Linda Weiss

Globalization and the

Myth of the Powerless State

The new globalist orthodoxy posits the steady disintegration of national

economies and the demise of the state’s domestic power. This article, instead,
seeks to show why the modern notion of the powerless state, with its ac-
companying reports about the demise of national diversity, is fundamentally
misleading.1 It is undeniable that striking changes have taken place inside
nation-states in recent times. On the social policy front, there has been a de-
cisive move towards fiscal conservatism, whether from the Right or the Left,
with reforms to taxation systems and the trimming of social programmes.
In the economic sphere, governments have moved towards greater openness in
matters of trade, investment and finance. These changes are often represented
as prima facie evidence of the emergence of a new global ‘logic of capitalism’.
According to this logic, states are now virtually powerless to make real policy
choices; transnational markets and footloose corporations have so narrowly con-
strained policy options that more and more states are being forced to adopt
similar fiscal, economic and social policy regimes. Globalists therefore predict
3
convergence on neoliberalism as an increasing number of states adopt the
low-taxing, market-based ideals of the American model.2

In contrast to the new orthodoxy, I argue that the novelty, magnitude

and patterning of change in the world economy are insufficient to sup-
port the idea of a ‘transnational’ tendency: that is to say, the creation of
genuinely global markets in which locational and institutional—
and therefore national—constraints no longer matter. The changes are
consistent, however, with a highly ‘internationalized’ economy in which
economic integration is being advanced not only by corporations but
also by national governments. Proponents of globalization overstate
the extent and ‘novelty’ value of transnational movements; they also seri-
ously underrate the variety and adaptability of state capacities, which
build on historically framed national institutions. My argument there-
fore seeks not simply to highlight the empirical limits and counter-ten-
dencies to global integration. More importantly, it seeks to elucidate
theoretically what most of the literature has hitherto ignored: the adapt-
ability of states, their differential capacity, and the enhanced importance
of state power in the new international environment.

Given such variety, even where globalization has gone furthest, as in

finance, we continue to find important differentials in national levels of
savings and investment, the price of capital, and even the type of capital
inflows and outflows. This suggests that any significant ‘weakening’ in
the capacity for macroeconomic management—to the extent that this
has occurred—may owe at least as much to ‘domestic’ institutions as to
global processes.

Indeed, evidence from Japan and the East Asian nics (newly industrial-
ized countries) indicates that strong states—that is, those with fairly
firm control over socio-economic goal setting and robust domestic link-
ages—are often facilitating the changes identified as ‘globalization’.
Thus, rather than counterposing nation-state and global market as
antinomies, in certain important respects we find that ‘globalization’ is
often the by-product of states promoting the internationalization strate-
gies of their corporations, and sometimes in the process ‘internationaliz-
ing’ state capacity. However, because state capacities differ, so the ability
to exploit the opportunities of international economic change—rather
than simply succumb to its pressures—appears much more marked in
some countries than in others.

Since much—though by no means all—of my evidence of robust state

capacity is drawn from East Asia, it is important to clear away at the out-
set any possible misconceptions which recent events (notably, the Thai
currency crisis) may have encouraged. It needs to be emphasized that,

1 This article draws on my forthcoming book, The Myth of the Powerless State: Governing the
Economy in a Global Era, Polity Press, Cambridge 1998. I would like to thank William Cole-
man, Robert Wade, David Levi-Faur, John Ravenhill, James Richardson, John Hobson,
Robin Blackburn and participants at the anu seminar on ‘Globalization’ for their comments.
2 For an argument which is more open-ended than conventional accounts about the

impact of economic globalization, see Jonathan Perraton, David Goldblatt, David Held
and Anthony McGrew, ‘The Globalization of Economic Activity’, New Political Economy,
vol. 2, no. 2, 1997, pp. 257–77.
4
due to historical-geopolitical, institutional and policy differences, the
state capacity concept does not apply in any uniform sense to the coun-
tries of East Asia. Even at the most basic level there are major differences
between first- and second-generation nics in the number, quality and
organizational commitment of career bureaucrats who might be mobi-
lized to coordinate transformative projects. The relatively weaker de-
velopmental capabilities of states in the second-generation nics—that
is, the Southeast Asian economies, Malaysia, Indonesia, and Thailand—
have rendered these economies more vulnerable to external pressures
than their northern counterparts.3 In Thailand in the 1990s, for exam-
ple, the availability of easy finance coupled with the virtual absence
of investment guidelines contrasts dramatically with the highly co-
ordinated investment strategies put in place earlier by the Taiwanese,
Koreans, and Japanese at a similar stage of development. Whereas the
state-guided strategies of the latter generated high levels of investment
in strong-growth industries, the Thai’s uncoordinated approach has
encouraged intense speculative activity, leading to a frenzy of over-
investment in the property sector and ultimately contributing to the
recent currency crisis.4

If these points remind us that no region or country is ‘crisis-proof’,

they should not be taken to imply that the East Asian region as a
whole—as opposed to some parts of it—is inherently fragile.5 The
Western media has certainly helped to propagate this image, offering
up every crisis emanating from the region as somehow portending
the end of the ‘East Asian miracle’. While some short-term spillover
effects are unavoidable in a highly integrated system, such episodes
often tell us more about the relative weakness of domestic institutions
in particular countries than about the generalized strength of global-
ization pressures. Indeed, the evidence suggests that East Asia’s indus-
trial star is still on the rise, the region’s transformative potential far from
exhausted.6

Different Hypotheses of ‘Globalization’

While I have thus far alluded only to the ‘strong globalization’ hypothe-
sis, there are in fact at least three hypotheses that can be identified in the
literature:

3 For an informative study of north-south differences, see Richard Doner and G. Hawes

‘The Political Economy of Growth in Southeast and Northeast Asia’, in M. Dorraj, ed.,
The Changing Political Economy of the Third World, London 1995.
4 In response to the Thai crisis, a number of commentators have suggested that the real

challenge for Thailand is to ‘overhaul its bureaucracy’ which, among other things, would
mean increasing pay to improve its quality; see, for example, the Far Eastern Economic
Review, 29 May 1997, p. 15; 12 June 1997, p. 74.
5
The Thai crisis has led both Malaysian and Indonesian governments to issue lending
guidelines to local banks detailing how much they should spend on any one sector. See the
Economist, 12 April 1997, p. 76; Far Eastern Economic Review, 12 June 1997, p. 72. But
such measures proved too little and too late to head off the financial crisis.
6 Support for this view comes not only from strong export growth, but also from the

changing composition of exports as more countries shift manufacturing from lower to

higher value-added—for instance, from textiles to computers. See, for example, the
Asian Wall Street Journal, 16–17 May 1997; Far Eastern Economic Review, 19 June 1997,
p. 63.
5
i) Strong globalization; state power erosion.7
ii) Strong globalization; state power unchanged.8
iii) Weak globalization (strong internationalization); state power re-
duced in scope.9

The findings of various studies summarized in the following section

provide strong grounds for rejecting the first and second propositions in
favour of the ‘weak globalization’ thesis. However, I find no compelling
evidence for that part of the third proposition which claims that the
state’s role is now generally reduced to that of legitimating decisions ini-
tiated and implemented elsewhere. Instead, I propose a fourth proposi-
tion that stresses the differential capacities of states and how the world
economy, far from eliminating such differences, is more likely to sharpen
and further emphasize their salience for national prosperity:

iv) Weak globalization (strong internationalization); state power adapt-

ability and differentiation emphasized.

The full development of this proposition rests on more extensive com-

parative material than can be mustered here. Nevertheless, I shall pre-
sent a two-step argument, for the globalization thesis can be tackled
in two different ways. The more common strategy to date has been to
evaluate the extent of economic globalization: how far has it gone? What
are its limits and counter-tendencies? Most of the literature has adopted
this quantitative approach, often with considerable ability and finesse.
Though such assessments are indispensable, they are also controversial.
The controversy arises as much from the notorious inaccuracies of the
available data as from the different uses to which the data are put. For
these reasons, I shall confine this first part of my account to highlighting
some of the main findings, and where relevant, the pitfalls.10 The second
part of my argument is concerned with the impact of so-called global-
ization and its implications for the ability of states to pursue particular
policy goals.

