An amazing must read paper from Prof. Dani Rodrik which looks at so many interesting and interconnected areas..Most Prof Rodrik papers are amazing stuff. I just wish we could read more of such papers which dont have an iota of stats/math but give so many ideas..
He says one of the common arguements these days is how technology is leading to break down of economic barriers. So the idea of nation/states is outdated. We instead need international organisation structures, regulators etc:
The nation state has few friends these days. It is roundly viewed as an archaic construct that is at odds with 21st century realities. It has neither much relevance nor much power, analysts say. Increasingly, it is non-governmental organizations, global corporate social responsibility, or global governance on which pundits place their faith to achieve public purpose and social goals. It is common to portray national politicians as the sole beneficiary of the nation state, on which their privileges and lofty status depend.
The assault on the nation state transcends traditional political divisions, and is one of the few things that unite economic liberals and socialists. “How may the economic unity of Europe be guaranteed, while preserving complete freedom of cultural development to the peoples living there?” asked Leon Trotsky in 1934. The answer was to get rid of the nation state: “The solution to this question can be reached … by completely liberating productive forces from the fetters imposed upon them by the national state.”2 Trotsky’s answer sounds surprisingly modern in light of the euro zone’s current travails. It is one to which most neoclassical economists would subscribe.
The economics against nation states is that they lead to rise in transaction costs:
Meanwhile the economic case against the nation state is that it is itself the source of many of the transaction costs that block fuller global economic integration. This is not just because governments impose import tariffs, capital controls, visas, and other restrictions at the border that impede the global circulation of goods, money, and people. More fundamentally, it is because the multiplicity of sovereigns creates jurisdictional discontinuities and associated transaction costs. Differences in currencies, legal regimes, and regulatory practices are today the chief obstacles to a unified global economy. As overt trade barriers have come down, the relative importance of such transaction costs have grown. Import tariffs now constitute a tiny fraction of total trade costs. Anderson and van Wincoop (2004) estimate these costs to be a whopping 170 percent (in ad valorem terms) for advanced countries, an order of magnitude higher than import tariffs themselves..
To an economist, this is equivalent to leaving $100 bills on the sidewalk. Remove the jurisdictional discontinuities, the argument goes, and the world economy would reap large gains from trade, similar to the multilateral tariff liberalization experienced over the postwar period. So the global agenda is increasingly dominated by efforts to harmonize regulatory regimes, everything from sanitary and phytosanitary standards to financial regulations.
However Rodrik thinks we still need Nation states. The core logic is that given the heterogeneity around the world, nation states are the best way to govern as they understand local knowhow better:
Instead, I wish to develop a substantive argument for why robust nation states are actually beneficial, especially to the world economy. I want to show that the multiplicity of nation states adds rather than subtracts value.
My starting point is that markets require rules, and that global markets would require global rules. A truly borderless global economy, one in which economic activity is fully unmoored from its national base, would necessitate transnational rule-making institutions that match the global scale and scope of markets. But this would not be desirable, even if it were feasible. Market-supporting rules are non-unique. Experimentation and competition among diverse institutional arrangements therefore remain desirable. Moreover, communities differ in their needs and preferences with regard to institutional forms. And geography continues to limit the convergence in these needs and preferences.
He calls the pursuit of hyperglobalization as futile. Nation states have provided the institutions for the world economy to grow. And whenever we have pursued hyperglobaliation dreams, we have met with terrible accidents:
The nation state was the enabler of globalization, but also the ultimate obstacle to its deepening. Combining globalization with healthy domestic polities relied on managing this tension well. Veer too much in the direction of globalization, as in the 1920s, and we would erode the institutions underpinning markets. Veer too much in the direction of the state, as in the 1930s, and we would forfeit the benefits of international commerce.
From the 1980s on, the ideological balance took a decisive shift in favor of markets and against governments. The result internationally was an all-out push for what I have called “hyper-globalization” (Rodrik 2011) – the attempt to eliminate all transaction costs that hinder trade and capital flows. The World Trade Organization was the crowning achievement of this effort in the trade arena. Trade rules were now extended to services, agriculture, subsidies, intellectual property rights, sanitary and phyto-sanitary standards, and other types of what were previously considered to be domestic policies. In finance, freedom of capital mobility became the norm, rather than the exception, with regulators focusing on the global harmonization of financial regulations and standards. A majority of European Union members went the furthest of all, by first reducing exchange-rate movements amongst themselves, and ultimately adopting a single currency.
Hmmm.. Superb reasoning..
He says we need nation states for following four reasons:
It remains without saying that such emergent forms of global governance remain weak. But the real question is whether they can develop and become strong enough to sustain hyperglobalization and spur the emergence of truly global identities. I do not believe they can. I develop my argument in four steps: (1) market-supporting institutions are not unique; (2) communities differ in their needs and preferences with regard to institutional forms; (3) geographical distance limit the convergence in those needs and preferences; and (4) experimentation and competition among diverse institutional forms is desirable.
Econs are always interested in unifying economic activity across the nation, globe etc. But they do not really take other aspects into account. Economics badly needs doses of interdisciplinary research to give different perspectives..