The Global Economy: its necessary instruments and cultures.

20.11.1997

Far from being confined to cross-border processes narrowly defined, Saskia Sassen says, globalization is partly embedded in national institutional arrangements and material resources.

The state remains as the ultimate guarantor of the "rights" of global capital, i.e. the protection of contracts and property rights. Thus the state has incorporated the global project of its own shrinking role in regulating economic transactions. 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 which cannot be replicated at this time by any other institutional arrangement; furthermore, this is a capacity backed by military power, with global power in the case of some states.

Two notions underlie much of the current discussion about globalization.

One is the zero-sum game: whatever the global economy gains, the national 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 judiciary decision.

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These assumptions about zero-sums and geography influence experts on the global economy as well as the general public. For experts it has meant that they have typically confined themselves to cross-border processes, notably international trade and investment; the analysis has produced a rather empirically and theoretically thin account that begs more questions than it answers. Analytically we can distinguish two sets of issues here, one concerning the relation of the global economy to national territory, and the other, the relation of the global economy to the institutions of the national state.

Several, very different bodies of scholarship are contributing to a new understanding about the relation between national territory and global processes. The world-system literature has developed analytic categories that allow us to see the operation of international dynamics in national territories (Wallerstein, 1988; Arrighi 1994 , to cite just a few). In a very different manner, political scientists such as Ruggie (1993) have examined the impact of new global political and economic processes on national territory.

Yet another treatment, one closer to the ground, so to speak, shows us the extent to which global processes and institutional arrangements materialize in national territories (e.g. Mittelman 1996; Knox and Taylor 1995; Drache and Gertler 1991; Castells, 1989; Sassen 1991); many transactions that are a key part of the global economy do not cross borders, or do not do so in the ways that investment and trade do. Further, even the most digitalized global financial market is grounded in a set of very material resources and spaces largely embedded in national territories. In brief, far from being confined to cross-border processes narrowly defined, globalization is partly embedded in national institutional arrangements and material resources.(I develop this argument at length in 1991).

As for the second issue, the relation between the global economy and the institutions of the national state, it has mostly been examined by political scientists who are contributing to a new theorization about sovereignty (Ruggie, 1993; Rosenau, 1992; but see also Krasner, 1997).

Here I want to explore some specific issues that concern the relation between the global economy, territory and certain institutions of the national state. This is part of a larger research project on governance and accountability in the global economy (and this paper reflects the fact that I am far from done with this research).

while globalization leaves national territory basically unaltered, it is having pronounced effects on the exclusive territoriality of the national state - that is, its effects are not on territory as such but on the institutional encasements of the geographic fact of national territory. I argue that precisely because to a large extent global processes materialize in national territories, a large number of national states have had to become deeply involved in the implementation of the global economic system and have, in this process, experienced transformations of various aspects of their institutional structure.

One of the key features of the role of the state vis à vis today's global economy (unlike earlier forms of the world economy) has been to negotiate the intersection of national law and foreign actors - whether firms, markets or supranational organizations. We generally use terms such as "deregulation" and privatization to describe the outcome of this negotiation. The problem with such terms is that they only capture the withdrawal of the state from regulating its economy. They do not register all the ways in which the state participates in setting up the new frameworks through which globalization is furthered; nor does it capture the associated transformations inside the state. One way of putting it then, would be to say that certain components of the national state operate as one of the necessary instrumentalities for the implementation of a global economic system. This would mean that the global economy and the national state do not relate to each other as in a zero-sum situation.

My focus is on the particular moment when a global process or actor intersects with a national law/regulation. It can be thought of as the moment when the state is engaged. Two aspects of this moment are of interest here. One consists of the multiple negotiations necessary for the implementation of the particular type of global economic system we now live with. These include familiar mechanisms such as lifting interest ceilings and new legislative measures allowing privatization of public sector firms, the latter a key condition for the entry of foreign investors. But they also include the formation of new subcultures in international finance and accounting. These are necessary to ensure the cross-border circulation of new financial instruments and new accounting principles, mostly Anglo-American in origin, and this even in such traditionally resistant countries as France or China. My time frame is the last decade, a period when a number of new negotiations emerged or older ones came into full fruition.