I. Limits To Globalization
There is clearly some substance to the new globalist orthodoxy. The sheer
volume of cross-border flows, of products, people, capital and, above all,
of money is impossible to dispute. The important issue, however, turns
on the meaning of these flows. Do they point to a clear globalization ten-
dency? If such a tendency existed, one would expect to find evidence
indicating that the changes in question conformed to at least three crite-

7 See, for example, K. Ohmae, The Borderless World, New York 1990; R.B. Reich, The

Work of Nations, New York 1992; M. Horsman and A. Marshall, After the Nation State,
London 1994.
8
This position is best expressed by the Economist (for instance, 7 October 1995, pp. 15–16)
which holds that the state never had the (macroeconomic planning) powers it is said to
have lost, and that those powers it continues to have are still (regrettably) significant.
9 This position is exemplified by Paul Hirst and Graham Thompson, Globalization in

Question, Cambridge 1996.

10 A more extended analysis of the limits of globalization can be found in The Myth of the

Powerless State, ch. 6.

6
ria: i) novelty—is it unusual or without parallel, thus suggesting secular
growth rather than oscillation? ii) magnitude—how substantial is it in
size? and iii) distribution—to what extent is it world-wide in scope? I
summarize the main counter-evidence under these three headings.

The Novelty of Global Flows

Are contemporary international flows without historical precedent and

therefore posing perhaps novel challenges? Are the post-war trends on-
ward and upward? If the answer to both questions is in the affirmative,
then we have clear evidence of a globalization tendency, of secular growth
rather than oscillation. The answer, however, varies greatly according to
when one starts to measure the changes, hence the often conflicting
claims in the literature. At least two findings suggest room for caution.

First is the existence prior to 1913 of trade and capital flows not dissimi-
lar in size to flows in the recent post-war period. A number of studies
concur that the level of international openness was in certain respects no
less remarkable in earlier periods than today. Thus for a range of industri-
alized nations, the ratios of export trade to gdp in 1913 may actually
have exceeded the level reached in 1973. As late as 1991, the oecd
shares of exports in gdp (17.9 per cent) did not enormously outweigh
those estimated for 1913 (16 per cent).11 As with trade, the ratios of cap-
ital flows relative to output appear higher during the Gold Standard
period than even in the 1980s. Indeed, the level of financial openness
appears to have oscillated historically, reaching a high point in the classi-
cal period of the gold standard, up until 1914. From then up until the
1970s, the combination of depression and war, followed by the strong
political consensus for Keynesianism, helped to weaken financial inte-
gration and strengthen autonomy in policy matters. Distinctive features
no doubt exist for each period, yet it seems hard to disagree with the con-
clusion reached by Hirst and Thompson that ‘the present period is by no
means unprecedented’.12

The second finding is straightforward. The post-war trend towards

greater trade integration, especially marked since the 1960s has been
weakening. While world trade has grown much faster than output, this
growth has actually been slowing over the 1980s and 1990s, the ratio
declining from 1.65 in 1965–80 to 1.34 in 1980–90. Moreover, as
Robert Wade has argued, there are not only cyclical but also structural
reasons for expecting this slow-down to continue. Structurally, a gradual
shift away from manufacturing within the oecd will mean less rather
than more trade integration as the share of less trade-intensive services
rises.13 Thus, from the perspective of our first criterion, evidence of an
unprecedented tendency is not compelling.

11
See Andrew Glyn, ‘Social Democracy and Full Employment’, nlr 211, May-June
1995, p. 44.
12
For studies supporting such a conclusion, see among others the excellent chapter by
Robert Zevin, ‘Are World Financial Markets More Open?’, in Tariq Banuri and Juliet B.
Schor, eds, Financial Openness and National Autonomy, Oxford 1992.
13
This paragraph draws on Robert Wade, ‘Globalization and Its Limits: Reports of the
Death of the National Economy are Greatly Exaggerated’, in S. Berger and R. Dore, eds,
National Diversity and Global Capitalism, Ithaca 1996, p. 66.
7
The Magnitude of Global Integration

How big are the changes? The answer depends not simply on when one
starts measuring, but on what changes are measured. I will address this
point with two examples commonly offered up by globalists as evidence
of globalization: Foreign Direct Investment (fdi) and capital mobility.

FDI
Globalists identify the transnationalization of production as the driving
mechanism of economic integration, drawing readily on aggregate fdi
figures in support of that hypothesis. However, the use of aggregate fdi
figures as proxies for the so-called ‘globalization of production’ seriously
distorts reality.

If one simply takes the aggregate measure of fdi flows, as key accounts
have done, one might well conclude that manufacturing production is
becoming increasingly interconnected and thus ‘denationalized’ as multi-
national companies (mncs) relocate more and more of their production
process offshore.14 But this conclusion is highly misleading. Three prob-
lems, which have received surprisingly little attention, deserve high-
lighting in this context.

i) Preponderance of non-manufacturing in FDI: the major part of global fdi

is directed towards technically ‘non-productive’ assets or speculative
ventures and financial services—golf courses, real estate, hotels,
department stores, banking and insurance, and so on. Japanese fdi is
probably more manufacturing—that is, production—oriented than
most. So Japanese figures are especially revealing. For even the lead-
ing industrial investor nation in Asia—whose fdi in the Southeast is
in many ways driving the industrial integration of the region—puts
almost two-thirds of its world fdi (61.3 per cent) into non-manu-
facturing areas. These are 1995 figures, representing an increase of
16 per cent over the previous year.15

ii) Concentration within manufacturing FDI on existing ventures rather than

new activities: a considerable amount of manufacturing fdi is con-
centrated on merger and acquisition (m &a) activity. Throughout
the 1980s, cross-border m &a expenditure grew at the expense of
‘new establishment’ investment. Often more speculative and ‘arms
length’ in character, m &a investment often justly invokes the idea
of ‘paper entrepreneurship’. The large outward flows from Sweden
and the uk in the 1980s were mainly for ‘portfolio’ purchases of this
kind, involving mergers and acquisitions of existing assets.16 Over

14
See, for example, Barbara Stallings and Wolfgang Streeck, ‘Capitalisms in Conflict?
The United States, Europe, and Japan in the Post-Cold War World’, in B. Stallings, ed.,
Global Change, Regional Response, Cambridge 1995, p. 78.
15 Of course, foreign companies often borrow locally so that their investments go un-

noticed in official fdi—for instance, Japanese investors already in Thailand borrowing

from Japanese banks operating in Thailand—but this does not challenge the basic point
about fdi composition: such locally raised funds probably find their way more readily into
non-manufacturing ventures, especially construction, real estate markets, and financial
services.
16 Glyn, ‘Social Democracy and Full Employment’, p. 49.

8
 the same period, m &a ventures expanded dramatically in the United
States, rising from 67 to 80 per cent of inward activity.17 Given the
coincidence of heightened m &a activity in several industrialized
countries with a relatively sluggish industrial performance in the
1970s and 1980s, it may be more plausible to see in such investment
trends the signs of an embattled productive system than of a grow-
ing global economy.

iii) Sharp decline of FDI as a proportion of total long-term investment flows:

another perspective on fdi can be gained by noting that it consti-
tutes both a relatively small and declining form of investment.
Simply put, overall fdi has been steadily dwarfed by ‘portfolio’
investment—various arms-length investments, including bonds
and mutual funds. In the ten years up to 1991– 92, total fdi de-
clined from 21 to 18 per cent of total long-term transfers from the
thirteen major oecd countries. By contrast, portfolio flows rose 28
per cent to account for half of all long-term capital transfers.18

Taking a more disaggregated approach to the investment figures, we can

therefore see why fdi does not automatically extend economic linkages,
especially in those areas of multinational economic activity that might
have a direct bearing on state policies. If the level of fdi is indicative of
a globalization tendency at work in the sphere of production, present
trends do not point in that direction.

