 289
• Globalization and the C risis of the Nation State 290
• Globalization and State Retrenchment: The Evidence Assessed 297
• Conclusions 3 12

Reader's guide
There is no to pic more controversial in the field of global political economy than the impact of
globalization on the accountability, autonomy, capacity, and sovereignty of the nation state: and the
controversy has only intensified since the onset of the Global Financial Crisis. Arguably, the demo-
cratic character of governance in contemporary societies is at stake in such debates. This chapter
reviews the extensive controversy that sur rounds such questions, focusing attention on the principal
mechanisms in and through which globalization is seen to impact upon the nation state and the em-
pirical evidence that might either substantiate o r question the existence of such mechanisms. It pro-
vides a detailed assessment of the case for and against the globalization thesis, examining the extent
to which global economic integr ation might be seen to restrict the par ameters of domestic political
autonomy. It concludes by considering the complex and sometimes par adoxical relationship between
globalization, democracy and the nation state.
288 Colin Hay

Introduction Much more than academic pride is at stake in such

debates. For, ,vhether or not we see globalization as
It is getting on for 4 5 years since Charles Kindleberger restricting the parameters of political choice domesti-
boldly proclaimed that: 'the nation state is just about cally, and whether or not ,ve see the nation state as
through as an economic unit' (1969: 207). Since then, having a present or, indeed, a future will have a very
,ve have ,vi messed a remarkable profusion of apocalyp- significant bearing on the space for political autonomy
tic predictions of the demise of the nation state-and we perceive there to be. This, in rum, has significant
a Global Financial Crisis. In such accounts, globaliza- consequences for the ext ent to which we might le-
tion is invariably cast in the role of prosecutor, judge, gitimately hold elected officials accountable for their
jury, and executioner. Yet, despite such doom-laden conduct in office. Given the significance of the issues
prognoses, government expenditure continues to ac- we are dealing ,vith, it is important to proceed w ith a
count for a significant and, since the Global Financial certain degree of caution.
Crisis, in almost all cases a rising share of gross do- We should perhaps be ,vary of accepting uncriti-
mestic product (GDP), while the nation state remains cally, as many have, that globalization leaves states
the principal focus of political identification and the (and the governments ,vhich give effect to state power)
principal locus of political debate and cont estation in w ith no alternative other than to capitulate to the de-
an interdependent,vorld. Given this seeming paradox, mands and desires of mobile investors. For to do so,
it is perhaps not surprising that the question of the im- is effectively to deny the possibility of the democratic
pact of globalization on the development of the state governance of economic processes in contemporary
has become a subject of considerable interest and in- societies, certainly at the national level. In other,vords,
tense controversy. Opinions range w idely. there is a certain danger that in accepting over-hastily
Though perhaps less influential than it once ,vas, an influential conception of the inevitable demise of
the view that globalization is in the process of, or has the nation state's capacity and autonomy, we provide a
already, precipitated a terminal crisis of the nation convenient alibi for politicians keen to justify otherwise
state is still widespread. Others see such apocalyptic unpalatable social and economic reforms by appeal to
claims as wild and unfounded extrapolations from an- the harsh economic realities of a global age. Maybe our
ecdot al evidence. Proponents of such a vie,v, they sug- politicians deserve such an alibi; maybe the constraints
gest, confuse a crisis of the form of the nation state for of the global economy are so exacting and all-pervasive
a crisis of the nation state per se. Yet others see globali- as to warrant the appeal to such a 'logic of no alter-
zation as a process driven by states that has, in many native"; maybe these are valid and defensible conclu-
cases, served to strengthen and certainly to increase sions. The crucial point for no,v is that ,ve cannot allo,v
the significance of state intervention for economic ourselves to accept at face value such claims without
performance-a view reinforced by the crucial role a detailed consideration-both theoretical and empiri-
played by states in bailing out domest ic financial insti- cal-of the arguments for and against such a view.
tut ions during the crisis (acting in effect as collective T hough space does not permit a fully comprehen-
public goods providers of last resort). Still others ques- sive exploration of the relevant issues, it is my aim in
tion the role of globalization in such dynamics, sug- what follo,vs to survey the existing literature in this
gesting either that globalization-though real-has area and, in so doing, to provide a basis for such an
little to do with the developmental trajectory of the assessment. It is important to emphasize at the out-
nation state or that the claim that we have ,virnessed set, however, that there is no agreed or emerging
a systematic process of globalization is itself mythi- consensus on globalization's impact upon the state-
cal. Finally, there are those who suggest that the very and such debates are only further complicated by the
idea of globalization as a harsh and non-negotiable recent Global Financial Crisis. Commentators are
economic constraint has itself exerted a po,verful in- divided and they are likely to remain divided. As ,ve
f] uence in confining the political ambitions of elected shall see, this is-at least in part-due to the rather
officials to those consistent w ith the pervasive neo-lib- slippery nature of the term globalization itself, which
eral orthodoxy. It is this, rather than globalization per has come to mean a range of rather different things to
se, they suggest, that has given rise to the impression a range of different analysts.
of a waning of the nation state's autonomy, capacity, T he chapter proceeds in four sections. In the first of
and sovereignty. these, I seek to establish a few necessary preliminaries,
 Globalization's Impact on States 289

distinguishing in particular between the politics of opinion varies considerably (compare, for instance,
globalization and the globalization of politics. In the Buzan, Held, and McGre,v 1998; Krasner 1999; Ar-
second, I identify the principal mechanisms in and chibugi 2003)--,ve must acknowledge that if globali-
through which globalization is seen to impact upon zation exists at all, and even if it is confined exclusively
the nation state before turning, in the third, to the to the economic and cultural spheres, it has a politics.
empirical evidence ,vhich might either substantiate While we may well deny the globalization of politics,
or question the existence of such mechanisms. In the then, unless we deny globalization itself ,ve cannot
final section, and by way of a conclusion, I consider deny the politics of globalization. It is ,vith the latter
the complex and sometimes paradoxical relationship that this chapter is principally concerned.
between globalization, democracy, and the nation More specifically, I shall focus on three analytically
state, looking both at the impact of globalization on separable, but nonetheless interconnected, dimen-
states and the state's im pact on globalization. sions of the polit ics of globalization:

I. The implications and consequences of

The globalization of politics and the globalization (whether economic, political, or
cultural) for the capacity and autonomy of the
politics of globalization nation state.
It is crucial at the outset that ,ve distinguish bet\veen 2. The interpretation of the opportunities and
the globalization of politics and the politics of glo- constraints associated with globalization and the
balization. This is particularly important, g iven the consequent appeal made, in political contexts, to
tendency-especially prevalent among international/ the language of globalization (often, as ,ve shall
global political economists-to talk about globaliza- see, to justify social and economic reforms).
tion as if it were a transparent, self-sust aining, and 3. The role of political actors, particularly state
purely economic dynamic (on the dangers of such actors, in the political 'authoring' of globalization
'economism', see also Teivainen 2002). It is a key and the processes which either sustain or im pede
content ion of this chapter that globalization is not a its development.
tendency that is furthered or, indeed, countered in the
absence of political actors. As such, it has a politics that The first of these might be seen as the stn,ctural di-
must be a central ingredient of any adequate account mension, relating as it does to the constraints and op-
of its development. portunities of the external environment for domestic
By the globalization of politics, l refer to the displace- political actors. The second relates to the [Link].l
ment of political capacities and responsibilities from dimension and, more specifically, to the way in which
the national and/ or regional levels to the genuinely political actors understand the constraints and op-
global level, through the development of institutions portunities that the external environment presents to
of global governance. them. The third relates to the intentional, [Link], or
By the politics of globalization, I refer to the politics agentia.l dimension- to the role of political actors in
of the process of globalization itself, to the political the creation and recreation of the very ext ernal en-
drivers of globalization and to the consequences of vironment in ,vhich they find themselves. Together,
such a process for political conflict, practice, and the they suggest an approach to the question of the im-
distribution of political responsibility. pact of globalizat ion on the state and the state's im-
W hether, and to what extent, we observe a globali- pact on globalization in ,vhich political actors are
zation of politics is a matter of empirical judgement. always present, in which the ideas they hold about
It is likely to relate, among other things, to our evalua- their environment shapes their political conduct,
tion of the ext ent and significance of genuinely global and in which they are never unburdened of the con-
institutions o f governance, the relative significance straints (and opportunities) of the environment they
of regional institutions, and the degree to which the have created (for a further elaboration, see Hay 2002b:
emergence of global institutions might be seen to 253-60).
g ive rise to a politics independent of and irreducible Such a perspective is applied, in the pages that fol-
to that bet\veen discrete nation states or regions. Yet, low, to a series of more substantive issues and contro-
whatever specific judgement we reach-and, again, versies. T hese might together be taken to comprise an
290 Colin Hay

BOX I I. I

Th e Po litics of G lobal iz ation: • The extent to which we can point to a parallel globalization
of political solutions and the corresponding emergence
Key C o ntroversies
of more or less dedicated institutions, mechanisms, and
• The extent to which globalization might be seen to ciminish the processes of global g<M!monce.
autonomy and 'perforate' the [Link] of the nation state
• The extent to which we can identify t he global diffusion of
(on 'perforated so,oereignty'. see D uchacek 1990; Jessop 2002). 'best practice policy solutions (or potential solutions) and/
• The extent to which globalization m ight be seen to establish or [Link] models in the form of the transfer of ideas about
[Link] tendencies towards global political convergence 'good' practice bei'M?e.n nations (whether by choice or
and homogenization. imposition).
• The [Link] to which it is right to identify a globalization of • The extent to which globalization might be seen t o promote
political problems-the proliferation of issues that require a the development of a global polity or cosmopolis capable of
response in the form of concerted global action. t ranscending the state (see e .g. Zolo 1997: Archibugi 2003).

agenda for a consideration of the politics of globaliza- Globalization and the crisis
tion (see Box 11.1 ).
of the nation state
Each set of issues, as ,ve shall see, reveals a sepa-
rate and distinct politics of globalization. By drawing If we are to assess the impact (if any) of globalization
anention to the multifaceted politics of globalization on the viability of the nation state, we must first iden-
in this way, my aim is to contribute to the attempt tify the principal mechanisms in and through which
to restore political (and one might hope democr atic) globalization is held, in conventional accounts, to limit
scrutiny and accountability to processes more conven- the capacity, autonomy, and sovereignty of the nation
tionally seen as economic and inexorable-and, con- state. Before doing so, ho,vever, it is perhaps impor-
sequently, as not subject to political deliberation (see, tant to emphasize that most strong variants of the
more generally, Hay 2002a). globalization thesis-which present the nation state
as a casualty of globalization-tend to do so without
pointing directly or explicitly to the mechanism or
KEY POIN TS mechanisms involved (see, for instance, Ohmae 1990,
1995; Reich 1992). At best, it seems, they treat the ex-
• The impact of globalization on t he autonomy. capacity. and istence of such mechanisms as self-evident. What ,ve
sovereignty of the nation state is much disputed. tend to see, instead, is what Andreas Busch (2000: 34)
• It is important to distinguish between the politics of refers to as 'casual empiricism '-the anecdotal appeal
globalization (t he political drivers of the process of to, and extrapolation from, single pieces of evidence
globalization) and t he globalization of politics (the that appear to confirm the general tenor of the argu-
displacement of political responsibilities and capacities ment being advanced.
from the level of the nation state through the [Link] At times, ho,vever, casual empiricism gives way
of institutions and processes of global governance). to 'casual theoreticism'. Here, tangential reference is
Globalization has a politics, whether or not politics has made to the increased bargaining power and/ or mo-
become globalized.
bility of capital in an era of globalization. In so doing,
• It is equally important to distinguish between and to 'hyperglobalists' appeal, ,vhether they are a,vare of it
acknowledge the structural ideational. and strategic or not, to mechanisms derived from neoclassical open
dimensions of t he process of globalization. The first
economy macroeconomic models (for reviews of
of these relates to the constraints and opportunities
the relevant literature, see Obstfeld and Rogoff 1996;
presented by globalization: the second to the w;ry in
which those structural factors are [Link]; the third
R0dseth 2000; Ugur 2001). This is an important point
to the role of political actors is 'authoring' the process of and gives a first clue as to the character of the hyper-
globalization itself. globalization thesis. For it serves to indicate that, for
such authors, it is economic globalization that is the
 Globalization's Impact on States 29 I

