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What Role for the State?

From Project Syndicate by Kemal Derviş:

The financial crisis of 2008 has spurred a global debate on how much government regulation of markets – and what kind – is appropriate. In the United States, it is a key theme in the upcoming presidential election, and it is shaping politics in Europe and emerging markets as well.

For starters, China’s impressive growth performance over the last three decades has given the world an economically successful example of what many call “state capitalism.” Brazil’s development policies have also accorded a strong role to the state.

Questions concerning the state’s size and the sustainable role of government are central to the debate over the eurozone’s fate as well. Many critics of Europe, particularly in the US, link the euro crisis to the outsize role of government there, though the Scandinavian countries are doing well, despite high public spending. In France, the new center-left government faces the challenge of delivering on its promise of strengthening social solidarity while substantially reducing the budget deficit.

Alongside the mostly economic arguments about the role of government, many countries are experiencing widespread disillusionment with politics and a growing distance between citizens and government (particularly national government). In many countries, participation rates in national elections are falling, and new parties and movements, such as the Pirate Party in Germany and the Five Star Movement in Italy, reflect strong discontent with existing governance.

In the US, the approval rating of Congress is at a record-low of 14%. Many there, such as my colleague Bruce Katz at the Brookings Institution, believe that the only solution is to bring a larger share of governance and policy initiation to the state and municipal level, in close partnership with the private sector and civil society.

But that approach, too, might have a downside. Consider Spain, where too much fiscal decentralization to regional governments contributed significantly to weakening otherwise strong public finances.

A crucial problem for this global debate is that, despite the realities of twenty-first-century technology and globalization, it is still conducted largely as if governance and public policy were almost exclusively the domain of the nation-state. To adapt the debate to the real challenges that we face, we should focus on four levels of governance and identify the most appropriate allocation of public-policy functions to them.

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