A more realistic indication of the extent to which the ‘national’ economy

is being outflanked by transnational linkages can be gained by measur-
ing inflows and outflows of fdi as a percentage of gross domestic in-
vestment. By this standard, the rates of fdi are actually quite modest.
With certain notable exceptions—for instance, Britain and Sweden—
gross domestic investment in Europe exceeds total fdi, both outbound
and inbound, by at least 90 per cent.19

Capital Mobility
Globalists assume that the world economy is now so integrated that the
constraints of location and of institutional frameworks are increasingly
irrelevant; that corporations—whether satisfied or disgruntled with a
particular national environment—can simply take a ‘random walk’ in
the world market, escaping the confines of any one nation-state. It is this
footloose quality of mncs—above all the threat of exit—that is seen to
pose the greatest threat to territorially constituted forms of governance.
The reality, however, is at odds with this vision. For, as many studies
report, the number of genuinely transnational companies is rather small.

17 Hirst and Thompson, Globalization in Question, p. 72. Has m & a activity slowed in the
1990s, in keeping with the popular view that the United States economy is booming?
18 From the point of view of both sustainable world growth and the effectiveness of

domestic policy, this imbalance is far from a desirable trend. Compared with fdi which
is more difficult to withdraw at short notice, large flows of portfolio capital have the
potential to destabilize domestic policy, as seen in the Mexican crisis precipitated by
the non-renewal of bonds. By contrast, these distinctions have been more readily appreci-
ated in East Asia where tighter controls have maintained short-term flows at a relatively
low level.
19 Glyn, ‘Social Democracy and Full Employment’, pp. 48–9, Table 2.

9
On virtually all the important criteria—share of assets, ownership, man-
agement, employment, the location of r &d—‘the importance of a home
base remains the rule, not the exception’.20

Conventional wisdom nevertheless tells us that cost-reduction is the

driving force compelling mncs toward a footloose career, and that new
transport and information technology liberates and encourages mncs to
exploit low-cost production sites, resulting in a globalization of produc-
tion. Yet, if cost-reduction were the driving force behind the mobile
mnc, we would expect to find most, or at least a very sizeable chunk of
fdi going to the developing countries. However, the evidence firmly
contradicts that expectation. As of 1991, a good 81 per cent of world
stock of fdi was located in the high-wage—and relatively high-tax—
countries: principally the us, followed by the uk, Germany, and Canada.
Moreover, this figure represents an increase of 12 points since 1967.
Indeed the stock of fdi in the uk and the us exceeds the stock in Asia and
the entire South.

Such figures underline the point that mncs do not by and large invest
where wages and taxes are lowest. Why not? Three considerations seem
relevant. First, new technologies place a premium on fixed costs (equip-
ment, machinery and so on), while reducing the importance of variable
costs (such as wages and raw materials). While certain types of labour—
especially knowledge-intensive labour—tend to be treated increasingly
as a fixed cost, the general effect of this overall transformation is to
reduce the cost savings to be gained by moving to low-income sites.
Second, new production methods emphasize the growing importance of
physical proximity between producers and suppliers—especially in non-
assembly operations. These methods privilege local supplier networks,
thus driving a trend towards the constitution of regional, not global,
sourcing networks. A third factor, underscoring the critical importance
of a home base, is the advantage firms derive from domestic linkages:
national institutional frameworks which enmesh business in support
relationships with trade associations, training and financial institutions,
and national and local governments. In sustaining high-wage economies,
one of the most important of these support systems is the relationship
between government and business, which underpins the national inno-
vation system. Being generally exclusive rather than open to all, support
relationships of this kind constitute a competitive advantage.21

These considerations suggest that the advantages of maintaining a firm

‘home’ or regional base may be stronger than ever, perhaps for most com-
panies outweighing those to be gained from ‘going global’. It would
therefore appear that not only the incidence but also the advantages of
mobility have been overstated. But the case against a strong globaliza-
tion tendency does not rest here. We turn next to evidence concerning
how the changes are distributed.
20
Yao-Su Hu, ‘Global or Stateless Corporations are National Firms with International
Operations’, California Management Review, Winter 1992; Hirst and Thompson, Global-
ization in Question; Winfried Ruigrok and Rob van Tulder, The Logic of International
Restructuring, London 1995.
21
This argument is developed in a comparison of state capabilities and state-industry rela-
tions in Sweden, Germany, Japan and the East Asian nics in The Myth of the Powerless State.
10
The Distribution of Trade and Investment

Up to this point, my objective has been to show that the novelty and the
magnitude of change has been overplayed. I have not sought to deny the
existence of a more integrated world economy, a fact which I broadly
acknowledge. My concern here is to draw attention to the way trade and
investment are distributed. Three trends are inconsistent with a global-
ization tendency.

i) The national bases of production

First, even if we accept that national economies are more integrated
through trade and investment flows than in the recent past, it appears
that in all but the smallest economies, trade constitutes quite a small
share of gdp, with exports accounting for 12 per cent or less of gdp in
Japan, the us and the ec. This means that in the main industrialized
economies around 90 per cent of production is still undertaken for the
domestic market. The national bases of production—and, as we saw, for
investment—therefore seem as pronounced as ever.22

ii) North-South divisions

A second pattern runs counter to the idea of a globalizing tendency.
Whereas globalization predicts more even diffusion between North and
South, in fact world trade, production and investment remain highly
concentrated in the oecd—that is, in the rich North. Over the 1970–89
period, the North’s share of trade grew from 81 per cent to 84 per cent—
though the decline of the South’s share in world exports masks their
changing composition, with largely negative growth of primary product
exports, and a rising share of manufactured exports. Investment has
followed a similar pattern, with around 90 per cent going to the North
over the same period.

iii) Regionalization
Finally, this predominantly Northern trade and investment is itself
becoming more geographically concentrated in intra-regional patterns.
For example, intra-European trade now accounts for some 62 per cent of
its total export trade. Intra-regional trade within the American region—
the us, Canada and Mexico—increased between 1980 and 1992 from 68
per cent to 79 per cent of total us-Japan and us-eu trade. Intra-regional
trade has also become the dominant trend in Asia—China, asean, Japan
and the nics—as the region has steadily enhanced its importance as
export market and production site for Japan and the nics. Intra-Asian
trade in the period 1986–92 rose from 32.4 to 47.7 per cent of total
exports, thus reversing the traditional dominance of trade with the us.
In short, trade within Asia has been growing more rapidly than trade
between Asia and the us.

A similar story can be told for investment. In Asia, especially since the
1985 Plaza Accord, investment-driven economic interdependence has
dramatically increased, Japan having now replaced the us as Asia’s pri-
mary source of fdi. In 1980, Japan’s cumulative investment in the rest of

22
Data for this and the following paragraph are drawn from Wade, ‘Globalization and its
Limits’, pp. 66-7.
11
Asia was worth little more than half as much as America’s, at $9.8 bil-
lion.23 By 1990, it was worth around 30 per cent more, at $41.8 billion.
This development has also boosted intra-regional trade and fostered the
development of regional production networks.

The us, Europe and Japan are not simply regional traders. However, cur-
rent trade patterns do make it clear that intra-regional trade is increas-
ingly important for the Big Three. Exports within North America, Asia,
and Europe rose from 31 per cent of total world exports in 1980 to 43 per
cent in 1992. Thus, overall, trade within the three regions has grown to
overshadow trade among its members (us-Japan, us-eu, Japan-eu).24

Compelling evidence for a strong globalization tendency has thus far

been wanting. In some respects, indeed, counter-tendencies seem more
apparent. If we turn to the finance sector, however, the reality of a global
market seems unassailable.

Since formal removal of the gold standard in 1971 and subsequent liber-
alization of exchange controls, international capital flows have reached
truly spectacular levels. Whichever way we look, it is hard to escape
the reality of global money markets where enormous sums are traded
daily. This is the ‘casino’ face of capitalism, unleashed by national
governments which now appear powerless to contain its destabilizing
effects. It is this change which has given most life to the idea and reality
of ‘globalization’.

