I thank A. Beaton, V.N. Belov, A.I. Demidov, M. Kashima, B. Weber and three anonymous reviewers for their helpful comments. Any remaining errors are mine.
There are two main arguments supporting the thesis that economic globalization threatens democracy: (1) increasing interconnectedness between nations restricts national sovereignty and democratic control over political agenda; (2) economic globalization tends to eliminate the social correctives to the market economy. The present analysis suggests that the relationship between globalization and erosion of the basic structures of representative democracy is of different nature. Complicated policy tasks require representative institutions to find new approaches and instruments, while the linkage between the institutions and the represented social groups have been eroding due to the changing structures of society and political communication. Thus, globalization highlights structural weaknesses of contemporary democracies but does not necessarily undermine the principle of democratic governance.
The crucial assumption behind the anti-globalizers’ skepticism is that the increasing transactions across the border of nation-states are eroding the efficiency of national governing structures, especially democratic ones. This The hypothesis that economic globalization erodes the ability of democratic governments to manage economic and social affairs in interests of the people, has been challenged in a number of studies but remains exceptionally influential: “The tradeoffs can be represented in the form of a trilemma: the nation-state system, democratic politics, and full economic integration are mutually incompatible. Of the three, at most two can be had together” (Rodrik, 2002: 2; see: Figure 1).
This “trilemma” becomes especially sensitive in the context of the increasing democratic aspirations around the world, the phenomenon, which Samuel Huntington has called the “Third Wave of Democratization”. As David Held has mentioned: “There is... a striking paradox to note about the contemporary era: from Africa to Eastern Europe, Asia to Latin America, more and more nations and groups are championing the idea of “the rule by the people”; but they are doing so at just that moment when the very efficacy of democracy as a national form of political organization appears open to question” (Held, 1995: 21) Are globalization and the “Third Wave of Democratization” two inherently controversial trends?
There are various models of democracy, whose diversity is imbedded in different normative approaches toward the democratic idea. The limited frame of the present paper does not allow us to elaborate in detail discussing these controversies; but one can hardly disagree with the argument that the modern democratic state is primarily a nation-state. The ideas of democracy and national sovereignty are deeply interrelated. The philosophers of the Enlightenment developed both these concepts with a logical interdependence between them. People, while they are joining into a society, erect the state and, as a consequence, constitute the nation (T. Hobbes); therefore, the sovereignty should remain with the people (J. Locke); and thus, the only proper government is a democratic one (J.-J. Rousseau).
Two main arguments supporting the thesis that economic globalization threatens democracy are present in the literature:
1) globalization erodes the ability of nation-states to exercise the effective control over the political agenda;
2) globalization eliminates the social correctives to the market economy. This loosening of the social safety net together with the on-going restructuring of the economic system (frequently labeled as “New Economy”) increase social inequality: the rich richer and the poor poorer. A result of these developments is the threat to the very social foundations of contemporary democracies.
Thus, modern democracy seems to be in the squeeze between the external pressure and unfavorable internal shifts in the domestic social structures.
The impact of globalization on modern democracies is usually debated under the name “crisis of the state”: “Globalization increases the potential mobility of financial capital, real investments, goods and services, and to a more limited extent, highly skilled labor. Consequently, mobile economic actors are better able to avoid undesirable state regulations, or to profit from ones that are more advantageous. To the extent that countries depend on these actors, or on the resources they control, they are forced into a competition for locational advantage that has all the characteristics of a Prisoner’s Dilemma game, and that reduces the capacity of the territorial state to shape the conditions under which capitalist economies must operate” (Scharpf, 1998).
The widespread vision is that globalization has directly challenged the ability of states to govern autonomously, even in the domain of domestic policy. States are losing their control over:
The lack of the ability to control information flows has increasing importance in the ostensible information age. In the 20 th century, the means of mass communication (cheap newspapers, radio translators, TV-sets, computers) became more and more ubiquitous. Control over the centers transmitting this information became an effective tool of manipulating the public opinion. Growth of international mass-media and consequent decline in governmental ability to control information being delivered to almost every house is therefore apparently challenging for authoritarian regimes, but it also creates some risks for a democracy since the latter can hardly guarantee access of different social groups to leading mass-media.
