Finding the Conditions that Reduce War in the World

By: Bruce Russett*

We now know enough to make some strong generalizations, based on a combination of theory and systematic evidence, about the political and economic conditions that have significantly reduced the probability of violent conflict in much of the world in general. When one or, especially several, of these conditions are present, the risks of deadly violence are much lower than where they are absent. I shall concentrate on what these conditions are, and leave it largely to readers to consider the degree to which they exist, or can be made to exist, in particular parts of the world. Readers who decide that they do not exist in any significant degree, and cannot be brought into existence in the reasonable future, should then consider what other policies might be put in place and what the consequences might be. What I present can take the form merely of early warning (or early assurance), or of warning plus some suggestions on how the warned-about events can still be avoided. It should also be clear that some of the policies that could flow from my analysis will be vigorously resisted by important political actors. So if the suggestions are to succeed, they will need especially vigorous promotion.

The evidence for my statements is based on a large body of research on the causes of major international violence, which, with many collaborators, and many challenges to keep me honest, I have been studying for over a decade. Similar but certainly not identical conclusions apply to civil wars, but I will confine myself to conflict between independent countries.

My approach is to think like a medical researcher, faced with the problem of what constitutes risk factors for such diseases as heart attacks or particular cancers. Some researchers concentrate on micro-examinations of the conditions in individuals, and all the way down to cell biology. Others use large data bases on many individual cases sometimes complied from controlled experiments, more often from surveys and medical records to compute the increase or decrease of risk associated with various genetic, environmental, and behavioral conditions that plausibly have some causal relationship to disease. Both of these kinds of research are essential to making persuasive generalizations. My specialty is the analysis of large databases, so that is what I will report on this short presentation, whit only brief mention of particular cases that illustrate my generalizations.

The informed base for my study of international violent conflict is based on the experience in each year of more than a century, since 1885 to be exact. It consists of information on the characteristics of countries and their interactions with all other countries over time. It is organized by pairs of countries, on the principle that countries don’t fight everyone at once, but fight particular other countries with which they have grievances, or which present opportunities for aggrandizement, and with which it has an opportunity fight and at least some perceived chances of success. Thus it is organized as Russia-China, Russia-U.S., Russia-Iran, Iran-Iraq, etc. in each year and in again in each year forward and back. For the whole period this gives us a lot of cases (pairs): roughly 230,000 with sufficient information to analyze.

The first thing we need to know about them is who fights whom when and, conversely, who doesn’t fight whom. Specifically, which pairs experienced the onset of a militarized dispute in which at least one person died. This category represents something of a middle point between all out wars and disputes in which violence was threatened, but not actually used at a level that produced a fatality. Most such disputes do not escalate to war, but most wars do begin as fatal disputes, so the latter have intrinsic potential importance. Wars are relatively rare events, and so harder to generalize about. Non/fatal militarized disputes are quite common, but somewhat less interesting. On average, fatal disputes arise in any year between in only about one percent of country pairs rare but, with over 2,000 instances, happen often enough to permit reliable generalizations. My research has nevertheless found very similar patterns of causation for non-fatal militarized disputes, fatal disputes, and wars, so my focus here on fatal disputes is not a slight-of-hand to mislead you.

The other things we need to know are about the characteristics of each pair of countries. Some are obvious: how near the two countries are physically, their relative power (rather evenly balances, or with one predominating), and whether they are allied militarily. Except for great powers with powers with a long reach, most fatal disputes are with one’s neighbors so distance becomes a control factor, as does whether one or both of the countries is a major power. Everyone who studies violence thinks relative power is important, but there is no consensus on whether a balance of power induces or inhibits violence so we have to look at the evidence. For this I use a composite index of military power and economic strength. And it is widely believed that allies have or create common interests that discourage violence between them.

But other possible inferences need also to be examined. It is now widely held that democracies are at low risk of fighting each other; that institutional constraints and/or perceptions of commonality make even low-level fatal disputes between them rare. Democratic leaders, knowing that they will be punished at election time for unnecessary wars on wars bringing high casualties on their own forces, prefer to settle their conflicts with other democratic leaders peacefully. Dictators, however, are not restrained by the fear of electoral defeat, so the risk of a violent dispute between a democracy and a dictatorship is higher, as are violent conflicts between dictatorships. So first we need to know how democratic each member of the pair is, and focus especially on how democratic the less democratic member is using a scale that is in common use in the profession. Second, there is a long tradition that considers international trade a pacifying influence; that countries whose economies are tightly enmeshed will have too much to lose from fighting each other. So we look at the evidence. To do so we need to know what proportion of Ruritania’s GNP is devoted to trade with Induland, and vice versa, and especially to focus on the lower of these two rations to gauge the strength of this putative conflict-reducing force. Finally, another line of thought about international relations emphasizes the role of international organizations in preventing and settling disputes short of war. So we need some indicator admittedly crude in this instance of the number of IGOs of all kinds (global and regional; security, economic, environmental, etc.) to which both members of the pair jointly belong.

A final caution is of course that a minimal (though not sufficient) requirement for attributing causation to any of these influences is that they must precede the dispute. So all the information on influences apply to the year preceding. We are then able to look at the evidence systematically, using statistical analyses like those used by the big-database medical researchers that allow us to identify the independent effect of each influence while holding all the other influences at their average value. It’s like what the doctor might say: If you would eat better, exercise more, and give up smoking you could cut your risk of a heart attack by half. But even if you won’t change your diet or get off the couch, you can still cut your risk of a heart attack by 30 percent if you’ll stop smoking. So the Table gives you a summary of these results. The control influences (distance and major power status) are part of the analysis, but their effect is not shown since they really are not subject to change by policy. (We could all cut our heart attack risk if we could grow younger, but that’s not possible) For the others, the table shows the percentage change in the risk of fatal dispute when each of the other members in turn is changes by a standard amount. For further details on the theory, the database, or the analysis I refer you to Russett and Oneal (2001), and Oneal and Russet (2003) which presents these latest results.

As the table shows, changing the pair of countries from not allied with each other to allied makes effectively no difference. The 1 percent increase is trivial, and not statistically significant. Simply concluding an alliance between two countries is not a reliable way to produce peace. All the other influences, however, have strong effects, and the effects are high significant statistically and so not the result of chance.
Relative power does make a big difference, with the evidence pointing to a balance of power as inducing dangerous uncertainty about which side might win a violent confrontation. Disproportionate power, however, often deters weak states from challenging or resisting strong ones. But to change its situation from one of near equality to a predominance at the 90th percentile of imbalance would demand a 40-fold growth in relative power virtually unattainable for any country. So, for policy-relevant interventions we must look elsewhere.

On average, if the less democratic country in the pair were to undergo a change in its regime to one that was highly democratic, that makes a huge difference in the risk of violence between the two. Trade also makes a substantial difference, though less than democracy. An increase in the value of trade to make the less dependent member of the pair much more integrated with the economy of the other member is associated with reduction in the risk of a fatal dispute by about one third. And a comparable increase in the number of shared international organization memberships produces a risk reduction of more that 40 percent. That’s what happens when each one of these three influences changes individually, holding all the others constant. Democracy, economic interdependence, and membership in a lot of IGOs are somewhat correlated, however, so it is not meaningful simply to add up the three percentages. But if all three of them change at the same time, the effect is to reduce the statistical risk of violence to only 5 percent of what it had been. Violence may sometimes happen (even some people who obey all the health rules still get heart attacks), but it is very rare.

These three influences their relations with one another, and with the probability of peace constitute what I call a Kantian system, after the 1795 vision of Immanuel Kant in his essay, Perpetual Peace. His title sounds quaint and naïve, but he has far more realistic than that title sounds. He recognized the importance of power politics, and the dangers of war among political units that did not share these three characteristics. But he anticipated that among countries that did share them war could be mad unthinkable and unnecessary. Kant also saw these influences as mutually reinforcing, in what we now call a dynamic feedback system. Here I have emphasized the putatively causal impact of each of these three influences on peace. But in related work other researchers, my colleagues, and I have found evidence of this system of mutually reinforcing influences. Peace in turn enables trade, and encourages IGO ties. Democracies trade more with each other that with dictatorships, and are more likely to join international organizations with other democracies. Many international organizations promote trade, and some promote democratization. Increased trade in turn requires more and deeper international organization ties. With the whole ball of wax one creates a set of very powerful synergies, a dynamic that is very resistant to reversal. That is what has happened most clearly in the Europe of the EU. But in lesser degree it has happened within the much larger set of OECD countries, and in much of Latin America, notably among the members of Mercosur. It can happen elsewhere.

Now you may well say that much of the world, including much of Asia and the Middle East, is a long way, figuratively as well as physically, from the EU or even Mercosur. And of course that’s true. But the Treaty of Rome was not built in a day, and surely any significant reduction in the risk of conflict in Asia or the Middle East will not happen rapidly. What might happen is the gradual buildup of Kantian linkages over time if doing so becomes, for whatever reasons, a goal of policy makers. In some areas the creation of economic IGO linkages, within the area and with neighboring states, may be easier than democratization. Something is better than nothing, maybe quite a lot better. Nevertheless, the abandonment of efforts toward peaceful democratization will incur costs in addition to those imposed directly on the peoples who continue under dictatorships- in terms of continued high risk of international conflict. If democratization becomes a casualty of other presumed priorities in the war against terror, other kinds of war will create other kinds of casualties.

I want to add two further comments. In analyses of this kind we also found that two popular theories about the causes of international conflict were unsupported by the evidence. One is that regime change, especially from dictatorship to democracy, made no systematic difference: countries that newly democratic, but truly democratic, were not more likely to get into fatal disputes. For every example of conflict induced by democratization there is another example of conflict avoided by democratization. Overwhelmingly the effect is one of the level of democracy achieved, not how recently it happened. So we should go on with speeding the full transition from dictatorship to democracy though I remain doubtful whether democracy can often be successfully imposed by outsiders.

The other is that the “clash of civilizations” phenomenon has been vastly overblown. If one controls for levels of democracy, economic interdependence, and IGO linkage, violent disputes are no more likely between pairs of countries with different “civilizations” than between pairs with the same civilization. And certainly it is easier (though of course not easy) for policy makers to raise the three Kantian influences than to change a country’s civilization. This is relevant to the so-called war on terrorism. Afghanistan under the Taliban government represented not Islamic counties in general, but a particular kind of Islamic government: politically repressive, isolated from the world economy, and barely represented in international organizations. Generalization from such a government to conflict between all Islamic countries and others is empirically false though if enough people on both sides should come to believe it, it could become a self-fulfilling prophecy.

I conclude with five bullet points:

·         Democratization, increasing economic interdependence, and an increasingly dense network of international organizations each produce a great reduction in the risk of violent conflict between those countries which share those characteristics.

·         Together, the three linkages of democratization, interdependence, and IGOs create a powerful self-reinforcing system to solidify peaceful relations.

·         Some improvement on each of these dimensions is better than none. Do what is possible.

·         There is little systematic evidence to support fears that the process of democratization will produce more international conflict. Get on with the job.

·         Fears of a “clash of civilizations” may not be groundless, but such clashes can be prevented by wise policy choices in establishing the three great linkages across civilizations.

 

References
Russett, B. and Oneal, J. Triangulating Peace: Democracy, Interdependence, and international Organizations. New York: W.W. Norton, 2001.

Oneal, J. and Russett, B. “Causes of Peace: Democracy, Interdependence, and International Organizations,” International Studies Quarterly 46:3 (September 2003).