However, there is evidence of national diversity even in money markets.

First, the price of capital has not converged. While studies disagree on
whether real interest rates in different national markets continue to
diverge, the price differential for both loan and equity capital remains
considerable.25 Second, whereas globalization implies equalization,
marked differences in savings and investment rates persist. For example,
in 1992, the ratio of savings to gdp in eleven countries ranged from 0.5
to 25 per cent. In the lowest band (0.5-2 per cent) sat the us, the uk,
Australia and Sweden; Germany and Austria occupied the middle band
(10–15 per cent); and in the highest band (20–25 per cent) were Japan,
Taiwan and Korea. The differentials in national investment rates tend to
parallel those for savings. In 1992, investment as a percentage of gdp
ranged from around 15–36 per cent, with the us, the uk, Australia and
Sweden in the lowest band (15–19 per cent), Germany, Austria and
Taiwan in the middle (22–25 per cent), and Japan and Korea in the high-
est (31–36 per cent).26

This strong correlation between savings and investment rates has been
interpreted to mean that countries do not draw freely on other countries’

23 See James Fallows, Looking at the Sun, New York 1994, p. 265.
24 Stallings and Streeck, ‘Capitalisms in Conflict?’, p. 73.
25 For references to this dispute, see Wade, ‘Globalization and its Limits’, p. 75. It should

also be noted here that even in the major industrial economies, such as Germany, govern-
ments continue to shape net price differentials in borrowed funds by instituting particular
tax regimes designed to favour certain kinds of investment.
26 Author’s calculations. For the comparative data for 1950–93, see The Myth of the

Powerless State, ch. 6.

12
savings. Robert Wade, however, reports a fall in the oecd savings-invest-
ment correlation from 75 per cent in the mid-1970s to 60 per cent in the
1980s. Financial markets, he suggests, have therefore become more inte-
grated, even if the mobility of capital is somewhat less than anticipated.27

Finally, ‘dualism’ rather than ‘transnationalism’ seems to distinguish the

operation of financial markets, most notably in the area of company
shares. These tend to be fixed to specific national stock markets, thus
contrasting dramatically with other parts of the financial market—for
example, the bond, currency and futures markets—which are genuinely
‘transnational’.

These qualifications to ‘global’ finance suggest that the relevance of

national institutions is far from insignificant. Thus, the conclusion to
the first part of my argument is that while national economies may in
some ways be highly integrated with one another, the result—with the
partial exception of money markets—is not so much a globalized world
(where national differences virtually disappear), but rather a more inter-
nationalized world (where national and regional differences remain sub-
stantial and national institutions remain significant). What does this
mean then for the power of governments to govern?

II. The Extent of Government Powerlessness

For many commentators, the power of global finance—especially of the
bond market—to undermine the monetary and fiscal policies of govern-
ments seems an incontrovertible truth. It is also viewed as the key con-
straining feature of a globalized economy: forcing all governments to
adopt similar neoliberal—deflationary, fiscally conservative—policies.
From this perspective, two conclusions follow. First, global money mar-
kets are all-powerful, forcing on governments fiscal conservatism —read
‘powerlessness’. Second, it matters not whether a state is weak or strong;
all national governments are impotent in the face of global finance. Here
I will examine each of these claims in turn.

The problem with the ‘powerlessness’ argument is not that it is wrong

about the new constraints on government capacity to make and imple-
ment policy. Rather, it is the assumption that such constraints are abso-
lute rather than relative, and that they represent ‘the end of state history’
rather than an evolving history of state adaptation to both external and
internal challenges. Three weaknesses in particular deserve highlighting.

Overstating Earlier State Powers

First, globalists tend to exaggerate state powers in the past in order to

claim feebleness in the present. Whilst financial globalization is com-
monly identified as the factor undermining governments’ ability to
practise effective macroeconomic management—of the Keynesian refla-
tionary variety—some commentators have recently questioned just how
effective Keynesian demand management ever was.28 While in theory
27 Wade, ‘Globalization and its Limits’, p. 74.
13
the fixed exchange rates guaranteed under the Bretton Woods system
provided a more stable policy-making environment, in reality there is
little compelling evidence that the state has ever had the sorts of powers
that allegedly it has been forced to relinquish.

What can be said, as Michael Mann has noted, is that while rapid growth
provided the fiscal surpluses to spend, expansionary macroeconomic
policies by post-war governments certainly seemed to produce results.
But more than two decades of troubled growth, recession, and falling
real income in the oecd have removed the fiscal surpluses.29 The point
to emphasize here is that many of the difficulties national policy-makers
have experienced with macroeconomic management—for example, bal-
ancing budgets, mobilizing sufficient revenue to fund programmes and
so on—have more to do with internal fiscal difficulties caused by the
recession, and little to do with ‘globalization’ tendencies.

From a wholly contemporary vantage point, it has appeared to many that

the pressures on governments to reduce the tax burden and restructure
the tax system are a result of increased openness: that is, ultra-mobile
capitalists who can shop around the globe for the best tax environment.
But from a much longer historical perspective, such pressures are in fact
the norm. As Michael Mann argues on the basis of earlier work:

at least since the thirteenth century, citizens have only consistently

agreed to pay a higher proportion of their incomes in taxes during
wartime. Their reluctance to stump up during the peaceful 1970s
and later, in a period of recession (when their real incomes were
stagnant or falling), is hardly surprising. It is the historical norm,
not the unique product of ‘postmodernity’ or ‘globalism’.30

The recent trend towards fiscal conservatism owes much to such domes-
tic pressures. Prolonged economic recession coupled with demographic
changes have required governments to raise more taxes to support the
increasing number of jobless and citizens retiring from productive work.
These pressures on the public purse are occurring at a time of stagnant
living standards. In such a context, and in the absence of national emer-
gency or external threat, electorates are increasingly reluctant to sustain
tax and spending increases. Prolonged peace, of course, provides only one
contextual variable for the new conservative agenda. Equally important
in explaining apparent policy convergence, at least after 1973, are the
common effects of the oil shocks, and the inflation they accelerated. As
Zevin concludes, rather than being the result of a sudden strengthening
of international interdependence, policy convergence can best be ex-
plained ‘by common responses to the inflation and perceived policy
errors of the 1970s’.31

28
See, for instance, The Economist, 17 October 1995, pp. 16–17.
29
For a fresh perspective on globalization tendencies more generally, see Michael Mann,
‘The Global Future of the Nation State’, paper presented at the Direction of Contem-
porary Capitalism Conference, Sussex, April 1996.
30
Ibid., p. 10. The contrasting ‘globalist’ argument can be found in Sven Steinmo,
‘The End of Redistribution? International Pressures and Domestic Tax Policy Choices’,
Challenge!, vol. 37, no. 6, 1994.
31
Zevin, ‘Are World Financial Markets More Open?’, p. 73.
14
To conclude that the difficulties faced by national policy makers are
largely attributable to prolonged recession and internal fiscal difficulties
is not to deny that some forms of global finance can play havoc with gov-
ernment policy. But the important point is that such ‘havoc’ might well
prove irrelevant in the context of renewed and sustained growth. In the
absence of sustained growth in the future, one can predict continuing
difficulties for governments, in turn continuing to nourish the idea of
all-powerful global finance.

Overstating Uniformity of State Response

The fact that not all governments follow neoliberal dictums surely
throws into question the central assumptions of the powerlessness argu-
ment. Far from acting in concordance with neoliberal prescriptions,
Germany (that is, formerly West Germany), which remained aloof from
Keynesianism for much of the post-war period, has recently sustained a
massive tax levy to help finance unification. Moreover, as the German
banks pursue increasingly conservative lending strategies, the German
federal government has stepped into the breach, acting as primary source
and coordinator of industrial investment in the East. In Japan, where the
importance of various government programmes to protect employment
has been evident at least since the two oil shocks, the unpopular con-
sumption tax has recently sustained a sharp rise, ostensibly to help sus-
tain further such programmes.