Paradoxically, these two trends may have different effects on democratic and authoritarian political regimes. Increased information flows challenge autocracies and, perhaps, were a cause of the major democratization wave in the late twentieth century. At the same time, financial flows and transnational organization of production may jeopardize democratic governance at the national level. Because the financial autonomy and ability to modify systems of taxation according to recognized social needs has been considered as a fundamental property of a modern sovereign state, the relative release of financial flows from direct national regulation is expected to undermine the authority of nation-states. In the case of contemporary democratic regimes, these developments are likely to weaken one of their basic pillars, namely, the social safety net. Thus, globalization is expected to challenge the basic principle of democratic governance, the authority of representative institutions to establish the rules of wealth re-distribution in a country.
The constraints on the financial capacities of nation-states are most frequently pointed to as the threat to national sovereignty and democratic decision-making in the “globalized world”. However, their existence is debatable. As F. Scharpf argues: “Empirical studies on tax policies also produce ambivalent findings, especially if they fail to distinguish between mobile and immobile tax bases. There is, for instance, no theoretical reason to assume that the liberalization of capital markets should be associated with a reduction of social security charges.” (Scharpf, 1998; see: Table 2)
Thus, Scharpf attacks a central proposition of the globalization theory, which maintains that higher taxes inevitably push the capital out of a country and negatively effect economic growth. He hypothesizes that this is not the overall level of taxation but its composition that affects economic growth. In order to test these contradictory hypotheses – those by the pundits of the globalization theory and by Scharpf, – I have analyzed statistical associations between economic growth (average annual change in 1990-98, in per cent) and direct investment inflows (in per cent of GDP, in 1997), on the one hand; and government tax receipts (total and from different classes of taxation, in per cent of GDP, in 1996), on the other hand.1
The analysis focuses on the advanced industrial nations of the OECD because of the following reasons. First, these countries are democratic and engaged in the global economic and, thus, provide us with evidence directly related to the topic under study. Second, these nations are similar in many respects (including political stability, the level of development, etc.) and, therefore, innumerable controls may be relaxed2 .
There is marginally significant correlation between the overall taxation burden, conventionally operationalized as the ratio of total tax receipts to GDP and economic growth in the 1990s. The respective Pearson coefficient is - 0.328 and significant at 0.1 probability level. This means that increasing the overall level of taxation may have a negative effect economic growth (see: Figure 2).
Do all types of taxation have a negative effect? The decomposition of the explanatory variable offers interesting results. First, the explanatory power of the model greatly increases: from 10.7% of the explained variance in the initial model to 57.8% after the decomposition. The F-statistic is equal to 2.89, which is significant at 0.05 probability level, a high standard for an estimation based on merely 29 cases. The model is reported below (see: Table 3).
The estimations indicate that the effect of so-called “social security contributions”, which in fact are a heavy tax on labor, especially unskilled labor, has a strong detrimental effect on growth. At the same time, the impact of taxes on goods and sales and, surprisingly for pundits of the globalization theory, the impact of corporate profit taxation appear to be either neutral or marginally positive.
Is the redistributive effect of the social security system or its currently widespread mode of finance through the special taxation on labor detrimental for economic growth? In order to address this question, the model for the average annual growth in the 1990s with the ratio of social security budget to GDP as explanatory variable was estimated; and, then, the ratio of social security contributions to GDP was included in the model.
The budget of the social security system (as the ratio to GDP) has a seemingly negative association with economic growth in the 1990s. The respective Pearson coefficient is 0.398 and significant at 0.1 probability level. However, this association vanishes as soon as the ratio of “social security contributions” to GDP is controlled. The model for the average annual growth in the 1990s with the ratios of social security budget and social security contributions to GDP as explanatory variables explains 33.2% of variance; the respective F-statistic equals 4.72 and is significant at 0.05 probability level. In the model, only the second explanatory factor appears significant. The respective t-statistic is -2.22 and significant at 0.05 probability level (see: Table 4). This observation is supportive for the hypothesis that not the volume of the social security of network but the usage of de-facto labor taxation in order to finance it is the source of troubles.