 

Source: http://216.122.222.203/pugwash/russett_2004_1.asp

 

 

The Rise Of The Virtual State

By Richard Rosecrance

Territory Becomes Passe

Amid the supposed clamor of contending cultures and civilizations, a new reality is emerging. The nation-state is becoming a tighter, more vigorous unit capable of sustaining the pressures of worldwide competition. Developed states are putting aside military, political, and territorial ambitions as they struggle not for cultural dominance but for a greater share of world output. Countries are not uniting as civilizations and girding for conflict with one another. instead, they are downsizing–in function if not in geographic form. Today and for the foreseeable future, the only international civilization worthy of the name is the governing economic culture of the world market. Despite the view of some contemporary observers, the forces of globalization have successfully resisted partition into cultural camps.

Yet the world’s attention continues to be mistakenly focused on military and political struggles for territory. In beleaguered Bosnia, Serbian leaders sought to create an independent province with an allegiance to Belgrade. A few years ago Iraqi leader Saddam Hussein aimed to corner the world oil market through military aggression against Kuwait and, in all probability, Saudi Arabia; oil, a product of land, represented the supreme embodiment of his ambitions. In Kashmir, India and Pakistan are wing for territorial dominance over a population that neither may be fully able to control. Similar rivalries beset Rwanda and Burundi and the factions in Liberia.

These examples, however, look to the past. Less developed countries, still producing goods that are derived from land, continue to covet territory. In economies where capital, labor, and information are mobile and have risen to predominance, no land fetish remains. Developed countries would rather plumb the world market than acquire territory. The virtual state–a state that has downsized its territorially based production capability–is the logical consequence of this emancipation from the land.

In recent years the rise of the economic analogue of the virtual state–the virtual corporation–has been widely discussed. Firms have discovered the advantages of locating their production facilities wherever it is most profitable. Increasingly, this is not in the same location as corporate headquarters. Parts of a corporation are dispersed globally according to their specialties. But the more important development is the political one, the rise of the virtual state, the political counterpart of the virtual corporation.

The ascent of the trading state preceded that of the virtual state. After World War II, led by Japan and Germany, the most advanced nations shifted their efforts from controlling territory to augmenting their share of world trade. In that period, goods were more mobile than capital or labor, and selling abroad became the name of the game. As capital has become increasingly mobile, advanced nations have come to recognize that exporting is no longer the only means to economic growth; one can instead produce goods overseas for the foreign market.

As more production by domestic industries takes place abroad and land becomes less valuable than technology, knowledge, and direct investment, the function of the state is being further redefined. The state no longer commands resources as it did in mercantilist yesteryear; it negotiates with foreign and domestic capital and labor to lure them into its own economic sphere and stimulate its growth. A nation’s economic strategy is now at least as important as its military strategy; its ambassadors have become foreign trade and investment representatives. Major foreign trade and investment deals command executive attention as political and military issues did two decades ago. The frantic two weeks in December 1994 when the White House outmaneuvered the French to secure for Raytheon Company a deal worth over $1 billion for the management of rainforests and air traffic in Brazil exemplifies the new international crisis.

Timeworn methods of augmenting national power and wealth are no longer effective. Like the headquarters of a virtual corporation, the virtual state determines overall strategy and invests in its people rather than amassing expensive production capacity. It contracts out other functions to states that specialize in or need them. Imperial Great Britain may have been the model for the nineteenth century, but Hong Kong will be the model for the 21st.

The virtual state is a country whose economy is reliant on mobile factors of production. Of course it houses virtual corporations and presides over foreign direct investment by its enterprises. But more than this, it encourages, stimulates, and to a degree even coordinates such activities. In formulating economic strategy, the virtual state recognizes that its own production does not have to take place at home; equally, it may play host to the capital and labor of other nations. Unlike imperial Germany, czarist Russia, and the United States of the Gilded Age–which aimed at nineteenth-century omnicompetence–it does not seek to combine or excel in all economic functions, from mining and agriculture to production and distribution. The virtual state specializes in modern technical and research services and derives its income not just from high-value manufacturing, but from product design, marketing, and financing. The rationale for its economy is efficiency attained through productive downsizing. Size no longer determines economic potential. Virtual nations hold the competitive key to greater wealth in the 21st century. They will likely supersede the continent-sized and self-sufficient units that prevailed in the past. Productive specialization will dominate internationally just as the reduced instruction set, or “RISC,” computer chip has outmoded its more versatile but slower predecessors.

 

The Trading State

In The Past, states were obsessed with land. The international system with its intermittent wars was founded on the assumption that land was the major factor in both production and power. States could improve their position by building empires or invading other nations to seize territory. To acquire land was a boon: a conquered province contained peasants and grain supplies, and its inhabitants rendered tribute to the new sovereign. Before the age of nationalism, a captured principality willingly obeyed its new ruler. Hence the Hapsburg monarchy, Spain, France, and Russia could become major powers through territorial expansion in Europe between the sixteenth and nineteenth centuries.

With the Industrial Revolution, however, capital and labor assumed new importance. Unlike land, they were mobile ingredients of productive strength. Great Britain innovated in discovering sophisticated uses for the new factors. Natural resources–especially coal, iron, and, later, oil–were still economically vital. Agricultural and mineral resources were critical to the development of the United States and other fledgling industrial nations like Australia, Canada, South Africa, and New Zealand in the nineteenth century. Not until late in the twentieth century did mobile factors of production become paramount.

By that time, land had declined in relative value and become harder for nations to hold. Colonial revolutions in the Third World since World War II have shown that nationalist mobilization of the population in developing societies impedes an imperialist or invader trying to extract resources. A nation may expend the effort to occupy new territory without gaining proportionate economic benefits.

In time, nationalist resistance and the shift in the basis of production should have an impact on the frequency of war. Land, which is fixed, can be physically captured, but labor, capital, and information are mobile and cannot be definitively seized; after an attack, these resources can slip away like quicksilver. Saddam Hussein ransacked the computers in downtown Kuwait City in August 1990 only to find that the cash in bank accounts had already been electronically transferred. Even though it had abandoned its territory, the Kuwaiti government could continue to spend billions of dollars to resist Hussein’s conquest.

Today, for the wealthiest industrial countries such as Germany, the United States, and Japan, investment in land no longer pays the same dividends. Since mid-century, commodity prices have fallen nearly 40 percent relative to prices of manufactured goods.[1] The returns from the manufacturing trade greatly exceed those from agricultural exports. As a result, the terms of trade for many developing nations have been deteriorating, and in recent years the rise in prices of international services has outpaced that for manufactured products. Land prices have been steeply discounted.

Amid this decline, the 1970s and 1980s brought a new political prototype: the trading state. Rather than territorial expansion, the trading state held trade to be its fundamental purpose. This shift in national strategy was driven by the declining value of fixed productive assets. Smaller states–those for which, initially at any rate, a military-territorial strategy was not feasible–also adopted trade-oriented strategies. Along with small European and East Asian states, Japan and West Germany moved strongly in a trading direction after World War II.

Countries tend to imitate those that are most powerful. Many states followed in the wake of Great Britain in the nineteenth century; in recent decades, numerous states seeking to improve their lot in the world have emulated Japan. Under Mikhail Gorbachev in the 1980s, even the Soviet Union sought to move away from its emphasis on military spending and territorial expansion.

In recent years, however, a further stimulus has hastened this change. Faced with enhanced international competition in the late 1980s and early 1990s, corporations have opted for pervasive downsizing. They have trimmed the ratio of production workers to output, saving on costs. In some cases productivity increases resulted from pruning of the work force; in others output increased. These improvements have been highly effective; according to economist Stephen Roach in a 1994 paper published by the investment banking firm Morgan Stanley, they have nearly closed the widely noted productivity gap between services and manufacturing. The gap that remains is most likely due to measurement problems. The most efficient corporations are those that can maintain or increase output with a steady or declining amount of labor. Such corporations grew on a worldwide basis.

Meanwhile, corporations in Silicon Valley recognized that cost-cutting, productivity, and competitiveness could be enhanced still further by using the production lines of another company. The typical American plant at the time, such as Ford Motor Company’s Willow Run factory in Michigan, was fully integrated, with headquarters, design offices, production workers, and factories located on substantial tracts of land. This comprehensive structure was expensive to maintain and operate, hence a firm that could employ someone else’s production line could cut costs dramatically. Land and machines did not have to be bought, labor did not have to be hired, medical benefits did not have to be provided. These advantages could result from what are called economies of scope, with a firm turning out different products on the same production line or quality circle.

Or they might be the result of small, specialized firms’ ability to perform exacting operations, such as the surface mounting of miniaturized components directly on circuit boards without the need for soldering or conventional wiring. In either case, the original equipment manufacturer would contract out its production to other firms. SCI Systems, Solectron, Merix, Flextronics, Smartflex, and Sanmina turn out products for Digital Equipment, Hewlett-Packard, and IBM. In addition, AT&T, Apple, IBM, Motorola, MCI, and Corning meet part of their production needs through other suppliers. TelePad, a company that makes pen-based computers, was launched with no manufacturing capability at all. Compaq’s latest midrange computer is to be produced on another company’s production line.

Thus was born the virtual corporation, an entity with research, development, design, marketing, financing, legal, and other headquarters functions, but few or no manufacturing facilities: a company with a head but no body. It represents the ultimate achievement of corporate downsizing, and the model is spreading rapidly from firm to firm. It is not surprising that the virtual corporation should catch on. “Concept” or “head” corporations can design new products for a range of different production facilities. Strategic alliances between firms, which increase specialization, are also very profitable. According to the October 2, 1995, Financial Times, firms that actively pursue strategic alliances are 50 percent more profitable than those that do not.

 

Toward The Virtual State

In a setting where the economic functions of the trading state have displaced the territorial functions of the expansionist nation, the newly pruned corporation has led to the emerging phenomenon of the virtual state. Downsizing has become an index of corporate efficiency and productivity gains. Now the national economy is also being downsized. Among the most efficient economies are those that possess limited production capacity. The archetype is Hong Kong, whose production facilities are now largely situated in southern China. This arrangement may change after 1997 with Hong Kong’s reversion to the mainland, but it may not. It is just as probable that Hong Kong will continue to govern parts of the mainland economically as it is that Beijing will dictate to Hong Kong politically. The one country-two systems formula will likely prevail. In this context, it is important to remember that Britain governed Hong Kong politically and legally for 150 years, but it did not dictate its economics. Nor did this arrangement prevent Hong Kong Chinese from extending economic and quasi-political controls to areas outside their country.

The model of the virtual state suggests that political as well as economic strategy push toward a downsizing and relocation of production capabilities. The trend can be observed in Singapore as well. The successors of Lee Kuan Yew keep the country on a tight political rein but still depend economically on the inflow of foreign factors of production. Singapore’s investment in China, Malaysia, and elsewhere is within others’ jurisdictions. The virtual state is in this sense a negotiating entity. It depends as much or more on economic access abroad as it does on economic control at home. Despite its past reliance on domestic production, Korea no longer manufactures everything at home, and Japanese production (given the high yen) is now increasingly lodged abroad. In Europe, Switzerland is the leading virtual nation; as much as 98 percent of Nestle’s production capacity, for instance, is located abroad. Holland now produces most of its goods outside its borders. England is also moving in tandem with the worldwide trend; according to the Belgian economic historian Paul Bairoch in 1994, Britain’s foreign direct investment abroad was almost as large as America’s. A remarkable 20 percent of the production of U.S. corporations now takes place outside the United States.