principal factor limiting the capacity and autonomy of era, this is no longer the case. Capital may now exit
the state in the contemporary context. In short, eco- from national economic environments at minimal
nomic globalization gives mobile international inves- cost (indeed, in most neoclassical-inspired models, at
tors the upper hand over domestic political authorities. zero cost).
Without going into any technical detail, it is useful Accordingly, by playing off the regulatory regimes
to examine further such open economic macroeco- of different economies against one another, capital
nomics models. In particular, it is important that ,ve: can ensure for itself the highest rate of return on its in-
vestment. Ceteris paribus, capital will exit high-taxation
I. Establish the assumptions on which such models
regimes for lo,v-taxation regimes, comprehensive wel-
are predicated.
fare states for residual states, highly regulated labou r
2. Assess the plausibility of such assumptions. markets for flexible labour markets, and economies
3. Consider the sensitivity of the conclusions derived characterized by strict environmental regulations
from such assumptions (for the viability or and high union density for those characterized by
otherwise of the nation state) to modifications in lapse environmental standards and low union density.
the initial premises from which they are derived. The clear prediction would be that capital will seek
out the high-gro,vth regimes of, for instance, newly
industrializing economies (l','IEs) (like Malaysia, for
The hyperglobalization thesis instance) unencumbered by a powerful environmen-
Arguably, the key factor determining the inevitability tal lobby, burdensome welfare traditions, rigid labour
of state retrenchment for hyperglobalists is the height- market institutions, and correspondingly higher rates
ened mobility of capital. The logic to which they ap- of taxation.
peal is, in fact, very similar to that elaborated by Adam T he process pits national economy against national
Smith in 1776: economy, in an increasingly intense competitive strug-
gle. States must effectively clamber over one another
' ' The ... proprietor of stock is properly a citizen of the in an ever-more frenzied attempt to produce a more
world, and is not necessarily attached to any particular favourable investment environment for mobile ('foot-
country. He would be apt to abandon the country in loose') foreign direct investors than their competitors.
which he is exposed to a vexatious inquisition, in order Yet, this is not a one-shot game-and an early influx
to be assessed a burdensome tax, and would remove his of foreign direct investment (FD I) only increases the
stock to some country where he could either carry on his dependence of the state upon its continued 'locational
business or enjoy his fortune at his ease. A tax that tended competitiveness'. If investment is to be retained in
to drive away stock from a particular country would so such an environment, states must constantly strive to
far tend to dry up every source of revenue, both to the im prove the investment opportunities they can offer
sovereign and to the society. Not only the profits of stock, relative to their competitors. Any failure to do so can
but also the rent of land and the wages of labour, would only precipitate a haemorrhaging of invested funds,
necessarily be more or less diminished by its removal.'' labour shedding and, in turn, economic crisis. A neo-
Darwinian survival of the fittest effectively guarantees
(1776/1976: 848-9, cited in Swank 2002: 245)
that states must internalize the preferences of capital,
Updated and restated in more familiar terms, the ar- offering ever more attractive investment incentives,
gument goes something like this. In closed national ever more flexible labour markets, and ever less re-
economies, such as those that (supposedly) charac- strictive environmental regulations, if t hey are not
terized the early post-war period, capital is essentially to be emptied of investment, economic activity, and
immobile and national in character; it has no 'exit' employment. Big government, if not perhaps the state
option. In such an environment, governments can itself, is rendered increasingly anachronistic-a guar-
impose punitive taxation regimes upon un,villing and antor, not of the interests of citizens or even consum-
relatively im potent national capitals ,vith little cost to ers, but a sure means to disinvestment and economic
the domestic economy (save, except, for the tendency CrlSlS.

for capitalists to hoard rather than to reinvest their Little wonder, then, that the hyperglobalization
profits). With open economy conditions, such as are thesis tends to predict 'social dumping', 'competitive
conventionally held to characterize the contemporary deregulation', and a race to the bottom in t erms of
292 Colin Hay

social and environmental standards, a process lubri- thinks of it, is simply not available to proponents of
cated by the 'deregulatory arbitrage' of footloose and the hyperglobalization thesis whose borro,vings from
fancy-free transnational corporations. neoclassical economics rarely extend past the assump-
The policy implications of such an account are tions to the algebra.
painfully clear. As globalization serves to establish Consider each assumption in turn. W hile it may
competitive selection mechanisms within the inter- seem entirely appropriate to attribute to capital the
national economy, there is little choice but to cast all sole motive of seeking the greatest return on its in-
regulatory impediments to the efficient operation of vestment, the political and economic history of capital
the market on the bonfire of welfare institutions, reg- provides little or no support for the notion that capital
ulatory controls (for instance, of the banking sector), is blessed either ,vith complete information or even
and labour market rigidities. w ith a relatively clear and consistent conception of
Plausible, familiar, compelling, and, above all, influ- what its o,vn best interest is. Moreover, as the political
ential though such a logic may ,veil appear, it serves economy of the advanced capitalist democracies dem-
us ,veil to isolate the assumptions on which it is predi- onstrates well, capital has a history of resisting social
cated. Por, as ,ve shall see, it is these, rather than any and economic reforms which it has later come both
inexorable process of globalization, ,vhich ultimately to rely upon and actively to defend (see, for example,
summon the crisis of the nation state. They are prin- S,venson 2000).
cipally fivefold, and each can be challenged on both The second assumption is, again , a convenient fic-
theoretical and empirical grounds (see Box 11.2). tion, used in neoclassical macroeconomics to make
Each of these premises is at best dubious, at worst possible the modelling of an open economy. Pew, if
demonstrably false. Such assumptions, it should per- any, economists would defend the claim that markets
haps be noted, are not justified in neoclassical eco- for goods or services are fully integrated or clear in-
nomics in terms of their accuracy, but because they stantly. Indeed, the degree of integration of such mar-
are convenient and make possible abstract quasi- kets is an empirical question and, as such, an issue to
mathematical modelling. That defence, whatever one which we return in the next section.
If the first two assumptions are problematic, then
the third is demonstrably false, at least with respect to
BOX 11.2 certain types of capital. For, however mobile portfolio
capital may appear in a digital economy, the same is
Core Assumptions of the simply not the case for capital invested in infrastruc-
'Hyperglobalization' Thesis ture, machinery, and personnel. Consider inward for-
eign direct investment. Once attracted to a particular
• That capital invests w here it can secure the greatest net
locality, foreign direct investors acquire a range of
return on that investment and is possessed of [Link]
non-recuperable or sunk costs-such as their invest-
information of the means by which to do so.
ment in physical infrastructure, plant, and machinery.
• That markets for goods and services are fully integrated
Consequently, their exit options become seriously de-
globally and that, consequently. national economies must
pleted. While it is entirely 'rational' for foreign direct
prove themselves [Link] competitive if economic
investors to proclaim loudly their mobility, exit is per-
growth is to be sustained.
haps most effective as a threat.
• That capital enjoys perfect mobility and the cost of 'exit'
What this in turn suggests is that predictions of
(disinvestment) is zero.
the haemorrhaging of invested capital from gener-
• That capital will invariably secure the greatest return on
ous ,velfare states are almost certainly misplaced. A
its investment by minimizing its labour costs in flexible
combination of exit threats and concerns arising from
labour markets and by relocating its productive activities
the hyperglobalization thesis about the likelihood of
in economies with the IONeSt rates of corporate taxation.
exit may well have had an independent effect on the
• That the welfare state (and the taxation receipts out
traject ory of fiscal and labour market reform. But
o f which it is funded) represents nothing other than
there would seem no a priori reason to hold gener-
lost capital to mobile asset holders and have no positive
[Link] for the competitiveness and productivity o f ous welfare state and high corporate taxation burdens
the national economy. incompatible with the attraction and retention of
foreign direct investment. As ,ve shall see in greater
 Globalization's Impact on States 29 3

derail in the next section, this is precisely ,vhat we that they impose, but for the access they provide to
observe from the empirical record. Not only have a highly skilled, reliable, and innovative labour force.
the most generous welfare states consistently proved High ,vages and high non-wage labour costs (in the
the most attractive locat ions for inward foreign direct form of payroll taxes) would seem to be a price many
investors (Locke and Kochan 1985; S,vank 2002), bur multinational corporations regard as ,vorrh paying
volumes of foreign direct investment ( expressed as a for a dynamic and highly skilled ,vorkforce.
share of GDP) are, in fact, found to be positively cor- Ar this point it might be objected that the above par-
related w ith levels of corporate taxation, union den- agraphs relate principally to the investment behaviour
sity, labour costs, and the degree of regulation of the of foreign direct investors and nor to financial market
labour market (Dunning 1988; Cooke and Noble 1998; actors. This is a valid point. Indeed, although the hy-
T raxler and Woitech 2000; Wilensky 2002: 654-5). As perglobalizarion thesis has rather more to say about
Duane Swank notes: the former, it has much to say about the latter, too.
Its assumptions about finance capital and finan-
' ' contrary to the claims of the international capital
cial markets are similar to those about productive I
mobility thesis ... the general fiscal capacity of democratic
invested capital and markers in goods and services.
governments to fund a variety of levels and mixes of social
Yet, the small differences are significant. Referring
protection and services may be relatively resilient in the
again to Box 11.2, the first assumption applies equally
face of internationalisation of markets. ' ' to invested and investment capital and is equally prob-
(2002: 276) lematic. Yet, whether it is accurate or nor, arguably
matters rather less in the case of portfolio capital. For
Here, it is perhaps instructive to note that, despite a such investors do nor need to act rationally or with
marked tendency for direct corporate taxation to fall perfect information in order to inflict considerable
in recent years in line w ith the predictions of such damage on the currencies against ,vhich they may be
neoclassical-inspired models, the overall burden of tempted to speculate and the stocks and shares they
taxation on firms has, in fact, remained remarkably may be tempted to dump-as the influential literature
constant, rising marginally since the mid 1980s (Kiser on 'irrational exuberance' and 'herding instincts' in
and Laing 2001; Steinmo 2003); it is set to do so again financial markets makes very clear and as the experi-
in the wake of the Global Financial Crisis. ence of the Global Financial Crisis perhaps confirms
No less problematic, are assumptions four and (see e.g. Shiller 2001, 2008; Akerlof and Shiller 2010).
five-that capital can only compete in a more in- Assumption two also applies equally to financial mar-
tensely competitive environment on the basis of pro- kers and to those in goods and services (see Pauly,
ductivity gains secured through tax reductions and Chapter 9 in this volume). All are assumed global and
cost-shedding (through rationalization, do,vnsizing, perfectly integrated. This may seem like a more plau-
and the flexibilization of labour), and that the ,velfare sible assumption to make of financial markets but, as
state is, for business, merely a drain on profits. Such we shall see in the next section, as an empirical claim it
assumptions reflect a narrowly Anglo-US conception is not easily reconciled w ith the available evidence. As-
of competitiveness which may arguably prove to be sumption three, though problematic for productive I
one of the conceptual casualties of the crisis-and, as invested capital as already discussed, again seems more
we shall see presently, are difficult to reconcile with plausible for portfolio investors. Stocks and shares can
the empirical evidence (Hay 2013). Though ever more cert ainly be traded, and assets swapped from one de-
influential, the hyperglobalization thesis extrapolates nomination to another, in the fl ickering of a cursor.
wildly and inappropriately from labour-intensive sec- Yet, whether this potential is reflected in the actual
tors of the international economy in which competi- behaviour of financial markets is, again, an empirical
tiveness is conventionally enhanced in this ,vay, to the question and the subject of some debate. This, too,
global economy more generally It fails to appreciate is discussed further in the next section. Assumptions
that foreign direct investors in capital-intensive sectors four and five are not directly relevant to finance capi-
of the international economy are attracted to loca- tal, bur they can be adapted to financial actors. Hyper-
tions like the Northern European economies, neither globalists tend to assume that portfolio investors have
for the flexibility of their labour markets nor for the a clear interest in, and preference for, strong and stable
cheapness of the wage and non-,vage labour costs currencies backed both by implacable independent
294 Colin Hay

central banks ,vith hawkish anti-inflationary creden-

Figure I 1.1 The hyperglobalizatio n thesis
tials and governments wedded in theory and in prac-
tice to fiscal moderation and prudence. Any departure
from this new financial orthodoxy, it is assumed, will
precipitate a flurry of speculation against the currency
and a haemorrhaging of investment from assets de-
nominated in that currency-or, indeed, a rise in the
bond 'yield· charged by financial institutions on na-
tional debt. Governments provoke the ,vrath of the
financial markets at their peril. This, again, is an in-
tuitively plausible proposition that would seem to be
borne out by a series of high-profile speculative fl ur-
ries against 'rogue· governments and highly indebted
states since the onset of the Global Financial Crisis.
It is, however, an empirical claim and, as we shall see
later, one that a gro,ving body of scholarship reveals Globalizauon Convergence
to be considerably at odds with the empirical evidence
certainly when considered over any sustained period
N0<e; Globalization {perrect capital mobility and per-feet competition
of time and ,vhen one starts to separate out the effect
under open economy cooditions} generates common prcssu~
of the crisis itself. {inputs): states and/or political-ecooomic regimes have no independent
As the above paragraphs perhaps serve to indicate, mediating role (no institutional effects}: hence oonvergencc on best
the theoretical case against the hyperglobalization practice ass...ning complete information. rational action. and Darwinian
thesis is strongest w ith respect to the assumptions competition~n shorL o,m(n:t(I N1puts p,oduc~ common outputs.