The same four models have been run in order to explain the international variance in investment rates. The association with the ratio of investment to GDP appeared to be marginally positive; the finding should be surprising to the pundits of globalization theory. The Pearson correlation is 0.339 and significant at the 0.1 probability level. The probable explanation is that investors are ready to pay higher taxes for the investment environment better in other respects, perhaps, including the socio-political stability, which a developed social security system may bring about.
The result of the multivariate model, where the taxation factors has been decomposed, may be puzzling indeed. The model is efficient. It explains 36.8% of variance and is significant at the 3% probability level (see: Table 5).
The most surprising finding is that the ratio of the fiscal incomes from corporate profit taxation has strong positive partial correlation with the investment rate. This finding is challenging for further investigations. The linear models for investment rates with the ratios of social security budget and social security contributions to GDP as explanatory variables did not show any significant correlations.
The results of the above analysis can be explained in terms of effective governmental policy:
There is ... not one best way through which advanced welfare states could maintain their economic viability in an environment of internationalized capitalism without abandoning their employment, social security and egalitarian aspirations. But as countries like Denmark, Switzerland, Australia, or the Netherlands demonstrate, there is no reason to think that economic viability should be incompatible with the successful pursuit of these aspirations. (Scharpf, 1999)
Our findings indicate the need to reform the systems of taxation and, especially, social security funding. In the latter case, either public funding out of indirect taxation or quasi-private finding with fixed contributions, or their mixture may be preferable to the currently most widespread system based on the heavy taxation of labor. Apparently, labor will be a crucial input of the “new economy” in whichever form the latter may develop. Thus, the fiscal suppression of the key developmental factor is detrimental.
However, the need for reform does not imply the necessity to abandon. Nation-states have much space for maneuvering. Neither their ability to tax, nor their capacity to maintain social security networks seems to be endangered from the viewpoint of international economics. However, both, the fisc and the social security provision, are under siege. The reasons may be ideological rather than economic in nature.
As the above analysis indicates, neoliberal theory is questionable, but even if it had accurately predicted that the effects of governmental policy and economic openness and liberalization are prerequisites for growth, there is no actual threat for democratic decision-making. Political decisions were always supposed to be made in the frame of rational choice. Democratic governance never meant that the public should be inconsiderate of economic realities. On the contrary, the development of representative democracy is a system of checks and balances aimed at binding the popular vote by reasons of economic rationality and the preservation of human rights. The goal of unlimited democratic sovereignty was never pursued in modern democracies after the Jacobin period of the French revolution. Even if the neoliberal theory were true, this would not mean that democracy should be replaced by a “technocratic government” of economic experts.
The issue presently confronting democracy is not the narrowing of the democratically controlled political agenda, but the new urgency of the old contradictions between economic rationality and other democratic values: equality and solidarity. These contradictions encompass the whole history of democratic development in capitalist society, and contemporary urgency over the problem is not caused by the (envisaged) reduction of opportunities for the democratic regulation of economic affairs, but rather by the complication of the political agenda; while the latter is a result of globalization processes.
This complication of the contemporary political agenda requires new solutions on the part of policy-makers. The problem of suitable instruments for a national democratic government has at least two dimensions: democratic governments need new instruments of social regulation and they need to change themselves in order to be able to employ these instruments. The prospects of an adequate response to these challenges are rather obscure: “The modern welfare state is based on democracy. Low voting rates, minor respect for politics and politicians, perspectives of the coming non-transparent and simultaneously very complex information society – these anti-participating phenomena are simultaneous significant threats for efforts to conduct the reforms of social policy”3 (Baeker, 1997: 27). One can say that the problems brought about by globalization seem to be political rather than economic in nature.