It is not only ‘strong’ states like Germany and Japan that have adapted
to their external environment, finding new ways to pursue their pro-
grammes.32 Weaker states too have displayed degrees of adaptive cap-
acity. Thus despite the pervasive rhetoric of ‘economic rationalism’
in Australian policy in recent years, the Labor government pursued an
expansionary policy, using deficit spending to fund welfare, labour mar-
ket, and industrial policies. It was not the power of money markets that
undermined these policies, but an electoral shift from Labor to the long-
excluded conservative coalition pursuing a neoliberal agenda.

Thus, if global finance has not exerted the uniformly debilitating effects
so often claimed for it, why then, we may ask, has the idea of the power-
less state seemed so persuasive to so many?

The Political Construction of Helplessness

Perhaps more than anything, it has been the rise of monetarist policies in
the 1980s, the emergence of fiscal retrenchment in bulwarks of social
democracy like Sweden, and the various speculative attacks on national
currencies that have led globalists to conclude that—while governments
may reign—the global economy rules.

32 By ‘strong’ state I mean not a coercive state but one with the organizational capacity for

governing industrial transformation. For a theoretical analysis of the domestic founda-

tions of state capacity as well as a discussion of its main varieties in Germany, Sweden, and
East Asia, see Weiss, The Myth of the Powerless State. For a more general discussion of strong
and weak states, see Linda Weiss and John M. Hobson, States and Economic Development,
Cambridge 1995.
15
It must be said, however, that political leaders—especially in the
English-speaking world dominated by neoliberal economic philoso-
phy—have themselves played a large part in contributing to this view of
government helplessness in the face of global trends. In canvassing sup-
port for policies lacking popular appeal, many oecd governments have
sought to ‘sell’ their policies of retrenchment to the electorate as being
somehow ‘forced’ on them by ‘global economic trends’ over which they
have no control.

While it is true that governments are responding to similar pressures in

the world economy—the long slump in world-wide demand, stagnant or
falling living standards—it is quite misleading to conclude that these
pressures derive solely or largely from ‘globalization’ tendencies, or that
the latter produces a uniformity of response.

III. Convergence Versus Varieties of

State Capacity
Globalists have not only overstated the degree of state powerlessness.
They have also over-generalized it. It is to this final weakness in the global-
ist argument that we now turn.

The variety of ‘national capitalisms’—continental European, East Asian,

Anglo-American—finds a parallel in the variety of ‘state capacities’ for
domestic adjustment strategies. In a different context, I will undertake
to show how the two may be linked. At issue here, however, is the vari-
ety, as opposed to the convergence, of state capabilities. Contrary to
globalist predictions, I propose that national differences are likely to
become more rather than less pronounced in a highly internationalized
environment, thus exacerbating rather than diminishing current differ-
ences between strong and weak states.

Yet even those who agree that ‘globalization’ has been highly exag-
gerated, nevertheless part company when considering the effects of
economic internationalization on state capacity. While some conclude
that the nation-state persists as an important locus of accumulation,
and that national—and international—actors and institutions continue
to structure economic space,33 others see state powers much more
circumscribed through the shedding and shifting of traditional re-
sponsibilities.

In a comprehensive recent study, Hirst and Thompson propose that

certain traditional powers are declining: ‘The power of nation states as
administrative and policy-making agencies has declined’ while the
state’s role as an economic manager is ‘lessening’. In this respect, they
appear to overlap with the globalists. In a more nuanced approach,
however, they insist on the enduring importance of the nation-state—
not in traditional terms as sovereign power or as economic manager, but

33 For two recent accounts respectively emphasizing these conclusions, see Wade ‘Global-

ization and its Limits’ and Mann ‘The Global Future of the Nation State’.
16
as the key source of legitimacy and the delegator of authority to powers
above and below the national level. Its territorial centrality and constitu-
tional legitimacy assure the nation-state a distinctive and continuing
role in an internationalized world economy, even as conventional sover-
eignty and economic capacities lessen: ‘Nation-states should be seen
no longer as “governing” powers... Nation-states are now simply one
class of powers and political agencies in a complex system of power
from world to local levels...’34 According to this interpretation of
current tendencies, state power is being reduced and redefined on a
broad scale, stripped to the basics, becoming even a shell of its former
self: still the supreme source of legitimacy and delegator of authority,
but exercizing no real capacity over its economic domain. The question
is whether one can identify any clear cases which might fit this con-
ception, and whether, having identified them, they represent not simply
a group of traditionally ‘weak’ states, but a group where real power shifts
are in train.

It is doubtful that the ‘basic state’ hypothesis fits even the eu experience,
which appears to inform so much of this kind of reasoning. In the
German case neither sub-national nor supranational agencies have sup-
planted the national state’s coordinating capacities. Indeed, in a number
of important respects—technological innovation and industrial in-
vestment—coordination has been growing, not declining, over the past
two decades.

Although Hirst and Thompson do insist on the state’s continuing

importance as the source of legitimacy and the rule of law, and would
therefore probably reject the ‘weak state’ characterization of their posi-
tion, it is hard to see what kind of substantive powers the state would
retain if it is no longer where the action is. If the state is increasingly
becoming merely the place from which law is promulgated, authority
delegated, powers devolved, then is that not simply a form of power
shrinkage by stealth—somewhat akin to the centrifugal tendencies of
feudalism? After all, their image of the evolving role of the state (as
Rechtsstaat) has much in common with the role envisaged by eighteenth-
century liberals: thus, not an eclipse of state power as some globalists are
led to claim, but certainly a very narrowly defined power.

This seems to me mistaken. For it is blind to state variety and to adapta-

tion. I, too, would emphasize change, but change is hardly novel to the
state. Adaptation is the very essence of the modern state by virtue of the
fact that it is embedded in a dynamic economic and inter-state system—
even the evolving forms of warfare must be seen in that context. My
argument is that nation-states will matter more rather than less—and,
though not elaborated here, this will advance rather than retard develop-
ment of the world economy. The argument is in three parts, emphasiz-
ing: i) state adaptation rather than decline of functions; ii) strong states
as facilitators not victims of internationalization; and iii) the emergence
of ‘catalytic’ states consolidating national and regional networks of trade
and investment.

34
Hirst and Thompson, Globalization in Question, p. 190.
17
Adaptiveness of the State

The whole issue of state capacity for economic adjustment has been mis-
leadingly cast as a choice between either Keynesian or neoliberal macro-
economic policies. Since they are both macroeconomic in focus, they are,
to say the least, a choice between highly restricted alternatives. Yet, as
the East Asian experience has shown, there is much more to governing
the economy than macroeconomic policy. Industrial policy continues to
play a large role in the Asian region. Even in the eu, where one would
most expect to find uniformity, industrial policy is far from dead. It has
simply changed its character. In Germany, for instance, the state still has
an important impact on corporate strategies, in particular industries,
through policies shaping strategic partnerships and innovation strate-
gies. More generally, the federal government provides support for ‘steady
state’ industries through the self-governing national system of inno-
vation. But it takes an active role where a steady state no longer applies:
at points of crisis management relating to issues of industrial decline,
or industry creation—as in the East—or competitive pressures for new
technology.

So used to treating states as ‘prisoners of a fixed genetic code’, to use

Ikenberry’s phrase,35 many commentators have also readily chorused the
‘death of industrial policy’ in Japan. Japan’s industrial bureaucrats in the
Ministry of International Trade and Industry (miti) have understandably
played a key role in cultivating this myth, largely to assuage American
complaints about ‘unfairness’ in trade disputes. Thus in recent years,
the foreign visitor to miti in Kasumigaseki in downtown Tokyo could
expect to be greeted with the solemn statement that miti’s main func-
tion in these times is to promote imports. Of course, if this were true,
one would have to wonder why miti’s renowned prowess in promoting
exports has not translated as smoothly to imports.