A reflection of how far these tendencies have gone is the growing portion of GDP consisting of high-value-added services, such as concept, design, consulting, and financial services. Services already constitute 70 percent of American GDP. Of the total, 63 percent are in the high-value category. Of course manufacturing matters, but it matters much less than it once did. As a proportion of foreign direct investment, service exports have grown strikingly in most highly industrialized economies. According to a 1994 World Bank report, Liberalizing International Transactions in Services, “The reorientation of [foreign direct investment] towards the services sector has occurred in almost all developed market economies, the principal exporters of services capital: in the most important among them, the share of the services sector is around 40 percent of the stock of outward FDI, and that share is rising.”

Manufacturing, for these nations, will continue to decline in importance. If services productivity increases as much as it has in recent years, it will greatly strengthen U.S. competitiveness abroad. But it can no longer be assumed that services face no international competition. Efficient high-value services will be as important to a nation as the manufacturing of automobiles and electrical equipment once were.[2] Since 1959, services prices have increased more than three times as rapidly as industrial prices. This means that many nations will be able to prosper without major manufacturing capabilities.

Australia is an interesting example. Still reliant on the production of sheep and raw materials (both related to land), Australia has little or no industrial sector. Its largest export to the United States is meat for hamburgers. On the other hand, its service industries of media, finance, and telecommunications–represented most notably by the media magnate Rupert Murdoch are the envy of the world. Canada represents a similar amalgam of raw materials and powerful service industries in newspapers, broadcast media, and telecommunications.

As a result of these trends, the world may increasingly become divided into “head” and “body” nations, or nations representing some combination of those two functions. While Australia and Canada stress the headquarters or head functions, China will be the 21st-century model of a body nation. Although China does not innately or immediately know what to produce for the world market, it has found success in joint ventures with foreign corporations. China will be an attractive place to produce manufactured goods, but only because sophisticated enterprises from other countries design, market, and finance the products China makes. At present China cannot chart its own industrial future.

Neither can Russia. Focusing on the products of land, the Russians are still prisoners of territorial fetishism. Their commercial laws do not yet permit the delicate and sophisticated arrangements that ensure that “body” manufacturers deliver quality goods for their foreign “head.” Russia’s transportation network is also primitive. These, however, are temporary obstacles. In time Russia, with China and India, will serve as an important locus of the world’s production plant.

 

The Vestiges Of Serfdom

The World Is embarked on a progressive emancipation from land as a determinant of production and power. For the Third World, the past unchangeable strictures of comparative advantage can be overcome through the acquisition of a highly trained labor force. Africa and Latin America may not have to rely on the exporting of raw materials or agricultural products; through education, they can capitalize on an educated labor force, as India has in Bangalore and Ireland in Dublin. Investing in human capital can substitute for trying to foresee the vagaries of the commodities markets and avoid the constant threat of overproduction. Meanwhile, land continues to decline in value. Recent studies of 180 countries show that as population density rises, per capita GDP falls. In a new study, economist Deepak Lal notes that investment as well as growth is inversely related to land holdings.[3]

These findings are a dramatic reversal of past theories of power in international politics. In the 1930s the standard international relations textbook would have ranked the great powers in terms of key natural resources: oil, iron ore, coal, bauxite, copper, tungsten, and manganese. Analysts presumed that the state with the largest stock of raw materials and goods derived from land would prevail. CIA estimates during the Cold War were based on such conclusions. It turns out, however, that the most prosperous countries often have a negligible endowment of natural resources. For instance, Japan has shut down its coal industry and has no iron ore, bauxite, or oil. Except for most of its rice, it imports much of its food. Japan is richly endowed with human capital, however, and that makes all the difference.

The implications for the United States are equally striking. As capital, labor, and knowledge become more important than land in charting economic success, America can influence and possibly even reshape its pattern of comparative advantage. The “new trade theory,” articulated clearly by the economist Paul Krugman, focuses on path dependence, the so-called QWERTY effect of past choices. The QWERTY keyboard was not the arrangement of letter-coded keys that produced the fastest typing, except perhaps for left-handers. But, as the VHS videotape format became the standard for video recording even though other formats were technically better, the QWERTY keyboard became the standard for the typewriter (and computer) industry, and everyone else had to adapt to it. Nations that invested from the start in production facilities for the 16-kilobyte computer memory chip also had great advantages down the line in 4- and 16-megabyte chips. Intervention at an early point in the chain of development can influence results later on, which suggests that the United States and other nations can and should deliberately alter their pattern of comparative advantage and choose their economic activity.

American college and graduate education, for example, has supported the decisive U.S. role in the international services industry in research and development, consulting, design, packaging, financing, and the marketing of new products. Mergers and acquisitions are American subspecialties that draw on the skills of financial analysts and attorneys. The American failure, rather, has been in the first 12 years of education. Unlike that of Germany and Japan (or even Taiwan, Korea, and Singapore), American elementary and secondary education falls well below the world standard.

Economics teaches that products should be valued according to their economic importance. For a long period, education was undervalued, socially and economically speaking, despite productivity studies by Edward Denison and others that showed its long-term importance to U.S. growth and innovation. Recent studies have underscored this importance. According to the World Bank, 64 percent of the world’s wealth consists of human capital. But the social and economic valuation of kindergarten through 12th-grade education has still not appreciably increased. Educators, psychologists, and school boards debate how education should be structured, but Americans do not invest more money in it. Corporations have sought to upgrade the standards of teaching and learning in their regions, but localities and states have lagged behind, as has the federal government. Elementary and high school teachers should be rewarded as patient creators of high-value capital in the United States and elsewhere. In Switzerland, elementary school teachers are paid around $70,000 per year, about the salary of a starting lawyer at a New York firm. In international economic competition, human capital has turned out to be at least as important as other varieties of capital. In spite of their reduced functions, states liberated from the confines of their geography have been able, with appropriate education, to transform their industrial and economic futures.

 

The Reduced Danger Of Conflict

As nations turn to the cultivation of human capital, what will a world of virtual states be like? Production for one company or country can now take place in many parts of the world. In the process of down-sizing, corporations and nation-states will have to get used to reliance on others. Virtual corporations need other corporations’ production facilities. Virtual nations need other states’ production capabilities. As a result, economic relations between states will come to resemble nerves connecting heads in one place to bodies somewhere else. Naturally, producer nations will be working quickly to become the brains behind emerging industries elsewhere. But in time, few nations will have within their borders all the components of a technically advanced economic existence.

To sever the connections between states would undermine the organic unit. States joined in this way are therefore less likely to engage in conflict. In the past, international norms underlying the balance of power, the Concert of Europe, or even rule by the British Raj helped specify appropriate courses of action for parties in dispute. The international economy also rested partially on normative agreement. Free trade, open domestic economies, and, more recently, freedom of movement for capital were normative notions. In addition to specifying conditions for borrowing, the International Monetary Fund is a norm-setting agency that inculcates market economics in nations not fully ready to accept their international obligations.

Like national commercial strategies, these norms have been largely abstracted from the practices of successful nations. In the nineteenth century many countries emulated Great Britain and its precepts. In the British pantheon of virtues, free trade was a norm that could be extended to other nations without self-defeat. Success for one nation did not undermine the prospects for others. But the acquisition of empire did cause congestion for other nations on the paths to industrialization and growth. Once imperial Britain had taken the lion’s share, there was little left for others. The inability of all nations to live up to the norms Britain established fomented conflict between them.

In a similar vein, Japan’s current trading strategy could be emulated by many other countries. Its pacific principles and dependence on world markets and raw materials supplies have engendered greater economic cooperation among other countries. At the same time, Japan’s insistence on maintaining a quasi-closed domestic economy and a foreign trade surplus cannot be successfully imitated by everyone; if some achieve the desired result, others necessarily will not. In this respect, Japan’s recent practices and norms stand athwart progress and emulation by other nations.

President Clinton rightly argues that the newly capitalist developmental states, such as Korea and Taiwan, have simply modeled themselves on restrictionist Japan. If this precedent were extended to China, the results would endanger the long-term stability of the world economic and financial system. Accordingly, new norms calling for greater openness in trade, finance, and the movement of factors of production will be necessary to stabilize the international system. Appropriate norms reinforce economic incentives to reduce conflict between differentiated international units.

 

Defusing The Population Bomb

So long as the international system of nation-states lasts, there will be conflict among its members. States see events from different perspectives, and competition and struggle between them are endemic. The question is how far conflicts will proceed. Within a domestic system, conflicts between individuals need not escalate to the use of physical force. Law and settlement procedures usually reduce outbreaks of hostility. In international relations, however, no sovereign, regnant authority can discipline feuding states. International law sets a standard, but it is not always obeyed. The great powers constitute the executive committee of nation-states and can intervene from time to time to set things right. But, as Bosnia shows, they often do not, and they virtually never intervene in the absence of shared norms and ideologies.

In these circumstances, the economic substructure of international relations becomes exceedingly important. That structure can either impel or retard conflicts between nation-states. When land is the major factor of production, the temptation to strike another nation is great. When the key elements of production are less tangible, the situation changes. The taking of real estate does not result in the acquisition of knowledge, and aggressors cannot seize the needed capital. Workers may flee from an invader. Wars of aggression and wars of punishment are losing their impact and justification.

Eventually, however, contend critics such as Paul Ehrlich, author of The Population Bomb, land will become important once again. Oil supplies will be depleted; the quantity of fertile land will decline; water will run dry. Population will rise relative to the supply of natural resources and food. This process, it is claimed, could return the world to the eighteenth and nineteenth centuries, with clashes over territory once again the engine of conflict. The natural resources on which the world currently relies may one day run out, but, as before, there will be substitutes. One sometimes forgets that in the 1840s whale oil, which was the most common fuel for lighting, became unavailable. The harnessing of global energy and the production of food does not depend on particular bits of fluid, soil, or rock. The question, rather, is how to release the energy contained in abundant matter.

But suppose the productive value of land does rise. Whether that rise would augur a return to territorial competition would depend on whether the value of land rises relative to financial capital, human capital, and information. Given the rapid technological development of recent years, the primacy of the latter seems more likely. Few perturbing trends have altered the historical tendency toward the growing intangibility of value in social and economic terms. In the 21st century it seems scarcely possible that this process would suddenly reverse itself, and land would yield a better return than knowledge.

Diminishing their command of real estate and productive assets, nations are downsizing, in functional if not in geographic terms. Small nations have attained peak efficiency and competitiveness, and even large nations have begun to think small. If durable access to assets elsewhere can be assured, the need to physically possess them diminishes. Norms are potent reinforcements of such arrangements. Free movement of capital and goods, substantial international and domestic investment, and high levels of technical education have been the recipe for success in the industrial world of the late twentieth century. Those who depended on others did better than those who depended only on themselves. Can the result be different in the future? Virtual states, corporate alliances, and essential trading relationships augur peaceful times. They may not solve domestic problems, but the economic bonds that link virtual and other nations will help ease security concerns.

 

The Civic Crisis

Though peaceful in its international implications, the rise of the virtual state portends a crisis for democratic politics. Western democracies have traditionally believed that political reform, extension of suffrage, and economic restructuring could solve their problems. In the 21st century none of these measures can fully succeed. Domestic political change does not suffice because it has insufficient jurisdiction to deal with global problems. The people in a particular state cannot determine international outcomes by holding an election. Economic restructuring in one state does not necessarily affect others. And the political state is growing smaller, not larger.

If ethnic movements are victorious in Canada, Mexico, and elsewhere, they will divide the state into smaller entities. Even the powers of existing states are becoming circumscribed. In the United States, if Congress has its way, the federal government will lose authority. In response to such changes, the market fills the vacuum, gaining power.

