Globalization and the Fiscal Autonomy of the State

This paper investigates the fiscal consequences of various measures of policy liberalization designed to increase the global integration of developing countries. Its principal conclusions are that globalization has further accentuated the fiscal constraints facing states, and that there is a cumulative process of causation between liberal policies and the fiscal constraint. These conclusions imply that the fiscal basis of constructive state action to promote human development and solve distributive conflict is now more limited than before. Even if there are significant long-run benefits to globalization (this remains a controversial claim), the transition to greater global integration in developing countries requires strong public action and a stable fiscal base. The push to globalization can and has been premature from this viewpoint. Globalization and human development are not orthogonal to each other. There are significant tradeoffs between them mediated especially through the fisc. Developing country governments are especially constrained by the paucity of tax and expenditure instruments which conflicts with accepted canons of economic efficiency and `good' macroeconomic policy which globalization is supposed to enforce. States must retain the autonomy from global market forces necessary to pursue nationally and politically determined tradeoffs. Not just international financial institutions but also states as policy-makers, have played an essential determining role in this process of external integration. Hence, it appears as something of a paradox that states are seen as helpless in the face of the forces of globalization. The paradox dissolves once it is recognized that the global arena of policy has both powerful and weak players, countries able to take advantage of the global marketplace and those vulnerable to its compulsions, individual countries and various collectivities of nations, active agents of change and passive onlookers. The fiscal autonomy of states has been trimmed, in part, by states acting autonomously and powerfully.