Peace, Prosperity, and Politics

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Peace, Prosperity, and Politics

The Political Economy of Global Interdependence Thornas D. Willeft,Series Editor Peace, Prosperity, and Politics, edited b y John MueLler Fiflatzci~IMgrkef Xcfor~ni ~ zChitua: Progress, Problems, utzd Prospects, edited by Baizln~~ Che11, j, Ernball Dietrich, and Wi Feng lnsfifufions,Tratzsifion Economies, utld Ecotzomic Developnsent, b y Tirn Veager Exhuttge-Xa te Policies far Emerging Mgrkt Eco1zomies, by Rchard f. Sweencty, CIas Wihlb~rg,and %amas B, Wilfett

Capitai Con trds irz Entergz'ng.Economies, edited by Christine I? Res artd Rchard J. Swee~tey f~l;tSilzgEcon~ntdcPolicy: Sekcted Writitzg of Gotqried Haberliler, edited by Echard J, Swcsertey, Edward Tower, artd Thornas D, Willelf

Political Cap~acityra~zdEcononlic Behavit~r, edited b y M x k ~ Arbermm a and jacek Kt~@er

fitteresf Groups attd Monetary Integration: The X"olifhl ECOI/~I)T~EY of Exclz:fia?tgeRcaginz~aaice, C a r s l e ~Hrfeker ~ Closure in b~fernati;utualPolitics: T!EPImpact of StruZ.esecrance,hztemafl;onal Relatl'ons: Peacr. or War?; and H. Brooke McDonrlld and Richard Rosecrance, "AAlliance and Struct-uraI Balance in the International System: A Reinterpreta29 (March 1985): 57-82, tion," "?urr-.mlof Go~zJktReso;otutio~ 4. Rlchard Rosecrance, The Rise of the Rading Slate; Richard Rosecrance and Arthur A, Stein, ""lterdependence: Myth or Reality?" World Potifr'es26 (October 1973):3-27; Richard Rosecrance, "International Interdependence," in Geoffrey L. Goodwin and Andrew Linklater, eds., Nezu Dimetzsiuzts of Inkorid Politics (Hew York: Hafsted Press, 1975); Richard Rosecrance, Alan AlexandroiEf,W. Koehler, J. Krtdl, S. taquer, and J. Stc>cker,"Whither Interdependence?" hztemational Organir 1977): 425471. There is a long-standing tendency in international relations to treat states as analogues of firms and to borrow- ideas from economics. Rosecrance argues that the realist mainstream has only bc~rrrtwed arguments about competition and that other ideas can be more frultfu-ullyapplied. See Richard Rosecrance, "International theory revisited,"VntenzatiozzalQrgn~lr'zafimz 35 (Autumn 2981): 691-713, as well as MS delineation of a political anal%ue for the virtual corporation in his ""Te Rise of the Virtual State," Foreigl.1 Aflnirs 175 (July/August 1996): 45-61. 5. 8x1this issue, see, in particulas; Richard Rosecrance and Arthur A. Stein, eds., The Dclrlrzestic Bases of Grn~zdStrategy (Ithaca, PJY Cornell University Press, 1993). 6. Rosecrance has long emphasizd the impc~rtanceof reward and pc~sitiveinducements in contrast to threat and sanctions as the basis for altering state behavior. During the Cold War, he nsted that deterrence could be more easily achieved by increasing the payuffs states obtained in the status quo and thereby reducing their incentive to challenge the status quo. This conclusictn emerged readily fmm the standard deterrence qurltions that others wed merely to determine which weapons systems were mc~rec)r less stabilizing. Richard Rosecrance,

Introdrretiotz: Prc~spectsR P ZProblerns ~ in the New Centzrq

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StrakgE'c Deterrence Recansidemd (London: International Institute for Strategic Studies, 1975); Richard Rosecrance, hz temationtll Rehtions: Peacc or War?;Richard Rosecrance, "Reward, Punishment, and Xnterdc3pendence,""journal of Cmjict Resofzrlian 25 (March 1982): 31-46, 7. This emphasis also picks up on a Rosecrance theme, namely the impc~rtanee of the relations fc?rged beh-een great powers at the end of major global wars. For his arguments about the prospect for a new concert of powers in the wake of the Cold War, see Rchard Rosecrance, ""A New Concert of 13awers,'"Foreign Afaim 71 (Spring 1992): 64-82. For earlier regectic~ngsee Richard Rosecranee, ed., America As an Orditzlary Country: U,$. Foreign Policy n ~ the d FZtt11re (Ithaca, NV: Cornell Uni17ersit.y Press, 1976). 8. Rowcrance has emphasized that states copy one another and that an international form of sc~ciatizationtakes place: Richard Rosecrancr;3,"'The Political Socialization of Nations," Ilztemcatiolzal f tudies Qararferly20 (Sptember 1976):414@. 9. Unlike many scholars of international relatims, Rosecrance has emphasized the utility and the centrality of scholarly analysis as a tvay of informing publie policy. Among others, see his recommendtatians for U.S. policy in Richard Rosecrance, America2 Ecarzomic Reszkrgctzce: A BoI~11New Strategy (New York: E-ilarper & Row, 3990); and his suggestions to Japan in Richard Rosecrance and Jennifer %W, "Japan and the Theory of htemational Leadership," Wc~rfdPof l'tics 42 Uanuary 1990):'I84-209,

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Corporations and States: Factor Flows in the Twenty-First Century

The Units Slates and Firms: The Conventional Theory 'The conventional theory of international politics compares the rivalry a m g states to the competition of firms in an industry.1 The two disciplines of microecmomics and irrternatiltnal politics are seen as operating according to sinnilar prjnciples. 'The relevant unit, cvhether state or corporation, seeks to succeed in a wider market.2 The firm was a hierarchical organization that made products for the consumer. Et desiped and manufactured components and then asscntbled them to create a final pmduet. Firms financed, marketed, and transported goods to prospective buyers. Shilarly in the conventional view states were hierarchical organizatjons that performed services for their mernbers,"ey protected their pcrpulations from outside threats and sought to gumantee domestic peace. Governments were created and instituted to provide social services for hdividuals. Through taxation, they offered municipal and na, and edutional services to citizens in the fields of police, w e l f a ~health, cation. They established the legal e~~virormment in which individuals and corporations could exchange goods and services. E'irms contracted with suppliers and buyers, but they also competed with other firms in the s m e industry,each seeking to provide a complete product to consumers, In the conventional tl-teory, statcs might equally

reach agreements with one another h arms control or trade, but they remained competitors for fnfluence and power h1 the system as a h o l e . 'They did not kvilliz~glyagree to the establishment of a hierarchy that placed one of their number above the rest; nor did they deveZop a stable division of labor among tkmselves internationally."n the conventional view states were similar units. They did not perform differentiated functjons. Like firms, hawevet they might occasionally enter into marketsharhg or sphems of influcmcc; armngements.

Slates and Firms: A Revised New Yct, the cmantional anaiysis provjdes on& o11e possible view of the link be-hnieen economic competition and international poE.t;ics*The ~ e o ofq intematimal trade (which, mlike the thet-lry of thc.firm, achrally deals with countries) offers reasons for nation-states to specialize in the pmdttdio~~ of goods and services internationally according to their ~spectivecomparative advantages. Countries derive benefit: from free trade in which they pwchase goods fmm others that they produce ~lativelyless efficienti,y at horne, Accodhg to the t h e o ~ of htemational trade, states can achieve a di\rision of labcrr illternationally, which is not altogether different h m the n swiety.5 economic division of labor among producas w i ~ i domestic

The Theory of' the Firm. A new division of lahor engendered by the process of market exchmge could thus reshape nations and their role in the world economy in accordance with the theory of international trade. Ronald G a s e held that the firrn was an equally flexible and adaptable entity-"It. exists only because individuals face intractable information and transaction problems in directly contracting with one another for the pmduction of goods and services. A firm bundles a serit.s of components or servkes into a c o q l e t e and htegrated product. By bringing t o g e h r the individuals or suppliers who produce the compmmts that make up a product, the firm provides a vital service, for which, of course, it exacts a return, earning a profit.7 If indivihals possessed enough inforntation and contracting abiliq; however, they might do the work on their own.8 Consider a homewner Miht) wishes to add a bedroom or patio to her housc. She may decide to perform the functions of contractor herself, or she may hire a prime contractor to oversee and coordhate the activities oE separate subcmtractors-bricklayers, carpenters, plumbers, and electricians-paying the fomter a fee in rehr,m. If she hires a prime cmtractor, that contractor acts like a corporation would, integrating a series of services and products toget-her. The size and function of the firm are always suhjwt to change MIith alterations in technology, hformation, and trmsactim costs, and the will-

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ingness of hdividuals directly to contract with each otlner.The firm is no its cmtracbal rdationships than is the nation-state." If an inctividud pllrchaser could seek out incli,vidual szxppliers of- subcomponents, she would not have to rely on a corporation to provide them.11 %e effect of hfomation technology (IT) is to shurt-circui_tthe complex commuficatio~~ ch els of tradjtimal firms, atlowi,ng individuals to find what they need purchase it ditorecdy without engagislg th.6 services of ccrrporate middlemen." The World Wide Web and the htemet provide such lhkages and the requisite &ormation. h adept individual with access to a good communications network can thus duplicate many of the fmc.tions of travel agent, banktor, insurmce adviser, stock broker, and real estate agent. h o t h e r eflcct of superior 1% is to give senior managers data that they never before possessed, allowing them to dispense with the expertise and services of mictdle management. Finally if physical capital can be substituted for routine work through robotics or other techolsgies, anly the most skilled and edurated workers need be retainld, Partly as a result of the widesprctad availahiIity of ir^lfoma.tion,&ercfore, trmsaetion costs have been great@ wdvced, and firms have bwomc kaner as a result, dispenshg with eeded. management m d labor. To save on costs, companies have also reduced the number of vertical levels in their organjz,ali.nn.'n Finding nccv m d rcljable suppliers, firms no l o n e r have to p d u c e all their subcon?ponents in-house. They can contrart out their production, saving expenses on large endowments of plant, equipment, and land. ""fst-in-time'bei-hods bring materials to the plant when a specific process occurs, saving m storage and warehousing costs. The net result is an efficimt 'ldCfwnsizil'~g"Of: corporaticms, wh,ieh then have extra fuxzds for invest~amtin new products. At one e x t m e end of this cmtinuurm of downsizhg lies the ""vil-tual corporation," an entity that performs headquarters functions-research and developmnt, product design, hancing, marketing, insurance, and transport-bu t which does not actually manufacture produ.cts.14 Proceeding along a rollte outtined by Ronald Coase, the firm subcontracts production to another company savhg OII h-house costs..As this process pmceeds, coqanies form industrial alliances to produce pmducts. This partly n-titigates the competitive relatimship between them. "Headquarters" companies design products to be made somwhere else. h the new locution of Silicon Valley, these are designated as "fabless" fifjrms (witltout fabrication capabilities). In response, '"faundry" "tor ""fabff)companies emerge-firms Chat produce goods for other connpanies but have no distjnctive products of their own,= Their production facilities have to be joined with other firms"roduct d e s i p for a new line of merchandise to be created. Rdations between "fabless" and "foundfy" companies are even more cooperatke than those between traditional companies that do more;. static in

"

contract WO& fnr each other. "Foundries" will never compete h product design with ""fablessf3irms,and thus strategic alliances with them will be more dependable. TT affects transaction costs h two ways, It reduces the necessary activity of the firm itself, =turning sovewignty to indivicfual buyers and sellers of goods who can now contract directly with one another, withouuhe intermdiary of the corporation. Second., new information makes a firm mom efficient, allowing it to cmtract with others for subcomponent production or even for production as a whole. In both instmces, the market gains while h-house costs decline,

The Theory of International Politics, Just as firms have downsized along Coasian lines, so s o m states have recognized that they do not have to produce everything at home. The rapid development of foreign, direct investment since Wvrld War Il is in part a reflection of the ncw tmnd. At particular stages of production, states like firms h d it convenient and econmical to produce their goods within other countries, benefiting 'som cheaper labor and closer proximity to the internationiil marketplace. All major industrjal countries have moved in this direction, including the United States, European countries, and most recent@ J a p a n The United States began heavily to invest abroad (particulaly in Europe) in the 1960s and 1970s. In the late 1970s and 1 9 8 0 ~ European ~ investment reciprocated, going largely to America. Since then, the UI~ited States m d Europe have directed hvestme~~t to East Asim cowltries and China. Now Japan has begun to diversify its production m d to invest werseas-in the Unikd States, the emerging markets of East Asia, and also particularly in mainland China. As a result, manufacturing has fallen as a proportion of Gross Domestic Product (CDP) in all deveXoped. countries. Services have now risen to ZC) pertlent or more of GDP inmany first world economies. And the t r e ~ ~isdhcreashg. As we have already seen, the most dynamic new players have been countries and regions that have moved fully to embrace high tcchnotogical services as their future industrial advantage.'Wese countries-and there are more on the way-have emerged as "vistual statesm-states that concmtrated on headquarters or "'head" functions and that produce their (joods through reliable coMracts with production os "body" nations somewhere else. The return on the high-level services performed. by ""had" nations has on the whole been greater than the return on manufacturing of a traditional sort. h part, of course, this shiff is simply a change inmarket incmtkes that brings correspmding chmges in corporate strategy among modern firms. The state is in part a bystmder in the process,.At the same time, states can either accqt or resist the chalzge. Like Great Britain, Holland,

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Switzerland, Hong Kong, and Singapore, they can seek to benefit from the shit't, mowing to gain new ccmlparative advmtage tJRroul;h services and a more-. highly educated and technical managemetnt and workfnrce. Or they can try to protect domestic industry (as Prmce, It+ and Japan did in the past), keeping production largely at home. As states move to accommodate and foster the industrial t ~ n d they , ehange their role as players in international relations. In this way there has been a gmwing alttlration in the function of the state, malngous to the shiA in the nature of the corporati.on or firm,. In both cases, the organization has become more horizontal and more (not less) dependent on relationships with suppliers, As firms and states cmtract out production, they dcvelop crucial economic inks hvith foreign entities. Their stake in the contixzuance of such relationships rises. Further, state control.of consumer decisions declines, The market rises as a dircct provider of servkes and the state contracts its role in the m r ket. This means that individual citizens are less beholden to the state for their long-term welfare. Individual sellers of their labor must rely mom on themselves and the m r k e t m d less on the safety net provi,ded by the state.

States and Firms: The Conseqzle~zcesof the Moderr Theoy 0 1lrrter~utic~~zal Politics The cctnventionai view holds that the &wry of the firm is the &coretied starthg point for the theory of the state acting in international. politics, W e n the firm undergoes a transformatiox~in its relafions with suppfiers and subcontractors,the nature of interfirm competition changes. Industrial alliances enrerge, There is a greater division of Labor even among erstvvhile compethg firms. Firms are no longr entkely "like units" but have underg m some differerntiation. 'The firm-traditionally a vertical entity bundling ail subcomponent production in-housethen emeqes as a contracting, horizontal entity in which many subcompmentAhave to be bought from suppliers or even from competitors. Flatter :irm are more efficient and mose profitable, but they also dcpend more on each other. In similar ways, there is a process of downsizing affecting contemporary states that now pucchase vital components abroad. They increasingly produce goods abroad. Foreign, direct investment creates interdependence based on production that is far stronger than past inkdependence based solely on trade. There is a differentidion of production and the beg ings of a division of Xahor among states. Tke theory of international trade augrrrs in favor of such outcomes. Ronald Come foresaw the possibility that firms would become less necessary as trmsactjon costs declined and information became cheaper

and more available.fl Mrt. are now witnessjng the unbundling of the state for similar Easons. The consequences for intemtional pditics arc. fundamemtd oncs. The theory of the firm jnitially presmed no differentiation of function among firms competing in a single hdustry. This assumption is no longer M y true, Industrial alliances, international production arrangentents, and sMbcontracthg of component- producrion all make the classical theory of the firm obsolescent, if not obsolete. The conventional theory of international potitics also inweighed against their being any division of labor among states. The emergence of foreig~zdirect investment, virtual states, comections between ""head and "body" nations &OW that, contrary to cmentional t.heory states are becoming increasingly "'um:likefkuFlits.Cooperation amongst them thus can nllw be founded on the beg ings of a division of iabor intmatimally. In acidition, tbe citizen emerges with a g ~ a t e independence r of the state m d greater cmtracting ability In these circumstances, citizens may be less willing to pay for state-oriented, foreign-policy activities if they appea to conflict with their own economic m d ct,ntract% interests.

The Interaction of Units In the convezztianal theory of jntematianal politics, states typically created a balance of power against potential aggressors, They formed alliances against states bent on political or military expansion.18 Or they rclarmed, u&ng "internal balancing" to deter conSlict.'" The convezztional theory assumed that nation-states contr01led. territory and that they needed to prevent an aggressor from seizjng new land, thereby upsetting the balance of power, Alfimces hemmed the aggressor in, and the rearmment of target countries made it djfficult to take a new province away Zn the ccmventional appoach, territory was one of the important elements in political and military power.^^^ Stocks and Flows Few denied that nations cou%d,gain power througtn stocks of raw matcrials, pqdation, and territory. Many wars (to say nothing of the colonial acquisitions of nineteer7.t.h-centuryintperialism) were based orz the territorial assumption. Territory and population lent power to their holders, But stocks were not the only elements in ecmomic or military power. :lf a nation contrdfed or could bellefit fmm "flo'cvsf\f goods, capital, and technology, it cou%dalso become powerful. In the economic assumptions of the post-medieval period, any successful country could control "flowsf"y fiat. It could keep goods at home, and it could prevent imports from conirtg in, When this was seen

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to be selhdeieatirrg, however, mrcantilist principles still dlctated that a nation should run a uniform trade or payments surplus with exports exceedbg imports..'The com~trycould then gain gold or foreign exchange to carry on its wars. In the nheteenth century, cwntries recowzed that export-led growth could be an irnpmmt addition to domestic demand, facili.tating rapid, econolnic expansion. Even before Great Britain came to control about. one quarter of the world." land area in 1897, it had rapidlqi developed to became the world? preminaldCoase . . . asked why workers were organised in firms instead of acting as independent buyers and sellers of goc-odsand services at each stage of prc>duction.He concluded that firms were needed because of the lack of information and the need to minimise transactic~nscosts. A tzrorld without firms in which production was organised entirely through markets would require full infc~rmatictnand no transition costs; but in the real world it takes time and maney to find out about the product being bought or sold. A firm resolves these probXerns. Mr. Coase argued that the size of firms is determined by the relative costs of bringing in sevvices from outside and the overhead cost of providing them in house" (The Ecanomis;.t,Spternber 28,1996). 9. Qliver Williamson makes an essential distinction between the corporation's decision to "make or buy" qrc3duct or component. See particularly OIiver Williamson and Janet Bercovitz, "The Mrdern Corporation as an Efficiency Instrument: The Comparative Contracting Perspective,'" in Cari Kaysen (editor), The Amcn"cnn Corporntu7rl Today (New York: Oxford University Presa 19961, p, 334, 10. Coase observes, "The amount of %erticalYintegration,involving as it does the suppression of the price mechanism, varies greatly frc~mindustry tc~in dust^ and firm to firm'"4389). 11. Coase formulates this point in the following way: ""At the margin, the costs of organizing [an exchange transadim] tzrithin the firm will be equal either to the costs of organising in ano>therfirm or to the costs involved in Xeaving the transaction tcr be %organised%by the price mechanism'"404). 12. In Coasian terms, "It is clear that the dynamic factors are also of corniderable importance, and an investigation of the effect changes have on the cost of organising within the firm and on marketing costs generally will enable one to expIain why firms get larger and smaller" @W5).

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13, Sc?e note 8. 14. See R. Rosecrance, ""The Rise of the Virtual State," "reign Aflairs, JulyAugust 1996, 15. Such firms are now emerging in Silicon ValIey; Taiwan, and other places in East Asia, See for instance, "Pure Foundry Pure Profit," in Eleclrunk Bzlsiness Asia December 1995. 46, See fcrr example, ""Services Becoming the Goads in Industryf" Nezu York Ti"~rres,January 7, 1997, p. Cl. 47, The effect of information technology is truly dazzling. According to one estimate, "Since the Scscond World War 60 percent of U.S. economic growth has derived from the introduction of increasingly ei'ficient equipment, the most important of which have been information machines. Around 1950 computers entered the economy; essentially as calculating devices, and the cost cof crunching numbers plummeted. Between 4950 and 1980 the cost of a MIP (millon insbuctic~ns per second) fell beh-een 27 and 50 percent annually. In the 1960s computers became Zabor-saving devices for storing, sorting and retrieving data, the cost of which probably fell at an annual rate of 25 to 30 percent betwem 1960 and 1985" (Newszueek October 28,1996, p. 92)18. Waltz argues, *'We find states forming balances of power whether or not they wish to" (125) and, "The theory leads us to expect states to behave in ways that result in balances forming" (125). But see Rosecrance and Lo, "Balancing, Stability, and War: The Mysterious Case of the Napoleonic international Systemf'' Intel-ptatiorzal Studies Quarterlyf December 4996. 19. Tn a bipolar world, internal balancing is likely Waltz writes that the Soviet Union and the United States "balance each other by "ntei-nal" rather than 'extern a l h e a m , relying on their own capabilities rather than on the capabilities of allies. Internal balancing is mow reliable and precise than external balancing""fl68). 20. Waltz observes that state capability and rank depend on "size of populaticon and territory resource endowment, economic capability military strength, political stability, and competence" (137). 21. Waltz himseff speculates that the free world" "loss of China" in 1949 could be made up by several years of American economic grc~wth("The Stability c ~ af Bipcolar Warld" D~aedalzls,Summer 1964). 22. See particularely Richard Kosecrance, The Rise of the Virtuul Stake: WczalZIz and h w ~ if2 r tlte Com212g Centzlry (New York: Basic Books, 1999). 23. See Samuel P. Hrmtington, ""Te Clash of Civilizations?" Foreigh.~~ Affairs, 7'2, no, 3 (Summer 1993): 22-50. 24. Jane Jacc3bs expressed this thesis in Cities and l l l p We~ltIrcfPd~lit?ns:Prizzct yles of Econo~rticL@, New York: Randorn House, 1984. It has also been adverted to by Paul Krugman. 25. See Alvin and Pieidi TaEfler, War l ? Anki-Wal:. Survival nt the L)nwfz of the 23st Cenluly. Bostct-on:Z,i ttle Brcow-n, 1993. 26. Waltz also recopizes this. He writes: "Ecc~nomicalZy~ the self-help principle applies within governmntally-contrived limits" ((91). 27. This Zack of sparks of course was not true in the seventeenth and eighteenth centuries, when the Dutch and British East India companies were in effect fighting organizations.

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The World Economv at the End of the Millennium

If a Rip van WhHe had gone to sleep at the end of about. 1,870and woken up in the last few years, he wouM fhd that little has changed hthe world. economy. He would note the various tcchnologicat advances fn transportation and communications (airlines, telephones, and the camputer) have further reduced the costs of international trade m d commerce and led to tbe progressive integration of the world economy which was well &er way after the first Geat Age of Reform, whm he wall to sleep. The terrible events of this century-tn.o world warst the Great Dcpressiftn, and the battles against two illiberal creeds-Fascism and Cornmunism-which led to the breakdown of the first l;iberal international economic order (LIEO)+reated under British leadership after the =peal of the Corn Laws-would form no part of his memory, Nor wollld the various and varying fads in economic policy-both national and internationd-during this century make any sense (e.g. exchange controls), the use of quotas rather than tari.flfs as instwments of protection, centralized ing and associated controls on production and distribution, m d restrictions on the free flow of capital. Having read his De Tocyucvi.LLehc wodd &so not btr, surpTiSed that the United States and Russia had become great powers in the latter part of this century. Nor, that it took the United States nearly a century to become the predominant powa, just as it took Great Britain nearly a century from the mid-eightee~~th-century conflict with France tilf the end of the Napoleonic Wars to achieve its predodnance, His reading of De

TocquevilXe would also allow birn to see a natural, progression from the rise of Great Britain-which was in a sense the victory of an aristocratic oligarchy over the divi,ne right of h g s - t o that of the U'nited States, which is a victory of Demos over aristocracy. Whether this is an unmixed Zllessing is open to questicm+l He2 wodd be surprised by two featurcs of the clnrrent world economy For unlike! the nineteenth century when these was free movement of goods, mmey and people, today there arc. ~lativelyfree flows of goods m d money but no free movement of labor. This is related to the second surprising feature he would observe: the welfare states to be found in most advmced countries, which as he would soon recognize, have created property rights h citizenship. This necessarily leads to restrictions igration, For immigration creates new citizens with an automatic right of access to the purses of exist* citizens through the transfer state. Having gone to deep in 11870 before Chc great scrantble o r Empire bp the nations of Europe, and the universal spread of the Romantic movement's ideal of naticmalism, he would also not be surprised by the twin tbrses of Richard Rosecrmce who we are honoring inthis work.3 First, that the territorial imperative that had mtivated competition between nation states since the end of the wars of religion was replaced by the commercial competition of tmding slates following the example of Great Britain in the first great Age of Reform. Second, that as more and more developing countries, particularly fndia and China with their vast pools of relatively cheap labor, are brought into an htegrated world ecmomy a new hternational division of labos is emerging, with developed countries mainly providirrg services and develophg ones manufach;lres. Wth this spatial divisjoll bet wee^^ 'the head" and 'the body' of economic activit.y;trade is becoming essential for the wellf being of aft comtries, thus reducixlg the attractions of nationalism and war. economic policies He would also not be surprised by the cmse~~sual inc~asingiyembraced around the world as they echo those of the standard textbook of nineteenth-century political economy---Mill% Priaciples."hoougb hc would be surprised by the tecl-micalities in which the discussions were conducted-particularXy amongst the new breed of academic economists-he would have no difficulty in urtderstanding and endorsing Cheir prescriptions: sound money Gladstonian finance, and a general acceptance of the nineteenth-century policy prescription oi "hissez fairear'Having missed the heated discussions and theories concerning planning, Keynesiarr macroeconomics, opti~rrumtaxation, and various other fads and fashions, he could happily neglect the voluminous literature they spawned in the time he had been asleep. Rut being of a curjous bent he wodd probably have decidcd to read s m e condensed account of what had happened to the world while he

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was sleeping. He would have been astounded by the events of this century-of a world gone mad. He wodd have tried to find an explanation of what had gone wrong, and why and whezn the tide t u r ~ ~ etod enable the world economy to resume the progress that had stajled after he had gone to sleep. tle would also wlrnder if the coming century would repeat the mista:kes of the last, or il that age of universal worldwjde peace and pmsperity that seemed, irnminmt toward. the end of the great nineteenthcentufy Age of Reform was now in prospect. These are the themes 1 will explore on Rip van Winkte's bbehlf in the rest of this essay. But before that I need to provide some harder evidence than :Rip%casual empiricism for his belief that the world wonorny has pickrd up where it left off h the late nheteenth century. Remembrance of Things Past These are two pieces of statistical evidence that show that the world errnomy is back to where it was in the late nineteenth century The first cmcerns the htegratio~nof global, capital markets. The second is the htegration of world commodiv markets througln tradc m d &us indirectly the world markets for labor. Determining the extent of" global, capital-"""et integration has s p m e d , a vast literature surveyed masterfully by ObstfeM (1.995). For our comparative historical pwpose what we need is a statistical measure of"this ilntegralion fnr which we can obtain historical data to see the trends in capjtal-market integration over the last century. There are essentially two routes-a price and a quantity route. On the price measure, if capital markets were globally integrated, the price of m asset must be the same wherever it is sold.. In practice it is very difficult to test this implication because there is insufficient data cm ide~lticalassets in itifhrmt markets. One data set that CJlbstfeXd (1995) has used is the onshoreoffshore price differential on a given asset. But the Euro curmncy markets, which allow these comparisons, are a p"&-World War II invention, and W cannot make s i d a r historical compmiso~ns, The second mute (Ilnrough quantily) is based on the argument that in a completeiy integrated, global, capitd market, as the pr0ductivil.y of a country's invesme~~t is not necessarily M e d to the determinants of its savilngs rate, a rise in the latter shouId. lead to their most efficient deployment worldwicte, which (:~"tL)ris parihzls should lead to a currmt account suvlus and a capital outflow and cowersely if there is a rise in the productivity of a country" hinvtment, to a capital account deficjt and a capital hflow. Eldstein and Horioka (1980) use this to argue that, in such a world, the savings m d i-nvesment rates hn a particular corntry should not be systematically associated.,They suggest a cmss section regression of the form:

where 1,Cf is the jnvestmemt ratio; S I v the savi.ngs ratio, and 21 is a random disturbance for each country j, If capital is completely immdile b=l, so r degree of capital that the lower the value of b from unity the g ~ a k the mobility There are various problems with the ixnplemntation and interpretad w i t e this, as tbr data on savtion of these types of regressions."* ings and investme~~t rates is readjly available,faz~tedc micrix, at least an imperfect measure of capital market integration can be derived. n e r e are moreover, two sets of data (with somewl~atdifferent countries covered) which allow us to obtain estimates of b from the late nineteerzth century to the present. These were compiled, by Taylar 0996) and Maddison (1991, 1992). Taylor has estimated the b coefficients for his historical data and wc have done so for the Maddison data, The res~dtingvalues are charted in Figure 3.1. A similar story emergedfmm all three trends in the b estimates, which is in consonance with the qualitative historical evj,dence we have on changing capital mobility over this long period.What this shows is that till 1900 there was growing capital market irrtegration, which was partially reversed in the early part of this cenhary. There was a partial recovery in integration in the 1920s' but with the Great &pression and World War I1 there was fur&er disintegmtion that cmtinued into the post-war period till the 1960s. This was 'oXfokved by some increased integration, but which did not become marked till the 1980s. So that now the hdex is rrrul;hly where it was in 1870 when Rip went to sleep! To determisre the degree of gl&ajiz&ion of commodity markets, we will use the historical data on real-wage trends for a numher of countl.ies around the Atlantic bash, which has been put together by Jeffmy Wlliamso~~ and his collaborators.' T'he Heckher-Ohl theory predicts that with growhg integration of cornmodit)i markets through international trade there should be convergmce in real-wage rates as the low wages of the labor t-abm~dmt com~triesrise towad those of labor-scarce com~triesFigure 3.2 charts m index of the dispersion of real-wage rates (measured by the coefficimt of variationf for the time series for the Atlantic economies derived by Willimson (1995) from 1BQto 1986 for 15 corntries ((4 in the New World, and 11hthe Old). There isfirst th penod, till 1845when there was a skzav divergence of real wages because of continuing trade barriers, high transport costs, and modest internationa'i labor migration. Then, sec:ond, after the repeal of Corn Laws in Britain in 1845 and the subsequent creation of the first LIE0 under British leadership there is a marked and continuing convergence in real-wage rates that continues till 1,900. 'This was the period during which Rip went to sleep, when thel-c we^ sharp

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FIGURE 3.1 Compariscjn of Beta Coefficients, by Decade MOTE: Taylor's data include Argentina, Australia, Canada, Dernark, Franc% Germany, Italy, S-Lveden, UK, US. Larger data include Taylor" data plus India, Korea, Netherlands, Taiwan. Maddison's data include Australia, Canada, Denmark, France, Germany, India, Italy, Japan, Korea, Netherlands, Ncjmay Sweden, Taiwan, UK, US.

falls in transpoft costs8 itnd trade barriers, md.free internaticmal migratic.m of labor and capital. Wt-h the creeping prot~tionisntat the end of the century this trend comes to m end. There folows the thini period from 1900 and the two World Wars, till about 1950, when there is a growk~gdispersion of real wages- 'This is the period hn which the LIE0 b ~ a k down s with the disintegration of world commodity and factor markets. mefnurth period is the gradual rc.emstmction of a new LIE0 under U.S. aegis from about I9ti0 to the present. A convergence in real wages beghs and co~ntbues till the early 1970f;,when there is a brief reversal, associated with the travais hdldced by the Organization of Petroleum Exporting Countrks (OPEC) oil price shock. This is followed by continud convergelnce in the 1980s, so that the index is nearly back to where it was irr 1"300, Shce much of the convergence in the nineteenth c m b y LIE0 was fueled as much by international labor migration as by the integration of trade [see Williamson et. al f1996)f, the more ~ c mconvergence t In real wages is more likely to have been caused by trade inf;egraticm,given the zlbiqz~itottsnessof imsnigration controls limiting the international migration of labor, It would seem therefore that &p's casuaf empiricism is sound, and we can exmine the t h e questions this rise, fall, and rise of the I,:IEC) over the last 150 years raises,

Dispersion

1630

ttm

tw

rm

tw Year

ttwi

1870

International real wage dispersion, 183+31869.

1870

t@75

1SBO

1W5

t89Q

384%

tSOO

1905

International real t v a p dispersion, 18"i"-1913. FIGURE 3.2. Four Curves of International Real Wage Dispersion

l@lQ

International reaf wage dispersion, 19164945,

FIGURE 3.2 (continued)

Why? Broadly s p e a b g the ghastly events of this celztuq and the breakdown of the nineteenth century CJEO were caused by the rise of variolls ideas underlay the that questicmed the ecmomic and political Ijbera1ism"t-h nineteenth-century Age of Reform, To delheate them and to put them into historical and intellectual perspective, some distinctions made by the Ex~glishpolitical philosopher Michael Oakeshott are useful. Oakeshott makes a crucial distindion between two miljor strands of Western thought on th State: the State viewed as a civil association, or alternatively as an e t ~ f e ~ r iassociation. se Oakeshott notes that the view of the State as a civil associatior~zgoes back to mcient Greece. The State is seen as the custodian of laws that do not seek to inrtpose m y preferred pattern of ends (including abstractions such as the general [social] welfatre, or fundamental rights), but merely facifitdes indivi,duals to pzlrsue their own cmds. This view has been chaflenged by the rival conception of the State as an enterprise associatim-a view that has its roots in the Judaeo-Christian tradjtio~z.The State is nokv seen as the manager of an enterprise seeking to use the law for its OTnJn substantive purposes, and in particuiar for the legislation of morality. 'The classical libaalism of Smith and Fjiulne entails the forxncr, whjlst the major secular ennhodiment of society vicwed as an enterprise association is socialim, with its moral aim of using tbr State to e p l j z e people. Equally, the otker major ideolcrgical chalfenge to classical liberalism in this century, Fascism (nationd socialisxn), dso viewed the State as an enterprise association. Both bred collectivist moralities as a reaction to the morality of individudism. Oakeshott (l"393)notes that as in many other preindustrial societies, modern Europe inhdted a "moraIitJi of communal ties'" from the Middle Ages. 'l-his was graciually superseded from the sixteenth century by a morality of individuality, whereby individuals came to value making their own choices "concerning activities, occupations, beliefs, opinions, duties and responsibilities'" and also c m e to approve oE this ""slf-determined cmdwtffi,n others. This individualist morality was fostered by the gradual:breakdown of the medleval order, which Lallowed a growhg number of people to escape from the "corporate and communal organization" of medieval life. But this dissolution of commmal ties also bred what Oakeshott terms the ""anti-individual," who was unwilling or unable to make his own choices- Some were resigned to their fate, but im others it provoked '"envy, jealousy and resentment. And in these emotions a new disposition was generated: the impuse to escape from the predicament by imposing it upon all mankind,'"(p. 24) Thjs, the anti-indi,vidual, sought to do

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through two means. The first was to look to the government to ""protect him from the necessity of be% m individual." (p. 25) A large number of governmem.t.activities epitomized by the Elizabet-han Poor Law hvere devoted from the sixteen& century onwards '"to the protection of those who, by circumstance or temperammt, were unable to look after themselves in this world of cruntbling commu~~al ties," (p. 25) The anti-individual, secondly, sought to escape his "feeling of wilt and inadewaq wwhich his inability tcr embrace the morality- of indkiduaiity provokedl"(p. 25) by calling forth a "morality of cdlectivism"", \zrhere '"'security?~ preferred to "iberty" "solidarity-o knterprise" and 'equality' to 'self-deteminati~)n~~~~ (p. 27) The indiwidualist and ccrlfectivist mora&ies wcre differew modScations of the earlier colnmunal mrality, but with the collectivist morality in addiSim being a reaction against the morality of individualism. This eolleetivist mordit-).hevitably szlpported the view of the State as an enterprise association, M i l e this view dates bark to antiquity, few if any premodern states were able to be "ente~rising'",as their resources were barely s~~fficicnt to undertake the basic tasks of gover and order and external defense. This changed with the crc tralized "nation-statesf"by the 1Cenaissance princes and the subsequent Ahinistrative Revolution, as Hick (1969, p. 99) has lalheled the gradual expmkion of t-he tax base and thus the span of control of the government ents now had the power tcr look on their over its sub~ectslives. Gove activities as m enterprise. There have been three versions of collectivist moralities Oakeshott identrlies with the State viewed as an enterprise associaticrn. Shce the truce declared in the eighteenth celztury in the European wars of religion, the major substantive pu~-f"ox~ouglnt by States seen as enterprise associations are /'nation-buildingf' and "the promotion of some form of egalitarianism'" n e s t . correspond to what Qakeshott (1993) calls the prod~hctivist. m d dtsfribui-ivisf versions of the modern embodiments of the enterprise association, whose wligiclzks version was epitomized by Calvinist Geneva, and in our time is provided by mornenik Iran. Each of these collective forms conjures up some notim of perfection, believed to be "the common goodu.70 C o d i n i n g these insights with those of the great Swedish econornic historian Eli. Heckher" Mercantilism allows us to provide a thumbnail sketch of the rise fall m d rise of economic liberalism during the last two hundred years. The precursor of the nineteenth century LEO was the system of mercml;ilism. It arose, as Heckskr has shorn, from the desire of the Renaissance princes of Europe to eonso:lidate their power by h c q o r a t j n g var-

ious feuding and seemingly disorderly groups that cmstikuted the rclatively weak states they iherjted Erom the ruins of the b m a n empirt;, into a ""nation'" This was a ""poductivist" enterprise in Oakeshottfs tems. The same nationalist motive also underlay the wry similar system of mercantilist industrial and trade controls that were established in much of the postwar 'Third World.11 In the Third World, the jealousy# envy?and resentment that bred the European mti-individualist, was based not merely on the dissolution of the prrzvious communal ties that industrialization and modern economic growth entail, but also because h these post-colonial societies, such e m tions were strengthemd by a feeling among the native elites, of a s h a d exclusion from positions of power during the period of foreign domhation. It is not surprising therefore that the dominant ideology of the Third. World came to be a form of nationalism associated with some comblnation ol the productivist and distrhtivist vcrsions of the state viewed as m enteryrise association. Historkally these secular collectivist versions have led to dirigisme and the suppressitm or control of the markctt. In both cases of ""nation-bujldjr~fg"(in p""-Renaissance Ewope, and the modem Third and Second Worlds) the unintended conseqtlences of the similar system of mercantilist cmtrols instiSuted to establish "'nrder"' was to breed ""disorder". As eco~~omic controls became onerous, people attempted to escape them through various forms of evasion and avoidance. As in eigbteenth-cenkry Europe, in the post-war Third World, dirigis~~ bred e corruption, rent-seeking, tax evasion, and illegal adivities in underground economies. The most serious consequence for the State was erosion of its fiscal base and the accompanying prospect of the unMarxian kvithering away cr( the State. In both cases economic Ijberalizatjon was undertaken to restore the fiscal base, and t:hence government controt ower what had become ungovernahte economies. In some cases the hangewer c d d o d y occur h o u g h rclvolution-most notably in France,l2 Hut the ensuing period of economic liberalism during the nfnekenthc e ~ ~ t u r great y ~ s Age of Rdorm, was short-lived in part becausc? of the rise of another substantive purpose that most European states came to adopt-tl-te egalitarian ideal promdgated by the Ex~lighte melnts in many developing countries also came to espouse this idcal of socialism. The apotheosis of this version of the %ate viewed as an enterprise association were the communist countries seeking to legislate the socialist idcd of" equalizing people. 'The collapse of their economies under similar but even more severe strahs than those that beset less collectivist neo-mercantilist, 'I'hird-World economies is now history h u g b I cannot help remarking on the i r o ~ ~that y it took two hundred years for 1989 to undo what 1799 had wrought!

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If this account provides some reasons for the unraveliirrg of the nineteenth-century LEO, as well for its subsequent resurrection-gradualI.y at first and more spectacularly in the last two decades-tbe dating of this change is of some importance. If asked to indicate what event or date marks an important turning point h this centuryr :I would choose the OPEC coup of 1973. For its major unintended consequence was tc:,set in motion various forces that undermhed the intellectual consensus u ~ ~ d e r pinning the dirigisme of most econumies in the first two decades after Miorld War II. From the perspective of the mird World, the OPEC_:coup r c p ~ s a l t e d the ultimate politicization of ecmomir decisions in the global economy. By forming comxnodity cartels it was hoped tbat the =source-rich colantries of the dcvelopi,ng world, would hold the rest of the world to ransom. Dcmmds arose for a new international economic order (NIEO) to replace the half-baked IJEO established in the wake of the collapse of the international system during the interwar and world War 11period. The partial restoration of the nineteenth-centur)i LIE0 after the World War 11 was based on three pitlars c ~ a t e c as l the outcome of the Rretton M o d s conference: the International Monetary Ful-rd (IMF), the World Bank, and the General Agreement on Tariffs and Trade (GATT). They were i11stitutiona1izt.d attempts to ~ s u r r e c three t of the important elements of the nineteenth-century I:.,IEC)that had coliiapsed in the early parts of this century: an international monetary system based on quasifixed exchange rates, flows of capital from developed to developing countries, and the frceing of trade and payrnents wgines. Of these, the GATT was the most successful in resurrecting another LEO. Under its auspices trade was progressively liberalized, which ushered in what has been termed the post-was "golden age,""Rut even \zrhile world trade boomed, most develophg countries, caught in the time warp of their import substitlxf;icmstrategies, did not reay>its fullbmefits, clairning asld getting their right to special privi,leges and except.ions in the emerg4ng global h e trade regime. The NIEO was their final attempt to replace this liberal trading order by one politically mmaged. But within a decade the wind hnd gone from their sails. The supposed commodi.tfi power wielded by OPEC proved to be illrrsory. As marketoriented economists had p ~ d i c t e dany , attempt Zly a cartel to artificially raj,, the price of its produd would, eventually c m e unstwk." b r such a price rise would first induce a search for substitutes, which would. reduce the dernand for the product, and seccmd, lead to a s e m h for alternative sources of supply. Both occurred. Various members of the cartel aXso succumbed to the terrrptation of increasing their share of the ra-

tioned output at the expense of the other members. Mrithin a decade the oil price was no longer headline news. Afer the f a i l u ~of another brief attelnpt at rigging it in the late 192Qs,it has cmthued to decline in real t e m s ever since.lThis effectively killed the illiberal dream of th NEO. GATT has now successfuily transformed itself into the World Trade Organization (WTO) after its latest Uruguay romd, and developing countries are now its most loyal supporkrs, In the monetary sphere, the M F was created to supervise the new gold exchange rate system based on thc adjusthie peg. It rczplaced the nineteenth-century gold. standard which, as the events of the interwar period had so painfully shown, could not be ~surrected:essentia1ly because of the inflexibj:lities in the workings of industrial labor rnarkets, which did not pernit the flexibiliv of domestic money wages and prices on which adjustments to ecmomic shocks was predicated under the gold standard. 'The socialist "enterprise" association viewpoht was represented in the incrctasingly social democratic countries of Che West by Keynesim prescriptions of aggregate d e a d management to maintain /'full empbymemt"",.Exchange-rak changes WE then deemed to be necessary when a country could only cut its red wages to achieve this target through devaluaticm, 'The o d y ccnantry not permitted this 'lluxury' was the United States-because it formed the base of the gold exchange standard through its fixed parity with gold. mefirsfconsequence of the OPEC coup, whieh raised the costs of an essential hput in all non-oil produchg cou~ztries,m d its partial molzetary accommodation by most countries, was to raise their generd price levels. At a time when the United States was already suffering from the hbtionary excesses associated with the financing ol the K e w m war, this further push to the inflationary process (and the stagnation in output that accompmied it) made the U.S. baiance of payments unviabie. Uevaluation was required to realigm~its domestic with the international price level. This was achieved by President :Nixon% closing of the gold window, which in turn inflicted the cozlp de grace to the gold-exchange standard. The subseqllcnt period has seen the insti.tutio1z of a worldwide free-floatjng, exclnange-rate regime ammg the major economic powers, which has made it ecessary to use dirigiste rrteans to manage the balance of payments. This was thefirst benefit horn the OPEC_:coup. It also undermined the origlnal mmdate of the IMF, which has since, like Pirandellcr's six characters in search of an author, been looking around for a play. It has skillfuly found a role in the ongoing adjustments f o m the plan to market underway in the Third and Second wcrrlds. But this has a natural limit. "The IMF" future cannot be bright, pasticularly (as argued below) in light of its most recent- ac.lims in South East Asia,

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39

The second benefit from the OPEC coup was that, the ensuing stagflation exposed the fallacies of Gynesian macroeconomics. Gradualiy all ents reatjzed Chat full employment cottld no longer be ding other peoples mney. The classical prescriptions of sound money m d deregulated labor markets (along with other supply side m e a s u ~ swere ) the only way to deal with stagfiation. The thind consequence, m d the most momentous for the Third fnJorld, arose from the disposition of their new-found crii wealth by t.he sparsely populated corntries of the Middfe East. 'The interwar coifapse of world capital markt-tts, which involved many ddaufts by Third World bormwers and led to their subsequent exclusion from w e s t m capital markets: though uloiqujtous exchange conlrols in Europe-kvith t-he UK only abolishing them in 3979-md legal. rcstrictions (e.g., the 'blue skyqlaws in the United States). The World Bank, or the International Bank far Reconstruction and Uevelopma~t(IBRD) as its initial and still major cornp a n t is called, was set up as a financial intermediary to fill this lacuna. :Its htergovemmentd ownership and guarantees allowed it to borrow at prcferenfial rates in developed countr>i markets and on-lend the money at near commercial interest rates to the Third World. For those countries deemed too poor to borrow at these rates a soA Loan window was established with money subscribed by W s t e m governments: the ZnternationaI flevelopment Association (IDA). These governments had. also established their own Materat, fowign-aid programs, maidy to compete for politjcal influelncc in the mird World durillg the Cod War, than to serve their professed aim of ajleviating world poverty As nearly all of these capitd flows wem mediated through multilateral or bilateral govenfd channels, the access of dwelopin,g countries to world capitd markets was necessarily politicized. This was in stark contrast to the nineteenth-centufy pattern when private capital Aowed from Europe to the rest of the world or1 m r k e t principles, The OPEC coup set in train a chain of events that were to dramatically change this p'""-war politicization of the disposition of fnternatimal capital. The OPEC counlries could not conceivably absorb the large surpluses derived horn the oil price rise domesticalh. They had to place them abroad. As Third World capital markets were underdeveloped, this in effect m a n t the West, But: having obtained their newfound wealth through a political coup, the OPEC countries were fearful of plachg it within the reach of government's whose citizens they had rcrbhed. It could be confiscated: a not unreasonable fear as &own by the subsequent sequestration oi Iranian assets by President Carter. So tkey placed their money in the offsbcrre branches of the m e y center banks (the sctcalled Eurocurrency market). These offshore banks had developed outside the jurisdiction and.reach of their parent mmetary authorilies and

goverments in the 1960s to allow intermediation of capital flows to communist Europe-which had been equally wary of dealing directty wif-;hhstitutions that would be sub~ectto political pressure from its Cold War adversaries. The consequent explosion fn the liquidity of these Western offshortbrmches Ied them to a irantic scralnble to on-lend this money. This recycling of the OPEC surpluses was also pressed by their governments, who were cmcemed by the worldwide deflaticmary consequences of m increase in the worldwide savings propetnsity caused by the trmsfcr of income from relatively fow to high savings p r ~ e n s i t ycountries that the OPEC coup entailed. There were many eager borrowers in the Third World., in particular in the "'inward looking" cou~~tries of latin h e s i r a * Thus the seeds of the debt crisis were sown, This bank lending to the Third World was based on variable interest rates linked to the London hter-Bmk Offer Rate (LIBOR). M e n , in the late 1970s, the United States and subsequentjy much of Europe adopted sound money policies to deal with the stagflation tbat had plagued them since the OPEC coup, world inkrest rates and the cost of sclrvicing deht rose dramatically, As most of the Third World borrowers-malnly h Latin America but not in East Asia-had borrowed to deal with their long-standhg fiscal deficits, they now found l.hemselves unable to service their debts, Starting with :Wlexico many in effect defaulted on their obligations. 'I'hey were forcled to =cognize-as had the mercantilist states in the past-that the only hvay to restore t-heir diminished control over the economy was through economic liberalization. Thus began the long drawn out process of rc.fonn whereby dirigiste "hward looking" regimes arc gradually being rcplaced bp more market lriendly "outward looking,' ones, all over the globe. Ecollomic liheralizatim has also provieied many developing countries a new-fond access to direct foreign and portfolio jnvestmemts. For them this is a morc desirable form of borrowing than bank bormwixlg at variable interest rates, because the associated currency and income risks artr h a r e d with the foreign investors, More sustainable f o r m of capital flows are thus now available to developing countries w i l h g to change their nationalist attitudes to mdtinationats.~%ese market-based capital flows now dwarf the politicized flows horn bilateral and multilateral agencies-whether they be IBRU loans or various forms of foreign aid (see Figure 3.3). 'I'he future of this politicized part of the world capital market is increasingly injeopardy16 Fi~nlly,the stagnation resulting from the OPEC coup also led to the replacement oE demand management by supply-side policies in m s t developed countries. Begjnning with the matchecik rclvolutim in the UK, the worldwide movement toward. prkatization, and deregulation-in

The World Ecorzomy at the End of- ftzc NZilletzr2ium

41 Private

Bilateral (including Multilateral (includ

FIGURE 3.3 Net Filws to Develving Countries, 1970-1993 (Percentage of recipient GNP)

particulaf of labor markets-is reversing nearly century d d trends and the habits and intellectud beliefs t h y had engendered. With the colXapse of the Carnmunist economic system,I? dirigisme for the first time in a centufy is in worldwide =treat.. Xt is a supreme irony that the unfntmtfed conseqwnces of the find push to set up a politicized planned global econmy initiated by the 1973OPEC coup should have instead led to this new era aE economic liberalization,

What Next? What ol the future? Is this new hvnrldkvide Age of: Reform likely to be more permanent than its nineteenth-century pxledecessor? n e r e are auguries-favorable and mfavorable, Fears. To take the latter first. The desire to view the State as m enterprise association still lingers on, as part of social democratic political agezzdas in mmy countries..It has ancient roats and is unlikely to die. It has now adopted a new voice, which Ken Minogue (1993) has labeled "constitzationd mania". This emphasizes substantive sociat and economic to the well h o w n rights to liberty-Sreedont of speech, rights in t?ddit.io~z contract, and association-ernphasid by classical liberaIs, It seeks to

use the law to enforce these '"rights" hbas partly on ""needs", m a n d partly on the "equdity of respect"' d e s i ~ dby a heterogeneity of self-selected miaorities differclmtiated by et-hnicity, gender, or sexual orientation. But: no less than in the coflectivist societies that have failcd, this attennpt to define and legislate a newly discovered and dense structure of riglzts (including for s o m activists those of plants and animals) requistls a vast expansion of the gove ent's power over people" lives, Their implementation moreover requires-at the least-some doctcrring of the marlret mechmism. Then there is the global etnvironmental seare m d the population scare, Finally the United Nations (WN) has taken up the cause of the world's poor a d is seeking to establish a wlrrlctwide welfare state through a UN ecotnomic security comncil. Classical liberals can clearly not yet lay down their arms! Equally worrying is the 'Velors" vision of Europe, M;hich seems to be a form of mercantilist nation-building, in the nnanner of the Renaissance princes documented,by Hecksher,lWmy voices are also resurrecting the threat fmm pauper labcrr imparts to U.S. and European living standards (p"~ticu1.arly of the low skilled), and thence their social harmony. This is particularly worrying as it echoes various fears hthe late nineteenth century of the social disruptions and discontent caused by the Industrial Revduti,on. mough recent historical work has questio~nedthe b l e d picture painted by novelists such as Dickens,l"their fears werc nevertheless influentid in propagatiz~gthe dirigiste cause, which led to the gradual unraveling of the nineteenth-centq L I E 0 as the distributive consequences of trade integration led to the rise of protectionist poiitjcal coalitions in fie United States, Germmy, and Frmce after 1870.20 Another great structural change is taking place in Western ecmornies, whose short-term consequences could be equally painful and trigger another dirigiste reversal d the emerghg LEO. It may be worth spelling this out. Hicks saw the substitution of fixed for ciscdating capital as the distinguishing feature of the Industrial Revolution.21 Rut, as Ricardo in his chaptm m "Maehinq" noted, during the period of adjushnmt there could be a reduction in employmetnt and output; though at. the end of the pmcess the productive power and hence the level and growth rate of output and employment would be higher. This explains why it took a long time in Great Britain b r the Induskid Revolut.ion to raise overall living standards, and why during the period of adjustment, the older handicraft workers (using cirt?ulating capital in various forms of the 'punhg out' system) initially suffered, unti:i they w e x eventwily transforntcd into much richer industrial workers. Today a siznilar process is underway in the West, with fie increasing su:hstitutiotn olh w a n for fixed cl7pjtal in its newly emerghg "inforntati.on age" service economies, This process has been accekakd by the emerlghg

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LIE0 as the unstcllled labor-rich countrEes of Asia-particularly China md. hldia-go &rough their fndwtrial revolutims, and incrwsingly specialize in the production for export of those manufactures on whjeh workersparticularly the3 low skilled-had depended in the past in the Mlcst. The mgoing substitution of h u m for fixed. capital is an unavoidable m a n s for maintaining and raising living standards in the West. But during the prwess of adjustment it may cause severe socid strahs, In this adjustment process it is inevitable that initially the premium m hunan capital should rise, as this provides the s i g ~ ~for a t wrkers to upgrade their skills. This rising skill premiunn accompanied by stagnation in the wages of the unskilled is evident in all Western countries. Those countries, maid?; in Ewope, \zrhich have prevented this signal from workhg, have found that, instead of low and stagnant wages for the unskilled they hawe the much worse problem of hi;h and rising unemployment. Despite the siren voices calling fnr protection fmm Third World irnports to ease these problems, for the West to follow their advice wodd be a snare and a delusicm, But, as the rise of protectionism based on tbo eqrxally deluded infmt industry arguments of- Hamilton and List in the late nineteenth century demonstrates, such snares are not always avoided. At a time when the Third and Second Worlds have enthusiastically embraced che LIE0 it is the tennptation for harried Western governments to turn their back on the world they have created that constitutes t the future of the new global LIE0.22 the g ~ a t e stt h ~ ato Then, there is the creeping and contkubg dirigisrne to promote various '"social policies" in many Western states (including the United. States). These iz~cludedemmds for the inclusion of environmental and l&or stmdards in the WTQ (wf.lichhas replaced GAn), as well as recent attempts to thrust Western moral values (demcracy and human rights) down foreign throats-using the threats of unilateral trade ~strictiom. Alf these inevitably poison international relations. The nagghg bad temper generated could lead to a gradual erosion of the liberal international ecmomic order, as in the late nineteenth cmtur)i. Meanwhile there are more immediate worries that the recelzt fhancial crises inAsia m i e t lead to a backlash agairzst the glcbbafization of capital flows in developing countries.23 There is a pervasive fear in the Third World, that continu,ing capital m r k e t liberalization will lend to a greater volatility in their national incomes damagixtg growth perlformmce. The recent Asian crisis, which kas taken the stripes off so many of the region's ti&ers, has merely accentuated these fears, Nahathir's recent rcimposi,tion of stringent capital controls in Malaysia maybe the harbinger of a trend toward the resucitation of economic nationalism. This fear of vo(ati(i,tyis an ancient worry of Che mird World, easfier exp ~ s s e das the purported adverse effects on growth of the export insta-

bility engendered by primary product exporting countries integration in the world economy." "1 the 25-country sbity covering thr periczd since Wctrld W r 11, Myint and I could find no statistical evjdence that the volatiliv of annual growth rates effected overall growth performances conclusion in consonmce with the numerous sbdies of the effects of export instability on g r w l h . Thus Hong Kong has had one of the most volatile growth rates amongst developing countries, while India m e of the most sti-tble-hut the l o n g - m growth performance of H o n g Kong puts the Indian one to shame, Thus, though there may undeniabfy be g ~ a t e volatility r in national inconnes of countries integrating with the wclrld ecmomy, this need not damage their lmg-run gmwth rates. But what of the lessons against globalizatim many in the mird World seem to be drawjllg from the recent Asian crisis? This appears to be a misrcoading of the causes of the crisis, and how future ones can be avoided. There w r e three min callses of the crisis: (i) the exclnange rate regime; (ij) the mural hazard in the domestic banking systems caused by the "sim model" (iii) the i~~temational moral hazard created by the actions of the IMF. To el.labomte and explain. The first cause was the quasi-fixed exchange rate mgimes in many of the countries. It is increasingly becoming clear s vithat: with a globalized capital market only two exchange ~ g i m e are able: a fully floating exchange rate or a rigidly fixed rate one as in the currency boa& of Hong Krng.25 The reascm is that: these am the only ones that allow automatic adjust~~ent to exter~naland internal shocks without any need for discre~onaryaction by th authurifies.2"n a world that requires instantaneous Rspmses to the actiom oE a highly decentraiized but inkgra.t.ed wxld capital market mediating thcse shocks, l-he arnt-horities do not have the tirne or the m e w to obtain the requisite infornation to er. 'f'hey often end up deal with these shocks in a centrally pl by being the p d l e m rather lhan Ihe solution if they try to manage their exchange rates in this volatile and unpredictable world economy, leading to serious misalipmcynts of thc. real erichange rate." h automatic acljustmmt mechanism is trherebre prekrabk to a discrctimary o~ze. The second cause was a systemic flaw in the "sian' model of development. A central kature of &is model-as seen most clearly in K m a but presaged by Che development of Japan-is a closc? linkage between the domestie banking system, hdustrial enterprises (particularly the biggest) and the government. The fatal R w in this "sim model'--as shown by the recent travails of- both Korea and Japm-is that, by making the hanking system the mature of the governmnt" will, it creates tmmendous moral hazard in the domestic b m h g system. The banks have no incentive to asses the credit worthisress of their borrowers or the quality of the investments their loans are financing, as they know-no matter how