As states downsize, malaise among working people is bound to spread. Employment may fluctuate and generally decline. President Clinton observed last year that the American public has fallen into a funk. The economy may temporarily be prosperous, but there is no guarantee that favorable conditions will last. The flow of international factors of production–technology, capital, and labor–will swamp the stock of economic power at home. The state will become just one of many players in the international marketplace and will have to negotiate directly with foreign factors of production to solve domestic economic problems. Countries must induce foreign capital to enter their domain. To keep such investment, national economic authorities will need to maintain low inflation, rising productivity, a strong currency, and a flexible and trained labor force. These demands will sometimes conflict with domestic interests that want more government spending, larger budget deficits, and more benefits. That conflict will result in continued domestic insecurity over jobs, welfare, and medical care. Unlike the remedies applied in the insulated and partly closed economies of the past, purely domestic policies can no longer solve these problems.

 

The Necessity Of Internationalization

The state can compensate for its deficient jurisdiction by seeking to influence economic factors abroad. The domestic state therefore must not only become a negotiating state but must also be internationalized. This is a lesson already learned in Europe, and well on the way to codification in East Asia. Among the world’s major economies and polities, only the United States remains, despite its potent economic sector, essentially introverted politically and culturally. Compared with their counterparts in other nations, citizens born in the United States know fewer foreign languages, understand less about foreign cultures, and live abroad reluctantly, if at all. In recent years, many English industrial workers who could not find jobs migrated to Germany, learning the language to work there. They had few American imitators.

The virtual state is an agile entity operating in twin jurisdictions: abroad and at home. It is as prepared to mine gains overseas as in the domestic economy. But in large countries, internationalization operates differentially. Political and economic decision-makers have begun to recast their horizons, but middle managers and workers lag behind. They expect too much and give and learn too little. That is why the dawn of the virtual state must also be the sunrise of international education and training. The virtual state cannot satisfy all its citizens. The possibility of commanding economic power in the sense of effective state control has greatly declined. Displaced workers and businesspeople must be willing to look abroad for opportunities. In the United States, they can do this only if American education prepares the way.

 

Notes

1 See, for example, Enzo R. Grilli and Maw Cheng Yang, “Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows,” The World Bank Economic Review, 1988, Vol. 2, No. 1, pp. 1-47.

2 See Jose Ripoll, “The Future of Trade in International Services,” Center for International Relations Working Paper, UCLA, January 1996.