The key point is that miti no longer needs to promote exports, nor pre-
side over industry creation. It may have ‘lost’ many of its former policy
instruments—for instance, capital, foreign exchange and licensing con-
trols—as all the standard accounts repeatedly tell us, but this is by no
means the end of the story. For miti continues to create new tools, more
suited to the new environment and to the new tasks that this engenders:
supporting self-governing cartels in basic materials, promoting—and
diffusing—technological innovation through cooperative arrangements,
as well as facilitating the internationalization of corporate activity
through the use of Overseas Development Aid (oda) and other instru-
ments.

The tendency to expect institutional convergence and the failure to re-

cognize state variety are two sides of the same coin. Both are based on a
‘policy instrument’ theory of state capacity in which the relevant instru-
ments are somehow predetermined and fixed in character. Any diminu-
tion in the importance of a particular policy tool is taken as evidence of a
loss of state power.
35
G. John Ikenberry, ‘“Funk de Siècle”: Impasses of Western Industrial Society at
Century’s End’, Millennium, vol. 24, no. 1, 1995, p. 125.
18
But state capacity for adjustment strategy cannot be reduced to policy
instruments. The point to underline here is that it is not the state as such
which is enfeebled by economic integration. If anything, it is the efficacy
of specific policy instruments which is in question—in particular, macro-
economic adjustment strategies which focus almost exclusively on fiscal
and monetary policies. Both Keynesian and neoliberal policies are simi-
lar in this regard, implying a focus on short-term macroeconomic objec-
tives. In both cases, the instruments of intervention are predetermined;
there is little room for creative adjustment. This may, of course, account
for the greater appeal of macroeconomic policy in settings lacking strong
state traditions.

But the very opposite is the case with industrial—read also ‘technol-
ogy’—policy. In so far as industry itself is constantly changing, ‘indus-
trial policy’ must of necessity be creative. Hence it cannot be defined
once and for all in static, ‘snap-shot’ terms. So many commentators have
looked for 1960s-style Japanese industrial policy in the 1990s and
unsurprisingly concluded that it doesn’t exist! It must be stressed how-
ever that the very capacity for industrial policy is one that requires the state to
constantly adapt its tools and tasks.36

Institutional arrangements, domestic linkages and state capacity

The major point to emphasize is that the capacity for domestic adjust-
ment strategy does not stand or fall with macroeconomic capacity,
whether of the reflationary or deflationary variety. It rests, perhaps more
than ever, on industrial strategy, the ability of policy-making authorities
to mobilize savings and investment and to promote their deployment for
the generation of higher value-added activities.

This capacity for a coordinated and strategic response to economic

change depends, in turn, not so much on specific policy ‘instruments’ or
levels of ‘integration into the world economy’. The contrasting cases of
Singapore and Britain are testimony to this. Highly integrated Singapore
—whose per capita gdp now exceeds that of Britain—maintains strong
control over its savings and investment rates, thus engineering upward
mobility in the international system.37 By contrast, highly integrated
Britain, with little capacity for industrial adjustment, has failed to arrest
its downward slide in the international order—Britain’s traditional
strength in promoting its financial sector being part of that drama.
Thus, high integration does not necessarily mean the displacement of
‘national’ economies as the locus of accumulation, or the weakening of
national economic management.
36 As the French discovered, industrial policy based predominantly on the tools of state-

led industrial credit has proved vulnerable to financial liberalization. But the conclusion
from the French case should not be ‘the end of industrial policy’ in general, but rather the
need for new tools to meet the new transformative tasks set in motion by international
competition.
37 Singapore’s remarkably high savings rate (approximately 45 per cent of gdp) has been

achieved through a system of forced savings which channels compulsory contributions

from employers and employees to the Central Provident Fund (cpf). Singapore’s domi-
nant social security institution, the cpf contributed 30.1 per cent of gross national
savings in 1990. For a discussion of the government’s use of these funds in a scope
much broader than social security, see Garry Rodan, ed., Singapore Changes Guard, New
York 1993.
19
Rather, a state’s capacity for a coordinated and strategic response prim-
arily rests on institutional arrangements which make key decision-mak-
ers in the economic bureaucracies at once ‘autonomous’ and in some
important respects ‘accountable’. The character of ‘autonomy’ applies in
so far as decision-making is largely—though never perfectly—insulated
from clientelistic political pressures and the plurality of special interests
that in most liberal democracies tend to privilege the politics of dis-
tribution over the politics of growth. This is not to suggest that growth
and equity—or indeed welfare—are incompatible—quite the contrary,
as the German, Japanese and nic experiences would indicate. Rather, the
issue is one of national priorities. No less contentious in discussions of
East Asian bureaucracy, ‘accountability’ nevertheless can be said to apply
in so far as the effectiveness of industry policies depends on domestic
linkages: notably, institutionalized structures for the exchange of infor-
mation and for participation of the business groups whose involvement
is central to successful implementation.

In the East Asian Three—Japan, Korea and Taiwan—the institutional

arrangements in question concern the core economic bureaucracies as
well as the financial sector, together with a host of agencies for tech-
nology development and diffusion, and the acquisition and exchange of
industrial information. These arrangements which pull together state
and industry in close—albeit not tension-free—cooperation, have un-
derpinned rapid structural change and technological learning.38

Thus, rather than attributing the current proclivities for macroeconomic

adjustment to ‘globalization’, one should look in the first instance,
domestically, to a country’s governing institutions, and thus to differ-
ences in national orientations and capabilities. This leads to the second
strand of my argument as to why the state’s importance is increasing
rather than diminishing in ensuring more equitable participation in the
world economy.

The State as Victim or Facilitator of ‘Globalization’?

In failing to differentiate state capacities, global enthusiasts have been

blinded to an important possibility: that far from being victims, (strong)
states may well be facilitators (at times perhaps perpetrators) of so-
called ‘globalization’. Although those researching in the field have yet
to explore this possibility, there is sufficient evidence to suggest that
this would be a promising line of enquiry. Such evidence as exists for
Japan, Singapore, Korea, and Taiwan indicates that these states are act-
ing increasingly as catalysts for the ‘internationalization’ strategies of
corporate actors. As ‘catalytic’ states (see below), Japan and the nics
are taking the bull by the horns, providing a wide array of incentives
to finance overseas investment, promote technology alliances between
38 For individual studies of Japan and Korea, see respectively Chalmers Johnson, ‘The

Institutional Foundations of Japanese Industrial Policy’, California Management Review,

vol. 27, no. 4, 1995; and Peter Evans, Embedded Autonomy, Princeton, nj 1995. For a com-
parative analysis of Japan and the nics, see Weiss and Hobson, States and Economic
Development; on technological learning, see John A. Mathews, ‘An Emerging Silicon Valley
of the East: How Taiwan Created a Semiconductor Industry’, California Management
Review, vol. 39, no. 4, 1997.
20
national and foreign firms, and encourage regional relocation of produc-
tion networks.39

‘Internationalization’ in Japan has become a key strategy of its bureau-

cracy. Through agencies such as miti, Japan has sought to manage the
trade imbalance with the us by facilitating the off-shore relocation of
the production process in industries such as micro-electronics. Firms in
this sector have for some time been required by miti to submit plans
detailing how they plan to reduce their surplus over a five-year period,
and have been provided with state assistance in relocating.40 Whilst Jap-
anese companies were relatively slow in taking up miti’s inducements in
the pre-Plaza period, once the Plaza accord was in place and the value of
the yen soared, business response to the relocation project was dramatic.
The point, however, is not that miti alone achieved this outcome, or that
business was pushed by the state to relocate, or even that relocation was
simply a response to us pressure over trade imbalances. The key point is
that relocation was much more a publicly coordinated effort than an ad
hoc response by individual firms acting alone. It thus provides a useful
example of how a government itself may be a part of the ‘globalization’
process. While the latter is so often invoked as the enemy of state power,
here we see state capacity as a condition of successful internationalization.