The other aspect has to do with the normative weight gained by the logic of the global capital market in setting criteria for key national economic policies. In the multiple negotiations between national states and global economic actors we can see a new normativity that attaches to the logic of the capital market and that is succeeding in imposing itself on important aspects of national economic policy making, though, as has been said often, some states are more sovereign than others in these matters. This is illustrated by the Mexican economic crisis of December 1994, usually described as the global financial markets having "lost confidence" in the leadership of the Mexican economy; the Mexican government then proceeded to work hard to regain that confidence as a way of "solving" the crisis. I am interested in researching the mechanisms through which a state implements this new normativity.

TERRITORY AND TERRITORIALITY IN THE GLOBAL ECONOMY

The global, telecommunications-centered economic system has distinct impacts on two of the marking features of the modern state, sovereignty and exclusive territoriality. There are many ways of demonstrating this (see Rosenau; Dezalay and Garth). Elsewhere I have developed one such way through the argument that globalization entails a partial de-nationalizing of national territory and a partial shift of some components of state sovereignty onto other institutions, such as supranational entities and the global capital market (Sassen 1996). Let me briefly address some of the general issues in this argument, one that plays on the distinction between territory and territoriality.

Economic globalization represents a major transformation in the territorial organization of economic activity and of politico-economic power. Today, the major dynamics at work in the global economy contain the capacity to undo the particular form of the intersection of sovereignty and territory embedded in the modern state and the modern state-system. But does this mean that sovereignty is less of a property, less of a feature in the international system? Or that territoriality is less of a fixture?

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. One of these concerns the actual territories where much of globalization materializes in specific institutions and processes. And the question here is, then, what kind of territoriality is this?

A second component concerns the ascendance of a new legal regime to govern cross- border economic transactions, a trend not sufficiently recognized in the social science literature. There has been a massive amount of legal innovation around the growth of globalization. The third component of the new geography of power is the fact that a growing number of economic activities are taking place in electronic space. This growing virtualization 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 components of the new geography of power to the global footloseness of corporate capital reveals aspects of the relation between global economy and national state which are not adequately, or usefully captured in the prevalent notion of a duality global-national conceived as a mutually exclusive set of terrains. It is this type of dualization that has fed the proposition of a declining significance of the national state in a globalized economy.

DISPERSAL AND VIRTUALIZATION OF ECONOMIC ACTIVITIES

Let me briefly elaborate on a few aspects. I will begin with the question of the spaces of the global economy, or 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 part of highly integrated corporate structures with strong tendencies towards concentration in control and profit appropriation. While conceivably this geographic dispersal of factories and offices could have gone along with a dispersal in control and profits, a democratizing if you will of the corporate structure, that has not happened. Indeed, many of these operations appear as "overseas sales" for large corporations; it is well known that a very high share (estimates range from 40% to 70%) of international trade is actually intra-firm trade.

There are two major implications here for the question of territoriality and sovereignty in the context of a 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 central functions. One way of saying it is that the more globalized firms become, the more their central functions grow - in importance, in complexity, in number of transactions.

Of importance to the analysis here is the dynamic that connects the dispersal of economic activities with the ongoing weight and often growth of central functions. In terms of territoriality and globalization this means that an interpretation of the impact of globalization as creating a space economy that extends beyond the regulatory capacity of a single state, is only half the story; the other half is that these central functions are disproprotionately concentrated in the national territories of the highly developed countries.

I should perhaps clarify that by central functions I do not only mean top level headquarters; I am referring to all the top level financial, legal, accounting, managerial, executive, planning functions necessary to run a corporate organizations operating in more than one country, and increasingly in several countries. These central functions are partly embedded in headquarters, but also in good part in what has been called the corporate services complex, that is, the network of financial, legal, accounting, advertising firms that handle the complexities of operating in more than one national legal system, national accounting system, advertising culture, etc. and do so under conditions of rapid innovations in all these fields.

