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Two notions underlie much of the current discussion about globalization. One is the zero-sum game: whatever the global economy gains, the state loses, and vice-versa. The other is that if an event takes place in a national territory it is a national event, whether a business transaction or a judicial decision. These assumptions about zero-sums and geography influence both experts of the global economy and the general public.
One of the roles of the state vis-a-vis today's global economy, as opposed to earlier phases of the world economy, has been to negotiate the intersection of national law and foreign actors, such as firms, markets and supranational organizations. This condition makes the current phase distinctive. We have, on the one hand, the existence of an enormously elaborate body of law that secures the exclusive territoriality of states to an extent not seen in earlier centuries, and on the other, the considerable institutionalizing of the "rights" of non-national firms, and the growing scope of cross-border transactions and supranational organizations. These new legal frameworks set up the conditions for a necessary engagement by states in the process of globalization.
We generally use terms such as "deregulation," "financial and trade liberalization," and "privatization" to describe the outcome of this negotiation. While these terms capture the withdrawal of the state from regulating its economy, they do not register all the ways that the state participates in setting up new frameworks to further globalization; nor do they capture the associated transformations inside the state. I have long argued that many transactions that are a key part of the global economy either do not cross borders, or do not in ways that investment and trade do. Instead, they are located inside national economies. Furthermore, I have tried to show how even the most digitalized global financial market is grounded in a set of very material resources and spaces largely embedded in national territories.
Besides the new functions of the state there is a new set of intermediary strategic agents that contribute to the management and coordination of the global economy. They are largely, though not exclusively, private. And they have absorbed some of the international functions carried out by states in the recent past, as was the case, for instance, during the predominantly protectionist regimes of the post-World War II decades. The role of these strategic agents is dramatically illustrated by a recent case involving China: when the Chinese government in 1996 issued a hundred-year bond to be sold, not in Shanghai but in New York, it did not have to deal with Washington but J.P. Morgan. This example can be repeated over and over for a broad range of countries.
Private firms in international finance, accounting and law, the new private standards for international accounting and financial reporting, and supra-national organizations such as the WTO, all play strategic non-government centered governance functions. They do so, however, largely inside the territory of states. Their participation signals the possibility of a whole series of engagements with various aspects of states and a diversity of outcomes depending on the specifics of each state.
Because global processes materialize to a large extent in national territories, many states have had to become deeply involved in the implementation of the global economic system and thereby have experienced transformations of various aspects of their institutional structure. In this process some components of states, such as ministries of finance and central banks, may well gain power, even as others lose power. My working hypothesis is that while globalization leaves national territory basically unaltered, it is having pronounced effects on the exclusive territoriality of the state - that is, its effects are not on territory as such but on the institutional encasements of that geographic condition.
Globalization, then, does not have to do only with crossing geographic borders, as in international investment and trade. It also has to do with the relocation of national public governance functions to transnational private arenas and with the development within states - through legislative acts, court rulings, executive orders - of the mechanisms necessary to accommodate the rights of global capital in what are still national territories. One overall effect is what I am calling an incipient de-nationalizing of several highly specialized national institutional orders, or the partial replacement of national legal and regulatory frameworks with "de-nationalized" ones. One concrete version of this change is the way states have shifted away from what are ultimately Keynsian principles toward agendas that ensure the rights of global capital inside their national territories. This is one way in which the state matters under conditions of globalization: its capacity as an administrative and technical apparatus can be used to govern the operations of national as well as of non-national economic actors and institutions.
The New Geography of Power
Economic globalization represents a major transformation in the territorial organization of key economic sectors. To what extent it also represents a possible transformation in the structures of politico-economic power is a difficult question. In my reading, the major dynamics at work in the global economy contain the capacity to undo the intersection of sovereignty and territory embedded in the modern state system. This does not necessarily mean that sovereignty is less of a feature under conditions of globalization. Rather, it may signal the re-location of some components of state sovereignty onto supranational authorities or private corporate systems. In its most extreme form I would argue that we are seeing a partial de-nationalizing of state sovereignty. Similarly, economic globalization does not eliminate the state's exclusive control over its territory, but alters the particular type of institutional encasing of national territory that has developed since World War II.