The “competition state” and representative democracy. The main points of neoliberalism as the leading ideology of “globalization” are: (1) the rule of the market; (2) cutting public expenditure for social services; (3) deregulation; (4) privatization; (5) eliminating the concept of “the public good” or “community” (cf. Martinez and Garcia, 1997). Application of these ideas leads, in particular, to the complication or, better said, “technologicalization” of the political agenda. Good examples are problems of deregulation, issues of the international division of labor, creation and regulation of quasi-markets for public goods (like educational vouchers or competing pension funds).
The complication of the political agenda and the vision of only one “correct” economic policy are employed in order to legitimize the shift of power within national governments. G. Baecker has demonstrated this tendency, using as an example the current developments in Switzerland:
The perception of [new] internal and external affairs in connection with the increased number of social issues regulated in international regimes leads to a shift of political power from the Parliament to the Executive. Many problems that have been treated through national legislation before can now be negotiated by the Federal Council within international treaties. Democratic legitimization for these issues is weakened by the fact that Parliament can no longer perform its deliberating function. (Wueger, 1998)
This is only an illustration. Similar tendencies are observed in many other parliamentary as well as presidential democracies, and the reader can, perhaps, recall many other examples.
The complication of the political agenda requires increasing specialization of the political class. At the first sight, it creates additional opportunities for representative democracy (parliamentary procedures and organized groups of interests). Political deliberations should be more open to representative organizations; while in practice: “Associations are dismissed [by governments] as hide-bound purveyors of the lowest common denominator sectoral view” (Coleman, 1997: 128).
At the moment, the structural weakness of traditional political parties, civic associations and the former “drivers” of the political system is a characteristic feature of many democratic political systems. The institutions of representative democracy (political parties, trade unions, other public organizations, and, to some extend, parliaments) appear not to be ready to bear the increasing load. Because of the change of their internal structure and pattern of conduct in “the golden time” of deliberative democracy (late 1960s - early 1980s), they have ceased to be the tools of fast reaction. In a short paper on “Political crisis as the crisis of communication”, P. Glotz describes problems of the modern German political parties as follows: “Parties are today one-sidedly constituted, rather closed and rather old, hierarchically organized circles of communication, in which miscellaneous needs of the differentiated civil society make the way for themselves hard and slow”4 (Glotz, 1997: 3-4). This situation creates an environment that favors the priority of institutional interests over the interests of represented social groups. The question of whether the set of traditional representative groups continues to reflect real cleavages within a modern society becomes relevant.
Investigating the new patterns of social regulation formed during globalization, G. Wewer noticed the crisis of other representative institutions, and, first of all, those of them who are being overloaded to the largest extent. If P. Glotz sounds the alarm because of the increasing alienation of the organized political elite, G. Wewer draws an even more unpleasant picture of the crisis of representative democracy today:
Not only parties, but also churches, trade unions and public organizations lose their supporters. Even the industrial and trade chambers should struggle with “rebels”, who do no longer want to pay contributions, and question their purpose. If, however, there are no longer public conditions, under which legitimacy was founded in the past, then it seems disputable, whether the problem can be solved by other ways. It results in the question, what will actually consolidate a society in the future.5 (Wewer, 1997)
To what extent can these structural changes in society and political communication be attributed to the globalization processes? As far as increasing external (international) similarities require internal (within a nation-state) differentiation, and as far as the theoretical prediction of a new emerging cleavage between “globalized” social groups and “the rest of population” is true, we would suggest the positive answer. However, the question remains open and points out a new dimension of the discussion on the political effects of globalization.
Globalization and plebiscite democracy. The matter of the above-mentioned claims is the crisis of the deliberative model of democracy, the ideal type of democratic government outlined by J. Habermas. Several kinds of mechanisms for compensating unsatisfactory work of the institutions of representative democracy emerge within modern political systems.
P. Glotz describes the reaction within representative organizations, to inadequate adaptation to new circumstances:
As the political elite naturally feel this deficiency, it tries to find a solution. If the elite are already moved by democratic routines (“democracy within the party”) from the increasingly distant voter, it has to invent a device, which reproduces some kind of telepathic relation to this unknown being, the voter. This is the top candidate, the hero, the embodying. Thus, in order to correct an erratic development, another erratic development emerges: one could label it - by a paradoxical concept - the democratic Caesarism. For the correction of the sluggish interior communications of the time-rich, a populist on the top was invented.6 (Glotz, 1997: 5).
