November 11, 2015    4 minute read

The Role of the State

   November 11, 2015    4 minute read

The Role of the State

In social sciences, state refers to a territorial region governed by sovereign bodies. The concept of state has to be distinguished from the concept of nation, the term nation referring to a group, a collective of people having common culture, common identity, and not necessarily linked or tied to any particular geographical location.

It is widely accepted that there is no such thing as a generic state. The literature on comparative capitalism, for example, distinguishes several different types of modern market economies. Within this literature there are several frameworks used for classification (by Streeck, Crouch, Boyer, Whitley etc), but the most popular one today is the framework proposed by Hall and Soskice, distinguishing between liberal market economies (LMEs), exemplified by such countries as UK, USA, Australia, New Zealand etc, and coordinated market economies (CMEs), frequently illustrated by the political economies of Japan, Germany, Sweden, Netherlands and others.

In recent times there has been a debate about the role of the state in modern economic governance. The question frequently asked is, whether states lose their market power due to challenges posed by globalization and increased interdependence between countries? Has the role of the state changed due to internationalization, and if it has changed then how it has altered? This essay will examine possible answers to these questions by, firstly discussing the traditional roles of the states in governance. After this the changes in the role of state in the context of increased interdependence will be analyzed. The concept of competition state will be discussed.

Traditional role of the state in economic governance

There is a number of functions that state might perform in economic governance. These will be discussed first.

One of the functions of the state is the law making function, with the state being the regulator and provider of the rules of economic exchange. Traditionally it has been the role of the state to provide substantive rules on the content of economic transactions such as labour laws, import controls etc. With increased privatization (a shift from public to private provision of goods and services in recent times) the function of the state it can be argued now shifted from being a direct provider of public goods to a regulator, controlling the processes of competition, looking to ensure fair market practices, regulating privatized industries, preventing monopolistic behaviour.

Another function of the state is in the economic domain, where the state governs the economy through fiscal and monetary policy. Thus, the states ultimately determine the rates of tax that their citizens pay. They are also engaging in public expenditure, managing thereby to some extent supply and demand in economy. As part of their monetary policy, they are also determining interest rates, thereby having impact on inflation and exchange rates.

Traditionally states also played a role in determining trading policy of the country, having an effect on the nature of goods passing through the borders, by managing imports and exports through a number of tariffs, quotas, production rules, capital controls, overseas promotion etc. States also matter for industrial policy of the country, providing incentives for Foreign Direct Investment (FDI) trough specific tax regimes, state aid and infrastructure investment.

Thus, as can be seen traditionally states have a central role in governance.

Globalization and the state

In recent years neoliberal argument had come to dominate political and economic debate. It is often associated with the work of Milton Friedman and Chicago School economists. It gained political following in late 1970s and 1980s in conjunction with Thatcher revolution in Britain and similar politics led by Reagan in USA. Neoliberals attack ‘big government’ and argue that the role of the state should be limited and should only be confined to preventing monopoly and expanding markets. Intervention of the state in economy is seen as undesirable and only acceptable in circumstances when absolutely necessary for markets to function properly.

In recent years with the rise of neoliberal argument and increased internationalization or even globalization of the world economy, the role and functions of the state are subject to debate. Globalists claim that globalization is causing the state to wither away, while sceptics argue that globalization is overstated and state remains essentially the same. Transformer position accepts that globalization is a new reality and has significant effect, but it also accepts that governments still have a role to play.

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