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risky and over extended their lending-thy will always be bailed out by the government. 'This can lead. in t h e to a momtain of bad paper and the de hcto jnSolwency ol a major part of thc banki.ng system, as has h p pened. in. Korea and Japan-not to mention the corruption that is inevithly invoked in this type of development. But "as the example of the U.S. savi,ngs and loms crisis shows" this colfapse of the banki.ng system can ultimatdy be clearcld up if there is the political will, Korea daes have the willf and shodd bounce back fairly shortly. By contrast, Japan, which inherited a political system based on institutiomaiizjng political parallysis fPom the Meiji oligarchs, shows nu sign as yet of grasping this nettle and its prospects must therefore remain a cause for cmtinuing ccmcem. Th.ird, the problem of moral hazard h r the domestic balking system created by this 'Asian' model have been aggravated by the actions of the M F and the entrance of fornip bankers as lenders in the newly liberalized capital markets. C): thc three types of c ~ i t flows d that can be &Stjnguished-direct foreign investment, portfolio investment, and.bank lending-the income and foreign currmcy risks of the flrst two types of flows is shared by the lender and the borrokver, as the 'investi~ents'are denomhated in domestic currency By contrast foreign bank loans are usually denominated in dollars and the interest rate is linked to LIBOR. 'This means that, if faced by a shock requiring a devaluation (in a adjustable peg exchange rate regime), the domestic currency burden of the foreign bank debt rises pari passu with the changing exchange rate, If this debt is inemred by the private sector, this risjng short-term debt burden need. pose no problem for the country. For, if the relevant foreign ,the borrowers can always default on their debt. Rut now enter the IMF. The foreign banfts faced by a default on their mird W r l d debt have ever since the 1980%debt crisis argued that this poses a systemic risk to the world's ffinancial system, and asked in effect for m international bailout to prcvent this catastrophe, Since the 1980's debt crisis and most clearly in the Mexi.can crisis h the early 1990s and the recent Asian crisis, the IMF has been more than willing to oblige, as since the demise of the Wrettm Woods system it has been searching for a new role. With the debt crisis of the 1988s and the more ~ c mMexican t and Asian crises it has increasingly become the international debt collector fnr foreign m n e y cerlter banks, as well as an important tool of U.S. forcim policy, The crisis in Illdtlnesia pmvieies the clearest example of this metaxnorphosis of the Fund. Before the Thai crisis hit the region the hdoilesian econmy had been firirly wetl managed despite the 'eronyisrm" of its capitalism. It had provided exceptional grow& rates, with a sensible deployment of its oil revenues-un(ike many other comprators (e.g., Niger i a F m d which had made an impressive dent hits mass poverty. At the

t h e of the Thai crisis, its economic fundamentals were sound: it did not have a massive trade or budget deficit, it had a trcsxible exchange rate, its debt burden was not onerous, alrd its foreig~~ bank debt was t?ll private.. When the contagion from. Thailand spread, the foreim bmks (mainly U.S. a d Japanescr banks), which had made loans to the fneionesian private sector; rm, leading to a deprecialion of Ihe rupiah and a massive increase in the domestic currency costs of servicing this short-term debt, Many of the borrowers woutd then have defatrlted, a d that would have been that, But enter the M E Under pressurc from the governments of the forcip banks it deemed that such private sector defaults would pose a risk to the worId's fhancial system, and under the cover of an IMF pmgram, the hdonesian government was in effect forced to take on these priv&tr, debts. The money from the IMF paid off the foreip lenders, and the general taxation of the fndonesian populace will have to repay t-he lME The Indonesim people have thus through the aegis of the IMF bailed out the f m i p banks. These actions of the IM ver since the 19f10"sdebt crisis-have generated serious moral hazard in foreign bank landing. With the increasingly cmfident expectation that they will be bailed out through the IMF no matter what the quality of their lending to Third World countries, forfc.ndbg.Z eign banks have no incentive to act pruda~tlyin their fctrcig~~ When this in.ternational moral hazard is coupled. with the dmestic moral hazard associated with t-he politirrized domestic banking systems of the 'Asian' model-as in Korea-there is double jeopardy Foreign bmks lendhg to domestic bmks that h o w they will be bailed out wit1 over-lend, leading tcr ropy invesments and an eventual debt crisis for the country. With measures to remove the domestic moral hazard being widely adopted in the region, the international moral hazarcj from t-he IMF's operations would still remain. 'Mrhat is to be done? The best sol~~tio~n would be to shut down the INE Its originaI mandate ended with the Brtltton Woods exchange rate system. Since then, its cmtinumce, though in the interests of its rent-seekjl7g jnternational bureaucsats, is no longer in the interests of the world economy, Being realistic it is unlikely that the M F will be shut dcrvvn-after all the redundmt United Nations Educational Scientific and Cultural &ganizatian (UNESCO), International Labor Office (ILC)), and United Nations Industrial Organization ( U N I m ) have not been, even though their major fhanciers at s m e stage sought to do so. In. the crjrcumstances, to avoid the socialization of the prhate risks assarriated with volatile foreign bank lending in the presence of this international moral hazard is for locai central banks to ensure that all such borrowing is suitably hedged. If they lack the requisite capital markets for such hedging some of them

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migbt consider a second best kcontP.olkn such capital flows till these markets art- developed. This would h y down that all short-run foreip bank loans taken out by residents m s t be denominated in local currc3mcy By raising the costs of such borrowirrg this will be equivalent to a market dekrmined tax m such flows. Secmd, it wouid mean t-he foreign banks would nocv have to share in the forclign exchange risk, and at times of contagion instead of running might pause and refhance their long-term viable borrowers,

Hopes, Against these dangers there are many hopeful s i p s , As in premodem times, today's states are filtding it m m and m m dift-icdtto find the rcf.sou,rces to col~tinllefor increase) their e~~terprise. This is partly bccause of the worldwide growth in tax-resistance,m and. most important the virtually ccmlplete integration of internationd fh~ancialmarkets. 'lhe latter has strengthcmed Che formez Nor is a reimposition of exchange controfs to stop this process likelyf if for no other reason than that it wodd now have to be adopted and enforced worldwide. The instincts of the State through most. of h m a n history have been pxledatory, The integration of world hancial markets provides a bulwark against these base hstkcts-like tying tilysses to the mast. Every govent is now concerned about. the rating of its country and its enterprises by world capital markets. Bad polieies-or at least those disapproved of by world capital markets-can lead to an instantaneous rclduction in a country's wealth, and the terms on whieh, it can acquire the means to incrcase it-a painful lessm many South East Asian countries have recently learned. The worldwide movemat toward fiscal rectihtde and the creation of an ecol~onticem\riJ-onmntthat is transparclnt and rewards efficiency is no longer a matter of choice but necessity. Wth massive global flows of capital triggemd at the press of a butbx~,governm e ~ ~are t s now faced with an hstantaneous htemational referendum on their economic policies. The Central Bank or Treasury proposes, but the money market disposes! The same actual or incipient fiscal crisis that has ultimately prevented the State from giving in to the3 "enterprise"' voice, or led to forced reversals in its past dirigjsme, also threatens the major form of its continuing enterprise in the West-the welfare state. The partiat dismanthg of the New Zealand welfare state and its contixluislg erosion in that social democratic beacon of hope, Sweden, are surely more than straws in the wind.30 I;inaIly$there is the recent spectacdar movement frm the plan to the market in China and India, The fitture progress of these ancimt civilizations raises u~zresnvedquest-ionsabout the relationship betweell culture, democracy, and d.eveIopment.31 Can the market survive in polities that

are undemocratic? Will glabalization necessarily lead to the worldwide spread of a homogenized Western culture? On the latter I have my doubts, partly because the very mainsprhg of Western culture-its individuaXism-is paradoxicajly leadlng to social decay and decadence in the West.32 There is a triumphalist tmdency in the West, most noticeable in the United States, to identify its cultural and political forms as necessary conditions for its economic succcss. This raises complex issues that 1cannot: go into on this occasitm." There is, however, one point that needs to be stressed' m d that cmcems the first of the questiom posed in this paragraph. Many, including the majm contemporary advocate of the classical liberal order-Hayek34-have posited a necessary connection between eco~~omic and political liberty (nowadays trmslated into the market cum democracy). 1disagree."? Oakeshott" distinction between a civil and enterprise association is more useful in jlldghg the sustainability of a market order. For after all, tilf 1997, the only "countsf-ht was clearly a civil rather tkan enterprise association-in Oakeshottk terms-was Hong :Kongl and it was a colony, now ertcinguished! Given these cmtsadictory trends in the global economy, I think we can. be certah that the PoZy aish hopes of an "md of history" aar premature. Mmkind is unlikely in the next miilennium, no less than in the past, to escape the mcient Chinese curse: "May you live in exciting times".

Motes 1. See Lal f1996b),(199t3c). 2.1 assume that Kip van WinEriie was a male, but in this politicalfy correct, andrc~gynousaget i f the reader likes whenever T write 'he' that should also imply 'she'. 3. Rosecrance (19%), (199%). 4. See Lal (1994a). 5. See Obstfeld (1995) for details. 6. See "f'aylor(1996) p.13 for details and references. For the current period see Bbstfeld (1995) and Goldstein et al. (1993). 7 . See Williamson (1"355), O'Rourke, Taylor, and Williamson (1996;), and Williamso~n(1996) for an o~vexliiew-. 8. O'Rourke et al. (1996) (p.509) find that between 4878 and 1940, freight indices for railroads and cxlean shipping drc~ppedfrc~m41 to 53 percent. This led to considerable price convergence for tradable gcmds. URaurke and Williamson (1994) find the spread between grain prices in Liverpool and Chicago fell from 60 percent in 18"ZQtc:, 14 percent in 1912; for meat and animal fats from 93 tcr 18 percent, far iron prcxlucts from 80 to 20 percent, and for cotton textile from 24 to 1 percent over the same period 9. I: use the term liberalism in the sense of classical liberalism and not in its current American sense, which makes it synonymous with some forms of mciatism. 40. Sugden (19931, in his review af Sen (1992), makes much the same distinction beween the two divergent views of public policy embodied in the techno-.

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cratic ""market failure'" school and in the neo-Autitrians and the Virginia public choice school. 11. See Lal and Myint Q1996), Chap. 7, an which much of this section is based. 12. See Aftalion (1990). 43, The one ccjntemporary cartel that has bucked this trend is the diamond cartef run by De Beers, which was originally created by Cecil Rhodes. See "Ti~eDiamond EEusiness,"The Ecortomz'sf,December 20,4997, pp. 113-145, for an account af haw the cartel resisted the trend, and why it might not be able to in the future, 44. Having risen from $4 in 1972 to $30 in 1883, it collapsed in 49886 and is now about $20. 15. The costs and benefits of direct foreign investment are outlined and case studies for India and East Africa presented in Lal (1975). 16. See La1 (1996a). Sc~urcefor Figure 3.3: Rs>dikf 1995), p. 170. 47, It is still unclear to what extent the collapse is due to internal factors resulting from the economic consequences of past dirigisme, which irnpeXs rei'orm ( ~ e Lal flWS]), or external factc)rs such as the threat (11Star Wars, which upped the ante in terms of unsustaiinable defense expenditures for the %viet Union. Certainly Deng" reforms in China were motivated by a threatened internal economic collapse rather than any external factors. 18. See Wolf (1994). 19. See Hayek (1954). 20. See Rc>gowski(1989). 21, See Hicks (1969), esp. the Appendix, and tal(19"3"8),Appendix A, 22. This fear is also echoed by Wiltiamson (1996). 23. The remainder of this section is based on Lal (1998a, 499%). 24. See Lal (1983). 25. The reason the Hcmg Kong currency board seems to be under same threat at the time of writing (Sept. 1998) is that the authorities took inappropriate actions, which broke the r u l e of the currency board. These actions were unsuccessfully aimed at propping u p the Hong Kong property market, but in the prcxcess have raised doubts about the continuing credibility of the Ffong Kong authoritieskcammitment to t l ~ efixed peg af the exchange rate, 26. See La1 (1%3), Chap. 6. 27. The real exchange rate (er) is defined as the relative price af nsn-traded (pn) to traded goods Qpt). As the nominal exchange rrate (e) effects the price of traded gaods given their foreign currency price (pf), the real and naminal exchange rrate are linked by the relationtihip: er = pn / pt = pn / e.pf. An inappropriate nominal exchange rate (e) can lead to a misaligned real exchange rate (er). 28. The refusal of the IMF and the Group of Seven to bail out the hreign lenders in the most recent Russian crisis may however show that at last this danger is being recognized. 29. In a rearguard action, howevex; the OECD has just announced a task force that will study how tcr prevent tax competitic~nbetween states, which is rightly feared to be eroding the ability of states ta extract the maximum revenue from their citizens. But tzrhether one shcauLd applaud this attempt to create a cartel af predatory states to maximize the exploitation of their prey depends upon whether one sides with the predator or the prey But even if such a cartel could be

formed it would be subject to the form of cheating which undermined the OPEC cartel; for instancq some count^ or other would find it in its interest to attract mobile factors of production with the inducement of lower taxatian. By so openly avc>wingthe cause of the predatory states that control its purse strings the OECD tzrorald seem tcr have signed its death warrant in the eyes of ecanomic liberals. 30. T may cXairn some foresight in seeing trends earlier than most cothers. %e Chaps. 8 and 15 in t a l (1993). 31, I deal with some of these in my 1995 Ohlin lectures, Lal (1998~). 32. See Lal (1998~)for details and substantiation. 33. But see La1 (1998a, 1998~). 34. See Ffayek (1'317%. 35, See La1 (3996113).

References E A ftalion (1990). Tlze I""~.enctz Rezjalzllion: An Economic TnlerpreEntion. Cambridge: Cambridge University Press. M. Feldstein and C. Horioka (1980). "Domestic Saving and Internatic>nalCapital Flows" Ecoi~lomkjt~urr-zal,vol. 90, June, pp. 324-329, M. Galdstein et, af (1993). Irztemntimznl Capital Illakts. Washington B.C.: International Monetary Fund. E A. Hayek (1954): Capitralisnz and the Hktori~ns,London: Routledge. (19176178). Denafiiunaliss'atz'oncf Money. London: Institute of Economic Affairs. (1979). Law, Legislnlion and Liberty. Chicago: University of Chicago Press. E, Hecksher (1955). M1"1"ca?ztilis1r~. 2 vols., 2nd rev*ed. London: Allen and Unwin. J. R. Hicks (1969). A Tlzeo~yc$ Economic Histoy, lEJoncSon:Oxfc~rdUniversity Press. D, Lal (1975). Apprnz'si7"1.gForeign Inve~lmezflin Dczzetapi~gGounfrz'es, London: Heinemann Educational Books, (1978).Men or Maclzi~es,Geneva: ILO. (1983/ 1985/ 19%). 'The h v e r f y c?f 'De-clelopment Eeonomi~',Institute of Economic Affairs, LZ,ondon;Haward Universiv Press, Cambridge, Mass, 1985; 2nd revised and expanded ed,, London: Institute of Economic Affairs. (1933). The Repwssed Econonty, Economists of the 20th century series. Aldershot, UK: Edward Elgar. (1934a). Agair-1st Dirigisnte. San Frandsco: ICS Press. (191)4b)."In Praise of tile Classics," in G, Meier, ed, from CEnssical Eco~zomies to Dez~elopmentEcmol*rtr'cs.London: Macmillan. (1996a). ""Freign Aid: An idea whose time has gone", Eco~tomicAfairs, Autumn 1996, pp. 9-13. (199fi;b)+"Participation, Markets and E>erno>cra~y.~Wew Directions ir-z Deuelaplr~entEconomics. M . tundahl and B, J. Nduiu (eels,), London: Routledge, (1938a). X~lzoulingChe Miracle: Eco~aomicDeueloprurent and Asia. h a ugura t E-larold CLough lecture, Institute of Public Affairs, Perth, July 1998. (19Stt3b). "Taxation and regulation as barriers to international investment flows," Paper for Mont Pelerin Society Golden Anniversary meeting, Nshington K,Aug. 1998. -----m

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(19438~).Urtintended Ccsnsegue~er.:Factor Endow?r~e~zts, C n l t ~ r ea ~ dh l i f i ~ : On Economic Pefovmance ir-z the La~zgRun. Cambridge, Mass: MfT Press. D. t a l and H. Myint (1996). Tke Political Econo~rtyof Xc"overty#Equity alzd Growtrlt, Oxfc~rd:Clarenclon Press. A, Maddiwn (19134). "A long run perspedive an saving." University af Groningen, Netherlands: mimeo. (1992). "A Long-rm perspective an saving." "andi~zar~innjarat-rzal of Ecanomics, vol. 94, no. 2, pp. 181-196. K. Minogue (1993). The Corzstitutiorlnl Mntzia. Pr>licyStudies No.134, tondon: Center for Policy Skdies. B. R. Mitchell (1992). Trzfer?zntionalHisloricnl Statistics: E-~trope,1750-2988. New York: Stocktr>nPress. M. Oakeshott (19;73). Qn Human Condrjef. Oxford: Cfarendon Press. (1993). Morality a~zdPolitics in Modern Ezrrupe. New Haven, Crtnn,: Yale University Press. M, Obstfeld (1995). ""International Capital Mc~bilityin the 4990's" in P. B. Kenen fed.). Ulzderstandirzg Interdependence, Princeton, N.J.: Princeton University Presa pp. 204-264. K, H, URourke, A. M, Taylor, and 3. G. Williamson (4996). "Factor Price ConverEconomic Review, vol. 3i7, no. 3, pp. gence in the Late 19th century" fi~tzternnfio~al 4913-530. K. H. OXourke and J. G. Williarnson (1994). "Late 19th century Anglc~American Factor Price Convergence: Were Hecksher and Ohlin RightT"m~nznt of EGOnontic Histoy, vol. 54, pp. 892-91 6. D, nodrik (1995), "Why Is There Multilateral tending?" Annzrerl World Barzk Conferefree on Det~eloprrlentEconamics. Wshington, D.6.: World Bank, pp, 467-193, R. Rogowski (1Cd89).Commerce alzd Coalitions. 13rincetm,N.J.: 13rincetonUniversity Press. R. Rosecrance (1986). The Rise of the Padl'rtg State. New York: Basic Books. (1999). The Rise ofthe VirEunl Slate. New York: Basic Bcmks. A, K. %n (1992). Incqunlity Reexamined. Cambridge, Mass.: Harvard University Press. R, Srsgden (1993). "A Review of Inequality Reexamined by Sen." but-rzal of Economic Ll'ternfme, Dec. A, M, Taylor (1996). ""lternational Capita1 Mobility in History: The Savings-Investment Relationship." NBER Worki~18&per, No, 5743, Sept., mimeo. J. G. Wijtiliamson (1995). "The Evolution of Gtt~balLabor Markets since 183Q:Background Evidence and Hypotheses." ExpEorntions in Eco~omr'cHistory, vol. 32, pp. 141-196. (1996): "Globalization, Convergence and History*"The )t?urr-ze;tlt?f- Ecotzomic Hislo~y,vol. 56, June, pp. 277-386. M, Wolf (1994): The Resistible Rise of Fortress Etirape. nochester paper N C ~1,. Trade Policy Unit, Center for 1301icySkdies, London.

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The Rise of the Politically Incorrect e-Handed Economist'

The world may well be on the verge of a massive expansion of economic growth. Professor Lawrence Henderson of Harvad University once suggested that by 1912, for the first timc. in human history, ""a random patient with a random disease cmsulthg a doctor chose11 at random stood better than a fifty-fifty chance of benefithg from the encounter.,"" This vivid observation suggests how mcent the cohermt rise of medical scimce has been and, furtkr, it points out that, not so lnng ago, physicians, while perhaps generally dedicated and well meanhg, ofkn did more harm than good. After all, a doctor who doesn't understand g e m theory may carry a disease from one patie~~t to the next, making matters far worse than if the patknts had instead consuked a priest, a t;lnamal.l, or a snake oil salesman, or if they had simply stayed quietly at home in bed. In this chapter, 1 would like to propose that eco~~omics is now about where mdicine was a cmtury ago. Essentially, 1 suggest, economics has ent official or busigrobaklly rclached the point where tbe random gow the random ecmomist is likely to benefit from ness executive co~~sult-ing the encomte~. That is, economists have now substantially come to a workable and esse3ntiaYly valid basic consasus about how economies functim. Because of this, they generdy k n w what they ase doh~g,their pills and palliatives are more likely than not to work, m d the policies they prescribe have a good chance of chancing m economfs abiiity to grow. n the past, the advice of economists was And there is anather chmge, X very often politically unattractive because policymakers have given

noneconomic values higher priorily, because other advisers seem to have mom intuitively plausible palliatives, or because acceptance of the advice would clearly cause short-term political. pain. Now however, the economistshdvjce is increasjngly being accepted by dccisimmakers, This chapter explows the rise of ecmomic science, its inc~asingacceptance, and the consequent prospects for a vast worldwide economic expansion. In the process, I srtgge" t a t economists and We-mfnded idea entrepreneurs seem substmtially to have managed to get across four highly consequential and enormously controversial ideas: the growth of economic well-being should be a dominant goal, wealth is best achieved through exchange rather than through conquest, inter~zationaltrade should be free, and economies do best when the government leaves them substantially free. The chapter also muses aver the curious fact that advances in ecanomic welll-being do not necessarily cause people to profess that they have become happier. Ratber, each improvement seems quickly to be taken in stride, and stmdards are eontinudly raised to compensate. However, this phenomnan seems to help stimulate further economic development, and it may have a kind of h~telfectuallyinvigorating ~ a l i t y af its own. One-Handedness Fifty-years ago, Harry Ruman oiten becam frustrated with econonnic advisers who kept telliz~ghim on the one hand that a certain conseyuence could be expected from an. action while on the ather hand that the oppasite conseyuence might come about. He frepmtly expressed a yearning for what he called ""a one-hm~dedec~nomist.'~ It seelns to me that over the twentieth century, economists, through trial and error, througtn experiment and experience, through abstraction and empirical test, have developed a substantial ccmsensus about broad. economic principles, if not always about nuance and detail, And thus we seem to be approachixlg the age Ruman yearned for-the age of the onehanded economist, I need to stress that I am. applying a stmdard here that is sig~zificant but not terribly exalted. By pmsent standards, after all, medicine was woefully inadeyuate at the turn of the century, and physicims were. still misguidedly kii,ling a fair nurnber of their patients. But, as Figure 4.1 demonstrates, over the course of this century medicine has advanced. from a base that has turned out to be essmtially sound, and the msdt has been a spectaedar asld histnrica:ll,y mprecedented increase in life expectancy, first in developed countries, and.then m m recently in the less

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FIGURE 4.1 Life Expectancy at Birth, 4550-1990

develoiped world.3 In like mamer, although economics is hardly an. exact science, if economists have at last essentidy gottm the basics correct, this accomplishment is potentialiy of enormous importance tcr the advancemcnt of economic well-being* The ""economists" l am referring to might perhaps be better designated "poZircy ecmomistsu-people whose business it is to derive cclherent and praclici? policy p~scriptionsfrom what they take to be the central notions of economic science, Included. in, this group would be not o d y many academies in economics departments and business schods, but also policy and financial analysts working for or rulming think tanks, private businesses, and investment firms as well as those hanging out at policy agencies like the Federal Reserve, the Congressiftnd BuiIget. Officer the Inlernational Monetary Ful-rd (IMF), asld the World Bank,It would also hclude those seeking to develop techlli.cal tools for analyzing and assessing the real world-as, of course, mcrdem medidne has been dependent h r m w h of its success on the developmelrt and proliferation of a raft of probing, measuring, and analyzing methods and toois," I do not propose that these economists now hiwe an all-embracing theory of the ecmomy: after all, physicims were correctly convhced that aspirin relieves pain and that smoking causes cancer before much oi an explanation was developed for why these things arc. so, Nor, certainly, do I mean to suggest that economists never disagree or err. For a very tong t h e physicians ordered parents to warm formula milk before feeding it to their infants presumably under the plausjblc assclnlption that bottled milk should.be the s m e temperature as breast milk; eventually, however, sonneone detemined that babies were generally quite capable of digest-

ing cold milk, and t h conventional advice was accodingl.y abandoned after causing great inconvenience to parents and occasional danger to their babies when sleepy pare~ztsinadverte~ztlyfed them scaldbg milk, But I propose that, in general, economists now are substantially on top of their topic, that they are amassing kncrwledge in a manner generaily progressive and cumulative, and Chat the advice they render is likely-or more likely than not-to be sound. An hnpressive indication of this c m e irr tbr early 1990s when economists were confronted with a new and quite astounding problem, For various reasons, some two dozen countries with highly cmtml2ed (and underproductive) eccmomies, inclrtdhg some of the biggest in the world, were suddanly freed of economy-stifling ideological controls and wishcd to become rich, As Lawrence Summers observes, the death of Cammunism caught the ecommics profession unprepared: Although there had been quite a few studies at that point about the transition of market econmks to contsolied. or command economies, "&ere was not a single book or article on the problem of transforming an economy from the cmmunist to a market system." hdeed, the word puhtz'zatiun had o~zly been recently developed in connection with Margaret Thatcher" relatively mcrdest efforts in the 1980s to denaticmaiize comparatiwely small portions of the British economy-? Economists were called in to sort w t this novel prclblem. Even though their ideas about how to encourage ecommic wel-keing and growah had been principally derived front analysis of economies t-hat wcre rcllatively free, it is impressive testimony to the fundamental soundness of these ideas that the advice so generated proved to be substantially (thaw not invariably) soulnd even when applied under these llnprecedelrted m d unstudied circumstances. In case after case, countries that generaw followed the advice have been ahle to achieve considerable (though certajnly not painless) success in transforming their economies and in achieving maningful growth, often in m astoundingly short time, Similar success, following similar advice, seems to have recently been achieved hmany places in soutfier~n,eastern, m d southeastern Asia and in much of Lath America,"

Political Incarrectness Ecmomists may give somd adwice, but, as the variable post-Commukst experience shows, the politicians and admhistrators who are their advisees may reject it because they fjnd it politically incorrect. They may find it so, first, because they disagree with the value or the goal the ecox70xn;stsadvocate. For the most part, this has not been a problem for medicine: The physjciads goal-better heal* for the patient-is

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readily accepted. By contrast, the economist" goal of economic growth and well-being has often been rejected-been found to be politically incorrect-becausc people hold other, ofien conflicting, values, Use honor or class differentiation or traditional justice or piety, to be more important. Accordingly, for ecmomic science to triumph, it has been necessary for eco~~omic goals to became dominant. Second, modern economists, like modern physicims, have had to convince their advisees that they knt,w what they are t a l h g about and that their proposed remedies will function..This has not been an easy task because, as m d e r n ecmornics has advanced, it has developed a perspective that often runs counter to some competing notions about how economies ought to work. Many of thcse altmat-ive notions arc mordly appealing and. LalXuringly commonsensicat-and hence politically correct-ljke the &ill-popular views that the best way to protect domestic elnployment is to =strict competitive imports or Chat the best way to beat inflation is for the government to dictate prices. Finally the advice of economists, even when accepted as valid, may be re~ecledbecause politkians and administrators find it to be politically painful to carry out. In this case, the analogy with medicine works quite welf. As it has burgemed, the science of medicine mfortzlnately did not discover that such agreeable remedies as eating chocolate could cure mdadies. hther, it kept comhg up with remedies that ixrvolved, cutting patients open, encasing them with plaster, drilling into their aching teeth, consigning them to passive inactivity, gjving them bad-tasting tonics, denying them the tasty foods they w s t want to eat, mandating boring exercises, and puncturing them with long needles.'" People had to bec m e convinced that physicians and del~tistsknew what they were dohg before they would follow advice like that. And they also had to becom willing to mallow the medkine-that is, to suffer short-range pain for the prontise of long-term, be12efit-particuiarly when priests and palmreaders regularly arrived at pajliatives that were less painful and rnorc convenient In like mannet; many-perhaps most-of the remecai,es modern economics has advanced have turned out to be politically painful, particularly in thr short run. As Michaei Winstein puts it, ecmomists '"compulsively rentind peoplc to eat lheir spi,aach.""eFor example, if econontists could discover that subsidies to politically active dairy farmers wodd not: only hrlp t.he farmers but also importantly benefit the ecmomy as a whole, politicians would be hanging on. their every word-the advice would be pure political chocolate. Unfortunately, economists have generally prescri27ed political spinach: Cutting the dairy farmers from tbr public dole-no mamr hnw deserving t h y m y be as people, no malt-er how bucolic their farms, nu matter how well groomed, their cows-and letting

them descend quietly into ignominious bankmptcy and then perhaps to seek other, unsubsidized, work. Moreover, there is very ofZen political djlemrna in that Che people who wilt. benefCit in the long term from the econmists%adVice don? h o w who they are while those who will be disadvantaged in the short term h o w this only too well and are yuick to scream, Four Economic Propositions That Have Become Increasingly Accepted For the ecmomists' politically incorrect perspectives and prescriptions to prevail, then, populations and policymixlcers have had to become convinced that economists h o w what they arc talking about and also to accept their dominant god-achieving a healthy, growing economy-as well as their oftcm-painful devices for achieving Chat goal. It has been a long, uphill, struggle, but as the century changes, economists and their allies seem substantially to have been successful in this endeavor. Four propositions seem central to this process, and each has been mi@tily contested over the last century or two, h my view, it has been essential for economists and like-minded idea entrepreneurs to get these propo"itims accepted to be effective. Moreover, if these four elemental prapo"tions have become substantially accepted, the ancillary ccmsequences are enormcrus. Not only do they seem to hold the formda for a huge expansion of economic wellbeing, but in combination they suggest the demise of such ccrntral human institutions as empire and war,

As cenlral goals, econmists d e n slrclss, or effectively stress, advances in econmic wdl-beirtg, a concept usually including considerations of economic growth as well as assessments of how the wealth generated by that grocvth is distributed, particularly insofas as it brings people out of poverty, To develop this perspective, they frequently assume, model, and essmtially favor people who are acquisitive: People who are centrally, indeed entirely; occupied with advancing their own long-term economic well-being. This perspective has traeiitionally rankled with people who trr-?asure such values and goals as honor, heroism, empathy, altruism, sacrjfice, selflessness, generosity, piety patriotism, racism, self-respect, spirituality# nationalism, and compassion. They of ten cmde the economic rnotives as crass, materialistic, cowardy, vulgar, debased, hednnistk, uncaring, selfish, immoral, decadent, and self--indulgent.

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Religion has been m e such opponent. As George Stigler observes, "a dislike for profit s e e h g is one of the few specik attitudes shared by the major religionsef"us, the Pope rails in a 1991 encycljcal t?$ainst "consumerism" in wwhich ""people are ensnared in a web of false and superficial gratificatbns rather than being helped to experience their perscmhood in an authentic and concrete way.ff"imilar re~ectionsof economic well being and growth as domjnant goals in favor of authentic and concrete personhood have routinely been fostered by such religious or moral leaders as Gandhi and momelni. Tntellectuals too, indud.ing even Adam Smith, bave held that the ""commerciar spirit . . . confines the views of m e n ' b i t h the result that the ""mindsof men are contracted, and rendered incagabte of elevation.'"'" And such thinkers as &xis de ?bcytleville, Thomas fefferson, and Montesquieu professed great concern that rampant ccrmmertliaiism wcruld lead to a tjnnid, and hdifferent dtizenry, leaving a country ripe for despotism.11 In Stigler" sunderstatement, "The intellectual has been contemptuous of comxnercial activiay for several thousand years."~~ In addition, as A.1bet.t Hirschman has observed, .throughout the ages people who exalt the aristacratic and martial virtues+hi:valryf honor, nobility glory, valor, and martiat heroism-have opposed wealth s e e h g as a dominant goal. After quoting Benjamin Franlklin on thc economic value oJt: hard work, honesty, punetualit)i, and frugdity, Max Weber notes that such sentiments "would both in ancient times and in the Middle Ages have been proscribed as the lowest sort of avariee and as an attitude entirely lacking in seXf-respect,"B "deed, appropriately greedy economic actors will mutinely grovel: They will have no sense of hanor or sel-respect or dignity as they seek to satisfr the whints of the consumer who, they feign to believe, is '"always right" even when patently wrong, t-hey s h o d be quite happy to let othAs long as t-hey profit fi~~anciaily, ers walk all over them,l4 From such behavior, Adam Smith concluded that commerce could render a m m '"capable of defending his country in war, 7'he unifomity of his stationary fife n"t-mlly corrupts the cotrrage of his mh~ld,and makes him regard. with abhorrence the irregula, unccrrtain, m d adventurous life of a solciier." Thus, he argued that commerce '"i~~ksthe courafSe of m m k h d ' k i t h the result that "the heroic spirit is almost utterly exthguished," and the "bulk of the peoplef' grow "effemixrate and dastardly" by '"aving ttheir minds ccmstmtly employed on the arts of luxury.'"5 Tocquwille was so alarm& at- the prospect of Che decaclence of ple~~itude that he advocated the occasionaf war to wrench people from their lethargylh Similarly in fapm t-he code of the Bushido held the pwsuit of (material) gain to be dishonorable and aecordiz~glyheld the economic pursuit of profit in contempt. And Immanuel Kant at one point contended

that the "commrcial spirit" fosters "a debasing self-interest, cowadice, and egeminacy, and tmds to degrade the character of the nation."l7 Many economists are, or at any rate act like, economic determinists and, to be sure, when anything notable takes place there is almost always somecme limewhere who is profiting finmcially. Agile ecommic determinhts (working on the principle, "IolI:o\v the money ") c m usualiy ferret out the profiters (or "profiteers"') and.triumphantly proclaim tbem to be the essential cause of the event. (The fact that there are also often mmy important and influential people losi~zgm n e y on the event rarely troubles them very much,) But, clearly, nmeconomic values have often been deemed more worZhy than economic ones- For example, Simon Kuznets has pohted out that the quest for otlnerworldly eternity and the quest to mintain ixrborn differa c e s as expressed im class stmcture have freyumtly been takm to be far superior to ecmomic advmce~nent.And, as Nathan Rose~~berg and L. E. Birdzel.1&serve, a number of buaixless innovations that clearly have been successful economically-such as joint-stock companies, department stores, maif-order houses, chain stores, trusts, brmch banks, md multinational, corpmations-have ixrspired g ~ a efforts t to make them unllawful Zly those who prefer to maintain traditional, even folksyr ways of dojng things even if this m a n s *wer economic developmmt. At the s m e tirne, sentirn.enta.l, economically dubious preference has oftcn been shown for cooperatives, s m d farms, m d mom-and-pop stcrres.18 h innportant area in which noneconomic values have usually dominated is war, Like murder, war rarely makes all that much economic sense even though it would be difficdt to find a war in which no one has profit.ed financially. For the most part, in fact, economic mothations ofien seem like a r a t h a l e for irngulses that are actually more nearly moral, aesthetic, emotional, or psychologicd. As Quincy Wright ohserved after a lifetintc ol study of the mat-ter: "Studies oE both the djrclet and the indirect influence of economic factors on the causation of war hdicate that they have been much less important than political ambitions, ideological convictim, techalogical change, legal claims, ixrational psychological complexes, ignorance, and unwillingness to maintain conditions of peace in a changing world."B Thus, Hitler's invasions were I"mked to a sort of crackpot economic theory about "2lving space," but to see his goals as prirniarily economic is to give short shrift to his egommia and to his much more motivathg nol;ions about race and the value of war in nation building." B ~ l s v k r and e at the same tirne, Japan" catastrclphic refusal to abandon its hugely-even absurdly--costly effort to conquer China when the United States so demmded made little economic sense. h d , on the o ~ e side, r the main reason the United Shtes became jnvolved. in Asia in opposition to Japan in the

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late 1930s was an aesthetic, sentimental, or mord impullse to keep the heroic, persecuted Chinese from being dominated by a vicious foreit;n ~ g i n t eas : Kruce Russett notes, "by embargoing Japan ill 1,941, the Unit-ed States was g4:vin.g up an export trade at least four times that with China.'"I The Cold War and its various damaging hot wars in places like Korea m d Vieham were maiinly impelled by a Communist expansionary idealogy that stemmed not so much from economics as from an elaborate theory about social class warfare that was pmfoundly romantic and sentimental. (and n\isguided). The Cold War abruptly evaporated not out of economic necessity, but because the Cammtlnists abmdoned their threatening &eory.zz I:.,ikewise,although the Gulf War of 1,991 is often considered to have been primarily about petroleum, if economic considerations of that sort had indeed been dominant, S a d d m Hussein would have quickly retreated after his economy was destroyed and it became clear he would be unable actually to sell the oil h had just conquered in Kuwait. Moreover, George Bush (motivated, it appears, mainly by aesthetif or humanftarian repulsion and by personal pique) would never have kvaded because m y problem of oil supplies had already been solved. by the quite cheerful willingness of Saudi Arabia and other countries to pump additicmal supplies-indeed, the only thing keeping oil prices high at the time W= Bush" threat to start a war.23 It seems hkely then, that, if people with bushess motivations had actually been ntnnhzg the world, its hjstory \.voulBhave been quite a bit d8ferent (and generally better). Econonists m d their like-minded allies have made an important cmtribu.ticm by helping to teach the world to value economic well being above passions Chat are often eco~zomicallyabsurd.24 As Bush and Hussein demonstrated in 1990, the pursuit of weal& is hardly tl-ze only motivatinl; factor today. The desires in China for mintea reunification with the ifngovcrished grating TaiMim or in Sowtk K o ~ for north are essentiaIfy rmantir and sentimental, md. tmpestuous and v t olent disagreement over the fate of Jerusalem scarcely makes much economic sense either. FIoweves, the singie-minded pursuit of weal& has come generally to be unashamedly accepted as behavior that is desirable, bmeficial, and even honorable, and we seem now be =aching the pllint where business motivations have become much more important than they have been in the past. Thus in formulating his policy toward China in the 1 9 9 0 U.S. ~ ~ President Bill Clhtazz decided that eco~zomicconsiderations shot~ldsubstmtially dominate ones about human rights-a conclusion that, however dismaying to some rights grou~s,generally went down well politically. In this regard, it may be useful to reviecv the association pmposed by Kant between the "commercial spirit" and ""slf-interest, cowardice, and

effeminacy" Maybe he had it right, and maybe that" not such a bad thing. Mter all, undcr the free systems advacated by economists, people can service their long-term economic self-irrterest mly if they are able to provide a good or a service other people freely find of value. And in the process of pmducing this good or service, acquisitive providers have generally discovered that they can profit better when their business practices are honest, fair, civil, and compassionate.2" Moreover, although it may be cowardly bp the slandards of those who exalt the martial virtues to turn one" back when insukd, it is possible, Zly other stmdards, to suggest that lethal batt1c.s f o w t over the cut of me's coat or over the color of one's sneakers or over "spheres of influence'" or over a chunk of land not big enough to bury the slain are not only economically fclctlish, but quite childi?ih." Perhaape; a world where a form, of cokvardice is ra-npmt xnight be better than one wherc?people are routirrely running around. looking for fights to prwe, or test, their manhood-constantly seeking the bubble reputation even in the camon's mouth, as Shakespeare's Jfaques puts it. And it may be effeminate to avoid unnecessary conflict, to temper anger, and to be guided by the not enf;irely unreasonable notion that other peoplc do, in fact, sometimes have feelings. But such gentk, accommodating behavior is, in general, econornicaUy beneficial-fiat is, it enhances the general prosperity. And a w r l d where that quality is in abundance may not, after all, be t?ll that undesirabk even if it sometimes comes faden with a degree of treacly sentimentality. Thus, a society dominated by "self-interest, cowardice, and efkminacy""might, under some circlzmstances, prove to be entirely bearable. And, in part through the insidious efforts of generations of economists, societies in the most advanced portions of the world have inmasingly moved in that diredion.

Wmlth [S Best Achieved Tf"~rough ExchUnge, Not T6zrot3:ghCorzqurst: The Demise of Empire and War The nineteenth-cenhtry British historian, Henry I'homas Bucicle, hailed Adam 5mit.h'~Wealth of Nations as "probably the most intportant bnok that bas ever been written"' because it convincingly demonstrated that gold and silver are not wealth but are merely its representatives, and because it s h o w that true wealth comes not from dimhishing the wed& of others, but rather that '"the benefits of trade are of necessiw reciprocal."n Smith's insights are element& and profound, and, as Buekte suggests, they had once been counterintuitive-that is, Smith and others had to discover them and point them out. n a n k s in part to the promotimd ef-

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forts of legions of economists and other like-minded idea entrepreneurs, they have now substantially infused the world. The gradual acceptance over the course of the twentieth century of propositions I (weafith-mhancement should be a donninant goal) and.2 (weatth is best achieved through exchange rather than conquest) has helped lead to one of the most remarkable changes in w r l d history: the virtual eradication of the ancient and once vital nution of empire, For milfennia, the size of a country's empire was accepted as one of the chief hdjcators of its greatness. Nlhough, the quest for empire was often irnpeXled by such noneconomic factors as the appeal of adventure or the need to '"civilize" or ccrnvert the unenlightened, it was often partly based-crr rationalized-as well on economic or pseudo-economic reasmjrrg, Over the last century, economists and alljed idea entrcpmeurs like tbe best-sellhg English journatist and ecommic witer, Noman An(jc.11,have successfdly undercut the appeal of empire by cmincing people more and more that economic well being, not the vague sense of "ownfng" distant lands, should be the domilnant goal and that trade, not cmquest, is the best way to accumulate wea1th.z8 Another combined effect-not necessarily in.tended-of agreement with propositions 1 and 2 is that war becomes unacceptal.lle. fn 1,795, reflecting a view of MO~~tesq~ieu and others, lmmanuel Kant argued that the ""spirit of commerce" i s '"incompatible with war"' and that, as cornmerile inevitably gains the ""upper hand," "states would seek ""t promote hanorable peace and by mediation to prevent war*" However, this notion is incomplete because, as Buckle pointed out, ""the c m mertlial spirit" c m be "wwaftike-""" Thus, commerce truly becomes ""incompatible MIith war'konly when both propsitions 1and 2 are accepted. AngeIl also understood this, His critics, such as the prmjnent Ameri' : Mahan, argued that even ff it were true can naval historian, Admirai A. 1 that war is ecmomically unprofithle, nations mainly fight for motives other than economic ones such as "ambition, self-respect, msentment of injustice, sympathy with the opprtrssed.'" Angel1 replied by continuing to stress, reflecting proposition 2, that the inescapable economic ehaos of war "makes economic bcnefit from victory impossible," But he also argued, in line with proposiliion 1, that nations should come to realize that ""breadand a decent: liveli,hoodHare of paramount concern, not such vague and elastic goals as Inonor, power, and irrfluence."] h g e l l helped to crystdize a line of reascming that has been gainkg in acceptability ever since. It is the central contention of Richard Rosecrance's inlportant book, The Rise of fhe TratJi~zgSt;nf;E, fOr example, that over the course of the last few centuries more and more corntries have come to the conclusion that the path to wealth is through trade rather than through conytlest, and h cites the strikjng and important examples

of two recent converts: "Today West Germany and Japan use internatimid trade to acquirc~.tl-te very raw materials and oil that, they aimed to conquer by military force in the 1930s. They have prospered in peaceful consequence." Among trading states, Rosecrance &serves, ""the incentive to wage war is &sent.""" Put another way, free trade furnishes the economic advantages of conquest without the unpleasantness of invasion and the sticky rcspmsibility of imperid control. Thus war is untikely if countries take prosperity as their chief goal and if they come to beljeve that trade is the best hvay to achieve that goal. Thanks in part to the success of econmists, both proyositions have now gai""d wide currency. Furthermre, although war has hardfy evaporated f"mm the planet, it js worth notlng that the nations of the developed world have avoided, war with each other for the longest period of time since the days of the Roman Empire, a ~nnarkabledevelopment partly (though certainly not entirely) caused by the increasing joint acceptance of propositions 1 and 2. n o m a s fefferson once referred to Europe as "an arena of gladiatclrs," m d cou~ztrieslike Frmce m d Germany once seemed to spend almost all their t h e either preparQ ior wars against each other or fighting them, But thry have now lived-and prospered-side by side for over half a century without even a glimmer Of war tak. Whether this will set the pattern for the rest of the world rcmahs to be seen, but it is certainly of intertrst, and may be of cmsequence, that areas like Latin America and east and southeast Asia, where wars were endemic for decades after VVorjId War 11, have now opted for peace and, not wrelatedly, for the banal pieasurt-s of ecmomic developmmt.32

I~zfer~zational Trade Should Be Free: From Adaitn Smith fo Bill CIifitrnz One may accept economic development as a pri~sarymotivation and agrc3e that exchange is a better way to prosper than conquest, but one could still conclude that prosperity is best achieved by restricting imports to favor and pmtect local enterpritjczs-the once-dominant mercantilist view. Free trade, h fact, has been a hard sell, but at the end of the twentieth century it seems to have emeqed triumphant, and the active proselytizing of the economics prokssion has probably been espeiaily crucial in this important development.33 11% 1993, President Bill Clinton co itted one of the greatest acts of political heroism h the nation's history: e~zergetic( m d successful) support for approval of the Nortln. Amencan Free Trade Agreement (NAFTA). He was well positioned politically to finesse and evade the issue a d was urged to do so by many of his politkal advisers. Nevertheless, he decided to counter not only this recommendation but also the adammt de-

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sims of one of his party" most impo"tant supporters, organized labor, as well as those of many of his party's major fit;urt.s including the leader in the House olRepresentatives." As far as I can see, he took up this painful and difficult task for no good reason except that he had come to the conclusion that NAE'TA-and, more. generally free trade-was good for tbe country in the long term.35 From this remarkable achievement Clinton (predictably)gaixred no notable electoral advantage. Indeed, his advocacy c h i e q inspired the (temporary) hostili,ty o.f labor, which scelns to have been inclhed to sit on its hands in the 1994 elections, something that may have helped with the losses Clinton's Democrats sustained in that contest. However, by his actions Clinton strongly put the Democrdic imprilnatur on the notion of free trade, got the world off its decades-long delay on advancing the General A g ~ e m e n on t Tariffs and Trade (GATT), and essentially put a cmse~~sual cap on a notion that: ecmomists had gradually come to accept over the two centuries since the publication in I776 of Adam Smith's Wealth q f Nations. Thus, by the end of the twemtiet:h century the world has come substantially to embrace the idea, not only that wealth is mhanced. by exchange rather than Zly conquest as in proposition 2, but that unfettered trade between countries is the best way for everyone to prosper: There will, of course, be coundess bobbings and weavingst m d even some notable setbacks, on this principle in specific application as countries jockey to obtain the best deal i,n a rapidb changing world. Rut wh& is important is that the basic idea seems substantially to have been accepted. In many wayti, the increaskg acceptance of free trade is quite remarka b . because poiiEieal logk is notably on the side of prokctiol~istsm d m r cantilists. After all, domestic businesses (and labos organizations) have great clout in a country"^ pditirs while foreign bushesses gmerally have little, and the locals should be able to use their advantageous position to keep foreign competition out." In addition, the businesses and workrrrs who will be hurt by chaper or better foreip products are likely to h o w wh.o they are,while lhose who will gailr from exports are less likely to be aware of their advantage since the benefits are likely to mterialize only in the long term. Moreover, even if a firm does find a market abroad and thus has m irzcentive to lobby for free trade, the firm is often tikely to soon dkcover that entrepreneurs in the nation to which is it exporting espy its success, set up local competition, and then pressure their gove out the hapless h a v a t h e foreig~~el: Final,lyy,free tradcrs are up agailrst the sentimental and intuitive appeal, of autarky or self-sufficiency, concepts that go back at least to Aristotk and have been dominmt far mLllemia.37 Deeply awed by such obstacles, George Stigler s~~ggested gloomily in 1975 that free trade was "unattahable without a fundamental restmchr-

ing of the political system."'3Wo such restructuring has taken place, Yet, although Clinton was surely well awarr;,that free trade wap; a pditicaily hcorrect venture, he still went h e a d wi& it. It seems to me that the chief reason be and other sensible politicians bave been willing to bear that gain is that they have findly-and, understandably, rather reluctantlybought the free trade line that has been cmse~nsuatlytouted bp economists for decades. As a certifiable poiicy wonk, Clinton has randoubtcdly heard and ingested the arguments economists make about why free trade is a good idca, but he is not an economist hintselfi has nevcr made a systematic analysis of the idea, on his own, and has prubably never even read a techtlicai study of the issue. Chiefly, I suspect, he favors free trade (even to the point of riskkg his politicai life on the issue) because, Eke the patient who dutifully swallows the distasteful medicine prescribed Zly the authoritative physicim, he trusts the expert cornensus Friedman observed in 19% that "n,o szxbject has so united economists since Adam Smith" WeaIIlz of N a f i v ~ was s published in 1776 as belief in the virtues of free trade. Unfortunately, with a k w exceptions dlarirrg the nineteenth century, that professional consensus has not prevented one country afier another from imposixzg trade barriers."39 But now, FR considerable part because of C I h t d s (and Friedman's) efforts, a substantial hternati.onal consensus by policymakers on this issue does seem fhally to have been achieved. Whatever wafFljng and backsliding there may be on the details of implementation, the general thrust and trend seem clear, Tt'le ~ l n f i c tktulee~r t~ pmce nlzd fmde. Although Kant and many others have proposed that trade enhances the prospects for peace, history does not: suggest that this noticm has much validity: Most wars, after all, are civil conficts, waged between groups that know each other only too wclI and trade with each other only too much, But a good case could be made for the opposite causal proposition: Peace often leads tol or at any rate facifitates, trade. 'That is, peace ought to be seen not as a dependent, but rather as an hdependent, variable in the relationship. For example, the long and historically unprecede~ntedabse~nceof war a m g the nations of Western Europe since 1945, has not been caused by their increasing ecmomic harmcmy. Ra&er, their economic harmmy has been caused, or at least expedited, by the peace they have enjoyed. Similarly, the rise of the multi-national corporation and the building of the long-enwisimd channel t el between France and Great Britain are fie cmsequences of peace, not its cause, Put the other way international tensions and the prospect of international war have a strmg dampenjl~geffect on trade. Each threatened nation has an incentive to cut itself off from the rest of the world econornicalk to ensure that it can survive if htemationat exchange is staeci by

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military conflict, nerefore, policies variously known as autarky, self-reliance, and self-sufficiency arc. Likcly to be very appealing. fn t.he peaceful modern trading world., however, s~tchonce seductive notions have come to seem quaht, Similarly, the Cold War could be seen in part as a huge trade barrier as Edward Yardeni points out elsewhere in. this volume. With the demise of that politically derived and economically foolish construct, tradc will be liberated. But it is peace that will have hcilitated trade, not the vpclsite.

