Today I am headed to the Wharton School at the University of Pennsylvania for a conference on the “Future of the State.” It is an interesting title. Ten years ago, we thought the state was on the way out. Between the rise of global corporations and global NGO’s, not to mention global networks of trade, internet communities, and international governance, it seemed that states were quaint anachronisms, important for keeping roads maintained and paying pensions to the boomer generation. But they no longer seemed so powerful, not major agents of change that would shape the world!
The actions of Vladimir Putin in Ukraine have just put an exclamation point on the continued relevance of the state. But in France, the UK, Hungary and Japan, in the rich world, and in Brazil, Turkey, Venezuela, Thailand, and other places in the developing world, we are seeing politics focus on the state once again — who will control the government, and what will they do, is the central question for these societies.
In fact, global networks and trade have not made the state irrelevant. Quite the reverse; the quality of governance and the choice of state policies now is the determining factor in whether countries benefit from the gains made available through global finance and the international economy.
Where a state invests in its workers, creates sound infrastructure, regulates the financial sector, encourages international investment, and maintains political stability and accountability, economies thrive in global competition. Where a state maintains access to economic and political opportunities, limits corruption, and provides strong public services, a middle class can grow and boost human capital, productivity, and consumption.
Yet where states fail to do these things, leaving workers with educations that are not useful for work, produce economic or political uncertainty, and corruption that diverts capital from useful ends and produces rampant inequality, people fall behind.
Today’s world has two huge challenges. Africa retains extremely rapid population growth, and will add 2 billion people to its population this century. Will they become productive contributors to the world economy and fast growing markets for the rest of the world? This is the greatest potential growth source in future — but whether it is realized depends entirely on the quality of governance in that region. And that is something that is very uncertain as we write today, with some countries like Ghana looking like models of good governance, and others like Uganda appearing to descend into the wreck of personalist and autocratic rule.
The second challenge is for rich countries (and China) who have rapidly aging and contracting workforces. How will these countries keep productivity rising fast enough to support aging populations, whether by keeping older people productive at work or raising the productivity of younger workers? Right now, these countries are not investing in the younger generation, but visiting on them high rates of unemployment and sharply decreased public investment in education, forcing the young to incur large debts just to acquire human capital. My daughter is starting college this Fall, and we were offered loans with an origination fee of 4% PLUS an interest rate over 6% per year. Can students truly move ahead with that kind of burden? Can the state turn over the future of its labor force to market forces when such forces threaten to choke off much-needed improvements to human capital?
In short, states and state policy matter hugely. Unfortunately, in the long run and on the big things that matter, we are getting it wrong. Not surprising, perhaps, that some states are flexing their muscles and not expecting a particularly strong and effective response from others.