10 Pages, Grade: Distinction
IRPG 849 International Political Economy
Are nations’ political and economic sovereignty threatened by the forces of globalisation? What are nations doing to protect against erosion of national sovereignty?
The notion of sovereignty emerged along with the appearance of the modern state system, after the Peace of Westphalia ended the Thirty Years War in 1648. As a principle applying to all states, sovereignty refers to autonomous political authority exercised over a geographically determined territory (Krasner 1995, p. 115). In other words, sovereignty entitles a state to handle all its internal affairs as it pleases, without any external actors having a right to interfere within the borders of that state. Basically, this is valid for all political issues, including the application of force as well as all fiscal and economic regulations (Held 1989, p. 215). Accordingly, a main characteristic of a sovereign state is the ability to control movement across its borders (Krasner 2001, p. 231). Globalisation on the contrary, describes the integrational process of growing interdependence and the worldwide flow of ideas, goods, capital and people across national borders (Meyer 2007, p. 262). From an economic point of view globalisation refers to the emergence of one single world market transcending national boundaries; international production and transactions render territorial location meaningless (Scholte 2006, p. 602- 608).
However, this essay will argue that although globalisation alters the political and economical sovereignty of states, the concept of sovereign nations is far from being out of date. In order to support this thesis, arguments both for and against economic globalisation causing the dwindling of state sovereignty will be applied consecutively. Explanatory, special focus will be put on transnational corporations, global finance and international organisations as prominent economic features of globalisation. Emanating from a realist perspective, the paper will point out examples of how nations oppose unintended erosion of sovereignty.
Globalisation is said to threaten or even trigger the end of nation states, since the forces of a global market will override state sovereignty in the long run (Poggi 1990, p. 184). Since “state control over space and time is increasingly bypassed by global flows of capital, goods, services technology, communication, and information” (Castell 1997, p. 243), the global mobility of capital denationalises the circuits of accumulation (Robinson 2001, p. 159). This involves the worldwide fragmentation and decentralization of production according to global cost considerations (Robinson 2001, p. 160). The creation and growth of transnational firms has to be understood “as an aspect of a broader process of internationalization of capital” (Jenkins 2003, p. 429). Multinational corporations, being suited best for transnational relocations and market-shifts, have then again accelerated the integration of global economy even further (Kobrin 2001, p. 193). Since intra firm-trade between subsidiaries as well as growing interconnected investments criss-cross national borders, “it is no longer possible to regard each country as having its own separate economy” (Willetts 2006, pp. 430-432). Following Strange (1997, pp. 365-369), increasing globalisation will finally shift power from nation states to enterprises. The reasoning is “that footloose modern businesses will simply leave a country if a government does not pursue liberalizing policies which foster corporate profitability and flexibility” (Woods 2006, p. 339).
Relevant boundaries are only those “drawn by the deft but invisible hand of the global market” (Ohmae 1993, p. 78). Therefore, income tax dependant states are not sovereign anymore in the determination of domestic regulations concerning the economy. Politico-economic agendas are dominated by big businesses, predominantly international corporations, whereas states are downgraded to only provide basic social and public services (Hirst 1997, p. 409). Since companies operate increasingly on a transnational and multinational basis, “states are less autonomous; they have less exclusive control over the economic and social processes within their territories” (Hirst & Thompson 1995, p. 415).
“Underlying the transnational mobility of capital and the construction of global production networks is a radically globalized financial system, whose operation fundamentally” dimishes state sovereignty in the economic realm (Evans 1997, p. 6). Since “globalization has stimulated many companies to go beyond strategic coalitions to full-scale fusion”, merging transnational corporations control more than 70 per cent of all foreign direct investment worldwide (Scholte 1997a, p. 437). Although states are interested to attract and maintain the ingoing flow of capital boosting their economy, this process also renders the enmeshed national economic systems manipulable by external financial speculations.
The argument is that “floating exchanges rates have created extreme currency instability, which in turn has created an enormous” amount of money operating completely independent from any economic activity like production, trade or even investment (Drucker 1997, p. 162). Derivates exchanges, for example, trade with contracts about future options on a fixed price and currency of particular products and shares on a speculative basis (Scholte 2006, p. 612). As Cable (1995, p. 27) points out, “foreign exchange trading in the world’s financial centres exceeds a trillion dollars a day […, which is] greater than the total stock of foreign exchange reserves held by all governments”. Therefore, groundless and unpredictable movements of that virtual money in and out of a currency greatly impact on national economics (Drucker 1997, p. 162, Quiggin 2001, p. 70). Evans (1997, p. 7) claims that, “any state which engages in policies deemed "unwise" by private financial traders will be punished by seeing the value of its currency decline and its access to capital shrink”.
Moreover, operating ‘offshore’, any profit generated by swift relocation of digital assets, exists “beyond the reach of onshore regulation” (Hudson 2000, p. 270). In other words, by operating from the outside of a particular nation state the money passes through, capital is not bound by national tax or secrecy regulations (Palan 2002, p. 155). Since already in the 1990’s “as much as half of the worlds stock of money either resides in or is passing through [offshore] tax havens” (Kochen 1991, p. 73), states are not only vulnerably to the unstable flow of capital, but also unable to control its profits. Accordingly, Chapman (2007, p. 169) concludes that together with the vast capacities of transnational capital, “the emergence of offshore and the wider internationalisation of finance had brought about the end of popular sovereignty and thus the idea of the nation-state”.
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