Eeono;tnis Do Desf WItm the Guver~zmejtzt Leaves TF2m . Szrbsta~sfiutlyFree As the experience in places like Japan and Sollth Korea has shown, it is possible to accept free trade between nations while maaalnlng that the donncslic ecol~omyshodd still be kept under major govermcmt.al controls. But, as the notion that vlternational trade should be free and open has become increaingly accepted, so has the propclsition that the domstic economy should also be free. This is a fairly recent development. It has not been that long since Joseph Schumpeter farnously and repeatedly declared "centralist socialism" to be the "heir apparentf"o capitalism. In 1976, Fred Hirsch published a book about why the twentieth century had "seen a unjversd prcdominant trend toward collective provision and state regulation in ecol~omicareas,'?nd around the same time Miftozz Friedman prese~~ted a paper (a very depressing one from his point of view) seeking to expIajn Mxhy collectivist beliefs flourish in the world of ideas."" Ilowever, things have changed mrkedly since then. As economist Robert Heilbroner, not usually known as an adcnt free-marketeer, noted only a few years ago: "There is today widespread agreement, includir7g amnng most socialist economists, that wfi,nl-everf o m advanced sncieties may take h the twenty-fist century, a market system of some kind will constitute their principal means of coordination. That is a remarkable turnahnut from the situation o11ly a generation ago, cvhen the majority of economists believed that the future of economic coordi,nation lay in a diminution of the scope of the market, and an increase h some form of cel~tralizedplanning.""Clr, in the words of an wonomjst who h ~ been s a consistent free-mariccrtcer, R. M. Hartwell, "The intctllectual agenda about the role of the government has changed from one determhed by the desirabiljty of intervcnt.ion to one determiaed by the dcsirahiSity of market econmy" The big question, he observes happily is no longer ""W+ not mom government, more. public omership, and more control and regulation of the market," but rather '"mynot less governmnt, more privatization, and less interference with the market?"41

Applyirzg the language Hendersm used when he assessed the state of medicine as it was in 191.2, Heilbroner and Hartwell am saying that, by the present state of ecmomic knowledge, the random politician or gove m e n t a l official consdting the random wonmist onty a generation ago was likely to get the hvrong advice: It wndd perhaps have been better, on abrerage, to consult a reader of tea leaves or an astrologer. Much of the most widely accepted economic t:hinking of the time derived from the work of John Mapard Keynes whose central theme, according t~ his biogralpher, was "the state is wise and the market is s b pid." Working from that sort of perspective, India%top economists for a gemration supported policies of mgulation and central control that failed abys~xally-leading one of them to lament recently; "h~dia"misfortune was to have brillimt ecmornists." And Latin American ecmomies were misdirected for decades by antimarket dependencia theory as forcefully and confidently advocated by well regarded economists in the United Nations Economic Commission on Latin America.42 In many respects the economic consensus Heilbroner and Hartwett note has burgeoned only rttcently, pparticularty after the abject and pathetic collapse d comrnand and heavily pl ed ecmomies in the late 1%8s and early 1990s. As a tap Indian economist put it recently, ""Between the fall of the Berlin wail in 1989 and the collapse of the Soviet Union in 1991,I felt as though I were awakening from a thirty-five-year dream. Everything I had believed about economic systems and tried to implement was wrong.'"J? The economic advice deeisiomakers around the world are heasing? and increasingly are accepting, is to rely on the nnarket rdhcr than forcing on it: externally derived and po1itieall.y comfortable concepts of fairness and justice. And with this acceptance, a set of alternative propositions aholxt the virtues of revolution and of the justice possible &rough a commanci or hewily maniputated econorny have effectively been scrapped as romantic, unrealistic, unproductive, and increasingly irrelevant.% Xn practke, all capitalist, or market capitalist, staks may not end up loo&ng a great deal like each other, any more than all democracies do, In particdr, the degree to which the government intervcncs in the economy with tax and welfare policy, regullation, trade restrictions, price supports, and direct control over certain individual enterprises varies considerably*But fie trend seems clear. The new consensual approach can probably be summed up in one short phrase: "trust the market.'%nd, like the rise in internatio~~al trade, this advice has been faciii,tated by a decline of war fcars: as a proJninent Italian economist has put it, "A state company has to do with war, national interest, and self-defctnse," wwheseas privatization "is driven by the

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absence of war, and by the opening of the international system that makes raw materials, money, and technology avaitable to everyoneef'45 C)ne of the principles that inform that advice, that international trade should be free has already been discussed. Among the others seem to be the following:

Wges and Prices Should Be Allowed Freely to Find Their Own Ranges and Limits.. It would be difficult to unde~stimatethe ecowmically pernicious effecb of efforts to determine the "just wage" and the ""just price" by non-market judgments. Yet for millennia prices were substantially set by custom, government, or the church, and the progressive jbandonn?em.t. oE this intruitively appealing and hence politically correct approach has been one of the major achievements of mndern ecmomic+it is quite possibly the economic equivalent of the germ themy hnd it has been a tough strmggle. R a t i o ~ ~ khas g ei~joyedquite a bit of political appeal even in peacetime, and many politicians, like E"iarry Trumm, have had a deep and abidillg belief in wage and price contrds, while a Republjcan president, Richard Nixon, suddeniy re-instituted them as late as the 1970s." The quest for the "just price" is still popdar in some arcasover cable television rates, for example, and rent control lingers in a declk;ing number of places. Rut, substantially, the battle has been won. Government Regulation is Often Unwise and Can Be Counterproductive. For the most part, the quest for optimal regulation or for full-bore economic planning has been cbanged to a preference for reducing or ing in many areas. Cove even e n d i ~ ~~g u l a t i o nand pl still sometimes play a heipful economic r o e by maintaking a vi,able justice system to enforce contracts and property rights and to police fraud and wiolent coercion, and it may also usefully seek to regulate matters of hedth and safcty and to cont-rot socially undesirable side e k c t s or externalities like air pollution-though even here reguhtions designed to shape parameters to allow the market do the hard work may well prove to be sounder than efforts to plan. Rut, as Yergin and Stanislaw put it, the idea would be to mnve the state away from being the '"producer, contrrrkr, and intervenor"' to being the "referee sseting the ntlcs of the game to ensure, arrtoIIg other things, ~ompetition.'~47 The Government Should Abandon Enterprises That Can Be Handled by the P ~ v a t eSectar. "Privatization" i s a aword that came into notable use only in the last decadcs of the twentieth century, intended to be used in pclinted distinction to an older word, ""nationalizationnf'The =&ation has taken hold that private enterprise simply does much better than the state at prclvidjng a whole series of goods and service-from communi-

cations to trmsportation to education to utilities to mail service to ship buildirtg-that many once felt could be provided better, m d more justly by the state. Privatization has been a key deve1opmem.t.in the post-Cornmunist states, and even the highly entrcnched welfase states of Western Europe have sold off over $lOO billion in state assets since 1985.48

High Taxes, Especially at the Top, Can: Be Economically Gaunterproduetive, and Capricious ar Discretionary Ones M m s t Mways Are. Confiscatory and discsrrtionary expropriat-ion was once standard practice by rulers around the world. The campaign against it has been a long and arduous one even though tax restraht has h o s t always been to the long-term economic advantage of thc co11fiscators.49 A Considerable h a u n t aE Economic Inequality Is Inevitable and Essentialty Desirable. Govennme~~t may smetimes play a useful social or safe@ net role by cus:bionhg pain through the judicious trmsfer of some degree of wealth from the economically successhl to the une;uccesshl.'" But the Communist experie~~ce suggests that efforts to jnduce true economic eyualiity arc liktlly to fait and, to the degree they arc successful, to exact a cost-often a very considerable one-in wonomir growth. Uncompetitive Enterprises Should Not Be Subsidized and Should Be Allowed to Fail. This notion is, of course, extremely painfui pcriitically, but the disastrous experiences in the Soviet Union and elsewhere (in India a major state fertilizer company with 1200 esnployees, completed in 1979, had by 1991yet to produw m a n y fmtilizer for sale) have helped economists to underscore its wisdoun."l Government Spending Should Be Kept Reasonably Law, and Government Deficits Should Be Kept Under Control. A form of the welfare state remains in place in aall developed countries, but the belief that such spending can detrimentally get out of hand s e e m incrc.asingly to be accepted, and s m e of the most entrcnched welfare states are judiciously trimming back," Principles like these centrally jnformed the successful advice given to the post-Communist states m d to others seeking economic growth, and such prhciples have often been considemd counterintuitive, i unjust. Rut however politically pt?inful, t h y seem increasingly to be accepted by policy-makers and potiticians around the world.5" Of course, the gatherk~g-hdeed, ga&eredsecnlnceand Arthur A. Stein, eds., The Domestic Bnses of Gra~tdStrategy flthaca, N Y Cornell University Press, 1993), pp, 48-62; Mueller 1995, chap, 2; Myron Rush, "Fortune and Fate," National Inleresf (Spring 1993):19--25. 23. John Muefler, Policy a d Opiniorz ilz Ijrc G u y War (Cl~icago:University of Chicago Press, 1g%), chap. 8. 24. See also Hirschman 1977; Donald McCloskey, "Bourgeois Virtue,"?Arnen"ca~ Sclzolnr 63 (Spring 1997):180-1 82, 25. On this issue, see J o h Muellel; Capitntism, Deitnocracy, and Rnlplr's Pretty Good Groce~y(Rinceton, NJ: Princeton University Press, 1999), chaps. 3-4. 26. For A. A. Milne" perspective on such thinking, see his Peace witlt Honour (New tlork: gutton, 19351, pp. 4,2Z-223. 27. Histoy of Civilizntion in England (New Yctrk: Appleton, 18621, pp. 154, 157. See also Milton and Rose Friedman, Frm to Ctzoose: A Personat Stratemetzl (New York: Harcourt Brace Jovanovich, 1980), pp. 1-2; Smith 1976, pp. 429-451 (1V.i). 28, On this issue, see at= Neta C. Clrawford, "Decalortizatictrt as an InternaSional Norm: "Te Evolution of Practices, Aqumentz;, and Beliefs," in inaura VV; Reed and Car1 Kaysen, eds., Enzerging Norms #)zisZ$ed Iztlcn?crzf.iotz(CambridgefMA: American Academy of Arts and Sciences, 1"393), pp. 37-61; Ethan A, Nadetmnn, "Global Prohibition Regimes: The Evoluticzn of Norms in International Sc>cietyV;"Ytzfemafional Organiation 44 ( A u t u m 1990):479-526; Rosenberg and Birdzell! 2986, p. 17. Beginning in 1908f Angeft a r g u d that "It is a lo>gicaXfallacy to regard a nation as incl-easing its wealth when it i n c ~ a s eits s territory." Britain, he pointed out, "c3wned" Canada and Australia in some seme? yet it certainly did not get the pmducts of those cormtrie for nothing-it had to pay for them just as though they came "from the lesser tribes in Aqentina or the USA.'The Brithh, in fact, could not get those pmducts any cheaper than the Germam. Thus, he asked, "If G-ermany cl-mquered Cmada, could the Germanti get the wheat for nothring? Would the Germanti have to gay for it just as they do nc>w"t~~tuldcc~nquestmake economically any reaX difference?" He also argued that the popular notion that there were limited supplies in the wc)rlCt and that countries had to fight to get their share was nonsnse: "The g i ~ a danger t of the modern tzrorld is not abwlute shortage, but dislcjcatian of the process of exchanget by which alone the fruits of tl7e earth can be made available G~eafIllzrsion: A Slacdy of tlw Relntiotz of^l\/iiliZ.nr;!P c ~ l ~ r for h u m n consumptim."T~~e fo Nlatimal Adz~antnge(London: Heinernam, 1914)' p. 31; The Grmt IrTlusiolr 1933 (New York: Putnam'q 19331, pp. 108,175, 29. Xmmanuet Kant, I;3P?"pta~i! Peace (fndianapolis, IN: Bobbs-Merrill, 1957), p. 2.4; see also Hirschman 19177, 79-80, 134135; Buckle 1862, 157. Peace activists of

the nineteenth century were quick to take up Mant" argument, and often with a similar sense of optimism. I""artieularlyprcjminent were two Englishmen, Richad Cobden and a Quakeu; John Bright, who saw international peace as one of the benefits of free and unfettered trade; and in 1848 John Stuart Mill concurred: "It is commer-cetzrhich is rapidly rendering war obsalete,'Wichaet t-loward, War and tlze Liberwl Conscience (New f2runswick, NJ: Rutgers University Press, 11978), p. 37. On booty as an important, though usually not primary, motive for medieval war, d ifi the see Richard W. Kaeuper, War, Justice, nud Public Order: Etzglalzd a ~ Fr~nee bier Middlc Ages (New York: Oxford University Press, 1988). 30, A. X Mahan, Armanrents and Arbitratz'on: ' f i e Place ofForcc. ifi trlte bztemntimzal Relations I?J:Stales (New Ycfrk: Harper, 1912), p. 131. A nation" jb-ealth, prosperity, and well-being . . . depend in no way upon its military poweu;'Xngelf argued, noting that the citizens of such war-avoiding countries as SW-itzerland,Belgium, or Hc~llandtzrer-e as well off as the Germans, and much better off than the Austrians or Russians. Affw All: An Autobiogmplty (NewYc~rk:Farrar, Straus and Young, 4951), p. 165; Angelf 1933,89-92,230; Angell1914,36. 31. Richard Rosecrance, The Rise I?( the Padz'fzg State: Ccsnqz-resst and Comnzeree ifi ttw Moderrz World (New York: Basic Books#1%6), pp. 46,24. For a discussion of tile mechanism by which attitudes toward war have been reshaped, and particularly of the crucial role of Worid War I in this process, see John Mueller, Refreak from Doomsday: The Obsolescence I?( Major War (New York: Basic Books, 1989), and especially Muelfer 1995, chap. 9. 32. Thomas Jefferson, Democracy (New York: Appleton-Centuryt 11939), p. 263. Since Roman Empire: Paul W. Schrc>eder,"Does Murphy's Law Apply to History?" Witsun Qunrterly 9 (New Year" 1985): 88. These developments might also affect religion. Modern science and medicine have been destructive of I-wo of religion" once popular appeals: its ability tcr explain the physical universe and its ability to heal. And the notion, at one time accepted w e n by atheists, that religion is vital because it supplies a mural code, is being undercut when, apparently for the first time in histcsry, formerly piaus Europe has developed soci&ies that are orderly, moral, and generally admirable even though religion, particularly organized religion, plays little effective part. Now, the newly emerging rmselfconscious acceptance of material gain as a dominant goal may tend to devalue another of the ehureh's appeals, Religion attained prominence in human life in part because it can sometimes supply spiritual uplift as a sort of relief from material woes and fates and because it seeks to give higher meaning to a dreary and difficult life. But if people become primarily materialistic and rich, they may come to feel they need religion less. Of course, in other areas, such as portions of the Islamic world, reltigiorjity may have actually been heightened in recent years, and it certainly retains a considerable degree of force in the United States, Thus, tzrhether Europe cmstitutes a true harbinger remains tcr be seen. Frrr the argument that it is nctt, see Peter L. Berger, "9cularism in Retreatf" Naf ionnl Inleresr", Winter 11996/9f;",pp. 3-12, For the argument that religion is weakest tzrhere it is state dominatczct and strungest where there is a vigorous competitive market for religion, see Laurence R, Iamacc~nne,Roger Finkej and Rcdney Stark, "Del-egulating Religion: The Economics of Church and State," &onomic fizquiry 35 (April 199'7): 350-3M.

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33. Actually, to be compXc3te about this, there may be something of a clash between prc>positions2 and 3. Logically; an ardent free trader should favor cunquest-at feast ones where damage is minimal and where long.-termresentments are not stirred up-since this would expand the free-trade zone to the general benefit. Frrr example, free traders tzrould presumably hold that North Americans would generally benefit if Canada were painlessly and benwolently to cmquer the United States, making it, perhaps, its eleventh province. 34, Elizabeth Brew OPZthe Edge: T'lte Clinton P~sr'dency(New b r k : Sirnun & ghuster, 49942, pp. 33&346. 35.11 is not true that "only Nixon could have gone to Chinam-the Democratic p~siclentsbefc3re him tried several times to imprc~verelations with that country o d y to find the door closed (see Mueller 1989, 184-185). But it seems likely that no Republican could have amassed the necessary (mainly Derno>cratic)votes in Congrss to pass NAFTA, 36, Legal restrictions forbidding fc~reigncountries or interests from cmtributing to political campaigns are, to that degree, unwise policy. See Peter Passell, "Economic Scene: Salmon eaters salute a victory against the protectionists,'Wezc;t York Tirnm, 22 January 1998, C2. 37. E A. Hayek, T71e Fatal Conwit: The Errors of Socialkm (Chicago:University of Chicago Press, 1988), p. 45.. On the once central, but now abandoned, quest in lndia for ""slf-sufficiency'" and in Latin America for freedom from "&epndency,'" see Yerrgin and StanjsXaw 1989, chaps. 3,9. 38. George J, Stigler, The Citixert a d the Stale: Essays opt Regulafr'un (Chicago: Universiv of Chicago Press, 1975), p. xi; see also Jarnes Buchanan, "%>ciiailisrnTs Dead; Leviathan Lives," Wall Street journal, 18 July 1990, A8. 39. Miltc>nFriedman, Tyranny c?f the Status Quo (San Diego, CA: Marcourt Brace Jo~anovich~ 19@), p, 129. However, in the 4930s Keynes advised against the "economic entanglements'" of trade. Jeffrey Sachs, ""Xntmational Economics: Unlocking the Mysteries of Globafization," hreigrz h l i q , Spring 1998, pp. 102-103,11Q. $0. Joseph A. %humpeter, Cayifalisrrt, Sociaifistrz and Dernacracy. 3rd ed, (New York: Harper (4r Row 19501, p. 417. Fred Hirscf.1, The Social LirrziCs EQ Crowtlr (Cambridge, MA: P-iarvard University Press, 1976), p. 1. Friedman: R, M, Hartwell, A FiTisfoq r;?f the Mont Pelerirz Sociefy (Xndianapolis, IN: 1,iberE.yFund, lli395), p, 165. See also Yergin and Stanislatzr 4998,22; Symour Martin Lipset, "ReFIections on Capitalism, %ciaXism & Democracy,'"otrrrznl of Denzocmey, 4 (April lli393):4%55, 41. Robert Heilbruneu; 21st Century Capitalism (New York: Norton, 2993), p. 97, Hart.wefl 1995, 191. On this issue, see George J. Stigler; " m e Politics of PoZiticaX Journal of Econo~rtics73 (November 1959):522-532; Yergin Ec~nomists,"Q~~~rtlterly and Stanislaw 1998. 42. Keynes: Robert Skidelsky, Keyrles (New York: Oxford University Press, 19"36), p. 117. lndia and Latin America: Yergin and StanisXaw- 1998, pp. 215, 234; see also Sachs 1li398, p. 101, 43. Vergin and Stanislaw 2 998, p. 138. 44. See Robert Heilbronel; "Tconomics by the Ifoc~k,"W~nt.iotz, 20 October 1997 pp. 16-19; Yergin and SIanisIaw 1998. 45. Yergin and Stanislaw 19913, g. 137.

46. On the once dominant notion of the "just price'" and the "just wage;?,'" see Rc>senbergand Birdzell 1986, g. 38. Nixon: k r g i n and Stanjslaw 19913, p. 62. 47. There also seems to be an increasing belief that it may be wise judiciously t c ~regulate the financial system itself, because, as one economist has put it, "There" s o r e of a stake in keeping the financial wetor hcjnest than there is, for instance, in cosmetics.'' Yergin and StanisXaw- 1998, 373' 349. See alwr Charlotte Demy, "World Bank in surprise policy U-turn,"T~unrdia~t W-rekly, 6 July 1997. On the successes of governmental efforts to deal with environrnrtntaf concerns in the Last few decades, see Gregg Easterbrcjok, A Momertt opt tl.1~Earth: The Comirtg Age of Enz7iro.onment d Bptim-ism (New York: Viking, 19955).See also Peter Passell, ""Eonornic kene: A new project will measure the cost and effect of regulation," New York Etnrus, 30 July 1998, C2. 48. Yergin and Stanisf aw 1998, g. 317. 4% See Rosenberg and Birdzell1386, pp. 149-1123; E, L. Jones, TIze Ezhrapenr~Mirack: Envimnnzepzfs, econonties, and geopolitics ipt tlze Izislo~yc$ Europe and Asia, 2nd ed. (Cambridge, UK: Cambridge University Press, 4987); Barry R, Weingast, ""The Political Foundatians of Limited Government: 13artiamentand S w e r e i p Debt in 17th- and 48th-Century England," in Job N. Drttbak and John V. C. Nye, eds., Tile Frmtiers c?f the Nezv X~zsEiizitionalEconomics ((San mego, CA: Academic 13ress, 199'7), pp. 213-246; Martin McGuire and Mancur BXson, 'The Economics of Autocracy and Majority Rule: The invisible Hand and the Use of Force," Jjclur~zalc?f Economic Ll'teratzc~34 (March 1994):72-96; Brad ford De Long and And rei Shleifer, "Princes and Merchants: European City Growth Before the Industrial Revolution,'' "urnnl of Lazu nlzd Economics 36 (October 1943):6'71-702; Douglass C. North and Barry R, Weingas6 ""Constitutions and Commitment: "T11c Evoluticm of Imtituticrns Governing Public Choice in Seventeenth-Century England," Journal of Economic Histofy 49 (December 4989):80%832. 50. For Margaret Thatcher" ready acceptance of this role, see Yergin and StanisXaw 1998, g. 124. 51. Yergin and StanisXaw 1998, p. 216. 52. Marlise Simons, "Dutch Take Third Way30 ProsperitytWew York Times, 16 June 11i397, Ab. Roger Cohen, "The Cries of Welfare States Under the Ir;rtife,"Wew Yo& Times, 19 %ptember 1997, Al. 53. It is common to calculate government spending as a pel-centage of gross domestic product and to conclude that, since this figure has risen in the last decades in mast developed countries, gr~vernmental"control" aver the economy has risen. But most government spending in these countries has not been in consumption but rather in subsidies and transfers, items that do not enter the GDP calculation QClive Crook, "The Future of the State," f i ~ e o d 20 , Sytember 1997, 548). What purpc~rtsto be a "percentage," "therefore, is actually a ratio. Moreover; in assessing ""control" of the economy, the rise of tramfers may well be far less significant:than the declines in regulation, in conf scatory taxation, and in once popular wage and price cmtrsls. On this issue, we Jrhn V. C. Nye, "Thinking About the State: Property Rights, Trade, and Changing Contractual Arrangen , ~ N. Drabak and John V. C. Nye, eds., Zte ments in a World wit11 C o e l ^ ~ i ~in~John Frontkrs of the New X~zstitutionalEcmol*rtr'l?s(San Diego, CA: Academic Press, 1997), pp. 138-1 41.

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87

54. Data from Paul Bairoch, Eco~omicsa ~ World d History (Chicag-o: University of Chicago Press, 1993): p. 95. 55, See, in particubr, Rusenberg and Birdzell 1986. See also David S, Lmdes, The Unbound Prometlzeus: 7?ec;rtlzologica:alclzalzge alzd ir-tdztsfrigllldez~elopnzcszltin Western Europe from 2750 to the present (Cambridge, UK: Cambridge University Press, 1969); David S. Landes, The Wenlfll and I""oz1ert.yc$r\JaCiorts: Wfzy Some Are So RicTl and Solne So Poor (New York: PljIc~Ttt~n, 1998);Jcstnes 4987. 56. Qn this point, see Muelfer 1999, chaps. 3-4. 57. See, for example, Siman 4995; Easterlin 1996, p. 84, 453; Lebergcltt 1993; Rosenberg and Birdzell 1986, p. 333; Landes 1998, chap. 29; Jones 1987; E. L. Jones, Crowtlz Recurrz'zzg: Econonfic Gllangcv in: Wrld Histoq (Oxford: Oxford University Press, 1988); Ben Wattenberg, "Going ga-ga over the Golden Age," Waslzz'zzgton Times, 20 March 199T A17; Steven E. Z,andsburg, F ~ i Play: r Wfznt Vottr Cllild Con Teach You Abozif Ecnnemics, klzle, a d the Menrzittg of-Life f New York: Free Press, 1997). 58. Aristotle: quoted, Angus Campbell, The Sense of Well-Beit~gin America: R e cent 13ntternsand Tre~zds(New York: McGraw-Hill, 19811, p. 56. Slovak film: *'Je LepSie Byt"ouZla2-1;. a Zdravy, Aka Chodobnq a Charjl" by juraj Jakubisko, Pearl Bailey: quoted, Stephen Munitz and Stanltitsy L. Engerman, "The Ranks of Death: Scular Trends in Income and Morta1t't~j;"Wealtl.z Tra~tsifiunReviezv 2 (Supplementary Issue, 1992), 29; Charles Murray attributes this pithy obsemation to Sophie Tucker: In Pwrsztil": G?fI-Inppi~ess and Good Covrmrrreni (New York: %man & Schuster, 19881, p. 68. 59. Rirfiard A. Eastertin, "Does Economic Growth Improve the Human Lot? Some Empirical Evidence," in Paul A. Davicl and Melvin W. Reder, eds., Nntiorzs alzd Hozlseholds in Econanzie Growtill: Essays HOBQT of Moses Abramoz?itz (New York: Academic Press, 44974), 90-96, mostly using Bata and analyws from Hadley Cantrilt, The Pntterrz of H~nznnConcerns (New Brunswick, NI: Rutgers University Press, 1965). On this issue, see also Murray 19813, chap. 4. 60. Ed Diener, ""Subjective Well-Being,'" Psyefinlogical Bulletir-z 95 (May 1983):553. See also CampbeXI 1981, 241; EasterZiin 19174, 99-104; Eastertin 1996, 13S135; Murray 1988,66-68; Ronald Inglehad and Jacque+Kene Rabier, ""Aspirations Adopt to Situations-But M y Are the Belgians So Much Happier Than the French?" in Frank M, Andrews, ed., Rc7s.etrrcI1on the Quality of L f i (Ann Arbar, MI: Institute far Social Research, University of MicKgan, 1986), 2-23, People in tzrealthy countries may be happier an average than those in paorer ones, but the association is often weak and hconclusive. See Xngjehart and Rabier 1986, pp. 40, 44-50; Eastertin 1974, pp. 104-108; Easterlin 1996, p. 138; but see also Ruut Vwnhoven, "Is Happiness Relative?" "cinl X?zdz'cator.s Researelf 24 (February 1993):g-3 2 64, Easterlin 4995, pp. 436, 138; Campbell 1981, pp, 27-30; Tom W. Smith, "Happiness: Time Trends, Seasonal Variations, Intersurvey Differences, and Other Mysteries," Social Psyclzologicaf Quarterly 42 (March 1979):48-30. 62. Veenhoven 1991, p. 19. Data far Britain and France: Ruut Veenhoven, Happiness itz Nations: Subjcrcii2:fcappreciatz'orz of E@ in 56 nntiorzs 19461992 (Rotterdam, Netherlands: Erasmus University of Rotterdam Department of Social Sciences, 19931, pp. 146-147. See also Murray 1988, chap. 4.

63. EasterXin 1995, pp. 136140; wing data fram Veehovm 1993, pp. 176-177, See also Inglehart and Rabier 1986, p. 44. 64. Easteriin 1974, pp. 111-11 6. 65. Carnpbell 1983. See also Murray 198%chap. 4. 66. In seeking to explain tzrhy professions of happiness did not rise between 1946 and 3 97'7 in the United, States, Stanley Lebergott points to a different consideration: the ominous simultaneous expansion in nuclear megatonnage. The considerable increases in measured real incomes during that time, he suggests, cannot offset fears of ""cdlective suicide" or of concerns over "poverty, civil rights, nuclear plant exptosians, the environment" 0993, p- 14). The problem with this explanation is that people seem to respond in very personal terms when they are asked about happiness; political considerations like those suggested by Leberpt t scarcely enter the happiness calculus unless tl-re question specifically asks about cmcerns for the nation itself (see Easterlin 1996, p. 134). Moreover, at the same time the problems Lebergott mentions were rising in the United States, others tzrere dissipating-onceabout fcmd shortages or labor disputesf for example. Even more pointedly, there was actually a considerable decline in fears of atomic war with the relaxation of intei-national tetnsions that began with the s i p i n g of the test ban treaty of 19663: See J o h Mueller, ""Changes in American Public Attitudes toward International Involvement," in EEtlen Stern, ed., The Limits oflblilitnry X1ztcrz7entz'an (Beverly Hills, CA: Sage, 19772, pp. 32G328. 6'7. 5rlte jo!/less Economy: The Psychkogy ofHzaman Satisf~cCion(New Ycfrk:Oxford University Press, revised edition, 1992), pp. vi-viii, 4. In like spirit, a letter sent to the Pdraw York Ernes from Labia worries that youth is being "worn dcwn by grinding affluence" (5 January 4998, A24). On the ""horrors of prosperitytpbeeAuberon Wizu&, Bridesfzead Benigi~ted (Bostitan: Little, Brown, 1986), pp. 49-51, 68. Smith 1976, p. 782 (V.i,f),Alexis de Tocquevilte, Dcntocracy kz Rmcricn (New York: Vintage, 1990), p. 263. Schumpeter 1950; see also Neif Mcfnnes, "Wrung for Superior Reasc~ns,"NP\iio;rzalInferesr",Spring 1995, pp. 85-97. 69, Charles Murray, in line with this proposition, argues that job satisfaction has declined in the United States (19tS8, pp. 1%-135). But poll data do not suppc~rt this conclu$on: See, for example, Richard C. Niemi, John Mueller, and Tom W. Smith, eds., Tre~ldsizz P ~ i b l kOpinion: A CompeszAiur7t of Surz~eyD ~ t a(Westp~?rf; CE Greenwr>od,1%9), p. 238. 70. Ludwig von Mises, The Antimyitnlistz'c Mentality (Grove City, PA: Libertarian Press, 19"1), p. 3. See alsa Murray 4988, pp. 6W9. 71. Lebergott 1993, p, 15; and, for his autlnoritatirfe calculation on flies and horse manure, p. 24n. For a rare exception to myopic recollection, see 8 t t o L. Bettmam, The Good Old Days-Tkey Were ErriFZe! (New York: 1X;landom House, 1974). 7 2 . Tt~daysuccessful people in the past-Commrmist cormtries often complain that they nc>wspend so much time accumulating wealth that they are no longer able to spend long evenings with. friends drinking cheap vc~dkaand talking and laugl-ring: Alessandra StanXey, "A A~oastflothe Good Things About Bad Timesrfr New York Ernes, 1January 1%5,4-1, Complaints like this arise even though economic devefopmrtnt generally increags options; it does not close them off. As the Arnish have shcJwn, it would stilt be entireiy possible to reject ecc~nc)micchange.

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Opportunities may increase, but that doesn? mean one has necessarily to reject the old ones. 73, For a discussion of ever rising standards of cleanliness and personal hygiene (at one time people routinely went around encrusted in dirt, rarely washed, and, well, smelled), see Juliet B. Schor, The Overworked Amel-ican: The U~zexpected Decline cqkisure (New York: Basic Bctoku, 19911, pp. 89-91. 74. Nieholson Baker, "From the Index cjf First tines,"Wezu firker, 26 December 1994-2 January 1995,83, See also David Whitman, Tke Optim-ism Gap (New tlork: Walkel; 19981, chap. 7; Cregg Easterbrook, "America the O.K." Mew Itqzlblic, 4 and 11 January 2999. 75. Air quality: Easterbrc3ok 1995; Hugh W. Elfsaesser; "Trends in Air PctXXution in the United States," hJutian Sirnon, ed,, Tfze State ofHzi~anity(Cambridge, M A : Blackwelt 19951, pp,491-502, People think: Waslzilzgton &sf/Maiser Family Fctundatisnif-larvard University Survey Project, "Why Don" Americans Rust the Governrnent3"31996. 7%. Rasenberg and ffirdzell1984, p. 6, also p. 265. However, impmvement was evident to economist Alfred Marshall when he published the first editian of his classic textbook in 4890: Principles of Ecurzumics (London: Macmillan, 1890), pp. 3-4.

77. For an extended critique, see John Muelfer, "The Catastrophe Quota: Trc3uble After the Cold War,'"loz-lrrzal of Conflict Resolution 38 (September 1994):355-375, 78. R. Jarnes Wolsey; Jr., Testimony before the S n a t e Intelligence CommitteeI 2 February 11i393. 79. Sidney Kraus, ed., The Great Debnfes: f(ennedy vs..Nixon, 1960 (Bloomington, IN: University of Indiana Press, 19621, p, 394, 80. Data: Mueller 1995, p. 23. t (New York: Random 84, Paul Kennedy, The Rise arzd Fall of the G r e ~ Pozoers House, 2987'7); Paul Kennedy Prepnringfor the Ttuenty-First Cenfury (New York: Random House, 2 9931, Zbigniew Brzezinski, Otlf of Corzlrof:Cltjbfzl Eirmoil on flze Ezpe offhe 22st Centuy (New York: Scribner's, 15393). 82. Overchoice: Lena Williams, "Free Choice: When Tbo Much Is Tbo Much," Npro York nnres, 14 February 1990, Cl. Buridan" ass comparison suggested by Stanley Engerman. 83. Such rexarch, however; might find that the problem sametimes scjlves itself. If customers in supermarkets become paralyzed with anxious indecision in front of, for example, the corn flakes, they will block the aisles. This will reduce the profits of the store owner, who will then logically be forced to increase the aisle space, reducing in turn the choice angst confrc>ntingthe previously hapless customers. 84. R o ~ n b e r gand Birdzell 1986, p. 5. David Hume, David Hzime: Writi~-zfr"s on Economics ((Madiwn,WI: University of Wixonsin Press, 1955), p, 14. 85. Easterlin 1996, g. 153. Hurne 1955, p. 21; see also Murray 1988, chap. 7.

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The Economic Consequences of the Peace

X. Introduction

'The end of thc Cold War in 1,989 w s undoubtedly one of the most important events in world history.%The monumental political hportance of the end of the superpowers' military and ideological rivalry was obvious and ixnmediateiy recognized by everyone transfixed by the telcvisiasl coverage of the populist demolitinn of the Berlin Wall during November 1989. 'lhe end of tl-te Cod War marked the begirming of a new era, not: only for internatio~~al pdtical relations, but also fclr the globd economy Ten p a r s later, there is stifl more aglleement than disagrctement about the pditical consequences of the end of the Cold War. Yet, even today in 1,999, the economic consequences of the end of the Cold. War are eilher not fully rccognized, or are hotly debated:

History shows that peace t h e m r e u w d y periods of deflation (i.e., faliing prices). Since the start of the 19905, inlation rates i,n the major i,nduslrial economies have declined significantly and. are near zero as the decade ends. Yet, most e c o n a ~ s tcoathue s ta believe that history wiU not be repeated because central bmks wifl avert defldion with ~aationrarymonetary policies. Easy money should eliminate excess supply-the cause of deflation-by boosting demmd, thus closing the gap with supply. I think they arc hvrong. The forces of d m t i o n have not been defeated, and they arc likely to prevail over the next few years.2 Perversely, easier

credit might prop up supply more than boost demand. En the long run, the most effective way to elimir~ateexcess supply is to allow market forces to put in&ent producers out of business. In the short run, of course, this is the most pajnhl path, and often triggers political intervention, that worsms the long-tern deflation problem.

CEobaEimtion ""GXobalizatio~~" and ""rstructuringf%ave become part of the vocabulary of the new era. The definitions are vague and may explain why there is so much cmtroversy about whether these arc. good or bad trends. Protectionists decry the ecmomic m d fhancial, turmoil caused by glabalization and. restructuring. In their opinion, the Asian contagion and the Long-Term Capital Mmagement crisis arc. =cent exanlples of the downside of global capitalism. They advocate government protectinn f r m these '"cruel and unfair" market iorces, and more gove of "crony capitalism.'"" I an? for regulated free-market capitalism. I hope this will be the choice of Asians, Russians, Latins, and other peoples who have experienced Ecent reversals of fortune. Whether we like it or not, markets always become more global du,ring peacetime, forcing companies to restructurtl Che way they were doing busisress during the precedbg wartime. We can resist these changes, or else we can adapt, and leam to prosper in competitive markets. Recelzt problems in Asia were not caused by unregulated crony capitalism, but rather by crony corruption, Capitaljsm may have unism, but it has yet: to complekiy triumph over another adversarid economic system, nmely, corruption..Capitalism is, first and foremost, a legal system that pmtects prczperty rights and enforces contracts. I advocate gave ent regulation (not protestion)-especially in banlcing and secur&iesmarkets-to eliminate cormpt practices, thus fasterirrg a legal climate that is conducive to capitalism.

:111 the United States, durir~gthe second half of the 1990s, ecmomists debated whett.lcr the business cycle was still rcllevant in the new era. Th,e so-called ""New Paradip" or "New Economy" camp argued that in&tion could remain low even if strorrt; economic growth continued to push the unemployment rate to the lowest level in decades. The hightech revolution is just one of several new developments that have weakened the traditbnal trade-off between unemployment and price inflation. The cou~~ter-revolutionaries sought to debmk the new era, and to

defend the old order: Strmg growth would lead to hflatim. FIigher inflation would force the Federal Reserve to boost interest rates. Tight credit would then cause a recession. The old-era bushess cycle is alive and well, I believe that the traditional business cycle model is no longer relevant. However, I m not prontoting a new pmadigm. Rather, X believe Ihat a very old. pardigm (i.e., perfect competition) has never been morc relevant. If so, then inflatilrn is prclbably dead, and a "Feed-led'" recession is, therefore, very unlikely. Rut rclcessjons can occw in the new era. Fox the first 10 years, the new era was a golden era for much of the global economy, especially in tbr United States. New eras are rarely golden all the time. Bad things c m happen even hnew eras.4

Yahoo Econmy Cantsibutirtg to the sense that we are in a golden era is the high-tech revolution. In the stock market, the technology sector has bem the strongest of the 11 sectors of the Standard and Poors (S8s:I3)500 composite of c m panies since 1993, Mose recently, Internet stocks have soared beyond any tradition& relationship with actual and prospective earnings. Some argue that the new economy is nrrorplhil~ginto the "Yahoo Economy-'" l["echnologyhas the potential to create extraordinary prosperity for ever).one around the world* I am sympai-hetic to this happy notion. But there are some cfouds that come with the silver lining. For example, the Internet is not good for everyone. It is bad for intermediaries between producers anci consumers. In many ways, it is fundamentally deflationay." Over the past 10 years, :l have promoted the notion that the end of the Cold War-the triumph of Capitalism ower Comunism-was wildty bullish for stocks-6X argued that it would lead to lower interest rates and inflation rates around the world. :l was one of the first to pxledict that the aging of the Baby Bowers wlruld be very bullish for stocks.7 I was an early proponent of the bulltisS-i inzplirat-ions of thc high-tech revolution. I have been one of the strongest advocates of the new economy view cfaiming that a secular rebound in productivity would allovv strong growth and low infiation. War and Peace and Prices

the end of the 50-Year Modern Day Wr-which includes TvVorld War II, the Cold W r , and numerous regional wars from Korea to Vietnam to Central America to Southern The collapse of the Berlin Wall marked

Africa and several other hot spots around the world. This war, which

lasted half a century, was in its effect an unprecedented trade barrier. Ameriems were prohibited from tradbg with Communist countries. The :Iran Curtain was a major obstacle to trade between all countries on opposite sides of the curtain. The lifting of the curtain, the destructim of the Berlin Wall, Che colhpse of Soviet imperial cmmunism all simultaneously herdded the elimhation of the world" ggrcatest barrier to trade, Coincidentally, trade among "Free M"i,rldffcountries was liberaliaxd further by l) the Europe 1992 movement, 2) the 14ruguay Round of trade talks under the General: Agreement on Tariffs and Trade (GATT) completed duril7g 1993,a d 3) the f i r t h I'tmerican Free Trade Agwement (NAFTA) of 19534. China r e ~ ~ a ih n scornmw~isthands, but trade between China and the rest of the world., especially the United States, has expanded sipificantly in the 1990s. There has been a clranatic expansion of global tracle, capital flow, and direct investment since 1989: 1. According to data compiled by the International Monetary Fund, total world exports at an annual rate m e to $5.6 trilXim during the first half of 1998, up 86% since 1989. 2. Crass-border loans of international banks soared 98% from $4.6 trillion during the second quarter of 1989 to $9.1 trillion in mid-1998, according to the Bank for International Settlements, 3. International banks increased their loans to Asia, (excluding Japan, Hong Kong, and Singapore)by 25196,from $137 billion to $481 hillion, between the second quarter of 1989 and the second quarter of 1997, just b c l m the start of the Asian crisis. Other lenders and investors poured money into Asia and other emerging econornic regions with equal enthusiasm, expecting that the new era would produce goldell returns. 4, The sum of U.5, direct investment abroad and foreip direct investment in the United States swelled Eram $94 billion at the start of: the decade to a ~ e o r d $224 bilfion in 1998, according to Flow of Funds data compiled. by the Federal Reserve. U.S. direct investment abroad l~overedbetween $10 billion and $30 billion per yeas during the l980s, then soared to a =cord $l30 billion in 1998, All wars are trade barriers" They divide the world into camps of allies and enemies. They m a t e geographic Obstacles to trade, as well as military ones. They stifle cornpetition. Economists mostly agree that the fewer reslrictions on trade and the bigger the market, the lower the prices

paid by consumers and the better the quality oi the goods and services 0fferr.d by producers. 'These beneficial results occur ~ m k tcrs the powerful forces d e a s h e d by coqetition. Peace t h e s tend to be deflationary because freer trade in. an expanding global marketplace increases competition m m g producers. Dcrmestic producers am no longer protected by wartim restrictions on d0rnesl.k and foreign competitors. There are fewer geographic limits to trade, and no serious military dangers. As more consumers become accessible around the world, mort? producers around the world seek them out: by offering them competitively prjced goods and services that offer high-quality standards compared to the competition. ERtrepreneurs have a greakr h~centiveto =search and &velop new technologies hbig markets than h small. Big markets permit a greater dkision of labor and more specialization, which is also conducive to technoiogicai History shows that prices tend to rise rapidly during war times and then to fall during peace tirnes. W;ar is innationary; peace is deflationary. :111 the United States, for example:

- During the War of 1812, the Consumer Price Index (CPI) rose 4"i"/& It fell 48"/0 after the war, - During the Civil VVar, the CPI rose 81%. It fell 40% after the war, - Durlng World MJar I, the GP1 rose 140%. It fell 35% after the war, - From 1939 through 1947, during World War I1 and the start of the Cold War, the CP1 rose about 50%1, - Then prices soared about SW% during the G l d War from 1942 to 15389. Durlng peace times, prices fell sharply for many years followiw all the wars listed above, except for the peace so far h the 1990s. Prices are still rising in the mited. States and in Europe, though at a significantly slower pace than during the previous two decades, when the Cold War was most intense. Japan is the one major industrial economy experiencing s m e deflation, I f peace has been deflationary in the past, then why are prices still rising in the 1990s, albeit at a subdued pace? Is deflaticm still possibfe as we enter the next century? If peace prevails into the next millennium, will deflation prevail? Or is history mosllly imlevant, so inflation will perSist and even rebound? The "war and peace" model of infiation is simple and scerns to account for the major price waves of the past. However, monetarists have plausibly argued that monetary policy and central bankers are also important contrihiutors to the in(lati011 process*I think some monetarists overstate

their case when they claim that inhtion is always a mmetary phenomenon. I EseEicve Ifgat the compctifiucstructure of markets is also a z?ey importanf. uarinbk in rnzderstnndi ilzflalion. But I also believe that molley matters. So far, in the peace of the 1990s, easy money has succeeded in offsetting the natural, peacetime forces of deflation. In the presmt s i b t i o n , the central banks of the major industrial economies have eased a e & t conbitions significantly in an effort to offset the forces of deflation. Of course, central bankers existed in the past when deflation prevailed, but monetary theory and operatjng prncedtdres were prjmitive. Gaug4ng whether monetary policy is rclstrictke or stirnulative can be controversial. Orthodox monetarists focus on the grow& of the money supply More eclectic observers might prefer inflation-adjusted interest rates (i.e., real interest rates). I'm cmtent to look at the w e i g h t e d average of three-month Euro deposit rates to gauge t-he direeticm of mtrnetary policy in the Croup of Swm (67)countries..My approach is adsrnittedly mscientific and casual, but the conclusion is obvious and robust: The G7 central bankers have lowfled i r r t e ~ s rates t sharply to avoid deflatbn. 'The G7 short-term rate plunged from about 10% in November 1989, when the Berlin Wall was dismantled, to 3.7%)at the end of 1998, Nevert;heless, inflation rates have cantirtued to fall and are now very close to zero (Le., literallly on the edge of defiation). Why? Is deflation inevitable? The End of Macroeconomics

Have the central bmkers defeated or just delayed the forces of deflationl This is one of the big ques.ticms for econornic forecasters looking into the next century If the risk af deflation is minimal, then the downtrend in interest rates during the 1990s may be over and could possibly he reversed Zly the start of t-he new cmtury*In this case, t-he major econmic legacy of the end of the Cold War was &art lived m d much less significant than I believed it would be. Time wili tell, of course, My hypotlnesis is that the forces of deflation have not been defeated, and they will soon prevail. Francis Fukuyama wrote a controversial article in the summer 1989 issue oi The Nntioanl blterest titled, "The End of History?" He argued that the ideological battle between capitalism and communism was over. The clear winner was capitalism, The clear loser was cornnunism. To Che extent that history consists mostly of epic struggles between opposing forces, the triumph of capitalism also marked the end of history, In the like to propose a simple notioll: Macraeconomics is same spirit, I w~t~1d. dead. The triumph of capitalism also marked the triumph of rrzicroeconomics over ~nacrclecanomics.This is an mfortunate division in the econolnics profession, As a result-, macroeconomists often fail to understmd the effect of changes in market structure and industrial organi.zatim on

the overall economyYThey tmd to promote an elitist (Kcynesian) notion that they can he-tune the eemomy from on high, while the little people go about their daily business, My major premise is that our economic present is better understood, and our ecommic h k r e is more accurately predicted, by a model from the micraecmornics text-book than from the macroeconomics text;books, The new "in" model is Perfect Competition, Out are Keynesian, mmetarist, and oher macro models. The perfectly competitive marketplace has the following characteristics:

* * * *

The god of firms is to maximize their profits. There arc no barriers to entry for nckv firms. The factors of production arc mobile. The number of cmpeting flrnts can be as n m r o u s as the market can profitably sustah. * There is no protection from failure, There are no government support programs or self-perpetuating monopolies, oligopolies, or cartels. * The goal of consumers is to maximize their utility given their budget constraints. * Cons~~mers are free to purchase the best pmducts at the hwest price from any producer. They have cheap and rcladib available information available to them to make their choices.

This model of perfcct cormpetition prcldirts that the market price will be equal to the marginal cost of produc'tion. No one firm, or group of f i m ~ , c m set the price. Profits are m h b k e d to &e lowest level &at provides just enough incent4ve for a sufficient n er of tiugpliiers to stay in busjness to satis@demand at the going market price. Consumer welfae is maxiunized. T'lxs sixnple model is fairly static and needs to be combhed witPI models of economk p w t h . It also needs to be more dynamic to reflect the effwt of techological hovation. Despite these limitations, this textbook model of perfczct competitim has probahly m v a been more rc3lcvmt &an it is today. Let" compare today" economy to the textbook model: 1. In capitalist societies, the pressure to maximize shareholder value is intense, Company managers are taking big risks to Estwcbre their businesses with the goal of increasirtg profitability. In formecly communist countries and in newly merging ones, govesnments are privatizing state-owned enterprises and permitting forr-?ignownership. 2, Globally, there art. fewer barriers to entq as a consequence of the end of the Cold War. This is certainly true geographicafiy. Et is also

3.

4.

5.

6.

true in other ways. For example, a potential barrier to entry in some industries is the availabirity of fhancing. Technology is especially dependent. on venture cagitd, t o w iMerest rates and booming stock markets around the world during most of the 399% provided plenty of cheap capital-too much h mme cases. Factors of production are becoming mare mobile because companies are becoming more mobile. U.S. corporations have a long tradition of setting up operations overseas in locai markets. Indeed, this accounts for the U.S. trade deficit, especiatly with countries like Japan and Germany that until recently had a m r e mercantilist business tradition of exporting to their fortrign customers. But change is occz~rring.Japmese and German companies are globalizing their operations, F o w i p business ventures artl attracted to emeqing ecm0mi.s because government regulations are mhirnal and labor costs are very low This trend is putting pressure m the governments of industrialized nations to d e ~ g u l a t etheir economies and to meddle less i,n disputes between workers and t h i s employers. Consumers and busbesses are rapidly taking advantage of the Ii-ttemetto obtain, at virtually no cost, the information they need to find the lowest prices for just about any product or service they desire. Gobat firms are adopting price cutting as a new competitivcl business strategy; 'They are strivhg to cut costs and to boost producti:vit)i in an effort to be among the lowest, cost producers in the world. Profit margins evqclrate quickly in competitive markets, so companies are under enormous pressure to imovate at a faster and faster pace. The simple goal is to sell as many units to as many consumers worldwide as possible at the lowest possible price h the shortest time.

If perfect competiticm is the "new"bodel that best explains aggregate econolnic acti\iity then inflation may be dead too. If inflation is dead, then the traditional business cycle may also be dead. In the new era, companies are under encrrmous press= to reduce their marginal costs so that they can offer the lowest prices. In this scenario, debtion is more likely than reflation. If inflation =mains low; cmtral bmkers won" need to tighten monetary policy in an effort to stop a cyclical rebound in inflation.. M a t i o n a y booms are less likely. Policy-engineered recessions are less likely as wellf, Of coursef not ali recessions are policy engineered. For examplef a recession caused by the bursthg of the specu,lativebubbc i,n the stock market is very likely, in my ophion. FIowever, t h standard tools of macro-

econmic analysis, particu%arIybusiness cycle indicators, may no longcrr accurately reflect the true nature of our econorny. Similarly, forecasts based s&ly on the busincss cycle model may also miss the mark. Furthermore, the secular trends unieashed by the high-tech revolution codd owervvhelm the cyclical pattern of the low-tech economy*Again, this is not to say that the business cycle is dead. However, it may no longer dominate the course of economic growth as it dld in the past. Deflation and Conrruption :111 a perfectly competitive market producers and cmsumers arc. "price takers"" No one has elzough clout in the market to dictate the price that evevone must receive or pay The "invisible auctioneer," who equates total market & m a d to total supply at the market% equilibrium price, sets the price. Clearly, therc? can't be excessive returns to producers in a competitive market. Xf there are, they will be eliminated as new firms are attracted. to enter the excessiwely pmfitable market. Fims that try to increase their profits by raising prices will simply attract mare suppliers, or else lose market share to firms that hold the market price. While the model predicts that no firrn can set the market price, tbr reality is that any firm a n lower the price. It will do so if management can find ways to lower costs and increase productivity Xf it lowers the prices of its output: below the market price, it will increase its unit sales and market share. 'This will be very profithle as long as unit sales hcrease more than prices arc reduced, The problem is that competitors arc bound to follow thk,path of the market leader. tlowever, everyone can still profit as long as consumers respond to the industry's price cuts by buying mol-c3 units. This is the Good Depafiol~scenario. Everyone benefits. Consumers enjoy lower prices, a d they respond by purc-hasing more, as their real incomes improve thanks ta productivity gains. Companies thriw because their earnings are boosted as they gain more unit sales growth than they lose on the pricing sicie. Mtemtively, Blrd DcPalicm occws whe12 companies are forced to lower their prices, but unit sales don3 increase e m g h to maintain prafitabiliq :111 thjs scenario, cclmpanies rt;spand to weaker profits by cutting employment and by reducing capital spencfing. The defltationary spisal starts curlkg as consumers become insecure about their jobs and reduce their spending. fn the Good DeZlation scenario, consumers view lower prices as a (jood reason to buy more. In the Bad Deflation scenario, they respond to lower prices by pmtponing purchases, figuring prices will be even lower tomorrow, when they might have less uncertainty &out their job security, Americans in the 1,930s and Japanese in the 1990s experienced the bad version of deflation.

But why wouldn't unprofitable firms sirnply go w t of busixress, leaving healthy firms in a position to enjoy higher prices once the excess supply is shut down? More often than not, the ansbver is corruption..Thew retically, in a free market, there is no protection from failure, En reality, aIl too often, i~~solvent cclmpanies remain in business. They may have highly placed political m d business friends in the governme~ntor in their major creditors. Insolvent businesses-a.k.a., "zomb.ies" or "'the IiviIlg dead."can only survive and thrive in an environment of pofitical rot (a.k.a., corruption). This zon?bie problem means that healthy companies are foxed to compete against firms that don" have to be profitable to survive. Obviously, if the sikaticm is allowed to persist, then it is only a matter of time before solvent companies become insolvent too.8 'This is the UgIIy Defiaf ion stcnario. Corruption is not the only source of Bad Deflation, An excessi\le supply of financial cagital can also he a problem. In peacetime, there is nnore money and credit availrable to finance private-sector business. The opportmities to prosper seem as big as the potentid global market. Before long, there is too mwh morlcy chasisrg too fcw good deals. Vet, pmverity t e ~ ~ d s to gcnerate overconfidence and unrealistic expectations, Projected returns are overestimated, while risk is underestimated. As a consequence, supply ternds to race ahead of dmand. The resulting ddation depresses returns and,at some point, stops the free hof inmcing. When this happens, even solvmt companies may be forced to shut down if thrir sources of credit dry up. This is another versjorn of the Ugly Dehtiion scenario, of course, What could be worse than to see well run companies go under and fire aIl tbrir workers because of an indiscrkninate flight-tcr-qualityin the credit markets? This happe~nedin Asia in 1997 and 1998 and a11zost becanre a glubal problem during the summer of 1998. What can policy makers do to avert the unhappy deflation scenarios? Here are five obvious policy responses: 1. Let insolvent firms fail. This is a major problem in many countries Wfiere there is a tradition of using government resources to protect companies from failure. 2. Establish effective b m h p t c y laws and courts. Companies must have m orderly mechmism to restructure their bushess activities. 3. Foster mergers and acquisit.ions of weak f m s by strong mes. This is a major problem in many countries where thert? is resistance to letting strong foreign companies acquil-e w & e r local ones* 4. Tighten and e n f o ~ ebank regulation and supervision. Limit lending to h s o l v e ~ companies. ~t Require proper accounthg for problem loans, The Bank for Xnternational Settlements cornpiled a list of somd banking prac"ciceslast year,"

5. Require greater and. more frequent corporate disclosure (i.e., transparency). Carpmate laws and ~grrlationsshould force directors to act in the best interest al: their shareholders, who should receive the information they need to be assured that this is the case.10 The basic message is to allow market forces to reduce excess capacity quicHy Today this is not happenh~gquickly enough, in my opinion.1~ The reason is obvious: Such restructuring is painfd. Initially, this approach worsens deflation by increasing unempluyment and &pressing spending. fnstead, the prtrferred solutinn to the deaatim prciblem is believed to be a painless easing of credit conditions through stimulative monetary policies. Central baxlkers hope that lower i n t e ~ srates t will revive demand enough to &so& all the supply. It is my view that this approach is b o n d to fail because it may very well prop up supply much more than it is likely to boost demand. Credit crmches are nature" s a y af cleaning out insolvent borrowers from the economy Easier credit conditions may actually exacerbate the zombie problem.

:In the idealized model of perkct competition, there am no barriers to elltry no protection from failure for unprofitable firms, and everyone (consumers and producers) has easy and free access to all information. These just happ"n"o be the three main charactt;ristics of Illternet cornmerce. The Inter~netis fundamelltally deflationary. While currellt Internet spending is still a s m l l fraction of total consumer and business spending, it is having a very denaticmary effect on pricing already*Increasingly pricing is determhed at the m r g i n by Internet commerce, which is extremely competitive, The %nternet certainly has the potentid to produce bad deflation by cutting out the middle persons in every trmsaction. The only sure w h ner is the household, and business consurner. Cybercompetition s i l l force producers to accept puny profit marghs. The techndcrgical costs of staying one step ahead of the competition are likely to burn money at a ferocious pace. For a m p l e , Amaznn,conn"s revenues have grown dramatically, but costs have increased even faster. While consumers win as cmsumers, they could lose as employees of companies that carnot cornpete in cyberspace. Tine fntemet lowers the cost of comparison shopping to zero. Increasingly, the conswer can easily and quickry find the lowest price b r any good or service. Xn the cybereconomy, the low-cost producer will offer the lowest price md. p v i & this infornation at no cost to any m d a3f paten-

tial customrs anywhere on the planet. :lnthe low-tech economy, the cost of searchkg fnr the lowest price was relativc;ly high, &ereby limiting a customer's search process to local or wll-established vendors. Now vendors anywkre in the world. c m bid fnr business anywhere in the world.14 The Internet is the ""killer" appfication that will continue to boorit the sales of computer hardkvare m d software. It's the ""gt-to-have-itfftool and toy for the next century hternet-drivm sales of high-tech gear will gene"& the cash flow and attract the fi~~ancial capital needed by the computer industry to develop even more powerfttt computers at constantly falling prices. More powerful computers permit. software developers to c ~ a t more e powerful muiemedia programs. These procesing and memory hogs, in turn, force computer users to upgrade to the latest generation of hardware, which is required to run the latest versions of the operating systems and agplications. In BibEcal terms, better computers beget better software applications beget more demand to upgrade to even better hardware and soAware. The I ~ ~ t mbegets et more upgmders and more newhies. One of the most u~~usual, and certainly most unique, attributes of the cornputer industry is that prices fall even as processing power soars and demand exceeds supply In high-kch markets, falli~~g prices are the reason why demand exceeds supplq.. But why do prices fall so rapidly in the face of boorning demand? As soon as a c o q u t e r chip is introduced, manufacturers are already developing the next generation. Innovators of generation "n'" chips arc forcd to create ""n+t,"chips. If they don't, the competition soon will, This situation means that the most successful producers of technology must cannibalize their own products to remail1 successful. The hightech industry literally eats its yotlng. The cost of high-t& research and development is so great these days that high-teeh manufacturers must sell as many units as posible of their new products in as short a time as possibfe before the n+l gencmtion is introduced. n a t % why they tend to offer more power at a lower price with the introductim of each new generation. Also, tbr introduction of n+l immediately reduces the demand for the nth chip and the nth cornputer. As the price of the old technology Mls, it limits the upside of the price of tbe newest technology As a result of these u n i v e trends, the purchasers of high-tech hardware are constmtly rczceiving more bang for their buck, I'he plunge in the cost of computing p w e r is probably the most extraordinary deflation in the history of this planet. In effect, the high-tech revolution has created a fourth factor of pmduc tim-namely, infomation. The original three factors are lmd, labor, and capital. Factors of production are substitutable for each other. Until recently; information was hard. to substitute for land, lahor, or capitaI. It was very expensive to col-

lect, process, and manage. nere were usually long lags between the creation of t-he raw data and its conversion into useful hfomation. The lags made the information less useful once it was available. It was old news by the time it was available to decisionmakers. With t-he high-tech revolution, enormous quantities of information can be collected, processed, and managed on a real-time basis at lower and lower costs, The price of information is dehting, As it gets cheaper and cheaper, ii; also becomes more substitutable for the other factors of pmduction. Imcreasingly, real-time informatio~~ is replacing labor and capital in the production process, For example, imurance companies can eliminate warehouses of archived files and the associated support staff with scanners t-hat can transfer information to opticd disks. The automakers have stashed their inventories with real-time information systems that can automatically glace orders with vendors, schedule just-in-time deliveries, and monitor the trmsportatio~~ progress of the orders"As a result, inventories-on-the-shelvescan be replaced with "inventories-onwbeels.'%fomation rey>lacesworking capital.

The American. Challenge and The Euro Of all the major industrial nations, the United States has responded best to the economic challenges of the post-Cold W;ar world. That's mostly because 1) industrial deegulation has increased competition, anci 2) labor markets have become more flexible in the United States. Labor markets remain mlatkely rigid in Europer and very much so in japan, Amerjcul wcrrkers tend to be more mobik than their European counterparts. They are willing to nnove very far hvithin the United States to find employment. They accept the fact that job security no longer exists, Enstead of automatic raises each year, more of workers' pay is h tl-re form of incentives and profit sharing. Most American workers are probably workng harder than they did five or ten years ago, With t-he unemployment rate below 45%, they seem to have more job seewity. However, American workers =cognize that, in hi&ly competitive markt-tts, there is no business securiv, They seem to understand tl-te importance of keeping costs down to keep their cclmpanies cmpetitive and to keep their jobs. They also seem to lcnow that a large fedtlral deficit, open-ended social welfare? pmgrams, and high taxes aren't: good fnr the competitive positim of the United States They ixlcrcasingly are inciked to set h i t s on the role m t in the economy-real l h i t s on the social welfare state before it becomes covletely b a n h p 6 just In time fnr their re~rement. They made this quite clear during the November 19994 elections. The Democrats lost their strangiehnld on Congress after the Republican's

1994 sweep. For the first tirne since 1948, Democrats held fewer than 200 seats in the Ilouse of Representatives. The ~ s u l t of s the 1996 elections cmfrmed the sea change amorng American voters"The Republicans held onto both houses. Ross Perot's vote drupged from 19% to 8% oi the popdar presidclntial vote between 1992 and 1996. 'This was a clear sign that Americans had turned less protection.ist. President Bill Chton, a Democrat, shrewdly adopted the Republican agenda by pushing successlully for NAFTA and welf are reform. As Americms continue to shrhk the welfare state m d reduce the role of government in the economy, then the competitive pressures on other industrial nations-specially in Wstern Europe-to do thr same will internsify Of course, the European nanny states are far bigger rclative to their economies than is the American version. Moreover, European beneficiaries of social wlfare seem to be much less wilting to accept ducti ions in their benefits than are Americans. But, they don't hnvc m c h choice. The end.of the Cold War dramatic* increased the globd competjtive p r e s s w s on the industrial social welfare state from newly emerging comntries with much lower labor, tax, m d welfare cost str~ctures. Eurapem leaders hope that a Europe united by a common currency will emert;e as a m r e competitive ecmomic force in the cornh~gc e n u y . 'The European Monetary Union (EMU) is a darding econamic experiment, The EMU has come to pass. It makes a great deal of sense by further pulling together a market of 292 million people. findeed, it has already been a great success in Europe by locvering and converging inflation rates and inter~strates at very low levels, The Euro is likely to force greater integration of EuroIandfs national econt,mies by stimulating greater stmdardization, thus cutting the costs of dokg bushess hthe region and mating economies of scale. The unj.fied European capital market will certainly be much more attractive to global investors who can naw purchase the region's securities all in orne currelncy Europem entrep ~ n e u r will s have greater access to capital, boosting the nurrrber oi new businesses and employment. Europe could s t u ~ ~ bbecause le monetary unification can't work very well without labor market mobilq m d fiscal fication, wKch is m important missing %redient. More likely, labor markets will become less rigid, as European companies presmre l-heir workers to be m r e flexiible or lose their jobs to workers in Eastern Eurclpe, China, and South Carolina. f span's Karaoke Capitalism

:It certainly has been a new era in Japan since the stock market crashrd at the start of the 1990s. It hasn't been a golden one so far*For ail, too long, Japan has been a rich country with poor consumers. The economic sys-

tern has favored and enriched the producers, while the standard of livlng of average Japanese consumers has stapated and certainly declined relative to their coufierparts in other industrialized nations. C)f course, there has been more job security in. Japan than in other industrial economies. There is a greater respect for the well being of others, less crjme, and more soc-ial cohesion. But, s ~ ~ r e atl l y these h i g w desirable traits of Japan" society can be mahtahed while providing a better life for the average worker. In the f,98(ls,many observers of Japan both the^ and overseas began to believe that Japan had crcated. a new and mre successful form. of capitalism. In America, we feared that it might be superior to our competitive system. We didzz? t~derstandtheir ""kiretsu" "stem of cross-ownership and cooperation very well. Still, we were very impressed by the apparent successes of K e i ~ t s uCapitalism. Wth the benefit of hindsight, I helieve Chat what appeared to be a new form. of capitalism has really been mostly old-fashioned corruption, My impression is that few, if any, businlJss a d economic ~laticmshipsare conduded on an arnt's-length basis. There is too much colluding, conspiring, m d rigging occurring among tfie business elite, the government bureaucrats, and even the mob. I prefer calling fapan's ecmomic system ""KaraokeCapita:[ism." 'The all-too-cozy cross-ownen;hip relations among m d between manufacturers, distributors, and the bankers worked well for ail concerned when real estate values and stock prices were soaring and exports wen. strong*It must have been fun going to the karaoke bars to celebrate the boom durlng the 1980s. But that was then, and this is now. Japan has only 3% of the world's landntass, yet it had 60% of the world's real estate value in 1,989, by one estimate. It was the biggest specuhtke bubbfe of all times. It burst at the start of the decade and t r i g g e ~ da stock-market crash. The resulting bad. loans mated a hor~mdousbanking crisis, which is proving harder to fix than was the savings and loan (S&%)debacle inthe United States. Japan's poiicylnakers not only failed to address this problem, they exacerbated it by propping up insolvent banks for h o s t a decade, Imagine h w bad the econornic and finmcid situation might be today in the United States ; propped up the S&L industry, inif hmerican banking ~ g d a t o nhad stead of restructrrrjng the industry Japan" leaders are once again promising to reform. their political, economic, a d financial systems. Many similar promises have been made before. They weren't kept."" -The Ljberal Democratic Party &DP) deserves a great deal of cmdit for leading Japan" emergmce as the second most powerful economir power on earth during the four hcades following the end of Wrld War H. However, in the 1,99Cls, the LDPfspoljcies have been disastrous.