made about productive / invested capital. Its assump-

tions about investment I portfolio capital, if perhaps
overly sim plistic, are, on the face of it, more plausible. produce common outcomes. Since liberal models of
Yet, they give rise to a series of substantive claims and capitalism best approximate the preferences of mo-
predictions which have prompted an important em- bile capital for open markets, low taxation regimes,
pirical challenge to the thesis. This provides the prin- and light regulat ion, they rapidly establish themselves
cipal focus for the next section. Before turning to such as the model to be emulated. Convergence on this
issues, ho,vever, it is important that we first consider Anglo-US ideal type is held to be rapid, lubricated by
the implications of the hyperglobalization thesis for capital's exit from more highly regulated regimes.
the question of convergence prior to examining an Influential though this simple convergence thesis is,
alternative and rather more political account of the it is not as unquestioned as it once was. An alternative
origins of the contemporary crisis of the nation stat e. and increasingly influential account points to a rather
more complex process of 'dual' or 'co-convergence'
(see Figure 11.2), again driven by globalization (see
Convergence, dua.1convergence,
earlier).
or divergence?
In this contending account, more attention is paid
Through attempts to enhance compet1t1veness like to the role of institutional factors in mediating the
labour market flexibility, ,velfare retrenchment, and state's response to globalization. Models of capit alism
the intensification of tax competition between states, are differentiated by virtue of the rather different in-
the hyperglobalization thesis predicts a simple conver- stitutions they embody In the no,v conventional clas-
gence among previously distinct 'models' or 'varieties' sification, liberal market economies (such as the US and
o f capitalism-on an Anglo-US or liberal ideal type. the UK) and coordinated market economies (such as Ger-
This can be represented schematically (see Figure 11.1). many, Sweden, and the Netherlands) are contrasted
Globalization is the driving force, unleashing an (Hall and Soskice 200 I).
intense competitive struggle between contending T he competitive pressures unleashed by globaliza-
models of capitalism. It exposes all economies (A-E tion may make similar demands of these institutions
in Figure I I. I) to common pressures, which, in tum, (such as balanced budgets, flexible labour markets,
 Globalization's Impact on States 29 5

(paying insufficient attention to the often regional

Figure I 1.2 The dual convergence t hesis
character of processes of economic integration
and/ or to the differential exposure of economies
to globalization, for instance).
2. In drawing a rigid and rather static distinction
bet\veen liberal and coordinated market
economies, it is not perhaps as sensitive to
institutional diversity as it might be (see also
Crouch and Streeck 1997).
3. It makes a series of empirical predict ions/ claims
about dual convergence, which are, at best,
contestable-as we shall see in the following
section.
Finally; in the ,vake of the recent Global Financial
Crisis, it might ,veil be asked whether the liberal mar-
ket economies (,vhose propensity to generate asset-
price bubbles has been so cruelly exposed and which
Globalization Dual convergence no,v look like the key source of systemic risk ,vithin
the global financial system) can be seen as models of
Note: Globalization produces a variety of common [Link] to which
adaptation to globalization (Hay 2009, 2013).
competing models of capitalism arc differentially exposed: this cxposu~
tends to promote a dual process or convergence. accentuating the
difference between li~I market ~omics and COOC'Oinated market
ecooomies----, short. gbbaNzofJOfl generores ammon pteS$[Link]' and
Globa.l problems, [Link].l solutions?
these~ te{r(l(;ted mst11uoonaffy to produced dual ~nee. Thus far, we have tended to focus exclusively upon
mechanisms identifying economic globalization as the
key determinant of the contemporary crisis of the na-
tion state. Yet, arguably altogether more plausible, is
and the control of inflation), but these can be deliv-
a rather more political mechanism. Strictly speaking,
ered in different ways in different institutional do-
this does not so much point to the diminished capacity
mains. Consequently, the 'varieties of capitalism'
and sovereignty of the state in an era of globalization,
approach, as it has come to be known, predicts not a
as to the globalization of the problems with ,vhich the
simple or singular process of convergence on the lib-
nation state is confronted-and its inability to deal
eral (or Anglo-US) model, but a complex or dual con-
w ith such problems. Indeed, it points to the more gen-
vergence in ,vhich capitalist polities cluster ever more
eral lack of the political capacity to deal ,vith genuinely
closely around the liberal and coordinated ideal types
global problems and risks that results from the contin-
(Hall and Soskice 200 I; see also Kitschelt et a.I. 1999;
ued ascendancy of the nation state as a political unit.
Garren 1998b, 2000b; Iversen, Pontusson, and Soskice
T he classic example here, is the problem of high-
2000; Hay and W incon 2012).
consequence global environmental risks (Giddens
In its sensitivity to institutional variations among
1990; Beck 1992). This is well expressed in the so-called
different models of capitalism and in its recognition
t ragedy of the commons, first identified by Garren
that common external pressures need not translate
Hardin ( 1968). Hardin provides an intuitively plausible
into common outcomes, the 'varieties of capitalism'
and all too compelling model of the seemingly intrac-
approach represents a considerable advance on the hy-
table problem of environmental degradation in con-
perglobalization thesis. Yet, in a number of significant
temporary societies. The systematic exploitation and
respects it, too, is problematic (see also Blyth 2003;
pollution of the environment, it is argued, is set to con-
Goodin 2003; Watson 2003; Hay 2004).
tinue since individual corporations and states, despite
I. It may, unwittingly; borrow too much from a clear collective interest, choose not to impose upon
the hyperglobalization thesis in presenting themselves the costs of unilateral environmental ac-
globalization as the principal agent of convergence tion. T heir logic is entirely rational, though potentially
296 Colin Hay

catastrophic in its cumulative consequences. Such ac-

KEY POINTS
tors know chat environmental regulation is costly and,
particularly in an open international economy, a bur-
• Many o f the strongest [Link] o f the globalization thesis
den on competitiveness. Accordingly, in the absence
fail to specify t he mechanism by which globalizat ion might
of an international agency capable of enforcing the be seen to lim rt the capacity, autonomy. and sovereignty o f
compliance of all states and all corporations, the an- the nation state.
ticipation of fre.e riding is sufficient co ensure that cor-
• Nonetheless, a variety o f such mechanisms have bee.n
porations and states do not burden themselves ,vich
posited. These are principally economk in characte.r and
additional coses and taxes. The long-term effects for often rely upon stylized assumptions about the behaviour
the environment are all coo obvious, preventing as it of capital drawn fram open economy neoclassical
does, a global solution co a genuinely global problem. economics. These assumptions can be questioned
The extent co which the narro,vly perceived self- theoretically and empirically.
incerest of states and gover nments can subvert the • The hypergtobalization t hesis predicts a simple
development of effective mechanisms and institutions convergence between 'models of capitalism' under
of global gover nance is ,veil-evidenced by the Bush conditions of ( economk) globalization: the more
administration's ,vithdrawal from the 1997 Kyoto Pro- recent 'varieties of capitalism' perspective predicts a
tocol (committing signatories co staged reductions in more complex process of dual convergence. There are
greenhouse gas emissions); the reliance on the agree- theoretical problems with both sets of predictions.

ment reached in the UN's COP21 negotiat ion in Paris • The nation state has always suffered fram a limited
on the US not using its veto power a second time in a capac~ t o deal with genuinely global problems;
similar way; and, for che crit ics of both, by the face that such proble ms are proliferating. The 'trage dy of
the commons' provides a compelling model of the
such agreements, even if fully implemented, would
consequences of this lack of capacity. pointing to the
only serve co reduce slightly the pace of an ongoing
need for effective and democratic institutions of global
process of environmental deg radation.
governance.
These are most important examples, and a number
of broader implications might be dra,vn from chem
(see Box 11.3).

BOX 11.3

The I mplications of the 'Tragedy of state, then, than a crisis produced by the resilience of the nation

the Commons' state.

While the pro liferation o f genuinely global political pro blems
The 'tragedy of the commons' is. e ffectively. a modem-day
does point to the incapacity of a system of [Link] states to
morality tale. It is indicative of a more general disparity between
deal wit h t he challenges it now faces. rt does not indicate any
the need for and supply of effective institutions and mechanisms
particular incapacity o f states to deal with the problems and
of global [Link]. For; while it is easy to point to genuinefy
issues they have always dealt with. This is, then, less o f a st ory o f
global problems requiring for their resolution coordinated
a loss of capacity than of the [Link] of issues which the
global responses, rt is far more difficult to find examples of the
nation state has never had the capacity to deal with.
latter:
Finally. and rather perversely. the disparity between the need for
As this perhaps suggests, t he 'tragedy of the co mmons' is not and supply o f global solutions to global problems is [Link]
really a story of the crisis of the nation state at all. For. it is the exacerbated by economic globalization. For this has served to
continued capac~ o f many (if perhaps not all) states t o behave drive states, at pain of economk crisis, to elevate considerations
[Link] and to veto inte.m ationaJ agreements that precludes of competitiveness over all othe.r concerns, including
the appropriate globally coordinated collective response. In environmental protection. [Link] is a clear and obvious dange.r
other words, political globalization (effective and author~ive that the narrow pursuit of short·[Link] economic advantage will
instrtutions o f global gove.m ance) is impeded by the retention of come at the long·term price of a looming environmental,
the nation state's sovereignty. This is less a crisis of the nation economic, and political catastrophe.
 Globalization's Impact on States 297

Globalization and state and the subsequent turn to austerity have been more
stark in the Anglo-liberal cases (Hay 2014). Yet it is
retrenchment: the evidence assessed
difficult to see this as any simple globalization effect.
As suggested in the previous section, the hyperglo- Moreover, the scale of any such austerity-engendered
balization thesis tends to present a theoretical, indeed, retrenchment effect ,vould appear to be in inverse pro-
largely hypothetical, argument for the contempo- portion to the initial size of the state itself (gauged in
rary crisis of the nation state. If its assumpt ions are GDP terms). W hat is more clear is that in the two dec-
accepted, then the predicted crisis of the nation state ades or so prior to the crisis there is certainly some evi-
is little more than a logical inference. Yet, as ,ve have dence of a decline in the proportion of GDP devoted
seen, there may be good theoret ical grounds for chal- to public spending. Though invariably greatest ,vhere
lenging some of these assumptions and with them unemployment has fallen most, this is consistent with
the claimed inevitability of the state"s loss of capac- the predictions of the hyperglobalization thesis to
ity, autonomy, sovereignty, and legitimacy In the end, some ext ent. But what is perhaps more important is
however, these are empirical questions-and it is to that in each and every case, the size of the state (as ex-
the empirical evidence itself that ,ve must turn if we pressed as a share of GDP) has increased considerably
are to assess the validity of the hyperglobalization the- over the period, peaking in most cases in the early-to-
sis and to assess the impact, if any, of globalization on mid 1990s and, in the Anglo-liberal economies, during
states. It is to this task that we now turn. We begin first the crisis itself.
by considering the dependent variable. Of course, state expenditure is not the only means
of gauging quantitatively the role of the st ate.
Figure 11.3 presents time-series data on the propor-
T he dependent variable: state tion of the total workforce employed directly by the
retrenchment state since the 1960s.
Again, the evidence is unequivocal. This period, the
It is perhaps appropriate to begin with the simplest
much-vaunted era of globalization, has ,vitnessed the
data that most directly addresses the contemporary
development of the largest states the ,vorld has ever
condition of the state. If the state were to experience a
seen and there is little evidence in this data series of
potentially terminal crisis, we might expect to see clear
this trend being reversed. That said, the Global Finan-
evidence of systematic state retrenchment. Moreover,
cial Crisis has had the effect of driving up levels of
we would expect t his to be most pronounced in highly
public debt-and it is likely that the next decade ,vill
open economies whose public spending had tradition-
see some scaling back of the public sector (and, hence,
ally accounted for a high proportion of gross domestic
public employment) in the advanced liberal democra-
product. Table 11.1 presents data on government ex-
cies, as the most recent data in the series seem to begin
penditure expressed as a proportion of gross domestic
to attest.
product for a number of developed countries from the
It would certainly seem that globalization is com-
1960s, conventionally the point of departure for politi-
patible ,vith a far higher level of state expenditure
cal economies of globalization.
(and employment) than the hyperglobalization thesis
The evidence itself is fairly unequivocal. These, for
would seem to imply-an observation which seems
the most part extremely open and developed econo-
set to endure the crisis and the subsequent turn to aus-
mies, sho,v little sign of systematic retrenchment in
terity; if the evidence of Table 11.1 and Figure 11.3 is
the so-called era of globalization. Indeed, in response
anything to go by. This presents something of a para-
to the Global Financial Crisis, their levels of public
dox: a widely accepted conception of state crisis and
spending have risen steeply. That said, in a number of
retrenchment which seems t o stand in some tension
cases (notably, many of the Anglo-liberal economies
to the available empirical evidence. There are at least
such as Ne,v Zealand, the UK, and the US), this sharp
four potential solutions to this conundrum, each with
rise in the period immediately follo,ving the crisis has
rather different im plications:
been replaced by a steep and unprecedented decline in
state spending as a share of GDP in the period since I. That the conventional wisdom on the subject
2010. It is, of course, too early to judge the significance is, indeed, correct, that 'big government'
of this. But it would appear that both the crisis itself represents an ultimately unsustainable drain on
298 Colin Hay