An even larger point can be extracted from these observations: domesti-

cally strong states may be able to adapt, and to assist firms to adjust,
more effectively to the external environment by creatively adapting its
tools and ‘internationalizing’ state capabilities. The Japanese bureau-
cracy, for example, has creatively used oda as a means of externalizing its
domestic alliances. As a condition of oda disbursement, Japan has not
only stipulated the import of Japanese goods, but also required place-
ment of Japanese bureaucrats in government offices abroad—which also
opens opportunities for the teaching of Japanese-style economics to gov-
ernments open to advice—thus ensuring a more receptive environment
for its own governed-market model of economic management.41 Japan has
thereby externalized aspects of its model of government-business rela-
tions beyond the home territory as part of the integration process. While
institutional differences may thwart Japan-style developmentalism in
Southeast Asia, it is likely that through Japan’s influence many regional
neighbours will absorb at least some of the lessons of Japanese institutions
and industrial policy. Thus, writes Business Week, by early next century,
this sort of ‘missionary work’ could exert ‘a profound effect on world cap-
italism’. As a result, regionalism in this part of the world should con-
tinue to look quite different from neoclassical American-style capitalism.42

39
The importance of miti’s industrial policy role since the mid-1970s is contentious and
cannot be defended here. For the most recent attack on the Chalmers Johnson school, from
the Kent Calder stable, see Scott Callon, Divided Sun: MITI and the Breakdown of Japanese
High-Tech Industrial Policy, Stanford 1995. For a critique, see Weiss, The Myth of the
Powerless State.
40 See Warren Davis, ed., The Semiconductor Industry, Washington 1992.
41 For an intriguing account of the contests between Japanese and World Bank officials,

representing opposing models of capitalism, in the making of the controversial World

Bank report on East Asia , see Robert Wade, ‘Japan, the World Bank, and the Art of Para-
digm Maintenance: The East Asian Miracle in Political Perspective’, nlr 217, pp. 3–36.
42 Business Week, 12 December 1994, p. 30.

21
Pushing Firms Abroad
This conclusion contrasts sharply with the claim that ‘Unlike bureau-
crats... large multinational firms are not territorially bound in their
operations’ and that as a matter of course they ‘seek the lowest-cost capi-
tal, components, information, and even government support to be found
anywhere in the world’.43 If this were true, then Japanese capital should
surely have been much more responsive to the strong relocation opportu-
nities offered prior to the Plaza agreement and the strong yen. The
Japanese bureaucracy is not unique in its capacity to promote interna-
tionalization. Other institutionally strong states, Singapore for example,
which are able to provide corporate actors abroad with the develop-
mental infrastructure, inducements, and government-business relations
similar to those enjoyed at home, have also taken to promoting off-
shore relocation. As a consequence of growing affluence and diminishing
space, the Singaporean government has for several years been prodding
its local and mnc companies to move off-shore to Singaporean-created
industrial parks throughout the region—chiefly to China, Malaysia,
Hong Kong, Indonesia, and more recently Thailand and Vietnam. When
some years ago Dr Goh Keng-Swee, then Minister for Economics,
announced the project to shift more business operations offshore, few
Singaporean firms were willing to take the plunge. In Goh’s words, firms
have to be ‘pushed’.44

The ‘regionalization’ of the Singaporean economy has thus been much

more a directly top-down affair, with the government driving the pro-
cess. As well as initiating government-business visits to the region to
explore investment opportunities, the city-state also set up government-
to-government bodies—like the China-Singapore Joint Steering Coun-
cil—to facilitate relocation of Singaporean companies, and financed and
administered the industrial parks and infrastructural projects abroad.
Following upon the government’s provision of economic data, incen-
tives, capital infusions, investment guarantees and training programmes
to potential off-shore investors, a great string of industrial parks is now
under construction, stretching from Indonesia to China and Vietnam,
with some of them already linked to the island’s service industries. If suc-
cessful, they are most likely to advance regional integration not at the
expense of state power, but by its internationalization via reproduction
in extenso of the Singaporean model.

Parallel stories can be told for Korea and Taiwan where the state has not
only abolished many of the restrictions on outbound capital flows, but has
also moved directly ‘to facilitate the globalization strategies of national
firms’.45 At least three strategies can be distinguished. First, the state has
encouraged local firms to raise money in foreign capital markets in order
to finance their investment projects. Second, state agencies supplement
private overseas investment with oda to assist business expansion in
43
Kent Calder, ‘Japan’s Changing Role in Asia’, in The Japan Society, New York 1991,
p. 27.
44
As cited in the Far Eastern Economic Review collection, Japan in Asia, Hong Kong 1991,
pp. 116–17.
45
Chu, ‘The East Asian nics: A State-Led Path to the Developed World’, in Stallings,
Global Change, p. 221. Though the argument developed here is my own, discussion of the
three strategies that follow is based on Chu.
22
developing countries.46 Third, local firms receive strong financial sup-
port to enter joint ventures or technology partnerships with mncs
in strategic sectors—for instance, in aerospace, semiconductors, tele-
communications, and biotechnology. In Taiwan, for example, the state’s
financial support, according to Chu, underpinned every major merger
and take-over proposal of Taiwanese firms in the us high-tech indus-
tries.47 In Korea, similar concerns are reflected in the dramatic policy
reorientation of the Export-Import Bank, which has been authorized to
shift from export financing to the support of overseas investment.

Finally, one can add a fourth category of state-facilitated international-

ization. This involves direct assistance for firms to relocate operations
overseas, as in the case not only of Singapore, but of the Taiwanese gov-
ernment establishing an off-shore version of its Hsinchu Science Park at
Subic Bay in the Philippines.

This sort of evidence is hard to square with the favoured image of states
being passive victims of powerful ‘transnational’ forces. There is no
attempt to suggest that all states are thus engaged in facilitating corpo-
rate internationalization. The point is that some are—amongst them,
the most industrially dynamic and highly coordinated market econo-
mies—and that this attests to state adaptiveness and to the increasing
rather than diminishing salience of state capacity.

In the light of the East Asian experience, it appears that state capacity for
industrial transformation is alive and well, at least in those countries
where post-war development has occurred under the aegis of so-called
‘developmental states’.48 This implies that in spite of a more integrated
world economy, the high-performance industrial economies (Japan,
Korea, Taiwan, Singapore) are now in a relatively strong position—espe-
cially compared with the uncoordinated market economies of Anglo-
America—to mobilize the savings and investment required to sustain
growth and higher value-added job creation. One further implication is
that, as the advantages of coordinated market economies continue to
be highlighted, potential adaptors of the Asian model are more likely
to emerge—at least in the Asian region—than blind followers of the
neoliberal model of capitalism.

More generally, so-called ‘globalization’ must be seen as a politically

rather than a technologically induced phenomenon. It is political, firstly,
in the general sense that the opening up of capital markets has occurred
as a direct result of governments, either willingly or unwillingly, ceding
to pressure from financial interests. But it is political also in the more
specific sense discussed here: that a number of states are seeking directly
to facilitate rather than constrain the internationalization of corporate
activity in trade, investment, and production.
46
In this respect, the management of oda tends to follow Japanese practice, being tightly
linked to trade and investment and focused on infrastructure projects of significance to
the investment activities of national firms.
47
Chu, ‘The East Asian nics’.
48
The classic source for this concept is Chalmers Johnson, MITI and the Japanese Miracle,
Stanford 1982. See also the important new collection edited by Meredith Woo-Cum-
mings, The Developmental State (forthcoming).
23
The Emergence of ‘Catalytic’ States

The final strand in my argument is that we are witnessing changes in

state power; but these changes have to do not with the diminution but
with the reconstitution of power around the consolidation of domestic
and international linkages.

As macroeconomic tools appear to lose their efficacy, as external pres-

sures for homogenization of trade regimes increase, and as cross-border
flows of people and finance threaten the domestic base, a growing num-
ber of states are seeking to increase their control over the external envi-
ronment. State responses to these pressures have not been uniform. They
have varied according to political and institutional differences. But, in
general, one of two strategies has prevailed. Both involve building or
strengthening power alliances: ‘upwards’, via inter-state coalitions at the
regional and international level, and/or ‘downwards’, via state-business
alliances in the domestic market.