The Japanese government, under the leadership of the LE)f:has implemented several fiscal stimulus programs in the 199t)s, presrtmably in an effort to revive econornic growth. In reality these expcrmsive outlays have mostly enriched party members, their political cronies, and their supporters. The latest bank rescue plan and fiscal stimulus package are impxlesske in their size and scope. &er $500 billion hpublic funds will be used to restructure the banks. However, the risk is that huge sums of public furtds witI be used to temporarily ease the crisis without any meaningful rclforms. In, many ways, the banking problem has been socialized, wit.h,otrt any clear plan to force better lendbg practices..

Emerging Ecanomies: Something Missing :In some ways, the emerghg economies of today hAsia, Latin America, and Eastern Europe r e s e d l e the U.S. economy when it was emerg-in.g during the 1180Qs.The U.5, economy grew dramatically during that cmtury. But &ere were lots of busts and panics almg the way. "There was plenty of corruptia~~. Foreig~~ hvestars lost huge sums of rnarrey on railroad deals that were either poorly conceived or just plain fraudulent. Long periods oi inflation were followed by long periods oi deflation, Despite all tbr turmoil and uphrawal, the history of the W.S. ecmomy is the history of one of the greatest emerging economies of all tirnes. There were at least two very important hgredielzts behjlld America's szxccess story The country had a dynamic lcgal system and a ~latively egalitarian distribution of income. Capitalism is, first and. foremost, a legal system. It rc.quirc.s laws that protect property rights. It depends on the enforceabiljty of contracts. The legal system has to be anchcrred in a body of pxm"dntI but it must be flexjbte enough to adapt to the changing requircmenfs of a dynamic economy. The rulings of the Supreme Court during most of the 18012s consistmtly favored the advocates of economic progress.l" Many emergi~~g markets today don't have legal a d ~gulatcrrysystems that can accomn-todate the needs of a rapidly growing economy. Without this legal infrastructure, economic adivities became less and less efficient, Without well defined property rigfiits and contracts, it becomes harder and hader to organize and. execute the larger scale of transactions that are the milestones of growth* Ancrther major deficiency of m y emerging econmies is their inccmle djslrjbution. Fast ecmonnic growth =quires a certain level of sacid stability and consensu,s. If, during periods of rapid growth, l.hc rich get richer while the poor are left behjlrd and see no prospects for sharing in

s m e mjnimal way in the new bounty, then rebels will emerge, Insurrection is very une;etthg to foreign investors. Asim nations have some of the world's fhest manufacrning plants and best worlrcers, who arc as productive as m y in the industriaizd capitalist economfes of Norlth America and Europe. Driven by the prOflt motive, Asians have prospered greatly over the past three decades. However, under the thin veneer of capitalism, there has been too much corruption, h the world" free markets for mmufarbred goods, Asims have been worldclass competitors. Rut, at home, competition has been slifled. Asians have built the industrid and technologird infrastmcturcr necessary to sustain export grwth. But, at home, there has been too little p r o p e s in establishillg the Icgal, accounting, and regulatory infrastmchrc of capjt.alism necessary to sustain e c m m i c gmwfi, Asia" pmsperiy has benefited. mostly Asia's prducing classes rather than the cons ers. Asims have embraced free-markt capitaljsm globallyI while maintaining an antiquated culture o.E mercantilism and crony cczrmptim at horn. This should all change for the better as a result of the Asian crisis as capitalism triumphs over corruption in the region." Many Asian nations am implementing refoms in response to the region" ffinancial and economic crisis. 'They are setth~gthe stage for massive restructuring oE Asian ecol~omies. A significant milestone in reducing gX&d corruptlion xcurred during F e b w r y 1999, when the Organization for Economic Development and Cooperation implelnented a convation that makes the bribery of foreign public officials to win or retah bushess a crirnin.al offense in mom than a dozen industlnalized nations.1"

In 1919, John Maynard Keynes published a short book titled The Econmk Cat-rseqzrr~cesof the Peace. It was m emotional m d vicious attack on the Treaty of Versaif1es, vvhich he argued was imposing a Carthaginian peace on l-he G e r m s m d would set the stage for years of economic sufferjng and political turmoil in Europe, As events unfolded., it was a remarkably accurate forecast. It was also a worldwide sensation. h fact, Paul J o h s o n szxggests that the bnok turned U.S. puhlic opinjon agahst the Treaty and the League of Nations. The S a t e voted. again.st the Treaty, and.the overwhelming defeat of the Democrats in the autumn of 1920 was seen as a rclpdation of Wsoa's Etlropean pdicy in its entirety. After World n7ar lil, many economists predicted a depression, or at least stagnation. They expected a slower pace of business during the peace. The stock market ignored these dire predictions. 'The S&l' 500 index soared 139'5, from April 1942 to May 1946, Industrial production

did dip r i e t after the war, but the revival, of cmsumc.r spending fueled a long period of prosperity until the late IsEiOs. Fortunately for us, the eeo~~amic scenario of the current peacetime is following the prosperity script so far. The U.S. stock market is up a whopping 240% since the end cJf 1983. 'The end of the Gold War was a liberating event af histork proportions. The global eeoIIamy was liberated from protectionism. The subsequent prolikratim of free trade should. conthue tct generate pmsperity far Americans and ail other humans on this planet who m wiXLing to accept Ihe competitive ehallernges.

1, This study is an update of my Topical Study #35, "The Economic Consequences of the Peace," May 7;1997.1first started to f-orecastthe economic and Bnancial conxquences of the end of the Cold t'Var in Topical Study #IT, "The Triumph of CapitaIism," A% I f 1989. These and other topica! studies can be found on http: / /www. yardeni.com/ togical.html. 2. See my Tc>picalStudy #32, '"The Undefeated Forces of r)eflatic>nfnOct. B,1996. 3. In the progressive/populist traditim, WiIliam Creider critiques glc~balization in Of24 World, Ready or Not: The Mattic Logic of Glnblar! Capitalism (New Ybrk S i m n & Sehuster, 1997). See also Rabert Samuetsctn, "Clctbal Capitalism, R.I.P.?" izlewszoeek, September 14,1998, His main point is that "much of the world simply doesn't have the values needed for free markets." 4.1 was the first proponent of the New Era view in Topical Study #Is, ""The New Wave Mani festo~"Oct. 5,19813, and Tc>picalStudy #25, "The High-Tech Revolution in the US of @,'" Mar. 28, 1995. Business Week coined the phrase' "New Economy" %e Michael J. Mandel, "The Triumph of the New Economy;" "~usiness Week, Dec. 42,4996, and ""New Thinking About the New Ecctnnmy," May 19,1997. See also Stephen B. Shepard, "The Mew Economy: What It Really Means," BtwiHess Week, Nov. 17, 49917, "Mew Paradigm" was the paper tiger invented by Stephen Roach, the chief economist of Morgan Stanley and the leading defender of the Old Order on Mrall Street. In acadernia, Professor Paul Krugman of MIT (www.mit.edu/krugrnan/) is the leading countemwulutionary. 5. Tcjpical Study #31, "'Ecmomic Consequences of the internet," Oct. 22,1996. 6. Topical Study #38, *'Bow 5000," May 9, 1990, Topical Study #20, ""Te Collapse of Communism is Bullish," "p. 4, 1991, and Topical Study #23, "The End of the Cold War Is Bullish,"%p. 18,1993. 7. Tc>picalStudy #12, "Hmv the Baby Boomers Are Changing the Econcjmy" Apr. 6,1988. 8. Jahn B. I3ockefefler observed, ""Oftm-times the must difficult competition comesf not from the strong, the intelligent, the ccjnservative competitor, but from the man who is holding on by the eyelids and is ignorant of his costs, and anyway he's got to keep running or bust!" Q~ucrted,Ron Chernowf Titan: The L# of j d n D. Rackefeller, Sr. (New York: Random House, 2 9981, p. 150. 9. Baste Committee on Banking Supemision, ""Sound Practices for Loan Accounting, Credit Risk Disclosure and Related Matters," Octcjber 1998, (http: / /www.bis.org/pubX/bcbs43.htm).

10. Countries that have the best legal protection for investors tend to have the biggest capital markets and the least concentration of share ownership. See Rafael La Isorta, Florencio Lopez-de-Silanes, Andrei Shleifeu; and Robert W. Vishny, "Law and Finance," National Bureau of Economic Research, Wcirking Paper 5661, JuL, 4996. See also their Working Paper 5KD, "Legal Determinants of External Finance," Ja n-.l 997. 41. See Sheryl WuDunn, ""IAsia, Firms 'Fail' but Stay Open," Inler~znti~2tznl Herald 'jfribu~re,%p, 9, 1998. Corporations are ""filing" in record numbers, but many stay in business. "But governments and legal systems routinely protect tycoons fram their own incompetence, setting the stage not far a Uaminian struggle but fc~rthe survival of the flimsiest." h many countries in Asia, the legal framework for bankruptcy is vague and loosely formed. 12. In Tc>picalStudy #32, "E~cnomicConsequences of the Internet," Oct.. 22, 1996, 1 observed, "The lnternet is fast becoming a global auction market and could commoditize most markets far prcducts and services." See atss ""ltemet Is Opening Up a New Era of Pricing,"Tfw Wall Sf-rgetjournal, June 8, 4998. The article notes that bwiness-to-bwiness commerce on the Internet is likely to dwarf the cmsumer sector. 13. ""Earlier this year, it seemed that a sweeping corruption investigation might send a number of Japan's sigl-rtyghilctsopher-kings,the bureaucrats who largely run the country, to prison, But tlwse days, despite a cabinet change;?,nearly the only goivernment e m p l o I ~ ewho has gone a n w h e r e is Katsuhjko Kurnazakj, the prosecutor who led a much-heralded investigation into scandals invdving expensive free entertainment paid for by businessmen who wanted the bureaucrats" favors, Mr. Kumazaki, 56, was transferred in June to a r e m t e coastal city, and the investigation seems to have fizzled out." "eryt WuDunn, ""Japan Corruption Investigation Fizzles," Infenzatiorzal Hemld Bibzrne, Aug. 15-46,1998. 14. According to Ron Chernow (op. cit., p. 297), ""sandard Oil had taught the American public an important but paradoxical lesson: Free markets, if left completely to their own devices, can wind up terribly irnfree, Competitive capitalism did not exist In a state of nature but had to be defined or restrained by law. Unfettered markets tended frequently toward monopoly or, at least, toward mhealthy levels of concentration, and government sometimes needed to intexlrene to ensure the full benefits of competition, This tvas particularly true in the early stages of industrial development." 45. Eansparency International (http: / /www. transparen~y~de), an international good-government advocacy group based in Berlin, annually ranks the world's governments from most to least corrupt. In its latest study, released %p. 1998, the group found no improvement stemming from the VVorld Bank and IMF effc7rtt; to reduce corruptic>nby including anticorruption measures in their loan agreements. According to the group's latest Corruption Perceptic~nsIndex (l =least corrupt), of the 85 countries surveyed, Indonesia ranks 80, R u s i a ranks 76, Thailand ranks 61, Mexicl-r ranks 55, China ranks 52, and Brazil ranks 46. 16. OECD, ""Combating Bribery of Foreign Public Officials in International Business Transactions: Text of the Convention,"%L-tttp:/ /www.oecd.org/daf/ cnnis/bribery/2Qnov1eehtm

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Dancing with the Giant: The Transformation of North American Sovereignties Approaching the Twenty-First Century ALAN S. ALEXANDROFF

The Consequences of Free Trade in North America Trade policy at the end of fie twentieth cenhtry is about a lot m m than just trade. The North Ameriem Free Trade Agreement (NAFTA) adopted in 1994 by the three Paorth American countries-the United States, Canada, and Mexic-is &out trade, fnvesmmt, and ~ g u l a t i o njust to name some of the arcas included. But it's also a po:[itical story. Thus this chapter exmines the loss of national sovereignty in Americds closest neigNors. It also, more surprisingly, chronicles the loss of national sowereignty in the United States-the last remaiining superpower, 'This story; then, represents an example of the rebalancing between markets and states in the quickening pace of globalizaticm at the millennium. In Mexico and Canada pditicians successfully sdved some iss~teswith new free trade arrangemenb. Yet other conseyuences, unforeseen, or dismissed at the time of each national debate over free trade, have come to arglaed at the time. The free-trade affect these societies as oppone~~ts arrangemnts have accelerated the constraints on govemental action that advcrcates and opponents of glohalization identified. "T'he trade agreements have contribukd to the o~zgoingreshaping of national sovcreignt.ies in North America. They rclflect a new batance between the trading and territorial world, the terminology used by Richard Rot;ecrance in his path-breakj,ng work on c o m e r c e and conquest in the modern world.' These regional trade arrangements have placed markets, not

governments, in the center. Markets today c ~ a t citizen e opportunities, benefits, limits, and costs. This story focuses primarily on America's neighbors-Canada and Mexico. This approach is a bit ranusual, but it is designed to provide the American reader with a different "take'kn the pm=% o k h a n g e in North America. However even this focus, as will become evident, is also a description of the United States, That is, to an extent seldom understood in the United States, the history and policy of Canada and Mexico is also the story of the United States. North, American free trade, then, reflects the unfolding story of the diminution and trmsformation of sovereignties across these three countries. Further thoLtgh, it describes a model for the evolut.ion of national sovereignty in h a r p contrast to the other contemporary story of sovereipty's transformation-the European Union (EU). For some time nowI Ewrope has presented the quintessential model for the evolution of developed. nation-states in the face of globalkatim. Eurclpe" ddeveXopment is built m administrative and political strucbres of evolving supranationalisrn and the broadenin.$ of markets. In, contrast the North A~aerican story is largetp market driven within a framework of legal rules. There are, in dramatic contrast to the European Union, minimal a h i n i s trative and political struchares. It is a model where thcre is minimal hstitutional channeling of the forces of economic change, The North American story is also a story of much sharper contrasts than in Europe. Canada and Mexico reprrzsent far smaller economies now tied through irttemational treatj.es to the much larga ecmomic neighboc This very asymmetry hightights some of changes in sovereignty among the three countries. The firth American Playen

The United States rep-esents a history of contrast. American history chronicles a society and polity lietermhed to act differently and achieve different ends than had been done in the old world. A great power, reluctant to exercise influence, but infused nevertheless with "exceptimdism,"z the United States claimed the mantle of a superpower fnllowing World War II, Its leaders sought to achieve with unmatched determination the triumph of democracy and capitalism. As part of &is plan, the Idnited States pressed relentkssly in the decades after the war for the liberalization of tracle even while it constructed the cold war poltical and security structures around the globe, The United. States pushed in the successive trade rounds for rapid trade liberalization under the General Agreentcnt on Tariffs and Trade (GATT). It supported the rclgional integration of Europe notwithstanding the views expressed at the t h e that

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such integration could prove to be a competitive disadvantage to the Idnited States. It protected Japan and encouraged its post-w"r economic growth. By the 1 9 8 0 ~ however, ~ American zeal for multilateral liberalization began to wane. The growing success of the form* vmquished, particd d y Japan, but also Qrmany and the European Economic C o m w ~ i t y , and the increasing competition from a host of rapidly develophg Asian ecmomies, led to growing demands from American inciustry sectors and Congress for a level playing field,"raditional Alnerican demands for free trade became increasingly demands for "free and fair trade." Reflecting recently on the effect of free trade, Michael Mmdel in his study, "The High-Risk SacietyfAescribesthe double-edged nature of trade liberalization: "Free trade, too, is a high stakes, high-return policy. Produrers gain horn fast-grovving forclign markets, while cmsumers can buy lower-price imports. At the same time, however, foreign competition leaves a trail of devastated hdustries and workers,""" in the mid-1989~~ the politics of trade in the United States ~ f l e c t e da growing se11si.tivity to t-he loss of Awrican jobs, that could be arp;ued, resulted from Amdca's '"open market" plicies. The political debate took on m increasiwly naticmalist, even protwtionist tone, recognizable mom from American pronounceme~~ts in the military-political dimension and fPom pre-war trade positions. The Cmadian s t q is one of a vast country with a thin ribbon of population stretched xross the continent "cheek-by-jocvl" to its American neighbar. The country has defned itself as much by the fact it itin" the ldnited States, and Canadians aren't Americans, as any positive defhition of itsdf and its people. Canada is a coulltry struggling to define its national identity under the burden of at least two societies-a majority Frmch-speakiw population in Quebec and m English-speaking majority in the rest of the country. The English Caxladian political blite, particularly, has sought to define Cmada's nature by focushg on masures of independme from its great southern neighbm Since World War 11, trade and investment policy in Canada has alternated between Canadian desires and Canada" economic realities, A. strcmg advocate for multilateralism,T~anada"strade m d inwestment bem e , nevertheless, increasingly bitateral and focused on the United States, While a variety of initiatives were urged to mderate the growing cont(inenta1pattern, the facts on the ground we=, Canadians did an increasing volume of business wilh the United States. Mexico is a populous developing society steeped in a rich c u h r e and language, a long history, and a more recent mvdutionary past. Mexico has been deeply marked by its relationship with the UI-rited States losing half its territory to the westwasd push of erican settlers in the nine-

teenth century. fn more recent times, Mexican politicians have sought to transform the nation into a prclsperous developed society on a foundation of state contrd and antj-Americanism. While the stratew appeared inc~asjngiysuccessful, especially with the development of Mexicm petroleum resources, it came crashing down in the 3980s. The United States has been a collntry and society determined to protect national sovereignty, even as it urged the removal of barriers atl around t-he world and the adioption of democracy. Canada and Mexico each h their own ways sought to protect: their idelltitles and defel~dnational sovereignty often in reaction to the United States. Into this climnate of nationalist rhetoric and the growth of protectionism nevertheless two free-trade arrangements were concluded that tightly tied together these three countries: the Canada-U.S. Free Trade Agreement (FTA) of 1989 and NAE'TA of 1994. 'These arrangements motivate and reflect the diminution and transfmation of sovereignty across the entire contixlent. The arrangements are a testment to the powerful forces at work in globalization. These forces, as made clear in Nrrrth America, are reshaping nations, rclgions m d indeed t-he hternati.ona1 system.

Leap of Faith Canada had danced the dance of free trade with the United States before. 'The last serious initiative to secure a "full" free-&a& arrangement had occurred h 1947. 'Then, in secret, the Liberal government of Mackenzie King negotiated free trade with the Truman administratim driven by Canada's irnbahnce of payments following World War 11. 'These discussions coMinued for some six months but we= &raptly ended by the Canadian frirne Minister who feared the consequences of tryjng to persuade the Canadim public of the a d v a n t a g e ~ fa bilaterd free-tr& arrangement, Prime Mirtister King was worried that, as Michael Hart, a noted Cmadim trade analyst wrote, "Canadim nationalists would once again confuse the reductim of custom duties and other trade barriers with the U'nikcd States with patriol-ism."" Canadian politicians turned, instead, to negotiate narrower sectoral arrangements with the United States. The classic example of this was the szxccessfully concluded Canada-U.S. Auto Pact, that en.ecred into force in 1965.7This sectoral approach underlined the appamnt truism in Canadian politics that the Canadian public could not be persuaded to accept k e trade with the U'xnikcd Stat.es: Free trade with the U'nited States represented a national threat and therefore political. folly. Or so it had become, F r m the days of the defeat of the Ijberal Laurier government's efforts to secure .free trade in 1911, this negative view of h e r i c a n free trade was expremed repeatedly in Canadian political circles."

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Much of the Canadian public was surprised in the mid-3980s when the Progressive Conservative M h o n e y gove ent mnounced its decision to seek a comp~hensjvefree-trade agmement with the United States, The mnomcement came as m even more unfriendly shock to nationalist interests in the media, the political opposition, and a wide swath of culturd and sncia:l,interests in Canada. rill these groups, and ot.hers, viewcd the United States with deep suspicion. Besides the mtiipathy that these interests held fnr the United States, part of the shock came from the dramatic turnaround taken by the new Conservative government. Izn the 1984 election cmpaign, the yet to be elected Prime Miniskr and his party had campaigned for improved relations with the Mited States. However, candidate Muhney explicitly rcljeeted a free-trade agreement with America, In the seemingty endless alternation between bilateral Canadian initiatives and multilateral negotiation, Canada had completed a cycle not long before. Under the prior Liberal government, a discussion paper had been published propo"i"g discussions with the United States in selected industries. While negotiations had been launched with the United States, they had failed. The Conservative agmda of economic renewal m d national reconciliation that had Icd the Conservatives to a majority g o v e m m t rel,ied ultimateiy m securing assured access to Castadds biggest export market. Promotion of one obvious goverment trade strategy-a comprehensive free-trade agreemeznt with the United States-was given a boost in November 1984, just a few months after the Gove mt's eelction, At that time fomer Liberal Msster, a d then current &aiman of the Royal Commissioln on the Economic Unioln and Development Proqects for Canada, Donald Macdonald, ounccd the Commissids support for free trade. It was this former Liberal Minister who described this free-trade strategy wiCh the United States ill the nocv famntls phrase-"lieap of faith." When the Macdonald Commission Aeased its final report in 19857 the commissioners set out two principal reasons for ~commenciinga comprehensive free-trade arrangentent Mth the United States. First, they suggested, Canadians generally agreed that trade policy needed to '"stirnulate a stronger, more efficimt, productive, cclmpetaive and growing econonty." The branch plmt structure of Canadian industry W= not productfie mough to compete successfully in the global economy Second, Canadian producers needed, "better more. stable and mom secure access to a large market."l"e rising chorus of protectiorn in the United States threatened the main export market for most Canadian manufacturers. This choms in favor of U.S. trade protectilmism in fie 198f)s,resulted, in part, from the macroeeonolnic policy of the Reagan admhist..rati.onand the overvahed Americm dollar. In 1985, the Americm trade deficit had

reached $150 billion (US). For many Americans, and increasingly their congressional representatives, such a trade imbalance confirmed their belief &at the United Stdes had been unfairly taken advantage of by their allies who were also their economic competitors, These voices now demanded the Idnited States take action to end unfair practices employed against American firms by these nati.ons and their firms. The United Stata government needed to ensure a ""level playing field." With over 70 percent of its exports destined for the tinited States, Canada had a great deal to lose if the protectionist voices were heeded. Already Canadian decisionmakers were aware that there had been m increase in the number of investigations of Canadian export prac"cices. In addition, specilic legjslation had been introdwed in Cot~gressto Ijmit Canadian imports to the United Skates. Xn a final reflection recornmending favorably a comprehensive Zlilateral arrangement with the United States, the Macdonald Commissioners co~~cluded: A bilateral agreement cmstruded along these lines tzrould make our manufacturing sedor competitive by encouraging a prc>cemo"f:e&ru&uring and rationalization of Canadian industry to serve the North American market and, from that base, to penetrate overseas markets. It would also incwase the security of access to our most impc~rtantmarket, a condition essential for grow& and new investment, given the relatively small domestic Canadian market. Finally, it would imprave the access tzre now enjoy in the U.S. market and thus allow Canadian industries presently shut out of that market to g r w and invest with r e n w e d confidence.12

By the time of the release of the fhal report, the Mulroney gover had moved drmaticalfy to initiate a serious negotiatim with the United States. Its purpose was clear: conclude a comprehensive free trade agreeme11t with the U.S. A nugh Slog hzdt M Deal

The exercise of negotiating a comprehensive frtze-trade agreement with the United States proved to be an enormous fmstration for the Canadian government and its negotiators. 'The beginning was far more upbeat, There were a series of positive statements of support from President Ronald Reagan. 'The Admillistration and Congressional officials rdeased statements to the press that the Wnifed States sought a "big" free-trade agreement with Canada. mere werc warm statements by the two govents and their chief negotiators, Peter Murphy of the United States and Simon Reisman a long-lim Canadian trade negotiator and head of the 7"rad.cRIegotiations Office (TNO). Yet notwithstanding all these posi-

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tive expressims of support, the two chief negotiators spent many fmitless mmtJls in discussions with little progress to show fnr thrir efforts. 1x1 reality the two countries, and their ~~egotiators, approached the pmcess and,expected nutcome dramatically diffemtly, Cmada saw the negotiatim as an historic oppwtunity to create a comprehensive alld broad trade arrangement with its chief trading part~~er. Such an arrangement would provide, by the end of the century, '"an open and secure mwernent of alI goods and services as well as better d e s for the movemelnt of invest~~ent m d people between the two colmtries,"Q2 e key far the Canadian side-a new framework, which would deal with trade remedies such as c o u n t e r v a duties, antidumping, m d safi3guard actions including actions against szxrges. Canada sought nekv procedures and rules to limit practices that gave rise to trade-remedy actions taken Zly hrnerican firms. In return, Canadian officiale; made clear Canada was prepared to entertain an agreemel~tthat would extend to services, govemmmt procuremmt, investment, and intellectual propaty' all areas the Idnited States had suggested it wanted Canadian cmcessions in. But the ""bottom lhe" ffor Canada and its negotiators was a new regime for trade in subsidies and trade remedy. As noted above, hrnerican officials had joined in calls fnr a ""big deal.'" America" chief negotiator apparently delighted in broadenhg the scope of the proposed agreement. So Peter Murphy at one point in the negotiations c ~ ranother sought to include the Auto Pact, subsidies including such semsi.tive *-rattersas culharal industries, social policies, and regional economic development policies. But the American negotiating posi'tion was quite different. The negotiation process revealed that the United States' negotiators saw the process as m opportu~~ity merely to resolve outstanding irritants between the3 United States and Canada. n e r e was no '"big deal;" in fact there wasn? even a big picture. In the end, the United States insisted on minor adjusmen6 on%y in areas such as procurement and technical: standads md, in services, While there were some changes in intellectual property, investment, and suhsicties, they were far more limited &m the Wnited States tnad urged early on in the negotiations. And, in the area of cc7ntin.gentprotection, the agreement hit a brick wall. 'This refinsal by the Unitclid States to conclude a new trade remedy regime almost destroyed the negotiation and the agree13"1e11t. The United States proved unwiflhg to write pmise mles defining acceptable and unacceptable practices in subsidies, clruntervailing duties, d u p i n g and mtidumpjng duties, and safeguard meamres. It proved unwiHing to subject these rules to bilaterd administration and intcirpretation. Cmadian negotiator, Simon &ismm in fmstraticm, and in failure, suspmded the negatia"cio11s in 9ptelxber 1987, Chly m eleventh-hour compromise negotiated between Treasury Secretary james Baker and Canadian ministers

saved, the negotiation from complete collapse. As a result the final agreement in December, 1987 ilncluded this key comprorrtise: Canadian and U.S. trade law would continue to apply and both sides would be free to change their laws, but they would have to specify that the changed law applied to the other and any such changes would, be subject to bilateral review for consistency with the agreement and with the GATT;. existing judicial review as to whether the law had been applied fairly and

properly would be replaced by a binational panel on the basis of whatever standard tzrorald have prevailed in the domestic tribunal; and negotiations would continue for five years to negotiate a wholly new rkgime to replace the existing one.l2

At-though there were other compmmjses, the willingness of the U.S. Administration to accept a binding bilaterat trade remeby process, made it possible for the Mulroney govcr ent to argue, somewhat disingenuously, that Canada had achieved its ultimte goal-assured access to Canada's most irnpmtmt export market. The Mulroney government argued this point and many similar ones over and over again in its efforts to secure approval: oi the Cmada-U.S. Free Trade Agreement. In the end tbr government was foxed tcr Q h t an election that was doxnjnated by whether Canadians should accept this comprehensive arrangernmt Ll'jth the UYlited States. The electoral debate was fierce..Opposition spokesmen insisted that the agreement would threaten Canadian cultural policy; its tax-supparted public h a l t h care system and other social policies, its water resolarces, and its control ower energy. The cfmdemnation was loud and persistent At the core of the opposition, both the poijtical opposition, especially the Liberal Party led by John Turner, and the social groupsunions, women, poverty organizations, health care advocates, a d cttkrs was a view that free trade with the United States would lead first to economic and eventually politird absorption. Some of the most articu%ate opposition pointed out that Canada was a l ~ a d ytoo heavily dependmt on the United States, Canada needed to find a policy approach that would rcdirect more trade to other trading partners, Without this, Canada, as a junior traciing parher of the Llnited States, would be unahle to sustain an independent pdicy and would f h d itself mabk to act in any way other than to support U.S. policy in the region and elsewhese. After a rancorous and often shrill election debate, the Mulroney Conservatives were returned wi& a secmd miljority government. Canada entered h t o the FTA on January 1,1989,

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If the stakes, not to mention the volume of the debate over a comprehensiwe frce-trade arrangement with the Ullited States, were at the highest possible level when considering the FTA, almost the opposite presented itself to C m d a in contemplatkg the extension of the agreement to include Mexico. M i k e the FTA, &ere was no compelling positive interest in Canada fos an emhrgexne~~t ol the FTA. For the Canadian governrment the political costs were likely to be high; yet Canada-Mexico trade and investment was mhuscule in cornpariscm to thr trade and investment relationship with the United States. W y the13 did Cmada become a full player and, proceed down this course to a trilateral free-trade arrangement? For the Canadian government: this course of action just barely a year &er the FTA was a matter of d a m g e limitali.on. Canada could. not allow the gains it had achieved in the FTA to be undone by a bilateral deal between Mexico and the United States. It could not stand by while the Americans redefined their econontic rel&ions in the Western Hemisphere starting with Mexico but conceivably extending to other p1ayc.r~h1t-he Hemisphere. election, so the Just as the FTA had been concluded only wi& a natio~~al implementation of the North American Free Trade Agreement (NAHTA) was delayed until the Conservative government went again to &e people for a mandate. Brat by 1993, Brian Mdmney was no longer Prime Mix-rister and the election hardly codd. have represented more of a contrast, The heart: of the Cmadian elec~onof 1993 was f n w t over the fclrrner Prime Minister hinnsel,f. Trade was haray discussed. The election and public ophim polls at the tixne made it clear that Canadims now accqted. the reality of free trade with the United States. It was no longer a bramhg natio~~al, question. Cmadians believed that the com~try,particularly bush~ess in Canada, had adusted to U?e new economic r6gime and there was no going back. The question that remained was who had been right about the cmseqraences of a he-trade arrangexnent in North America.

Winnitzg Prosperity# T/freafertir~g a Country? For t b s e Canadjan negotiators who stuck it out to conclude the FTA, m d t-hen in 1991 went back to extend the deal to Mexico, there must be real satisfacthn at the results of the agreement, I.f one laoks at the trade measures, there is discernible trend that advocates of free trade would applaud- While t-he Canadian economy entered a severe recession in the early nineties, soon &er the completion of the FTA, exports, principdly to the United %ate%,have been a bright spot in Canada" economic performance. Trade as a sham of Gross Domestic Product (CDP) has grown since the 1960s but the share has accelerated since Canada entered into the FTA and NAFTA. Currently over 80 percent of Canada" exports and

irnports today are directed to the Uni"ted States. In part because of t h automobile and auto parts sector concentrated in &tario, over 90 percmt of a t a r i a " exports are targeted to the United States. The trade picture that emerges for the period 1988-1995 is one whercl Canada's exports to the United States increased at a significantly faster rate than exports to other com-rtries..Momover, if you segment trade into liberalized and nonliberalized categories (liberalized meanjng categories where tariffs have been reduced or elimFz1atc.d as a result of p r ~ v k i o min the FTA), Canada" eexports to the United States in liberalized sectors (14 out of 16 categories) grew considerably faster than both exports to the United States in sectors not liberalized and in comparison to the rest were similar telzdencies for imparts. And while data of the world.'"ere is far less reliable, it woulid appear that services also have increased, though the FTA made only a lhited foray into the liberalizaicm of services. More anccdotdy, it appearHthat Canada's brmch plant firms have made a pahful passage to greater efficiency corporate profitability, and competitiveness. In 1975, Canada"~exports of"goods and services to the United States we= equal to 15 pescent of GDP, Rat had risen to 28 percent by 1995, With respect to merchandise trade, exports now represent almost 40 percent of Cmada's GDP. This figure represents the largest percentage for any of the Group of Seven (G7) economies. Rut it has come at a cost. It is a cost that opponents of the FTA had long feared. 'The economic union has begun to loosen, possibly dishlegrate. Canadians, and Canadian business in particular, have reoriented activi.ty to the United States. As Greg lp, then of the Globe u ~ Mail, d wrote: "h1 the last 15 years, alizost every province" economy has become more dependent on exports to other countries than m exports to other provirzces, Within mcompanies themselves, the United States border and the 'Canadim marketf have ceased to matter. 'The Cmadian and U.S. markets for goods, capitaf, services and, incxasingiy, labour are becoming ane.'"'" M i l e the evidel-rceis incomplete, since we do not have a handlie on interprovixlcial tradc in services, the Ostta.rio example shows how sipificant a change the economfc union has undergone. In 1981, hterprovincial and international exports were about the same in this ke)~, manufacturing province ($38bilIjon CDM); by 1995, international exports had risen to twice the vaiuc of hterprowincial exports-$340 billion CDM versus $62 billion CDN. M i l e not as dramatic as in mtario, other major pmvinciai markczts, such as Quebec and British Columbia, have experienced the same changes. Sumeying these changes in Canada, Ip concludes: ""Fee trade, it turns out has been about a lot more &an trade, as many of its critics feared. It has acted as a spur to economic jntegration

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beyond the silnple exchange of goods, going on to the harmonization of business standards and the creation of a sjngle market for capit& serv i e s and perhaps, eventually, people.""" Using another measure, the acceleration of north-south trade can be underlined. In 1988-1989 the provinces ercported twenty times m m to other provinces than to states of the United States of compmablc size and distance, John McCallum, the Chief Economist for the Royal Bank of Canada pointed out in a 1997 Report17 that under fie conditim that there was no Canada-U.S. border, one could hypothesize, the provhce of m e bec, for example, shoulld trade &out ten times more with CaIifornia than with British Columbia. In the example, the distances between Quebec m d British Columbia and Quebec and California are about the same but the California market is ten times the size of the British Columbia market. Tlx.~s,the hypothesis that trade would be ten times larger with xspect to California. Hawever, actual trade in 1988-89 shows that the value of Quebec-BC trade was 2.6 t h e s greater than Quebec-California trade, In ather words the existence of the border promoted east-west trade. I h e actual pattern of tradc reflects the bordcr and the eMect of the internal Cmadim market, Notwithstanding that, the trend over the last decade reflects the decline in the economic u n i o ~'The ~ . data reveal that the provinces now only trade 14 times more w&t each other than with states of comparable size m d distmce, down from 20 times. Wl~ilethe data reveal still that it is not a world withotll: natiorlal borders, the trend seems a p p a ~ n tCanadjans . have fought for over 100 years to defne ecmornic exchange in an eastwest direetim to underpin this northern nation. Rut tbr ecmomic bindings are being eroded. Canadian busjiness and markets are being reoriented in nor&-south segments across the conthent. This reorientation of economic Canada is occurring even as the role af the mt.innal governmmt is diminishing. Years of kderal fiscaX expansion left the governmmt by the 1980s with a major federal debt and amual enormous federal deficits. First, slowly under the Mulrmey gowemment, and then in m xceierated fashion undcr the Liberal government of Jean ChrOtien, the federal government began the painful task of reliucing the deficit in part through the ~ductictnby the federaf gove fer payments to the provirtces. M i l e successful, these steps rclinbrced a view that the federal government was increasingly less relevant to the lives of ordinary Cmadims whetfter in Quebec, Ontario, ar British Columbia. Some argued that the near-swcessfd vote for sovereignty by Quebecers in October 1995, coufd be laid at the doorstep of these two trends: The perceived irrelevance of the federal government; a d the loosening of the bonds of economic uninn in Canada, as a result of free trade, Sovereiptists in Quebec we= among the stmngest supporters of

the FTA and argued loudly that a sovereign @ebec could still rely on the free-trade arrangements under the ETA and NAFTA.

Leap of Fear C)n August 21, 1990, President Carlos Salinas de Gortari of Mexico pro-

posed i_nitiatilrg negotiations for a comprehensive free-trade ag~exnent with the United States. Ch-t September 26, Prclsidmt Bush fomally noefied Congress of his intent to negotiate a k e t r a d e agreelnent wi& Mexjco. These public mnouncements foIIowed a private proposal by President 5ah1as to George Bush to cmsidtrr a free-trade agreement in a visit to Washington June of the same year,.M a t had caused Carlos Sdh~asde Gortari to propose such a "radical" step? As late as a State visit to Miashington not a year earlier, Presi$mt Salinas had dismissed the idea of a h e trade agreement. At that point, the Mexican Presjde~~t had argwd that the "mevemess of the two economies made such m idea mrealistic.'"B What conditions changed so sipgiilantiy to alter the President's mind? It would appear that the President changed his mind after a series of foreign trips. Returning bome from abroad be concluded, that Mexico could not rely on either E m p e or Japan to prowide adevate foreip investment; nor could thcse com-rtries&limb Mexico's anlicipaed exports" Like Canada, Mexico had become a major trading partner with the United States in the decades follawhg World War 11, Cmada was Ameri c a " ~largest trading partncr; Mexico fdlowed right after Japan in third place. Mexico had. undergone a debilitating revolution in the early twentieth century that took aimcrst nineteen years to wet. By the end of the rclvolLttio~~ary harmoil, Mexico had established a one party arnt-horitarian ent. It devised an economic developmnt strategy that relred increasingly on the public sector and state-sponsored inward-oriented growth. One P ~ s i d e n after t another of the 12artido Revolzrcior~arioIkzstitue i o ~ n(PRI) l s o u e t to bring sufficient economic development to meet the rising pcrpdation and manage tbe transfarmation of Mexico to a modern develqed ecolIomy. For s o m $0 years following 1940, Mexico experitnced growth and the hope of change. From 1.970 to 3981. the Mexican economy grew by m average 7 percent. However, Mexico found it necessary to rely on foreign loans to maintaixr gmwth and its expansionary fiscal policy By 1976 because of a balmce of payments crisis, Mexico was forced to devalue the peso, the first devaluatian since 1953. Mexjco, in turn began to rely on its petroleum resources. Tnternationlal banks we= more than happy to loan Mexico money on the basis of its Rscrrwes and the rising price of oil. In the summer of 1982, petrodollar recycling came to a dramatic halt, With increases in ixrtemational interest rates and the sharp drop in petro-

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leum prices, Mexico could, no lmger maintajn the hterest payments on the $100 billion (US) of external debt the Mexican government had built. Is By the t h e Carlos Salinas was dccted President oi Mexico, the counSalinas try had suffered seven consecutive years of ecommic dep~ssion. szxrveyed a Mexican economy debilitated by macroecmonnic instability, protectionism, and low international competitiveness. Average wages had dczciined s o w 40 perc:mt and inflation had soared to triple digits. In 1987 inflation reached 160 percelzt. The Salinas admhistration tackled the economic crisis. The President put together a t e r n to solve or duce the external economic crisis. 'That team negotiated a debt relief plan, the so-called "'Krady Ran" that reduced the debt from $100 billion (US) to $86 billion (US) m d in turn reduced debt-servicing costs. Salinas then raised revenues by enfnrcling tax laws and he began to cut public expenditures, As a result, thc fiscal deficit shrmk from 11.7pescmt of GDP in 1988 to 5.8 percent in 1989 and. inflation fell to 19.7 percent by 1989.20 In addition to these fixid rneastlres, Salinas began to dismantle the import substi-tutian structure. The Salinas administration begm privatizing the! web of parastatal corpc-lra~ons as well as unilaterally lowerin; the tariff and nontariff barriers that had dra-natically reduced the competj.tiveness of the Mexican economy As a resufl of such actions, economic growth r e m e d . Mexko's GDI" grew 2.9 perilent in 1989. Even capital began to flow back into Mexico after fleei,ag follow12zg the czconnmic crisis and the natimaiizatim of the banks durhg the Ue ia Madrid g w e While tbr Salinas administration" eefforts helped to r e s t w a measure of confidence, it was apparent that more econolnlc reform, was needed. Xt was also apparent that the crisis was not purely ecmomir. Because oi the dose integration of the PRI with the gove ent and the go\remmentfs ever-expanding role in the econornqi Mexico's governance strttcturc was also being challenged. There were ever more insistent calls insjde and outside Mexico for demcratization and the end of one-party rule. Critics zlrged that Mexico nceded to open its ecolzonny and free itself from government" heavy band. Rut additionally the opening up w d d =quire that Mertico break free of its authoritarian past. Yet after cmtrol of Nlexico exceeding 40 years by the PM, the political interests, local and nationaI -the so-cdled "old guard." of the PfU, wodd, not easjly rehquish political and e c m m i c cmtroi.21 Salinas-irection was apparent. With his highly educated economic technocrats he intended to reform the economy through a series of liberalizhg efforts and r e h m the political system more slowly*Salinas made it clear that political reform and delnocratization efforts would take a '*back-seatf'to economic reforms, Some critics argued that the Salisras ef-

forts were desiped to liberalize the economy without displacing the PR1 from its central role in politics. Others hsisted that the order of liberaliza.t.ion+conomics and then politics-was bou~ndto fail. The Salinas government c d d not reform the ecmony without first democratizing Mexico, One of the government"^ most articulate critics, forge Castafieda, offered this view of the need for reform:

. . the absence af clemc>cracyin Mexico was not just a political drawback but one of the principal causes of the glarjng sociaX inequalities that plague Mexico; that cold-turkey, free-market policies would not solve Mexico's ecuncrmie dilemmas; that only a cornbination af state and market, trade liberalization and prc)tect.ionil;m, redistribution and integration with the United States could place Mexico back an the path of economic growth;"^^ "".

Rise and Fall in Mexico Salinas began his srtxmio, the shgle six-year term for Mexican Presidents, in difficuk circumstances. He won dection to the presidency with a bare majority of 50.4 pcrlrcmt the ctosest vote since the revdution, 'The opposition, and many observers, claimed that thc X,Rf hnd stden the election through vote fraud from the opposition, Having ""won,"' boweves, the Salinas Administration undertook sitgnfficant efforts to open the eccmomy, as noted above. From one of the most protected markets wi& import licenses on most products including tariffs as high as a maximum 100 percent, the admhistration reduced the tariff rkgime to an average weighted tariff of 9,s percent. As a rcls~dtof these efforts, the economy began to grow again and mmufacturhg exports begm to surge, The d i l e m a facirtg Mexico's economic developmat was highlighted as a rest& of its ecolnontic =form policy- If Mexjco chose to open its economy, tl-ten that economic reform c a s e underlined Mexico" dependence on access to the United States market. Just as in the case of Canada, Mexico needed the secwity of market access to its largest trading partner to ensure growhg exports* While the Mexican eccmomy began to respond to liberalizaticm efforts, investment flows failed to i n c ~ a s erapidly enough to gelnerate signiicant or sustaina:blc growth, As noted above, trips to Europe and Japan had Zlrougbt home to Salinas that Europe was tclcr preoccupied with the fall of communism and the openhg of Eastern Europe and Japan was far too hesitant to represent a source of expanded investment, Milt anti-Americanism had gone hand-in glove with the internal e c m m i c development model, the end of the statist ayproach, and the turn to liberal,iza.t.ion, or apertzlm, enabled, in fact demanded., Salinas jettison some old "ideologi-

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cal baggage." h a liberalized Mexico, the United States became the major source of Fnvesment and trade and a key to job growth: More than a complement to the modernization policies embarked upon since 1985, NAFTA was seen as a silver bullet to neutralize the obstacles those policies engendered-.When more capital than expeded was needed and greater reluctance to invest was encountered, NAFTA would make up the difference, It would also relieve pressure from abrc~adto accelerate pc>lit-ical refc~rm,a s U.S. supporters of N A E A toned down their criticisms of human rights violations and electoral fraud in Mexico to avoid imperiling free trade?

And the Mexican publk largely iapproved. this new revolution h Mexican potitics. tn a nation-wide poll in July 1990 it was found that 59.4 percent of the Mexicran public fwortlct a fsee-trade agreement: and o d y 19.3 percent opposed it.% hlctrest and generally favorabv ratings cmtinued through the process of x~egotiationand tken approval. Under such conditions the Salinas aduninistration found it both logical, and po:[itically passible, to set a course for free trade with the United States. The early U F T A period seemed to vindicate the actions of the :Mexican government. Folfowing the November 1993 U.S. Congressional appmval of NAFTA, there was a sipificant inflow of capital into Mexico. In fact between 1991 and the end of 1493 foreign capital inflows grew from $23 billion (US) to $29 biiljon (US).ZVy early 1994, Mexican international reserves reached a record $30 billion (US). Consumer haation dropped from 18.8 percent to 8.0 percent h-t3993. From the late 1980s throutgh 1992 the economy showed red dynmism growing on average 3.5 percent. Market capitalization grcw enormously. From 1988 to 1993capitalization went from $13 billion (US) to $132 billion (US), a ten-fold increase. But: there were signs that all was not well. The Sdh~asAdmhistratio~~, first because of the need to =sure American approval of NAFTA, m d then because of political factors-mat importantly the presidential etclcgon of 1994, failed to take critical correctitre economic steps. By the second quarter of 1993, it was appxent that Mexiran economjr growth bad all but disappeared. For all of 1993, the Mexican economy grew by a mere 0.6 percent. Memwhik-.the trade imbajance co~~tinued to grow. By 1994 Nexiro reached a record deficit of $18.5 billion (US). While inflows oi capital continued, thc.key indicator-forclip direct investment PI)-failed to grow FDI decbed from $4-8bil1io11 (US) ~ I1991 I to $4-4biEon (US). By 1994, in8umtia.l voices were stressing the need for significant economic changes beginning with the overvalued peso. At a conference held by the Brookings institution h Wshhgtosr, Rudiger Dornbusch, a well known economist and longtime Mexico watcher, along with his col-

league Alejandro Wemer, warned that a siwificant departure horn the then present peso exchange rate was requimd and =cornmended currency deval~n,liol?.~~Subsequently, Dornbusch wrote in Brtshess Week that the capital M o w to Mexico was substantially '"lot muney", likely to leave at the first hint of difficulty and only retained by high interest rates.. Most commentators, however, and importantly Wall Street analysts, chose to i g o r e these warnings. Wanwhile, political events kept chipphg away at the stability of the administratio~~. CSxr January 1, 1994, the Zapatista rebels in Chiapas appeared out of the rain forests to make hemjspheric headlines, Then on March 23, the PR1 p~sietentialcandidate, Luis Uonaidcr Colosio was assassinakd and there was panic in the Mexican hancial markets. This assassination was followed by the assassination of PR1 secretary general, Jose5 Francisco Ruiz Massieu. W i l e the election of PR1 cmdidate Ernesto Zedlillo in August went easily, and wjthout the contmversy that accomp a n i d his predecessor's narrow victory, the cmtinuing uncertahty of the political enwirclnment kept the g o w e m n t off balance. The Mexican economic situation b e c m e evw more djfficult particularly as interest rates began to climb in the Urtited States.27 As Masks NaiYn suggested, by late 3994, the Zediflo administration faced ""botlh political uncertainty and economic fragility."zg ent decided finally to attack the economic problem of capital ouf;flowsm d the depletion of Mexican =serves, reactions were e x t ~ m eFoliowing . the unnerving =port: by the media on Decetnber 19 that the Zapatistas had.broken through the military cordon in Chiapas, which in turn triggered a ~ n e w e dcapital flight, Mexican authorities decided to devalue the peso. Within two weeks of the initial devduation, ounced at 15 pescent, the peso had lost more than 30 percent in US. dollar terms; the Balsa, the Mexican fi~~ancial market, had dropped almost 50 percer~tin M a r terms. By March 1995 almost 2511,000 Mexicans had become unemployed as a result of the economic crisis that had. been touched off by the initial government announcement. The crisis was clearly un~.vantedby those who had planned for and described rising prosperity as a resdt of NAFTA. Yet when it c a m , the way in which Mexico and the United States reacted showed the effect of NAFTA on haw decisio~~makers dealt with one another. Constraining Sovereignty-in North America :In January 1989, United States e n t v into the FTA with Canada passed with little notice ill U.S. public opinion. Even in Congress there was little reaction. Other than the revolt in the Senate Finance Committee that almost defeated the admisristration" authority for ""fast track"" at the com-

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mencement of trade-treav discussions, the negotiation, and then the approval of the tmaty, occurred without serious opposiliion. This uneventful passage of the FTA contrasted sharply with the incorporation of Mexico in the W T A , While Canadians saw NAPTA as an expansion of the original FTA, fie U.S. media, the public, and W.S. politicians t ~ a t e dit as a second and quite separate f ~ e - t r a d earrangentcnt. for the hemisphere. And whether it was Mexico" developing economic status, its history of conflict with fie United States, ""dep-seated'kegative attitudes twarcls Mexico, or a gcokvlng concern about the border, drug trafficking, and illegal immigratiun, NAFTA received wide public attention and initiated. a major debate by Congress and the U.S. public. In the fall of 1993 the prospect of MFTA produced a classic debate in the United States. Oa one side was one of W T K s fjercest opponents, &ss Perot; on the other, administration booster, a d the vice-president of the United States, A1 Gore. In the end, President Clinton, and his adnninistratio~~, defended the agreement as one that would create jobs lfor Americans and increase its export trade. And while the vote in the House oE Representatives was close, the Cllnton administration was able to secure congressional approval. With such a high-mergy debate, it was not surprising to hear a variety of statelnents exaggerating Ihe benefits and the costs of PdAE:TA- It came as something of shock, then, when the Mexican clconomic crisis sudden:ly emerged. It was with s w r i s e that U.S. politicians, Wall Street fnvestors, the media, and the U.S. publk greeted this fi~zancialcrisis. 'The admhistratbn" rresponse suggested the deep effect of these comprehensive trade a r r q e m e n t s , though NAFTA had hardly been inked. Soon after the onset ol the crisis, the Cli;nton administration sought approval from Congress for a $40 billion (US) package of loan guarantees. Reprablieaxl Speaker of the House Newt Gingrich and Republican Smate Majority Leader Bob Dole supported the initiative, as did Allan Greenspan, Chairman of the Fedcral Reserve. Statments of support followed qrtickly from a variety of brmer presidents and cabillet ministers. Notwithstanding alf this poliical muscle, it becalne apparent that Congress w o d d not easily, or in a timely manner, approve such a rescue package. In response to gmwhg congrc;.ssionalwstioning and opposition, I'sc.sident Clinton assentbled an &ernative packa,ge that did not requirtli congrcs"iml approval relying instead on funds supplied by the U.S. Exchange Stabilization Fund and by the Internation4 Rcronetary Fund (IMF). These funds collateralized with Mexicm oil receipts m d includjng a stiff macroeconomic package to deal with structural problenns in the Mexican econmy highlight the importance of Mexico, and its c m thued economic heal% to policymakers in the United States..Against the backdrop of negative U.S. public opinion and the U.S. Congress, the Clin-

ton administraticm pursued the rescue package, It mpresented a sharp contrast to U.S. actions in the Mexican debt crisis of the early 1980s. If: the U.S. administration felt ilnpelled to act, then Mexico's actions repmsented equally the effect of the new rkgime in Nor& Amrica. As became apparent in the m n t h s follcrwing the first peso devaluatim, tbr reid cost fell on the Mexican people with tigM money a peso that fell from 3 pesos to the U.S. dollar to over 8 pesos, exoibitant tendlng and. mortgage rates, and spirding memployment. Notwithstanding the calls from the political opposition outside and jnsi,de the PR1 for protection from markets, Mexico did not resort to the h d s of measures that formed the basis of domestic reform in the debt oil crisis. Mexico remained open to the helxisphere and international markets. Mile the U.5, actim shows a hi& degree of collaboration m d sensitivity to the mGhborhg Mexifm economy resort. to national action has not bee11 eihhzated as a result of:NAP"TA.Nohhiill-cstmdh~gthe agreed N A E A t b t a b l e , the United States failed. to begin licmsjng Mexican tmcks to operate in the Unikd Stilt- im 1996 citing safety concerns. And, Alnericms m d U.S. politicims have not accepted wi&out question the constrah~tson sovereignty that flow from these comyrehensive arrangerncmts. For Cmada, we noted, the heart of the F'IA was the new restraint on the trade remedy rkgixne in the U.S. And that constraint on American sovereignty has chaffed, In 1996, :Republican Presidential candidate Bob Dote urged that the binational review rcirgime be denied any futurcz country acceding to NAFTA most i~smediatelyChile. Twenty-me lobby groups organj.zed as the k r i r a n Caalilion for Competitive Eade filed. a complaint with the US. Court of Appeals. Their position, though not: finally sustai,ned in the courts, was that the binational panels organized under Chapter Nineteen of NAFTA are usurping the cmstilutional authority of the U.S. judiciary and that US. sovereignty c h these wayhby. international agree~sents.zfl Yet the constraints are r e c v i z e d and accommodated just as often as they are resisted, In November 3996, for instance, Wxico and the United States signed m agreement that gives bo& countries broad access to each other%rapidly growkg direct-to-home television markets. Companies in both cowtries will be able to sign up subscribers in the other. While some restrictions are aXlowed, the agreement provides a sig~~ificant opening of this market. For all practical purposes, "when it comes to satellite televisim transmission, the 2,OI)Q-mileborder between the two countries shodd not be a barrier.'"Und the grocving acvaremess of lhe "fadingf' of the border is apparent in the Mexican decision to =cognize the right of Mexicans to hold US. citizenship without losing their rights as Mexican cjtizel~s..The rt?a:lity of Hispanic infiue~~ce in stale and national races in the United States has gained Mexican legislative recognition.

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Nodh American Sovereignty As a Lumpy Cheese Melt

In the contemporary evolution of the intematio~~al system, Europe, and particularly the EU, has taken center stage, The Europem Community, now Union, is the model of a morcl intepated state system-m emergent supranatiod organization of slates in the jntemational systern. Most malysts descriEae a slow, even halting, but linear development in Europe. Underpjnned by functionalist theory, analysts have chronicled the march to supran&ionnJism in Europe. The contemporary cap to this m r c h to a '"United States of Europe" has been the Maastricht Treaty. Centsal to Maastricht is the currmt commibent by member states of %heEU to the creation of a shglc monetary system. In turnpone presumes, Europe wili mar&, or be Led, to a common fjscal policy and then to further integ-rative steps. Yet, in fact, tJle painful buildil.18 of this supranationalEurope from the Treaty of Rome to Maastriet has more to do with the past t-han the fuhnre. It has more to do with old nationalism and the political effort to constrain deunities of Europe. mmtd forces w i t h these nations and e h i c co European irrtegration has reljed fundmentally on the logic of economic integration overseen by institutiunal and bureaucratic structures that have tied together Western European societies and, increasingly, constrained national, sovereignty. This grokving web of lnkages between and among the current states of the EU has a federalist innpulse at its c m . Desiped to integrate Europe" g ~ arivds-France t and G e r m a q it now spreads to the greater part of Western Europe with the potential to reach into Eastern Europe in the post-Cold War environment. h the logic of functiondism, current linkages will lead to the extension of ecclnornie and societal activities from one f eld. of activity to another and to an everwidening roster of countries. There will be an ever tightening of economic and social activities that will feed the growing politicai and bureaucratic irrtegratio~~. The product of this functionat integration is the emergence of a suyranational state. As Europe so starkly displays, the EU is built from the top down-fmm political and b~xreaucraticstrwtures down to markets and civil society. Though at an uneven pace, the Europeans have tried to replicate, seemingly, the dynamism, economic irrtegration, and material prosperity of the contineldal United States..It may also seek to approach the political integration of the United States. It is a doomed effort to create the structures of the nineteenth- and twentieth-centrrry state in twenty-first cclrtury Europe. It suggests that the Europeans are trying to create a future out of the past, Superficiaify, the ~gional-tradefnitiatives in :Nor& America appear to be copyirrg the actions seen in European integration. Yet the logic in these regional agreements are distinct from that seen in Europe over recent

decades. In North America policymakers are c ~ a t i n gthe past in the hture. These regimal-trade arrangements are notably distinct from Europe's efforts. They are not built or1 the founhtion ol' political structures but primarq on markczts. The creation of new free-trade arrangements in North America is devised absent any federatist impulse. Indeed, while there are institdional intergovemns~talarrangements, including working groups and various secretariats, the structures arc deliberately mjnimid and without political clout. These comprehensive free-trade arrangements in North America are in marked contrast to the European administrative and bureaucratic behemoth that is today" EU. Common rules and the lowering of trade and non-trade barriers alike build the North American regional trade links" The focus in North America is the establishment of rules applicable across the NMTA. These rules arc. set in place without the i~~stitutions and bureaucrats so dear to the EU. Yet the constraints on sovereignty are real. Given the focus on c m m o n rule formation in the FTA, and then in MAFTA, in a formal instibtional way national governments remain largely uncmstrained. Nevertheless, the picture of national sovereignty that emerges in North Amrica is one of a growing blurring of national barriers. I wmld liken the evolution of North Amrica to a set of blocks of cheese that: sllnwly melt. Governments remain though the blocks dissolve and flow slow)p into me anotf-\er.The national states remah and exert sr,vereipty to a greater or lesser extent depende~~t on continuing political pscssurc?, Still the constrajnts on snvereignty are identifiable on a variety of substantive and physical aspects. The most evident blurring can be seen at the borders. There is a slow mixkg withotlt: the evident reinforcement of institut.imal constrahts. It is, therefore, a slow melt of sovereipty as the balance between marent is altered. In North Arnerica the h h r e is not a picture of states dissolving into a web of suprmatior~alism,as we have seen in Europe. hskad it reflects a dynamic "'guo'-a codination of markets, ccrnti~~ui~tg governmental sovereignty, civil organizations private and not-fopprofit entities, djssolving orle into the other, The future is not just the tradhg state of &chard. Rosecrance but the trading society as well. h d it is being born, rather surprisingly, right here in North America at the beginniing of the twenty-first century.