Simultaneously, there are growing demands from public groups that do not consider their interests as adequately represented by traditional political institutions, because the parties are too inert: public organizations are either corrupted or do not respond to the changed structure of the society. The unsatisfactorily represented social groups insist on expansion of plebiscite elements in the democratic political systems. This demand corresponds also with the tendencies inside the representative organizations. As a result, the growth of the plebiscite elements is often combined with the increase of political populism.
Certainly, economic globalization highlights or even exaggerates structural weaknesses of contemporary democratic regimes. However, none of these developments indicate that globalization has an inevitably debilitating effect on the foundations of democratic governance at the national level. Politicians are not obliged to focus exclusively on mentoring of the public in neoliberal ideas. Representative institutions may accommodate newly developed social interests and articulate the cleavages that globalization deepens. Thus, opportunities for political populism can be reduced. At the same time, there is no fully convincing evidence that developments in democratic society have to follow such an optimistic scenario and the effect of globalization on democratic political systems will be ultimately positive. My argument is that globalization, as a catalyst of change, may have a positive effect in terms of democratic representation and governance.
The linkage between economic globalization and erosion of the democratic nation-state is more political than economic in nature. The main problem is not the negative effects of the increasing influence of financial market players, but the structural crisis of deliberative democracy caused by:
1) inadequacy of the traditional representative institutions in managing the complication of policy tasks brought about by globalization;
2) erosion of the linkage between representative institutions and represented social groups due to the shifts in social structure as well as structural weakness of the institutions themselves;
3) neoliberal ideological reaction to globalization, whose assumptions are often used by the political elite for legitimization of its functional failure.
Recent developments within contemporary democracies suggest two possible scenarios of reinvesting the democratic government. According to the optimist view, the tasks of current economic and social regulation will be transferred to the independent public institutions and market players through privatization, mechanisms of “new public management”, etc.; while the government will gain a new glance of democratic legitimization by the plebiscite mechanisms and maintain the role of the main innovator and moderator.
A more skeptical vision draws the picture of uncontrolled segmentation of policy regulation and populist political leadership challenging popular demands. It implies also a new cultural cleavage within society: the development from rather homogeneous (at least, in cultural aspects) national society to a society with two coexisting types of culture: “traditional” national culture of the industrial society and “globalized” culture of economic and political elite, focused on the values of the post-industrial society. This discrepancy can be demonstrated both on a national level, between the new elite and “less globalized” social groups, as well as on an international level, where the gap between the countries, which are spearheading globalization, and “the rest of the world” rapidly increases.
Again, as in the case of external challenges of economic globalization, we should say that the risks are serious and reforms are necessary. However, all the above problems are domestic problems of national political systems, and they, respectively, have domestic solutions. It remains implausible that the development of supranational political structures – a “world government”, for example – may be an efficient means to ameliorate the problems associated with the on-going reconstruction of political systems within nation-states.
Baecker, G. (1997). Der Sozialstaat hat eine Zukunft, in: Aus Politik und Zeitgeschichte, vol. 48-49.
Cerny, P.G. (1998). Globalization and Politics, in: Schweizerische Zeitschrift fuer Politikwissenschaft, vol. 4, issue 2. Available on-line: http://www.ib.ethz.ch/spsr/debates /debat_global/art-1-2.html
Coleman, W.D. (1997): Associational Governance in a Globalizing Era: Weathering the Strom, in: Hollingsworth, J.K. /R. Boyer. Contemporary Capitalism: The Embeddedness of Institutions. Cambridge University Press.
Glotz, P. (1997). Die politische Krise als Kommunikations-Krise, in: Aus Politik und Zeitgeschichte, vol. 36-37.
Held, D. (1995). Democracy and the Global Order. Cambridge: Polity Press.
Martinez, E. and Garcia, A. (1999). What is “Neo-Liberalism”? A brief definition. http://www.tqsbooks.com/Publications/Neo_Liberalism.html.