3 Daniel Garstka, “Land and Economic Prowess” (unpublished mimeograph), UCLA, 1995; Deepak Lal, “Factor Endowments, Culture and Politics: On Economic Performance in the Long Run” (unpublished mimeograph), UCLA, 1996.

~~~~~~~~

RICHARD ROSECRANCE is Professor of Political Science and Director of the Center for International Relations at the University of California, Los Angeles.

Source: Foreign Affairs, Jul/Aug96, Vol. 75 Issue 4, p45, 17p, 1bw.

Globalization: What’s New? What’s Not? (And So What?)

By Robert o. Keohane & Joseph s. Nye jr.

“Globalization” emerged as a buzzword in the 1990s, just as “interdependence” did in the 1970s, but the phenomena it refers to are not entirely new. Our characterization of interdependence more than 20 years ago now applies to globalization at the turn of the millennium: “This vague phrase expresses a poorly understood but widespread feeling that the very nature of world politics is changing.” Some skeptics believe such terms are beyond redemption for analytic use. Yet the public understands the image of the globe, and the new word conveys an increased sense of vulnerability to distant causes. For example, as helicopters fumigated New York City in 1999 to eradicate a lethal new virus, the press announced that the pathogen might have arrived in the bloodstream of a traveler, in a bird smuggled through customs, or in a mosquito that had flown into a jet. Fears of “bioinvasion” led some environmental groups to call for a reduction in global trade and travel.

Like all popular concepts meant to cover a variety of phenomena, both “interdependence” and “globalization” have many meanings. To understand what people are talking about when they use the terms and to make them useful for analysis, we must begin by asking whether interdependence and globalization are simply two words for the same thing, or whether there is something new going on.

The Dimensions Of Globalism

The two words are not exactly parallel. Interdependence refers to a condition, a state of affairs. It can increase, as it has been doing on most dimensions since the end of World War II; or it can decline, as it did, at least in economic terms, during the Great Depression of the 1930s. Globalization implies that something is increasing: There is more of it. Hence, our definitions start not with globalization but with “globalism,” a condition that can increase or decrease.

Globalism is a state of the world involving networks of interdependence at multicontinental distances. The linkages occur through flows and influences of capital and goods, information and ideas, and people and forces, as well as environmentally and biologically relevant substances (such as acid rain or pathogens). Globalization and deglobalization refer to the increase or decline of globalism.

Interdependence refers to situations characterized by reciprocal effects among countries or among actors in different countries. Hence, globalism is a type of interdependence, but with two special characteristics. First, globalism refers to networks of connections (multiple relationships), not to single linkages. We would refer to economic or military interdependence between the United States and Japan, but not to globalism between the United States and Japan. U.S.-Japanese interdependence is part of contemporary globalism, but is not by itself globalism.

Second, for a network of relationships to be considered “global,” it must include multicontinental distances, not simply regional networks. Distance is a continuous variable, ranging from adjacency (between, say, the United States and Canada) to opposite sides of the globe (for instance, Great Britain and Australia). Any sharp distinction between long-distance and regional interdependence is therefore arbitrary, and there is no point in deciding whether intermediate relationships–say, between Japan and India or between Egypt and South Africa–would qualify. Yet globalism would be an odd word for proximate regional relationships. Globalization refers to the shrinkage of distance on a large scale [see box on pages 110]. It can be contrasted with localization, nationalization, or regionalization.

Some examples may help. Islam’s rapid diffusion from Arabia across Asia to what is now Indonesia was a clear instance of globalization, but the initial movement of Hinduism across the Indian subcontinent was not. Ties among the countries of the Asia Pacific Economic Cooperation forum qualify as multicontinental interdependence, because these countries include the Americas as well as Asia and Australia; but ties among members of the Association of Southeast Asian Nations are regional.
Globalism does not imply universality. At the turn of the millennium, more than a quarter of the American population used the World Wide Web compared with one hundredth of 1 percent of the population of South Asia. Most people in the world today do not have telephones; hundreds of millions live as peasants in remote villages with only slight connections to world markets or the global flow of ideas. Indeed, globalization is accompanied by increasing gaps, in many respects, between the rich and the poor. It implies neither homogenization nor equity.

Interdependence and globalism are both multidimensional phenomena. All too often, they are defined in strictly economic terms, as if the world economy defined globalism. But there are several, equally important forms of globalism: Economic globalism involves long-distance flows of goods, services, and capital, as well as the information and perceptions that accompany market exchange. It also involves the organization of the processes that are linked to these flows, such as the organization of low-wage production in Asia for the U.S. and European markets. Military globalism refers to long-distance networks of interdependence in which force, and the threat or promise of force, are employed. A good example of military globalism is the “balance of terror” between the United States and the Soviet Union during the cold war. The two countries’ strategic interdependence was acute and well recognized. Not only did it produce world-straddling alliances, but either side could have used intercontinental missiles to destroy the other within 30 minutes. Their interdependence was distinctive not because it was totally new, but because the scale and speed of the potential conflict arising from it were so enormous. Environmental globalism refers to the long-distance transport of materials in the atmosphere or oceans, or of biological substances such as pathogens or genetic materials, that affect human health and well-being. The depletion of the stratospheric ozone layer as a result of ozone-depleting chemicals is an example of environmental globalism, as is the spread of the AIDS virus from west equatorial Africa around the world since the end of the 1970s. Some environmental globalism may be entirely natural, but much of the recent change has been induced by human activity. Social and cultural globalism involves the movement of ideas, information, images, and people (who, of course, carry ideas and information with them). Examples include the movement of religions or the diffusion of scientific knowledge. An important facet of social globalism involves the imitation of one society’s practices and institutions by others: what some sociologists refer to as “isomorphism.” Often, however, social globalism has followed military and economic globalism. Ideas, information, and people follow armies and economic flows, and in doing so, transform societies and markets. At its most profound level, social globalism affects the consciousness of individuals and their attitudes toward culture, politics, and personal identity. Indeed, social and cultural globalism interacts with other types of globalism, because military, environmental, and economic activity convey information and generate ideas, which may then flow across geographical and political boundaries. In the current era, as the growth of the Internet reduces costs and globalizes communications, the flow of ideas is increasingly independent of other forms of globalization.

This division of globalism into separate dimensions is inevitably somewhat arbitrary. Nonetheless, it is useful for analysis, because changes in the various dimensions of globalization do not necessarily occur simultaneously. One can sensibly say, for instance, that economic globalization took place between approximately 1850 and 1914, manifested in imperialism and increased trade and capital flows between politically independent countries; and that such globalization was largely reversed between 1914 and 1945. That is, economic globalism rose between 1850 and 1914 and fell between 1914 and 1945. However, military globalism rose to new heights during the two world wars, as did many aspects of social globalism. The worldwide influenza epidemic of 1918-19, which took 30 million lives, was propagated in part by the flows of soldiers around the world. So did globalism decline or rise between 1914 and 1945? It depends on what dimension of globalism one is examining.

Contemporary Globalism

When people speak colloquially about globalization, they typically refer to recent increases in globalism. In this context, comments such as “globalization is fundamentally new” make sense but are nevertheless misleading. We prefer to speak of globalism as a phenomenon with ancient roots and of globalization as the process of increasing globalism, now or in the past.

The issue is not how old globalism is, but rather how “thin” or “thick” it is at any given time. As an example of “thin globalization,” the Silk Road provided an economic and cultural link between ancient Europe and Asia, but the route was plied by a small group of hardy traders, and the goods that were traded back and forth had a direct impact primarily on a small (and relatively elite) stratum of consumers along the road. In contrast, “thick” relations of globalization, as described by political scientist David Held and others, involve many relationships that are intensive as well as extensive: long-distance flows that are large and continuous, affecting the lives of many people. The operations of global financial markets today, for instance, affect people from Peoria to Penang. Globalization is the process by which globalism becomes increasingly thick.
Globalism today is different from globalism of the 19th century, when European imperialism provided much of its political structure, and higher transport and communications costs meant fewer people were directly involved. But is there anything about globalism today that is fundamentally different from just 20 years ago? To say that something is “fundamentally” different is always problematic, since absolute discontinuities do not exist in human history. Every era builds on others, and historians can always find precursors for phenomena of the present. Journalist Thomas Friedman argues that contemporary globalization goes “farther, faster, deeper, and cheaper…” The degree of thickening of globalism may be giving rise to three changes not just in degree but in kind: increased density of networks, increased “institutional velocity,” and increased transnational participation.

Density of Networks

Economists use the term “network effects” to refer to situations where a product becomes more valuable once many people use it–take, for example, the Internet. Joseph Stiglitz, former chief economist of the World Bank, has argued that a knowledge-based economy generates “powerful spillover effects, often spreading like fire and triggering further innovation and setting off chain reactions of new inventions.” Moreover, as interdependence and globalism have become thicker, systemic relationships among different networks have become more important. There are more interconnections. Intensive economic interdependence affects social and environmental interdependence; awareness of these connections in turn affects economic relationships. For instance, the expansion of trade can generate industrial activity in countries with low environmental standards, mobilizing environmental activists to carry their message to these newly industrializing but environmentally lax countries. The resulting activities may affect environmental interdependence (for instance, by reducing cross-boundary pollution) but may generate resentment in the newly industrializing countries, affecting social and economic relations.

The worldwide impact of the financial crisis that began in Thailand in July 1997 illustrates the extent of these network interconnections. Unexpectedly, what first appeared as an isolated banking and currency crisis in a small “emerging market” country had severe global effects. It generated financial panic elsewhere in Asia, particularly in South Korea and Indonesia; prompted emergency meetings at the highest level of world finance and huge “bail-out” packages orchestrated by the International Monetary Fund (IMF); and led eventually to a widespread loss of confidence in emerging markets and the efficacy of international financial institutions. Before that contagious loss of confidence was stemmed, Russia had defaulted on its debt, and a U.S.-based hedge fund had to be rescued suddenly through a plan brokered by the Federal Reserve Bank of New York. Even after recovery had begun, Brazil required an IMF loan, coupled with a devaluation, to avoid financial collapse in 1999.
Economic globalism is nothing new. Indeed, the relative magnitude of cross-border investment in 1997 was not unprecedented. Capital markets were by some measures more integrated at the beginning than at the end of the 20th century. The net outflow of capital from Great Britain in the four decades before 1914 averaged 5 percent of gross domestic product, compared with 2 to 3 percent for Japan over the last decade.

The financial crisis of 1997-99 was not the first to be global in scale: “Black Tuesday” on Wall Street in 1929 and the collapse of Austria’s Creditanstalt bank in 1931 triggered a worldwide financial crisis and depression. In the 1970s, skyrocketing oil prices prompted the Organization of Petroleum Exporting Countries to lend surplus funds to developed nations, and banks in those countries made a profit by relending that money to developing countries in Latin America and Africa (which needed the money to fund expansionary fiscal policies). But the money dried up with the global recession of 1981-83: By late 1986, more than 40 countries worldwide were mired in severe external debt.

But some features of the 1997-99 crisis distinguish it from previous ones. Most economists, governments, and international financial institutions failed to anticipate the crisis, and complex new financial instruments made it difficult to understand. Even countries that had previously been praised for their sound economic policies and performance were no less susceptible to the financial contagion triggered by speculative attacks and unpredictable changes in market sentiment. The World Bank had recently published a report entitled “The East Asian Miracle” (1993), and investment flows to Asia had risen rapidly to a new peak in 1997, remaining high until the crisis hit. In December 1998, Federal Reserve Board Chairman Alan Greenspan said: “I have learned more about how this new international financial system works in the last 12 months than in the previous 20 years.” Sheer magnitude, complexity, and speed distinguish contemporary globalization from earlier periods: Whereas the debt crisis of the 1980s was a slow-motion train wreck that took place over a period of years, the Asian meltdown struck immediately and spread over a period of months.
The point is that the increasing thickness of globalism–the density of networks of interdependence–is not just a difference in degree. Thickness means that different relationships of interdependence intersect more deeply at more points. Hence, the effects of events in one geographical area, on one dimension, can have profound effects in other geographical areas, on other dimensions. As in scientific theories of “chaos,” and in weather systems, small events in one place can have catalytic effects, so that their consequences later, and elsewhere, are vast. Such systems are difficult to understand, and their effects are therefore often unpredictable. Furthermore, when these are human systems, people are often hard at work trying to outwit others, to gain an economic, social, or military advantage precisely by acting in unpredictable ways. As a result, globalism will likely be accompanied by pervasive uncertainty. There will be continual competition between increased complexity and uncertainty, and efforts by governments, market participants, and others to comprehend and manage these increasingly complex interconnected systems.

Globalization, therefore, does not merely affect governance; it is affected by governance. Frequent financial crises of the magnitude of the crisis of 1997-99 could lead to popular movements to limit interdependence and to a reversal of economic globalization. Chaotic uncertainty is too high a price for most people to pay for somewhat higher average levels of prosperity. Unless some of its aspects can be effectively governed, globalization may be unsustainable in its current form.

Institutional Velocity

The information revolution is at the heart of economic and social globalization. It has made possible the transnational organization of work and the expansion of markets, thereby facilitating a new international division of labor. As Adam Smith famously declared in The Wealth of Nations, “the division of labor is limited by the extent of the market.” Military globalism predated the information revolution, reaching its height during World War II and the cold war; but the nature of military interdependence has been transformed by information technology. The pollution that has contributed to environmental globalism has its sources in the coal-oil-steel-auto-chemical economy that was largely created between the middle of the 19th and 20th centuries and has become globalized only recently; but the information revolution may have a major impact on attempts to counter and reverse the negative effects of this form of globalism.
Sometimes these changes are incorrectly viewed in terms of the velocity of information flows. The biggest change in velocity came with the steamship and especially the telegraph: The transatlantic cable of 1866 reduced the time of transmission of information between London and New York by over a week hence, by a factor of about a thousand. The telephone, by contrast, increased the velocity of such messages by a few minutes (since telephone messages do not require decoding), and the Internet, as compared with the telephone, by not much at all. The real difference lies in the reduced cost of communicating, not in the velocity of any individual communication. And the effects are therefore felt in the increased intensity rather than the extensity of globalism. In 1877 it was expensive to send telegrams across the Atlantic, and in 1927 or even 1977 it was expensive to telephone transcontinentally. Corporations and the rich used transcontinental telephones, but ordinary people wrote letters unless there was an emergency. But in 2000, if you have access to a computer, the Internet is virtually free and transpacific telephone calls may cost only a few cents per minute. The volume of communications has increased by many orders of magnitude, and the intensity of globalism has been able to expand exponentially.

