State Activism Is Needed To Unite, Not Divide

With the United  States on the verge of a trade war with China and the European Union (EU),rising tensions in the Korean peninsula and in the Middle East, an ongoing existential crisis in the EU and the threat of cyber-warfare - a dangerous kind of state activism looms over the horizon. The nation state is coming roaring back. Those who predicted its demise under the relentless march of globalisation are in for a rude awakening. The world is seeing a sharp and somewhat scary shift towards nationalism and protectionism.

Globalisation reached its apogee just before the global economic crisis. Global trade to GDP ratio peaked at just over 60 per cent in 2007- 08, after rising almost uninterrupted for the previous 50 years. There were particular years in which the global trade/GDP ratio had fallen, but the trend was always up. Since the global economic crisis of 2007-08 we have seen a plateauing out of  the trade ratio at around 56 per cent.   

The last decade has not only seen a pause in globalisation, but also a huge increase in the role of  the state. The first factor  which brought the state back in was the need for a huge fiscal and monetary stimuli to deal with the Great Recession of 2007-08. Fiscal spending increased both due to automatic social spending rules but also as governments felt the need for Keynesian style spending increases to help recovery and provide jobs. While the size of fiscal stimuli varied, on average it amounted to around two per cent of GDP in the industrial countries and even higher levels in the developing world. Activist monetary policy also played an even larger role perhaps, as the Fed and other central banks went  in for aggressive quantitative easing which helped avert a global depression, but may have gone too far and now need careful unwinding.

The state’s role also expanded in stronger regulation of the financial system as a reaction to the bail-outs. The Fed and other regulators abdicated their mandate in the run-up to the global financial crisis – and legislative bodies weakened regulatory systems. The correction came soon thereafter with the Frank-Dodd Act which strengthened financial regulation. A decade later, with the memory of that crisis fading, the US Financial Choice Act once more weakens the regulations introduced in the Frank - Dodd Act, but creates the risk of another financial crash and the need for more bail-outs.

A second recent factor increasing the role of the state is protectionism – with the US threatening to start a trade war, walking out of  the TPP and renegotiating NAFTA. Signs of rising protectionism are also evident elsewhere – with the WTO mechanisms looking ineffective in dealing  with this slide. If a full-scale trade war were to break out, the world risks another global depression or recession. Even if a full-scale trade war does not break out, more nationalistic strategic trade and investment policies are likely to be pursued.

The area that needs more state activism is the threat of climate change  - the mother of all market failures.  In 2016 there was hope as the world came together and committed to plans and programmes in meeting climate change targets under the Paris Accord. But the world’s largest economy, the United States, has pulled out of the Accord- weakening the pressure on others to remain committed to it. If the Accord unscrambles, reaching an agreement will become even harder in the future.

The role of  the state is likely to increase in cyber-space. The Internet was developed by government but its multitudinous uses were engineered and expanded by the private sector in a continuous wave of  IT revolutions. But with growing concerns over the use of data and privacy issues, there is a growing clamour for greater cyber regulation. The Global Data Protection Regulation of the EU that came into force on May 25, is one such regulation. Growing nationalism has also increased the risks of cyber-warfare and the use of fake news to destabilise social and political systems and their outcomes. Better regulation is needed to address these issues, but what form it will take remains to be determined.  

Rising intra-country inequality and stagnant living standards for sections of the population are major forces driving nationalism and protectionism. The solutions lie not in beggar thy neighbour policies. Instead, a different type of state activism is needed to provide help for improving education, re-skilling and investments in infrastructure. More state activism is needed to address market failures that are contributing to climate change as well as better regulation and consumer protection. State activism is needed to unite through collective action and not divide.

The German philosopher Wolfgang Goethe said it best: “Divide and rule, the politician cries; unite and lead is watchword of the wise.”