Table I I. I Government expenditure as a share of GDP

AUL AUS BEL CAN DEN FIN FRA GER IRE

1960 22.1 32.1 34.6 28.9 24.6 26.6 34.6 32.0 28.0

1965 25.6 37.9 36.5 29. 1 29.6 30.8 38.4 36.3 33.1

1970 25.5 39.2 42. 1 35.7 40.2 30.5 38.9 37.6 39.6

1975 32.4 46.2 51.3 40.7 47.5 38.4 43.5 47.1 46.5

1980 34.1 48.5 58.7 41.5 56.2 39.4 46.2 46.9 50.8

1985 38.5 51.7 62.3 47. 1 59.3 45.0 52.2 47.5 54.8

1990 37.7 49.4 55.3 47.8 58.6 46.8 49.9 45.7 4 1.4

1996 37.2 56.1 52.6 46.6 58.7 59.8 54.5 49.3 39.1

2000 35.2 52.2 49.2 41. 1 53.3 48.3 5 1.6 45. 1 31.3

2005 34.8 SO. I 52.2 39.9 52.5 50.3 53.4 46.2 33.7

20 10 36.7 52.9 52.3 43.3 57. 1 54.8 56.5 47.3 66.2

20 15 36.1 52.2 53.4 39.5 57.5 59.3 56.9 43.7 36.9

Net growtha' (%) 63 63 54 37 134 123 64 37 32

Growth to peak (%) 74 75 80 65 158 125 64 54 136

Decline from peak(%) 6.6 7.5 16.7 21.0 3. 1 0.8 12.8 79.4

ITA )AP NTL NOR NZL SWE swz UK USA

1960 30.1 18.3 33.7 32.0 26.9 31.1 17.2 32.6 27.2

1965 34.3 18.6 38.7 34.2 36.0 19.7 36.4 27.2

1970 34.2 19.3 45.5 41.0 43.7 21.3 39.3 3 1.6

1975 43.2 27.3 55.9 46.6 49 28.7 46.9 34.6

1980 45.6 32.7 62.5 49.4 38.1 65.7 29.7 44.6 33.6

1985 50.8 32.7 59.7 45.6 64.3 31.0 46.2 36.4

1990 53.6 32.3 57.5 54.9 41.3 60.8 30.9 42.3 36.6

1996 52.5 36.7 49.4 48.5 41. 1 62.9 35.3 42.2 36.6

2000 46.1 39 44.2 42.3 39.2 57.0 35. 1 36.6 33.9

2005 48.1 38.4 44.8 42.3 39.1 54.0 35.3 44. 1 36.2

20 10 49.9 40.7 48.3 45.0 47.8 52. 1 32.9 48.3 42.8

20 15 50.6 41.6 45.7 47.6 39.4 52.2 33.7 43.1 37.7

Net growtha' (%) 68 127 36 49 46 68 96 32.2 39

Growth to peak (%) 78 127 85 72 78 I II 105 48 57

Decline from peak(%) 5.9 37.0 15.3 21.3 25.9 4.7 12. 1 13.5

Noles: AUL= Australia: AUS= Austria: BEL= Belgium: CAN= unada: DEN = Denmark: FIN = finland: GER= Germany: IRE= Ireland: ITA = Italy: IAP
= Japan: NTL = Netherlands: NOR = Norway: NZL = New Zealand: SWE = Sweden: SWZ = Switzerland: UK = u,,;tcd IGngdom: USA = Unned States
lNet growth here refers to Ulc [Link] increase in the share of GOP devoted to govemment expenditure.
Sot-. calwlatcd from OECD. &[Link] Ourlook (various years).
 Globalization's Impact on States 299

Figure 11.3 Gover nment employment: as a share of total population in working age ( I S-64)

10 . .. .. ., .....

- - AUL CGEWAP ..._ CAN CGEWAP - - DEN CGEWAP - - FRA CGEWAP ..._ GER CGEWAP

- ITACGEWAP - - JAPCGEWAP ..._ SW CGEWAP UK CGEWAP USCGEWAP

Note: AUL = Australia: BEL = Belgiim: CAN = Canada: DEN = Denmarl<: AN = Finland: GER = Germany: ITA = Italy: JPN = Japan: NOR = Norway. SW
= 5-.w:den: UK = United Kingdom: US = United States.
Sourco: caJculated rrom Brady. Huber. and Stephens (20 14) (available at [Link]

competitiveness in an era of globalization, but that 1996, 1997; Hay and Wincon 2012). We have not
the institutional form of the state has become so w itnessed, nor should we expect to ,virness, a
entrenched and embedded as to make its reform terminal crisis of the nation state, but we have
and retrenchment an incremental process down already experienced a significant process of stat e
which ,ve are now only slowly embarking on. retrenchment driven by, or at least simultaneous
(T hough perhaps the most plausible defence of w ith, globalization.
the 'crisis of the nation state' thesis, this argument 3. That ,vhile the aggregate evidence may, indeed,
is rarely made in the existing literature. It might, mask the real degree of retrenchment that
however, draw inspiration from the work of has occurred, the conventional w isdom is still
historical institutionalists who have consistently wrong since there is no a priori reason to hold
pointed to the inertial nature of complex globalization responsible for such retrenchment
institutions like the state; see, especially, Pierson and/ or no consistent evidence of a hist orically
1994, 1996.) unprecedent ed process of globalization in recent
2. That the conventional ,visdom, though somewhat years (Hirst and Thompson 1999; W ilensky 2002).
overstated, is basically correct, since the aggregate 4. That, in expecting globalization to precipitate
empirical evidence, in fact, masks the actual a terminal crisis of the state, the conventional
degree of retrenchment. Once we control for w isdom is simply inaccurate. Far from
demographic and other 'welfare inflationary' representing a drain on competitiveness, the
pressures (such as higher levels of unemployment state is the very condition of competitiveness
and the near exponential growth in health care in an ever more competitive international/
costs since the 1960s), observed state expenditure global market (Weiss 1998). Globalization, as has
is, in fact, substantially below that we ,vould been shown by the crisis, does not discriminate
anticipate were consistent levels of generosity principally berween states on their size but on
and coverage to have been maintained (Bar r their effectiveness in promoting and sustaining
1998; Esping·Andersen 1996a, 1996b; Rhodes international competitiveness. Consequently,
300 Colin Hay

,vhile we might expect to see convergence on best contentious issue that we cannot hope to do full justice
practice bet\veen states, we should not expect to to here. Space prevents an exhaustive survey. Nonethe-
see a ,vithering of the stat e itself (Cerny 1995, less, we would once again expect the convergence or
1997). co-convergence theses to be most relevant to the most
developed and most open economies in the ,vorld
As this already serves to indicate, there are a number
system. Moreover, given that welfare expenditure is
of ways of rehabilitating an albeit somewhat 'respeci-
most frequently described in the globalization litera-
fied' variant of the globalization thesis in the light of
ture as the kind of unnecessary indulgence which can
the above evidence. We can probably reject the notion
no longer be afforded in an era of heightened com-
that globalization has precipitated a terminal crisis of
petition among nations, ,ve might expect to find the
the nation state. Yet, the evidence considered thus far
strongest evidence of convergence or co-convergence
is by no means incompatible ,vith the claim that glo-
among European ,velfare states.
balization circumscribes the parameters of domestic
Yet, the evidence sim ply does not bear out that ex-
political choice and is the principal determinant of the
pectation (see also Hay 2003; Hay and Wincott 2012).
state's developmental trajectory. If we are to assess
Limits of space allo,v us only to consider social trans-
that claim, then ,ve need to turn our attentions from
fer payments (expressed as a percentage of GDP).
the dependent variable (the extent of state retrench-
These are, in essence, a measure of basic welfare
ment) to the independent variable (the process of
expenditure. Par ease of comparison, they are here
globalization itself). Before doing so, however, it is im -
standardized at 100 for 1960. Precisely because these
portant that we first consider one remaining aspect of
are standardized measures, they are bound to show an
the dependent variable-the question of convergence.
initial divergence. Yet, the convergence thesis ,vould
lead us to expect that initial divergence to be checked
considerably by the 1980s and 1990s. It would predict,
T he dependent va.r iable: convergence
in short, an oval shaped distribution. And the co-con-
or dual convergence
vergence thesis would predict the emergence of two
Having originally placed their emphasis upon the clusters-one grouped around Germany, the other
crisis and transcendence of the nation state as a po- grouped around the UK.
litical unit responsible for regulating an economic Neither prediction is borne out by the evidence, at
jurisdiction (Ohmae 1990, 1995), proponents of the least in the period before the crisis-which, of course
hyperglobalization thesis now more frequently cast and as noted earlier, gave rise to a steep increase in state
institutional and policy convergence as the depend- spending at least as a share of GDP (see Pigure 11.4).
ent variable (Teeple 1995; Gray 1998; Parker 1998). Instead, consistent paths are mapped out from the
Globalization remains the independent variable and 1960s, ,vhich social models continue to follow for the
is depicted as a stable equilibrium and as an entirely most part to the present day T he wide initial variance
non-negot iable external economic imperative ,vhich in growth rates is sustained over time. T his is not a
exposes all economies within the global system to story of systematic welfare retrenchment, nor is it
near identical pressures and challenges. In a highly a story of the diminishing distinctiveness of regime
competitive environment in which only the fittest sur- types-which seem, if anything, to be reinforced over
vive, successful adaptation will rapidly be emulated, time. Indeed, it is the Nordic welfare states that have
resulting in a powerful tendency to convergence. grown the most. Under globalization, it would seem,
As we have seen, the institutional sensitivity of the the most generous welfare states have thrived.
'varieties of capitalism' approach appeals to a similar Second, we might consider the raw unstandardized
logic (and an identical independent variable), in pre- data itself.-i.e. social transfers expressed as a share of
dicting a rather different outcome-a more complex GDP. To aid the analysis, European welfare regimes
process of dual convergence around liberal and coor- are here grouped in terms of the conventional three-
dinated market economic models. fold classification. The Nordic regime type refers to
To what ext ent are these contending predictions S,veden, Denmark, Finland, and Norway; the conserv-
borne out by the empirical evidence? Since we might [Link] regime type refers to Germany, the Netherlands,
consider convergence with respect to any number Italy, and France; and the liberal regime type to the UK
of potential dependent variables, this is a somewhat and Ireland.
 Globalization's Im pact o n States 30 I

Figure 11.4 Social spending in Europe, 1960-2004 (1 960 = 100)

....

50

0
,.. co ,.. co ,.. co .,. co0 .,. co ,..
0
"' "' 0
"' "' 0
"'
co "' co co co
" °'" °'" °'" °' °' °' °' °' °' "' "' "' "' -
"' 0 0

°'"' °'"' °'"' °'"' °'"' °'" °' °' °'

°' °'
°' °'
°' °'
(X) 0 0 0 0 0
°' "' "' "' "' "' "' "' "'
0 0 0 0 0 0 0 0

- NOR - FIN - FRA - GER - IRE - ITA - NTL - SW UK

Note: IM!st Germany (until 1992 data).