1. Richard Rosecrance, The Rise of the Trndizzg State: Commerce n ~ Cc~~zques?sf d in the Modem World (New York: Basic Boc~h,3986). 2. The classic analysis of ""exceptionaiiism" in American foreign policy can be found in Stanley Hoffmann, Gulliverk Roubles, or the Set litrg of Anterican Foreign Policy (New York: McGraw-Hill Book Company, 1968).

l;tn~cingzuifh the Giant

131

3. Toronto University" Sylvia Ostry has writtm extensively an the creation of what she describes as the convergence club. In some detail she writes of the shrinking gap in per capita GNP between the United States and first Etarcspe, then Japan, and finally East Asia and the contributing role that the United States played. See Sylvia Ostry, The Post-Cold War Tr~dingSystem: Wlzo's 0 1 7 First? (Chicago and Idondon:The Universiq of Chicago Press, 199'7). 4. Michael Mandel, "The Eligh-Risk Society," Business WcekI October 28, 1996, p. 5%. 5 . For a description of Canada's successfuI multilateral diplomacy see the study by trade policy analyst and former trade official, Michael Hart. The study is entitled, F$fy Years I?J: Canadian Tradecraft: Carzada at Clle GATT 2947-1 997' (Qttawa: Centre for Trade Policy and Law, 1998). 6. Michael Hart with Bill Q m o n d and Colin Rot-tertson, Decisio:on at Midrziglgt: Inside Ilze Gatlnda-U.S.. Fr~reTrade Negotiafiorzs (Vancouver: UBC Press, 44994), p, 57. 7. According to Canadian trade official and FTA negotiator, Gordon Ritchie, by the late 496Os, ""aetwork of discriminatory special arrangements covering better than a quarter of aur trade-autos and parts, oil and gas, and defence productsf' fclrrned the basis af bilateral trade with the United States: Gordon Kitchie, Wrestling with trlte Eleplra~f:The Irtside Slaty of the C~nada-U.S.Trade Wars (Toronto: Macfarlane Walter & Ross, 19971, p. 23. 8. Candidate Mulroney e x p ~ s s e dthis Canadian public" aversion to free trade in the 1984 election. He toXd Canada" Maclenn3 Magazi~ze,""Canadians rejected free trade with the United States in 1911, They tzrorald do sc~again in 4983." Cited in Cordon Ritchie, p. 43. 9. Report of tlzfl~oyn/ Commission or2 the Economic Ulzion arzd Devetopmetzt P m s y e ~ ffor s Canada (Ottawa, Minister of Supply and Services Canada, 1985), p. 269. 10. Royal Co~rtmiss-iolz,Volume Che, p. 269. 11. Royal Co~nmissr'sn,Volume One, g. 375. 12. Hart et al., p. 300. 13. Hart et af ., pp. 333-3%. 44. These results are derived from the thorough analysis af trade economist Daniel Schwanen of the C. D. Howe Institute. The analysis not only examines trade but also investment and labor. His most up-tcr-date examination can be found in Daniel Schwanen, "fiading Up:"f he Impact of Increased Continental Integration an Trade, investment and Jrhs in Canada," C. D. kIt1211e1nsiiftit.e:CornNo. 89 (Toronto: C. B. Howe Pubticatians, March 1997). ~rzenta~y 15. Greg Ip, "The Borderless Wc~rXd,"Tlze Globe and Mail, Saturday July 6,1996, p. D1, 16. Ip, g. D5. 47, Royal Bank of Canada, "Has Canada Capitalizd an Asian Crowth?"(September,l997). In this section McCalXum reXies on previous work using gravity model measures from himself and Professar jcrtfirr Helliwell. See John McCa11um, "National Bordas Matter: Canadas-USipulationby Per Capita Income Class

Poor ~$700

Lower-middle class

$711&2785

Upper-middle class $278&8625

R iclz >$B626

# of states

56

47

25

24

Share crf world population

54

18

13

14

For 152 member states (excl~~ding ministates), there is hformation on. populations and.income; their distribution by income classes is shown in Table 7.1.4 Broadly speaking, the rich states are in Western and Central Europe, North America, and the fringe of the Pacific, the poor in Africa, and Asia, and the aspiring more widely distribuf;ed, A state's military pctkver is a function of t h e variables: population, income, and political decision to devote =sources to the creation and maintenance of military power, At the present moment, military power is even more uneqztalfy djstributed than other aspects of state pocver. The U'nited States has a u n i y e combination of substantiat.forces in being in all arms, equipped with the most techologically sophisticated weapons and support systems now deployed anywhere, and manned by wcll-trained and regularly-exercised troops. Its logistical capacities far surpass t h s e of any other nation and it can project substmtial military power to almost any part of the world. As a matter of budgetary choice, the level of U.S, forces is simificantly Iower thm it has been in the recent past, and well below what the United States could sqport. Japan and Germany, both large rich countries also have significant military capabilities, but inboth cases political constraints, now essent-ially self-in?posed, limit their military power significantly below its potential strength. France and the United Kitngdom also possess well equipped, well traimd forces of a sjmilar size, again constrained by budgetary choices to a level well. below what their economies and gopulatims could suppcrrt. The military power of" Russia, only recently the core of the Soviet Union" formidable armed forces, is now in disarray. China and India mahtain large military forces, but of uneven quaiity, and far short of the technological. level and trajning of those of the West and Japan. The wealth and power of states will change over time, China appears to be "mong the most rapidly growing economies; though fndia is not growjng as fast, its recent growth rate exceeds that of"the larger rich states. If Chinese per-capita income grew at an average rate of 7 percent

(about its current rate) for the next twenty-five years, it wwld be about five times its present level, =aching the current middle-income range. If China committed itsetf: politically to do so over a subslantid period, it could develop into a formidable militar). power, at the cost of a lower level of well being for its population, and, perhaps, a lower rate of econolnic grokvth than it might otherwise achieve with a difterent: docation of resources. For China to sustain so high a growth rate m average w e r a quarter century wodd be historically unprecedented, but it camot be said to be impossjble. India, Brazil, possibly Indonesia, and Mexico might likewise be economically and technicaliy capable of creating powerful military forces by the mid 2020s, if they choose to do so. 'The United States, Japan, and the European Union (EU) will contirtue to have that capacity, and even at their current rates of economic growth, will be able to devote more economic and scientific resources to the task at less relative cast to the well being of their citizens, However, the question of choice rather than capaZliIity is likely to be the decisive factor, as will be argued below. In any event, the disproportionate military power of the United States is almost certain to diminish over time, New nations arc. not the only new actors on the international political scenc. Both official and unofficial (non-governmmtal) 0 r g a n i z a t . i ~bave ~ multiplied in numbers and broadened their scope, The League of Nations was c ~ a t e d irr 1919 as a gmeral-purpose political orl;mization primarily but not excl~~sively cmcerned with sect~rity.It did not achieve the universal membershi-p its creators envisioned. A year later, two mlated specialized bodies were organized in affiliation with the League: the International Court of Justice and the International Labor Organization. Five official intergovemmntal organizations, in principle, universal, antedated the League. hll werc. special purpax, one might say, techtlicai organizations; the International Telecommunication Union (2865), the Universal Postal Union (1.874), the World Tntellectual Property Urganization (1KK3), the International Instihte of Agriculture, and the Internationat Forestry Center (3,904). The mmes of the first three organjzations tell their purposes; vvithixl their narrow donnahs, they hstitutionalized international cooperation and created w a s oE international governance. The agricu,ltu,ral and, fnrestry organisations funclinned prharily to exchange information, and had no formal governance roles." Today the picture is much richer. The universal and bmady compeknt United Nations has associated with it 18 specialized agencies, rmging fPom the original International Labor Office (ZLO), m d htemational Tetecommunications W o n (ITU) to the W r l d Health Clrgmization ( W O ) , the World Meteorological Orgmization (WMQ), the Food and Agricultural Organization (FAO), to the Tntemtional Civil Aviation Organiza-

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tion (ICAC)). Most function as transmitters of technical information, Some, like the old ITU and the ICAO have governance fmctions. There are 14 other UN Bodies, like the United Nations Children" Fund (UNICEF) and. the United Nations FXigh Commissioner for Refugees (UNHCRl.6 'lhere is an equally multitudinous array of regional organizati.nns, s o m with general political cmpetemcc, most functionally specialized. Thus, Alrica has the Organization for Africm Unity (OAU), in the former category, and the UN Economic Commission for africa, in the latter, as well as more than two dozen more specjaljzed functio~zalorganizations, rmghg from health to water management, The UY.ganization of An-terican States (C)AS), originally the I'm-American Unim (191(1),the oldest of the regional organjzations, embraces all the countries of the Americas, The 8 A S origisrated at the initiative of the United States, as an instnmlent of American hegemony. It has grown into a m m balanced f o r m , whicl-r the Latin Anterican and Caribbean states frequently use to modify or oppose U,S, policjcs. Eurclpe, the Arab countries of the Middle East and North Africa, Southeast Asia all have both general m d specialized regional organizations.7 The growth in number and scope of nongovernmental intematimal organizations (N(;C)s) beginning somewhat later has been even more rapid than that of h r m d ktergovernmcntd a s . The UN gives recognition to NGOs by registering them. In 1985 the Eeonomic and. Social Comcil registert-d m e 750 N G a ; eleven years later the number bad doubled. h2 &&-ion t-he UN Department of Public Information had ~ g istered 14W other NCOs in 1996.8 The organizations cover a wide spectrurn of activities: disaster relief, health and medicine; human rights generafly and rights of specific groups, women, children, aborigines; envimnmental concerns. The typical NGO combines action in the field with political lobhying in national fora and in the tinited Natims system. Embiematic of this combined approach is Parliamentarians for Global Action, an NGO whose members art- members of the legisraturrs in their ~spectivestates. The organization has been particularly activc in arms control, dvocating the Cannprehmsive Test Ban Treaty and. the unlimited extension of the NonProliferation Treaty. The orgmizaticm lobbies in the General Assembly; its mernbess also lobby individudly in their several legislaturcls, thus pmvicrting one example, among many, of the interpenetrating of national domestic and internaticrnal politics. It is a connmonplace that the sovereignty of states in the economic sphere is greatly constrahed by international forces, No state can individudly orcler its macroecmmic monetary and fiscal politics with any wide range of choice independent of market constraints. Reaties and conventions set other constraints, whether on tariffs or fishing, Some-

what less frequently noticed is the increasjng importance of substate political actors in the international realm. For example, the EU deals not only with its member states, but also directly with special regions within them in respect to subsidies for particular underdeveloped areas, American states now typically org"ni"e trade and inwestment missions in other comtries, both promoting the exports of companies operating in them and seeking foreign investors within their jurisdictions.. China's regions and large cities deal directly with foreign ir-tvestorson a variety of issues, rather than through the central government. The national state is neither an exclusive nor a unitary actor on the international scene. As the result of the multiplication oE the number and kinds of international actors, states, substate political units, international organizations, and NGOs, aIl states, including large, rich, powerful mes, arc involved in a continurrus web of formal puhlic and quasi-public intentatimal s c r u k y and djscussiorn of their activiy in dmost every sphere. The consequent need for states to justify themselves and the force of the international process and its echoes in the domestic political realm place sipificant canstrahts on. the actio~nsof individual states.

Adam Smith has triumphed over Karl Marx worldwide. For 150 years, socialism and central planning offered a plausible alternative compethg candidate as the basic organizing principle for a socioeconomic system. Their appeal was generated by the widely and detlply experienced shortcomings cJf the industriafizirng market economy of the nineteenth century: grinding labor, poverty, urbm squalor, unemployment, geographical displacement, and the destmctjon of settted ways of life. These ills are still with U$, now less widespread and less acute in the rich nations, but equally or more so among the poor majority of the world. But the collapse of the Soviet Union, which practiced what its ideoiagies and acdytes hailed as "real sociafism" in the days of ascending Soviet appeal two and three decades ago, has all but swept Marxist socialism horn the world ideological stage. Q~lythe small states of North Korea and Cuba retain an dicial ideological commitment to Marxist socialism; both artr in poor econontic shape, and North Korea appears to be thc m s t successful of the world" p&ties at isolating itself and its peopae from all interaction with the outside world, China talks socialism officially but has stopped pacticing it, Cornmmist parties elsewl.rere in the farmer socialist world, mstly rechristened and withI so to speak, new coats of exterior paint, =main strong, especially in Russia and some other republics of the former Soviet Union. 'Their stre1ngt-h lies in part in their c m t k u h g grip m an infnerited orgmizational stmcturc with, deep penetration into

Fqty Years of Peac~alzd Prosperity

139

their societies and in part in their promises to alleviate the pains of transition to a more market-directed economy by sioLving down its pace. The intellectual classes, the manulacturers of idedogy, have been deeply affected by the change, From the Great Depmssion on, Marxist and Marxisant writers and thinkers almost everywhere, with the ertception of North h e r i c a m d the U'njted Kingdom, dominated these groups. The third-world intellllectuals who came to the fore in the postWirrld War E wave of decolonization almost universally shared this orientation: their anti-imperialism was strmgly elntwined with anticlapitalism, ~Rectingthe Marxist understanding of imperialism. Tke collapse of the Soviet Llnicm and its satellites reinforced the rightward shift of t-he idedogical spectrum that was a h a d y underway in thc rich countries of VVirstern Europe, Paosth America, and the Pacific :Rim. It destroyed the symbolic appeal of m "actual socialism" the Soviets provided to the third world, as well as the Soviet role as a sot~rceof- anti-imperialist, anticapitdist propaganda and material as well as symbolic resource for Marxist intellechtals. On the world stage, the ideologicai struggle over socioeconomic orgmization has become one in which the advocates of strong laissez-faire capitalism arc advancixlg, their more social-dernocrratic oppments are =hating, and Marxir;t anticapitalists are off in the wings, perhaps on the way out. The iddogical transformation coincides with the penetration of all corners of the world by t-he global market in goods, capitd, and, to some degree, labor, The ginbal m r k e t reaches into many areas that were mostly outside the reach of the earlier world market in the period from the 1870s to World War I. Market capitalism is the carrier of two impartant wider ideological and cullturali currents: instrumental rationalism, and individualistic hedonism. Ii~stmmentalrationalism, the. culture of mems-ends calculations, is embedded in the argmization of business and its day-to-day management in the context of a market economy. The habits of rational calculation push organizations and the people maming them to universalism rather than pmticu,la,rism, eMicacy rather than status, in respect to their workaday relations with others. The same habits and attitudes are embodied in the institutions that generate increases h the stock of h o w l edge on which improvments in the techology of producrion rest, and transmit it to the oncoming cohorts who staff the system. These forces are slow-actil-tl;, as the survival of many forms of social exclusion and dornination in most modern countries shows, but they are persistelnt and, over t h e , powerful. Individuaiism and hedonism are also strongIy implicated in the market society hndividuals as both producers and cmsumers are taught to focus on their own (and their Ifamily") achievements and satisfactions,

Occupational roles are incrcasixzgb the major source of social status, and income is a major index. The contb-tued creation of ~ ~ goods e w and serv i e s and t-he parallel creation of ~ l c wwmts for them are important drivers of economic growth, A notewlrrthy aspect cJf indkiduaiism in the producers' r d c is the high social valuation. market society places on successful exrtrepreneursihip, the conception and realization in practice of somethl-ng new: a new product, a new process, a new market, a new orgmization.9 The interrelated ideologies of democracy and human rights have spread in paralkl with the ideology of the market, though not coextensively with it. Uemcracy and human rilr;hts are directly related, hut analyt.ically separate, connected in part by the idea of the rule of law- The central tenet of the democmtic ideolqy is that only democratic governments are. legithate: namely h s e for which a bmadly based electorate chooses its government in regtrlar, hquent, and fair ellections m a oneperson-one-vok basis, and in whjch all are eligible to compete for office as well as vote. The ideology of human rights comprises two sets oE elements: one set limiting the powers of governments over t%le lives of their citizens both substantively and procedurdly; the other, specifying some minimuln set of positive obligations oE government to their citizens. 'There is much wider agrecsnent on the first set-freedom of speech, pxless, assembly, and religious worship, due process of law in any deprion vation by government of the liberty or property of its citizen-than the second, which hcludes such matters as obligation to provide some mhimurn level of education for aZI children, or mhimum subsistence for those Wlflo are unable to earn it in the makeplace. Although there is a broad carrelation between democratic gover and respect for human ri@ts, it is hardly a one-to-one comspondence: some oligarchical goverments have been more respectful of human rights thm many Ihat are at least formaily democratic. The sprcad of ideologies of democracy and human rights is facilitated by the spread of the ma+ket economy and its ideology. Again, there is neither necessary cannectior~,nor anything like or~e-to-onecorsesponde~~ce; one need. only think of Singapore, Thailand, or hdonesia to make that goirrt. Yet the changes over the last decade in South Korea and 'fBiwan also make a point, The comeetinn between market society and d e m cratic polity lies more in the ideological and cultural compati:bility between the indiviciualism that market-orgmized societies induce and inforce, and the individuafism that underlies dcrnocratic organkati.on of the polity, Zi> be surc, the egalitarian strand in democratic thought is not directly presmt in the individualism of the market, but the pressures of the culture of inskumentd rationalism, pusfiing against ascriptive distinctions m m g persons, g0 in that direction, It is true that the market society tmds to generate, and its ideokgy to justify sipificant ecmomic

=-

Fqty Years of Peace alzd Prosperity

l41

inequality, and in this respect it does not reiniorce democracy There is, however, another positive clmnecticm: 7beeffective functioning of a market economy depends strongly on the rule of law with respect to property rights, and the limitations of the arbitrar)i exercise of power in economic matters by governments. Althugh, again, the rule of law in these respects does not directly promote democracy or human rights, it helps create a social climate: favorable for them, As well as being assisted in all these ways by the spread of the market as the primary means of"socioeconomic organjzation, the ideologies of democracy and human rrghts are spreadjng on their own. They have wide appeal to the m;l_jr.tritiesof the world's population who live in golities wf.tere they are absent. entirely or inpart. 7"he gr0wt.h of a wnrjld society discussed beioui, makes it easier for a wider and.wider audience to be exposed to that appeal. Furfier, it makes the expression of eiirect opposition to thcse ideologies less legitinnate. Governments are apt at least to invoke the labels to cover practices that are in part the opposite, In an essay pub1ishc.d in 1993, Ernest Haas discussed the distribution of states by the degree to wh,ieh their crjtizens werc free and their govemments democratic.lWe presented the compilation made by Freedom House shown in Table 2.2, which exhibits a sipificant increase in the percel~tageof states and their popdations that are either "free" or ""partiy His o m more refhed classif ration divides states into six classes as of mid-1992, as follows: States with a relatively unbroken record of peaw"fut change of ent by democratic means before m d skce 1975. 3Q% Fonxerly authoritarian or totalitarian states that have conducted a peaceful change cJf government by democratic means since 1985. IQ% Formerly authoritarian or totalitarian states that now have ~ g i m e committed s to democracy and &at have conducted one peaceful and demncratic electinn. 32% Authoritarian or totalitarian states committed to liberalization (regirnes that have announced the intention of holding multiparty elecljons and allow freedom of"advocacy and organization), 18% Authoritarian regimes under single-party dictatorship, or army rule, uskg selective repression cvithnut seeEng fctrcjble change in social m d economic life. 39% Totatitarian regimes under single-party dictatorship, seeking forcible change in society and econosny. 6% States whose situation is unclear because of unresolved civil war, 5%

TABLE 7.2 Distribution of States and Populations by Extent of Political Freedom, 1073 and 1990 Percelt t c$ States

Free

PnrEfy Frce Not Free

Prrcen l- of PupuEatioe;'~1 Free Parfly FRY Not Free

If one equates Haas" classes I and 2 with "Free," 3 and 4 with ""Partly Free," and 5 and 6 with "Not Free" in the Freedom Hause classification, his classification shows a mughly similar pattern, and thus reinforces the judgment that democracy and human rights are spreadjng as practices and supports a stronger conclusion on the spread of the idealogjes of democracy and humm rights thm the Freedom House data alone.

Changes in Social Organization The ongoing and accelerating revolutions in technologies of trmsportation and communication, which have been central to the increasing global inlegratio11 of national economies h t o a single world economy; are also mating a world, society. The sense of a slngle world society is captured, if exaggerated, in Marshall fvfcluhan" phrase ""the global village.jf3U hvorld society can be defined as existkg when importat groups in most countries are h communication with each other and share ideas and interests, their shared ideas and interests constitute significant elelnents in their actions, especiaw as they impinge on the polifical sphere, and this irnpact is spread widely among nations. jet airplane has ~ d u c e dthe cost of intematimai and particularly intercontinentd travel to a level that has m d e mass tourism possible. The result is that increasing proportions of thcr middle classes of most countries have had some experience of societies other than their own, More important is the joint effect of convenient, rapicl, and cheap longdistance travel and cheap, reliable, and cmvenjcnt long-distance communication by telephone, fax, and e-mail in uniting elites of various nations into international c m m i t i e s . Seiel~tificelites have long been connected by interchanges of comm~nicatianand international conferences and congresses, but the intensity and frequency of their interchanges and face-to-face meetings have greatly increased, and those meetings and interchmges have involved a larger fraction of working scientists e-hmever before. Social scientists and the social sciences are bec m i n g as htemational as the natural scie~~ces, The growkg intellectual role of comparative studies in all the social sciences bas played a role in

Fqty Years of Peace alzd Prosperity

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accelerating the process. Other cultural elites-musicians, dancers, writers, scholars in the humanities, movie-makers, journatists-a havifig the same experiences. So are elites in some sports. The globalization of the ecmorny involves more and more businesses in activities in other than thrir home nations that go beyond the export of their prodttcts and inchde production, research, marketing, and service organizations that are staffed mostly by nationals of the countries in which they operate, but typically involving some ercpatriates, especialy at higher managernernt levels. 011ce s~lchmdtinational corynra.t.ionswere largely American-with the exception of a few oil and other mineral producers. Today only fifteen of the fifty largest muitinational corporations are American; nineteern are Europem; thirteen, Japanese; three are based in other countries.12 As a consequence, business elites, including the engineers and applied scientists who work chiefly in a business framework, arc becoming an hternational cornunity too. So arc political elites. &re again, the tranche of top politicail leaders and professional diplomats has long had a certain community crossing national bout~darks.In earlier eenturks, it was to a substmtial degree a bnmity, espwi"lly among mona~ihsand aistwrats. But now the interchanges encompass much wider groups md. reach deeper, including members of legislatws and civif servants, as well as top political executives, Even military elites, inthe past the symbolic bearers of national pride and idmtiv, are creating communities across national and alliance lines. Further, the internalionalizatian of ncws and entertainmernt trhroug%l CNN and the World Wide W b brings large parts of the nonelite world into virtual cmtact. It also spreads knowledge of what elites say and do, and thus narrows the distmce between elites and nonelites. I:inaIly$the growing activity of NGOs of an intmatimal character also contributes to the formation of an international society. Some are focused djrectly on action, such as those concerned with disaster relief; some on political efforts to influence the actions of governments and formaI internatimal organizations, such as human rights agencies. iall are in some sense political. actors, mobilizing cmstitnxer~ciesin many nations and acting in both the many domestic and the international political fora, Perhaps the most impmtant NGOs are the mul.tinational cmporations, though they usually are not thought of u d e r this rubric. Like all businesses in a market economy, they arc in contjnued interactiosl with g w ents that regulate, tax, and subsidize them, and are effortfully stmgglhg to keep the t e r m of their relations favorable. h a t u r d result of these interactions is the transmission of information and irnpulses originating on both sides of the transactions among jurisdictions. Furthermore, businesses can become in\roluntasy trmsnnissims age~ntsfor other forces, which originate: in one or another of the societies in which they

operate, and wfirich are at best neutral and frequently hostile to their own i m d i a t e ecmomic interests. h e r i c a n companies operating in South Africa in the '70s and '80s became m hstrument for trmsmitting disappmval of apartheid on the part of many groups in the Unj-t.edStates to the South African government in more effective ways than these groups coufd have achieved had the business connection not exi,sted. Today, analogous pressures on U.S. producers of footwear and clothing with factories in South and East Asia may be causing changes in labor startdards in those countries" All these instlitutions and groups, s m e more, some less orgmized, that reach and function across national boundaries form the strands of the thickening web consfitutkg m hternational society m d permeatkg the boundaries behnieen state and non-state actors and ;international and domestic politics.

Changes in Military Techno2om 'The destructive power of organized military forces has increased vastly over the past halkentury or so, gl-eatly stimulated by the large investments in military technology during and after World War If. The most outstandi,ng result of that impulse, the nuclear and balbstic rnissjle revolution, is now virtually completed, having crcated the capability of delivering lirmfttess liestructive power to any place on the globe. A second wave of imovations is now in course m d will conthue. It has two prime dhensions: the capability to &liver force in carefully graduated amclunts with great precision even at great distmces, and the caphility to locate the assets of an opponent in a wide variety of drcumstances4a.y or night, fair weather or foul, fixed or movirrg. The new weapons produced by the first technological volution may be too powerful and tas hdiseriminate to be used in actual fighting..So far, except for their first use, they have not been put into action, whatever their defensive value. The weapons i s s u i ~ ~from g the mgoing current wave of techological developmw are not under the s m e constraint.^, In early versions, the United States used them in the Gulf War, and they demonstrated some capacity- to perform as hoped, thcrugh not living up to Ihe ads, as ncwly developed weapons rarely do in thcir first: use, Investment in improvi"g &m and developing new ones cmtinues, Logistic capacity to move forces from their home bases to rcmote areas is almost as importmt to a high-capability force as its weapons. This capacity depends more on organization and training and less on investments in technokgies specialized to war. Rut it is expensi\le and quires large capital investments, especidy in aircraft, ships, and communieations equipment.

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The gap between the power of a high-investment, high-technology, highly trained rnilitary force and that (II ordhary forces is large and widening. Substantid continued investment is required to field, equip, train, and mavltain such a force. Only rich and relatively large nations s poare able to create and maintain such forces, and it ~ q u i w persistent litical will to do so. Not only wealth in generd, but scientific and technical capacity is needed. Just how much capacity, over what domains of science and technology, depends in part on the degree to \zrhich advanced weapons m available in hternatimaI tradc. Nations have typically souglnt a high degwe of self-suffiiciency in the provision of crucial items of weapmry, and rclstricted the exports of their best and necvest military products to close allies. More recently, treaties and kternational regimes have forbidden or restricted trade in particular suspect classes of w e a p m s weapons of mass destructio~~ m d ballistic missiles.'" If these practices cmtinue, only nations commanding wide scientific and techical capacity in etectronics, ccrmputers, telecommunications, optics, materials science, and aerospace would be able to maintain nrrilitary forces at the forefront of capability. Further, a fairly large flow of recruits with at least good secmdary education, as well as more highly educated ofGcers in smaller numbers, would be needed to staff such a force. Alf these factors aajain point to the continuislg disparitks in military potential between the few lafge, rich nations and the rest. M e t h e r those nathns potent-idy capafnle of &ployin.$ and maintaining effective, widespectrum military forces at the frontiers of technical capability in fact do so, and at what scale, will mmah, of course, a matter of political decision. The proposition that the trends of change over the last hdf century sketched, a b o v e i n political orgaslizatim of the intmational world, in ideology, in the growth of a world societli, and in miitary technologies and organization-will continue at a greater or lesser pace, or at least be mahtained and.not reversed over the next half century, is a m c h more likely forecatit than the alternative proposition, that they will be reversed. If these trends do coMinue, how wiil they explain the half century of peace and prosperity that our imagined historian looking back from 2050 will have observed?

Why There Was Peace 'The m s t d i e n t internationd political issue at the beginning of the period. was the gap in weli-being between the minority of rich states and the majority of poor ones. This problem oloviously could not be resolved or the gap dimhished by a war of the poor aga,i,nstthe rich (symbolically, South versus North). In terms of milbry power and the prospects of suc-

cess, such a war was a nonstarter. Most of the poor nations, in fact, Fnrproved their lot over the period. Continued access to thL. markets and capital of the rich was the key for this result, as explained in the following section, This access was maintained and advmced by discussions in. international fora, as well as by the balance of political forces in the domestic politics of the rich countries. Wlhi,le thc impulse to protectionism was always present in the nations of the North in considerable strength, it was outweighed by the interests of those economic sectors which gained from imports, and saw investment and export opportunities in the South, reinforced by the political weight of organj.zed groups focusing a widespread diffuse sentiment in the NcJrth that their countries had an obligation to help narrow the gap. 7i,be surcl, the minorlity of rich nations in the North could have been indifferent to the miljority of poor people and states in the South and could have sought to insulate themselves from tht.ir stmggles, conflicts, and problems. At the beginning of tkc period, it was certaislly the case that the bulk of international flows of trade and investment was among the rieh and upper-middle-income na.t.ims, and s m e saw ""letting the poor stew in their own juices" as a plausible policy path. But both economic and pditicai prtrssures went in the opposite direction. The competition among bushess Hrm .for access to markets, resources, and cheap labor drove t h other w q . So dld the polit.ical pressure from the South in international fora, m d their reflections and reverberations in the domestic politics of the Nort-h. The rich states had no reasons to seek war, either with each other or elsewhere, T h y w a mostiy democratic, particularly the larger ones. Many of those that w r e not, w r e populist, in the sense that the welfare of the rcpresentatke citizen was the central object of state policy, as, for example, in Singapore. The k w who were exceptions at the oUtsef of t k period, such as Saudi Arabia or Kuwait were too weak to cmsider war as a serious policy option. For a h o s t all the rich states, economic and social issues, rather than hterndional o~zes,dominated domestic politics. The bencfit/cost ratio fos war in both economic and political terms was much more likely to fall short of one &an exceed it. The continued increase in the destmctive c v a biljties of: conventional weapons weighed heavi,%y in any such calcdations, as did the existace of nuclear weapons. Further, the popdar willinpess in the rich comkies of the Nor& to support:war, *atever a "r("dist" calculat-ion mi.ght show, was very low. Chly samething that could plausibly be seen as a fireat to the securie and prosperity of their cczuntrjes could justify political leadus in askkg for public support for war,'" The middle-income states and the more successful among those initially poor werc moving toward, the rich in politics and ideology. Their

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pmsperity was tied. strongly to international markets and the attitudes of investcrrs toward them. Market ties militated against war. At the beginring of Ihe hdf century there were many conflicts between particdar nations of the sort that had traditimlally led to war, and had in fact erupted in war in the =cent past. They included the codicts between India and Pakistan over Kashmir; between Greece and Turkey involving Cyprus and the Aegean boundary between the two; between Israel and its Arab neighhors. "T'he prewwe of the international system organized Llzrough the Secwrity Council and supported by most of the militarily powerfll states finally resulted in the settlemmt of these conflicts by negotiation, although not wiahout some fur&er episodes of vicrlence. Two large states, Rtxssia and China, w m also engaged in cmflicts with their neighbors that just bordered on violence at the beginning of th period. Both of them had the potential of becoming much wealthier and more militari:ly powerful; Russia was d y nekvly and b m l y democratic, China was fully authoritarian. Arguably both had incentives to behave in a very differcmt way from tbr other large, richrr states. In fact, both discovered that their paths to prosperity; down which they had already started, lay through hcrclasing integration into the capitalist world market and were incmsistent with seek% to dominate their neighbors by military force, either l.krough intimidalion or applicathn. Over the course of time, they heclame more and more like other large, rich states in their internationd behavim and their domestic political structures. It might well have been diffe~mt;possihle dtemative paths are discussed below. In gmeral, no state fnitiated a war or smght to settle an ongoing conflict by war because it wodd have unit-rd most of thc rich and militarfiy powerhl states against i t That initiatjng war would have this result became ever m m litkely as the delegitimization d war as an instmmmt of national policy proceeded in a h o s t all democratic societies. The underlying comitment to the peaceful resolution of international disputes set forth in the UN Charter beecame the settled belief oE the great m;-tjority. The period had begun h m epidemic of internal conRjct chiefly in the poorer states, but in some middle-income ones too. Such conflicts seemed. endernic in Africa, but took pbce in parts cJf South Asia and Latin America as well. They hvere caused by a ntixtrrrc of elements: Simple struggles for power were often exacerbated by religious and ethnic conflict; ideological elemnts also played a role, partly reflecting class wars, partly the rclsidue of Cold War struggles and the powerful mixture of anti-imperialism and anticapitalism. In many cases, the persistmee of Cold War ideological clrntlict was =inforced by the cclntfnu% struggles for power betweelz factions that had been s~~pported if not orgmized by the United States or the Soviet Union, and, in Africa, by Cuba and China.

Over b e these conficts died out. Their most rapid end came in Lath AmeAca, where the change in U.S. behavior caused by the end of the Cold War and the replacement of dicrtatorial gover ents of the left and right by elected governments of a more democratic cast led to the resolution of many clrnficts by compromise and concifiatictn: Nicaragua and El Salvador provided early examples. The Orgmizatiol~of Americm States and vclxious NGOs played. a facilitating role in these situations and 0thers, providing political pressure on the parties to cease fighting and move to comprolnises and electoral rclsdutions of conflicts, and help in organizjng elections and pmvidhg external observers of their fairness. Many of these internal conflicts had external repercussions in the shape of ref~tgeeflocvs, wcapons smuggling, and border crossings by armed bands that stimulated intervation by nei&borsf by rcgional orgmizations, and by the United Nations seeking to darnpen and ultimately resolve them, By 2010-2020, the middfe of the half century, the organization of competent regional peacekeeping forces under the joint d Security Council m d ~ g i o n a organizal auspices of t-he U ~ ~ i t eNations tions such as the QAU m d OAS, greatly assisted in halting armed conflicts at an early stage and substituting poiitics for civil wars.15 Peace Pemitted Prosperity: How Did It Come About? The absence of large anci/or widespreatl wars pemitted continued, if not unixlterrupted, economic growth worldwide. The experience of the last several decades of U?is century taught nations what they had to do to take ad\)a~~tage of the natural dynamic of market capitalism tcr achieve sustaisled economic growth. The prirnc mans were ahwing m d pro~~oting the e x p m i m of markets at home, and opening their clcmomks to international trade anli investment." Domestir market expansion meant chkfly ~ r n o v h ga varkw of restfictions and obsbcles to the grow% of peasant agriculture and.business, and also the provision of some hdjspensahle public goods in a rc.a~;fmahlyefficient m er, par"tialarly educaticm and. puhlic heal&, as welt as the physical infrastmctures that are needed for an urban society to funrtion, These actions and the openislg of the economics to international trade and investmtvnt were compkmentar forced the other in a virhzous circle. The djsappearance of Lhe ideological conflict about the proper path to growth-market capitalism and international venness vs. socialism and self-sufficient development-*at had marked the previovls haif-cenbry made it mwh easier ctr the aspiring nations to learn and appiJi these lessons with rcasmabje persistence. To learn and apply these lessons rc-rquired gclvemments of modest strength to betnave in a modestly sensible way. They had to provide and maintain the legal framework for a market economy enforcing property

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rights, restrainjng corruption within acceptable bounds, rcfrahing from arZtitrary confiscations. 'Ihey llad to have the legitimacy and strengtb to colXczct enough taxes to szlpport these activities and to provide the physical and sociai infrastructure required-roads' education, public health. They had to engage in enough income rttdistrihution and cor~ctionof egregious m r k e t failures to keep the social peace. T'he experience of the United Kingdonz in the nineteenth centuq (9815---1914)shows that m c h ecmomic inequality m d social discord and conflict were consistmt with vigorous econo~nicgrowth and political. stability. Democratic and populist states, as most we=, were always under pressure to avoid pab~fuladaptation to economic change by protectionism and szxbsidizatiorn. 'These and other forces inclincd thern to promise more than they had resources to deliver and to cover the gap by inflation. They resisted these pressures with enough success to prevent Mation, overvalwd currencies, and protectionism from choking the international flows oi trade and investment that propelled growth. These efforts of aspiring natic,nat governments were svported in a modest way by assistmce h m international orgmizatims and the richer nations of the North, A modest amount of investment came through the World Rank and similar agencies; a g ~ a t e amount r of technical assistance, particularly in educ&ion, public health, and nnecdjclinc e m e through a variety of international organizations and :PdGOs. But the major flows of both resources and techolngy came through the international mrkret, l.he competitive efforts of business corpor&ions seeking markets, labor, resources, The successful governments in the South grew increasirtgly skilled in usillg their control of access to their markets to bargain with interna,ti.ond business over the conditions d e r whiCh they operated.. Increasingly over the period, the governments of the South were suppcntcd in these dforts by the devdopment of international standards through the political.activities in the North of NGOs and the publics they mobilized, as well as by their own political pressures in international fora. The result was something much less t-hmmid-twentieth-ce~~tury Western European social democracy, but also something more than mid-nineteenth-century lalssez-f aire. A half-century historical cmspeetus that could be appropriately characterized as one of peace and prosperity by no m a n s implies that both we= uniform or cmtiuzuous, Al.though these were no big wars, codicts, both internal and intematimal, episodically broke out, and some intern& conaids persisted. Mast but not alf, countries folloklp'ed the path of emnomic openness to growth. Some did, so with more persistace than &ers; some failed entirely. But 2050 seemed as much better than 1995 in terms of peace and prosperity worldkvide, as 11912 seerned than 1,812 in Europe and Nor& America.

Alternative Passibilities Dominated by Wars and Preparation for Wars The most plausible alternatke possibilities that lead to a much bleaker outlook for the next half century invcrlve Russia and China. Indeed many analysts writing today see them as not only plausible, but more likely than the optimistic scenario sketched above. In this view, Russia today is "Wehar Russia," filled with unmanageable hternal canflick, smartkg with injured pride at a humiliathg defeat in the Cold War and.an equally humiliating postwar settlement, in which its fomer subservient allies became the allies of its cmquerors, particularly the hated United States. 'The consequences are predicted to parallel those in Gemany-an authoritarian nationalist Russia seeking to recreate the Soviet Empire that will at least re-ipite the C d d War in Europe, if not start a hot one. This scmario is clearly possible. There are two reasons to deem it unlikely The first, indirated above, is that it is inconsistent with the path to recovering its strezzgth on which Russia has already started: converting from m almost isolated centrdly planned. sodalist economy to a market economy integrated into the inkrna.tiona1 market. Without a high degree of marketkatio~zm d hter~~atio~zal hztegration, Russia will recover its economic strength only slowly, if at all, It would h s be hard put to build up its military strength, and without that strmg$h it could neither attract its neighbors nor overawe &ern, especially if fared with m alliance of the rest of Europe against it. % c o d , m d mare fundmentally, without m ideobgical substitute for Cmmunism, now dead. beyond revival, Russia could not create a strong enough state to compel a n?ajority of its pmple to commit themselives to this goal, Coercion m d repression done will not suffice. The other threat, already on c ~ just r w e r the horizon, is an aggressi\/e, expansive Chha, the world's most populous nat-ion and with rapid economic growth, seeking hegemony over East Asia. Et would do so as an authoritarian polity allowir-tgcmsiderable scope for a market economy, and for the wealth m d ease of its successful,busirrcssmen, so long as they accepted the political dominance of the state, Et would attract considerable support from werseas Chjnese throughout East Asia, and the respect, if not admiration, of other nearby nations where the tradit.ions of democracy and h u m n rights are shallow. The result wodd be, at best, a Pacific Cold War, with Japan either an uneasy neutral between North America and the Chinese-dominai-ed cmtine~zt,or joining the Chinese camp. At worst, there would be a Sino-American war arjsing from an American defense of the indepencience of Taiwan and the Philippines, necessary beaus@of a Chinese failure to take seriously U.S. clernonskations of resolve in response to repeated aggressive moves by China.

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The darkest view of the possible futurc sees the unim of both these scenarios in a revived Sino-Russian allimce, this time with China as a more equal partner, but with Russia s ~ ~ p p l y kthe g majority of the nuclear forces. The resdt: at best motber fifty years of Cold War, The reason for thinking these oukomes unlikely, even if not impossible, is the s m e fnr China as for Rwssja. China's prosperity is as deycmdent on intmational, trade and investment as Russia", perhaps more so. h overly aggresshe path risks cutting back China% access to international markets sevedy and so endhg its rapid, grocvth along the capitalist road. Amther =ason is that Chinese military capacity is still modest, especially relative to that of the United States and Japan. fn the short run, aggressive behavior by China is much more likely to move Japan even closer to the United States, and their combined power f a r outweighs by the Chinese would not China". Thus, even the narrowest calculatio~~ warrant the choice of an aggressjve path in the near futurc, The possible reaction tl-tereto, especially by the United States and Japan, would by combining economic and military pressure slow Chinese economic growth and could even halt it, The further into the future one looks, the mme likely that the Chinese economic transformation will hawe produced a political transformation as the result of its cor~tinuhgintegration into the ixrtemational economy and po2ity. A third alternative scenario for a thrtratening rather than a promising futurc rests 811 the possihle smstahed failure of the rich staks to deal with, the social and political strains arising from rapid economic change, caused in part by gtobalizatim, in part by contiz~uingchanges in technology favaring highly skilled and educated workers over the less skilled. The current problems of job-displacement, unemployment, and increasing inequality in the distrihution of inrclme and wealth would be exacerbated. Political canaict withh these countries would hcrease, and the response might be the suppmt oi more repressive gwernmmt, implementing xmophobic and protectionist policies and tderating or stirnulating social aggression against minorities and immigrants. The increased social c d i c t and econmic isolationism would have a negatke impact on economic growth, leading to a vicious cycle of further social conflict and pctlilical repression. The same currcnts could feed anti-internationalism and hostiljty to aspiring ixrdustrializing countries in the third. world. In the extreme, a new fascism, combining domestic repression with a nationalistic and t ? & g ~ s hexternal e stance and s e e h g contahmmt if not domination of nations popukted by inferior peoples. A c u r ~ n t l yfashionable variant of this scmario sees in the rise of religious hndarnentalism, especially but not only in the Muslim world, a harbinger of a coming clash of civilizatiosl+the Latin West, Orthodox

East and Southeast Europe, Islam, the Confucian, Hjndu, and Buddhist wcrrlds, This is a vision of a worId of conflict, not coclperation, with mdernic border wars and episodic outbursts of larger ones. In such a world, democracy and h u m n rights would. recede rather than flourish, and endemic war w o d d make a poor envircmment for contirnued economic growth.17 Anotber gloomy possible future cast be sketched ccntering on ecological catastrophc: climate change accelerated by continufng deforestation and increasing combustion of- fossil fuel in China and other countries of the South; fajlure of population growth in the Middle East, South Asia, and Africa to slow down; soil emsiolz and water scarcity This scenario reflects the proposition that markets will continue to fail to adapt by responding to scarcities through substitution and fosterirrg new technoloents anci international orgmizations wifl gies and that national gowe not adapt by supplementing and on occasion anticipating and leadirrg market responses to changing constrahts on resome use. Not irnpossible; but likely718

Of course, the imagined historian, looking back from 2850, will be explainjng what will have actually happened. 'Thisjerr d'espvit simply offers

explanations for a set of pbusible resrnlts seen as more likely than some possibtc dterniitives. No future, however plausible, is inevitable, hence our inabiijty to predict it with any confidence. It is hjghly cmtir~gent,depending m choices to be made by po,i.tical leaders, parties and other poitical organizations, busbesses, investors, consumers, other kinds of social instibtions, and ordinary people. These choices will be made by human beings in a variety of contexts under a variety of constraints. The faith that sustains the optimism of this essay is that there are available choices that can be made to lead to the favorable outcomes set out.

1. Eric Hobsbawn, The Age of Extre~r~es (New tlork: 13antheonBmks, 1994). 2. See Phillip E. Tetlc~ckand Aarnn Bellien, eds., Coun$e~jact.zmlmoztght Expcritrzents in Mrol.ld I)oll'tics (Princeton, NJ: Princeton University Press, 1996). 3. United Nations, Divided World, Adam Rc3berl.s and Benedict Kingsbuy eds., 2nd edition (Oxford: Clarendon Press, 19941, Appendix C, 4. World. Bank, TrVorM Dez~elopmenl.R ~ ~ o r1995 l . (New York: Oxford University Press, 14996), Tables I and la, pp. 162-163, l a, p. 228. 5. George W. Barr, Inlemational Organizntians, revised edition (Wilmington, DE: gholarly Resources Inc., I WO).

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6. Giuseppe Schiavone, Xnterrzntionnl Organization, A Dictionary and Di~ctory, 3rd edition (New Ycxk: St. Martin" Press, 1993). 7, k i d . 8. United Nations, Ezreryone's Unifed MaE.it?ns(New York, 1996). For listings of individual organizations by function, see T k Tillzes Guide fo World 0rge7~izafion~ (London: Times Books, 1996). 9. Joseph A. Schumpeter was the Brst writer to give pride of place tcr entrepreneurship so defined in analyzing economic development. See his Theory of Economic f)c.veloptnent (Cambridge, M A : P-iarvard University Press, 11931;). This was an English translation of the work first published in Germany in 11911. 10. Ernest Haas, "Beware the Slippery Slope, Notes tow-ard the Definition of Justifiable Intervention,'" in %aura W. Reed and Carl Kaysen, eds,, Emergilzg firms of Jusd@dbfe I~ztervenCion(Cambridge, M A : American Academy of Arts and giences, 1993). 11. Marshall McLuhan arnd Quentin Fiore, Tlze Meditlnz is the Massage (New York: Random P-ic~use,4967'). 12. Fortune, Annual Fortune 500 issue, 1994. 43, Stcyckholm international Peace Research Institute, S1PXI Yenrbuuk (Oxford: Oxford University 13ress, 19941, Part IV, Arms Control and Disarmament; also Chapters 1I and 14 in SIPRl Yearbook 1993. 14. See John Muelleu; Retreatfrom Doomsday, trlte Obsolescence oficlajor War (New York: Basic Book, 1989); Car1 Kaysen, ""iWar ObsoleteTYtzternafionafSecurity 14 (Spring 4990); Bruce Russett, Gmsping the Democmtic Pelzce (Princeton, N J : Princeton University Press, 19933). 15, See Carf Kaysen and George Rathjens, ""Send in the Troctps," Washitrgfon Quarterly, 20 (Winter 19971, for an analysis of the utility of UN and regional fcxces. 16. Beepak La1 and H, Myint, The Polific~lEconomy of Pot?rj.rty{Equity alrd Growth (0xfc)rd: Clarendon Press, 1996). 17. Samuel I? Huntingon, T?ZG Ctnsh c?f'Cizliliaationsn ~ trlte d Remnki~zgofthe World Order (New York: Sirnon and Schustex; 1996). For a skepticaf review see Stephen M, Walt in Foreigr-i Poliq, no. 101; (Spring 49971, pp. 177-189. 18. See Car1 Kaysen, 'The Computer That Printed Out WQ.L.E," "reigrz Affiirs, 50 Uuly 1 9 n ) for a discussion of the rigidities of eartier mcydels of ecdugical catastrophe.

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apan, and Germany in the New World Polity'

Mihy despite being one of the great w ers in the Post-Cold War international system, does China appear to be increasingly dissaCisfied with the current world order? Why has it givm evidence that it might be a revisionist state, one that is so deeply disenchmted with tbl" East Asian political-territorial order that it might use force to alter that- order? The discussion below seeks to address these questions through a comparison of recent chmges in Chinese national strategy with those of two otber key eomtries that hnve bee11 major beneficiaries of the modern world order, Germany and.Japan. The Frablern: Chinese Economic Success, Chinese Political Dissatisfacfion China has been a mgor wimer in the cmtemporary world sygem, With the collapse of the Soviet Union, China finds itself in a highfy favorable security ewironment: For the first time in its modern history, no major state has an interest i,n trying or the capacity to undertake si.gnificant military operations agaixlst Chka.2 :Pe&aps even more important, China has become one of the great econcrmic growth machines of recent times. Frc,m the mid-1980s through the mid-1990s, its real gmss domestic prodwt. per capita grew at a rate of 6.9 percent per year, a growth experience exceeded by ctdy two countries during the same period (nailand and the Repuklli,~of Korca). By 19534, China kad the seven& largest econosny in the world, surpassed. only by the United States, Japan, Germmy, France,

the United Kingdom, and 1taly.WChina" future overall growth prospects by the early-to-mid-1990s were extraordinarily bright, and remained very fworable ever3 in the face oE the terribk economic crisis that swept through East and Southeast Asia and other emerging markets during 199"i"d 1998. Projections from such sources as the CIA and the World Bank regarding China, ht:it might have the largest economy in the world (based m purchasing power parity estimates) by the year 2020, appeared to be still creditale at the end of the 1990s." Chha's recent eco11omic success can be traced to its structural reforms of the late 1 9 7 0 ~reforms ~ that brought about the development of frcer markets and substantial privatization of economfc activiv in the country by the mid-to-late 1980s. While the m r c pllrely dcrmestie elements of t,he reform program have surely been the key to China's economic transformation, that transformation has also been due to China's decision to open its ecmomy in large measttre to the world m d its subsequent enjoyment of increasingly beneficial, economic relations during the 19ROs and 1990s with its East Asian neighbors, the corntries of W4lstefi-rEunrpe, and especially the U d e d States. Between 1989 and 1995, for exmple, China" exports grctw by 183percent, from about $53 billion to about $148 billion, and by consequence China was the wwld's nninth largest exporter by the mid-1990s." Particularly profita:ble for China has been its trade with the United States. In 1994, for example, accordhg to Cl~inesefigures, China en~oyed a trade surplus with t-he United States in the range of $7,4 billion. China's success in the h r i r a n market thus not only easily covered its imports oE capitd and other gwds from the United States that year, it also gemrated a trade surplus capahle of covering China's deficits with other innportant commercial partners-for example, Japan ($4.8 billion) and the European Union ($2.3 billion)." The figures above suggest that, while it is not yet a member of the World Tradc Organization (WTO), Chha has been in recent years one of the biggest bemfieiarit.~of the opportmities for trade that are provided by that ~ g i r n eChina , has aXso been a rnajor benefciciary of the inkrnational regimes for international money and finance, the International M o n e t q Fund and the World Bank. It is a m e h e r cJf both arrangem e ~ ~ tand s , as fames Sh has noted, China by the mid-1990s bemme the largest single national rccipicnt of current World. Bank loans.7 Given its tremendousty successfut ecmomic performance a d the important link betwee11 that superb performance and its external economic relations, one Hlight expect that China would be essentially satisfied with the contempwary East Asian and international orders*Moreover, one might expect: that China would want to do everythhg it cott1d to ensure continued participation in the FRternati~nafpolitical economy so as to

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maxixnize its prospects for future growth and even greater medium-term stature in world aMairs. And yet, China has presented sit;ns that it is dish East Asia, that it is pursusatisfied with contemporary arrangeme~~ts ing a foreign policy toward the region that has revisioni.st elements, and that it may be wilting to put into jeopardy its favorable global and political relationships in order to improve its position in East Asia." In particular, China is putting an incmasing emphasis m the use of military instruments both in the ~ g i o and, n t h r o q h arms sales, in other pasts of the wctrfd. For example, CKna has threatewd to use force to prevent the independence of Tajwan, and. in 1996 undertook missile tests close to the island to make that threat credible, h addition, China has announced claims to the potentially oil-rich Spratly Xslmds region and hdeed a large portion of the South China Sea, and has applied low levels of force in support of thlrse claims.Worecrv, China has sold nuclearweapons-related technology asld nuclear-capable missiles to Pakistan and has corn close to major sales of nudear technology to Iran,'() China stiti lags far behind the United States in military capabili.ties, and it is quite possjlble that Chat gap will grokv in favor of Che U'njted States in light of the information revolution in modern warfare. En addition, recent careful anaiyses of China's ability to prqect military force szxggest that China camot nocv use, and m y not hope, for the foreseeable future, to use military hrce to compel iTjiwan to accept control from the mairrland, or to acquire the Spratly Islands.lWever&dess, China has h recent years hcreased its allocation of national resources to the acquisition of military capabilities. According to the Ix~ternationalInstitute for Strategc Seuliies, for example, Chjnese military expenditures, adjusted by tntennational Mmetary F W I ~(IMF) m d World Bank estimates of purchasing power parjties, may have FRcrcased by roughly 40 percent between 1490 and 1995." Finally, as Alastair Johnston has recently demonstrated, China appears to be developing a war-fighthg? as opposed to a deterrence-oriented, nuclear weapons doctrine.1" In light of these actions, China appears at a minimm to want to make it clear that it is a major power hAsia. S o w evidence also suggests that it may want to bring about a significant chmge in the polit.ical m d perhaps even the territorial status quo in that part of the world. Finally China's recent: actions h regard to Taiwan and, perhaps even more ominously, in the South China Sea area, suggest that China may be willing to use military force to effect adjustments in tbr regirm+l4 If this assessment is correct, the11 it. mark a significant change front the track C h a appeared to be following from the late 1970sthrmgh the 198%. &rhg that period it seemed, in light of its domestic economic rczfoms and its npenh~gto the world econorny, that C%ha had decided to shift away from the kind of tough, territorially aggressive f m i p policy that it had.

pursued in the 1950s (the Korean War), the 1960s (the war with hdia), md. the 1970s (the war with mebarn). It appearcld instead that China was becoxnh~gmore oriented toward comtruc'eirng relationships in the regio~~ md with the m t e d States that emphasized muhrally profitable economic ex,using terms suggested by Kichard Ros~rance,China gave some evide~~ce k the 19ms of b e g h i ~ to ~ gmove down the road of becoming less of a "terrjtorial state" and. more of a "tradin.g state."'"-s It should be emphagmd that not all of Chirta's recmt behavim should t national territorial necessarily be coded as rep~sentinga new i n t e ~ sh expm"ion and control. X n pasticular, the case of Taiwan magi entail not so much the initiating of new mainland Chinese efforts to retake the island, but simply reaction to efforts by the Taiwanese government to gain new international acceptance. But there remains the troubling matter of the 5pratly Istancls. In that case, it is China that is seeking to estahtish a new situation in East Asia, nmely, to attain a nekv level of formal, legd control over the area. Formal control by Chha of that area would be mimportant ecommicaliy if, as is likely Chinese employment of force to take it led to a connict hvilh other states in the rcgion and possibly hvilh the United States, a conflict which would make it hfeasible to exploit the potential oil resources in the area. Yet this is tbe risk that China appears hmasingly willing to run, sqge"tjnf: that it has shifted its interests in favor of fomal territorial ownership, or at least hegemonyf even if this new status means the en~oymentof fewer economic benef"its.16 To the extent that the empirical. discussion above is accurate, we need to address three key questions: 1. Why has the Chinese state (or, more precisely, why have top Chinese decisioslmakers) shifted that country's orientation f m appxently becoming more like a traeiing state to turning to being more like a traditiond territorial state? 2. Why have Chinese leaders apparently come to h d intolerable precisely the international frame~iorkin vvhich China has been doing so w d for Che past ten to fifteen years?I7 3. If Chinese leaders are dissatisfied with the contemporary international and regional status yuo, why do they believe they must act assertively in ffie near firurnmy do they not wait and, MIith time and China" ppr4ected rate of iuture growth, become progressively and steadily the hegemon of the region and therclby bring about gradual changes in the regional. political status quo so that the latter is more in line with China's interests?lB It should be noted agaiin that there might be an importmt distinctio~~ to be drawn between mcent Chinese foreign policy in regard to Taiwan and

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its policy in the South China Sea. 7"0 the extent that Chinese leaders believe that it is Taiwan that is seekh~gto change t-he regiond status quo by its efforts to acquire gseater acceptance in the international comurGty, their behavior may be seen more as reactive than assertive. In contrast, Cl~illain recent years has seemed to be taking t-he initiative in the South China Sea case in terms of a t t e l ~ p t h gto create a new level of Chinese control and even sovereignty over the area. And it is precisely China" interest in establishing such cmtrol, and its wiliinpess to use force to do so, wh,ieh may be indicative of a Chinese shift frnm movirtg towards bec m j n g more of a trading state to returning to territorialist goals backed Zly tradition& power instmments.