We can begin to address these questions by examining major aspects of economic globalization that contribute to what I think of as a new geography of power. Three components in this new geography of power are of interest here. The first concerns the actual physical territories where much of globalization materializes in specific institutions and processes. The second concerns the ascendance of a new legal regime to govern cross-border economic transactions, a trend not sufficiently recognized in current social science literature. The third component concerns the fact that a growing number of economic activities are taking place in digital space. The growing digitalization of economic activity, particularly in the leading information industries such as finance and specialized corporate services, may be contributing to a crisis in control that transcends the capacities of both the state and the institutional apparatus of the economy. Adding these three to the footloose quality of global corporate capital reveals that the relationship between the global economy and the state has not been captured by the traditional notion of the state and the global economy as two mutually exclusive realms.
For me, these processes raise questions about the exclusive authority of the state over its territory. One answer is that they point to the partial relocating of a growing number of activities under newly emerging institutional umbrellas that are increasingly not governmental but private. However, insofar as these new institutional umbrellas govern processes that take place at least partly in national territories, they involve explicitly or implicitly the participation of select components of states. Let me briefly elaborate on a few aspects. I will begin with the question of the strategic geography of globalization, or more conceptually, the particular form of territoriality we see taking shape in the global economy today.
The worldwide geographic dispersal of factories and service outlets is actually part of what are highly integrated corporate structures with strong tendencies toward concentration in control and profit appropriation. While conceivably this geographic distribution of factories and offices could have gone along with a wider distribution of control and profits, a democratization of the corporate structure has not happened. Indeed, many of these operations appear as "overseas sales" for large corporations; a very high share (estimates range from 40 to 70 percent) of international trade is actually intra-firm trade.
There are a number of implications here for the question of territoriality and sovereignty in the context of the global economy. First, when there is geographic dispersal of factories, offices and service outlets in an integrated corporate system, particularly one with centralized, top level control, there is also a growth in corporate central functions. The more firms become global, the more their central functions grow in importance, complexity, and number of transactions. Of importance here is the dynamic that connects the dispersal of economic activities with the ongoing weight and often growth of corporate central functions. In terms of the state's authority, globalization's capacity to create an economic space that extends beyond the regulatory capacity of a single state is only half the story. The other half is that these corporate central functions are disproportionately concentrated in the national territories of the highly developed countries.
It is important to analyze the strategic corporate functions of the global against the overall corporate economy of a country. They are not completely overlapping worlds; many components of a country's corporate economy have little to do with globalization. Conversely, many "national" corporate sectors have become deeply global in their orientation and have little resemblance to their erstwhile national-market orientation. For the purposes of many kinds of inquiry this distinction may not matter; for the purposes of understanding the global economy, it does.
Another instance today of this negotiation between transnational process and a national territory is that of the global financial markets. The orders of magnitude in these transactions have risen sharply, as illustrated by the U.S. $75 trillion in turnover (as estimated by The Economist) in the global capital market, a major component of the global economy. These transactions are partly embedded in telecommunications systems that make possible the instantaneous transmission of money and information around the globe. A great deal of attention has been given to this issue, but the other half of the story is the extent to which the global financial markets are located in particular cities in the highly developed countries. Indeed, the degrees of concentration are unexpectedly high. The topography of activities in many of the global digitized industries, such as finance, actually weaves in and out of digital space. When it moves out of digital space and hits the ground it does so in massive concentrations of very material resources, from infrastructure to buildings, inevitably located in some or another national territory.
The establishment of a worldwide network of factories, offices, service outlets, and global financial markets has required innovations in national legal systems and the creation of whole new frameworks outside those national systems. This is, in my reading, a second component of the new geography of power confronting states. Social scientists often summarize these legal changes under the rubric of "deregulation." For them, deregulation is only another name for the declining significance of the state. There is, it seems to me, a more specific process contained in these legal changes, one that, along with the reconfiguration of space I address above, signals a fundamental transformation in the matter of sovereignty. This process points to new contents and new locations for that particular systemic feature we call sovereignty.
