The Importance of Nation

It is now abundantly clear that there are fundamental problems with the current world economic order – as those on the Left have been arguing for years. The key doctrine of globalisation advocated by neoliberals can now be seen as a means of transferring command of more of the world’s resources to those willing and able to play the system, while producing only limited benefits to many poor countries. In this article we will look at some of the issues which need to be addressed in tackling the current problems.

The paradox of globalisation is that, while nations have been stripped of powers under GATT and WTO, nevertheless the nation has the final inescapable responsibility when things go wrong, as recent events clearly demonstrate. We will argue that this position of responsibility without power is untenable, and that redressing the failures of globalisation will inevitably involve redefining the role and powers of the nation state. We will not presume to offer solutions to all the world’s problems: but we will give pointers as to how important progress could be made in at least one key area.

The symptoms of the current world economic malaise are frighteningly apparent. To name just a few:

• There are grotesque and increasing disparities of wealth between different social groups, in both the ‘advanced’ and ‘emerging’ economies.

• The world financial system is such that many of the major banks and institutions are technically insolvent on any realistic valuation of their asset bases – and are only propped up by government-organised cheap credit; that is effectively by governments printing money.

• Many of the states with advanced economies have levels of debt which mean that some form of sovereign default is virtually inevitable.

• The problems in the eurozone are so severe that it will either break up, ushering in an era of unfathomable chaos, or else some form of European superstate will emerge, to impose a disastrous regime of fiscal discipline upon the European periphery.

These are the symptoms: but with all this economic chaos going on, the political elite in the US and in Europe seem incapable of rising to the challenge, either of developing a coherent course of action, or of bringing the electorate with them. In the US, the body politic seems to be fatally riven into two camps. In Europe, the basic problem is that the mechanisms which have been set up would require further fiscal, social, and political integration if they were going to have any chance of working: but this was not in the original prospectus, and further integration does not address the problem of underlying structural imbalances.

We propose a charter which states that the natural resources of a nation are the inalienable property of that nation, which are held in trust for the mutual benefit of that nation, the entire world, and future generations

While the causes of the debacle are more difficult, an important role has clearly been played by the undue trust which has been placed in some of the tenets of the neoliberal consensus: and these tenets can now be seen to be fallacious. Among these fallacies is the belief in the invisible hand, and that markets, if largely left to themselves, provide optimum outcomes. Another fallacy is that the increased volume of trade and capital flows stemming from globalisation lead to a sustainable increase in economic activity benefiting all countries. There is also the mistaken belief that monetary unions are instruments of convergence: in other words, if a monetary union is set up covering a group of countries which have achieved some adequate degree of initial convergence, then their economies will move forward in increasingly close economic harmony. (In fact, the opposite is the case – since the reduced number of adjustment mechanisms in a monetary union, which are primarily labour and capital flows, tend to be disequilibrating rather than equilibrating.)

The world economy is so fundamentally broken that it is going to be no easy task to put the bits together again in a more workable fashion. We will argue that to redress the problems an essential role has to be played by the nation state, and that there has to be renewed focus on those functions which the nation is uniquely positioned to perform. But first, it seems clear that any solution should satisfy most, if not all, of the following requirements if it is going to have a chance of success:

• That there should be protection from the corrosive effects of uncontrolled flows of capital on exchange rates and industry.

• That there should be some form of protection (not necessarily tariff protection), for local industry, so that it cannot be killed off by dumping, or simply taken over and shipped off shore. But that this should be smart protection – that is, we do not want protective measures which simply encourage inefficiency.

• That there should be suitable arrangements in place to encourage stewardship of basic resources, (that is, resources like land, water, renewable and non-renewable energy and landscape). Such stewardship should provide an appropriate balance between the needs of national and international interests: and between the needs of current and future generations.

• That monetary policy should be such that it suits the requirements of each area: that is, interest rates should be set with local (in some sense) requirements in mind, leaving aside for the moment exactly what is meant by ‘local’.

• That there should be mechanisms in place which can be called upon, if necessary, to correct imbalances in the distribution of income, either between areas, or different social groups

• And finally, that there should be an effective set of accounting arrangements in place – particularly for governments and the financial sector. These should take a prudent and conservative view on when governments and financial institutions are operating solvently.

The theme of this article is that the nation state will have to play a fundamental role if these requirements are to be delivered. But first, what do we mean by nation?

A standard definition would be a geographical entity which possesses sovereignty on decisions like defence, on the operation of the key economic levers, and citizenship. This is fine as far as it goes: but for present purposes, we would argue that a nation proper is defined not just in terms of sovereignty, but that it must also possess some concept of coherence. This is a rather tenuous concept: but a working definition might be that a nation must possess political mechanisms which are capable of arriving at a view on major issues which is accepted by the bulk of the population as expressing the collective will of the people. On this basis, Europe, for example, is not a nation: the UK increasingly fails to satisfy the concept of coherence: but as regards Scotland, one of the gratifying aspects of devolution is the extent to which Holyrood is increasingly regarded as expressing the collective will of the people – in other words, Scotland is, increasingly, a nation.

Going back to the above wish list, it is remarkable how many of the items on that list can only hope to be delivered at the level of what we have defined as a nation. For example, control of monetary policy for an area, including the ability to set interest rates, requires a currency. And this requires, not just a printing press, but the ability to back that currency with the political will, institutions, and revenues of a state. In the context of the European Union, because of the terms of the anti-competitiveness directives, the ability to control fiscal policy, industrial policy, and competition policy, are all greatly restricted at the sub-national level, as compared with the individual member state level.