Problem with Current Explanatiana for the China Puzzle 'There arc a nurnber of possfile ansbvers to the questions posed above. However, differences betwem Chinese nationd strategy since the end of the Cold War alld those of Germany and Japan, as we11 as (less pron0lmct.d) differences between Ceman and fapanese national slrategie, cast doubt on their efficacy. Germany has responded to the end of the Cold War with a strategy that has made it look more and more like a Rosecrancian trading state. Most important, Germany has markedly reduced its allacation of mtional resources to military power. For example, German sgendhg on defense decreased fsoan &out $46 billi,cm in 2985 (using constmt 1993 prices) to $34.8 billion in 1994, and tot4 armed forces have been cut from 478,0C)(1 persons in 1985 to 367,000 h 3994." At the same time, Germany has been a principal f m e (together with France) in European efforts to build stronger regional ixrstituticms. These recent efforts include reinvigmating thc. Western European Union (WEU) military arrangement and, under the auspices of the Europem Uninn (EU), worki.ng toward Economic and Manetav Union (EMU) and a European Common Foreign and Security blicy (CFSP). Japan d M g the Cold War was perhaps more of a trading state than was G e r m m ~and it was vastly less oriented to territorial,state goals and hstrments than was China. However, and very htewstingly Jalpan has rclsponded to the end of the Cold War by undertaking a shift dorng the trading state-territorial state continuum that is similar in dirczctim to that of China, and not Germany, although Japmfmshiftin favor of greater tercilorialism is not so great in magnitude as that of China and it certainly has not left Japan at the same point m the continuum as is now Kcupic?d by its large neighbor. 013 the one hand, Japan has not respor~dedto the erzd of the Cold W;;rr by becoming more asserthe or bellicose in Asian rcgional politics. It has

not, for example, sought to attain unilateral control of Asian sea-lmes or acem resources as has been true of China. At the same time, and in contrast to Germany, Japan has markedly incrclased its defe~~se spemdj.ng in recent years. Gcrmany still devotes a larger percentage of its gross domestic product (GDP) to defense ( 2 percent in 1994) thm does Japan (1 pcscrent), but in terms of absolute resourcle allocatjons Japan has been able to take advantage oi its progressively larger economy to spend more on defense while still staying at tbr domestically and ~ g i m a l l yimportant I percent GDP limit. The result has been that while Germm, British, and French military expenditures (again, in. 1993 constant dollars) exceeded that of Japan in 4985, fapanese expmdihtres exceeded those of all three countries by 1993-1994.2Vinally, whereas Germany has worked very hard. to assure its nei@bors that it remains firmly and ixrdced increasingly crrmrrtitted to regional cooperatim, and is willing to reinforce that commitment through concrete institutional initiatives, Japan has been highZy reluctant to accept numerous invitations f r m Malaysia to help establish a unively East Asian regional economic arrmgemmt, an$ has played a marginal role in Che oniy multilateral security asrangement in the area, the Regional F o r m (ARF) of tke Association of Southeast Asian Nations (ASEAN). Keeping in mind these broad-brush characterizations sl: German and Japanese post-Cold WBr national strategies, we may identify and evaluate at least four possible argumcmts about China and its appartlnt =turn ta territorialism in world affairs: 1. Chinir has grow i-rz e c r m m i c yclxl?e.r,am! tk~ks320xi3 has both a~ interest ilz chungi~~g the East Asilrlz order, and u rwzhallced huse wirh which to create militay pozuer and t o Z I S ~ it t o b r i q about szrch chayzC";:es in East Assit.21 Athough it is c o r ~ c that t China has greater relative national economic capa:hilities today than ten or fifteen years ago, this is dso true of Germany in Europe and Japan in East Asia..Yet Germany ir; not seeking to convert its econolnic strengths into military capabilities; Japan has not started to do so to the same degree as China; and neither Germany nor Japm is seeking to bring about major crihanges in the status quo sf their respective regions. Thus, a major change in relative economic capabilities within a ~ g i m or the international system as a whole may be a necessary condjtion for the emergence of a "challenger state" and efforts by it to use force to change the status yuo, but such a change is not itself sufficient.22 2. -The best path to securityfor a state is to nlaximize its nutkl.rul mililaty power a ~ its d C L I M ~ Y over O ~ exfertldl sources of important rf.soarc:s,z"

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For this reason China, newly empowered with a growing ecmomy is acting like a normat, security- and power-maximfzk g state. This is a useful argument. However, it has a problem in terms of its applicability to the other cases, The German case since the end of the Gold War prcrsentri us with an instance of a state that has experienced an kcrease in overall power bui has avoided. d a r t s to i_ncreaseits ppolitical-military power or territorial control*Japan represents a more difficdt case: For several decades after World War I1 it declined to convert its growiz~g economic capabilities into a commensurate level of military power, but in cent years it has enhanced its poiitical-militv capabilities quite substantially At the same time, Japan has not given evidence in recent years that it wishes to overturn any aspects of the Asian regional order, especially in terribrial matters. 3. Chinu is acti~zgmore assertively because offear of a rc.szlqotl Rrssin

and the possihilify crf tcasivns on its borders with that conrzty.

Russia dttri-tg the mi$-to-late 1990s has been preoccupied by .failed attempts at ecol~onticreform at home, the utter collapse of its power position in Europe (sym:bofized by the expansion of the North Atlantic Treaty Orgmization to Polmd, Ilungary, and the Czech Republic), and argummts with the former Soviet repubtics about the d.isposi.tion of assets and other matters related to the disscrlution of the fomer USSK.24 However, China may be concerned that Russia might, as was true sf the USSR from the 1960s until well into the 19&0s,become an adversary at some point in the future, and themfore is enhancing its capabilities and politicat status k the world h order to meet that potential challenge, The probkm with this argument is that another country that might clearly be fearful of Russi ermany-has not responded with increases in military power or greater assertiveness h world affairs. Moreover, China has not acted since the end of the Cold VVar in ways that have brought it into conflict wi& Russia (md indeed it has sought to improve relations with that country), but instead it has come into more frequent djsagreement and c d i c t with the ( m m distant) United States. 4. Cililzn has a cartclized pditical regim, and Cfges~'reginlt's are highly likely to became m0l.e hellicuse mz'litarily as they attaitt g m t e r ecolzmnic power and face i~zcmusingdo~nesf tc de~nundsfir do~nes f ic politi c ~ refonn l -25 This is a strong proposikn, and it is buttressed by the contrast between Cllha and Germany since 3989. tlcrwever, rishg autocratic states are not uncondi,tionalfy aggressive. AAer its success agahst France in 1870, Germany under Bismarck was an

example of a countsy with a very fast-growing ecmony and a very conservative f o ~ i g npolicy In addition, as is moderately suggeskd by recent chnnges inJapanese mt.innal policy, modern dennocracies may also shift away (at least slightly) frm a trading-&& orimtation and toward a territorial, military-powerconscious orientatio~~. Accounting for the Cases: Passible Paths for Eaing Farvvard Clearly a fncus on domestic politjcal variables is needed to account for the appare~zt turn by Chjna to a territorialist as opposed to a tradingstate foreign policy and its greater emphasis on such a nationd strategy as c o m p a ~ dto fapan or G e r m y . In this regard China's recent behavior m i g t be examined m d explained inpart by reference to the recent work of such scholars as Jack Snyder and Charles Kupchan. FIowever, to the extent that recent Japanese nationai strategy can be diffamtiated from Germm natio~~al strategy in the sense that Japan has increased its military power in recent years while G e m m y has gone in the opposite direction, then space will be ~ e m up d to go beycmd a purely domestic arg u m n t about the sowces of- clnange h strategy of those two countries as well. as China. En particular, if the dcscription provided, above is correctthat both China and even to some degree japan (the latter in terns of enhancing its military power) are shifiing their orientation away from a tradhg-state strategy and.toward, a more traditional territorial approach to its neighbors, while Germany is becoming even more of a trading state-then t-he question arises as to whether thew are fundamemtdly different regional-level (as upposed to either domestic or global) forces at work today in Asia and in E m p e that arc. contributing to this diffcrmtiation in behaviar. These farces in East Asia may be pushing not just China to move toward a =turn to territorial-state behavior, but may even be causing tbc. seemingly h a d case of Japan to make some movement in that direction, cvhereas an absence of such forces may be Icadi,ng to a different experience for Germany in post-Cold War Europe.2" At least two regiond-level factors may be bringing about the diffewntiation jn strategy betwee11 China and Japan on the one hmd, and Germany on the other: g ~ a t e instabjlity r in AAsia in relative ecmomir capabilities, and a lower level of trust between nations. RegimaP-level tzsrbzrk~~ce in wlaliue caplrlhililks Even with the reunification of Gcrman)i chmges in overall relatiw economic capabilities among the main Western European cowtries have not changed dramatically shce 1990; in contrast, there is a great deal of turbulence in relative capabilities in East Asia.27 Compared to China, and by cmsequence Japan (if

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the latter is basically inc~asingits capabilities to offset the growing challenges from the fomer), Germmy and its neighbors may be having less difficulty in calculatjng the W " and losers, and the more hfluential m d less influential states, in Social cupiCaf as a legacy L$ fhc Cold War. This line sf analysis would involve followjng up on Mjles Kahler's argurnent that the count.ries of Western Europe enjoy g~eaterinstitutional density and, relatedly, more favorable endowments of transnational "social capital" than is true of East Asia. It is especially the difference in rclgionnl social capital-or mutual trust-that might help exylajn why China believes it must act in the near term to translate its ecmomie g r w t h into a more favorable territoria,l-djp1omati.cxgional posi.tion, whieh in turn m y be provoking Japan to enhance its own militaq- capabilities. But why did the two regions develop such different levels oE social capitalMt least one possible argumelnt wodd be that Chc difference in social capitd refiects the mmncr in which the Cold War was conducted in the two regions," That is, the geopoliticd realities of the Cold War in Europe required the Western states to permit German rclarmment, but to offset the risks of German unilateralism the return of German power took place early under the auspices of European and Atlantic institutims. The Cold War, in a word, required Franco-German reconciliation m d the development of tmst between those two countries, and this set the stage and even served as the motor for a wider instiautionalization of state relationships in Western Europe. h East Asia the So~rietand Chinese threat was met by an American network of bilateral defense treaties. By cclnsepence, the countries in the region that received hrnerican protection did not have a need to reconcile with Japan. Moreover, when China joined the American-led coalition of Pacifie Kirn states against the USSR in the 1971fs, its joiniq was based on an informal enknte with the United States and not a formal regional arrangement involvhg other regional states, Thus, while the Cold War induced cooperation and mconciliation in Western Europe, a d set the stage for the formation of hstihttions and social capital able to withst..and the shocks of 198(3--1990,it left Asia without either a habit of institutiondized cooperation or a mservoir of mttbal twst able to contain s r ch el ti;m"ing Ch;nese power.

'The modest improvement in U.S.-Chinese relations during 1997 and 1998, including an exchange of state visits between President Bill Clinton and President gang Zemin, the vieting of Chinese-Taiwanese. relations, the smooth takeover ol Hong Kong by the mainland, and China's forbearance in the midst of the financial crises of 1997-1998 m i e t yield, the

conclusion that fears expressed earlier in the decade about China were misplaced or overdrawn. Yet, at least two of China's core concerns were not yet resolvccf by the end of the 1990s: l;aiwan was still a separate entity that showed siws of a desire for jndependence, and ownership of the Spratly Islands was still an open matter, These two political problems are likely to emgemdcr regional tensions in the years ahead; one or another m i e t even be the basis for a hill-fledged political-militaq crisis involving China and the United States. While economic turbulence in Asia during the last years of the 1491)smight raise questions abouC China's grow& tr;ajectory it remahs likely that China will continue to become an, economic pwerhouse during the next tvuenv years. Thus, there is a good chance that we witf continue to be faced with the combhation of growing Chinese capabifities and growing Chinese ambition in regard to Taiwan and tbe Spratiys. So we are left with several questions, What will China do with its growing power? M a t does it want from the international system? What can the ldnited States and its main allies do to smooth the way for China as it grows into its new status in world polities? Should the United States facilitate or impede the growth of China and the enhancement of its power? These will be the trouhlimf;vestions that we will need to address in the years ahead, in part as a consequence of the peace and v k tory achieved by America in 1989,

Motes 1.1 thankJc>bnMueller for his very hetpfut comments on an earlier draft of this payer, and Giacomo Cltiazza for his excellent research assistance for this project. 2. On this point see Jing-dong Yuan, ""Threat Perception and Chinese Scurity Policy After the Cold War," PacFfic Foczis 13 (Spring 1998): 62. 3. See World Bank, The World Bank A tl'ns: 1996 (Washingtc>n,1996): 18-1 9. 4. See Richard Halloran, ""The Rising East," Foriligrt. PoEi~y,No.102 (Spring 1996): 11, Joseph Nye correctly points out that it is important to be cautious in making straight-line projedions about China's future economic status, but even with such caution there are strong grounds to believe that China will be a major economic center over the next twenty years: See Nye, ""China" Re-emergence and the Future of the Asia-Pacigc," Survival 39 (Winter 1997-1998): 66-68. For anafyses of China" economic challenges regarding both domestic economic restructuring (in particular, in dismantling what is still a very large and inefficient stateowned industrial sector) and external financial linkages, see Neit C. Hughes, "Smashing the Iron Kee Bowl," Foreig~2Afaz'rs 77 (July/August 4998): 67-77; and Nicholas R. Lardy, ""China and the Asian Contagon," h r e i g ~ Aflal'rs t 77 (July/AMgust 4998): 7&88. 5. See International Monetary Fund, Direction of Trade Yearbook: 3 996 (Washington, 1996): 3-5; and Dz'mfion@ Tr~deSla tz'stics Quavlerly (Washington, June 1998):

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2, On China" dramatic trade success during the past decade, also see "China: A Funny-Lcrokjng Tiger," "onon~ist, August 17, 1 9 6 , p. 18. 6. It should be noted that the bilateral trade figures prwided by both states to the International Monetary Fund for 1994, and presmted in the latter's 1996 Directiorz of Trade Yearbook, cited above in note 5, differ dramtically as a result of the manner in which each country then treated trade that transited through Hong I(c3ng: Acel-rrding to China, in 1994 it enjoyed a mel-chandise trade surplus with the United States in the amount of about $7.4 billion; according to the United States that figure was about $32.0 billicm. 7, See Jarnes Shinn, ""Eggaging China: Exploitirtg the Fissures in the Facade," Current History (September 1996): 243. According to the 1995 Wc3rtd Bank annual report, the World Bank committed $13.937 bitlion in loans to China beween 1990 and 1995; the next largest recipient was India, t s which $11.851 billion was committed during the same period. See World Bank, Rnr2zmt Report: 2995 (Washington, 1W5):69,75. 8. Frrr a very helpful discussion af the concept af state revisionism in tzrorld politics, see Randall L. Schweller, DcadEy Imbcklnlzces: Tripctlnrity and HitlerS Strategy of World Curzqucst. (New York: Columbia University Press, 4998). 9, For helpful discussions of the Spratly Xslands/South China Sea dispute, see GeraXd %gal, '"ast Asia and the Tonstrajnment" of China," h~nfernntionalSectlrity 20 (Spring 19%): especially 216-123, and Miehael G. GaXlagher, ""China" Illusory Threat to the South China Sea," hter.nnfio~TnalSec~4riI:y19 (Summer 1994): 169-384. 40. Far a helpful overview of China" international military sales programs, see Rc>bertS. Ross, 'TGhinaff' in Richad N. Haass, ed., Econontz'c Snnctions nlzd Anicrimn Diplomacy (New York: Council a n Foreign Relations, 1998), pp. 21-28, It should be noted that Ross argues that China became more cautious about making arms sales to Middle Eastern countries after 1988. 11. See 13obert S, Ross, "Beijing as a Conservative Power," "reign Afairs 76 (March-April 19917): 35-38; Nye, '"China's Re-emergence," pp. 6&-.'70; and especially Avery Goldstein, "Great Expectations: Interpreting China" Arrival," httcrnational Security, 22 (Winter 1997/98): 42-54. 42, See International Institute for Strategic Studies, The Milifary Bntatzce: 1995/96 (London, 1995), p. 27l. 43, See Alastair Iain Johnston, "China's NW "Qd Thinking': The Concept af Limited Deterrence,', l~ntemnticlnnlSeezdrity 20 (Winter 19951%): 5-42. 44. For further discussion of the pc~ssibilitythat China's pc~liciesmay be highly destabilizing in East Asia (especially if and as they evoke a Japanese response int~olvinga renationalization of its national security policy), see Aamn L. Friedberg, "I3ipe for 1Xivalry: Prospects for Peace in a Multipolar Asia,'" Irzternntional Seczirity 18 (Winter 1993194): 5-33; Richard M. Bettt;, "Wealth, Powex; and Instability: East Asia and the United States After the Cold War," Inferr-.mtioior?nltSee~sriZy18 (Winter 1993/94): 34-77; and Barry Buzan and Gerald SegaX, "Rethinking East Asian %curity," Surr~ivtuf36 (Summer 1994): 3-21, Frrr a critical assessment of this line af analysis, see Bavid Kang, "The Middle Road: Security and Co~)geration," ask^ Perspective 19 (Fall-Winter 1995): 9-28. 15, See Richard Rosecrance, T71e Rise of the Tracli~~g State: Colrtmerce and Conquesf izz the Modem World (New Yc3rk: Basic Books, 1986).

16. Robert Ross, a close observer of China who finds that it is pnerally pursuing a conservative, cautious national strategy notes that the exception to China's overall caution is its assertive policy regarding the Spratly Islands; see Ross, "Beijing as a Conservative Power," pp.41-42. 47'. That China is becoming disenchanted with the international status quo in spite of gaining fmm it would appear to be in accord with the pc~wer-transition thesis. On its argument that rising pclwers come to find the existing international order unacceptable, and are willing to w e force to change it, see, for example, A.I",K. Organski and Jacek Kugler, The War Ledger (Chicago: University of Chicago Press, 1980), especially p. 23; and Robert GiXpin, War alzd Clznnge in Wudd k l i f i c s (Cambridge: Cambridge University Press, 1983), pp. 93, 18621Q. 18, This question is prompted by Michael Gordon" discussion of Germany and Great Britain at the turn of the century: In terms of projected power trajectories Germany (clearly becoming Europe's ecclnomic hegemon) should have been confident and patient, whereas Britain (clearly a reXativeXy declining power) should have been easily provoked and yet was rather reticent to respond to German p;rtlssure, Sf3g Michael R, Gordon, "Domestic C o d i c t and the Origins of the First World War: The British and German Cases," jozrnznt of Moderr-z Hisfury 46 (June 1974): 191-226. It is also informed by Jack Levy's discussion of the argument by A.F.M. Organski and Jacek Kugter that rising chaXXenger-states will display a tendency to use military force to topple the then-hegemon and thereby bring about what b r the rising state is a more favorable international order. Levy asks about this posited tendency: "Why should the challenger incur the risks of fighting whiXe it is still inferior? Why doesn't it wait until existing trends in emnomic and military power, which Organski and Kugler cclnsider to be irreversible, catapult it into the stronger position?" See Jack S. Levy, "Declining Power and the Preventative Motivatirltn for War," World Politics 40 (Octclber 4987"): 84, 19. TISS, Military Balance 199W6, p. 264. 20. IISS, Mz'lit~ryBnln~ce3995/96, p- 264; also see p. 172, at which the IXSS reports that this shift beween Japan and the three European middle pcJwers occurred in 1993, and that it was reinforced by 4935 projeded defense spending by the major powers, and that "With the po~ssibEeexception of Russia, Japan nc>w spends appreciably more m defence on any other country apart from the US." 21. This is a line of analysis that might follow the work by Gilpin, War and Cllange and by Organski and Kugler, War Ledger. 22. This conclusion is noted by Organski and Kugler, War Ledger, p. 51. 23. This view is gut foxlnrard most effectively by John Mearsheimer, in "The Security 19 (Winter False Promise of International Institutions," bzfer~~atianal 1994195): 11; also see Fareed Zakaria, "Realism and Domestic Politjics: A Review Essay," lnter~zatiorzalSec~lrify17 (Summer 1992): 490-496. 24. For o>vervic;mrsof Russia%truncated status in world politics, and its interactiom with former Soviet republics, see Michael McFaul, ""A Precarious Peace: Domestic Politics in the Making of Russian f o r e i p 1301icy," h~nferrzationalSeczdn'ty 22 (Winter 199V98): 5-35; and Daniel Drezner, "Allies, Adversaries, and Economic Coercion: Russian Foreip Economic Policy Since 1991,'" Security Studies 6 (Spring 199'7'7):65-111.

CFzitzn, Inpan, alzd Germany in Ik New WurIcZ Polity

l67

25, The argument linking dmestic authoritarianism, and specifically political cartelization, tc:, external state aggression is pursued by Jack Snyder in Myths of Empire: Domestic Politics and Itzterrzationnl Ambitz'alz flithaca: Cornell University Press, 1991). In addition, see Charles A. Kupchan, The Vzrlnernbility of Enzpire (Ithaca: Cornell University Press, 14994). 26. Such a possible mcjvernent by Japan toward traditionat nationat strategy cmcerns and bdavior is especially interesting inmfar as recent literature would probably consider that country to be a highly unlikely candidate for such traditional statecraft. For compelling arguments that Japan has mclved decisively away fmm traditional foreign policy goals and means, see Rosecrance, Rise of thc TraAirtg Shte; in addition, and for arguments that put special weight on Japan's contemporary culture and internal political structures as constraints on such a return to traditionalism in foreign affairs, see Thornas Berger, "Fmm Sword t c ~ Chrysanthemum: Japan's Culture of Anti-Militarism," lnferttnliorznl Secllrr'ty 17 (Spring 1993): 319-150; and Peter J. Katzenstein and Nc~burrOkawara, "Japan's Natic~nalSecurity: Structures, Norms, and Policies," Inkerr-zafit~nral Scctirity 17' (Spring 1993): 84-118. For analyses which suggest that Japan's fcoreip policy is more likely to be a functic~nof external cmstraints and threats than internal domestic political and cultural conditions, see Barry Buzan, ""y pan% Defence ProbXernatique," The 1"ncGc Rez?l;crw8 (1995): 25-43; and Michael Green and Benjamin Self, ""japan" Changing China 1301icy:From Commercial Liberalism to Reluctant Real ism, Stlmival38 (Summer 1996): 35-58. 27. I pursue this argument in ""Systemic Sc~urcesof Variation in Regional Imtitutic>nalizatlionin Western Europe, East Asia, and the Americas," in inelen Milner and Edward Mansfield, eds., Tbc Political Ecorzumy of Rcgi;urjnlis'sm(Mew York: Columbia University Press, 1997), pp. 164-187. 28. For this line af analysis, see Joseph M. Grieca, ""Realism and Regionalism: American 130wer and German and Japanese Institutional Strategies During and After the Cold VVar;" h inthan Kapstein and Michaef Mastandunob eds., Unipolar hlitics: Realistn a ~ State d Stmtegis After fke Cold War (Mew tlork: Columbia Unit~ersityPress, 31999).

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Human Capital in the Twenty-First Century

'That a professor e~~phasizes the importance of human capital will, I suppose, surprise no one, Yet when the organizers of this vohme asked the contributors to speculate on "an innovation or discovery of the twentieth celztury that will have greatest impact h the twenty-first," and when, recallbg the occasion that unites these essays, 1narrowed that seasch. to innovations or discoveries that wsonate particularly with Richard Rosecrance's work, I felt compeikd to give pride of place to G a y Becker's invention, or re-invention, of the concept of human capital, and to our growing realization of how central h an capital is to economic and pdolitieal development. Tn the spirit of some of bsecrance" own best work, 1will gladly label everything I have to say on this topic '%speculative." In a pphrase that our late UCLA colleague Richard Ashcralt: often used, I hope to "msettle" questions rather than to '"settle" them; to explore some new and strange terrain rather tmtatiwely. I may well have missed hportant strains of literature, be ignorant of importmt hcts and fhdjngs. 1 will welcome collegial correction and criticism. 'The cmcept of human capital is not difficutt to grasp: H u m s , like computers, can be ""prsgrammed" to ddo certain tasks. M a t hcmputers we call ""software" h humans we call. ""silZs." Humans however download more slowly-me students, we will alt ruefully acknowleitge, must be rebooted several times befare installatio~zis even moderately satisfactory-and must curtail productive acti:viti.esto acquire the skills they

need. Flowever, a person who acqrrires new skills becomes more produrtive: The same hours of labor yield more output. In this sense human capital, like physical capital, is a factor of production, an argument in such familiar production functions as the CobbDouglass or the const;tnt elasticity of substitution; in s w e of the "ned" growth theory human capital is in fact treated as a factor of production (Rarro and S&-i-Martin 1995, esp. chap. 5). X n other, and I think more important, senses, humm capital is a factor quite unlike other factors of production. I will focus here on six differences:

* C~MIXEMENTAICITY. H u m capital ccrmplements, rather than substitutes for, physical capital"Countries with a lot of labor or land ordinarib employ less physical capital: They rely on more labor- or land-intensive production. Countries abundant@ endowed with hurnan capitd, as we shdl see, employ mart? physical.capital. This comection between the presence of human capital and the use of physical capital is what: makes h the sine 4ua non of economic g m t h . * Po~x~~srt.,rru, Land cannot be moved at all, m s t physical capitaf only with great diffietxlv. Of all possible inwestments, human capital-kvhich one literally carries around in one's head and hands-is the most portable. This fact has both econurrric and political implications, for example, with ~ s p e cto t migration. * IP~CREASINC MARGINAL RETURNS. Economics 101, states it as axiomatic that the first plow a iarmer buys inercases her production more than the second, fie second more f i m the third*Similarly a billion dollars of new physical capital. will produce a much bigger increase of productivity in a very poor country (with little physical capital) than in a very rich one (with a lot). The reverse seems to be true of human capibl: Later years of education have a higher return than earlier ones, m d the same educational input yietds more in an educated society than in an unschooled me. Indeed a plausibfe estimate (as, again, we'll we) is that each year of additional education in a society actually multiplies its productivity at a constant rate (just mder 1.51, so that in absdute t e m s two years of high school adds a lot morc3 than two years of primary schoo1.1 * ATTENUATED EFFECT OF OTHEa ENDC)WWIENTS. capital permits and encourqes humm innovations, some of which defy our traditional view of factor endowments, Germany in World War I lacked nitrates, crucial to her land-scarce agriculture; but her sdentists qztickly synthesized them, literal)?: out of thin air. Any prediction that land-scarce Indja would. ever be

self-sufficient in cereals s e e m d risi:ble, yet Norman Borjaug's "Gmen Krzvoluti:ionf"yielded exactty this result (East&rook 1997). * AGGLOMERATION. Human capital is most productive when surrounded by other human capital. The isolated genius is the rare exception, Siliccm Valley or Route 128 is the rule (see m m generally Krug~aan1991). * E N V X R O N M E NXMPROVEMEN"T, ~L DAMPIXIG OF X3813ULAT18NGROWTH. More gmerally human capital substitdes for the factors of lmd and labor. Agriculturaf,hnovations, by maEng existing acreage more productive, retard and reverse environmental despoliation;%and parents' propensity to invest in the education of a few children leads them to produce fewer offspring (Easterbrook 1997, V-78). These points, m d particularly the claim about increasing marginal returns, will be controversial enough; but 1shall compound. my sin by venturitlg even shakier clmjectu~sabout the implications for international politics. The first section lays out the essetntialiy econolnic story l have just outlined. The second considers some first-order social and polit'tcal effects. ?"he third addresses some major policy issues that will likely arise. And the fourth offers some co~nclusions. The Pectxlliadties of Human Gapitat

Begin by lookixlg at the relationship between buman capital per worker and physical capital per worker at the level of the nation-state (see Rgrrre 9.1,) Here we proxy human capital (very imperfectly) as mean years of education in the poprrttion aged twenty-five or more pars, as reported Developn~ezzt&port; m d W proxy physical capital by in the UN M~TZZUB flow rather than stock, that is, new investment in physical capital, per person, as reported by the m r l d Bank,".$The data points arc the ninetyseven countries for which such information was available in 1991. lmmdjately apparent is the st.rong pos-itive association beween human and physical capitaf, whilrh h r n s out to be linear in the logarithm of investment (see Figure. 9.2). Roughly, the estimated regression equation tells us that each additional year of education in a countrfs adult population adds 50 percent to annual investment in physicd capital:" country with h e l v e years' average education in its populace will have E 0 times (1.4912) t-hc investmemt of orle wlnose sub~ectsare totdy uneducated. And this formulation probably states correctly the direction of causation: As pathbreaking researcb on economic growth by Rohert Barro and Xavier Sala-i-Martin,has consistently shown, level of h m a n capital appears to he one of the best predictors of subsequent physical in-

vestment, and hence of economic growth or decline (Barro 1991; Barro and Sala-i-Martin, 1992 and 1995).f i r e anecdotally fie extremely rapid growth of Japan and the Asian tigers had its origins in educational investment; the pathetic dccline of many postindependence African states in thr corruption and violence that hterrupted education. NOWthe relation. depicted in Fig~~res 9.1 and 9.2 is a rather peculiar one between two nominally independent factors of production. If we plotted instead labor/land and capital/land, we would expect to see a lot more "'scatter" and an overall negatjve rclationst.rip: Japan for example has a lot of labor and a lot of capital, Bangladesh a lot of fabor and little capital; Australia has little labor (i.e., a low labor/land ratio) and much capital, Argentina little labor and much less capital. On the hlrhole, however, Xabor-scascc countries will face high wage rates and be likelier to substitute capital for labor; labor-abundant countries will he under no such constraht. The pattern of Figures 9.1 and 9.2 suggests tfiat h u m and physical capital are complements rather than substitutes in production: the morcJ you have of on6 the more (not the less) you wmt of the oher; and a lot of one is useless withhout a lot of the otbes." ehcated populace, then, ten& to amact physical capitd; and the two toge&er guarmtee economir grow*. Again, however, the effect is exponential. Figure 9.3 illustrates that years of education =late linearity to the logarz'thfnof per capita p s s dornestis:poduct (GUP): each additional year of education mises social product per head by about. 48 per cent, so that a nat-ion that averages twelve years of education will have 108 t h e s (1.11.81" the per capita product of one with no eduExcept perhaps m o n g extremely educated populations, cation at d. humm capital. is characterized by hcreask~gmarghal returns. One explanation is doubtless the one widely used by adherents of the "nevv""rovvth theory, namely the positive social r:xfmrzalitieuof human capital. A hvorker's skils bmefit not only herself but fellow workers, indeed the society at large: Even if :I remain an ignorant toad, the kiss of Minerva that trmsforms you into a prince s h w a s me with diammds.7 This paht is closely related to the olles about agglomeration m d portabjtity Workers with particular sklXls (say in sofware d e s i p or automobile m musical-irnstmment manufacturing) find their marginal product (and hence, normlfy, their wage) to be less when they arc dispersed, much higher where they are geographically concentrated. Hence they are strongly drawn to major caters of such activity, and the total portability of their human capital eases trhejr migsatitln,WC):aXI established factors of production, the stock of humm capital is likely to be the most ""footfoose,"" To reiterate: Human capital is a peculiar factor of pmduction. Giwm its growth and p d u c l i v e ixnportmce, it is crrucial,that we understmd at least the first-ader social and political consequences of these peculiarities,

First-Order EffecZs of the Peculiarities

I c o ~ ~ f the h e discussion here to five areas in which humm capital" peculiarities have significant implications: inequality of nations and regions; migation and ""bfain drainM";soial underin\restment and political f d ure; democratization; and wars and warfare.

:If humm capitaj jndeed has inc~asingmarginal productivity#then existing inequalities between nations and ~ g i t t n will s tend to persist or g m . Mercjly by inveskg the s m e share of output in new hwmm-cvital formation, an dready highly educated society can increase production more &an one less skilled; and of course the fact that returns to investment are less jn the lafter society means that actually lcss w i i he invested. Tn turn, the strong complementa.rity oi human and physical capital that we have already observed means that the skill-pwr ecmomies will also attract less invesment in nekv plant and machinery Msent signjficant imports of technology from more developed countries, the less developed will suffer in addition from greater environmental degradation; and their low returns to huntan capital will, mean continued high rates of populatim growth. The overall result seems dear: hstead of the "convergence" of economies that neoclassical growh theory predicts (Rarm and Sala-iMartin, 1995, esp. chaps. 1 and 2), the natural workhg of markets will lead tcr divergence: an increasing gap between developed and less developed econorniese10Political jntervezztions c m forestall such divergence, but they may prove fiendislnly diffjcult to engheer. f discuss these policy issues in a later section. Divergence can only be augmented by the attenuation of factorendowment effects noted earlier, Advanced societies, rich in human capovative capacity, can ~ a d i l yfind substitutes for most of the land-, labor-, m d resource-intensive products of less developed ecmomies,ll As substitution becomes an ever cheaper alternative, the terms of trade of less developed ecmomies worsen, ""Bain drairt " a d other ~ f i i g r a t i o t ~ ~ ~ Diverge~~ce plus agglomeration implies migration. Able people in backward, regions will know that skills are blghly rewarded in world caters of activity, will acquire skills, and will move: Indim engineers, Nigerian fhmcial wizards, Chhese statisticians, Russian computer experts's will flock to places like Los Angeles, Pale .Alto, :Route 128, London. As the

most talented individuals leave, and as their presumptively more tal' the backward areas beented offspring benefit other ~ g i o n sgme-pools, come yet more backward: Divergence is exacerbated. 'The complementarity of physical capital and ixrcmasingly nuid financial markczts-a change that Rosecrance has rightly stwssed-impiy that new inwestment will also flocv djsproportimatcly to the advanced econonties. Tnsightful urban historians and sociologists have nuted that precisely these highly remlanerated possessors of human capital, facing high opportu~~ity costs on thek time, ge~zerateswelling demmd for the labor-intensive services that are not easily automated: cleaning, cooking, childcare, gardening. Because such services are, almost by definition, nontraded, the result is growil2g mitqration also of lw-skill third-world labor to agglomeratims of "intelligence-intensive" activiy and the rise of what these scholars-foremost among them UCLKs f o h Friedmann (Friedntann f 986,1995, morc generally h o x and Taylor 1995)-have I.abeled "world cities."' Mrorld cities, in this view are characterized. by widening clatis divisions and intmse ethnic connicts: A cosmopolitan, extremely prosperous elite lives cheek-by-jow%with ethnically specific enclaves of hardscrabble third-world service workers. Perhaps the least contmwersial observaticm of this school is that Los Angeles is not unique: London, Paris, Frankfurt, Hong Kong, even Mexico City display quite similar divisions,

That human capital has sipificmt pogtive externatities means (as even most conservative theorists have recognized) that a pur(3Iy private m r ket will entail significant underinvestment: .An individual will, acquire skills cmly up to the point that the marginal to her eyuals her marginal cost, alld this point wiil be significantIy below the one at which margislal social return equals marginal cost, Hence gave dization can improve welfare; but where government is weak or compt, market fajlu,re will go urnmedied. In, short the peclnliari? of h m a n capital implies a high wdfare cost to political failure and great social benefit from good governance.

Demoera t imtion Empirically; the crass-national association between. human capital and democracy is very strong, and considerably stronger than that between wedth and democracy (see Fig. 9.4 cf. Lortdregan and Poole 1946).14 The likely aso on, as I arguc elsewhere (Rogocvski 1997), is that the portability of human capital gives subjects well endowed with such capital a

FIGURE: 9.4 Mean Years of Education by GastiX Ranking of Democracy: 158 Countries, 1991

more crcldiblc threat to emigrate (cf. Bates and Lien 1,985).But Ihe economic divergence emphasized above then implies a political divergence: a First World of democracies, a Third World of nondemocracies.'Wnd iff as some have argued, democracies are likelier to subsidize educatio~~, the political d jvergence re-intensses the economic one.

Wars nt-rd zuarf"mre :If W(" take as facts the frcrquent observations that democracies do m t fight each ot:herl%and Chat they win most fights with nondemocracies (Lake 1992), we must also mvisim a pacific First and a bellicose Third Miorld. Countries rich in human capital LviZt rarely fit;ht each &her, countries poor in it will do so freqrae~~tly; and the rare (and seemingly irrational) fights between rich and poor will only devastate the latter, From the standpoint of thr twenty-first century both the Iran-:lraq c d i c t and the Gulf War will have been depressingly accttrate auguries. T =-emphasize that these are but first-order effects. They c m he countered by other influences, including sensible policy. Mlhat that pdicy might he, however, is far from clear- It: is to this topic that I next turn. Policy- Issues The good news about b u m capital seems almost to be ouhiveighed by the bad. Policy interventions have been proposed, and o&ers may readily he envisioned, that supposedly would, count.eract the bad effects while retaining mast of the good, Agajn :I shall consider unly the most obvious,l7

'The seexningly "no-brajner" "me* for h o d all of thesc ill effects is massive subsidization of third-world education-the avenue, as noted earlier, by which mppwedly first Japan, later the Asian tigers, and now some regions of- India and China have escaped their natwral caXling as exporters of labor-ixltensive manuiactures and bave risen (or are rising) so rapidly into the ranks of the developed ccrmtries. Surely the third-wctrld govemcmts themselves, and evert enlightened fjrst-world states, shodd be pourhg money into th-ird-world schools, Yet if a marginal dollar of human-capitd inwestment generates far higher rehnms in the first world than in the third, it c ot be in the interest of first-worfd gwernments to divert money from domestic (high-reh n ~to) foreip (low-return) education.18 hdeed, any such h.ane;fer dirninishes world welfare and (depending on one's ddjstrilbutional ssumptions) may actua11y make the third-world '%bt;neiiciariesUwwoe off. But won't third-world rulers find it in their (enlightened) self-hterest to educa.t.eCheis subjects? Not necessarily, for Fhrce reasons: (1,)Given the inc~asingmarg4nal return to human capital, the most skill-deprived societies will have tlne least incenti\ie to curtail currt-lntconsumptior.3and invest in educati.on.lV(2)The poorest sodeties are likely to be the most politically unsettled, and rulershresultant bigh discount rates-the knowledge that their hold on power will be fleeting-makes the inevitably lo~~g-term payoff from education even less attractive. (Indeed, it can rarely hold a candle to the more traditional Swiss bank accomt.) (3) Even where (1)and (2) hold with less force, rulers must consider the likelihood of '"brain drahf'":hat is, the likelihood that much of the human capital they subsidize wilX simply migrate (together with its possessors) to more highly educated societies and (except in tbr form of remittmces) be lost to their countries of 0rigi.n. The impIicat-ion seems dear: Education, and particularly high-end research apprenticeships, will concentrate even more in the first world. Able third-world students will. have to trek to the first to be trizhed. In doing so, of course, they will acquire the languages that make their subsequent emit;ration to the metropole all the easier.

Ernipation tnx Exactly these considerations have led some astute third-world rulers, and indeed a few world-class e c o m i s t s (most nota:bly Jagdish Bhagwati: see particularly Bhagwati and Partingtcm 19714), to take seriously a poliey option that one migfit have thought perished with the Soviet Union, namely an emigration, or more specifjcallya "brain drain," tax, In

its strongest varimts (~zotembraced by Bhagwati), this approach wodd mean either irnposlng a lump-sum emigration tax or requiring sbdents to work off at h m e any educational suhz;idy received (see description and analysis in Miyagi:wa 1941,757-758). Thus if the ZBiwanese state had subsidized my undergraduate and Ph.D. trainh~gto thr tune of $lC)l),Of)(Z, I might have to pay back the full amount if I entigrated immediately; $90,fX30 if X emigrated after one year; $80,000 if 1 waited two; and so on. :111 the Bhswati version a (l~igher)income tax is hnposed on those who work and earn abroad."" Again the Fnstrument is blunt and raises equally blunt objections. Most obviously, any such measure djminishes subjectsf incentives to amass h u m n capjtal in the first place: Knowing that education will earn me less, I acquire less of it. By that long-term route, and in the short mn as well, such a tax diminishes world welfare: The thiTd-world engineer can e m more in Boston than in Botswana becausc? she is more productive in Boston; keeping her in Botswana makes her, by definition, less productive; and most tax schemes assure only that the most mediocre engheers will rernain in Kotscvana-the best will stilt entigrate (Miyagi.wa 11991, 750-751). Add that the tax will mean fewer Future Botswanan engineers, and the d m a g e is compounded. :In the extrem case, such a tax may even mke the home government worse off, if, for example, the difference between home md. foreign salaries is so extreme that Zocal earnings would be less than foreip remittmces.

As students of the ""new" growth theory havc long argued, the ml,y possible answer is a massive, rapid, and credible growth of the weraIl productive structure-including, h-t particular, the howledge bas less-develnped economy (see, e.g., Murphy, Shleifer, and Vishny 1989). Such an effort may require broad state intervention (cf. Wade 1990), heavy involvement of multinaticmais (whose cmss-nationd ties partially szxbstitute for geographical agglomeration), or both. The task is dmt~nting in the best of circumstances; in the poorest th-ird-worlb countp.les, typically extwmely howledge-scam and politically corrupt, it is probattly impossible.

Again the k e e n Revolution, hatched by erican agronomists working in a Mexican research center and barked by Rockefeller Foundation funds and the political clout of first-world fertilizer firms (which rightly foresaw huge new markets for their product), demmstrates the large irn-

pact that even modest exports, or gifis, of first-world technology can pmduce.zl A plausible scenrxrio has human capital concentrat@ increasingly in the first world but findi,ng fertik soil for its technological innovations hpoorer countries. Plausihte but, :l think, not likely, I'he whole intern& his to^ of today"?; rich corntries is one of grawhg regional imbalmce: Appalachia, the Xtalian f~tezzagiorno,the North of England, incrclasingly the U.S. Great Plains, all have neither formed their o m agglomerationsof talent nor pmspered. by importing the technology that others produce; rather, they have simply '"emptied out," "coming deserts whose few oases are sustahed only ental transft3rs. 7'he lrkelier international scenario is a replication of what most third-world countries have already experielzced internally, namely massive migration into urban agglomerations ol. 'kedgecity" agglomerations. This is a f u t m of mobile factors that is worthy of Rosecrmce" salysis. Rut again the Green Revolution suggests how enlightened first-world gwemments m d foulle;iations, fearing sowtl-ring like the nineteen&-century lrish famirze (amd e~nigration)on a world scale, m y sixnply give away the needed techlogies, or indeed m y provide larger-scale subsidies. The dilemma of first-suarl edumf ion

As the stock of human capital incrmses in rich corantries, so (qparently) does its marp;inal productivity and so (presumably),its positive externalities. To maximize social return, subsidies to education must rise; but subsidies to what kind of education, and in what form? Gove notoriously bad at anticipating the market and at delivering services efficiently and stories of utterly misguided educational outlays abounrl. X n the nineteenth century, whiie German universities were pioneerir~gorganic crhentistry, optics, and electrical engineering, Oxford and C m b d g e meered. at ali but classical and theological pursuits (Landes 3969); prtrsent-day U.S. schoclls notoriously emphasize "self-esteem" to the neglect of science and mathematics and seem better at multiplying administrators than at educatillg pupas. Subsidies are required, but how can gove mts best guarantee that they will gezzerate the human capital their ecmomies actually require? Although it will badly please professors to a h i t it, traditional direct state suppIy of education (for example, tbrclugh the public school or university) provides about the worst possible incentives to "market-conforming"' provision of human capital. Far better, thou& still imperfect, are ""voucher"-type partial subsidization of the sbdent m d subsidization of student loans. Clearly m n y first-world governments are moving in this direction.

In a rare scholarly consensus, human capital has emerged in the last decades of the twentieth century as the magic key to economic and political development. At the same time, peculiar characteristics of human capital as a factor of prc?du,ction-increasing marginat productivity, agglomeration effects, strong complementarity with physical capital-suggest a twenty-first c m w y of divergent growth and increasing inequality between and withh nations. So what, if mythiTtg, is to be done? Two initially unyopular prescriptions appear to offer the most promising results, namely that first-world states should lower remaining barriers to trade and migration and increase market-confomjng subsjdies to education, includjng scholarships and loans to promising third-world students and (under particuiar circumstances) sll.bsidies directly to third-world educatio~~. To take the first suggestion first, trade in goods, as we knowI substitutes mutualiy for trade in factors; and blocking the import of labor-intensive goods (e.g., %gad into develnged countries is a sure ol way of inc ~ a s i n gimmigration of unskiXIed labur. Those who purport to be troubled by such i igration should particularly press h r heer trade. With barriers to trade disman.t.led,people will, migrate ml,y because their marginal product in the new country is genuinely higher &an in the old; and then, by defhGtion, their migratrim improves world welfartr (and that of the country of destination, usually a developed one). As for the second suggestion, educational subsidies compensate for the growil7g positive ertCernalities of first-world education and &us help to bring the total supply of human capitai closer to the social optimunt. But policies that =strict such subsidies to one"s own citizens are foolish, Able youth from any part of the world witl gain fmm a first-wcrrld education (at least at the graduate level) and, give11 a h i g k r mrginal product due to agglomeration effects, will in all likelihood remain there, There is even a case for first-world subsidies to third world education-if the thirdent commits irrevocably not to rcstriet subsequent emigration and indeed undertakes to ease it, for example by prwiding universal instmction in E~~glish. Perhaps the strongest arguments against alternative policies come fPom experience with regional inequalities withh states (the North-South divides in Italy and Eng1""d. the East-West ofie in Germmy, increasingly the efforts of the Etlropem Ullion to assist declining regions throughout its jurisdiction). Efforts at "stmctural ad~ustment"or in.ter-regional subsidies seem only to have womencd the problem; harriers to trade or migration (which Germmy actually experienced so long as it rernaiined two states) hflict yet grcater damage. Only the dismantling of barricrs and

the provision of good public services-above all, good education-h aIl regims has effected sdid results. Better policies may surely elBerge, But the beghiing of any wisdom is to understmd the significance of humm capitaj as a factor of produclion and t-he special characteristics of that factor.

4. I hasten to paint aut tcr graduate students that this prclcess has to stop samewhere. More seriously the curve flattens out after about the eleventh year. 2, In 1950, the world produced 692 million tons af grain on 4.7 billion acres af cropland; in 2992,2 .9 billion tons on 1.73billion acres: That is, per-acre yield grew by a factclr af 2.75. One plausible estimate is that, had the productivity gains af the Green Revolution not occurred, India alone woutd have had to plow an additional 108 million acres, an area roughly equivalent to that of Califc>mia.Eastehrook 1997,78. 3.1 commit this heresy for the good reason that much better data, for far more cctrmtrie~~ are available about investment than about the stock of capital. Whereas economic theory would lead us to expect that new investment woutd correlate negatively with existing capital, in practice the converse appears to hold (cf, Barro 1991). For fifty-faur of the ninety-seven countries examined here, the Penn World Tables (on-line database, May 1996) offer estimates of capital stock per worker far at least one year in the period 2990-19% at 2985 international prices, The correlation between those values and the ones far investment per capita used here is rz.93, 4. The numbers used here are actually prcjducts of W Ofigures reported by the World Bank, namely gross domestic investment as a share of GDP and (dollar) GOP per capita. (Wc3rld Bank 1992, Tables 1 and 9). The prc>ductapprojxirnates (dollar) investment per capita, since (investment/GDP)(GDP/pc~pulation) =r investment /population. 5. Delog both sides by raising to be a pawer of the natural number e, so that

6. I think the ecctnomic jargon for this is a Leantieff t e c h o l a g , 7. This explanation of course impties that the private market will fail to provide adequate motivation for training and educatim: Individuals, guided only by market incentives, will substantially underinvest in human capital formation. That effect and the palicy issues it raises are addressed below. 8. M i ~ a t i o nhowever, , is nwer costless; barriers of culture, language, and pulitics (state barriers to migratlicyn) remain significant even for highly skilled workers. 9. New physical investment probably flows even more easily, but-as noted earlier-the stock of physical capital is far less mobile. 40. For endogenous-~cjwthmodels that b c ~not imply cmvergence, see Barrel and Sala-i-Martin 1995, chap. 4.

11. Examples include synthetic yams, rubbers, and fertiltizers. 12. A convrindng model of brain drain based on economies of scale in higher education is developed in Miyagiwa 1992. 13. Just to mention cases persc>nallyknown to me in Los Angeles. Yes, 1 kknaw that is merely anecdc?ctal. 14. The resource-rich but human-capital prxx states, including garticufarfy those of the Arab Gulf, pull dc~wnthe aswciation bemeen tzrealth and democracy. 15, Other variables of course increase the odds of democracy, particularly in states of middling human capital (and, usually, middling tzrealth), for example, pressure by stability-seeking domestic etites and by other states in the region (particularly instructi-c~eis the Spanish experience: Londregan and h o l e 1996, 2&25). To the extent that poorer countries become and remain democratic, the dire predictions about warfare in the next section are attenuated. 46. The pioneering statements w e l ~ Doy le 1983 and 1986. The by now voluminous literature is surveyed in take 1992,128, and Mansfield and Snyder 1995, n. 1. 4'7. One frequent prexriptic~nof the past, namely Sviet-style forced saving to accumulate physical capital, X shatl pass over as a clear nonstarter-not only by reawn of historical experience, but for a reasan laid out above, namely that physical capital is unproductive without accompanying human capital. The skills are crucial, not the iron. 18. Unless, of course, the third-world gavemmnt commits credibly not to restrict emigration of their ablest, thus in effect adding them to the first-world pool. More on this in the cmclusicm. 19. A secondary issue is whether ]W-skill countries gain greater marginal benefit from primary, or from higher, educa tion, Unfortunately the national-level data fram which I am working here allcow no firm inferences on that point; but the general argument about economies of scale suggests that tiny islands of highly educated people, in seas of ignorance, will be highly unproductive. 20. For the original prc)posaX, see Bhagwati and Detlalfar 1973; its reception and evolution are traced in Bhawati 1976. As Miyagiwa (1991, 757-758) shows, the crucial effects of the various gropc~salsare quite similar, except that the Bhagtzrati pmpclsal, if it included highly prc~gressivetaxes on immigrants, waltld be mr)re effective at keeping the most taklented at home, 21, In the first year, yields in India rose by 70 per cent; in the secmd year, by 98 per cent. In 2965, Pakistan hamested 3.4 million tom of wheat, India 11 million; today" figures are 18 million tons for Pakistan, 60 million fc~rIndia. Averaged over the intervening thirty years, that amounts to an increase of about 5.8 percmt each year. Easterbrook 1997, '78.

Ref erearces Barr~,Robert P. 2991. ""Economic Grow& in a Crass Section of Countries," Q~uarCerly jozarnnf of Economics 106: 407-343. Barro, Robert J,, and Xavier Sala-i-Martin. 1992. ""Convergence," jourr-.ml of Pc~litimf Economy 180: 223-252. 4995. Etjonornic Crowlti. New York: McGraw-Hill, Inc.

Bates, Robert H., and Ba-Hsiang Donald Lien. 1985, "A Note on Taxation, Bevelopment, and Representative Government." &?lilies6 Society 113: 53-70. Bhagwati, Jagdish N. 1976. "The Brain Drain Tax Proposal and the Issues.'" In Bhagwati and Partington 1976, chap. l. Bhagwati, Jagdish N., and Williarn Detlalfar. 3.973, "The Brain Drain and Income Taxation."Torld Developmenl, l : 94-101; reprinted with minor revisions as chap. 2 of Bhagwati and Padington 1976. Bhavati, Jagdish N., and Martin Partington, eds, 2976. Taxing trlte Brain Drai~z. Amsterdam: North Holland Publishing Co.; New York: Elsevier Publishing Co. DoyXe, Michaet W. 1983. "Kant, Liberal Legacies, and Foreign Affairs." PPI.tilaso;~hy and Public Aflairs 12: 295235 and 323-353. 1986 "LiberaXisrn and Wrfd PoXitics." American bEitica:nlSeienw Reviezu 80: 1151-1169. Easterbrook, Cregg. 1997. "Fcc>rgctlttenBenefactctlr of P-iurnanity'Tke Attnrztic Munllzly 279: 74-82, Friedmann, John, 1986 [4995]. "The World City Hypothesis." Developtnetzt a~zd Cliange, 27: 69-M, Rqrinted as Appendix to Knox and T'ylor 1995. 1995. "Where We Stand: A Decade of Wc~rldCity Research.""n b o x and Tayfor 1995, chap. 2. Knom, Paul L., and Peter J. Taytor; eds. 1995. World Cities in n W;I1rld-System.Cambridge: Cambridge University Press, Krugman, Paul R. 1991. Cec?gr.aphynlzd Rade. Cambridge, M A : MTT Press. Lake, David A. 4992. ""Ptlwerful Pacifists: Democratic States and War." Amen"ca~ I;"oliticnlScience Review 86: 24-37. Landes, David S. 1969. Tf'lw U~zbozirjdPrc~lnefkus:Tcehl.rulogiml Clzntlt;e and t k Industn'al Revolution in Westerr? Eurapefiom 3750 to the Pzsenf. London: Cambridge University Press. Londregan, John B,, and Keith T. 13001e. 1996. ""Uac;ts High Income Promote Berno>cracy?"Mrld Politics 49: 1-30, Mansfield, Edward D,, and Jack Snyder. 2 995, ""Bernucratizatian and the Bangers of Wac" hternntional Security 20:5-38. McCubbins, Matthew! and P a d Brake, eds. 4997. The Origins $Liberty, Princeton, NJ: Princeton Liniversiv Press. Miyagiwa, bz,1991. ""Scale Economies in Education and the Brain Drain PrctlbXern." terrzafional Econo~rticRezjiezup32: 74S759, Murphy, Kevin M,, Andrei Shleiker, and Kobert Vishny, 4989. ""Idustrializatim and the Big Push," Jloz-lrrzalof Political Eco~omy97: 1Q0%1026, Rc>gowski, Ronaid. 1997. "Democracy, Capital, SkiXI, and Country Size." In MCCubbins and Drake 1997, Wadef Rc>bert.3990. Governhg the Market: Economic 5rheoy nnd tlze Role c$ Csvemmc~ttirz East A s k n Ifzdusfr&limtiorz.Princetan, Nf:Princetc3n University Press. World Bank, 1992. World Ifez~elltpmenlReport 1992: Dezlekoptztent and ilie Enz?rionmc~tt.New York: Oxford University Press.

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The Continuing Conundrum of Internal Conflict MlCHAEL E. BROWN

There are g o d reasons for being optimistic about fie prospects fnr peace in m y corners ol t-he world. The jncidence of interstate war has plum,meted in recent times. Since 1945, no great-power wars have taken place, and Wstern Europe, Ntrrth America, and South America have experienced only one interstate war, over the hlklat-td Islands.Wmcover, with the end of the C d d Was and the growing robushess of hternational economic ties, the futrare of international affairs-as many of the cmtributars to this volume would argue-appears to be comparatively bright, 1 w d d argue that, although North Amrica and Western Europe are unlikely to expericznce major interstate wars in the foreseealole h b r e , we Shod$ be cmeflll about malting sweeping generalizations about the pmspects for war and peace in the intelrrational system as a whole. Internal or intrastate conflicts are still wide spread."^ of 1995, major armed conflicts-that is, conflicts in which at least 1,000 people have been killed-raged in over thirty-five locations around the world. In thirteen of these conflicts-in Afghanistan, Angola, Azerbaijm, Bosnia, Burundi, Cambodja, Indonesia, Iraq, tjberia, Rwanda, Somaia, Sudan, and Tajikistm-more than 50,CKJO people had. been killed; in at least six-in Afghal7istan, AngoZa, Cambodia, Iraq, Rwanda, and Sudan-over 500,(300 peopfe had been ki.lled. My expedation is that this tragic slate of affairs will contirrue: Horrifyirrgly violent internal conAicts will continue to be widespread. I wndd argue, moreover, that internal cronfliicts s h o d be &ought of as important international phenomena. Internal conflicts almost always

have ~ g i o n adjmensions-few l are hemetically sealed-and they therefore pose threats to regional sta:bility and security, Vic-tltlnt internal cmfiicts can trigger refugee flows, djsrupt rclgional economic activities, and lead to military incursions h neiighhoring states, Neighboring states often meddle in the internal conflicts of others to distract and weaken reginnal rivals. 1nterstal.e wars can result, If regional security is an important jYtternational concern, then internal confiict should be as well. Inten~alconflicts are atso important because they undernine ~ g i m a l and intemat-ional organizatims, such as the United Nations (who= stated purpose is the promotion of peace and securily); jnternatimal norms of b e havior and internatimal law (with respect to human ri;;hts, for example); and internationd order jn general, These costs are difficult to xneaszxre, but they arc real and they arc paid by every actor in the international system. Policymakers in Washington and other international capitals should not be ailowed to claim-as they oftm try to d at inteml pmblerns infar-oll" lands are oi no consequence to distant powers and the intemtional community in general. These problems art. consequmtial. In this chapter, I will discuss the causes of internal co~~aicts and then develop some guihlines for htematimal responses to these problems. Altb,-ragh violent internal connic.ts will, in all prcrbhiliv, be part of the international lmdscrape fctr years and decades to corn%they are not impervious to tmtema"cJm1 irrfluence, The international commmity can take constmctivo steps to prevmt, manage, m d r e s o h these deadly disputes.

The Causes of Internal Conflict

Mmy policyntakers and jourstalists believe that trhe causes of inter~~al conflicts are s h p l e and straightforward. The driving forces behhd these violent codicts, it is said, are the "mcient hatreds" "at mmy e t h i c and religious groups have for each other. In Eastern Europe, the former Soviet Union, and elsewhere, these deep-seated animosiSics were held h check for years by authoritarian d e . The collapse of authoritarian rule, it is argued, has taken the lid off these mcient rivalries, allowing Long s u p p r e ~ d grievances to come to the surface and escalate into armed conflict. Sc?riousschofars reject this explanation of internal conflict. ?"his simple but widely held view cannot explain why violent connicts have broken out in some places, but not others, and it c ot explain why some disputes arc. more violent and harder to resolve than others. It is undeniably true that Serbs, Croats, and Bosnian blttslin?s have m y historical grievances against each other and that these grievances have plqed a role in the Balkan conflicts that have raged shce 1991. Rut it is also true that other groups-Czechs and Slavaks, Ukrainians and Russians, Frenchspeaking and English-speaking Canadims-have historical grievmces of

various kjinds that have not led to violent conflkt in the 1990s. This singk-factor explanation, in shcrrt, cannot account: for sipificant: variation in the incidence and intelrsity of internal and e h i c codict. The startirtg point for analyzing the causes of internal c d i c t is recognizing that different types of conflicts are caused Zly different things. The chalfenge for schdars is to identify these diffe~rzttypes of conflicts and the different sets of factors that bring them about.