For instance, over the past 20 years, international commercial arbitration has been transformed and institutionalized as the leading contractual method for the resolution of transnational commercial disputes. According to Dezalay and Garth, international commercial arbitration is a delocalized and decentralized market for administering international commercial disputes, connected by more or less powerful institutions and individuals whose purpose is to avoid national courts. A second instance of a private regulatory system is represented by debt security or bond rating agencies, which have come to play an increasingly important role in the global economy. In 1980, Moody's and Standard and Poor had no analysts outside the United States; by the early 1990s they each had about 100 in Europe, Japan and Australia.
The predominance of these and other transnational institutions raises questions about the relationship between state sovereignty and the governance of global economic processes. International commercial arbitration is basically a private justice system, while credit rating agencies are private gate-keeping systems. Along with other such institutions they have emerged as important governance mechanisms whose authority is not centered in the state.
Notes Toward Mapping a Role for the State
The new geography of global economic processes - the strategic territories for economic globalization - had to be produced, both through the practices of corporate actors, the requisite resources (i.e. global cities), and the work of new legal regimes. Insofar as all of these processes take place at least partially in national territories, states have had to play a role. Mapping this engagement is a central part of my current research project. At this point, it is clear to me that there are multiple manifestations of this engagement, such as particular court rulings, legislative acts, executive orders, and private corporate decisions. I think of these engagements as representing a frontier zone, with many skirmishes between different vested interests and with many different outcomes across institutions and states. There is also the work of legitimating the changes, such as, for instance, government endorsement of privatization of public sector firms and deregulation of financial markets, both of which de facto entail today the opening of a country's economy to foreign investment.
With these legal innovations has come what we could think of as a new normativity, one deeply embedded in the new logic of the global capital markets. To become normative, this logic requires that states endorse and implement it as the "proper" way for governing a national economy. In this regard, the role of central banks has emerged as critical. Although they have lost some of their macroeconomic authority, they have now become intermediary institutions through which the new international rules of the game are implemented in national economies. Note also the new importance attached to the autonomy of central banks from the executive branch, a condition states must reach in order to get loans from the IMF.
Thus, characterizations of the state as simply losing significance are inadequate. Such characterizations fail to capture this very important dimension, and reduce what is happening to a function of the duality that splits state and global economy: what one wins, the other loses. Deregulation marks not simply the state's loss of control. It is also a mechanism for negotiating the juxtaposition of the inter-state consensus to pursue globalization with the fact that national legal systems remain as the major instantiation through which guarantees of contract and property rights are enforced.
At this time, we can identify at least the following in an effort to map the role of the state in these processes.
First, the emergent, often imposed consensus in the community of states to further globalization has created a set of specific obligations for participating states. The state remains as the ultimate guarantor of the "rights" of global capital, i.e. the protection of contracts and property rights. Firms operating transnationally want to ensure the functions traditionally exercised by the state in the national realm of the economy, notably guaranteeing property rights and contracts. The state here can be conceived of as representing a technical administrative capacity that cannot be replicated at this time by any other institutional arrangement. Furthermore, this is a capacity backed by military power, even global power in the case of some states.
This guarantee of the rights of capital is embedded in a certain type of state, a certain conception of the rights of capital, and a certain type of international legal regime. It is largely embedded in the states of the most developed and most powerful countries in the world, in Western notions of contract and property rights, and in a new legal regime aimed at furthering economic globalization. The state continues to play a crucial, though no longer exclusive role in the production of laws around these new forms of economic activity.
Secondly, while central, the role of the state in producing the legal encasements for economic operations is no longer what it was in earlier periods. Economic globalization has been accompanied by the creation of new legal regimes and legal practices and by the expansion and renovation of some older forms that bypass national legal systems. This is evident in the rising importance of international commercial arbitration and the variety of institutions which fulfill rating and advisory functions that have become essential for the operation of the global economy.
Third, what is generally called deregulation actually refers to an extremely complex set of intersections and negotiations which, while preserving the integrity of national territory as a geographic condition, do transform the exclusive authority of the state over its territory, i.e. the national and international frameworks through which national territory has assumed an institutional form. The discussion in the preceding sections brings to the fore the distinction between national territory and the exclusive authority of the state. These have corresponded closely for much of the recent history since World War I, especially in the case of highly developed countries. Today, globalization and deregulation may be contributing to an incipient slippage in that correspondence. Much deregulation has had the effect of promoting that slippage and giving it a legitimate form in national legal frameworks.