To the extent that states are seeking to adapt and reconstitute them-
selves in these ways, they can perhaps best be seen as ‘catalytic’ states, to
use Michael Lind’s term. Catalytic states seek to achieve their goals
less by relying on their own resources than by assuming a dominant
role in coalitions of states, transnational institutions, and private-sector
groups.

As a catalyst, this kind of state is one that seeks to be indispensable to the

success or direction of particular strategic coalitions while remaining
substantially independent from the other elements of the coalition,
whether they are other governments, firms, or even foreign and domestic
populations.49 Thus, far from relinquishing their distinctive goals and
identity, states are increasingly using collaborative power arrangements
to create more real control over their economies—and indeed over secu-
rity. As such, these new coalitions should be seen as gambits for building
rather than shedding state capacity.

There are many who would support the claim that we are witnessing the
end of an era marked by the ‘integral state’, with assured territorial con-
trol over the means of legitimacy, security, and production. But at a time
when serious analysis of ‘state power’ or the ‘state’s role’ has become aca-
demically unfashionable, there will undoubtedly be less support for
Lind’s assertion that in place of the integral state we are now witnessing
the rise of the catalytic state.

To what extent can the catalytic state be generalized? The first point to
make is that ‘catalytic’ is being contrasted with ‘integral’. It is a way of
highlighting the tendency of states to seek adaptation to new challenges
by forging or strengthening partnerships with other (state and non-state)
power actors, rather than going it alone. Consolidation of such alliances
is taking place primarily at regional and international level, between
states, though also domestically, between states and corporate actors.
The proliferation of regional agreements between nation-states—includ-
49 Michael Lind, ‘The Catalytic State’, The National Interest, no. 27, Spring 1992, p. 3.
24
ing the eu, apec, and nafta—can be seen as one manifestation of this
tendency. The evolving character of close domestic government-business
cooperation, most notably in East Asia, is another.

The second point, however, is that even catalytic states have differential
capabilities: some, like Japan and Germany, have both domestic and
international clout, and hence are able to use their domestic leverage to
position themselves advantageously, for example, in regional coalitions.
Others, like the United States, exploit strong international leverage but
at the expense of domestic adjustment capacity. Still others, like Russia,
are so lacking in domestic capability that they are not even serious can-
didates for the kind of regional coalitions they otherwise might aspire to
lead or join.50

Recent examples of states using international agreements as a means of

pursuing domestic economic goals include such initiatives as nafta and
apec. While both weak and strong states enter into such alliances, it is
often the domestically weaker states which take the lead in seeking out
this external path, aspiring to constrain others to adopt their own more
‘hands off’ approach to trade and industry. Australia’s enthusiastic
efforts in seeking to establish apec, and the United States’ leadership of
nafta can be seen in this light. These states, with their traditional ‘arms
length’ approach to the corporate sector, lack the more strategic capaci-
ties of their East Asian counterparts. In the absence of a normative and
institutional base for strengthening developmental capabilities at home,
both countries have sought instead to ‘level the playing field’ outside
their domain. To this extent, one might agree with the conclusion that
unlike the eu, such moves are driven not by a supranational vision but
by ‘insecure governments’ seeking ‘new tools to stimulate growth,
employment, and a stable regional policy community’.51 To make the
point in slightly different language, regionalism (inter-state coalitions)
without domestic capacity (public-private coalitions) is only half the
story, akin to conducting a war of movement without having established
a war of position.

What this analysis suggests is that the most important power actors
in these new inter-state coalitions will not be those initiating them—
for instance, the us and Australia—but those who participate in them
from a position of domestic strength. For the major solidity of Japan
as a catalytic state in international coalitions is that it has developed
robust capability at home via domestic (government-business) link-
ages. By contrast, the major weakness of the us is the underdevelop-
ment of such linkages, reinforced by the overdevelopment of external
strength.52

If this reasoning is accepted, then we must enter a caveat to the notion of

the rise of the catalytic state. Domestically strong states will more likely

50 Iam grateful to Victor Sumsky for the observation about Russia.

51 Ikenberry, ‘Funk de Siècle’, p. 124.
52 For an accomplished discussion of this issue, undertaken from an historical and compar-

ative perspective, see John M. Hobson, The Wealth of States: A Comparative Sociology of
International Economic and Political Change, Cambridge 1997.
25
act in concert with others; while domestically weak states—especially
large ones like the United States—will not completely lose their ‘inte-
gral’ character. In such cases, rather than a concentration on power-shar-
ing we can expect to find an oscillation, as weak states shift between
acting alone—through, for instance, defensive protectionism and bilat-
eralism—and with others.

Thus, in this new era, the most successful states will be those which can
augment their conventional power resources with collaborative power:
engaging others—states, corporations and business associations—to
form cooperative agreements and ‘consortia’ for action on this or that
issue. But by far the most important of these coalitions will be partner-
ships of government and business, for this goes to the very heart of state
capacity.

In contrast to Hirst and Thompson’s conception discussed earlier, both

domestic and regional coalitions imply that the state is not so much
‘devolving’ power—in a negative sum manner—to other power actors
from whom it then maintains a passive distance. Rather, the state is con-
stantly seeking power sharing arrangements which give it scope for
remaining an active centre, hence being a ‘catalytic’ state.

Responses to Globalization

Against the hypotheses of advancing globalization, diminishing state

capabilities, and eroding institutional diversity, this paper has advanced
three propositions. First, the world economy is an internationalized
economy, increasingly a regionalized economy; but it is not genuinely a
globalized economy in which territorial boundedness and geographic
proximity have declining importance for economic accumulation. While
money and finance have increasingly become ‘global’ in some—but not
all—aspects of their operation, the same cannot be said of production,
trade or corporate practice.

Second, convergence towards a neoliberal model of political economy is

highly improbable. This is not simply because economic ‘globalization’
is rather more limited and subject to counter-tendencies than many
accounts would suggest. It is also because nation-states themselves
exhibit great adaptability and variety—both in their responses to change
and in their capacity to mediate and manage international and domestic
linkages, in particular the government-business relationship.

Finally, however, because domestic state capacities differ, so the ability

to exploit the opportunities of international economic change—rather
than simply succumb to its pressures—will be much more marked in
some countries than in others. For while current tendencies in the world
economy subject more and more national economies to similar chal-
lenges and opportunities, these are likely to solidify the institutional dif-
ferences that separate the weaker from the stronger performers. Change
is indeed occurring, but by the end of the millennium, one should be
able to see more clearly that the changes in process in different national
systems are those of adaptation rather than of convergence on a single
neoliberal model.
26
 The rise of East Asia, the national responses elicited by that challenge,
together with the proliferation of regional agreements suggest that we
can expect to see more and more of a different kind of state taking shape
in the world arena, one that is reconstituting its power at the centre of
alliances formed either within or outside the state. For these states,
building state capacity, rather than discarding it, would seem to be the
lesson of dynamic integration. As we move into the next century, the
ability of nation-states to adapt to internationalization—so-called ‘glob-
alization’—will continue to heighten rather than diminish national dif-
ferences in state capacity and the accompanying advantages of national
economic coordination.

Invitation and Call for Papers

International Conference on the
150th Anniversary of the Communist Manifesto

Havana, 17-20 February 1998

Themes: the history, impact and validity of the Manifesto; its relevance for the
Third World; socialism; globalization; class struggle under new conditions; the
state; culture; indigenous, environmental, gender, ethnic and other social
movements in the empancipatory process; new concepts of world society.

Sponsored by the Marxist Educational Press in cooperation

with the Institute of Philosophy, Academy of Science and
other Cuban academic institutions.

For information on travel and submission of proposals (one-page abstracts due

15 October) write to: MEP, University of Minnesota, 116 Church Street S.E.,
Minneapolis, MN 55455-0112, USA; tel. (612) 922-7993;
e-mail: marqu002@tc.umn.edu

27