Types of Orter~mlConflict h~temalc d i c t s can be categorized accorcling tcr whether they are triggered by elite-level or mass-level factors m d whether they are triggered by internal or external developments, There are, therefore, four main types of internal conflicts, and they can be depicted in a two-by-two matrix. (See Table 10.1.) First, conflicts can be triggered by internal, mass-level phenomena, such as rapid ecmomic development and modernization or patterns of politics) and econolnic discrinrination. To put it morc prosaicdly, they can be caused by '%bad domestic prohlcms." The conflict in Punjab, for example, was gafvanized by rapid modernization and migratlc,n.%other example is the conflict ovcr Nagumo-Karabakh, which was triggered by problematic ethnic geography and patterns of disckmination highlighted by the hreakup of $he Soviet U~~icm, Thc. proxirnat-e causes of a scco~zdset of co~zsfictsare mass-level but external in character: swarms of refugees m fighters crashing across borders? bringing h m o i l and viczlclnce with them, or radicalized politics sweeping throughouC regions-T'hcse are co~zflictscaused by the "cmtagionPf""iffusion," and "spillover" effects to whi.ch many policymakers?analysts, md. scholars give much credence.Qe could say that such codicts are caused by "bad neigMorlronds.""The expulsion of mdieal Palestinjans from Jordan in 1970 led many militants to resettle in Lebanon, where MuslimChristian tensions were already mounting. This influx,one could argue, was the spark that ipited the civil war in Lebmon in 1975. The proxhate causes of a third set of conflicts are external but elitelevel in character: They are the msdts of discrete, deljberatre decisions by governments to trigger conflicts in nearby slates for political, economic, or ideological purposes of their own. The external fomentation of codict only works, one must note, when the permissive conditims for codict aiready exist in the target country; outsiders are generally unable to foment trouble in stable, just societies. Nevertheless, one could say that such conflicts artl caused by '%"bad. neit;h:bors." Examples inclrtdie the Soviet Union" meddling in m d subsequent 1979 invasion of Afghanistan, which bas yet to eznerge from chaus, and h s s i a n meddling in Georfyia

TABLE 10.1 The Proximate Causes of Internal ConBict

ELite-triggered Mass-triggered

Bad Leaders Bad Domestic Problems

Bad Neighbars Bad Neighbarhaad

and MoMova in the 1990s. Another example is modesia"s establishment of REN'AMC) i,n 1,976to underntine the n w government in Mazannhiq~ae. The proxhate causes of the fourth and final type of internal conflict are internal and elite-level in character. Variations inchde power struggles inv&in$ civilian (Georgia) nr rnilitary (Nigeria) Icaders; ideological contests over how a country" ppolitical, economic, smial, and religious affairs shodd be organized (Algeria, Peru); and crimi~~al assaults on the state (Ctllornbia). Tc, put it in simple terms, conflicts such as these arc t r i g g e ~ dand driven by "bad leaders." The hpoYtnnce of Domes tic Eiites

The scholarly literabre on the causes of internal crrnflfet is strcmg in its exminat-ion of slructufal, politicat, economic, social, and cultural forces that operate at a mass level-indeed, it clearly favors mass-level explanations of the causes of internal conflict-but it is weak in its underst..anding of the rolcs played bp eliks and leaders in instigding violemce. The fatter have received. comparatkely little attention. The result is ""nofaultf%istory that leaves out the pernicious efkcts of influential individuals-m important set of factors in the overall equation. Although mass-level factors are clearly ixnportmt underlying conditions that make some places m m predisposed to violence than others and although neighboring st&es routinely meddle in the internal &airs of others, the decisions and actions of domestic elites often determine whetber political disputes veer toward war or peace. Leaving elite decisions and actions out af the equation, as many social scientists dof is analytically misguided, It also has important policy implications: Underappre"i"ting the import of elite decisims and actions hinders conflictprcvmtion eltf'ortsand f a i s to plare blame where blame is due. The proximate causes of m q internal conflicts are the decisions and actions of domestic elites, but these conflicts are not ail driven by the m e dornestjc forces. mcrcl are t h e e main vaciations: ideological strzlggles, whirh are driven by th ideologiral convictions of various individuals; criminal assadts m state sovereignty, which arc. driven primarily by the economic rnotivatims of drug traffickers; and power struggles between and among competing elites, whirh are driven by personal, politi-

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cal motkatims, Admittedly, these compartments are not watertight. It is acmetheless important to make these distinctions, however rough they might be: There are several, djstinct mot.i\r&ionalforces at work her several identifiable prmixnate causes of internal violence. It is important to have an app~ciatictnof the multifaceted nabre of the problem, particdarly if one is interested in enhancing international efforts to prevent, manage, and resolve internal conflicts,

Idealogical Canf-Xicts, Some internally drivezz, elite-triggered conflicts am ideological, strqgles over the osgaslization of poiitical, e c o m i c , and social affairs in a country Some ideological struggles are defined irr economic or class terms; others are fundamentalist religious crusades guided by theological frameworks, Ideological stmggles over how political, economic, and social affairs should he organized have not gone acvay with the end of the Cold War, but they have tended to take on new forms. Class-based movements with Marxist agendas have 'faded from the scene in many parts of the world, including Southeast Asia, thr Middle East, Africa, and Latin America, although some rebels in Colombia and Peru have remained largely true to form, Some rebel movements have mutated and taken on the political agendas of indigenous peoples and ethnic minorities, In many places-Mghanjstan, A%geria,Egypt' India, Iran, Sudm+onflicts have farmed aromd new secularist-fundamentalist fault lines, These e t h i c a d fundmentalist movements draw on m n y oE the s m e sources that impelled elass-based movement.^ in the C d d War era-patterns of political, ecmomic, and culkral djscrimination, and widespread dissatisfaction with the pace and ewitabiiity of economic development-but they are chamekd in di,fferetnt directions. In other words, many of the underlying causes of these conflicts are the same, but their proximate causes have changed. CriminaX Assaults on State Sovereignty, Some htemaly driven, elitetriggered contlicts are in effect crimirrd assaults cm state sovereipty. In severnl cowries, in Asia and Latin h e r i c a in particular, drug cartels have accumulated enough p w e r to challenge state control over large tracts of territory. This is certainly true in afgbanistan, Burma, 'I'ajikistan, Brazil., Mexico, m d Venezuela, for example. Xn Colombia, most notably, drug barons and their criminal organizations have directly chalimged probstate sovereignty. "This problem shows no sign of abating. A ~ l a t e d lem is that, with the end of the Cold War and reductions in financid support from Moscow and W h i n g t m , many ethnic groups and political movements turned to drug trafficking tc:,finance their activities. This is true, for exmgle, of various groups in Colombia and Peru. h addition to its other pernicious effects, drug trafficking complicates the nature of the

conflicts in question and therefort. makes conflict management and resolution more difficult. Power Struggles, Finallypsome conflicts are in essence power struggles between and among cmpetiz-rg etites. Of the three types of fnternally driven, elite-triggered conflicts outlined here, rakv power skuggles are clearly the most common. Some are sustahed government campaigsls to repre" ethnic miz~oritiesand democratic activists. This would seem to be a fair characterization of the canflicks in Burma, Cambodia, Guatemala, Indonesia, Iraq, and Turkey, for example. Government repression is a prominent feabre of other cmflicts as well, but power stntgg1t.s are particdarly ink~nseand Che "ethic card" is played very aggressively. Examples abound: Angola, Bosnia, Bumndi, Croatia, Kenya, Liberia, Philippines, Russia/Chechya, Wan&, Somalia, and Tajikistar-r. C31e type of pokver struggle is particularly prominent and particu,larly pernicious: It accounts for the slaughter in the former Yugoslavia and Rwanda, and has pbyed a r d e in t-he c d i c t s in hzerbaijan, Burundi, Carneroon, Chechnya, Georgia, India, Kenya, Nigeria, Romania, Sri Lanka, Sudan, Togo, Zaim, and elsewhere,?The starting point is a lack of elite legitimacy, which sooner or later leads to elite wuhterability. Weakening state structures, political trmsitions, pressures for political reform, and economic problems can aX I bring about vuXnerabilities. Those who are in power are determined to fend off emerl;ing political challengers and anxinus to shift blame fos whatever economic and poli.lrical setback their countrim ma)i be experiencing. Tn cases where ideological justifications for stayiw in power have been overtaken by events, they need to devise new formulas for legitimizing Cheir rule. Entrenched pditieians and aspiring leaders alike have powerful incentives to play the '"ethnic card," embracing ethnic identities and prodaiming themseives the charnpions of ethnic groups. This produces a shift in the terms of public discourse from civic nationalism to e t h i c nationalism and to increa~;%ly virulcnt forms oE etbnic niitionatis~~, Ethic minorities m often singled out and blamed for the country" problems: Ethnic scapegoating and ethnic bashlng become the order cJf the day. m e n power struggles are fierce, politicians portray other et-hnie groups in trhreatening terms and haate these threats to bolster group solidarity and their own political positions; perceived threats are extremely powerfd unifying devices. When leaders have control over the nati.01nal media, these kinds of carnpaigrrs are particularly effective: A mlentless drumbeat of ethnic propaganda can distort political discourse quickly and dramatically. Poiiticat campaigns such as these undermhe stabiiiity and push countries towards violence by dividing and radicalizing p u p s along ethnic fault lines. In the fomer %oslavia,

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Serbim leader Slobodm MgiXosevic and Croatian leader Frasrjo Tudjman rose to power by polariziw their societies, even hug11 Serbs and Croats had coexisted peacef ully for clecades.

Why Do Followers Follow"ZIt is easy to understmd why desperate and opportunistic politicians in the midst of power struggles would resort to nationalist and e t h i c appeals. For many politicians, tearing their countries apart and causjng thousands of people to be killed are small prices to pay for getting or keeping power. The more interesting question is: Why do followers follow?b Given that poli.licians all over the world employ ethnic appeals of one kind or anothrr, why do these appeals resonate in s m e places but: not others? Why do large numbers of peope folllow the e t h i c flag in some places at some t h e s , but not others? Two factors art? parSicufarly impmtmt in this regard: the existence of antagonjstic group histories and mounti,ng ecmonnic pmblcms. If gmups have bad histories of each other and especially if they see thmsetves as victims cJf other, aggressive ccrmmunities, ethl~icbashing and inflated threat.s seem plausi:ble. If economic problems such as unemployment and inflation arc mounting and resource competitims are intensif?ijng, ethnic scapegoating is mcrw likely to =sonate and m m people are likely to accept a radical chmge in a conntry's politicd coufse, including armed confrontation. Xn short, the emergmce of elite competitions m e t be the proximate causes of conflicts in places like the former Yugoslavia and M d a , but hostilities escal&e only because of the existence of o&cr underlying problms or permissive conditions-problematic group histories and econmic problems. It appears that all three factors-i,ntensifyhg elite competitinns, problematic group histories, and economic problems-must he pmsent for this k i d of conflict to explode. Russians and Ukrainjans, for example, have had to contend with collapsing ecconomies and stmdards of living, and many Ukainians do not have b e n i p historical images of Russians, However, Wkrairrian politicians have by and large rehained from making the kinds of nationalistjc appeals that have caused troubl,e elsewhere. They undoubtedly rcrognize that provokhg a Russian-Ukrainian confrontation would not bode well for tJkraine or their own positions as leaders of an independent state, Some Russian politicians have been far less responsible inthis mgard, but their nationalistic appeals have not yet taken over the Russian national d&ate. m e & e r or not nationalis.tic and pseudonationalistic politicians remain confined to the margins of the Russim political debate is certairrly one of the keys to its future and to the stability of a large part of the world. A few parts of the world have experienced econolnie turmoil and power struggles but have been blessed with homogenous populations

and few ixrternal ethnic problems, Finland, for example, has experitnced a sharp economic decline since the late 19811sbut has not experienced interethnic strife, because minorities are few m d small m d because intergroup relations are relatively harmonious. Simihrly, Poland has gone through a complete political and economic transformation shce 1989, but it has few minorities and few intergroup problems: Nationalistic appeals have no audience. Polmd" hotly contested 1995 presidentid eXection was cmsequently fought along ideological lines. Other parts of the hvorld have deeply troubled ethnic histories and leaders who have not hesitated to do whatever was necessary to get and keep power, but they have been spared massive bloodlettings because of their compara.t.ively rosy economic pictures, Much of Southeast Asia experienced considerable turmoil durtng the Cold War but was quite stable in tke 39")s because of the econcrmic boom that swept most of the region. Much of this can be traced to a track record of sustained economic growth, which gives groups, even relatively disadvantaged groups, incentives to avoid conflict and destruction of a system that is bringhg more and more ecmornic benefits to more and more peaple. One can also point to East-Central Europe, which has experienced more than its share of b m o i l in the past and which is not blessed with leaders steeped in the prhciples of Jeffersonian democracy, but which has nonethetess avoided the carnage that has consumed, the fomer hgodlavia a few hundred rniles to the south. East-Centrd Eurolpe has been comparatively peaceful, even though every country in the region has been going through a political tracrsition of the most profound sort; elites have been jockeying for position ever since 1989. If one had to point to one reason for East-Central Europe's stability, one would point to its comparatively good economic perfomance m d its compasatively good ecmomfc prospects. The fact that the states of this region have a good chance of join;ing the Europem Union at some point in the not-taa-distant future gives people powerhl jncentives to i p m nationalistic appeals and not rock t-he boat. This poht is driven home with even greater force when orle looks at differences wiChin the ~ g i o nNationalistic : appeals have been less successful in Hungary which has an ethnic diaspora but one of the region" sstrcmgest ecmomies and one of the region" best chances of johing the European Union quickly, than in Rommia, which has stmggled economically. Ecollomic eteveloprnents have also marked important turning points in the Middle East and Africa. The Middle East experienced considerable domestic turmoil in the 1950s and 1 9 6 0 ~ when ~ weak states were mable to meet societal demands, but less instability in some places in t-he 1970s and 1981)s, wher~hjgh oil prjces and high levels of floreign aid from the Uni"ted States and the Soviclt Union gave gove ents more largesse to

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spread around. Potential opposition forces werc pacified and, in essence, bought off. The fact that oil prices and foreip assistance levels have declixled sharply in the 1,990s does not bode well for the region"^ future.. Much of sub-Saharan Africa has experienced similar probhrns for similar mascms. Many g m ents in West, Central, and East Africa were able to hold their heads above water in the 19"10s and 1988s-even though they werc riddled with e t h i c problems and run by corrupt, incompetent leaders-bwause they receivd substantial amounts of financial support from two external sources: the superpowers and Western Europe; and international hancial institutions such as the International Monetary Fund (IMF) and the World Bank, h the iate 198C)s, howewer, two things happened: The Cold W r elndcd and hternat.ional financial hstitutions changed their ways of t h i n h g about how ftancial assistance wlruld be hartded out. Direct aid from Washington and Moscow drird up, and most aid from Western Europe was redirected to Central m d Eastern Europe. h addition, international financial instjtutions threatened to withholLi aid unless governments overhauled their cormpt political systems and ineffective economic systems. This placed. many leaders inAfrica betMieen a rock m d a hard place: If they overhauled their patronage systems they would lose the support of their domestic cmstituezzcies and subsequently lose power; if they told the IMF and the Wodd Bank that they would not implement political and. eccmamic reforms, they would not get financial assistance from abroad, ents and economies would coltqse, and they would lose power anyway. Many leaders in West, Central, and East Africa failed to resolve this d i l e m a and cmsequmtly threw tbrir countries into turmoil h the late 1%0s and early I"30s. Nigeria, which had st~bstmtialoil reserves, suffered similar financial setbacks when oil prices dropped and its government mismanaged the country's oil income. Altkough parts of .hf"rica-southern .hf"rica, in particulax-havc stabilized si,nce &c end of the Cold N r , much of the continent has moved in the other direction,

Ccancrrnics and Internal ConfEicf Although economic developments can affect the prospect for internal conaid, as discussed above, the relationship between economics and hternal edict is complex, First, countries at different stages of econornic etevelopment have to contend with different kinds of economic problems. In industrialized countries or region" pd1i.c dissatisfaction c m intensify even if econmies are growhgl if they are not growhg as fast as they once were or fast enough to keep pace with societal dmands. Countrjes in the process of making transitions from cmtraUy p1 ed to market-based systems usu-

al.ly have to contend with a host of economic problems, ranging h m high levels of unemployment to rampant haation. Countries that are in the process of modernizing have to cantend with migration, urbanization, and o&er social and econnmic dislocations, En addition, gmwing public demands and expectations in mcrdemizirrg countries can overwhelm the capacities of political institutions to respctnd.7 fn multiethnic countries, these kinds of economic problems vlvariably have e t h i c reveiberations. Ecclnomic problems, ~ g a r d k sof s their source, can aggravate existing et-hnic tensions or generate new tensions, especidy if they take place in a context where dilferent ethnic groups have unequal economic burdens, different standards of livillg, and different economic oppwtunitieswhich is almost always the case. These te~~sions are often compounded by domestic elites, who, incampaigns designed, to eiher px.eserve or enhance their own political positims, blame e h i c minorities for whatever economic difficulties their country may be experiencing. Second, although economic booms can dampen ethnic tensions and reduce t-he potmtial for ethnjc violence-as seen in M a l v i a , :Indonesia, and mailand in the 1990s, for example-economic growth is not a panacea. hdeed, economic booms can generate e t h i c problems of their own,fn Thailartd, for example, the ccnantry"~growing economy has attracted illegal imigrants fmm Burm, where good jobs are scarce. Xn Indonesia, the Chinese mi.non-ty, which heads the business community has benefited disproportionately fmm the ccnantry"~ econ0mi6 upswing. This disparity has generated a great deal of r e s e ~ ~ t min e ~other ~ t e t h i c quarters. The economic boom in Chixla has benefited some regions more than others: Coastal areas have prospered much more than remote interior areas, many of kvhich are nninorit.y regions, Again, this disparity is of course rclsented in these minori-ty areas. China's economic boom, moreover, was sparked by econmic decentralization, which has led to a duction in the cent.erfscontrol over relnote nninority areas. This has led to relaxed border controls, which have allowed outside money and arms to s t m m into minority w a s . As a ~ s u l tsome , minorities along China's periphery have growing capacities for independent action"The net effect of China" economic boom, thesef ore, is that many of China" minorities are both more dissatisfied with the central gave ent and m m capable of pursuing their own political agendas. Third, economic developments should not be t h o u e t of as facts of life. Leaders make decisions about the kinds of ecmomic systems that will be put into piace as well as specific economic policies. f,eaders also make decisions about whether or not they will. try to mitigate the impact of economic problems on the mlevant ethnic co mities. 111short, this is an area where domestic elites have considerable influence over the course of events.

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International Responses to Internal Conflict To develop g~~idelines for international action with respect to internal cmfiicts, one needs to consider two related but disthct questions: First, what a n international powers and international organizations do to prevent, mmage, and resolve intemal codicts? Second, wfiat should international powers and international o~anizationsdo with respect to these problems? I contend that international powers can do a great deal and should do more than they have done in the 1990s. 1 will develop six general arguments about what the international commtlni.ty cm and should do with respect to internal cmflicts, as well as three clusters of specific arguments abwt confict prevention, co1zflict managemnt, and c d i c t resolution. The first of my general arguments is that the problems posed by internal conflict are formidable, but that options for ixlCenatiollal action do exist. The track record of international eft;orts to deal with the pdlenns posed by inf;emalconflicts is mixed: Some efforts have succeeded; others have failed. The challenge for scholars is to idcntify "Ie conditions under which success is most likely The challenge for policymakers is to act accordingly. Second, internal conflicts are complex, so actions taken to address these problems have to be multifaceted. There is no silver b d e t for the internal confict problem, Third, internal conflicts have deep roots, so long-term efforts will be needed if prwention, mmagement, and resolution efforts arc to succeed. mere are no quick fixes to these probkm, Fourth, internal conflict is widespread. and internationd resources are lhited, so difficult choices will have to be made &out when and where to act. This means, in effect, addsessjng s o m problems and ignoring others-frkge. Fifth, the international community should hvor actions that have high pmbabilities of success and low costs. This would be a banal thing to say, but for Ihe fact that the inkrnatimal cornunity often does p~ciselythe opposite. The goal should be buildjng a track record. oi success that lends credibility to intematimd undertakings. Sixth, internal codicts fall into two basic categories as far as internationaI actors are concemed: cases where local parties are willing to work for peace and give their ccmsent to international involvement; m d cases where they are not. There is a sharp linc betweell cases where Local authorities have gken their consent to international htervention and cases where they have not. It is imperative for intervmors to h w if they artr engaged in cooperative or coercive exercises. Operations that have the approval of local authorities have higher probabilities of success and lower costs than their coercive counterparts, and should therefore be givcn a higher pricrrity. This does not mean thnt coercive actions shodd. never be mdertaken: Coercive actions are indeed warranted when im-

portant interests are engaged or when moral outratges, such as genocide, are being committed. In cases such as these, the international co can still do much to prevelzt or end violence, but the costs of action m higher and the probabilities of success arc lower, because irtternational powers are in the coercion business. Coercive actions should therefore be u~zdertakelzselectivelyr with great care, and with great determhation.

The idea of cmfict prevention has a lot of intuitive appeal: ConBict management m d c d i c t solution clearly have to contend with far m m inflammatory situatims. C a d i c t prevention, hokvever, is far .from simple." Conflict is, after all, inherent irt political, economic, and social life, even if ot be extinguished, violent conflict is not. Conflict, broadly defhed, c only contrded. 'That said, I would suggest three broad guidelh2es .for international actors interested irt preventing internal conAicts,

Adopt a Two-Track Strategy for ConBict Prevention, n o s e interested in c d i c t prevention should have a two-track strategy. Une track should be a series of sustained, long-term efforts focused on the uneiertying problems that m k e vidazce likdy. The other track shodif. be a series of more aggressive efforts focused on the proximate causes of internal conflicts-the triggers that turn potentiauy violent situations into armed confrontations,.Both tracks need to be pursued. Long-term efforts to address the permissive condit.ions of htemal conflicts are relatively lowrisk undertakings, but they tend to be neglected by policymakers in national capitals and international organizations who are inevitably p~occupiedwith the crisis du jorir. At the same time, the catalytic factors respomible for triggering violence-often in places where bloodshed could be avoided-merit careful attelztion and vigorous action.

Place More Emphasis an Underlying Prablemu and Long-Term Salutions. Z,ong-term efforts aimed at the underlying problems that make violence likely need to be given more emphasis and made more effective. This is easier said than done..If a simple fomula existed for dealing with these problems, the world hvottid be a more tranqwil and happier place than it currently is. To fie extcnt they change at all, the structurat, political, economic, and cdtural problems that predispose some places to violence change slowly. This means that international efforts to hfluence events will have to be long-tern undertakings. It dsrr means that international efforts to address the root causes of internal confiict will have to be multifaceted in character, Efforts will have to be undertaken irt several areas.

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Securily concerns and arms mccs contribute to instabilq and the potential for violence. One way to reduce the uncertainties that often drive arlns races is to promote transparency and adopt confide~~ce-building measures. fn many cases, the challenge will be convincing gwernmnts that they face these kinds of instability problems a d that they should agree to outside hvolvernent in domestic secz~ritymatters. When people feel that existirtg political arrmgemmts are unjust and incapable of being changed peacefulty, the potential for violence increases dramaticatly. Internationat actors can help promote peaceful political change by extending technical advice about constitutionai and electoral rdorms, for example. They can also exert consilierabte fnflucnce by linking rjnancial assistance m d the developme~~t of closer economic tics to political reforms-that is, by makirrg financial aid and economic relationships conditional. They can also link mernhers:hip in htemational economic, military, and political institutions to domestic political reforms. This approach has worked fairly well in East-Central Europe, where states are e q e r to join the Europem tlnicm and the North Atlantic Treaty Organization m d hvilIing to do hlrhatever is necessary to improve their chances of being offered early admission to Western institutions. A country's ecmomic sikation and economic prospects have tremendous ixnp:l-icationsfor its potential for violence. If international actors are serious abwt preventing int-cmal conflict and civil war, they have to do more than treat the military dimensions and mftitary manifestations of the proble~n;they have to address the econolnic soucces of conflict in troubled societies. International actors can help prornnte economic reforms the same way they can help promote political refoms: by extending technical assistance; by linking financial assistance and econolnic relationships to the irnpEgmentatim of reforms; and by linkhg membership in international orl;anizations and institutions to reforms. StilCes, international financial, instiSutions, m d other inkmational organizations shoufd work together to develop "mini-Marshall Plans" for countries In need of special economic attention. Ncrngcrvernmental organizations shovlld devote more of thcir rclsottrces to these "silent emergencies," as opposed to post huc responses to crises that have alseady exploded into violence and chaos. Fkally;, international actors need to address the cultural and perceptual factors that lead some countries towards violence, This means working to overturn patterns of cdtural discrimh~ationby safeguarding rights with respect to lmguage, religion' and education. 'This also mems working to revamp the distorted histories groups often have of each other, ents could be asked to enter into international dialogues about group hjstories and to puhlish fnreig~~ criticisms of school curricula and textbooks.%cholars and teachers should be brought into these dialogues.

Pernicious group histories play important roles in galvanizing htemal conflicts, and they need to be given mu& greater attention in c d i c t prevention circles. Neutralize the Proximate Causes of Internal Conflicts. Those interested in conAict prevention should also pay morc attention to the proximate causes of iYttemal conflicts. As d?iScussed above, internal conflicts can be triggered by any one of four cttlsters of proximate causes: internal, mass-level factors; external, mass-level factors; external, elite-level factors; and internal, elite-level factors, That said, mmy hternal conflicts are triggered by domestic elites, and many of the conflicts that fall into this cat-egory arc raov power struggles..It: foltows that- internatiand actors interested, in conflict prevmtion should focus on this problem area. Conflicts triggered by internal, mass-fevel factors-bad domestic problems-are often drivcn by e t h i c strife. The key to negating pressures fos ethnic violence is overturning perceived patterns of political, econmic, and cdtural discrimination. W e n tension is building, vidence is looming, and diskust is molmting, internationd actors can help defuse potentially explosive situations by internatimalizhg the dialogue and injecting impartial observers and mediators; into the equation. Fact-firtding missions can he lamched to help identify the origins of specif c problems, human rights monitors can help ensure that injustices do not go unnoticed, and electicm monitors can help guard the integrity of political processes. The United Nations can be very helpful in this regard. Ethnic bashing and scapegoating in the media can be countered by internationd organizations and the international media, thereby helping to promote charged debates. less emotio~~allly Conflicts triggered by external, mass-level forces-bad neighborhocrds--are sparked by waves of refugees or troops crashing across international bordccs, bringing turmil and violmce with &ern. Waves of refugees and.motley gangs of renegade troops arc hard to deter or control because they lack effective leadership. The international community can try to prevel~trefugee probkms from becoming rcgional problems by setting up refugee camps and safe areas in the country where violence first started. To be effective, however, international actors will have to move qllickly and convince refugees that safe areas are genuinely safe. This will not be easy to do, given the international community% track record in Bosnia and Iraq. Preventive military deployments are anothrr option. hternal conflicts triggered by external, elite-tevef forces-bad neighbors-wollld seem to he easier to prevent. Specific itctions can be proscrjbed, potentially troublesome governments can be identified, and a wide range of: coercive actions can be threatened or taken with respect to

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renegade states, States are powerful actors, however, and they can therefore be difficult to dissuade, especially if leaders believe impclrtant national interests are at stake. Deterring bad neighbors from causing trouble in nearby states is particdarlp difficult when the neighbors in question are large and powerful. Kussia, for example, clear@ played a key role in triggering conflicts in Georgia and Moldova, but it was hard to influence because of its size, its position on the UN Scunty Council, and its firm conviction that Georgia and Moldowa were part of its sphere of inauence. Finally, conflicts triggered by power struggles between opportunistic e and desperate politicians are common, and should therebre ~ c e i v special international, attention. Since econmic problems make escalation and violence more likely, emergency economic relief packages should be part of the equatim when tensio~~s rise and danger looms. Cynical campajgns to mobilize ethnic support, polarize e t h i c differences, and blame other e t h i c gmups for whatever troubles a country may be experiencing are often responsibie for incithg violence and leading countries into allout civil wars. It follows that international actors interested in prrzven.t.ing these conflicts from becoming violent and escdating out of control should endeavcrr to neutralize hate-mongers and their propagmda. At a minimum, this means launching international information cmgaigns and mtipropaganda efforts to ensure that reasoned voices can be heard. and alternative sources of information are available in political dclbates. In more extrelne cases, whesz leaders call for the extermhation of- theiradversaries or cmtire ethni.c groups, as in Rwanda in 1994, more forceful measms will be called for. Taking coercive action is a big step, but some situdions-such as calls to commit garocide or slaughter-&ould lead to Iforcefuf,international action. Many internal conacts are triggered by self obsessed leaders who will do any&ing to get and keep power. They ofien incite ethnic violence of the most horrific kind for their own political ends, If h e international c nity is serioue; &out preventing inten-tal coficts, it needs to &:lrtink more carefully about: the kinds of poiiticd bchmior that should be proscribed and,the kinds of actions it will be wil.ling to take to steer or even seize control of domestic poliPical debates. These arc. extremely difficult problems, both intelkctually and pofitically, but they havc to be confr~ntedif international actors are to prevent the deadliest internat conflicts. The Challenge

Laf ColzfZict Mamgement

Once violence breaks out and fighting begins, escalation becomes much more difficult to control. %cu,rity concems and a r m races densify, and attacks m civilians can spiral out of control. C o m p m i s e and settlement

become more difficult. C o d i c t managemmt is mom challenging than conflict prevention, and &odd therefore be undertaken m m selectively and with great care. The costs and risks can be hi,gh. The foltnwing trhree guidelhes should be kept hmind. Aet Eady to Keep Violence ham Escalating.

In.temat.imal actors worried Labout emerging internal conflicts shouid act sooner rather t h later. h~temalcclnflicts often begin with limited clashes that escalate only gradually- Put another way; a whdow of opportunity for crisis manage~aent exists even after violence breaks out. The longer international actors wait, the more htense conflicts become, and the more diHicult contlict mmagement becorns. International actors have a wide range of policy instrummts at their disposal, hcluding cooperative irsstmments such as mediation and the deployment of traditional peacekeeping forces, and coercive instruments such as arms e~abargoes,ecmornic smctions, and the use of military force, Unfortunately, hternatima mcltivations to take action are weakest in the early stages of internal codicts, when levels of violence are low and windows of opportunity are T e n . Mothations to take action h r c a s e as levels of violence increase, but rising levels of violence also make conflict management efforts more difficdt. In other words, intemat.imal motivations to act arc weakest when options are strongest, and rnotivations to act are strcmgest when options are weakest.

Keep Internal ConfIiclts from Becoming Regional Conflicts. Internaticmal actors irrterested irr contlict mmagemtynt shlruld strive to keep internal conflicts from becolning regimd codicts. Internal conflicts usually become mnre difficult to cmtrol and. resolve when neighboring states become invokd. Additimal sets of interests are hjected into the equatiorr, and additional resources are made a~railableto combatants. Fighting often intensifies, and negotiations almost always become much more complicated. Achieving this goal means addressing two problems. First, it means working to minjmize the impact of internal conflicts on neighboring states, inchxdk~grefugee problems, economic problems, military prcrblems, and instability probems. These kinds of poblelns o f t a ~lead neighboring states to launch defensive or protective interventions. Second, international actors should work to discwage neighboring states from engaging in opportrxnistic acts of aggression, such as supporting rebel forces in order to influence the rcgional balance of power or launcblng opportunisl;ic invasions. There arc reasons for being optimistic &out the hternational comnunity % aability to take effective action in this area. The problems that intctr-

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nal conflicts pose for neighboring states are easy to identify, even if they are not all easily scrlvahle. 7'he actions that neighboring states should be djseouraged fron taking are also easy to id,en,tify. Phs, the UN Charter provides a legal foundation for taking action to majntah international peace and security: fn addition, international actors artl dealing with established governrnernts in neighboring states, asld governments can be engaged and influenced in ways that amorphous political movements and rebel groups cannot. If necessary the full array of internatimal policy instruments can be brought to bear on troublesome or potentially troublesome neighhoring states, including threats to use ecmomir sanctions and military force. Distinguish. Between Cooperative and Coercive Acltions. It is essential for international actors ccrntemphting intervention to distinguish between two fundmelntdly different- kinds of problms: cases wl-tercz the local parties are ready to stop fighting and are receptive to international involvement, and cases where they arc. not. 'The track record of international effosts to bring fighting to an end is good in the former, bad in the latter, and truily awhl, when the line between cooperations and coescive mdertakings is bhrred. During the Cold Wr, peacekeeping operations were usually deployed to monitor cease-fims, and they were deployed with the consent oi the relevant local parties. These operations cclnsequently enjoyed a high rate of success. It was understood that there was a sharp line between these kirrds of undertakings and the coercive operatims launcbed under Chapter W1 of the UN Chartelr, This line began ta get blurred in 1992, when UN secretary-general Boutros-Ghdi suggested that future peacekeeping operatims m i e t not depend m the cmsent of all local partiesl"7'he UN-authorized n-tissims to Somalia and the former Yugoslavia that fdlowed were? deeply troubled exercises, mavlly because the Iine between cooperation and coercjon was blnrmd. UN humanitarian operatims in these two countries were presented as impartial efforts to relieve human suffering, but they WE seen quite differently by local leaders, who correctly understood that humanitarian relief had implications for the local bafmce of power, fnten~ational efforts to put pressure on local leaders and open the way for humanj.tarian supplies failed, first, because international actors insisted on prtrtending that thry wew not engaged in coercion and, seemd, because they did not have sufficient forces on the ground to engage in eMective coercion. h fact, the deployment of lightly armed units to escort humanitarian relief convoys was counter-productive: UN peacekeepers became prepositioned hostages, and hostage-takhg completely undercut international efforts to brilng the fighting to a quick end.

UN officials, to their credit, have leamed h x s r these mistakes, and by 1995 it wa~; agak an article of faith in UN circles that there was a sharp line betwee11 cooperative m d coercive mdertakkgs.n Some scholars m d malysts continue to argue, however, that there is a gray area between cooperation m d coercion, and tbat a "third optionffor "'middle vtion'" exists,12 My view is that the new thinEng at the United Nations is correct: Cooperathe and coescive operations are fundamentally different klnds of undertakings, and it is essential for international actors to keep these two h d s of activities separate.'" Thc WN-authorized missions to SomaXia and Bosnia ran into trouble because whatever consent had once been given begm to evaporate wbrn missim objectives expanded and international actors began to engage in more and n n o ~ coercion.. This is not to say that international actors should eschew coercion, only that they need to distinguih between cooperative and coereive undertakings and be prepared to play hardball when they are engaged in the latter, Coercion cr;lnwork, and the international community has many coercive po2ic.y instrments at its disposal. Individuals can be held accountable for their actions through the establishment ol iutternational criminal tribunals. A m s embargoes can he imposed on one party or another. Economic sanctions can be powerful sources of leverqe, especially wheln one is dealing with central gover ents, neighborhg states, and other easily identifiable and targetable actors. Mlitary force can be t in the U.S. Departthreatened or used and, contrary to c u r ~ nthinking melnt of Defsrse, it can be used in limited ways in support of limited objectjves: Safe arcas can be estabilist-ied and protected; heavy-weapon exclusion zones can be established and enforced; and air power can be directed at specific targets such as arms depots, colnmunications and transportation links, military bases, and forces in the field,'" SuccessftlT coercion liepends on several things. First, international actors must recog~nizem d admit that they are engaging in coercion: m e y should not delude themsehs or try to delude their publics into thinking that thmatening to use military force, for exan-tple, will he seen as a form of cooperative engagement. Coereon is not aimcd at "conflict": It is aimed at governments, groups, and indjviduals who will, see threats and coexive acts as foms of aggrasion. Seccmd, international actors need to be clear about both their long-term political objectives and their shortterm, operational objectives, This requirement of clarity is one of the reasons why coercion worked in Haiti and failed in Bosnia, W mandates, which &odd be secured whelnever possible, should be dear on these counts as well. Third, coercive actinns need to be pursued with great political determination and with sufficient resources, When military forces are involved, this might mean deploying large nulnbers of heavily armed troops guided by clear and liberal rules of mgagement. Lightly amed.

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peacekeepers should not be sent out to wage war or into situations where they might =asonably be ercpected to engage in open combat. It is reckless and irrespomible to place peacekeepers &Isuch jeopardy. Although coercion can work, the international community should emphasize cooperative conflict management actions over their c o e ~ i v e counterparts" Cooperative actions-such as sending mediators to help negotiate cease-fires and sending peacekeepers to help monitor ceasefires-are relatively low-cost, low-risk undertakings. They should be the mainstays of intemati.mal efforts in this area. Coerciorn is more expensive and riskier, and s h d d he eznployed d y when important hterests are at stake or when crimes against humanity, such as genocide or the deliberate slaughter of civi1ims, are being committed. The international community should. engage in these kinds of high-cost, high-risk undcrtakings only when the stakes are high m d only when it is determined to see a serious carnpaig~~ through, to the bitter end. The Potetlf id for Conpicl Resolu t l ; , ~ The end of the Cold War has Zed to the solution of a number of con-

flicts-in El Salvador, Mozambiyue, Nicaragua--driven in large part by the geostsategie campetition between Washingto11 m d Moscow. The hternational community, under the aegis of the United Nations, has p1ayc.d an active and important role in helping to bring these cclnflicts to an end. It has also helped to bring to an end the conflicts in Haiti, Nmibia, and.South Africa, which were not driven by Cold W a dynamics, and it has helped to dampen tensions in Cambodia, Iraq, 'l'ajikistan, and Western S&ara. C d i c t rtsolutian is an enormously tricky proposition: It is hard for people to lay down their arms, =build rawaged political and economic systems, reconstruct: civil societies, and reconcile when large amounts of blood have been spilled and vengemce has come to dominate political discourrse. There are, however, reasons for being hopeful about the prospets for conAict resolatinn in s m e parts of the world, and about the ability of the international comunity, througtn the Unlted Nations, to facilitate these conflict resohtim pmcesses-as longer international actors ohserve the following guidehes,

Help Those Wha Want to Be Helped. The international communityfs rclsn~trcesare not unlintited, and &&cult decisions will inevitably have to be made about where and when to try to lend a helping hand. The guiding principle should he: First help those who want to be helped. When people are cletermined to keep fighting, the kternationd cornmunit.y can do little to bring hostilities to an end unless it is willing and

able to impose peace, fxnposing peace mems employing c o e ~ i v instrue ments with a hewy hand, and in most cases it probabty means unleashing a massive, cmshing milit.ary blow foilowcd by the Iong-term deployment of milikry forces and the imposition of an international trusteeship under the supervisbn of the Ur7ited Nations. These operations are bound to be exceedingly expensive and open ended. It is therclfare highly unlikely that the hternational community will be hclhed to go down this path. It did not do so in eithrr Somaiia or b a n d a , where hummitarian crises were intense and Local militmy forces were eomparathely weak. Given that the international c m m m i t p has limited resources to devote tcr peace processes and a limited toierance for pain, it makes seme for international efforts to be concentrated in places where combatants am tired of fighting, ready for peace, and,looking for help, R e r e is a lot the internationd communjty can do to help msolve c d i c t s and make peace under these conditions, when it has the lulf consent and cooperation of the local parties. It can provide bummitarim assistance to refugees a d othen; in need. It can launch fact-finding and mediation missions to help resolve outstanding pdi,tical differences. Traditional peacekeeping forces can help keep former adversaries apart while cooperative disarmment efforts get under way. Multifwctional peacekeeping operations c m help with political and economic reconstrudion. 'The track record of hternational efforts in postconflict settkgs such as these is good: k a h , international actcrrs can do a lot to help people who genuinely wmt to make peace. The key is makirtg sure that one is dealing with people who gcrnuinely want peace. Most people want peace, of ""U'", but on their own term.. When they agree to peace settleme~~ts and dectio~~s, eaders ol factions often assume that electoral triumph is in the offing, Problems can arise when electicms turn out in unexpectedly unsatisfying ways: Peace settlements that were attractive when hjgh office appeared to be part of the package are much less attracthe when it is not, When leaders d d t get g they may ccmdude that mthe electoral =suits they were h o p i ~ ~for, szxlning the fight in the bush or the jungle is preferable to being a political non-mtiw This is what happened in Angola after the September 1992 elections, which Jonas Savimbi lost. 'I'he chalZenge for international actors is to make sure that local pasties are acting in good fai& and that local leaders iul1.y understand the potential ramifications of the peace process.

Launch Multifaceted Undertakings. Shce the forces that drive internal conflicts are complex, conflict resolution egorts have to be multifaceted undertakhgs. The United Nations has launched a number of multif-unctional peacekeeping operations since the e ~ of~ the d Cold War" 'The UN missjons in Cambodia, El Salvador, Haiti, Mozmbique, Namibia, and

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Nicaragua are the most prominent exaxnples. As noted above, these wide-ranging, multifaceted operatrions have a fairly good track record, and offer some useful lessons fsr the ft~ture. Ideally, international efforts to help resolve internal conflicts will address four sets of problems. The first mder of business must be to bring militay hostilities to an end m d add,ress attendant military and disarmament problems. Cease-fi~shave to be negotiated, irnglemented, and monitored. International mediators and peacekeeping forces can be trememdously helpful inthis rclgard. Military adversaries then have to be persuaded to hand. in their arms; buy-back scbemes have been successful in El Salvador, Haiti, and Mozambique. @er time, rebel military forces and militia havc to he &mobilized, m d national military forces, inclrading appropriate representation from all relevant ethnic and political gnrups, have to be reconstikted. The key to conthued progress is addrc~ssimgthe security concerns that f o r m r adversaries will inevitably have as disarmament md. d.ernobi1izati.mprocesses unfold. :International actors can help to =assure local parties by monitoring these processes carefully and promotbg transparency Second, international actors can help with political reconstruction, In the short term, this means helping to establish transiliiond governments, as well as f a i r asld e(fective police forces asld courts. In EI Salvador, Nicaragua, South Africa, and elsewhere, the United Nations has helped to organize and supervise elections. The United Naticms can also provide techical expertise with respect: to constitutional reforms: the creation of a fedcral system, the establishment of rninority rights safeguards, and.the like. Third, internationat actors can help-jndeed, they must hejp-Mlith the long and difficult problem of economic reconstmctim and the promotion of ecmomic development. Mmy c0untrit.s torn apart by internal codict were in poor economic shape to begin with; years of war have only made matters worse. As noted above, '"mini-Marshal1 plans" involving the combined efforts of gove ents, international fhmcial hstitutions, international development organizatims, regional organjzations, and multixlational corporations will generally be needed, Finally international actors will have to hefp with the complex problem of rebuilding civil societies"This can involve acthities ranging from the repatriation of ~ f u g e e to s the creation or =-creation of a free and fair prtrss to the founding of schfrclls. Getting groups to came to terms with the distorted and pernicious mpects of- their histories and inculcating the values of compromise and tolermce in political and sorrial. discourse are among the most important problems war-tom colantries face. In short, education is one the keys to long-term politicad stability This is surely an area where the international commmity can make a difference,

Make Long-Tern Commitments. One of the most depressing aspects of internal conflict is its ~ c u r r h g nabre. :ill place after place, from Angola to Zaire, conflicts sputter to a halt, only to start up with re~~ewed fury years or decades later, hternal codict seems to go into a state of suspended animation from t h e to time, but it never seems to go away. Conflict resolution is not easy' and it cannot be brought about in months or even a year or two. Conflict resolution is a long-term process, and if international actors are to contribute in useful ways to this process, they:have to be willing, hlc, and prepared to mke long-term etforts. Consider the mapitude of the problems most countries face in the aftermath of ciwit war: State structws have to be rebuilt; legal institutions and pdice forces have to be reconstituted; pditical institutims and electoral processes have to be re-established; industrial and agricultural activities have to be relaunched; communication and trampoftation systems have to be recmstructed; schools have to be reopened; and so on. The goal should be creatixzg a lasting peace that would allow international actors to walk away at some point: Peace would be self-sustaining. 'This is not an impossible dream, but it most certainly is not a short-term pmposition. Politicians in Western capital; who need immediate gratificatim and crave rczgular diplomatic triumphs need not ap&. This is a job for serious international actors capable of m a f i g long-term c o r n i t mmts to deep-seated problems..

What should the international community do about internal conflicts'! 'The central dilemma confronting the international community is that peace, order, and stability are not t h m l y values policymakers shouXd seek to maximize. Political, economic, and social justice are eyuaily irnportme and these two sets of vahes are not always in perfect harmon)r, Although policymakers should try to prevcnt conflicts as a general: rule, they should not necessarily work to keep oppressed peoples fmm rising up "&"in" tdalitarian leaders who will not accept peaceful political change. Although pnlicymakers should try to keep arrntd conflicts from escatating as a general rule, they should not w r k to keep a m s from people who have been attacked by others or wfio are being slaughtered in large numbers, And, Lalthough policymakers should try to msolve cmflicts quickly, this mission becomes complicated when aggressors have the upper hand, which they often do.Under these conditions, bringing a war to a quick conclusion might not be compatjble with brhging it to a just conclusion, The challenge, of course, is to promote both sets of values-peace, order, and sta:bility on the one hand; political, clconomic, and social jus-

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tice on the other-at the same t i m . The best way to meet this challenge is for the international community to devote more effort to political and economic developmetnt and the broadening and deepening of civil societies. tntemal conflict is not just a military probfem: Et is hndamntally a poiil-ical, economic, m d social problem. Addressing the military manikstations of internal conflict means dealing with the political, econonnic, and social, roots of organized violence, This need leads to yet another policy dilemma. Arthough the international community's best: bets for peace and justice are long-term, confliict prevention efforts, the moral concerns and national interests of international actors are engaged most acutely when people are k i n g killed or displacied in large numbers-that: is, whe~nan htense war is under way. :In other words, the international commux.lity%motivations to act are strcmgest wbrn the options for taking effective action are weakest. This brings us to a find pctlicy dilemma. W e n policym,akers contemplate intervention in internal conflicts, the costs of international action are easy to measure and they hawe to be paid immediately: 'They include the fimancial costs of economic sanctions and miljt-ary deploymmts; &c. risks to troops placed in harm" s a y ; and the domestic poli.tical risks that poiicymakers might have to .The costs of inaction are. much harder to measttre and are usually realized only in the long term: They include damage to core political values, hternational norms of behaviop;, international law and order, and ~ g i m aand l international stability It is important to remember that almost all hternal conRicts have regional dimensions, implications for regional security, and inlplications for international order. lnternal conajcts are rartrly self-contained pockets of turmoil. The costs of hactio~nare therefore real, as is the moral dimirzishmmt that attends inaction in the face of slaughter. Unfortunately but inevitablb the costs of action receive mom attention thm the costs of inaction in polieytnaking debates, Politicians invariably focus on the calculable, short-term costs that they will have to bear as political figures. Statesmen worry more about the kng-term costs to national and inkrnational secrarity that accu,mulak ml,y hvilh the passkg of time-but true statesmen are few and far between.

4. See I(alevi 5, P-iolsti, The Slatef W Ra ~~ the ~ dS&te of War (Cambridge:Cambridge University Press, 1996), pp. 21-25. For mc>redixussion, see Jchn Mueller, Redre~t From Dt~umsil2ny:The Ob~oIes~(~r~ce of Mnjar War (New York: Basic Books, 44989). 2, My ditjcussion of internal conflict draws on my contributions to Michaet E, Brom, ed., I-ttterptatit?nnfBz'mnensr"otzsc?f-lnler~~al Gor$ict (Cambridge, Mass,: MIT Press, 1996); and Michael E. Brown and Sumit Ganguty eds., Goc~ernmentPolicies

and Etlitnic Relati;orzs itz As-in and the PacFc (Cambridgef Mass.: MTT Press, 1997). By "internal cc>nflicts,"h e a n violent or potentially violent pc~ljtjcaldisputes where the m a h disputants are domestic actors; where the main objects of cmtention are domatic political, ecc>nomic,and social arrangements; and where armed violence takes place (or threatens to take place) primrily within the borders of a single state. Examples include violent pclwer struggles involving civijian or mi1itar)r leaders, armed e t h i c conflicts and secessionist c a m p a i p , challengs by criminal organizations to state sovereignty, armed ideolo&.icalstruggles, and revolutiom. 3. See Sumit Canguly, ""Cr>nRictand Crisis in South and Southwest Asia," in Brown, The International Birnensiom of Internal Conflict, pp. '141-1 72. 4. See, far example, John A. Vasquez, "Factors Related to the Contagion and Diffusian of Xntmatianal Violence,'" in Manm I. Midlarsky, ed., Tile Interrzafionaliziation c$ Cumrnzcnnl Strqe (London: Routledge, 1992), pp. 149-172; Ted Rcybert Gurr, M-inuriliesat Risk: A Glub~fView of Ethtzopoliticnl Co~zflicts(Washington: U.S. Institute of Peace Press, 19931, pp. 132-135. For an excellent c>vexlriewof this Iiterature, see Stuart Hill and Dc;)naldRothchitd, "The Contagion of Political Conflict in Africa and the VVorid," journal of Conpict Resalu tion, Vol. 30, No. 4 (Becember I986), pp. 746-735. 5. See Human Rights VVatch, Slnzdghter Afrrong Neigttbol^~:The X"3oEiticcail Origi~zsof Contnzunnl Vioferzce(New Haven, Conn.: Yale University Press, 1995). 6. See Donald L. f-forowitz, Etlznic Grotlps in Ca~flI'ct(tlerkeley: University of California Press, 119851, p. 140. 7. See Samuel P. Huntington, Political Order in Clzarging Societies (New Haven, Conn.: Yale University Press, 1968); Ted Robert Gurr, Why Merz Rebel (Princeton: Princeton University Press, 4970). For an overview, see Saul New man, "Does Modernization Breed E t h i c Conflict?"Wol.ldPolitics, Vol. 43, Ha. 3 (April 1991), pp. 451478; jack A, Coldstone, 'Theories of Revolutim: The Third Generation," World Politics, Vol. 32, No. 3 (April 19801, pp. 425-453. 8. See Stephen John Stedman, ""Achemy for a New World Order: Oversetling Cmflict I3reventim,"ToFogn @;R"'$ Vol. 74, No. 3 (May-Jme 1995), pp. 34-20. For other views, see Michaef S. Lund, ""Underrating Preventive Diplomacy," Foreigtz Aflairs, Vid. 7'4, No. 4 (July-August 4995), pp. 460-463; J u h Stremlau, "Antidote to Anarchy;" Washington Qunrfcrly,VcA. 18, Net. 1 (Winter 19951, pp, 29-44, 9. See Stephen Van Evera, "Hy-potl~esson Nationalism and War," Ilztc.rmtio:orze;tl Sectlrity, Vol. 18, No. 4 (Spring 19941, pp. 5-39, 1Q. See Boutms Bosxtros-Ghali, An Agenda fir Pence: Preztcn five Diplumncy, Pence~rzmkz'zzg,and Pcacehepizzg (New York: United Nations, J m e 1992>,p. 11. 11. See Boutroys Bsutrc~s-Ghali,Szappfenfentto an Agenda for Peace: 170sif;ionPaper. of the Secretncy-General on flze Bcmsion c?f fFze Fftietlz Alznii-persary c?f the Ufzited NQfions, S/ISff-15/1,January 19%, paragraphs 33-35; Shashi Tharc>or#"United Nations Peacekeeping in Europe," Surv-ivnl, b l , 37, No. 2 (Summer 1995), pp. 121-134; Shashi Tharoor; "Should UN Peacekeeping Go 'Back to Basics??""~urvizxzl, Vid. 37; Nc>.4 (Winter 199511996), pp. 52-64. See also Charles Dobbief ""A Concept for Post-Cold War Peacekeeping," Sur.r.~izlaE, Vol. 36, No, 3 (Autumn lli394), pp. 424-448, 12, %e Adarn Roberts, "The Crisis in UN Peacekeeping,'" Szrrviml, Vol. 36, No. 3 (Autumn 19941, pp. 93-120; Dt~nalcSC. E Daniel and Bradd C. Hayes, "Securing

Observance of UN Mandates Through the Employment of Military Forces,'" manuscript, March 1995; Donald C.E Daniel and Milton E. Miles, "Ifs There a Middle Option in Peace Support Operations? implications for Crisis Containment and Disarmament," Paper Prepared fc3r the UN Institute far Disarmament Research, Ncjvember 1495; Adam nobeds, "From San Francisco to Sar;ljevo: The UN and VOX. 3i7, Nct. 4 (Winter 399511996), pp. 7-28. the Use of Forcef" %SEIYZJZ'"UI ~, 43, It is certainly true that peacekeping operations often engage in ct~ercionat a tactical level (against renegade elements or in the contrtxt of monitoring a ceasefire), in the course of policing activities (to stop looting), and in self-defense. However, this kind of coercion takes place with the consent of lsxal leaders and usually within the framework of a cease-fire agreement. There is a big difference between this kind of "tactical" coercion and "strategic" coercion designed to secure an agreement from local leaders, change their political goals, or change the correlation of local military fctrces. Tactical ccjercion is normal and acceptable, Attempting t c ~engage in strategic coercion with tightly armed peacekeepers deployed under misleading or c;)bst~lete pretemes is deeply prc~blernatic,as we have seen in the Horn of Africa and the Balkans. 44. I concur with IVQ Daalder; who argues that the Pentagon" all-or-nothing approach to the w e of force limits U.S. military intemrzntion to cases where vital interests are engaged. This guts the cart before the horse. National interests should define policy objectives, and policy objectives should determine how force is used. If interests and o3bjectis7es are limited, one should be able to use force in a limited tvay. If one is unable to use force in a limited way for doctrinal reasons, then bureaucratic dogma is damaging nationat interests. See Daafder, "United States and Military Intervention in Internal Conflict," in Brown, The IEferrzafz'olralDilnensions I?( l~lterr?nlCo~pict,pp. 461488,

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Trading Up and Trading Down: The Impact of Technological Change on the International System

Che of the distinguishislg aspects of both the work and the teaching of fichard Rasecrance has been his focus on chimge over time. W ~ i l econventionnl international relations trheory has jdentified continuities across countsies m d throu;hout history, or highlighted structures that persist across systems, Rosecrance has focused cm historical, cmtempcrrary and potential changes in both state behavior and the international system, The dramatic changes apparent in politics, economics, and society bought about by the end of the bipolar Cold War conaict have convinced other scholars to move in Roseerance's direction: to focus on change, even if d y to explain the glleati)i unexpected rapid triunnph of capitalism and the demise of cammunism. Sholars today are focusing on the changing nature of threat, as wfl as the appearmce of new opportunities for peace and prosperity. Skill, Richad Rosecrance urged the study of the dynamics of the international system long before the end of the Cold I/Var cowificed more convel~tiondscholars to undertake that study. This chapter focuses on the roots of change in the international system. :It seeks not so much to identify the cause of changes in a specific distribution of power in a system, such as that br0ugh.t.about by the dclnise of the Soviet Union and the end of the Cold War, as to discover the basis of more general changes in the elements of system structure. These dqInamir featurcs include changes in the role of internationd institutions as major actors in the system, changes in the terribrial versus trading

strategies adopted by individual states, and the origins of the dramatic changes in norms and ideas we are seeing at the end of this millennium. By ide~~tifying the roots of these Changes, one can ground speculation abwt the new anillennium mnrc fjrrnly in a study of changes in f i e present-and changes in the past.This paper will first lay out the themtical mderpinnings for an argumrnt about systems change, then review changes in the recent past (since Miorld War If), and finally lay out some expectations for the futurcz.

Realism and Liberagism The falf of the Soviet Union in 1989 signaled an end to the dominance of realism in the field of international relations. This parsimonious and powerhl themy sudcienly appeared problematic even to its most f w e n t proponents: Meowalists had predicted stability o r the bipolar system" and therefore instability for a unipolar system (in which lesser powers wodd challenge the dominant state until balance was restored). Yet: the Soviet Exnpirc. broke apart: hlriihout a major war or conquest from a challenging power, and, thus far at least, no alfiance of lesser states has emerged to challenge the dctminance of the xmaining supwpower. Hence, some of the assumptions underlying those realist predictions have had to be reconsidered. These assumptiosls incXude ntltions that states are the major actors in the system, that the system is anarchic, that the system therclfore? forces all actors to be functionaily ul~differentiated, and that each state therefore necessar.ily seeks to improve its relative position. h state's ~latriveposition is determined by how powerful it isand power, to the neorealists, is fuxrg;ible, with military power paramount, The anarchic structure of the system forces states to guarantee their own security: Military protection of borclers is the most fundamental fundion of the state, The structure therefore ensures states will all. behave similarly (a consequence of being functionally undifferentiated), pursuing strategies that will maxin-tize their relative power and position. Neorealim, of course, had its critics long before the fall of the Soviet Union, Many of these critics were lumped together in the ""Iiberal"' ttheory camp, despite diverse critiques. Although most liberals did not specifically prectict the fall of the Soviet tl'nion, many focused on changes in the international system, arguing that these changes were real and lasting, and that the realists failed €0hresee m y true change in the system. Liberal critiques ranged from specific chdenges to Waltz's assmptions concerning functional diferentiation" to argtaments that imreasingly powerful nonstate actors were challenghg the domhmce of states,"^ a r g u ~ ~ e nthat t s military power was no longer predominant,4 to arguments that states pursued absolute gains in many cases.'

What these liberal theories shared was m assumption that power is not necessarily fungible, and that, at different times, different issue areas artl dorninmt.qLiiberaf, theorists placed m emphasis on economic strategies, which the realists tended to treat as secondary concerns far states, By turning to a focus cm trade and economic matters, liberal theorists argued that there can be more change in the system than the redists f o r e s w that cooperative strategies can be followed, possibly even at the expense of a state's relative position, and that instiktions and norms artr estalnlished to h t k r gmranke cooperation. Liberal t-heorists s h a ~ dthe view that strategy is what determines structure-that, as Richard Rosecrance argued, a t r a d a stra.tegy and increased interdependence can create a systern in which states are essentially playj,g a mutually beneficial "assurance" "nne.7 For realists, given their focus on relative (military) power, states persist in playi.ng the more competitive ""prisoners3dilema'" game, alld the system remains static. Fllr liberals, new actors (institutions, multinational corporations, and others), functional differentiation, new norms, and shifts in the dominant actors in the system all can occur from the pursuit of new strategies. These two schools of thought-neorealim, with its treatment of power as fungible and its argument that structure deternines bcrhavior, and liberalism, with its treatmernt of power as not fungibte and its argwernt that strategy can determine structure-have continued. to conflict. halists argue that their themy remaim a powerful predictor of state behavicrr, as it: was durhg the superpower era. Liberals argue that realists cmtinue to deny the fudamental changes in the system even during that era. Differences between the two schools today are perhaps most strikingly obvious in their predictio~nsfor the next millennium: Realists conthue to argue that military thrcats will m-emerge, generally through ethnic conflict and more specifically through the ""Clashof Civilizations.'" Liberals argue that a peaceful, cooperative world. will corntinue to evolve, as less powerful states k i t a t e the trading strategies of the powerful: Either the world will be peaceful and boring as we see "the end of history,"%r else it will be lucrative and ever mare interdependent with the rise of the ""virtual state."i(WVVhat is misshg is a sense of what systemwide variables might lead a system in a new directim-or keep it statnle and unchanging. Without a theory of change-of kvhat types of h n g e s occur and whether they can be lasting-not onXy will specific changes in the distribution of power (like tl-te fall of a superpwer) be impossible to p ~ d i c r t but theoretical disal$reements about what elernents in the international system are essential will conthue. An understanding of system dynamics is needed to h o w tryhether actors pursue absolute or relative gains, whether they seek military or economic power (or whether power really is fungible), whether self-help is the organizirrg principle of the system,

which actors matter, whether norms matter, and whether ;institutions are merely epiphenomenal.