Fourth, in the case of the global capital market, we can see that beyond the fact of its raw economic power, the logic of this market has assumed normative weight in the making of national economic policy. We see this in countries as diverse as the United States and Mexico and, most recently, in countries such as France and Germany, which have long resisted this influence.
Much of my discussion is concerned with a particular type of issue: the formation of new legal regimes that negotiate between national sovereignty and the cross-border operations of corporate economic actors. But there is a second, distinct issue: the particular content of these new regimes. While such regimes contribute to strengthening the advantages of certain types of economic actors, they weaken those of others. With regard to questions of governance, then, there are two different agendas. The new legal regimes discussed here are centered on the effort to create viable systems of coordination among the powerful economic actors now operating globally, such as international commercial arbitration, credit rating agencies, and the new international standards for accounting and financial reporting. But there is a second agenda, one focused on equity and distributive questions in the context of a globally integrated economic system that produces immense inequalities in the profit-making capacities of firms and in the earning capacities of households. There is a larger theoretical question here that concerns which actors gain the legitimacy for governance of the global economy and the legitimacy to take over rules and authorities hitherto encased in the state.
Saskia Sassen is Professor of Sociology at the University of Chicago. Her most recent books are Globalization and its Discontents (1998) and Losing Control? Sovereignty in an Age of Globalization (1996). She is a Fellow of the World Economic Forum and a member of the Council on Foreign}ons. The following article is an expanded version of the keynote address she delivered at the School of Social Work Building dedication on September 25, 1998.
This paper is extracted from a longer essay, "Embedding the Global in the National: Implications for the Role of the State," set to appear in D.A. Smith, D.J. Solinger and S.C. Topik (eds.), States and Sovereignty in the Global Economy (London: Routledge, 1999).
See the United Nations Conference on Trade and Development, Program on Transnational Corporations, World Investment Report 1993: Transnational Corporations and Integrated International Production. New York: United Nations 1993, and United Nations, World Investment Report 1992: Transnational Corporations as Engines of Growth. New York: 1992.
Yves Dezalay and Bryant Garth, "Merchants of Law as Moral Entreprenuers: Constructing International Justice from the Competition for Transnational Business Disputes," Law and Society Review (29:1, 1995) 27-64.
There are two agencies that dominate the market in ratings, with listings of US$3 trillion each. They are Moody's Investors Service, usually referred to as Moody's, and Standard & Poor's Ratings Group, usually referred to as Standard & Poor. The two largest Eurpoean credit rating agencies are Euronation and Fitch IBCA.
This paper is part of a larger five-year project on governance and accountability in the global economy. The first place of the larger project was partly published as the 1995 Leonard Hastings Schoff Memorial Lectures: Losing Control? Sovereignty in an Age of Globalization (Columbia UP, 1996). I want to thank the Schoff Memorial Fund for their support and Columbia University Press for allowing me to use portions of the published lectures.
This dominance assumes many forms and does not only affect poorer and weaker countries. France, for instance, ranks among the top providers of information services and industrial engineering services in Europe and has a strong though not outstanding position in financial and insurance services. But it has found itself at an increasing disadvantage in legal and accounting services because Anglo-Saxon law dominates in international transactions. Foreign firms with offices in Paris dominate the servicing of the legal needs of firms, whether French or foreign, operating out of France. Similarly, Anglo-American law is increasingly dominant in international commercial arbitration, an institution grounded in continental traditions of jurisprudence, particularly French and Swiss.
There is a whole other realm through which the question of sovereignty and territorality is engaged, and which is part of my larger research project. Though in a manner very different from that of the global capital market, the emergent international human rights regime also engages the exclusive territorality and sovereignty of states. It posits rights not dependent on nationality and on their being granted by a state. A key issue for me is the fact that this international regime largely becomes operative in national courts. It is then, yet another manner in which the state participates in transnational projects and is, at least in principle, transformed by this participation. These developments can then be seen as a move away from "statism" but not necessarily from the state as a key institution.