Such services have become so specialized and complex, that headquarters increasingly buy them from specialized firms rather than producing them in-house. These agglomerations of firms producing central functions for the management and coordination of global economic systems, are disproportionately concentrated in the highly developed countries - particularly, though not exclusively, in the kinds of cities I call global cities. Such concentrations of functions represent a strategic factor in the organization of the global economy, and they are situated right here, in New York, in Paris, in Amsterdam.

One argument I am making here is that it is important to unbundle analytically the fact of strategic functions for the global economy or for global operation, and the overall corporate economy of a country. For the purposes of certain kinds of inquiry this distinction may not matter; for the purposes of understanding the global economy, it does. Further, to operate a worldwide network of factories, offices and service outlets, major and minor legal innovations were necessary, a subject I return to later.

Another instance today of this negotiation between a transnational process or dynamic 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 75 US$ trillion in turnover 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/information around the globe. Much attention has gone to the capacity for instantaneous transmission of the new technologies. 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.

DENATIONALIZATION OF NATIONAL TERRITORY

One could ask whether the impact of economic globalization on national territory and state sovereignty is yet another form of extraterritoriality, only one centered in economic rather than purely political factors. If this is a form of extraterritoriality it would leave the sovereignty of the state fundamentally unaltered. Or is this a development of a different sort, one wherein the sovereignty of the state is engaged, where both these categories - territoriality and sovereignty - are partially transformed.(For a fuller discussion see Sassen 1996).

One aspect of this question concerns the particular forms of legal innovation that have been produced and within which much of globalization is encased, framed; and, further, how these innovations interact with the state, or more specifically, with the sovereignty of the state. These legal innovations and changes are often summarized under the notion of "deregulation" and taken as somewhat of a given - though not by legal scholars. In much social science, deregulation is 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 may signal a more fundamental transformation in the matter of sovereignty, pointing to new contents and new locations for that particular systemic property 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. In a major study on international commercial arbitration, Dezalay and Garth (1995) conclude that it is a delocalized and decentralized market for the administration of international commercial disputes, connected by more or less powerful institutions and individuals who are both competitive and complementary. (See also Salacuse 1991). Another 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. Ten years ago Moody's and Standard and Poor had no analysts outside the U.S.; by 1993 they each had about 100 in Europe, Japan and Australia.

These and other such transnational institutions and regimes do raise questions about the relation between state sovereignty and the governance of global economic processes. International commercial arbitration is basically a private justice system and 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. They contribute to maintain order at the top.

Of particular concern here will be how the newly formed World Trade Organization negotiates the growth of these private regimes and the attempt to form supranational regimes still centered on states and the inter-state system. As Rosenau has noted, because so many processes are transnational, govts increasingly are not competent to address some of the major issues confronting our societies; this is not the end of sovereignty, but rather an alteration in the "exclusivity and scope" of the competence of governments.

What matters here is that global capital has made claims on national states and these have responded through the production of new forms of legality. The new geography of global economic processes, the strategic territories for economic globalization, had to be produced, both in terms of the practices of corporate actors and the requisite infrastructure (i.e.. global cities), and in terms of the work of the state in producing or legitimating new legal regimes. Representations that characterize the national state as simply losing significance fail to capture this very important dimension, and reduce what is happening to a function of the global-national duality - what one wins, the other loses. I view deregulation not simply as a loss of control by the state but as a crucial mechanism to negotiate the juxtaposition of the inter-state consensus to pursue globalization and the fact that national legal systems remain as the major, or crucial instantiation through which guarantees of contract and property rights are enforced.