Markets react more quickly than before, because information diffuses so much more rapidly and huge sums of capital can be moved at a moment’s notice. Multinational enterprises have changed their organizational structures, integrating production more closely on a transnational basis and entering into more networks and alliances, as global capitalism has become more competitive and more subject to rapid change. Nongovernmental organizations (NGOs) have vastly expanded their levels of activity.

With respect to globalism and velocity, therefore, one can distinguish between the velocity of a given communication–”message velocity”–and “institutional velocity.” Message velocity has changed little for the population centers of relatively rich countries since the telegraph became more or less universal toward the end of the 19th century. But institutional velocity–how rapidly a system and the units within it change–is a function not so much of message velocity than of the intensity of contact–the “thickness” of globalism. In the late 1970s, the news cycle was the same as it had been for decades: People found out the day’s headlines by watching the evening news and got the more complete story and analysis from the morning paper. But the introduction of 24-hour cable news in 1980 and the subsequent emergence of the Internet have made news cycles shorter and have put a larger premium on small advantages in speed. Until recently, one newspaper did not normally “scoop” another by receiving and processing information an hour earlier than another: As long as the information could be processed before the daily paper “went to bed,” it was timely. But in 2000, an hour–or even a few minutes–makes a critical difference for a cable television network in terms of being “on top of a story” or “behind the curve.” Institutional velocity has accelerated more than message velocity. Institutional velocity reflects not only individual linkages but networks and interconnections among networks. This phenomenon is where the real change lies.

 

Transnational Participation and Complex Interdependence

Reduced costs of communications have increased the number of participating actors and increased the relevance of “complex interdependence.” This concept describes a hypothetical world with three characteristics: multiple channels between societies, with multiple actors, not just states; multiple issues, not arranged in any clear hierarchy; and the irrelevance of the threat or use of force among states linked by complex interdependence.

We used the concept of complex interdependence in the 1970s principally to describe emerging relationships among pluralist democracies. Manifestly it did not characterize relations between the United States and the Soviet Union, nor did it typify the politics of the Middle East, East Asia, Africa, or even parts of Latin America. However, we did argue that international monetary relations approximated some aspects of complex interdependence in the 1970s and that some bilateral relationships–French-German and U.S.-Canadian, for example–approximated all three conditions of complex interdependence. In a world of complex interdependence, we argued, politics would be different. The goals and instruments of state policy–and the processes of agenda setting and issue linkage–would all be different, as would the significance of international organizations.

Translated into the language of globalism, the politics of complex interdependence would be one in which levels of economic, environmental, and social globalism are high and military globalism is low. Regional instances of security communities–where states have reliable expectations that force will not be used–include Scandinavia since the early 20th century. Arguably, intercontinental complex interdependence was limited during the cold war to areas protected by the United States, such as the Atlantic security community. Indeed, U.S. power and policy were crucial to the construction of postwar international institutions, ranging from NATO to the IMF, which protected and supported complex interdependence. Since 1989, the decline of military globalism and the extension of social and economic globalism to the former Soviet empire have implied the expansion of areas of complex interdependence, at least to the new and aspiring members of NATO in Eastern Europe. Moreover, economic and social globalism seem to have created incentives for leaders in South America to settle territorial quarrels, out of fear both of being distracted from tasks of economic and social development and of scaring away needed investment capital.
Even today complex interdependence is far from universal. Military force was used by or threatened against states throughout the 1990s, from the Taiwan Strait to Iraq, from Kuwait to the former Yugoslavia; from Kashmir to Congo. Civil wars are endemic in much of sub-Saharan Africa and sometimes have escalated into international warfare, as when the Democratic Republic of Congo’s civil war engulfed five neighboring countries. The information revolution and the voracious appetite of television viewers for dramatic visual images have heightened global awareness of some of these civil conflicts and made them more immediate, contributing to pressure for humanitarian intervention, as in Bosnia and Kosovo. The various dimensions of globalization–in this case, the social and military dimensions-intersect, but the results are not necessarily conducive to greater harmony. Nevertheless, interstate use and threat of military force have virtually disappeared in certain areas of the world notably among the advanced, information-era democracies bordering the Atlantic and the Pacific, as well as among a number of their less wealthy neighbors in Latin America and increasingly in Eastern-Central Europe.
The dimension of complex interdependence that has changed the most since the 1970s is participation in channels of contact among societies. There has been a vast expansion of such channels as a result of the dramatic fall in the costs of communication over large distances. It is no longer necessary to be a rich organization to be able to communicate on a real-time basis with people around the globe. Friedman calls this change the “democratization” of technology, finance, and information, because diminished costs have made what were once luxuries available to a much broader range of society.
“Democratization” is probably the wrong word, however, since in markets money votes, and people start out with unequal stakes. There is no equality, for example, in capital markets, despite the new financial instruments that permit more people to participate. “Pluralization” might be a better word, suggesting the vast increase in the number and variety of participants in global networks. The number of international NGOs more than quadrupled from about 6,000 to over 26,000 in the 1990s alone. Whether they are large organizations such as Greenpeace or Amnesty International, or the proverbial “three kooks with modems and a fax machine,” NGOs can now raise their voices as never before. In 1999, NGOs worldwide used the Internet to coordinate a massive protest against the World Trade Organization meeting in Seattle. Whether these organizations can forge a coherent and credible coalition has become the key political question.
This vast expansion of transnational channels of contact, at multicontinental distances, generated by the media and a profusion of NGOs, has helped expand the third dimension of complex interdependence: the multiple issues connecting societies. More and more issues are up for grabs internationally, including regulations and practices–ranging from pharmaceutical testing to accounting and product standards to banking regulation that were formerly regarded as the prerogatives of national governments. The Uruguay Round of multilateral trade negotiations of the late 1980s and early 1990s focused on services, once virtually untouched by international regimes; and the financial crisis of 1997-99 led to both public and private efforts to globalize the transparent financial reporting that has become prevalent in advanced industrialized countries.
Increased participation at a distance and greater approximation of complex interdependence do not imply the end of politics. On the contrary, power remains important. Even in domains characterized by complex interdependence, politics reflects asymmetrical economic, social, and environmental interdependence, not just among states but also among nonstate actors, and through transgovernmental relations. Complex interdependence is not a description of the world, but rather an ideal concept abstracting from reality. It is, however, an ideal concept that increasingly corresponds to reality in many parts of the world, even at transcontinental distances–and that corresponds more closely than obsolete images of world politics as simply interstate relations that focus solely on force and security.

So what really is new in contemporary globalism? Intensive, or thick, network interconnections that have systemic effects, often unanticipated. But such thick globalism is not uniform: It varies by region, locality, and issue area. It is less a matter of communications message velocity than of declining cost, which does speed up what we Call systemic and institutional velocity. Globalization shrinks distance, but it does not make distance irrelevant. And the filters provided by domestic politics and political institutions play a major role in determining what effects globalization really has and how well various countries adapt to it. Finally, reduced costs have enabled more actors to participate in world politics at greater distances, leading larger areas of world politics to approximate the ideal type of complex interdependence.

Although the system of sovereign states is likely to continue as the dominant structure in the world, the content of world politics is changing. More dimensions than ever but not all–are beginning to approach our idealized concept of complex interdependence. Such trends can be set back, perhaps even reversed, by cataclysmic events, as happened in earlier phases of globalization. History always has surprises. But history’s surprises always occur against the background of what has gone before. The surprises of the early 21st century will, no doubt, be profoundly affected by the processes of contemporary globalization that we have tried to analyze here.

Source: Foreign Policy, Spring2000 Issue 118, p104, 16p

 

The Rise of American Hegemony

By Robert Gilpin

in Two Hegemonies: Britain 1846-1914 and the United States 1941-2001 edited by Patrick Karl O’Brien and Armand Clesse (Aldershot: Ashgate Publishing, Ltd., 2002), pp. 165-182

The dominant world role of the United States following the end of World War II has been the subject of many scholarly and conflicting analyses. At the core of the different views regarding America’s central position in international affairs over the past half century has been the relationship of American primacy and the world economy. In the opinion of most American analysts, there is no connection between the dominant political position of the United States and the nature of the postwar international economy. Political and economic developments, according to this position, may and do of course occasionally impinge on one another. However, politics and economics are said to exist in two separate spheres and are not logically connected to one another. In the opinion of Marxists and leftist writers, on the other band, politics and economics are intimately linked. The insatiable desire of capitalists for continuous accumulation has been the driving force behind politics in every capital economy. The outstanding expression of this conception of political and economic affairs is Immanuel Wallerstein’s concept of the Modern World System. A third interpretation, which will be set forth in this article, is that politics and economics are indeed joined, but not in the way assumed by Marxists. According to this position, the international political system has a profound influence over the nature and functioning of the international economy. A principal expression of the perspective is what has been called the theory of hegemonic stability.

 

The Theory of Hegemonic Stability

According to ‘the theory of hegemonic stability’, as I am using it in this article, the creation and maintenance of an open and liberal world economy such as the one that has characterised most of the world economy since the end of World War II requires a powerful leader. This leader uses its power and influence to promote trade liberalisation and a stable international monetary system primarily in order to advance its own political and economic interests. The leader, however, can seldom coerce reluctant states to obey the rules of a liberal international economic order and must seek their co-operation. These other states co-operate with the hegemon because it is in their own economic and security interests to do so. For example, although the American hegemon played a crucial role in establishing and managing the world economy following World War H, it did so with the strong co-operation of its Cold War allies.

The original idea that a liberal international economy requires strong political leadership by the dominant economic power was initially set forth by Charles Kindleberger in his book The World in Depression, 1929-1939 (1973). 1 The existence of a liberal international economy, Kindleberger argued, required a political leader that could and would use its influence to create the international economic system and subsequently to perform a number of necessary economic functions to keep the system working efficiently. In The World in Depression and other writings, Kindleberger identified and discussed at length the tasks that the leader of the world economy must carry out. These tasks of the hegemon that include the creation and maintenance of a liberal trade regime, the establishment of the international monetary system, and playing the role of ‘lender of last resort’ to prevent financial crises.

A corollary of Kindleberger’s hypothesis is that the relative economic decline of the leader leads to a weakening of the regimes governing a liberal world economy. The declining ability and willingness of the leader to enforce the rules of a liberal world economy results in increasing trade protectionism and violations of the regimes governing trade, monetary, and other forms of international commerce In the 1990s, an extremely important manifestation of the relative economic decline of American economic power has been the growing tendency for the world economy to fragment into regional blocs centred on the major economic powers. The dynamics of the rise and then of the steady erosion of a liberal world economy can be demonstrated by an examination of the British and American eras of international leadership.

Kindleberger’s basic ideas on the importance of a political leader for international economic affairs were appropriated (with proper acknowledgments) by American political scientists including me. However, we made several modifications that placed his basic insight in a realist or state-centric intellectual framework of political analysis and thereby fashioned a realist version of the theory of hegemonic stability. In the first place, we substituted the Greek word ‘hegemon’ for ‘leader’ to reflect the fact that the leader had to exercise power to achieve its objective; more specifically, a hegemon is the leader of an alliance such as the one organised by Sparta to defeat the Persians in the fifth century B.C. In addition, whereas Kindleberger argued that the leader created a liberal international economy for cosmopolitan economic reasons, political scientists argued that the hegemon created a liberal international economy to promote its own interests. Finally, in contrast to Kindleberger’s assumption that the interests of the leader were primarily economic, political scientists argued that these interests were not only economic but also political. Despite these differences between Kindleberger’s liberal version of the theory and the political scientist version, both versions state that the provision of international collective (public) goods such as free trade and monetary stability requires a dominant power with an interest in a liberal world economy and a willingness to expend economic and political resources to achieve and maintain this goal.

The world has known only two eras of economic liberalism based on a hegemonic power. From the late nineteenth century to the outbreak of World War I, Great Britain led the efforts for trade liberalisation and monetary stability. Similarly, the United States led the world economy following World War II. However, it should be noted that there were several fundamental differences between the two periods. In the first place, the liberal world economy in the late nineteenth century was truly global and was characterised by non-discrimination in trade, unrestrained capital movements, and a stable monetary system based on the gold standard; the American system comprised only the ‘Free World’ and has been characterised by trade discrimination, capital controls until the mid-l970s, and monetary instability after 1971. Whereas the British promoted and inspired free trade through a series of bilateral agreements, the United States championed trade liberalisation through multilateral negotiations in the GATT. International security considerations, that is, the forging of the Western alliance against the Soviet Union, played a crucial role in America’s promotion of free trade. Although the Bank of England played a central role in the management of the gold standard, the nineteenth century monetary system was largely denationalised. The post World War II system was based on the dollar and was subject to American influence.

British economic decline began in the late nineteenth century as other countries, especially Germany and the United States, industrialised. Britain responded to new developments with a gradual retrenchment of its global position and initiation of numerous measures to strengthen its security. Although Great Britain modified a number of its economic policies, its huge dependence on trade forestalled a retreat into protectionism. British leadership in trade liberalisation slackened, and by the 1930s Britain bad retreated to a system of imperial preferences. As early as the mid-1970s, concerns over the relative decline of the American economy and the damaging effects of international competition on American industry were expressed by American political leaders, business interests, and scholars. These changes produced the New Protectionism; as formal tariffs were reduced through trade negotiations, the United States erected such non-tariff barriers as those embedded in the Multi-Fiber Agreement, in which many nations were assigned quotas, and imposed ‘voluntary’ export restraints on Japanese automobiles. In response to the ballooning American trade deficit intensifying fears of deindustrialisation, and rising protectionist pressures, the Reagan Administration in the mid-1980s significantly modified America’s postwar commitment to multilateralism. The Administration began to pursue a multitrack trade policy that has not only de-emphasized multilateral negotiations, but also increased unilateralism and bilateralism (especially ‘managed trade’ with Japan) and economic regionalism as well (in the North American Free Trade Agreement with Canada and Mexico). My concern in this article, however, is the rise of American hegemony following World War II and its implications for the world economy.

 

