The demise of the Nation State?
Vito Tanzi

Under current and likely future trends, the total role of the government in the economy would be reduced.

Total tax revenue will probably fall and, given limitations to public sector borrowing, public spending must also fall. If taxes had been too high, this fall might encourage more growth provided that spending were reduced correspondingly. Globalization may also reduce the use of regulations imposed at the national level, often used as proxies for taxing and spending, while increasing those imposed at a global level. Globalization will have its greater effect on the role of national governments for the reasons explained above and because the taxes most affected will be those collected at national levels. Local governments will be less affected on their tax revenue and will be required to play a larger role in creating a living environment that attracts investment and higher-income individuals.

Local governments may also face problems which, if allowed to become significant, could constrain them and reduce the benefits that may come with the new environment. Here we can only mention some of these problems.

Tax competition among local governments might intensify, thus leading to revenue losses and to possible misallocation of resources. This is important because the larger role played by local governments would require larger spending on their part and thus larger revenue than in the past. The greater assignment of spending responsibilities to the local governments would not automatically be matched by a greater assignment of tax revenue.

Corruption by local officials—in zoning decisions, in licensing, in inspecting, in authorizing certain activities, in discouraging others, and so on—can be significant and can increase the cost of doing business in a given area. Recent literature has shown that corruption can play a role similar to that of high tax revenue in discouraging foreign investment. See Wei (1997) and Mauro (1995). Arguments have also been advanced that corruption may be more prevalent at the local level than at the national level. See Prud'homme (1994) and Tanzi (1996b).

National markets may become fragmented if local governments put obstacles on some activities or on the movement of people (e.g., through licensing, residency requirements, and so on). This is likely to happen if those who are getting rents from protected or monopolistic positions at the local level are able to influence the decision of the local policymakers or officials. Local protectionism (through the use of regulatory instruments) is definitely a danger worth worrying about.

Perhaps it is important to reiterate the basic point of this paper: that the absence of a world government to deal with many allocative issues at the international level is creating the need to expand the role of the international institutions. Two points are worth making in this connection. First, because of the lack of taxing power on the part of these institutions, their role will be largely played through their regulatory power and their power of persuasion. In some cases, regulatory tools may not be the most efficient tools. Second, in their attempts to address market failures at the international level, these institutions will undoubtedly experience some failures similar to those commonly referred to by the public choice literature as government failures. Hopefully, these government failures will not become as important as the market failures that the institutions attempt to correct.

This speculative paper has analyzed some of the recent trends in the world, and particularly those associated with globalization and related technological developments, to draw inferences about the future role of national governments and, to a lesser extent, the assignment of fiscal responsibilities between national and subnational governments. The conclusions reached are highly suggestive and important, but much more thinking and work will be necessary before they can be considered as definitive conclusions.