Rodrik, D. (2002). Feasible Globalization. Working Paper, Harvard University, May.
Scharpf, F.W. (1998). Globalization: The Limitations on State Capacity, in: Schweizerische Zeitschrift fuer Politikwissenschaft, 1998, vol. 4, issue 2. http://www.ib.ethz.ch/spsr/debates/debat_global/art-2-1.html.
Scharpf, F.W. (1999): The Viability of Advanced Welfare States in the International Economy: Vulnerabilities and Options. Max-Planck-Institute fuer Gesellschaftsforschung Working Paper 99/9. http://www.mpi-fg-koeln.mpg.de/publication/working_papers/wp99-9.html.
Wewer, G.(1997). Vom Bürger zum Kunden?Beteiligungsmodelle und Verwaltungsreform, in: Klein, A. and Schmalz-Bruns, R. Polilitische Beteiligung und Bürgerengagement in Deutschland. Bonn.
Wueger, D. (1998). Globalization - Challenges to Constitutions. The Case of Treaty Making, in: Schweizerische Zeitschrift fuer Politikwissenschaft, vol. 4, issue 2. http://www.ib.ethz.ch/spsr/debates/debat_global/art-3-3.html.
1. The Czech Republic, Hungary and Poland were excluded from the sample because of the expected strong affects of the post-communist transformation on the above-mentioned indicators. Because of the lack of primary information, the following approximation were employed: In computing the correlation between economic growth and taxation, taxation data in 1996 were used instead of the data from the whole period which is concerned in the case of economic growth (1990-98). The occurred changes in the taxation systems are therefore disregarded. However, some of the findings sound rather interesting and provocative for further investigations on this topic.
2. In fact, I tried to introduce several of the controls that are most frequently employed in the so-called Barro-style growth regressions: lagged GDP per capita, the average level of education attainment, etc. However, the introduction of these controls did not considerably affect the main results of the analysis.
3. Der moderne Sozialstaat ist auf Demokratie angewiesen. Niedrige Wahlbeteiligung, geringes Ansehen von Politik und Politikern, die Perspektive einer intransparenten und zugleich hochkompexen Informationsgesellschaft – diese anti-partizipatorischen Phänomene stellen zugleich eminente Gefahren für sozialpolitischen Reformbemühngen dar.
4. Parteien sind heutzutage einseitig zusammengesetzte, relativ geschlossene und vergleichsweise alte, hierarchisch gestufte Kommunikationszirkel, in die die vielfältigen Bedürfnisse der differenzierten Bürgergesellschaft nur mühsam und langsam.
5. Nicht nur den Parteien, sondern auch den Kirchen, Gewerkschaften und Verbänden laufen die Anhänger weg. Selbst die Industrie- und Handelskammern müssen sich mit den “Rebellen” herumschlagen, die keine Beiträge zahlen wollen und deren Sinn in Frage stellen. Wenn aber die gesellschaftlichen Voraussetzungen nicht mehr gegeben sind, auf die sich Legitimität in der Vergangenheit gründen ließ, dann erscheint äußerst fräglich, ob dies durch andere Verfahren überspielt werden kann. Das führt zu der Frage, was die Gesellschaft in Zukunft überhaupt noch zusammenhält.
6. Da die politischen Eliten dieses Defizit natürlich empfinden, sinnen sie auf Abhilfe. Wenn man durch die demokratischen Prozeduren (“innerparteiliche Demokratie”) schon zu weit vom Wähler weggedriftet, muß man ein Medium erfinden, das eine Art telepathische Beziehung zu diesem unbekannten Wesen, dem Wähler, herstellt. Das ist der Spitzenkandidat, der Held, die Verkörperung. Also entwickelt sich zur Korrektur einer Fehlentwicklung eine weitere Fehlentwicklung: Man könnte sie – mit einem paradoxen Begriff – demokratischen Cäsarismus nennen. Zur Korrektur der zähen Binnenkommunikation der Zeitreichen erfindet man den Populisten an der Spitze.
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