Source.: <:alculated rrom OECD Statistics Library {various years).

Again, it seems, the evidence is in some tension consolidation-not the retrenchment-of the most
with the predictions of the existing literature (see generous welfare states the world has ever known. In
Figure 11.5). For, far from being associated w ith wel- recent years, social expenditure has been stable, w ith
fare retrenchment, the period of (supposedly) most little or no evidence of convergence either between
intensive globalization has been associated w ith the geographical clusters or between individual welfare

Figure 11.5 Social spending o f EU Member States, 1995- 20 13 (as percentage of GDP) by regime type

+--------------------------------------
35.00

3QOO-I-- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

IQOO+--------------------------------------
5.00
1995
r==============================-
QOO +--~.--.------.
1997 1999
- -.--.
200 I
- ------
2003
.2005
-- . --
.2007
------
2009
. --
.20--
II
. -----~
20 13
.
- Nordic Average - Continental Average - Anglo-liberal Average - Standard Deviation

Source: <:alrulated rrom European Commission (20 15).

30 2 Colin Hay

states (the standard deviat ion of social expenditure globalization is, in face, a rather inaccurate descrip-
for the EUZ5 remains almost constant over time and tion of existing patterns of international economic
actually rises in the period since the crisis as austerity int egrat ion and cannot credibly explain the develop-
has bitten harder in liberal welfare regimes). This is, ment of the stat e in recent years (for an import ant
above all, a picture of continuity rather than change. critical response co their work, see Held, Goldblatt
T he Nordic regimes remain the most generous, the and Perracon 1999).
Continental European regimes the next most gener- The principal claims of chis literature are summa-
ous, ,vith little co choose between the Anglo-liberal, rized in Box 11 .4 and discussed in more detail in the
the Southern European, and ease central European following pages.
in terms of total social expenditure. Much has been
going on in the political economy of the EUZ5 during
this time, but their levels of welfare state investment The comparative history of globa.1
have remained remarkably constant (see Hay and economic integration
W incott 201 Z). le is conventional, as already noted, co dace the cur-
Of course, we cannot infer from such evidence rent era of globalization from the 1960s. And it is cer-
that globalization is not an agent of convergence or tainly the case chat if we plot economic data from the
co-convergence, merely chat the evidence considered early 1960s co the present day, we see clear evidence
here is not consistent with such a claim. It is also im - of an almost exponent ial increase in trade and capi-
portant co note chat, even was chis a valid inference tal flows (expressed as shares of global GDP). Yee, it
co dra,v, it would be wrong co conclude chat globali- would be ,vrong co infer from this the development of
zation has no impact on the nation state. For, if glo- an unprecedented integration of the global economy,
balization serves, as some have suggested, co increase w ithout first considering the history of economic
the sensitivity of economic performance to the quality integration.
of public policy (see, for instance, Weiss 1998), then If we do chat, then what becomes very clear is the
there is no particular reason co expect either a crisis sensitivity of the conclusions drawn by proponents of
of the state or convergence. Moreover, if, as is w idely the globalization thesis co their preferred start dace.
assumed, globalization generates common pressures If we extend the time frame, choosing as a starting
for neo-liberalizacion and chis has been more enthu- point the lace nineteenth or early twentieth century, a
siastically embraced in regimes already characterized rather different picture emerges. Consider, first, eco-
by their liberalism, we might expect co see at lease an nomic openness with respect co trade (the value of
initial period of divergence. im ports plus exports expressed as a share of GDP) (see
Bue, ,vhac evidence is there of a historically unprec- Figure 11.6).
edented phase of globalization capable of generat- As Hirst and Thompson note:
ing such pressures? We turn no,v co the independent
variable. ' ' apart from the dramatic differences in the openness
to trade of different economies demonstrated by these
figures ... the startling feature is that trade to GDP ratios
The independent variable: [Link] were consistently higher in 1913 than they were in 1973
As already not ed, proponents of the hyperglobaliza- ... Even in 1995 ... the US was the only country that was
cion thesis have rarely felt the need co defend the considerably more open than it was in 1913. ' '
intuit ively plausible claim chat ,ve live in a fully
(1999: 27)
integrated global economy. Casual and anecdotal
appeals co supporting evidence largely exhaust the True, the composition of trade in, say, 1913, is likely
empirical content of chis lit erature. Yee, in recent co be remarkably different from chat in 1973 or 1995,
years, a more rigorous and systematically eviden- reflective in the case of the UK, the Netherlands, and
tial assessment of patterns of econom ic integration France of a strongly colonial dimension. Nonetheless,
has emerged. Its authors invariably draw a rather in inviting a closer examination of the character and
d ifferent sec of conclusions. Thus, on the basis of not just the quantity of trade, Hirst and Thompson
an exhaustive (if not uncontroversial) assessment provide a powerful challenge co the conventional lit-
of the empirical evidence, sceptics such as Paul erature. le should, however, be noted that, since 1995,
H irst and Grahame Thompson ( 1999) conclude chat levels of world economic integration have, indeed,
 Globalization's Impact on States 303

BOX 11.4

T he Empirical Case against the 5. The pace of economic integration is higher within regions
(such as Europe. North America or Pacific Asia) than it
Globalization Thesis
is betw'een regions. suggesting that regionalization rather
I . Although the period since the 1960s has seen the growing than globalization is the overriding dynamic in the process
openness of national economies (such that imports plus of [Link] economic integration (Frankel 1997:
exports are equivalent to a growing proportion of gros.s Kleinknecht and ter Wengel 1998; Hay 2004: Ravenhill
domestic product), [Link] is still some considerable way to go Chapter 6 in this volume).
before figures of prior to the First World War are likely to
6. Financial integration has failed to produce the anticipated
be exceeded (Bairoch 1996: Hirst and Thompson 1999). [Link] in interest rates which one would expect from
2. There continues to be a positive and, indeed, strengthening a fully integrated global capital market (Zevin 1992: Hirst
relationship bet"""en public spending (as a share of gross and Thompson 1999).
domestic product) and economic openness (Cameron 1978: 7. Financial integration has failed to produce the anticipated
Katzenstein 1985: Rodrik 1996, 1997; Garrett I998b).
divergence [Link] rates of domestic savings and rates
3. There is no inverse relationship, as might be expected, of domestic investment which one would expect in a fully
between the volume of inward loreign direct investment and integrated global capital market-the so-called Felclstein-
levels of corporate taxation, environmental and labour market Horioka puzzle (Feldstein and Horioka 1980; see also
regulation~ generosity of ""[are benefits or state e,penditure Epstein 1996: 212-15; Watson 200 1).
as a share of gross domestic product (Dunning 1988: Cooke 8 . Though the liberalization of financial markets has certainly
and Noble 1998: Traxler andWoitech 2000. Wilensky 2002). increased the speed, severity. and significance of investors'
4. Tracie and international flows of capital (such as foreign reactions to government policy, capital market participants
direct investment) tend to be extremely concentrated appear far less d iscriminating or [Link] in their
within the core 'triad' (of Europe. North America. and political risk assessment than is conventionally assumed
Pacific Asia), providing evidence of regionalization and (Swank 2002; Mosley 2003). Consequently. policymakers
'triadization', but hardly of globalization (Petrella 1996; may retain rather more autonomy than is widely
Frankel 1997: Hirst and Thompson 1999). accepted.

Figure I 1.6 Ratio of merchandise trade to GDP at current prices

120 J------------------------------11----a ,.______

100 ~- - - f f . - - - - - - - - - - - - - - - - - = - - - - l 1----a 1----a

80 -'-- -..J ~- - - - - - -- - - --f'lf - - -..J L------ ' -- -..J L------ ' -- -..J

19 13 1950 1973 1990 1995 2003 2007 2010 2014

8 UK 8 France 8 Japan 8 US • Gennany 8 Holland

Sources: Calculated rrom Maddison ( 1987: table A-23): Hirst Thompson. and Bromley (2009: 34): ©World Bank (2002c. 20050. 2009<. 20 ISe):
World Development Indicators Database (available at http1/[Link]-catalog): \/\brld 8arl< (20 ISe) \/\brld Development Indicator.
"Merchand s,, Trade (% or GOP)". av,,;1ablo at http1/[Link]/[Link]
304 Colin Hay

surpassed those experienced during the latter half of expenditure in OECD countries has only grown in
the nineteenth century. subsequent decades. For proponents of the hyperglo-
The data w ith respect to capital flows reveal a simi- balization thesis, this takes some explaining. Yet, for
lar pattern. Between 1870 and 1914, international cap- Rodrik, it is easily explained:
ital flows between the G7 economies averaged some
' ' W hat should we make of this? I will argue t hat the
4 per cent of GDP, peaking at around 6 per cent in
puzzle is solved by considering the importance of social
1914. Bet\veen 1914 and 1970, they declined to 1.5 per
insurance and t he role of government in providing cover
cent of GDP. Since 1970, they have charted a consist-
against external risk. Societies t hat expose themselves to
ent upward trajectory, rising to 3 per cent of GDP by
greater amounts of external risk demand (and receive) a
the early 1990s. Yet, they still have a long way to go to
larger government role as shelter from t he vicissit udes of
reach the figures of the period prior to the Pirst World
global markets. In the context of the advanced industrial
War (Lewis 1981; Turner 1981; Bairoch 1996: 184;
economies specifically, this translates into more generous
Hirst and Thompson 1999: 28 , figure 2.4). In quantita-
social programmes. Hence the conclusion that the social
tive, if not perhaps in qualitative terms, the current
welfare state is the flip side of t he open economy! ' '
period is not unprecedented or, indeed, unsurpassed.
In sum, then, ,vhile from the mid 1970s there has (1997: 53)
been an increasing trend towards financial and trade
integration (albeit one sent into at least a temporary Rodrik"s is, of course, not the only possible explana-
period of reverse with the advent of the Global Pi- tion. Equally plausible, is that high levels of state
nancial C risis), economic openness ,vas greater in the expenditure are a result of success in international
years before the First World War than in the 1990s. markets-a consequence rather than a condition
of the globalization of the domestic economy. Yet,
whichever way round it is, economic openness ,vould
'Stateness' and openness seem far more compatible with state expenditure than
Arguably more significant, and certainly less con- is conventionally assumed.
tested, are recent attempts to reproduce and update
David Cameron·s (1978) groundbreaking study of The determinants of [Link] foreign
the covariance of economic openness and public ex- direct investment
penditure. Such findings are particularly damaging to
the globalization orthodoxy which predicts a strong As we saw in an earlier section, orthodox accounts of
inverse correlation bet\veen 'stateness' and open- globalization tend to make a series of clear and more
ness-high levels of state expenditure (expressed as a or less plausible assumptions about the preferences
proportion of GDP) should suppress the globalization and interests of mobile investors. Such assumptions,
of the domestic economy. as ,vas shown, are directly responsible for the influen-
W hat Cameron demonstrated in a now famous tial thesis that states enhance their locational competi-
paper published in the American Political Science Review tiveness to foreign direct investors by offering targeted
in 1978, was a strong positive correlation bet\veen investment incentives, eliminating labour market ri-
trade openness and social protection, funded through gidities, reducing the burden of corporate taxation,
taxation. In other ,vords, international economic in- and ensuring that environmental regulations are not
tegrat ion seemed to go hand in hand w ith compre- overly restrictive. Alter the assumptions, and a rather
hensive social provision. Moreover, openness was also different set of inferences (and consequent policy im-
positively correlated ,vith social democratic tenure, plications) follow.
union po,ver, and the degree of regulation of the la- Recent scholarship, which examines the revealed
bour market. preferences of foreign direct investors as exhibited
More damaging still to the orthodox globalization in actual investment decisions (rather than making
thesis has been more recent research in this vein by, a priori assumptions about such preferences), chal-
among others, Peter Katzen stein ( 1985), Dani Rodrik lenges the globalizat ion orthodoxy in important re-
(1996, 1997), and Geoffrey Garrett (1998b). What spects. Particularly notable here, is the work of Cooke
these authors demonstrate is that the strength of and Noble on the geographical distribution of for-
the correlation between openness and government eign direct invest ment from the US ( 1998). This work
 Globalization's Impact on States 305