The American System

The United States emerged from World War I with a clear vision of the new international order that it wished to create. The so-called Rooseveltian vision, named after President Franklin Delano Roosevelt, had several elements. The United Nations and particularly the Security Council (including the five permanent members) would be responsible for guaranteeing the peace. In addition, the Bretton Woods conference (1944) proposed that a constellation of novel economic institutions, which were to include the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (World Bank), and the International Trade Organisation, should be responsible for promotion and administration of an open and multilateral world economy; with the eventual defeat of the International Trade Organisation by the United States Congress, the United States and its economic partners established the General Agreement on Tariff and Trade (GATT) as a negotiating forum although not as a full-fledged international organisation. The postwar international order was to be based on the Atlantic Charter and its Four Freedoms (today’s ‘human rights’) in whose name the United States and its allies had fought the war. Within this structure, the victors would build the peaceful, prosperous, and humane world that had eluded mankind after World War I. As we know at the turn of the century, not all of these worthy objectives would be achieved.

Within a brief period, the Rooseveltian concept of ‘one world’ was shattered. The Soviet-American confrontation over the territorial settlement in Central and Eastern Europe destroyed the wartime spirit of Allied collaboration. The ideal of a reunited world economy collided with the realities of the economic devastation wrought by World War II and the ensuing Cold War; the world economy soon was ideologically driven into what Stalin called the two antagonistic ’systems’ of capitalism and socialism. Responding to this situation, the United States and its allies assumed the task of fashioning economic, political, and security arrangements that would restore the shattered economies of Japan and Western Europe and provide for their common security. The American System emerged from this joint effort of the United States and its allies.

At the core of the American System, including its associated military alliances, was a shared perception of the overriding danger of the Soviet threat. In the interest of political unity, the United States and its allies tacitly agreed to subordinate their short-term economic and other differences to the long-term political priority of containing Soviet power. The Soviet danger provided the political glue that helped hold together the postwar international economy and facilitated compromise solutions to a number of serious economic problems throughout the postwar period. Although the economic and political structure created by the United States and its allies between 1946 and 1950 still stands, the tensions within the System have become increasingly pronounced with the end of the Soviet military threat.

The American System has included both the American relationship with Western Europe and the American relationship with Japan. Although these two principal components of the American system have certain common features, these relationships are fundamentally different regarding a number of economic, political, and security matters; these differences have become increasingly important in determining the economic and political relations between the United States and its two major allies. My principal concern here, however, is with the differences in the economic relations between America and its principal allies.

 

The American-West European Component of the System

As relations with the Soviet Union deteriorated after 1945, the United States realised that there were urgent fundamental problems related to the security of Western Europe. The most pressing need was to assist in the revival of the West European economy while also finding a way to guarantee the military security of the West Europeans against the threat from the Soviet Union. To achieve an American commitment to the pursuit of these goals, the American people had to be linked psychologically to Western Europe. It was vital to prevent a retreat into isolationism like that which had followed World War I and contributed to the outbreak of World War II. With the strong cooperation of its Western European allies, the United States undertook several initiatives.

The first important initiative was the launching in 1947 of what became known as the Marshall Plan. The Marshall Plan transferred huge capital resources from the United States to Western Europe, while basing American financial assistance on the premise of intra-European cooperation. By one estimate, the cost of Marshall Plan to the United States was approximately $13 billion over four years or approximately about 1.5 per cent of the American Gross National Product. In 1994 dollars, this amount would be $100 billion. The United States was able to finance the system because, at the end of World War II, it was the world’s major creditor. Like Great Britain in the late nineteenth century and like Japan in the late twentieth century, the United States used its accumulated wealth to help create a world that American leadership believed would serve both American economic and political interests.

Another major initiative strongly supported by the United States was the formation of what would become the European Common Market or European Economic Community (EEC). While the primary responsibility for this truly extraordinary initiative lay with the West Europeans themselves, the United States gave the project its complete backing. Although the political goal of reconciling France and Germany was the principal purpose of the EEC, its proponents believed that the creation of a huge market in Western Europe would give the West Europeans the economic strength to resist their domestic Communist Parties and the blandishments of the Soviet Union. In addition, the European Economic Community was conceived as a means to anchor West Germany firmly to the West despite the fact that historically the industrial Ruhr and other areas of West Germany had looked eastward for their export markets. These markets were now in Communist hands and alternative markets had to be found to decrease the feared West German temptation to strike an independent deal with the Soviets.

Although the Common Market represented a violation of the American ideal of a multilateral world and entailed European discrimination against American exports, American policymakers accepted these economic costs as necessary for security reasons. The United States could tolerate European protectionism because of its immense economic superiority over the Europeans and other countries. However, the United States assumed that the Common Market with its external tariff and protective Common Agricultural Policy would be a short-term expedient and that it would, over the longer term, become a stepping-stone to a multilateral system. American officials believed that, when Western Europe had regained its economic strength and self-confidence, the West Europeans would lower their external barriers and participate in the open world economy envisioned by the United States at Bretton Woods.

American officials, however, did demand an economic quid pro quo from the West Europeans that would become of considerable importance in defining the long-term economic relationship between the United States and Western Europe. As a precondition for supporting the movement toward European economic unification, the West Europeans agreed to treat American multinational corporations as if they were European corporations and to avoid discriminating against them in their policies. Or, in more technical language, the West Europeans extended the principle of ‘national treatment’ to American firms, While the United States did demand access to the Common Market for American corporations, it tolerated what it assumed would be the temporary discrimination against American agricultural and other exports in order to rebuild Western Europe and thwart Soviet expansionist designs.

The other important American initiative was the 1949 creation of the North Atlantic Treaty Organisation (NATO) to link the two sides of the Atlantic militarily. In effect, the United States brought Western Europe under the American nuclear umbrella through the strategy of extended deterrence and thereby communicated to the Soviet Union that an attack on Western Europe would be tantamount to an attack on the United States itself. The stationing of American troops on European soil became a visible sign of this commitment. The NATO Treaty identified and legitimated for Americans and West Europeans alike the linking of their security. In short, economic and security ties have been closely linked in defining the relationship of the United States and its West European allies since shortly after the end of World War II

 

The American-Japanese Component

In Asia the United States also found itself facing a serious political, economic, and strategic challenge. World War II and its aftermath had strengthened the position of the Soviet Union in East Asia, while China and North Korea had become communist countries and political allies of the Soviet Union. These important traditional Japanese markets were now in hostile hands. Similarly to West Germany, intense concern existed that the forces of economic gravity would pull Japan toward the Soviet Union and its Chinese ally. Moreover, the Japanese economy was a shambles; it had been much more devastated by the War than had initially been appreciated. Although in retrospect, it is difficult to understand, American officials truly despaired over the problem of ensuring Japanese economic survival.

In addition to guaranteeing Japanese security through the formation of the American-Japanese Mutual Security Treaty (MST), the United States wanted to integrate Japan into a larger framework of economic relationships and thereby remove the attractiveness of the communist-dominated Asian market. However, unlike West Germany, there were no large neighbouring non-communist economies to which the Japanese economy could be anchored. To overcome this problem of an isolated and vulnerable Japan, the United States took several initiatives. One was to expedite the decolonisation of southeast Asia (it should be remembered that one cause of the Pacific War was that European colonizers had largely closed these economies to Japanese exports). The United States also sponsored Japanese membership in the ‘Western Club’. Despite strong West European resistance based on intense fear of Japanese economic competition, the United States eventually secured Japanese participation in the IMF, the World Bank, and other international organisations. In addition, the United States gave Japan relatively free access to the American market and to American technology. Furthermore, the United States used its vast financial resources to assist in the rebuilding of the Japanese economy, but it did not demand access to the Japanese economy for its multinational corporations. Instead, the quid pro quo for American economic concessions to Japan was Japanese permission to use their air and naval bases in order to deter the perceived threat of Chinese and Soviet expansion.

In order to guarantee Japanese security, the United States also spread its nuclear umbrella over Japan. The MST, however, differs fundamentally from the NATO alliance. Under the NATO treaty an external attack on any member obliges the other members to consider measures of mutual defense. In the MST, the United States agrees to defend Japan if Japan is attacked, but the Japanese are not obligated to defend the United States. Also, whereas the NATO agreement applies only to the territory of its members, the MST refers to the outbreak of hostilities in the entire Pacific region. Through this agreement the United States obtained the right to use air and naval bases in Japan to defend and secure its position in the Western Pacific. The Japanese were given access to the American market in exchange for the right to anchor on Japan the American strategic position in East Asia.

In these ways, the United States became the fulcrum of the American system; the American-West European and the American-Japanese components of the system had little to do with one another. Lines of cooperation, however, did and do run through Washington. Although Japan and Western Europe would become equal participants in the annual ‘Western’ summits, Japanese-West European diplomatic relations were primarily a function of their ties to the United States. In the economic arena, Japanese-West European commerce was and still is relatively minor compared to the commerce of each with the United States. With respect to security, no military connections exist between Western Europe and Japan. In economic, diplomatic, and security affairs, the American system has, for nearly half a century, tested squarely on American leadership.

The American system of alliances across the Atlantic and the Pacific provided the political framework within which American political and economic influence expanded around the globe until the expansionism was brought to an end at least temporarily in the jungles of Vietnam. Although both the United States and the Soviet Union sought to expand their domain, the United States was the most successful expansionist power in the postwar era. In response to its intense fear of communism and in pursuit of its policy of containment of the Soviet Union, the United States, like other great powers before it, became the most expansive power in the international system. American influence expanded rapidly in Europe, Asia, and the Middle East. Thus, in its effort to contain Soviet expansion, the United States itself became a highly successful expansionist power.

 

The Liberal World Economy

The institutional framework of the postwar world economy was constructed at the Bretton Woods conference in 1944. Eventually known as the Bretton Woods System (BWS), this essentially American-British achievement reflected the thinking of Harry Dexter White and John Maynard Keynes. (In retrospect, the small number of principal players involved in formulating the agreement accounts in large part for the extraordinary success of the conference and is in marked contrast to subsequent efforts to agree on rules to govern the world economy.) Although a number of disagreements divided the American and British negotiators, the conference succeeded in reconciling its two major objectives. The first goal of the conference was to formulate unifying principles that would be embodied in the institutions to comprise the BWS: the International Monetary Fund (IMF), the World Bank, and what would become the General Agreement on Tariffs and Trade (GATT). These guidelines included (1) a commitment to trade liberalisation via multilateral negotiations and the principle of nondiscrimination, (2) agreements that current account transactions should be freed from controls, but that capital controls were permissible, and (3) agreement that exchange rates should be fixed or pegged and that their adjustment was of concern to all. The second goal of the conference was to leave mom within the BWS for governments to pursue Keynesian stabilisation and social welfare policies; individual nations would be free (within prescribed limits) to pursue economic growth and full employment policies. These fundamental principles and the international institutions embodying them created the framework within which the postwar international economy has flourished.

In subsequent years the original Bretton Woods System has been significantly modified in response to economic and political realities beginning immediately after the end of World War II. The prostrate European and Japanese economies, the problem of the ‘dollar shortage’, and especially the exigencies of the Cold War brought about major changes in the original system. In the interest of forging an alliance system against the Soviet Union, the United States reversed its prior positions on a number of international economic issues and took a decisive leadership role in the creation of the postwar world economy. The emergence of the postwar international economic order cannot be understood without recognising the need for allied co-operation against the Soviet Union.

The world’s foremost creditor nation, the United States, used its financial reserves, primarily through the Marshall Plan, to facilitate the rebuilding of the West European economies as a buffer against Soviet expansionism. Despite its historic aversion to trading blocs, the United States pressured the West Europeans to pursue European integration. As a pre-condition for receiving American assistance, West European governments were required to remove intra-European trade barriers and to co-operate and co-ordinate their economic plans through the Organisation for European Economic Cooperation (OEEC); the West Europeans were also encouraged to carry out domestic economic ref orms, including the adoption of America’s more productive manufacturing and management techniques. In order to promote European integration, the United States even tolerated European discrimination against American agricultural and manufactured exports. In a less dramatic but equally important way, the United States also used its financial and other resources to help rebuild the Japanese economy and integrate it into the Western system. Thus, during the Cold War, the postwar international economic order and the international security order became intimately joined to one another.

The core of the modified Bretton Woods System was composed of two international regimes with important roles in the early success of the international economy. The first regime was the international monetary system based on fixed but adjustable exchange rates, rates for which the International Monetary Fund (IMF) was given formal responsibility in reality, the United States used its economic resources and political influence to assure the early success of that monetary system. The second important regime was the international trading system based on the GATT; responsibility the the trading regime was diffused among a number of nations and, as this number increased during the postwar years, the trading regime became more and more unwieldy. There were plans for a third regime (based perhaps on the World Bank) to be responsible for promoting the economic development of the less developed countries. This regime never materialised, largely because of the strong opposition of the industrial economies; even at the end of the twentieth century, no full-fledged development regime or agreed-upon principles regarding economic development yet exists.

 