As regards stewardship of basic resources, mismanagement tends to occur when the scale of the resource does not fit well with the scale of the sovereign unit. This can, of course, take place when the scale of the resource is too large, and no-one takes responsibility – global warming, or pollution of the seas are examples. But there are also acute problems when the geographical resource is small relative to the state, and the state therefore regards the resource as expendable. Classic examples would be the UK’s virtual surrender of Scotland’s fisheries as a price worth paying for EU entry. Or indeed, the UK’s decision under Margaret Thatcher to treat North Sea oil as a consumable – a decision which would have been unthinkable if Scotland had been in charge.

Finally, the use of transfer or fiscal mechanisms is likely to be possible only if the ‘coherence’ test of nationhood is met. A classic example is the refusal of Germany and the northern European states to consider transfers to compensate for fundamental imbalances in the eurozone.

So what sort of steps can be taken, given the magnitude of the problems the world faces? To see what might be done, we want to look in more detail at one specific area – namely, the question of the stewardship of natural resources.

The first important step that we suggest needs to be taken is to redefine the rights of a nation in respect of its basic resources. What we propose is that a charter should be developed which states that the natural resources of a nation are the inalienable property of that nation, which are held in trust for the mutual benefit of that nation, the entire world, and future generations. Establishing such a charter would immediately, and fundamentally, change the terms upon which natural resources are exploited. Outright privatisation of resources would be impossible. This does not mean that the private sector, and private capital, would never be involved in developing and exploiting the resources of a state: but the private sector would play a different role. Instead of capital being involved as the owner of privatised resources, henceforward, capital would be involved as a partner in the development and exploitation, under agreed terms, of a resource whose ultimate ownership would remain with the state.

Secondly, where the state is dealing with private sector operators in the field of basic utilities (like water, or energy), the state needs to do more to formalise and exploit the strength of its own bargaining position. In the face of a major corporation, the individual is virtually powerless: but the state is not. In particular, the state in principle controls the right of the corporation to enter the market at all: and for this right the state should be able to extract a significant price.

Third, there needs to be a rethink of the way in which capital is provided for investment in major utility projects. At present, in a typical UK utility, the customer pays a double penalty for the cost of the capital involved in the utility. First, because the utility borrows from the market at a higher cost than the state could borrow. Secondly, as a result of the arcane current cost method which utility regulators use to work out the charge for capital, utility operators earn a windfall profit on capital invested, over and above the cost of borrowing. In fact, if we are operating at the relatively large scale of a nation, these extra layers of cost are redundant. At national scale, the requirement for capital investment in a utility is largely stable in real terms from year to year. This immediately removes one of the basic reasons for borrowing: namely, to smooth out lumpy capital payments over time. In the absence of this smoothing requirement, the cheapest approach, from the point of view of the consumer, is to fund capital direct from customer charges. Moving to such a system would cut out both the interest cost premium, and the current cost charging premium, which consumers currently pay. It would also protect investment in vital infrastructure from the vagaries of the capital market. (It might be objected that this approach would lead to misallocation of resources, since it would remove the opportunity cost function which payment of interest on capital provides: but there is no reason why customer financed capital could not have a shadow interest rate applied.)

Implementing the above three proposals would transform the way in which basic resources are managed, and in which utility services are delivered. If the proposals were implemented, then the natural relationship would be for the private sector to enter into time-limited relationships with the state, whereby the private sector would be able to manage the exploitation of a basic resource for a specific time, and to a specified extent – and for a defined benefit to both the private sector and the state. Ultimate ownership and control would rest with the state. And the need for investment of private capital, and hence reliance on the financial markets, would be much reduced.

We have taken the area of stewardship of resources as one particular example of what needs to be done. Some of the ideas we developed in that context could in fact be applied more widely. For example, we argued that the state should derive economic benefit in its dealings with individual corporations by extracting an economic rent from its ability to grant or withhold the ‘right to supply’. But exactly the same principle could, and should, apply to the level of interactions between states. To give an example of how this might work, consider China. One of the fundamental imbalances in the world economic order has been the deliberate manipulation by China of its currency, to achieve an extra competitive edge for its industries – and hence to secure a large part of the world’s manufacturing capability. But this strategy would have been impossible if large customer states had exercised the right to control the countries they were willing to be supplied by, and if they had made it a condition of China’s ‘right to supply’ that the Chinese exchange rate was allowed to move closer to a more equilibrium level. Such an approach would have prevented the extreme build up of debt owed to China by some of the main Western economies. But it would also have had a profound effect on the industrial structure of these economies, since they themselves would have been able to maintain a much more balanced industrial base.

Implementing the strategy outlined in the previous paragraph would not be easy. It would require substantial amendment to the current WTO rules. It would also require substantial education, to persuade people that some offers of supply might be too good to be true in the long term. And, of course, it would greatly help if the national accounting systems in operation were able to detect much earlier than the current system of national accounts just when a country was running into unsustainable levels of debt.

In general, the state needs to re-think its position, and re-assert its powers, in each of the key areas of economic life. Since the Second World War, there has been an ongoing process, under GATT, WTO, and EU, whereby the individual state has ceded its power to manage and control market forces. What we are arguing is that this process needs to be reversed: and that individual states should re-assert their power against the market. This is not a plea for narrow protectionism. Instead, the ultimate benefit of all will be secured by individual states working together intelligently, rather than by states collectively, and blindly, surrendering their interests to the market. And the benefits of such an approach are not just economic. What would result would be a much more even distribution of wealth: a much more balanced economic structure within each country: and much less need for destabilising flows of labour. All of these things would be to the ultimate benefit of society.