Photo by Bloomberg/Getty


Why nation-states are good

The nation-state remains the best foundation for capitalism, and hyper-globalisation risks destroying it

by Dani Rodrik + BIO

Photo by Bloomberg/Getty

The populist revolt of our day reflects the deep rift that has opened between the worldview of the global intellectual and professional elites, and that of ordinary citizens. These two groups now live in parallel social worlds and orient themselves using different cognitive maps. Yet the intellectual consensus that brought us to this chasm remains intact. Proposed remedies among mainstream thought leaders rarely go beyond an invocation of the problem of inequality, and a bit more focus on compensating the losers.

But the problem lies deeper, in elites’ attachment to a globalist mindset that underplays and weakens the nation-state. Without a shift, we might find not only our open global economy, but also our liberal, democratic order swept away by the backlash wrought by the blind spots and excesses of this mindset.

Among the intelligentsia, the nation-state finds few advocates. Most often, it is regarded as ineffectual – morally irrelevant, or even reactionary – in the face of the challenges posed by globalisation. Economists and centrist politicians tend to view globalism’s recent setbacks as regrettable, fuelled by populist and nativist politicians who managed to capitalise on the grievances of those who feel they have been left behind and deserted by the globalist elites. Last October, the British prime minister Theresa May ignited an outcry when she disparaged the idea of global citizenship. ‘If you believe you’re a citizen of the world,’ she said, ‘you’re a citizen of nowhere.’

Markets need regulatory and legitimising institutions to thrive – consumer-safety rules, bank regulations, central banks, social insurance and so on. When it comes to providing the arrangements that markets rely on, the nation-state remains the only effective actor, the only game in town. Our elites’ and technocrats’ obsession with globalism weakens citizenship where it is most needed – at home – and makes it more difficult to achieve economic prosperity, financial stability, social inclusion and other desirable objectives. As we’ve all seen, elite globalism also opens political paths for Right-wing populists to hijack patriotism for destructive ends.

The globalist worldview is grounded in the argument that an interconnected world economy requires collective action at the global level. But this premise is largely false. The conventional picture of the world economy as a ‘global commons’ – one in which all nations would be driven to economic ruin unless they cooperate – is misleading. If economic policies fail, they most often do so for domestic not international reasons. Global governance remains crucial in some areas, for example climate change or health pandemics, where the provision of global public goods is essential. But in the economic sphere the best way in which nations can serve the global good is by putting their own economic house in order.

Historically, the nation-state has been closely associated with economic, social and political progress. It has curbed internecine violence, expanded networks of solidarity beyond the local, spurred mass markets and industrialisation, enabled the mobilisation of human and financial resources, and fostered the spread of representative political institutions. Failed nation-states usually bring economic decline and civil war. Among intellectuals, the nation-state’s fall from grace is in part a consequence of its achievements. For residents of stable and prosperous countries, the nation-state’s vital role has become easy to overlook.

But has the nation-state, as a territorially confined political entity, truly become a hindrance to the achievement of desirable economic and social outcomes in view of the globalisation revolution? Or does the nation-state remain indispensable to the achievement of those goals? In other words, is it possible to construct a more principled defence of the nation-state, one that goes beyond saying that it exists and that it has not withered away?

For many, the nation-state evokes nationalism, the extremes of which have meant war and death to millions. But a corrective is in order, to remember not just the ideological excesses of the ‘nation’ part, but also the transformative, historic role of the state component. As scholars of nationalism like to say, the state usually precedes and produces the nation, not the other way around. The best definition of the nation remains that of Abbé Sieyès, one of the theorists of the French Revolution: ‘What is a nation? A body of associates living under one common law, and represented by the same legislature.’ Ethno-nationalists, with their emphasis on race, ethnicity or religion as the basis of nation, have it backward. As the historian Mark Lilla at Columbia University put it recently: ‘A citizen, simply by virtue of being a citizen, is one of us.’

Robust nation-states are actually beneficial to the world economy. The multiplicity of nation-states adds rather than subtracts value.

A principled defence of the nation-state would start from the proposition that markets require rules. Markets are not self-creating, self-regulating, self-stabilising or self-legitimising, so they depend on non-market institutions. Anything beyond a simple exchange between neighbours requires investments in transportation, communications and logistics; enforcement of contracts, provision of information, and prevention of cheating; a stable and reliable medium of exchange; arrangements to bring distributional outcomes into conformity with social norms; and so on. Behind every functioning, sustainable market stands a wide range of institutions providing critical functions of regulation, redistribution, monetary and fiscal stability, and conflict management. These institutional functions have so far been provided largely by the nation-state.

Throughout the postwar period, not only did this not impede the development of global markets, it facilitated it in many ways. The guiding philosophy behind the Bretton Woods regime, which governed the world economy until the 1970s, was that nations – not only the advanced nations but also the newly independent ones – needed the policy space within which they could manage their economies and protect their social contracts. Capital controls, restricting the free flow of finance between countries, were viewed as an inherent element of the global financial system. Trade liberalisation remained limited to manufactured goods and to industrialised nations; when imports of textiles and clothing from low-cost countries threatened domestic social bargains by causing job losses in affected industries and regions, these, too, were carved out as special regimes.

