The demise of the Nation State?
Vito Tanzi

The situation described above characterizes developments in the post-World War II and, especially, in the post-1960 period. By the 1960s, the Keynesian revolution and the ideology associated with central planning and socialist thinking were having a strong influence on the actions of many governments in industrial countries. See Tanzi (1997). The prevailing intellectual climate led to:
(a) policies that gave a growing role to the government, especially as measured by the share of government spending and taxes into GDP; and, because of the nature of the new activities or the new spending, led to
(b) a growing importance of the national government in the total activities of the public sector. In terms of economic functions, in many countries the national governments became more important than the subnational governments.

More recently, and especially since the early 1980s, the social and economic environment started changing as it became less friendly toward governmental action. The reasons were several.

First, the Keynesian revolution lost much of its steam. Many intellectual and practical developments challenged some of its basic premises and showed some of its shortcomings.

Second, growing knowledge about developments in Eastern Europe and in the Soviet Union sharply reduced the attraction that socialism and central planning had on Western intellectuals and policymakers. There was less talk about the virtue of developing a “mixed” economy. In the l990s, most of the centrally-planned economies started a difficult transition to become market economies.

Third, the growing burden of taxation made taxpayers progressively less willing to support additional taxes and stimulated the growth of the underground economy. The underground economy has become a major concern for many policymakers.

Fourth, high public debts led to increases in interest rates and in interest payments to service the debt.

Fifth, there was a growing perception on the part of the citizens of many countries that the money raised through high taxes or through higher fiscal deficits was not contributing in any appreciable way to enhancing the indicators that determine social welfare. While spending went up, many of the problems remained.

Recent research has provided some empirical backing to these perceptions. See Tanzi and Schuknecht (1997). That research has suggested that higher public spending has not contributed to better results as measured by various socioeconomic indicators. The countries that kept total public spending relatively small did as well, or even better, in terms of many of these indicators than those that allowed government spending to reach high levels. Concern about inefficiency in government expenditure and about corruption and underground activities associated with the higher role of the government also grew.

Sixth, many came to believe that in recent decades governments had been distracted by the new, ambitious functions that they had assumed. As a consequence, they tended to pay less attention to the more traditional and more important core activities of the state. See World Bank (1997) and Tanzi (1997). Because of this, markets and economic activities suffered.

Finally, a phenomenon generally referred to as globalization started affecting economic activities and policies. Through its many ramifications and effects, this phenomenon has started to influence what governments do and the division of responsibility between national and subnational governments. The next two sections will address more directly these issues.