contains a number of significant findings, each trou- Thus, skill and productivity differences bet\veen
bling co proponents of the hyperglobalizacion thesis. economies make a significant and additional
difference in anraccing inward investment.
I. le is direct market access and / or proximity co
Comparing the UK and Germany; Cooke and
market chat is the single greatest determinant
Noble explain, 'both have comparable average
of investment location. ln\vard direct investors
years of education ... but substantially different
value, above all else, geographical proximity co
average hourly compensation coses ... Germany's
a subst antial and affl uent market. Consequently;
unmeasured skill base has garnered about $2.3
the greatest single predictor of the volume
billion more in US PD! per industry than has the
of inward investment is total income \vithin a
UK's unmeasured skill base ... high-skill-high-
1,000-kilometre radius of the investment site.
wage countries chat further enhance skill levels
2. Once access and proximity co market are can anracc significant additional US foreign direct
controlled for, educational anainmenc/ skill level invest ment' (1998: 602).
is the most critical factor in determining the
4 . The conclusion is clear, 'countries need not
anracciveness of an industrial relations regime.
encourage ... \vage restraint, since high hourly
Yee, the effect is complex and not as anticipated.
compensation coses do not reduce ... foreign
As Cooke and Noble note, 'with respect co
direct investment, provided these coses are
investments in lo\v-skill-lo\v-wage countries,
matched by higher skills and productivity'
the evidence indicates chat US multinational
(1998: 602).
corpo rat ions have sought co match lo\ver\vork-
force educat ion \vith t he limited labour skill T his, and ocher evidence like it (see e .g. Dunning
requirements of operations that gee located in 1988; Traxler and Woicech 2000; Swank 2002; Wilen-
low-skill-lo\v-wage countries ...[A]cross low- sky 2002), seriously challenge both the assumptions
wage-low-skill countries US multinationals on \Vhich the hyperglobalizacion thesis is predicated
invest more in locations w ith the lo\vesc and the predictions it makes about exit from highly
levels of education' (1998: 596). This much is regulated labour market regimes w ith generous \Vel-
consistent w ith the hyperglobalization thesis. fare states funded out of taxation receipts.
Yee, 'in contrast, it appears that, in matching the
high labour skills requirements of operations
located in high-skill-high-wage countries, US Globalization or 'triadization'
multinationals invest more in countries \vith both In the highly contentious political economy of globali-
higher average education levels and higher hourly zation, perhaps no issue is more controversial than the
compensation coses' (1998: 596). This reveals a geographical char acter of the process of international
globally segmented market for inward investment, economic integration chat we have w itnessed since
in \Vhich it is only developing countries chat the 1960s. le is, in particular, the challenge posed co the
are compelled co compete in terms of labour conventional \visdom by the recent work of arch glo-
coses. Investors, it would seem, are perfectly balization sceptics, Paul H irst and Grahame Thomp-
prepared co pay the price of the highly trained son ( 1996, 1999), that has provided the central focus
and appropriately skilled \Vorkforce chat (some) of an ention and controversy (see also Petrella 1996:
developed economies are capable of providing. 77-81; Allen and Thompson 1997; and, fora flavour of
3. Moreover, and in seeming confirmation of chis, the critical responses, Held and McGrew 2002: 38-57;
it is not just the quantity (duration or level of Perracon et al. 1997).
anainmenc) of education chat is important. Hirst and Thompson, along \Vith a growing cre-
T hough it is difficult co gauge empirically, the scendo of 'sceptics', have questioned the ext ent co
evidence strongly suppo rts the thesis that it is which the term globalization accurately characterizes
the quality and not the cost of skilled labour that both the panern of economic integration within the
is the key determinant of investment behaviour. international political economy today or the trajec-
Again, it would seem, cost (direct or indirect) is no tory of relations of economic integration and inter-
impediment co investment if the perceived reruril dependence since the 1960s. Rather than a process of
provides adequate compensation for chat cost. globalization, they suggest, a process of 'criadizacion'
306 Colin Hay

is and has been [Link] (1996: 2, 63-7). By triadiza- and, more recently, the decline in the size of the US
tion, they refer to the selective and uneven process of and European economies (relative to the world econ-
deepening economic integration bet\veen the 'triad' omy) due to their differential exposure to the Global
economies; and by the 'triad' economies they refer to Financial Crisis (and, of course, the eurozone crisis to
North America, South East Asia, and Europe. In short, which it gave rise).
some economies are more globalized than others and Moreover, in 1996, despite accounting for only 14.5
this must ultimately lead us to challenge the appropri- per cent of the world's population, these economies
ateness of the appellation 'globalization'. For a signifi- account ed for some t\vo-rhirds of global exports (Hirst
cant and rising proportion of international economic and Thompson 1999: 73). T his figure is only margin-
activity is conducted w ithin and between the triad ally lower than that for 1992 (70 per cent). Yet, it is
economies. T his is true of trade, foreign direct invest- significantly greater than that for either 1990 (64 per
ment, and finance. For H irst and Thompson, then, the cent), 1980 (55 per cent), or 1970 (61 per cent) (Hirst
developmental path of the international economy is and T hompson 1996: 69; Perrella 1996: 79). Finally, as
far more accurately characterized by pointing to the Riccardo Perrella notes, 'during the 1980s, the triad ac-
effects of two separate processes: counted for around four-fifths of all international capi-
tal flows ... [,vhile] the developing countries' share fell
1. A more general process of intra-regional
economic integration or 'regionalisarion' from 25 per cent in the 1970s to 19 per cent' (1996: 77).
How much damage this does to the globalization
(discussed in more detail presently).
thesis depends, to a considerable ext ent, on what one
2. A more specific process of inter-regional rakes that thesis to be. Indeed, arguably the debate is
economic integration dra,ving the triad
largely semantic (see also Scholre 2000: 14-20). Scep-
economies into an ever denser ,veb of complex
tics such as Hirst and Thompson and Perrella adopt
interdependencies. a rather more exacting definition of globalization, it
The appeal, and, indeed, much of the novelty, of seems, than many of the hyperglobalizarion theorists.
Hirst and Thompson's work when first published If, to count as evidence of globalization, processes
,vas its reliance on a substantial body of empirical have to be either genuinely global in scope or opera-
evidence. Until their contribution, the innumerable tive in unleashing such dynamics, then globalization
empirical assertions made in the literature on glo- poorly characterizes the condition and trajectory of
balization were largely unsubstantiated or defended the international economy If, on the other hand, glo-
only in a loose and anecdotal sense. Indeed, Hirst and balization means little more than economic openness
Thompson's iconoclastic claim ,vas that such asser- (as witnessed by greater volumes of trade, invest-
tions sim ply could nor be defended evidentially In so ment, and financial flo,vs as a share of global GDP),
doing, they pointed to the far from global character then globalization is certainly under way bur it is un-
of flo,vs of trade, investment, and finance. Space does likely to have the effects so frequently attributed to it.
nor permit a detailed exploration of this evidence. This is the challenge that the sceptics present-one, it
Suffice it to say that, between 1991 and 1996, over would seem, that is largely borne our by the empirical
60 per cent of all flows of foreign direct investment evidence.
,vere conducted ,virhin and between the triad econo-
mies and, in 1995, over 75 percent of the accumulated
Globalization or regionalization?
stock of foreign direct investment ,vas located w ithin
the same triad bloc (Hirst and Thompson 1999: 71; see Hirst and Thompson's (1996) emphasis, particularly in
also Brewer and Young 1998: 58-60). Bet\veen 1980 the first edition of Globalization in Question, is on the
and 1991, the figures were almost identical (Hirst and process of 'triadizarion' and hence on a series of inter-re-
Thompson 1996: 68). The triadic concentration in the gional processes of economic integration linking North
accumulated stock of outward foreign direct invest- America, East Asia, and Europe. Yet, as indicated above,
ment is even more pronounced (see Figure 11.7). T he this rests on the prior identification of a more general
more recent trends do show a sizeable gro,vth in in- tendency ro,vards regionalizarion (within, and, indeed,
bound foreign direct investment destined for the less beyond, the triad economies). In fact, in the second and
developed economies. Yet this is largely due to a com- subsequent editions of [Link] in Question, the sig-
bination of the opening up of the Chinese economy nificance of triadizarion is somewhat downplayed as, on
 Globalization's Impact on States 307

Figure 11.7 The triad's share of inward and outward FDI stock

The triad's share of inward FDI stock (share of total)

100.0~--------------------------
90.0+-- - - - - - - - - - - - - - - - - - - - - - - - - -
80.01----====--==~-=::::::::::::--------
70.01- - - - - - - - - - - - --=-....::::::::::::====--
60.0~---------------------------
50.0 ~- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

t===:5~-::::_~=><~~=:~===~=
40.30.00
20.0~- - - - - - - - - - - - - - -.:::::::::::..=====---
10.0,- -===-- - ~========- - - - -- -
0.0+-----~.----~.----~----~.
1990 1995 2005 ~ ----~---~
2010 2014 2000

- - [Link] - - EU - - JAP. HK TW. SW - - Total triad

The triad's share of outward FDI stock (share of total)

100.0~------------------------------
90.01===============:::=::;:::::===
80.
70.0~-----------------------------
60.0+-- - - - - - - - - - - - - - - - - - - - - - - - - - - -
50.0+-- - - - - - - - - - - - - - - - - - - - - - - - - - - -
40.0 +----=========~=-~::::::::::===========---
---
30.0 1-------------------=:::,,....-======- -
20.0 ~-----------------------------
10.0~--=~-----------=======--
0.0+------~.-----~
1990 1995 . -----.~----~.-----~.----~.
2005 2010 2014 2000

- - N .Am --EU - - JAP. HK TW, SW - - Total triad

Note: Because of limitations in the data. Pacific Asia he~ refers only to Japan. Hong Kong. Taiwan. and Singaporl!.
Sources: Calculated rrom Brewer and Yoong (1998: Tables 2.7 and 2.8): UNCTAD (20 ISb) "FOi inward S10Ck. by region and ecooomy. 1990-2014".
World Investment Report 2015: UNCTAD (201Sb) "FDl outwa..dS10ck. by region and economy. 1990-2014". IM:>rld Investment Report 2015.
(both are available at hUp1/[Link]/en/PageslDIAEIWorld%20f"""stment%20Rcport/[Link]).
308 Colin Hay

the basis of a re-examination and updating of the availa- Such findings have been replicated for foreign direct
ble evidence, regionalization now emerges as the perva- investment flo,vs to and from Europe (Kleinknecht
sive tendency within the international economy (Hirst and ter Wengel 1998; Hay 2004).
and Thompson 1999: esp. 99-103; Hirst, Thompson, Finally, so-called gravity models have been used to
and Bromley 2009). Here, again, Hirst and Thompson's examine the sensitivity of trade and, indeed, foreign di-
,vork provides a po,verful statement of a developing rect investment to distance for a number of European
consensus among sceptical voices. countries (Hay 2003 , 2004; see Box 11.5 for further de-
Yet, it is the ,vork of Jeffrey Frankel that is perhaps tails). A gravity model predicts that trade (and/ or for-
the most comprehensive on the question of region- eign direct inve.s tment) w ill decay exponentially ,vith
alization (see, especially, Frankel 1997, 1998). On the distance. In an era of globalization, in ,vhich transpor-
basis of a detailed examination of the empirical record, tation costs have been diminished and barriers to trade
he demonstrates that, with respect to trade, any ten- eliminated, we ,vould expect to see the decreasing sensi-
dency to globalization or even inter-regional economic tivity of trade (and investment) to distance. Accordingly,
integration has been swamped by the rapid growth in the gravity model should become ever less effective in
intra-regional integration. Due largely to the gro,vth of predicting patterns of trade (and investment).
preferential trading arrangements at the regional level, Yet, unremarkably perhaps given the evidence dis-
intra-regional trade accounts for an ever-gro,ving share cussed later, far from showing a consistent pattern
of global economic activity, suggesting once again that of globalizat ion since the 1960s, the gravity model
globalization is in fact an increasingly inaccurate charac- becomes an ever better fit to the data. This demon-
terization of both the process of economic integration strates, once again, a pervasive regionalization ten-
and the resulting pattern of economic interdependen- dency in ,vhich trade and investment become more
cies. Figure 11.8 updates Frankel's data, showing the not less sensitive to geographical distance. European
continuing contribution of intra-regional trade to total economies, it ,vould seem, have experienced a consist-
trade for many of the world's leading economies. ent and ongoing process of deglobalization since the

Figure I 1.8 Intra-regional trade as a proportion of t otal trade

0.4
-
0.3

0.2 - - ~:::::::::;;:::::;-
i- - - - - - - - - - - - - - - - : :::::,__,:::~-
0.1 i--:::::::
.....--,,....---=::;:::
_ =-- ----=:::::::;:::
_ =-..-L- - - - - - - - - - - -
-
0+-~~~~~~-,,~~~~~~~...-.~~~~~~-...-.~~~~~~-..-.~~~~~~-.--.~~~