Yet the postwar years saw historic growth in trade and investment, in no small part because Bretton Woods encouraged healthy domestic policy environments. Economic globalisation relied on the rules maintained by the major trading and financial centres. National monetary systems, central banks and financial regulatory practices served as cornerstones of financial globalisation. Domestic political bargains, more than GATT rules, sustained the openness that came to prevail. Prosperous communities within nation-states – major urban centres, suburbs and technology hubs – thrived precisely because they could rely on the institutional infrastructure established by national governments.

A truly global economy, in which economic activity is unmoored from its national base, would necessitate transnational rule-making institutions that match the global scale and scope of markets. But there are no such institutions.

Nor are market-supporting rules universal. The United States, Japan, individual European nations and all advanced societies are to varying degrees market societies, but all have also developed historically under different circumstances and institutional setups. These market societies feature divergent practices in labour markets, corporate governance, social welfare systems, and regulation. They all have generated comparable amounts of wealth under very different rules. There is no single institutional recipe for economic success. Yes, markets, incentives, property rights, stability and predictability are important. But they do not imply unique blueprints.

The institutions facilitating capitalism are malleable. History and contemporary reality make this clear. As the political theorist Roberto Mangabeira Unger has emphasised, there is no reason to think that the range of institutional divergence we observe in the world today exhausts all feasible possibilities. Desired institutional functions – aligning private incentives with social optimality, establishing macroeconomic stability, achieving social justice – can be generated in many different ways. The only limit is set by our imagination. There simply is no single best-practice set of institutions.

Institutional diversity among nations is as close as we can expect to a real-life laboratory for capitalism

Given the non-uniqueness of practices and institutions enabling capitalism, it’s not surprising that nation-states also resolve key social trade-offs differently. The world does not agree on how to balance equality against opportunity, economic security against innovation, health and environmental risks against technological innovation, stability against dynamism, economic outcomes against social and cultural values, and many other consequences of institutional choice. Developing nations have different institutional requirements than rich nations. There are, in short, strong arguments against global institutional harmonisation.

Consider the question of how to regulate financial markets. Should commercial banking be separated from investment banking? Should there be a limit on the size of banks? Should there be deposit insurance and, if so, what should it cover? Should banks be allowed to trade on their own account? How much information should they reveal about their trades? Should executives’ compensation be set by directors, with no regulatory controls? What should the capital and liquidity requirements be? And so on.

A central trade-off here is between financial innovation and financial stability. A light approach to regulation will maximise the scope for financial innovation (the development of new financial products), while also increasing the likelihood of financial crises and crashes. Strong regulation will reduce the incidence and costs of crises, but raise the cost of finance while excluding many from its benefits. There is no global answer, no universal formula to apply to these questions. Different communities will find a range of answers to the optimal innovation-stability trade-off. A global solution might have the virtue of reducing transaction costs in finance, but it would incur significant other costs from being out of sync with local realities and preferences. At the moment, financial regulation faces this very conundrum: banks are pushing for common global rules, and domestic legislatures and policymakers are resisting.

Finally, since there is no fixed, ideal shape for institutions, and diversity is the rule rather than the exception, a divided global polity presents an additional advantage. It enables experimentation, competition among institutional forms, and learning from others. To be sure, trial and error can be costly when it comes to society’s rules. Still, institutional diversity among nations is as close as we can expect to a laboratory for capitalism in real life.

But wouldn’t a world with fewer global rules that restrained nation-states be one rife with protectionism? National governments are meant to look out for national interests, and rightly so. This does not exclude the possibility that constituents might act with enlightened self-interest, by taking into account the consequences of domestic action for others. But what happens when the welfare of local residents comes into conflict with the wellbeing of foreigners?

Luckily, in most economic areas – taxes, trade policy, financial stability, fiscal and monetary management – what makes sense from a global perspective also makes sense from a domestic perspective. Economics teaches that countries should maintain open economic borders, sound prudential regulation and full-employment policies, not because these are good for other countries, but because they serve to enlarge the domestic economic pie. The magic of comparative advantage is that international trade enlarges economic opportunities for each nation, regardless of its economic structure or level of development.

Of course, policy failures – for example, protectionism – do occur in all of these areas. But these reflect poor domestic governance, not a lack of cosmopolitanism. They result from the inability of policymakers to convince domestic constituencies of the benefits of superior choices, from political capture by powerful interests, or from unwillingness to make adjustments to ensure that most domestic groups do indeed benefit. What gives economic nationalism its deservedly bad name is not the pursuit of the national interest per se. It is the reliance on remedies that serve yet another group of special interests – protectionist lobbies or nativist groups.

When pushing for trade agreements, intellectual and financial elites often accuse their critics of neglecting the interests of the global economy or of poor nations. But hiding behind cosmopolitanism in such instances is a poor substitute for winning policy battles on their merits. And it devalues the currency of cosmopolitanism when we truly need it, as we do in the fight against global warming.

Institutional design comes with a fundamental trade-off. The diversity of social needs and preferences push governance down, to the local level. Meanwhile, the scale and scope of market integration push governance up, to the global level. An intermediate outcome, a world divided into diverse polities, is the best that we can do.

Insufficient appreciation of the value of nation-states leads to dead ends. We push markets beyond what their governance can support; or we set global rules that defy the underlying diversity of needs and preferences. We eviscerate the nation-state without compensating improvements in governance elsewhere. The failure to grasp that nation-states constitute the foundation of the capitalist order lies at the heart of both globalisation’s unaddressed iniquities, as well as the decline in the health of our democracies.