There are two distinct issues here. One is the formation of new legal regimes that negotiate between national sovereignty and the transnational practices of corporate economic actors. The second issue is the particular content of this new regime, one which contributes to strengthen the advantages of certain types of economic actors and to weaken those of others. Regarding broader questions of governance these two aspects translate into two different agendas. One is centered on the effort to create viable systems of coordination/order among the powerful economic actors now operating globally (to ensure, one could say, that the big boys at the top don't kill each other). International commercial arbitration and credit rating agencies can be seen as mechanisms for creating this type of order. The second is not so much focused on how to create order at the top but on equity and distributive questions in the context of a globally integrated economic system with immense inequalities in the profit-making capacities of firms and in the earnings capacities of households.

The strategic spaces where many global processes are embedded are often national; the mechanisms through which new legal forms, necessary for globalization, are implemented are often part of state institutions; the infrastructure that makes possible the hypermobility of financial capital at the global scale is embedded in various national territories. These developments signal a transformation in the particular form of the articulation of sovereignty and teritory that has marked the recent history of the modern state and inter-state system, beginning with WWI and culminating in the Pax Americana period. The specific process under way today is one of the de- nationalizing of national territory.

Both through corporate practices and through the fragments of an ascendant new legal regime, territory is being de-nationalized, though in specific and highly specialized fashion - as befits the tenor of this era. This process of denationalization of national territories cannot be reduced to a geographic conception as was the notion in the heads of the generals who fought the wars for nationalizing territory in earlier centuries. This is a de-nationalizing of specific institutional arenas: Manhattan and the City of London are the equivalent of free trade zones when it comes to finance. But it is not Manhattan as a geographic entity, with all its layers of activity, and functions and regulations, that is a free trade zone. It is a highly specialized functional or institutional realm that becomes de-nationalized. It is in this sense that globalization can be seen as having an impact on territoriality rather than territory.

THE NECESSARY INSTRUMENTALITIES AND CULTURES OF THE GLOBAL ECONOMY

In brief, multiple policy, analytic and narrative negotiations were necessary for the implementation of a global economic system in the context of national territorial sovereignty. We can identify at least the following:

a) First, 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 exclusive territoriality, i.e. the national and international frameworks through which national territory has assumed an institutional form. The discussion in the preceding section brings to the fore the distinction between national territory and national territoriality. Territory and territoriality have corresponded tightly for much of the recent history of mostly so-called protected economies, especially in most of the 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.

b) Secondly, many of the negotiations necessary for the implementation of a global economy have to do with the creation of new business cultures and new consumer cultures. And they have to do with distinct ways of representing what is the "economy" and what is "culture." In my reading of the evidence, economic globalization is encased in a broad range of cultural forms, typically not recognized in general commentaries (by the media) or in expert accounts as cultural but rather seen as belonging to the world of techne and expertise.

For instance, international finance became an immensely creative practice in the 1980s, with many new, often daring instruments invented and the creation of several new markets. For this to succeed required not only state of the art technological infrastructure and new types of expertise. It also required a very specific transnational subculture within which these innovations could circulate, be acceptable and be successful-- that is, actually sold. We simply cannot take for granted the vast increase in the orders of magnitude of the financial markets and the variety of mechanisms through which forms of capital hitherto considered fixed (such as real estate) were made liquid (and hence could circulate globally). These massive innovations entailed a very significant set of negotiations in view of what had been the dominant banking culture. And it entailed a rather dramatic increase in the number of very young and very smart professionals who had command over both the math and the computer/software knowledge required, and who at a far younger age than had been the norm in the industry gained significant control over vast amounts of capital.

Another important instantiation is the ascendance of a certain type of legal and accounting services as the "correct" one in global business transactions, basically Anglo-American in origin. This also entails a series of negotiations, some conceptual some operational, e.g. locating Anglo-American firms in Paris or in Beijing, as is now happening, to handle cross- border business in either direction.