1960 1970 1980 1990 2000 2010

I --+- East Asia • ·• • · EU- 12 ----- Mercusor --+- NAFTA -+- Africa

N>te: EU- 12 = Belgiim (and Luxemboorg). Denmark. France. Germany. Greece. Ireland. Italy. Netherl>nds Portugal. Spain. and United lulgdom: NAfTA
=[Link]. and Mexico: East Asia= ASEAN-6 (Brunei. Indonesia. Malaysia. Philippines. Singapore.. and Thailand). plus China. Hong Kong. Japan. South
Korea. and Taiwan; MERCOSUR = Argentina Brazil. Paraguay. and Urug,,ay. APEC = East Asia- I I. plus NAfTA-3. plus Australia Chile. Now Zealand. and
Papua New Guinea: Andean Community = Bolivia Columbia. Ecuador. Peru. and Venezuela
Soun:tt Calculated fr-om Frankel ( 1997: 22-4):WlD \Nord Trade Statistics (various years). Such findings have been replica~d ror foreign direct
investment nows to and from [Link] (Hay 2004: Kleinkn~t and ter '-"kngel 1998).
 Globalization's Impact on States 309

BOX 11.5 Figure I 1.9 Intra-regional concentration ratios for trade

Gravity Models: The Sensitivity of 5

4.5 -I--....- - - - - - - - - - - - - - - -
Trade to Distance 4 -1--=:::,..~....
~--------------
Wrthin a gravity model, trade is assumed to be associated
3.5 +---=--,,------------

2l ~~
positively with t he 'size' of t he economtes between which it is
t ransacted (usually expressed in [Link] of their respective
shares of global GDP) and to be associated negatively with 1.5 ~ _,, ....
the distance between them. Geographically proximate - ___-..::::!!:::,,,,.[Link].....
O.~ .1-...:::..-==c:..... -------
countries will trade more with one another than those O.J-- -. -- -.- - -
. - -. -- - . - - - - -.- ~.
separated by great distances. just as those economies w hich 1962 1965 1970 1975 1980 1985 1990 1994
account for a substantial share of global GDP will tend to Year
t rade more with one another than smalle.r economies.
- - EU-12 ....... NAFTA -.- East Asia
The basic model can be written as an equation of the ....... APEC -e- Africa
following form: 18 ,
16
r, =a + b log(GDP/ P,) + c log(GDP/ P) - d log(D,) + ...
log
14
//
/ '/ -
where r, is the volume of trade between countries i and j : 12
/ /
GD~/~ is the GDP per cap~a of country,: D, is the distance 10
8
- . //
between country I and j. / ........ ./ ---..//
6 .....
.. / ~

4
2
0 . '
.
1960s as the process of European economic integra· 1962 1965 1970 1975 1980 1985 1990 1994
tion has accelerated. As Pigure 11.9 ,vould suggest, Year
similar tendencies would appear to be undenvay in ....... Andean Commun~ ....... MERCOSUR
many, if perhaps not all, regions w ithin the interna·
Nole: EU-12 = Belgium (and [Link]<embourg). Denmark. Franco.
tional economy. As this suggests, globalization is a ten· Germany. Grocce. lroland. Italy. Netherlands. Po..tugal. [Link] United
dency that has, in the majority of cases, been swamped Kingdom: NAfTA = US, Canada. and Mexico: East Asia = ASEAN-6
in recent decades by a regionalizing counter-tendency (Bn-,ei. Indonesia Malaysia. Philippines. Singapore. and Thailand}. plus
China. Hong Kong. japan. South Koroa. and Taiwan: MERCOSUR =
Argentina. Brazil. Paragt,ay. and Uruguay: APEC = East Asia- I I. plus
Capital market integration and interest NAfTA-3. plus Australia. O,ile.. New [Link]. and Papua New Guinea:
Andean COOVT'[Link] = Bolivia. Columbia. Ecuador. Peru. and Vaiczuela.
rate convergence
Source: calrulated from Frankel (I997: Table 23).
T hus far, we have examined evidence principally relat·
ing to trade and foreign direct investment and it is im·
portant that ,ve now tur n our attention to the degree
of integration (or globalization) of financial markets. integrated capital market, a common international
It is o ften assumed that, even if the case against the rate of interest on short-term and long-term loans
globalization thesis is credible w ith respect to trade would emerge almost instantaneously; for fairly ob-
and foreign direct investment (for the reasons dis· vious reasons. All things being equal, borrowers ,viii
cussed above), the thesis is rather more robust ,vith seek out the lowest rate of interest available to them,
respect to financial markets and, moreover, that the ef· just as investors will seek the highest rate of return
fects of financial market integration on the autonomy (and, hence, int erest) on their investments.
of the nation state are most pronounced (see, for in· Yet, as numerous commentators have noted, and
stance, Cerny 1995, 1997). Yet, as we shall see, recent despite some controversy about which precise index
evidence casts some doubt on this claim, too. to use and what specific inferences to dra,v from such
The first surprising piece of empirical evidence evidence, interest rate differentials persist and sho,v
for proponents of the globalization thesis, is the ob· little sign of being eroded (Kasman and Pigott 1988;
served failure of interest rates to converge. In a fully Prankel 1991; Osler 1991; Bayoumi and Rose 1993;
3 IO Colin Hay

and for a revie\v, Simmons 1999: 57-61). Moreover, as correlat ions sho\v no consistent pattern of decline
Robert Zevin has argued, 'every available descriptor in the 1980s and 1990s (Feldstein and Horioka 1980;
of financial markets in the late nineteenth and early Feldstein 1983; Bayoumi 1990; Feldstein and Bacchetta
t\ventieth century suggests that they were more fully 1991; Tesar 1991; Epstein 1996). As Hirst and T homp-
integrated than they were before or have been since' son suggest, this 'testifies to the continued robust rela-
(1992: 51-2). tive autonomy of financial systems' (1999: 38). Indeed,
This is an im portant observat ion that again dra\vs the 'savings retention coefficient ' (the proportion of
our attention to the less than totally unprecedented incremental savings invested domestically) remains at
character of the contemporary phase of economic 67 per cent for the period 1991-5 (Obstfeld 1993).
integration. This is relatively easily accounted for. T his, again, is an important finding and one that
Quite simply, capital market integration occurred (to continues to trouble international macroeconomists,
the ext ent that it did occur) far earlier than most have for whom it remains something of a paradox even
assumed. This is why there is no clear contemporary after more than two decades. T he 'Feldstein-Horioka
evidence of (further) interest rate convergence. As puzzle·, as it has come to be kno\vn, has given rise to an
Hirst and Thompson suggest, 'the coming of the elec- extensive literature and considerable controversy (for
tronic telegraph system after 1870 in effect established reviews of \vhich, see Obstfeld and Rogoff 1996: 161-4;
more or less instantaneous information communica- Bayoum i 1997: 30-53; R0dseth 2000: 163-4). Unre-
tions between all the major international financial and markably, a series of challenges have been mounted to
business centres' (1999: 37-8). The shift in the 1870s the notion that it provides clear evidence of the lack
from ships to telegraph \Vas far more significant than of integration of capital markets. Yet, as we shall see,
that from telegraph to telematics in the 1970s. Finally, none of these caveats is ultimately devastating.
it might be noted that the Global Financial Crisis and
I. As a number of commentators have noted,
the substantial increase in perceived investor risk that
aggregate indices of national investment do
it has generated has led to a significant (if perhaps
not discriminate bet\veen public and private
temporary) further divergence in international inter-
investment (see, for instance, Bayoumi 1990).
est rates, arguably reinforcing the distinctiveness of
Savings-investment correlations might, then,
national financial markets.
mask a decrease in the savings-investment
correlation for private investors. This is certainly
Savings and investment correlations: the accurate, yet the effect is likely to be relatively
'Feldstein-Horioka' puzzle small; the essential paradox remains.

Interest rate convergence is not the only index of fi- 2. If, as H irst and T hompson conjecture, there were
nancial globalization. In a perfectly integrated capital 'no significant difference bet\veen the return
market, \Ve \Vould expect t o see a clear divergence on financial investment' from one economy
of domestic savings and invest ment rat es. In a sys- to the next, 'then we might not expect a large
tem of closed and bounded national economies, redistribution of capital relative to savings' (1999:
these should correlat e absolutely (or very closely). 40). Consequently, domestic savings-investment
In a genuinely open economy (a perfectly integrat ed relations might prove persistent. Under such
capital market), we would expect the correlat ion to conditions, \Ve would be wrong to infer low
break down as investors become genu inely global, levels of capital market integration. Yet, though
sourcing their investments from around the world. plausible, the empirical evidence does not bear
Indeed, we \vould expect the correlat ion to fall to this out. For, although there was, indeed, some
zero (Feldst ein and Horioka 1980; see also Bayoum i convergence in returns on investment in the
1997: 17-19). Consequently, a persistent correlation 1970s between the developed economies, this has
bet\veen domest ic savings and invest ment levels pro- given \Vay to subsequent divergence (Hirst and
vides strong evidence of a lack of integration of capi- Thompson 1999: 41 ). Again, the paradox remains.
tal markets. 3. In gro\ving desperation, perhaps, international
W hat do we observe? T he evidence is again rela- macroeconomists have increasingly turned to
tively unambiguous. As a large number of com- hypothetical solut ions to the paradox. If, they
mentators have noted, national savings-investment suggest, the global economy had experienced a
 Globalization's Impact on States 3I I

productivity shock, we would expect profitability in the conventional literature about the preferences
to increase. This ,vould result, in turn, in an of economic act ors (principally invest ors) and the
increased propensity for both savings and actual preferences of such actors (as revealed in their
investment. Under such conditions, the anticipated conduct). We have seen how the behaviour of foreign
correlation between savings and investment direct investors is rather different in 'reality' from that
would be spurious, at least in terms of the degree attributed to them in much of the existing literature.
of capital market integration-as it would be The same is equally true of financial investors, how-
generated in the absence of domestic investment ever more intuitively plausible the conventional as-
being sourced from domestic savings (Ghosh 1995; sumptions may seem for such actors.
R0dseth 2000: 164). This hypothetical solution to Here, the recent ,vork of Layna Mosley (2003)
the paradox is both plausible and ingenious, but it is especially notable. Mosley's ,vork is unique in the
is significantly compromised by the fact that such exist ing literature in its attempt to gauge empirically
productivity shocks are both relatively rare and, both the expressed preferences of market participants
generally, short-term in nature. The persistent through an extensive series of interviews with fund
and seemingly long-term character of domestic managers, and the [Link] preferences of market par-
savings-investment correlations (first observed in ticipants through a detailed stat istical analysis of their
1980) ,vould suggest that a productivity shock is investment decisions. Her conclusions are extremely
simply not responsible for the Feldstein-Horioka im portant and do some considerable damage to the
paradox. conventional wisdom.
4. Rather more plausibly, it has been suggested Though the liberalization of financial markets
that economists have tended to dra,v the wrong has certainly increased the speed, severity, and sig-
(or, at least, an exaggerated) inference from the nificance of investors' reactions to government policy
persistence of domestic savings-investment (as the Global Financial Crisis attests ,veil), capital
correlations. For, while in a perfectly integrated market participants appear far less discriminating or
textbook capital market we might expect such well informed in their political risk assessment than
correlations to tend to zero, in a real-world capital is conventionally assumed. For advanced capitalist
market, even a highly integrated one, we ,vould democracies, the range of government policies con-
expect some correlation to persist (Watson 2001). sidered by market participants in making investment
Real markets are not perfectly integrated, nor are decisions is, in fact, extremely lim ited. As Mosley
they likely to become so. W hether this provides explains:
the elusive 'solution' to the 'Feldstein-Horioka
' ' Governments are pressured strongly to satisfy
puzzle' or merely demonstrates further the financial market preferences in terms of overall inflation
dubious nature of the premises which continue to and government budget deficit levels but retain domestic
inform influential understandings of globalization policymaking latitude in other areas. The means by which
(as reflected in unrealistic expectations about the governments achieve macropolicy outcomes, and the
degree of capital mobility we should expect to see) nature of government policies in other areas, do not
is a moot po int. concern financial market participants ... [G]overnments
Finally, although we still lack the time-series data retain a significant amount of policy autonomy and
to confirm this, savings-investment correlations are political accountability. If, for domestic reasons, they
almost bound to have intensified since the advent of prefer to retain traditional social democratic policies, for
the Global Financial Crisis as investors have grown instance, t hey are quite able to do so. ' '
nervous of holdings and stakes denominated in other
(2003: 305)
cu rrencies.
This is a most im po rtant finding, all the more so
given the methodological rigour of the study from
The expressed and exhibited
which it derives. It would seem to support Duane
preferences offinancia.1market actors
Swank's o,vn important findings. On the basis of a de-
A persistent theme of this chapter has been the dispar- tailed statist ic analysis, he demonstrates the existence
ity bet\veen the a priori theoretical assumptions made of a complex interaction effect between welfare state
3 I2 Colin Hay