International Monetary System of Fixed Rates

Experts from many countries holding common views on the technical issues needing resolution played significant roles in the creation of the international monetary regime. The system had to provide monetary reserves and reserve credits in sufficient amounts to enable member governments to keep their exchange rates fixed or pegged to one another. (This is called the ‘liquidity problem’.) The IMF would solve this problem by offering reserve credits to deficit states using contributions from member countries. Second, the system also bad to solve the so-called Nth problem. (This is called the ‘adjustnent problem’.) In a monetary system based on fixed exchange rates covering N countries, if policy conflict is to be avoided, only N-I countries can, at any particular time, pursue independent exchange rate policies, i.e., the currency of at least one country must stay stable while others are free to vary the value of their own currencies. The requirement that countries had to obtain IMP approval to alter their exchange rate was designed to solve the Nth country problem. Third, the monetary system had to anchor its members’ monetary policies to some objective standard in order to prevent global inflation or devaluation. (This is the ‘confidence problem’.) Stabilisation of a monetary system can be achieved in one of three ways: by (1) tying every currency to a ‘non-monetary’ asset, gold being the asset of choice; (2) adopting a policy rule to co-ordinate national monetary policies, or (3) following a leader whose revealed policy preferences promise to provide the desired degree of economic stability. Although all three methods were in fact employed in the early postwar years, the monetary policies of member states were ‘anchored’ by tying every currency to gold and the major powers coordinated (informally at least) their national economic policies.

The postwar international monetary system, which lasted until 1973, was extraordinarily successful. The system was designed to provide both domestic policy autonomy and international monetary stability; in effect, the system provided a compromise between the rigid gold standard of the late nineteenth century under which governments had very little ability to manage their own economies and the monetary anarchy of the 1930s when governments had too much license to engage in competitive devaluations and other destructive practices. In order to achieve both autonomy and stability, the system was based on the following principles: (1) fixed or pegged exchange rates, but with sufficient flexibility to enable individual states to deal with extraordinary situations including the pursuit of full employment; (2) the establishment of a reliable source of reserve credit in the event of an international payments problem; (3) an agreement among member countries to peg their currencies to gold at $ 35/oz. or to the dollar; (4) IMF approval of exchange rates and of adjustments in the event of a ‘fundamental disequilibrium’ in a nation’s balance of payments; (5) monetary reserves provided by an IMF endowment to create a pool of national currencies or county quotas which could be made available to deficit countries. These principles would govern the system until its breakdown in the early 1970s.

The ways in which the system actually functioned in practice did not fulfill the intentions and expectations of its founders. Firstly, although the IMF was made responsible for maintaining liquidity, in practice the primary solution was the build-up of the dollar reserves of member governments due to continuing American balance of payment deficits, especially after 1959. In this way the American dollar became the foundation-stone of the international monetary system. Secondly, although the adjustment or Nth country problem was to be solved by requiring counties in ‘fundamental disequilibrium’ to obtain IMF approval before changing exchange rates, in practice, the problem was solved politically through co-operation among the United States and its allies and by the passive US attitude toward the exchange rate of the dollar up to the 1971 Nixon shock. The confidence problem was solved as the members followed US policy preferences which, in the early postwar era, promised to provide stability to the system. However, the essential requirement that the United States as the N-I country, pursue a policy of price stability failed eventually with the escalation of the Vietnam War in the late 1960s; the ensuing inflation leading to the abandonment of the fixed rate system by the Nixon Administration in the early 1970s because the system no longer suited American interests. Nevertheless, the United States and the dollar have continued to be the foundation of the system.

The key role of the dollar in the international monetary system held the American alliance system and the world economy together, and the international role of the dollar as both a reserve and transaction currency actually became a cornerstone of America’s global economic and political position. Because America’s major allies and economic partners were willing to hold dollars for political as well as for economic reasons, the international role of the dollar conferred on the United States the right of ’seigneurage’; this term refers to privileges associated with being the provider of the currency for an economy, in this case the international economy. As President Charles de Gaulle of France bitterly complained in the 1960s, the ‘hegemony of the dollar’ conferred ‘extravagant privileges’ on the United States, because it alone could simply print dollars to fight foreign wars, buy up French and other businesses, and go deeply into national debt with no fear for the consequences.

As Robert Triffin warned in the early 1960s, there was a fundamental contradiction at the heart of this dollar-based system. While the huge outflow of American dollars to finance the re-building of Western Europe and Japan and the American military build-up during both the Korean and Vietnam Wars helped to solve the liquidity problem, this outflow or overhang of dollars meant that the United States would one day be unable to redeem in gold those dollars held by private investors and foreign governments at the agreed price. Triffin predicted that confidence in the dollar would be undermined as the American balance of payments shifted from a surplus to a deficit. As this deficit grew in the late 1950s and the 1960s, the conflict between the monetary system’s mechanism of liquidity creation and the solution of the confidence problem became increasingly severe. The problem became even more acute in the 1960s when the escalation of the Vietnam War and its inflationary consequences caused a deterioration of international confidence in the value of the dollar. As confidence in the dollar declined, the foundations of the Bretton Woods system of fixed rates began to erode.

Decreasing confidence in the dollar led to intensifying speculation in gold, and this was followed by attempts to find solutions to the confidence problem; the most important of these efforts was the creation in the late 1960s of Special Drawing Rights (SDRs) as a new reserve asset to complement the dollar. However, the ’solution’ reached was essentially political. America’s Cold War allies, fearing that a collapse of the dollar would force the United States to withdraw its forces from overseas and to retreat into political isolation, agreed to hold over-valued dollars to prevent the monetary system from breaking down. In essence, the confidence problem was solved by the political necessity to maintain the anti-Sot alliance. Another factor in the allied support of the overvalued dollar, however, was that the American market was lucrative for such export-oriented economies as West Germany and, later, Japan.

At any particular time during the postwar era, the United States has had one primary partner in defending the dollar and hence its international position. In the early postwar period, the American position in the world and support for the dollar were based on co-operation with the British this ’special relationship’, begun between World Wars I and II, had been solidified by the wartime experience. The Anglo-Saxon powers worked together to frame the Bretton Woods System and re-establish the liberal international economy. By 1967, however, the relative decline of the British economy forced Great Britain to devalue its currency and pull away from its close partnership with the United States. West Germany then replaced Great Britain as the US’s foremost economic partner and supporter of the dollar, Throughout the Vietnam War and into the 1970s, the Germans supported American hegemony by holding dollars and buying American government securities. The inflationary and other consequences of this new special relationship weakened the American-West German relationship in the mid-1970s and eventually led to its fracture in 1979; the Germans refused to support what they considered to be President Carter’s inflationary economic policies and, with their joint sponsorship with the French of the European Monetary System in the late 1970s, began to isolate the mark from the wild fluctuations of the dollar. During the Volcker Recession in the late 1970s and early 1980s, Germans were replaced by the Japanese who ‘provided the financial backing for President Reagan’s economic and military policies. In the 1990s, in the guise of the G-7, the international role of the dollar has been maintained primarily through the informal co-operation of the American, German, and Japanese central banks. This co-operation continues largely out of fear of what would happen to the international economic and political system if the monetary system were to break down.

 

The Trade Regime

The trade regime was born in conflict between the American and British negotiators at Bretton Woods. Reflecting American industrial supremacy, the American negotiators’ goal was to achieve free trade and to open foreign markets. Although the British were also committed to the principle of flee trade, they were extremely concerned over the ‘dollar shortage’, the possible loss of domestic economic autonomy to pursue full employment, and a number of related issues. However, the eventual British-American compromise and agreement to create the International Trade Organisation (ITO) to complement the IMF and the World Bank, proved futile. The American Administration itself rejected the ITO because it believed that the ITO would meddle in domestic economic affairs, resulting in the American government failure to ratify the agreement.

As an interim measure until a replacement for the defunct ITO could be found, the United States and its principal economic partners created the GATT in 1948. The purpose of the GATT (like the moribund ITO) was to promote ‘freer and fairer’ trade, primarily through the negotiated reduction of formal tariffs. Although the GATT was remarkably successful in fostering trade liberalisation and providing a framework for trade discussions, its authority and the scope of its responsibilities were severely limited and applied primarily to manufactured goods. The GATT did not have authority to deal with agriculture, services, intellectual property rights, or foreign direct investment; nor did the GATT have authority with respect to customs unions and other preferential trading arrangements. Successive American administrations and other governments became increasingly cognizant of these inherent limitations and, following the completion of the Uruguay Round in the 1980s, replaced the GATT with the World Trade Organisation (WTO) whose responsibilities are much broader and which, unlike the GATT, is a full-fledged international organisation rather than merely an international secretariat.

Despite the limitations of its mandate and organisational structure, however, the GATT for many years played an important role in reducing barriers to international trade. Embodying the neo-classical economic commitment to free trade, the GATT provided a rule-based regime of trade liberalisation founded on the principles of non-discrimination and Most-favoured-Nation treatment (MFN), unconditional reciprocity, and transparency (for example, the use of formal tariffs and the publication of trade regulations); in effect, the members of GATT agreed to establish regulations lowering trade barriers and to let markets determine trade patterns. Under GATT, markets were opened and new rules established by mutual agreements and negotiations carried out under its auspices; agreement was based on balanced compromise or unconditional reciprocity rather than on unilateral actions by the strong and the type of ’specific reciprocity’ that; in the final decades of the twentieth century, became increasingly characteristic of international trade. The goal of the GATT was an open multilateralism, that is, the agreement provided for the extension of negotiated trade rules without discrimination to all members of the international system; however, candidates for membership had to meet certain criteria and agree to obey the rules. The founders of the GATT wanted a steady progression toward an open world economy with no return to the cycle of retaliation and counter-retaliation that had characterised the 1930s.

Although the early postwar period witnessed a number of agreements to lower tariff barriers, a significant shift in trade negotiations took place with the Kennedy Round (1967), initiated by the United States in response to a growing concern over the trade diversion effects of the European Economic Community. As a consequence of American pressures, the Kennedy Round resulted in an approximate 35 per cent reduction of trade barriers on nonagricultural imports and led to a number of basic reforms such as the regulation of anti-dumping practices and the substitution of across-the-board tariff cuts (or the principle of ‘general’ reciprocity) on industrial products for the earlier emphasis on bilateral negotiations and the ‘multilateralising’ of tariff reductions on individual products (or ’specific’ reciprocity). Subsequent rounds of GATT negotiations cut tariffs by more than 75 per cent. These tariff reductions have had a profound impact on international trade in manufactured goods, but trade liberalisation in agricultural products has developed much more slowly. With the reduction of trade bathers, international trade grew at an annual rate of 7 per cent between 1948-1973.

In 1971 the industrial countries committed themselves in the Smithsonian Agreement to reduce tariff and other trade barriers even more. The agenda of the subsequent Tokyo Round, far more comprehensive than previous meetings, included tariff cuts, liberalisation of agricultural trade, and elimination of non-tariff bathers. In addition, the industrial countries pledged to pay greater attention to the demands of the LDCs for special treatment of their exports. However, the most important task of the Tokyo Round was fashioning codes of conduct dealing with unfair trade practices. The results of the Round, completed in 1979 following nearly a decade of bickering, were substantial. For example, tariffs on manufactured goods were lowered by about an additional 34 per cent and the negotiations resulted in a number of codes of conduct such as the prohibition of export subsidies and the elimination of some discrimination in public procurement. However, the Round failed to resolve the American-European dispute over agriculture and neither satisfies the LDCs nor prevented the noxious proliferation of non-tariff barriers that had been occurring throughout the 1970s.

With these trade-liberalising agreements, international trade throughout the postwar era grew one or two percentage points more rapidly than did the Gross World Product. This substantial expansion of trade meant that imports penetrated deeply into domestic economies and exports became a much more important aspect of national economies. In fact, for some EEC countries, exports have reached as high as 50 per cent. Even the domestic markets of the United States and Japan were internationalised. Between 1970 and 1989, American imports increased from 4,1 per cent to about 18.1 per cent of GNP. For Japan, the increase was from 10 per cent to 13 per cent of GNP. It is particularly significant that Japanese imports have included a growing percentage of manufactured goods. Meanwhile, GATT membership greatly expanded over the years until it included 125 members in 1995, while growing trade flows created a highly interdependent international economy despite the slowdown in the 1970s with the onset of global stagflation.

 

Limitations of the Bretton Woods System

The Bretton Woods System had several inherent limitations that would in time weaken the foundations of the postwar economy. Many issues and topics of potential importance were left vague or simply not covered by the rules of the Bretton Woods system. On the trade issue, the fundamental purpose of the GATT was to govern the exchanges of products and commodities, and at the insistence of the United States, agriculture was excluded from GATT rules. Services, foreign direct investment and intellectual property rights, issues which were quite unimportant at the time of the founding of the Bretton Woods institutions and were not included in GATT rules, would become major components of international commerce only in the 1970s. Certain monetary issues were never satisfactorily resolved, i.e. the problem of adjustments in payments imbalances and determination of the responsibility of deficit and/or surplus countries to correct imbalances. The role of international financial flows, which would transform the global economy in the 1970s, was unanticipated and no rules were developed to govern such matters. Finally, the increasing importance of the multinational corporation (MNC) and foreign direct investment (FDI) in the postwar era profoundly transformed the international economy, especially as trade and investment became linked to one another. Initially, MNCs were mostly American corporations that began a rapid overseas expansion in the 1950s as a response to the creation of the European Common Market, but subsequently, the firms of all the industrial and some industrialising countries would join the growing ranks of the multinationals. Indeed, many of the economic activities and economic problems that would become extremely important in the 1980s and 1990s were not covered by the original GATI’ framework. Despite these limitations, the Bretton Woods system and the hegemony of the United States on which it rested provided a solid foundation for the success of the world economy following World War II.

Note

1 Kindleberger, C., The World in Depression, 1929-1939 (London, 1973).