* c) One of the distinctive features of this current phase as compared with the three decades after WWII is an incipient de- nationalizing of national territory such that a "global" transaction (e.g. a deal between a French and an Indonesian firm) can take place inside a particular territory (e.g. Manhattan). Deregulation has played a critical role in this; but so has the ascendance of computer networks. For instance, over half of the transactions in the fiber-optic cable network in Manhattan involve international deals; but they are taking place inside Manhattan (e.g. from one building to another, or involving a bi- national stock market operation on Wall Street). This is all part of the global economy, but it does not cross borders in the geographic sense of the word. For this to be possible required a whole set of institutionaland legislative innovations at the national level. In the U.S., for example, the so-called International Banking Facilities made much of this possible.

Here I am particularly interested in researching instances of global transactions which cannot be captured in studies or measures of cross-border transactions, and which require considerable elaboration of national legislative or regulatory frameworks. Much financial activity falls under these characteristics.

* d) In terms of sovereignty, the emergent consensus in the community of states to further globalization has created a set of specific obligations on participating states. The state remains as the ultimate guarantor of the "rights" of global capital, i.e. the protection of contracts and property rights. Thus the state has incorporated the global project of its own shrinking role in regulating economic transactions (Cox 1987; Panitch 1996). 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 which cannot be replicated at this time by any other institutional arrangement; furthermore, this is a capacity backed by military power, with 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 state 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 (Trubek et al. 1993; Coombe 1993). The state continues to play a crucial, though no longer exclusive, role in the production of legality around new forms of economic activity (Sassen 1996).

d) While central, the role of the state in producing the legal encasements for economic globalization is no longer what it was in earlier periods. Economic globalization has also been accompanied by the creation of new legal regimes and legal practices and the expansion and renovation of some older forms that bypass national legal systems. Among the most important ones in the private sector today are 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 (Dezalay and Garth 1995; Salacuse 1991; Sinclair 1994).

* e) 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 U.S. and Mexico and, most recently in countries such as France and Germany that have long resisted this influence.

f) There is a whole other realm through which the question of sovereignty and territoriality is engaged. Though in a manner very different from that of the global capital market, the emergent international human rights regime also engages the exclusive territoriality and sovereignty of national states. It posits rights not dependent on nationality and on their being granted by a state. What matters here is not so much the moral force of the idea or the weakness of its implementation, but the far more practical fact of a rapid multiplication of instruments available to judges (and the build-up of case law where this applies, as in the US for example) (Jacobson 1996; Reisman 1990). A key issue here 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.(see Franck 1992).

IMPLICATIONS

The theoretical and methodological challenge presented by the current phase of globalization is that the latter entails a transcending of exclusive national territoriality and of the interstate system yet is implanted in national territories and institutions. Hence globalization directly engages two marking features of much social science: the nation-state as the unit of analysis and the implied correspondence of national territory and national exclusive territoriality.

As has been frequently noted, much social science rests on the explicit or implicit assumption of the nation-state as the container of social processes. There is, it seems to me, a second common assumption underlying much social science: that exclusive territoriality is the same as national territory. Both these assumptions describe conditions that have held for a long time, i.e. the history of the modern state, but are now being partly unbundled. One of the features of the current phase of globalization is that the fact of a process happening within the territory of a sovereign state does not necessarily mean it is a national process. This localization of the global, or of the non- national, does violence to many of the methods and conceptual frameworks prevalent in social science. Developing the theoretical and empirical specifications that allow us to accomodate this is difficult and will be time consuming. But it has started (see for instance the effort in this direction by Mazlich and Buultjens, 1993; Knox and Taylor 1995; The Gulbenkian Foundation Report on the Status of the Social Sciences, 1996; Sassen 1996).

These assumptions about the nation-state as container and territoriality as synonymous with territory work well for many of the subjects studied in the social sciences. But they are not helpful in elucidating and developing research techniques when it comes to globalization.

On the broader normative front, globalization has brought with it and indeed, has depended on, national states internalizing some of the goals of globalization. The global capital market has acquired normative weight in shaping key national economic policies. We need to understand to what extent this new realm of economic power is at all accountable to citizens through the traditional mechanisms for governance and accountability of modern democracies. And if it is not, how we can make it be so.

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