expenditure, on the one hand, and international capi- Conclusions

tal mobility, on the other. W hen budgets are in bal-
ance, capital market liberalization produces a positive What are we to make of this? Well, the overall pic-
effect on ,velfare effort; when budgets are moderately ture that emerges is rather more complex than that
in deficit there is no effect; and when budget deficits we began w ith. While the economic processes usually
exceed 10 per cent of GDP, the effect becomes nega- labelled 'globalization' have led to a greater degree of
tive. As Swank concludes, contrary to the prevailing economic integration than at any point in the post-war
consensus: period, cur rent levels of economic interdependence
are neither unprecedented historically nor perhaps as
' ' rises in international capital openness, or exposure
genuinely 'global' as is invariably assumed.
to international capital mar kets, do not exert significant
T he impact of such processes on the capacity, au-
downward pressure o n the welfare state at moderate
tonomy, and sovereignty of the state is also complex.
levels of budget imbalance [and] when budget deficits
Por, while there is certainly some evidence of state
don't exist, some expansio n of social protection is possible
retrenchment in the decades prior to the crisis, espe-
even in the context of international capital mobility. ' '
cially once one controls for the higher demands placed
(2002: 94) upon welfare states by demographic change and
higher rates of unemployment, there ,vould seem to
It would seem that the constraints im posed by be no clear evidence that globalization is the driver of
financial market integration on domestic political this retrenchment-and that retrenchment has since
autonomy, certainly in the advanced capitalist econo- been reversed. Indeed, the evidence reviewed in the
m ies, have been grossly exaggerated. Yet, the picture previous section ,vould strongly suggest that the con-
is not an undifferentiated one. Por developing coun- straints imposed upon domestic political autonomy
tries, as Mosley again demonstrates in considerable by heightened levels of economic integration (w ith
det ail, financial market participants are rather more respect to trade, foreign direct investment, or finance)
exact ing in the demands they make of government have been both exaggerated and misunderstood. Yet,
policy and correspondingly more severe in the con- this does not mean that globalization has had no im-
straints they impose. Additionally, the Global Pinan- pact on the nation state-merely, that ,ve need to be
cial Crisis will almost certainly result in a cert ain extremely cautious in attributing state retrenchment
recalibration of financial market actors' risk assess- to globalization.
ment and evaluation. Rather more plausible, and sadly overlooked in
much of the existing literature, is the impact of ideas
about globalization. If it is conceded that policymak-
ers increasingly view the world they face through a
KEY POINTS series of assumptions about globalizat ion, then their
conduct in office is likely to be shaped significantly by
• [Link] is little evidence of systematic state retrenchment those assumptions. Arguably, then, the idea of globali-
at the hands of globalization. zation may be more influential in shaping the devel-
• [Link] is little evidence of systematic convergence or dual opmental trajectory of the nation state today than the
convergence bei'M?en models or varieties of capitalism reality of globalization (see Box 11.6).
under conditions of globalization. T his raises an important po int about democratic
• The impact of globalization of the nation state suggested legitimacy and accountability today. Por, it is all very
in the hyperglobalization thesis has been challenged well to argue that state autonomy remains essentially
empirically by a numbe.r of authors. They have pointed to intact in an era of globalization. But, if such auton-
the less than unprecedented degree of integration of the omy is perceived to have been eroded by all credible
global economy today. the pos~ive correlation between
candidates for political office, then such autonomy
openness and public spending, the factors which attract
is purely hypothetical. While globalization may not
foreign direct investors, the regional and triadic character
have narro,ved the field of democratic choice itself,
of [Link] trade and investment, the far from
ful ly integrated character of financial markets, and the
the idea of globalization may well have done so-as
investment behaviour of financial market actors. parties across the political spectrum converge on a set
of prudent economic and social policies designed to
 Globalization's Impact on States 3 I3

BOX 11.6

T he Ro le of Ideas about administration foolish enough to discount or test the mobility

of capital by retaining high levels of corporate taxation will be
Globa lization: Tax Competition
rudely awakened from its state of blissful ignorance or
between States
stubborn scepticism by a rapid exodus of capital (Scenario 2).
Conside.r tax competition between states. The In a world of perfect capital mobility. then, the learning curve is
[Link] thesis suggests that in a globalized context likely to prove [Link] steep. indeed.
[Link] by the heightened mobility of capital, vicious
Were we to assume instead that we inhabit a world in which the
compet~ion between states will serve to drive down the level of mobility of cap~al is much exaggerated and in which cap~al has a
corporate taxation. Accordingly. any failure on the part of a state dear vested interest in threatening exit, the scenario unfolds
to render its corporate taxation levels competitive in
rathe.r differently. Here, fiscal author~ies lulled into accepting the
comparative terms. through tax cuts, will result in a punitive hyperglobalization thesis by the (ultimately hollow) exit threats
depreciation in net revenue as capital exercises its mobilityto
of cap~al will cut rates of corporate tax, (falsely) attributing the
exit. If governments believe the thesis to be true. or find it to
lack of capital flight to their competitive taxation regime
their advantage to present it as true, they will act in a manne.r (Scenario 3). Yet. [Link] they to resist this logic by calling capital's
consistent with its predictions, [Link] contributing to an
bluff. they might retain substantial taxation receipts without fear
aggregate depreciation in corporate taxati~whethe.r they
of cap~al flight (Scenario 4). The crucial point. however. is that
are right to do so or not. while pol~icians believe the hyperglobalization thesis-and act
To elaborate, were we to envisage a (hypothetical) scenario in upon it-we cannot differentiate between Scenario I (in which
which the hyperglobalization thesis were accurate, the free the thesis is true) and Scenario 3 (in which it is false). Though in
mobil~y of capital would. indeed, serve to establish tax Scenario I, globalization is a genuine constraint on political
competition between fiscal autho rities seeking to retain autonomy and in Scenario 3 it is [Link] a social construction, the
existing investment levels while enticing mobile foreign direct outcomes are the same. As this suggests, it is kleas about
investors to relocate (see Figure I 1.10). The price of any globalization rather than globalization per se that affects political
attempt to buck the trend is immediate cap~al flight with and economic outcomes. This makes the role of international
consequent effects on budget revenue. In such a scenario. any institutions in the dissemination of ideas about globalization
rational administration aware (or assuming itsetf to be aware) especially significant
of the mobility of capital will cut corporate taxes with the
Source: Adapted from Hay (2002b: 20 2-4).
effect that no exit will be observed (Scenario I). Any

Figure I 1. 10 The idea of globalization

HypergSoba.1aation thesis true:

Y: corpor-atetax cuts;
hit- taxation leads to
capi,al ft;gt,, no exit ([Link] I)
Does the goverrnent
believe the hyperglobal1zatJOn
thesis (or seek advantage from
presenting ,t as true)~
N: no corporate tax cuts:
exrt (Scenano 2)

HypergSoba.1rzation thesis false:

hit- taxation leads to the Y: corpor-atetax cuts;
hollow threat or
no exit ([Link] 3)
capi,al ft;gtrt Does the goverrnent
believe the hyperglobalizat1on
thesis (or seek advantage from
presenting ,t as true)~
N: no corporate tax cuts:
no exrt (Scenano 4)
3 14 Colin Hay

appease footloose multinational investors. Arguably, final point is perhaps the most troubling of all. It is cer-
this has much to do ,vith the ,videspread contempo- tainly tempting to dismiss globalization as a myth or
rary disaffection w ith liberal democratic regimes (see, as a process with minimal im pact upon the historical
for instance, Pharr and Putnam 2000; Hay 2007). De- capacities of the state. Yet, the problem of the lack of
mocracy is no less a casualty in such a scenario. This the political capacity t o deal ,vith urgent global prob-
makes the public scrutiny of influential assumptions lems in an effective and democrat ic ,vay remains. The
and ideas about globalization a most urgent political challenges ,ve face are essentially twofold:
priority It establishes, once again, the phenomenal im -
portance of the ongoing controversy that surrounds I. To find ways of designing effective and democratic
the question of globalization's im pact on the state. institutions of global governance capable of
O ne final point might also be noted. While there commanding political support and legitimacy.
is, in fact, little evidence for the thesis that the nation 2. To find ways of passing responsibility and, indeed,
state's capacity and autonomy has been significantly sovereignty from a system of nation states that still
eroded by vir tue of globalization, it is, nonetheless, provides the focus of political identification and
the case that globalization poses a series of prob- citizenship to such institutions.
lems for the nation state which it has never had the
capacity to deal w ith. We have seen, and are likely At the point at which we prove ourselves capable of
to continue to see, a proliferation of interlinked and responding to both of these challenges, we might le-
genuinely global political, economic, and, above all, gitimately begin to speak of a transcendence (if not
environmental problems requiring, for their resolu- perhaps a crisis) of the nation state. But that point is a
tion, effective institutions of global governance. This very, very long ,vay off.

8 QUESTIONS

I. Is there. or has [Link] been. a crisis of the nation state?

2. What is meant by the globalization of politics and has it occurred?

3. What mechanisms can be pointed to sugge sting a clear link between globalization and state retrenchment?

4. What are the key assumptions of the hyperglobalization thesis? Are they plausible?
5. Isglobalization an agent of convergence. dual convergence, [Link]. or continued diversrty?

6. How does the model of the 'tragedy of the commons' illuminate the problem of global [Link]?

7. Assess the evidence for state retrenchment.

8. What impact has globalization had on the development of the nation state?

9. Are the constraints on the autonomy and capacity of the nation state arising from globalization largely real or
imagined?
I0. How might the Global Financial Crisis se.r ve to change the relationship between the state and the process of
globalization?

- FURTHER READING

Cerny, P. G. (1 997), 'Paradoxes of the Competition State: The Dynamics of Political Globalization'. Government and
Opposition. 32/2: 25 1-74. The clearest exposition of the highly influential 'competition state' thesis.

Garrett. G. (2000b). 'Shrinking States? Globalization and National Autonomy'. in N . Woods (ed.). The fb~tJcal Economy of
GlobaJizatx>n (Basingstoke: Palgrave). A clear and comprehensive survey of the existing lite.r ature and supporting evidence
by an influential commentator:
 Globalization's Impact on States 3I5

Hall. P.A. and Soskice, D. (eds) (200 I). Varieties ofCDp,talism (Oxford: Oxford University Press). The definitive statement
of the 'varieties of capitalism' perspective linking globalization with a process of dual convergence.

Hay. C . and Wincott. D. (20 12), The Political Economy ofEuropean Welfare uipiralism (Basingstoke: Palgrave). An alternative
to Hall and Soskice's influential 'varieties of capitalism' [Link] which seeks to chart the complex relationship between
globalization, European economic integration. and ~Ifare state trajectories in Europe before and during the crisis.

Hirst P.. Thompson. G., and Bromley. S. (2009). Globalization in Question. 3rd edn (Cambridge: Pol~y Press). The defin~ive
statement of the case against the globalization orthodoxy.

Jessop. B. (2002), The Future ofthe CDpira/ist State (Cambridge: Polity Press). The product of almost two decades of schol·
arship. this is perhaps the single most important work on the condition of the state today. Though dense and at times
drfficult it rewards dose reading.

Mosley. L. (2003). Global CDpitaJ and National Governments (Cambridge: Cambridge University Press). An exceptionally
important recent addition to the existing literature, and a comprehensive reappraisal of the conventional wisdom about
the domestic political constraints issuing from financial markets.

Ohmae, K. ( 1995). The End ofthe Natx>n State: The Rise of Reg,onaJ Economies (New York: Free Press). Though widely dis·
cred~ed, still the core exponent and defender of the hyperglobalization thesi~

Weiss. L. ( 1998). The Myth of the Pav,.,r/ess State: Go,,eming the Economy in o Global Era (Cambridge: Polity Press). A clear
and accessible defence of the continued centrafrty and importance of the nation state in an era of globalization.

__
, WEBLINKS

Useful searchable data sources can be found at:

[Link]

[Link]

[Link] u/portal/ page/portal/euroscat/home

(;I ONLINE RESOURCE CENTRE

For additional [Link] and resources, please visit the Online Resource Centre at:
[Link]/ravenhillSe