The Dynamics of the System Techology is the motor that drives syste17ns change. As described in a general framework of system dynamics (drawn from Steele 199519, all individual states at all points in history arc. interested in both security and prosperity. The tracle-offs they are Willhg to m k e betweell the two goals are a function of three Ifastors. The first factor is the domestic situation: the leaders, the culture, and the type of governmental system within the state.. The second is the history of the individual state's kteraclinn with other states and the current strategies of those states, including the level of rmflictual strategies versus trading strategies. The third is the level of incentives in thc internaticmal systeln itself for states to adopt certaisl types of strategies, Underlying changes h any of these thme factors is technological change. Techolc-tgicalchanges, both in the security m d in the cmmercial realm, can lead to changes in incentives in the international system, At certain times, the system may therefore be more conducive to cooperation alld trade; at other times, it may be more conducive to territorial conflict and war* Tnnovations in technology can crc3ate dlspmportionate retums for investments in one strategy as opposed to another. If rc.h;lrns for warm&ing strategies increase, t-he system as u zuf~crlewill b w m e more belligerent. If returns for strategies of commerce increase, the system as a whole will become more peaceful. That is, as teehrrology changes, states find they can better reach their s e c ~ ~ rm i vd prosperity goals by pursuk~geither mnre cooperative or more conflictual strategies. The workings oi this principle lead to a system of mom territorial states at some points in history (which tend to be geographically large states, or ever3 empires), or more trading states (which tend to be smaI.Ier geographically), If returns to both cooperative and conflictual strategies stay constant, no real change in systeds incentives will occw, and little change in the mix of states will be expected. If the returns to botln incrcase in parallell, or decrease in parallelf there will be no real change in the mix cJf trading and territorial states in the system (although states may find it easier or harder to reach their goals as technology changes). It is only when the returns to one type of strategy incmase or decxase rt;btive to the other type of strategy that the system as a whole becomes more cooperative or more conflictual, This focus m technological chmge is broader than just a focus on offensive or defensive weapons. Other authors have described periods in which either offense or defense is clearly dominant and the effect this

dominance has on war12 or even offered the offenseldefense argument as an explanation for certain shifts from eras of war to eras of peace (such as the devolution of the fairly peaceful period during the Concert of E~trope into the VVodd W r 1period). But this argument explahs only very specific and timited periods or specific wars, both because it is often hard to tea kvhich type of weapon is h i n a n t , and because the dominance of one type of weapons technology often leads to the pursuit of a technology that can counter it, so that the dominance of one type of technology is short-lived.1" addition, those who focus on weapons tend to neglect other types of technology that affect trade as well as military strategics, such as impmc"vement"in communications or transportation, which lower trmsaction costs and bring better returns to tradhg strategies, Finally, technolog does not just affect the success of was or trade but can also change the purpose oE strategies and thr goals states pursue. For example, the value of terrilory itself. changes as if hecorns morc costly or cheaper to defend, m d as territory becomes more useful or less useful as a source of goods to trade, or a help or a hindrance in moving or exchanging goods. Thus the utiljty of military expansion may go up or down as territory becomes more highliy valued-independent of the types oE weapms that may be dominant. AS Richard Rosecrance has pointed oul, the prospects for peace and stability become enhanced as more states adopt trading strategies and diminish as they adopt territorial strategies." "1 &er to make predictions for prospects of peace and war; or for territorial expansior~and trade in the new millennium, we have to focus on trends h technological change and innovation. The theory presel~tedhere is a path-dependent one, h which hnovations serve as breakpoints h a model of punctuated equilibrium, Major changes in the structure of the system are rare and depenli, in part, on where innovations occur and how they &fuse, on who the existing major actors are, and on what rules and institutions am in place. When s the returns states expect periods of intense ovation lead to ~ v e r s a l fn from their jnvestmnts in me type of power v e r s u another, systelns change does occur. Institutions and nmms will be established that enhance the benefits states glean from following particular strategies. That is, if military power is prednminant, institutions will be formed which lower the costs of c d i c t , such as institutions in which it is easy to coordinate alliances, write treaties, and make diplomatic contacts. If economic power is predornhmt on the other hand, institutio~~s will be developed to lower the costs of trade and financial interactions, such as institutions to disseminate ir~formaticm,ease negotiations and contracts, and foster coordination. Tfirough bstitutions m d norms, pat-power states structure the system so that they can maximize gains from the

strategies they follow This system then provides incentives for other states to adopt similar strategies: conflictual ones in a world in which military power and territory predominate; cooperative ones in a world in which economic power and trade predominate. The Recent Past The intema~onaisystem before World Miar If was already a strmg military-political one. Territorial competitio~~ drove states into two destructive World Wars, and culmislated h the detonation of the atomk bombs at Himshima and Nagasaki. 'fhe United States and the %vkt Union emerged as two superpowers in a strong@bipolar world. Power depe~~ded on territory and on military capabilities (part7icullariy nuclear weapms) to protect each state's own survival and interests. The colonial system was dead, replaced by a system of d i e s and satefites. States strove for self-sufficiency except in the nuclear realm, in which some states did strive to attain their c ~ w nuclear n capabilities, whereas others were content to find prcrtecticm &er the nuclear ulnbrelfa of the superpowers. The two great areas of innovation in the postwar period, were first, in the military sphem, in the form of nuclear weapms and their delivery systerns, and second, in the commercid/economic sphere, in the form of advances in information and communi.cations, i n c l u h g the use of satellites and computer" which had an irnpact on both ecmomic and military power. Innovations in rni1it.a~power over the last fifty years have raised the cost of the use cJf force everywherlt. This change was brought about in past (but not exclusively) by the clevelopment of nuclear weapms. 'The realists argue that the postwar bipolar system was extremely stable because of the disparity between the s u p e r p o w a m d the rest of the systern that nuclear capability created. But the effects of nuclear weapons am felt throughout the system. All states face an unprecedented degree of threat because of the great costs associated with using them. Part of these costs corne from the technology itself: possible "nuclear winters," the well-publicjzed risks of an)i radiation in the atmosphere, and the impact of nuclear accidents like Chernobyl have convinced all actors fiat grave costs wodd be incurred by both the aggressor and target states in any nuclear confrontation, Additional costs come from the deterrence doctrkes of the nuclear powers and the system of alliances in the system. h decision to use any force must include the cmsideration of the costs associated with using nuclear weapons, because any conRict theoretically c m escalate into a nuclear one. Nuclear weapoIIs have not been the only military hovation in the last fifty years, of course, Zmprovemnts in conventional weapons indude

dramatic improvements in firclpower and.accurac5 in the range and the reach of that firepower, and in the speed with which attacks can be delivered, t?ll of vvhich arc also attributes of nuclear weapons themselves, Fighter planes and bombers are faster, better cloaked, better able to identify targets, and better able defend themselves against attack. Missile technology has continued to develop, including interconlinentd-ballistic missiles (extremely long-range), SAMs (cheap, mabile surface-to-air missiles), antiballistic missiles (seen as destabilizing), cruise missiles (which can be launched by ship, submarine, or air), and the neutron bomb, which kills people (through e&anced radiation) but leaves real, estate intact.l"~ecause the time period in which weapons can reach their target is nllw so short, and because the geogsaphical reach of these weapon."^ now so great, territory today is less important as a defense against attack. It no longer serves as a buffer againe;t enemies. lmproveme~ntsin chemical and biological weapolns hnvc led to greater fears of mass devastation,just as nuclear weapons have. En addition, high technology weapmhhave been developed since World War 11. Such weapons h c l ~ ~ se~nsors, de mtipersamel weapons, and precision-guided '"smartf' munitions, Again, these have improved accuracy and lethality High-tech conventicmal weapons have become more ccrstly to develop and &ploy, but, like nuclear weapons, they arc also more lethal, can extend that lethal.ity over greater distances, and can wreak havoc in very brief periods of time, leaving little time for diplomatic resolution to crises. Findly, although high-tech weapons are costly to dcvdop and dcploy, their development depends mre on knowledge and level of technical sophistication than on natural resources-mahg territclry which provides natural resources, less valuable. 'Thus the potelntid for widespread devastatim from military strategies has increased, the costs for advanced wagons have skyrocketed, and territory has become less useful as a means of protection aga.inst: attacks or as the basis of ~ s o w c e s needed fnr the development of military powel: The returns for investin.g in military power, taking into accournt the increase in expense, the increase in risk, the increase in the cost of devastation, and the diminishing benefits of taking new terntoryf have Mien. Durirrg this same post-World War I1 pericrd, dramatic occurxd in communicat.ions, transportation, and computer technology These innovations have profoundly influenced both miiitary and economic strategies. Focusing first on this technology's impact on military strategies, instantaneous communication. improves command and cmtsol of military forces, and has enabled the development of precisionguided- weapcms; satellites allow for early wamh~gsfor mobilization of forces or missile launcheslQnd, of course, would be the basis for a Strategic Defense Initiatke (SDI, or "Star Wars") system. Thus the k p a c t

on military strategy is mixed: Weapons are more accurate (for those who can afford %h-tech weaponry), but military strategies designed to take territory are more difficult-surprise attacks are no longer possible. Such technology has also helped make territory itself less vital as a means for security and prosperity. As alwady described, territory is tess vi,t.aias a butCi?r if weqonry has a long reach, and the mtufal resources that come with territoq are less impodtarlt for information-based technologies. But fnfsrmation techology has also made it more diaficutt to cmtrol populations once territory is taken. Borders are now more permeable, as access to computers, faxes, and broadcasts means that individuals or groups can spread information (andlor propaganda) independent of gavel: ent co~~trol and oversight. CesztraS govermxents no longer have a monopoly over the control of infomation and can no longer lie with impunity. Of course, this permeability is not absolute: Many leaders try to use this same techology to spy on their own citizens, and they also try to control citizensbaecess to information-as China has succeeded fn doing, to a great extcnt. But such efforts to control access to information are very expensive. On balance, inform&ion technology at tirnes makes weaponry mre accurate and rapid. (possibl.Y making war more devasting once war is eteciared), but it has &creased the intportance of taking and holding territory (and so there is less reason to go to war). Ch the commercial side, information techolol;ies have dramaticdy lowered transaction casts for trade. Coardbation between manufacturers, the delivery of goods, and access to markets have afl improved, As trade has increased, interctependence between states has increased, leading to greater state specialjz&ionbased on comparative advantage. Communications and computer industries show inc~asingreturns, in which specialization is more pmfitable than competition because of the lockout phenomenon. These industries requistl few raw materials for productim, and mta.il hi@ msearch and development costs. Investments in infant industrjes such as electmics are risky: It is difficult to predict which of scveral viable models will becomc the standard far the indwtry 'The prevalence of knowledge-based industries in which people "learn by dczing'hmeans that firms increase returns over time as the workforce gains expertise, and spin-off i,ndustriel; further incrclase profits. Speciatization and interdependence in the economic realm inevitabw afEczcts the security realm. Countries that have dewelved these kinds of industries, such as Japan and the European Community (EC), have chosen not to seek self-sufficiency in their military strategies, hstead, they rely to a gwat extent m the U.S. nuclear umbrella. They aiso rely on increashgly interdependent economic ties to provide ""cheap deterre~~ce": that is, they rely on the fact that it is more costly to bomb trading partners

than independent competitors. Cooperation has come not only out of trading ~lationships(the pursuit oE absolute gains) but also as a means of lowerhg risk and developme~~t costs h high-tech industries. The returns to trade have been so great that the relative retums from. investments in military and economic power have slniAed to the point where returns for producljve investxnent.~and strategjes are greater than for military strategies.': The incentives of the system have encouraged investments in the ecommic sector m d the pursuit of econmic strategies in order to pursue both secwity m d prosperity As the incenthes in the system, shifted over the last fifty years towasd tra&g strategies, the major powers in the system establisf-red norms m d instittztio~~s. These norms and instihations fell into two categories: first, those aimed at making war less likely (and hence, any possible escalation to the use of weapons of mass destruction), and second, those aimed at facilitathg trading strategies and ereatkg further hcentives for states to follow such strategies, The costs associated with actually using nuclear weapons were so devastating, the security costs were so great in a world in whieh, nuclear weapons could be used, and the trade-oils for prosperity so unacceptable, that the great powers were able to agree to these norms, which lessened the likelihood of war, lowered security threats, and freed resources to invest in productive strategies, Tfiese included norms against nuclear proliferation and nuclear testing and use18 in order to lower the risk of nuclear exchanges. Arms ccmtrd agreements covered both nuclear weapctns and other weapons of mass destruction.19 Other agmements emouraged the move tow& stabilization, verification of a r m control, and stable nuclear strategies.20 ""anticolonial norms and norms against territorial expansion were established to further l o w r the risk of a possibly devastatirrg war: Breaking the norm would, entail a cost so hjgh as to make the bendits of territorial challenges not worth the costs. Institutions like the United Nations" have provided a foruln for diplomacy and cooperation, as well as establishing a mechanism to set formal rules and to enforce smctions. Norms and institutions were also established to foster trading strategies and further lower transaction costs. Formal islstitutions we= established and have become primary players themselves in managhg the world economy They have included broad arrangerne~~ts such as The Bretton Woods agreement and the esta:blishment of the fnternationd M o n e t q Fund (IMF) starting in 3994, successive rounds in the General Agreentcnt on Tariffs and Trade (UTT), and evcnhaally the World Trade Or^ganization(WTO) in 1994, as well as regional arrangements such as the European Wnirm.zWhe impact of those organjzations continues to (jrow: Tnday, even less developed states that dislike IMF po1iri.e~find themselves bargainhg with the IMF and follawing their stabilization re-

quircments in order to have access to international loans, Even China is now ready to join the WTO. As interdependent ties arc. f o d i z e d and commitments are made, further cooperation is fostered. Ruks are clear, compliance is verified, and sanctions are administered, As transaction s and states have greater incencosts for trade &crease, ~ t r t m increase, tives to follow tradi,ng strategies. Those Left Out of the System l[i, argue that certajn institutions (like the United Nations or the IMF) have emerged as major players in the system, or to argue that new ntles and norms have been established to allow for Che reward and prmishmmt of certajn state behavior, or to argue that the domin.ance of m e type of p o w r (military or ecmomic) limits certain possi23le strategies m d expands others, is not to say that statesmen and stateswomen no longer have any real choice of policy. This pay-er does suggest that some new opportunities am created, and that the casts and the payoffs that accompany diffemt choices may change, In other words, the incentives in the system for states to follow certain choices but nut others can shift dramatically. Rut not all states can take ad\..antage of these incentives. Historically; Great Powers have been most able to respo~zdto hzcei.ztives (and to shifts in irrcentives) in the system. hdeed, Great Powers are often even instmmental in establishing the instih;ltions and norms that create some of those incentives, Not all Great Powers will always make predictable choices, even when the hcentives are clear (leaders may have mmy codicting interests), but at least they are abte to take aclvantage of the incei.ztivesw h n they chnose. Other stdes, hocvever, have s e v c ~ l y constrahed choices. This constraht could be for one of several reasons. First, they could be so beset by thmats to their security (either horn domestic mrest or from extemai enemies) that they have no choice but. to follow military strategies, even in a world in whirh economic power is domhmt. %cmd, they can be either tcro poor or too lacking in resources (natural ~sources,an educated kvork force, and so forth) to take advantage oE trading strategies. n i r d , they may be excluded from certail.1internatiunal instif-u~ons,of generally t ~ a t e das pariith states, either far geagr"phica1 or po(iticd reasons, m d so be mable to take a d v d a g e of many of those incentives. Thus an overfy optimistic view of the future, based on a recowition of the increasing incentives to fdlow trading strategies rather thm territorial o~zes,will leave scholars and policymakers alike mzable to predict or prepare for continujng conflict around the wodd. One recent example is the newly erupting nuclear arms race between India and Pakistan. Both countries seem to be makkg irrational crihoices, given the incentives for tradjng strategies in the international system, ac-

cepted n o m s against proliferation and testing," and the need both have t (whcr support the norms for ecmornic invesment by the G ~ a Powers against proliferati.on). Not ordy are they failhg to make choices trhat take advantage of incentives toward tradjng strategies and a w q from military strategies, but they actually seem to be flaunting existing norms (such as the Non-Proliferation TreaC;v BI"T]) and are in fact suffering economic sanctions (hthe h r m of the loss of aid and kvestment) because of their "ohavior, The Bharatiya Janmta Party (the largest group in the coalition ruling India at the time of the blasts) was so proud of their achievement following their M a y 1998 nuclear tests that they handed out sweetmeats to celebrate the blasts, discussed buildbg a monument at Pofiaran (the test site) to be ""a slnrilte oi strength" h toe visited by pilgrims, and talked of s e n d i ~ ~samples g of s a d from the test site all ower the country so that ""thewhole nation could partake of the glow."zWile local vitlagers Wpmssed concern about radjoacthity, public opinion around Delhi supported the blasts as enabling India to achiwingdependence on Russia, which under Catherine X I exploited their rivalry in order to expand its control of Poland and aggrandize itself at the =pen= of the Ottc>manEmpire. In 4871, France felt theatened by Germany and was revisionist; Awtria felt itself sc:, dominated by the new Bismarskian Reich and dependent upon it that its only chance for security lay in allying with Pmssia-Germany and turning its power against Russia; Rmsia was secrretly worried by the new Gemany, convinced that Germany tzrould have to show that it was Rusia's friend or Russia tzroutd have to find ways to check it; and Italy was at once fearful, insecure, and greedy. Only the

British were relatively complacent about the outcome, as they had been afkr 176% and in both cases that mood did not last Iong. 4. Illustrating this inaction in the later eighteenth century was the failure of the French and Austrian attempts to get European cooperation tc:, save Poiand or the Ottoman Empire; in the late nineteenth, the failure of all attempts to revive the Three Emperc~rsLeague and the fate of the Hague peace conferences. On this last point see especially lost D-iifffer, Regetn gegen derz Krieg.7 Dic Friedenskurzfererzze~z z7on 2895" irnd 2902 in der irzternafiotzakctt Potif& (Berlin, 2981). 5. j, H. Elliott, The Count-Dtike of Otivares (New Haven, 1986) and Ric!tclku and Olizpares (Cambridge, 1984); 1%.A. Stradling, Pllilip IIV nnd the Govern?raentof Spnirz, 1627-1655 (Cambridge, 1988); tucien Bely lies relations internnfionales csz Euvapc ( X VIIe-X VHXe sizclesi (Paris, 1992). 6. Robert Bireley, Refigion and Politics in the Age of the Counter-Refort?lnfio~z (Chapel kfilt, NC, 1981); Geoffrey Parkeq Tlze Tllirty Years War (New York, 1984); Bely, Relatitpns izzfetnafionales. 7, T. C , VV: Blanning, The Origins of the Frenclz Revolutiannry Wars (London, 1986), and The Frenclz Reztolutisnnry Wars 2 787-1802 (London, 1996;); Paul W. ghmeder, Tlze Transformnt iorz of Eurupmn PoEitiw 1763-1 846" (Oxford, 4994). 8. For a convincing scholarly defense of this revisionist verdict, see G. H, %>utou,Lkr ef l'e s a ~ g les : buts de guerv kconomiques de In F"retni2re Gzterrc ntondiale (Paris, 1989). 9. This verdict is of courx not original, but also not simply a conventional one. It seems to me, moreover, in line wit11 the main outcr~meof the orthodox-revisionist debate in American foreign policy hlstoriography, strengthened by recent tzrorks taking account of new material from the Soviet archives. See, for example, Norman Nairnark, The Rzass-inns irt Genrznuy:A History of the Soviet Zone of Occupatio:orz,2945-1949 (Cambridge, M A , 1995); Carolyn Eisenberg' Drawing ttw Line: Tkc Anzerr'can Decision to Dizjide Germany, 12944-1949 (Mew b r k , 2996); VIadislav Zubok and Constantine I""leshako.vkTrzsllde Clle Kretnlin S' Cold Wilr: Fmm Sfalz'z?CO Kf.~ndshclzev (Cambridge, M A , 1996),276. For an excellent recent survey and interp ~ t a t i o nof the evidence, see MeXvyn Leffler, "The Struggle for Germany and the Origins of the Cold War," Occasional Paper N C ~16, , German Historical Institutef Washington (1996). 40. There are striking historical ironies here-that anti-Marxists should now develop a capitalist version of the Marxist-teninis doctrine of the withering away of the state, or that strong hostility to big government and distrust of its power should coexist with a sanguine confidence about enormom concentratians of power and wealth in great curpc~rations,institutions generally more secretive and Xess transparent and accessible to the control of law than democratic governments are, 41, It can, for example, help declining states incapable of still acting as independent great powers accept their Icsss of status and security peacefully by holding out the prospect that their economic future can still be secure even after the loss of great-power status. Even for this possibility, however, a working international market system is only a necessary, not a sufficient condition. It also requires political action and commitment on the part of the military-poli"ccaX victors and losers alike tc? make this happen.

About the Editor and Contributors Alan S, Alexandruff is research director of the Program on Conflict Management and Negotiation at the Centre for International Studies at the University of Toronto and a Director of Nnvigant Consulting, Inc. in Toronto. Michael E, Brown is associate professor at the Edmund A. W i s h School of Foreign Sexlsice at Georgetow-n University Joseph M. Grieca is professor of Pc>Xiticalkience at Duke University Casl Kriysen is B. W. Skimer Professor emeritus of Political Economy, Scurity Studies Program, Massachusetts Institute of Technology. Deepak La1 is Jarnes S. Colernan Professor of Internat.ic>nalDevelopment Studies at UCLA. John Mueller is prc~fessorof Political Science at the University of Rochester. Ronald L. Rogowski is professor of Political Science at UCLA, Richard Rosecrance is professor of Political Science at UCLA,

Paul W, Scfiroeder is Professor emeritus of History at the University of Illinois. Arthur A Stein is prc>fessorof Political Science at UCLA. Cherie J, Steele is t~isitingassistant professor of Government at Dartmouth College.

Edward Yardeni is Chief Ecc~nomistand Global Investment Strategist at Deutsche Banc Alex. Brown.

Index Action, nlzd Reaction in W;lldd Pt~ll'tics (Rclsecrance), 3 Afghanistan, 22,187, 189,191 Africa, 134,147,152, 174,191, 494, 195 AgeQs) of IXeforxn, 27,28,29, 34, 3 6 4 1 Agglomeration effwts, 171,1;"6,17'7,182 Aggressors, 21,22 Air quality, 78 Algeria, 190, 191 Alliances, 17, 18,120,151,217, 218,123'7, 241,242,263,264,267,273,274 American Coalition for Competitirvo Trade, 128 Anarchy, 236 Angeit, Norman, 63 Angola, 187,192,206 Annates historiography, 258-260 Anti-individuals, 3-35, 36 Apologies, 248-249 Arab states, 4447 AJZF. Sce Asia, Regional Forum Argentina, 474 Aristotle, 73 Arms races, 20, 199,222-223. See also Weapons ASEAN. See Association of %>utheast Asian Nations Ashcra,Fli, Richard, 169 Asia, 106, 4143, 434, 2713 Asian crisis, 44, 45,94, 100, 107, 156, 163 Asian Miracle, 94 Asian modet, 44,46 Asian tigers, 174, 179 East/Sctutheast Asia, 16, 19, 38,40, 47,56,64,144,147; 150,452,157, 158,166,162,Zfi3,191 Regional Forum (AW), 1I;C)

Assassinations, 126 Aswciation af %utkeast Asian Nations (ASEAN), 160 A f l a ~ l i c77 , Awtralia, 174 Austria, 265 Autarky, 65,67 Baby homers, 93 Baker, lames, 117 Balance of pay merits! 248 Balance of power, 4,113,203,238,1249, 259,263--264,265,267,268,273, 1278 Balkans, 488,265 Bancroft, George, 239 Bangladesh, 174 Bank for international Sttlernents, 100 Bankruptcy, 1OQ Banks, 3940,44-45,36,37, 91, 94, 95, 96,100,101,105,106,122,123, 1236 Barro, Rabert 171 Becker, Gary 169 Berlin Wall, 94 Beta fb) coefficients, 30, 31(fig.) Bhapati, Jagdish, 17'9 Birdzcrll, L. E,, 60, 78,80 Bismarck, 266,267 Black, Huga, 240 Boredom, '75 Bosnia, 187, 188,192, 200, 1204 Boutras-Ghaiii, Bnutras, 203 Bracfy Plan, 123 Brain Brain, 476-177,179-180 Brazil, 136,191

Brzezinski, Zbigniewt 7'9 Buckle, Henry Thomas, 62,63 Buridan" ass puzzle, 79 Burma, 191,992 Bush, Cet~rge,61, 422,240 Cambodia, 187,192,205,206 Campbell, Angus, 75 Canada, 111,112,113, 114-1122, 126-1 27,128,1638 exports, international vs. interprovincial, 120, 121. See also Exports, Canadian exports to U.S. Macdonald Commission, 115,116 Mulroney government, 115,116, 118,121 Canada-U.S. Auto Pact, 144, 417 Canada-U.S Free Trade Agreement: (PTA), 114,118-119,12&127,130 Cap"ia1, 18,19,22,23,42,100,102, 103, 146,279 capital marketg 39,40, 43,44,45, 46-37, 104,126,177. See also Markets, capital market integration human capital, 43,76,169-183 social capital, 163 venture capital, 98 Sce also tinder FLOWS Capitalism, 1, 5,67, 68,75,77; 92, 96, 106,107,139,148,225 in Japan, 104-106 Casta$eda, Jorge, 124 Catastrc3pFte quota, 78 CESP. See Europe, Eurc3ppean Common Foreign and Scurity Pc>licy Change, 213-.214,215,216,224,225, 231,252,258,259,261-262,266, 280 China, 2, 16,121, 22,28,43, 47,94,134, 135-1 36,138,147, 150-151,152, 155-1 M, 179,196,220,222,275 as I-erritorialist,458, 15gt 160, 462 trade with U.S., 156 Choices, 7'9,136,197,222,231,243

Chrktim, Jean, 121 Churchill, Winston, 235 Citizenship, 428 Civil rights, 276 Civil M r (U.S.), 95 Class issues, 177, 192 Clinkon, Bill, 61, 64-65,66,1Q4,427, 163 Coalitions. See Alliances Coase, Ronald, 14 1 5 , IT, 23 Cothen, William, 238 Cold War, 1,2,39,40,62; 78,91,93,95, 96,147,148,151,159-160,163, 191,194,495,203,213,222,228, 230,237,241,257-281 as breakthrough tcr new system, 272-273,274-275,277 Colombia, 190, 191 Commerce vs. conquest, C; Communications, 142,217,219,220, 224,227,276 Communism, 27,56,94,96,138 Comparagve advantaget 14 17,220,227 Competition, 13, 17, 22,28,65,69, 76, 93,96,403,113, 446,269,279 in Cold War, 275 cybercompetitisn, 101 of elites, 192, 193 Perfect Competition model, 97,98, 101 Computersl 102,218,219,220,227, See also Internet Concert of Europe, 217 Confewace on Scurity and Cooperation in Europe QCSCE), 276 Confidence building, 199 Conflicts, 21-23,62,&, 147-1 48,353, 152, 178, 487-209,247,222,237, 279 causes of internal, 18&19(;, 1%(table), 20&201 intei-na"tiona1 responws to intei-nal, 197-209 management, 197,201-205 prevention, 197,198-201 regionat 202-203,209,224

resolution, 197,206,207, 208 types of internal, 189-120 Sce also Ethnic conflict; M r s Conxnsus, 265. See also Peace, consensus on practical definition of; under Economics; Rules Consumerism, 59 Consumer Price Index (CPI), 95 Consumers, 9 7 98,99,4101,113 in Japan, 104-105 Contracts, 92, 106 Caoperatian, 15,28,236,160, 163,215, 216,221,222,226,227; 231,237, 246,247,251,252,265,273,274, 276,277,278 Core-periphery issueg 227,228 Corporations, 13-23,6&,101,143, 149, ItPO, 207,215,279 virtual, 15 See also Firms Corruption, 36,45,92,99-101, 2 05, 1%,107,174,195 Costs, 38,47, 70,923, 99, 220, 123, 177, 19'7; 217,221,225,228,231 of cc>mparisc>nshopping, 101-1102 and internal conflict%209 of use of force, 218,249,224 Sce also prransactioncosts Cowardice, 62,71 CPI, See Consumer Price Index Credit, 92,93,96, 100, 101 Crick, Bemard, 280 Crimean War, 266 CSCE. Sec Conference an Scurity and Cooperation in Eurtjpe Cuba, 138,147' Currencies, 2229, 46,47, 104 devaluation of, 38,45,122,126, 128, 223,236,245,247 Cycles, 259,276277 Czechoslovakia, 188,24 1 Debt crises, 40,45,46, 123 Deficits, 70,79, 103 Canadian, 121 Mexican, 423 trade, 98, 315-2 2 6, 156

Deaation, 91-92,93,95,9(;, 98, 406 and corruptian, 99-101 Good vs. Bad, 99,100 and Internet, 101-1 03 Demand. Sw Supply and demand Democracy, 1,224,124,242-144, 152, 276,277' and human capital, 177-178 D~pendcrzeintheory 68 Deterrence, 248,220 Developed countries, 71,72(fig.) Dirigisme, 36, 37,41, 43,47 Distribution issues, 58, 106107, 151, 179 Division of labor, 4,19,17, 18,28, 95 Dole, Bob, 127, 428 Domestic politicslmobifiza tic~x~, 237-241,249,250,252 Danaldo Colosio, Luk, 2 26 Dorhusch, Rudigeq 425-426 Dawnsizing, 2 5, 17,21 Dmgs, 490,191 Dumpingf 2 2 7 Easterlin, RLchard, '74,80

Ecunufnic Cor~sequer~ces of the I"ccr;ltx (Keynes), 107 Econamic growth, 19,43-44,53, 56, 57, 58, 64, 70, 71-72, 73, 78, 92, 97, 106,107,12& 123,124,125,136, 2 40,148,199,152,194,195,275 and business cyclef 99 in China, 151,455-456,196 grc>wththeory; 176,180 and happiness, 7&79# 80 and human capital, 2 70,174 Econamic inequality, 70,440-444, 149, 251,176,182 Economic liberafization, 40,41, 43 Economic planning, 69 Econamic prcjblems, 193, 196,204 Economics, 5,53-56,557; 69,71,259 conwnsus in, 54,66,68,70,7'2 end of macrtleconomics, 96-99 increasingly accepted propc>sititic)ns in, 58-71

and internal cmflict, 195-1 96 and shift to potitics, 280 Economic sanctions, 203,204,209,223 Economic well being, 54,56, 5842,63, 71,72,80 Economism, 2741. Education, 148,4449, 170, 471,174,178, 280,181,183, 2% and democracy 1;78(fig.) and physical / human capital, 171 in third tzrnrld, 17Pf 4482 Egalitarianism, 3536, 340 Egypt, 191,243-244 Electionli, 206 ELites, 36,4105,113, 442-443, 177,278 and internal conflicts, 189,190-2 92, 192,193,l94,196,200 El Sallrador, 148, 205,206,207 Empire, 58, 63,264,273. See nfso Imperialism Emplo>yment,38,39,42,5T7, 75-76, 99, 101,1Q3,405,113, 425,427,151 EMU. See Europe, European Monetary Union "End of History, The'" (Fukuyama), 96 Enlightenment period, 314 Environmental issues, 78,79,152,171, 176,227 EshkoX, Levi, 244 Ethnic conflick 2,78, 447,177,489, 2c32,196,201,215,230 histories concerning, 133, 494, 2 99-2a8 EU. See Europe, European Union Europe, 26, 28,3536,3% 40, 42, 64, 73, 103, 104,124,1,%, 150, 159, 162, 163,262,264,267 East/Centra;t Europe, 106, 129, 152, 194, 199, 227,275 European Common Foreign and Security Policy (CFSP), 4 59 European Economic Communityy 113 European Monetary Union (EMU), 104,159 Europe 92 movement, 94

European Union (EU), 112,129p130, 136, 138,156, 159, 182, 194, 199, 220,221,226 integration of Western Europe, 275 Western European Union (WEU), 2 59 Exceptionalism, 442 Exchange rates, 38, 44Ir $5 Expectatic?ns, 245, 262 Exports, 19,43,44,(41, 65,107, 127, 246 Canadian exports to U.S., 115, I 16, 149-120,424,127' Chinese, 356 Mexican, 422,124 total world, 94 Fascism, 217, 34,151 Feldstein, M,, 29 Ferdinand TI (emperc>r),230 Finland, 194 Firms, 21,65, 97,99, 2 OQ Canadian, 120 fabless vs, foundry, 1 5-16 mergecs/acquisitions of weak, 108 theory of, 1&16,27 See nfsu Corpc~rations F~OWS, 18-19,20-21,22,23,28 of capital, 27; 37,40,41 (fig.), 43,45, 47; 94,41110,123,125, 426,1"i", 247 Foreign aid, 39,194,195,199,201,223, 23111 Foreign exchange, 19 Fctreign policy; 231;,231;",40-241,244, 252 France, 17, 36/42, 64,66, 73, 129, 134, 2 35,159,160, 2 (43,258, 2262, 26%2af 270#273 Franklin, Benjamin, 59 Frederick TI of Prussia, 266 Freedom House, 141 Friedman, Milton, 66,67 Friedmam, John, 177 FTA. Sce Canada-U.S. Free Trade Agreement Fu ku y ama, Francis, 96 GATT. See General Aveement on Tariffs and B a d e

GDR Sec Cross Domestic Product General Agreemat on Tariffs and E a d e (GATT), 37; 38,43,65,94, 212,118,221,248 Geno>cide,198, 277 Georgia (country), 189,290, 192, 201 Germany, 19,21,42,64,98,107', 143, 129,134,335,150, 160,Idil-362, 162-163,170,484,182,23f3,241,

263,265,267,275 and France, 159, 463 German Empire, 270 as trading state, 159 Gingrich, Newt, 2 27 Gtc)balizatlion, 2,4, 5, 30,113,114,118,92, 98, 441,112, 414,143, 454, See also Wcjrld economy GNP. See Groyss National Product Gold 38 Gore, Al, 127 Government intementians. See States, governments' role in econum jes Government spending, 70-71 Great Britain, 16, 19, 27,126 30,110,112, 56, 66, 7'3,134,135,149, 460, 182, 2%,238,245,2CS3,264,266,26'7, 273 Elizabethan Poor Law, 35 Great Depression, 27,30,247 Great powers. See States, great power states Greece, 34,147 Green Re\rolution, 172,180,181 Greenspan, Allan, 127 Grenada, 240 Gross Domestic Produd (GDP), 16, 120,123, 174, 2 75(fig.) Gross National Product (GNP), "i'2(6g.) Group of S v e n (6-7); 96 67. See Group of Seven Gulf War (1991), 21, 61, 144,178,238, 240. See also Iraq; Kuwait Haas, Ernest, 141 Haiti, 204,205, 20bt 207 Happiness, 72-t30 Hapfiburg Empire, 264,265,270

Hart, Miehael, 444 Harhnrell, R, M,, 67, 68 Hayek, F. A., 48 Health issues, 73, 74-75, 76,148, 149. Sea nlsa Life expectancy Hecksher, Eli, 3536,42 Hecksher-Ohlin tI"Imr~30 Hedoprism, "7,80,139 Heitbrc)ner, Robert, 67, 68 Helsinki Accords, 2% Henderson, Lawrence, 53,68 Hicks, 1. R., 35, 42 "High-Risk Society, The" "andel), 213 Hirsch, Pred, 67 Hirschman, Albert, 59 History of long duration, 25&2f;CI, 2174, Hitler, Adolph, @2,23f3,244 Hobsbawm, Eric, 133 Holland. Sea Netherlands Holy Roman Empire 263 Hong Kcmg, 17,22,44,48,163, 2 77 Horioka, C., 29 Homing, 73 Human rights, 61, 125,140-142,152, 188,275-276 Hume, David, 80 Hungary 494,241 Hussein, Saddam, 21,61,2110,243, See also Gulf War IBRD. See International Bank for Reconstruction and Development IDA, See Internatic~nalDevelopment Association Ideas, 277,278,275, Ideology, 2 34,138-142,247,148,190, 1% ,194,265,273,278 ILO. See International Labor Office IME See International Monetary Fund Immigration, 25 ImperiaXism, 26'7, 270, 271,277. See also Empire Imports, 113, 146 Incentives, 216,222,223,224,225,226, 229,230,246

Incomesf 10&107, 151 per capita, 174, 134, 135(tabXe), 135-136 India, 28, 43, 44, 47, 68, 70, 134, 135, 136,147,458,1;70-1"9, 179, 491, 192,222-223 Bharatiya Janata Party 223 Individualisxn, 48,139-140 Indonesia, 45-46 47; 336,1817,192, 196 Industrial Revdution, 42 InElation, 22,38,58 91, E, 98,104,106, 123,149,393,196 war as inflationary, 95-96 Sce also Defltation; Stagfiation Infc>rmation,17,19,98, 101,201,218, 227 as factor of production, 102-1 03 information age, 42 information technolc>gy(IT), 15, 36, 220,228 Infrastructure, 149 Innovations, 98,170,171,218,224,225, 226, See also under Technolot~y Institutions, 213,245,217; 221, 222$ 225,226,251,267,2T6, 277 Instrumental rat.ic>nalism,339, 140 Intellectual prope&y, 117 Intellectuals, 139 Interdependence, I"i",18, 23,215, 220, 224,226,227,228,231,252,275, 279 Interest rates, 22,40,45,93,96, B, 101, 104,122,426,128 Intergovernmental organizations, 2 36 International Bank far Reconstruction and Development (IBRD), 39 International Development Assc2ciation (IDA), 39 Intema tional hjstcy~,geric>ds/stages of, 260 International Institute far Skategic Studies, 157 International tabor Office (ILO), 46, 136 International Monetary Fund (IMF), 37; 38,114, 45--46,534, 327, 156, 157, 195,221,236,248

International politics, theory of, 16-1 8, 213,231,261 International solciety, 244-249,254-252 International system, 21%23'1,252,266 change in, 261-262 stages of development in, 258 Interplec 1%,93,98,101-103 Investments, 29-30,46,94, 111, 113, 217,124,125,144-345,148,149, 177,221,223,225 foreign direct, 16, 17, 18, 22,40,45, 94,125 and human capital, 172-1 73(figs.), 176 social underinvestment, 17'7 Ip, Creg, 120-121 Iran, 35,39, 157, 178,191,236 Iraq, 21, 178,187, 192,200,205, 22%224,235,236,240,242 Iron Curtain, 94 Islam, 21, 151, 452 Israel, 21,347,243-244 IT. $SL Infe>rmation,infclrmatic~n technolo~ Italy f 7; 14,134, f 82,265 Japan, 16, 17,19, 44,45, 59, 660,64,67, 74, 95,98,99, 103,133, 322,124, 134,135,436,151,161,162-163, l74,1 79, 220, 2230, 231,239/ 275 apology tcr Korea by, 244-249 capitalism in, 104-106 and end of Cold War, 159-11;CI Liberal Bemocra tic 13arty (LBP), I 05-3 06 trade deficit, 156 Jeffersc>n,Thornas, 59,M Jerusalem, 61 Jiang Zernin, 163 Jcrhnwn, Lpdcm, 238,243244 J c ~ h w nPaul, , 107 Jol-mstm, Alastair, 157 Joint ventures, 229,231 Juridical ey ualily, 263,2654 Justification, 235-252 as pretext, 241-244 types, 249-252,25@251 (tables)

I(aFLLer, Milest 163 Kant, Xmmanuelt, 59-60,f;l-62,63, 66 Katzenstein, 13eter, 19 Kenned y, John, 79 Kennedy, Paul, 79 Keynes, John Maynard, 68, 107 Kim Dae-jung, 246249 King, Mackenzie, 144 Korea, 44,45, $6,156,158,275. See nlso North Korea; South Kr~rea Kupchan, Charles, 162 K u ~ at,i 146,235,236,23& 240,1242, 243 Kuznets, Sirnojn, 60 Labur, 19, 28,229,30, 39,41,42,43, 102,103,184, 170,171, 174,228, 223 Xabor migratian, 3'1 ol-ganjzed labo.~; 65 third world, 177 See also Employment Land, 402,170, 1'71,474 1,anguage, 179,199 Latin America, 48,56,64, 613, 406,134, 197,148,191,278 Law(s), 34,42,100, 401,106,118,123, 279 rule of law 140,341,276, 278 LBCs, See States, Xess devdoped countries LDP. See Japan, Liberal Democratic Party Leaders, 490,193,494,195,196,204, 20ci,216,261,262,266,268,278 League of Nations, 136 Lebanon, 189 1,iberal international economic order (LZEO), 27, 30,31,34,37,42,43 l,iberalism, 1,34,36,48,214-215,224, 234 1,ibert.y 48,280 LIBOR, Sec London Interest Bank Offer Rate LIEO. See Liberal international economic order

Life expectancy, 54,55(fig.), 76, 77, 78, 79,230 Living standards, 42,73,105,1li36 Lock-out phenomenon, 229 IdondonInterest Bank Offer Rate (LIBOR), 40,45 Los Angeles, 176, 177 Louis XIV (French king), 265--264 Maastricht Treaty, 1;?f) McCallurn, Jchn, 124 Macdonald, Donald, 215 McLuhan, Marshall, 142 Madclison, A., 30 Madison, James, 238 Mahan, A. T., 63 Malaysia, 43, 160, lli36 Managers, 15,765 Mandel, Michael, 443 Manufacturing, 15, 16,19,23,28,43, 124,179,228,229 Marketg 5, 13,1 7,48,95,184, 111-11 2, 113, 116, 120, 128, 130, 146,147, 156,228,234 banking and securiQI 92 capitat market integratim, 29,30, 47 commodity, 30,34 domestic expansion, 148 market system, 67; 68,72,92,96, 100,101,139,240, 176,195,276, 279-280 Marx, Karl, 74 Media, 77,126,192,200 Mercantilism, 49, 35-36,42,64,65,98, 107,230 Mercan dilism (L3ecksher), 35-36 Mexico, 40,45,111, 112, 115114,119, 122-1 26,127-1 28,136,191, 238-239 Chiapas, 126 Partido Rez~ulmciorzarioInsfituciotzat (PRf), 122,123,124,126 Middle East, 39, 78,73,134,152, 494, 194-1 95,275 Migration, 47T),178,181,482,189,1196, See nlso Brain drain

Military issues, 20,24,135, 436, 147, 150,151, 357,159,161, 363, 164, 214,245,217, 218,219, 222, 223, 226,227,230,238 and internal cmflicts, 4488,200,202, 203,204,206,207,209 military spending, 160 offentie vs. defenmse, 216217 See also Technology, military; Wars Milt, John Skart, 28, 279 Milssevic, Slcfbc>dan,193 Minclgue, Ken, 41 Minorities, 192, 196, 207 Missiles, 239 Modernizatian, 189, 196 Mctldova, 190,204 Monetary policy, 95-96, 101 Montesquieu, 59,63 Morality, individualist vs. coflectivist, 34-35 Mctzambique, 490,205,206,207 MuXroney, Brian, 119. See also Canada, Mulrc3ney government Multilatesalisnn, 113 Mrrrphy, Peteq 416,117 Myint, H., 44 NAFTA. See North American Free Trade Agreement NagorneKarabakh, l89 Nairn, Mogs, 126 Namibia, 205,206 Napoleonic wars, 269,270,273-274, 275 Napoleon TIX, 266 Nationatism, 28,36,114,115,129,150, 393,194,228,250,268, 22177 economic, 43 ethnic, 192 Nationalization, 69, 423 Natian.-building, 35,36,42,6O Nation-states. See t-lndrr States Netherlands, 16,721 New international economic order (NIEO), 37; 38 Newness, 240 New Yorkr, 7 7 New York Times, 77

New Zealand, 47 NGQs. See Nongc>vernmentaI organizations Nicaragua, 148,2Q5,207 NIEO, See New international economic order Nigeria, 45, 490,192, lli35 Nixon, Richard, 38,622 Nctngo>vernmentalorganizations QNGOs), 137,143, 348,149,199 Nctn-Proliferation Treaty (NPT), 223 Ncjrms, 215, 21';7, 221,222, 223,224, 225,227, 229, 245,246, 262,267, 273,274,276,277' North American Free Trade Agl-eement (MAFTA), 6445,94, 104,11"1112,125,127-130,226 Nctdh Atlantic Treaty Organization, 161,199 Nctdh Korea, 338,223-224,229 NPT. Sec Non-Proliferation Treaty Nuclear issues, 15'7. See also Weapons, nuclear Oakeshott, Michael, 3&35,36, 48 OAS. See Organization of American States OAU. Sec Organization for African Unity Obstfeld, M,, 23 Oil, 61,64, 78, 79, 158,240,242. See also 11 nder Prices O13EC. Sce Organization of PetrtlXetrm Expc~d-ing Countries Optimism, 266,268,276,277,278 Organization for African Unity (OAU), 437,148 Organizatio>nfor Economic Develctpment and Cooperation, 107 Organization of American States (OAS), 137,148 Organization of Petroleum Exporting Countries (OPEC), 31,3741 Pakistan, 147,157,222-223 Palestinian% 189

Parliamentarians for Global Action, 137 Peace, 66, 264f 280,281 consemus on practical definition of, 262,263,265,1266,267,268,269, 272-2173,274,275-276,277,278 peace and prcjsperity 5, 6, 29, 108, 133-152,213 peace as deflationar~g95 Peaceful coexistence, 275 Peacekeeping forces, 202,203,205,206 Perot, Ross, 104,427 Peru, 190,191 Philippines, 150,192 Poland, 194,241,267 Policy issues, 22-23,171, 105, 124,146, 147,222,247 and deflation, 100-101 and human capital, 17"8181,182 and internal conflicts, 188, 190, 198, 202,208,209 policy economists, 55 See also Monetary policy Political correctness/ incorrectness, 56-58,69 Political eultuw, 262 Political ctrganizatlion, 134-1 38 Polk, Jameg 23G239 Populations, 18,134, 135(table), 176 Poverty, 513, 7% Power, 218,228,23&237,266,278 as fungible vs. not Eungibie, 215 power struggles, 190,192-193,208, 201 See also Balance of pcjwer Predictions, 233, 134,215, 222,231 PR1. See Mexico, Partidir Rez?olziciotzarit~ Il?stitueionnl Prices, 29,92, 95,97; 98#99, 401-402, 103,223 during Cold Was; 95 of oil, 37,38,6l, 122-123, 194, 195 price cmtrols, 57, 69 See also Deflation; Inflation; Stagfiation Prz'nci~~les, (Mill), 28 Prisoners"ililemma, 246-247

Privatization, 40,6-9, 69-7,97,112, 156,230 Production, 14, 15, 16, 47,23,27, 139# 279 factors of gmduction, 19,20,22,97, 98,102,170,174,182 Prc~ductivity,29, 93,98,99, 170, 176, 181,182 PrcIfits, 98, 101, 220 profit weking, 59,60,62, 97,99, 407 Property rights, 28'9% 1OS, 141,279 Protectionism, 31,42,43,57,64,65,92, 104, 108,113, 114,115,116,123, 146,149,151,231 Prussia, 265,266 Public opinion surveys/polIs, 73,119, 125 Racism, 250 Rationing, 69 Raw materials, 228,229 Reagan, Ronald, 116,240 Real estate, 105 Realism lneorealism, 214,215,225, 231,237,240,241,242,244,272 Realpof itik, 267 Recessions, 93,98,119 Reforms, 40, 104, 107, 123,124,125, 156,198 Refugees, 188,200,2%, 207 Regional organizations, 137,188, 207 Regulationideregu1atic>n,40,68,69, 92, 98, 403,111 bank regulations, 1Q8 corporate regulations, 401 Reisman, Sirnon, 116,117 Religion, 35,59, 73,151, 452, 190, 494, 199,250,263 Remittances, 17(3/180 Renaissance period, 35,42 Restructuring, 532,97,101,107; 116 Revolutions, 36,122,265 Rhodesia, 1% Rights, 44-42,499,2O7,23Oy236,2"i", 280 Rise of the Traditzg $Cnte, The (Rosecrance), 3,b

Rise of Ijlzc VirfiinJ Stnte, The (Ro~secrance),3 Risks, 266,2170 Romania, 192, 194 Rcyasevelt, Frartklin, 235,236,239 Rosecrance, Richard, 3,4,6,28,63-64, l14,130,158,469,l"i", 213,215, 217 Rc>senberg,Nathan, 6Q,1725,8Q Ruiz Massietr, Josk Francisco, 126 Rules, 245,24&247,248,251,252,262, 264,265,266,267,273,274 consensus on, 262,263 Russett, Bruce, 61 Russia, 1,2,21,27, 106, 134, 135, 138, 147,150,154,161,188,448~490, 193,201,266,267 Rwanda, 287,192,193,201,206 Sala-I-Martin, Xavier, 171 Salinas Be Gortari, Carlos, 122, 123-124 Satellites (communication), 228,219 Saudi Arabia, 61,146,238,240,242 Savimbi, Janas, 206 Savings, 29-30,110 gapegoating, 492,193,200 %humpeter, Joseph, 67,% gitovsky, Tibctr, 75 %lf-defense, 250 %If-interest, 237,268 srvices, 16,23,28, 42, 117, 120 %ven YearsW a r , 266 Shinn, James, 156 Singapore, 17; 146 Skills, 47'0,174, 477 Smith, Adarn, 59,f;;?, 75-76, 279 Snyder, Jack, 162 Socialism, 34, 36,38,67,1138,139,448 Social justice, 208,280 %>cialol-ganlzation, 134,142-3 44 Social sciences, 142 %>malia,187, 192,203,204,206 South Africa, 144,205,207 %>uthChina Sea, 157,159 South Korea, 64,67,24%249. See also Korea

Sovereipty, 5,111, 112, 114, 121,128, 329,130,190,2217,236,262,264 constraints an, 437 criminal assaults on, 190,191 Soviet Union, 20,"t", 94,138, 447,189, 214,241,273,276,278 Spain, 262 Sparta, 242 Specialization, 95, 220, 224,226,229, 231 Sprat-ly Islands, 157; 158, 164 Stability, 5,21,22,44, 406, 144, 162, 1638,192,1(33,194,195,199,2Q7, 208,209#214,218,259,264-265, 267,268,279 Stagflation, 34,40 Standards, 77,80, 95,149 StanisXa~nr,Joseph, 69 States, 4,5,18,2&21, 216,220,225, 227-228,340-241,242-243,1248, 250,251 challenger states, 160 citizensf relations with, 17, 18, 140, 237-238,252,276 as civil assariaticstn, 34, 48 classification by freedom/dernoxracy criteria, 1$1-142,142Qtable) constraints on, 138 and corporatiom, 13-23 as enterprise association, 34,35,36, 41,47 as functionally differentiated, 214 governments" role in economies, 54, 57,67--72,103,104,123,141,180 great-power states, 21 ;7,222,223, 259,264,268 justifying states, 235-252 less dderrelc~pedcl-runtries(LDCs), 226,228,229,230. Set?also States, richlpcror; Third World middle-income states, 1414-147 na tion-states, 35 newly independent states, 224 obsolescence of, 279 pariah states, 224,225 revisionist states, 157,242, 267

rich/pc>or, 135, 445, 146,170, 478, 182,225,231, See nlso "fhird World rivalries among, 22-23 smalt/large, 19-28,121,228, 229 strengthening of, 22 substates as political actors, 138 territorial goals of, 158,159, 460, 162,213. See also Strategies, territorial vs. trading; Territory theory of the state, 17 trading states, 6,22,28,64,130, 158, 159,162, 216. See nlso Strategies, territorial VS. trading virtual states, 16,18,245 welfare state, 2% 42,47,'I"Q,103 See also Stlrver-eipty Stigler, George, 59,65--66 Stock markets, 93,98,104, 405,107, 108,223 Stc~cks(goods), 18, 19,122 Strategies, 222,227 as determining structure, 215 grim-trigger, 246 territorial us. trading, 213-214,215, 216,217,218,221,223,224,225, 230. Sce also States?territorial goals of; Territory Subrahmanyarn, K., 223 Subsidies, 57,70, 117, 138,149 for education, 178,179,188,181,182 Sudan, 487 181,192 Summers, Z,awrence, 56 Supply and demand, 91,92,99, 400, 101,102 Sweden, 47 Switzerland, 17 Taiwan, 22,f;l, 150,158-159,163,164, 180 Tariffs, 247 Taxation, 46,47, 70,103, 404, 123, 149 Ta ylor, A, M,, 30 Taylor, Zachary 239

Technology 2,18,20,22,93,988 404, 102,176* 180-181,21&218,225, 232,259,268,277 innovatian;sj,95,97, 144,216,217, 219 military, 134, 144-145. See nlso Weapons nuclear, 157. See also Weapons, nuclear techolc2gica1 change, 243-231 Sce also information, information technology Television, 128 Territc3ry 18, 19,2Q, 21, 21Y8218, 21 9, 220,225,226,227,230,239,279. See also States, territorial goals of; Strategies, territorial vs. trading Terrorism, 78,79 Thailand, 45,46,155,196 Thatcheu; Margaret, 56 Third World, 36$37,39,4f), 43,4111, 46, 72(fig.), 139, 177, 178, 179, 181, 182,275 debt of, 45 Thirty Years Ws; 269,272,275 Threats, 20, 204,213,215,218,226, 242,273 Thucydibes, 242 Tjnbergenf Jan, 22 Tt2cqueville, Alexis de, 59, 76 Tomiichi Murayarna, 248 Trade, 2,6, 19,28,29,31, 42, 43,61, 62-64,125,145,148f149,1182,217,

220,221,222,225,247; 276,279 Chinese-American, 156 free trade, 3 7 54, 64--67895,108,113, 144. See also North American Free Trade Agreement liberalizd, 420 and peace, 66 theory of international trade, 14, 47' and wars, 94-95 See nfsu Defidtti, trade; States, trading states Transaction costs, 14, 15, 16, 1723, 217,220,222,224,226 Transportation, 142,217; 219, 224

Treaties, 261,262-263,264,265 Trurnan, Harry 54,6(3,114 Trust, 463,273 Tudjman, Franjo, 193 Turkey, 147,492 Turner, J o h , 118 Twain, Mark, 238

Viema Congress/system, 261,265, 274,278 Vietnam war, 38, 93, 458 Victory cmcept, 2615,269,271 Violence, 2,23, 75, 174, 188, 192,198, 202, f e e also Conflicts; W r s von Mises, tudwig, 77

Ukrainians, 488,193 UN. See United Nations Unemployment, 43,92,101,403,126, l28,151,193,2"36,279 UNESCO. See United Nations, Educational Scimtific and Cultural Organization UNXDO. See United Nations, Industrial Organization United Nations (UN), 42,188,2200, 2QS204,205,206, 207,221 Ecctnnmic and Sc~cialCouncil, l 37 Ecctnnmic Commission on Latin Axnrtrica, 68 Educational kientific and Cultural Organization (UNEKO), 46 Human Develilpmcn t Report., 171 Industrial Organization (IJNIDO), 46 member states? 134 Security Council, 147,l 48,223 specialized agencies of, 1 3 6 137 %mited States, 1, 16,27,28,38,42,48, 60-61,73,93,9(3, l 1l, 1 12-1 13, l 34,135,151,223,231,238,273 and China, 161,163,164 investments, 94 loan guarantees to Mexico, 127-1 28 4994 elections in, 10S104 states in, l 38 Supreme Court, 106 U.S. Exchange Stabilization Fund, l 27 Utrecht, Treaty of, 261,264,265

VVages, 30,31,38, 44, 63,123,174 reail wage dispersion, 32-33(fig.) VVar of 4842,95 War of the Spanish Succession, 261, 263 Wars, 118,19,22,28,30,58,63,64, 68-69,179,145-146,358, 1"722,187; 216,217,223,224,238-239,241, 243-244,250,259,262,265,2~, 26'7,268-269,2"i7271 causation of, 60,230,269-270 civil wars, 2208 delegi.timizatian of, 147,275 and democracies? 238 50-Year Modern Bay War; 93-94 future, 350-352 and market ties, l 47 nuclear, 229. Sce also Weapons, nuclear See nfsu Conflicts Wealth, 54,58,61,224,279 and exchange vs. conquest, 62-64 and happiness, 74 Weznltlt qNiufions (Smith), 62 Weapons, 14&445f246-217 conventional, 218-21 9,220 nuclear, '78-79,146,218,219,220, 222,222-223,224,229,240 See nfsa Technology, military Weber, Max, 59 Weinberg, GerFtard, 2172 Weinstein, Michael, 57 Welfare, 103, 104, 9 77 Wemer, Alejandro, 126 Wstphalia, Treaties of, 263,262-263,

Value% 43,56, 71,2208, 209,237; 240, 242f243,245,250-251,252,277, 279 noneconomic, 57,58,59,60 Versailles, Treaty of, 407

1274 WEU. See Europe, Western European Union William of Orange, 264 Williarnso)~,J. G., 30

Wilson, Harc~ld,236 World Bank, 37,39, 249, 356,157, 171, 195 WrXd cities, 177 W r l d economy, 2748,76,91,93,95, 108,114,221,247' W r l d society, 141 World Trade arganization (WTO), 38, 43,156,221,222 World War I, 95, 1';/Q, 217;269,270, 272,275,277

World War 11, 19, 30,6O, 93,95, 144, 235,236,239-240,269,270,1272, 275,277 VVorfd welfare, 180, 382 Might, Quiney, 60 WTO. See W r t d Trade Organization

Yahoo ecmomy, 93 Uergin, Daniel, 69 hgoslavia, 192-1 93,203,275