The System Worked_How the World Stopped Another Great Depression

by Daniel W. Drezner

  Both public rhetoric and private diplomatic discourse suggested that US policymakers shared this view of China’s new superpower status. On the US side, for example, the official assessment of Chinese economic power was reflected in Secretary of State Hillary Clinton’s 2009 conversation with Australian prime minister Kevin Rudd. In response to Rudd’s suggestion that the US should pressure China, she asked rhetorically, “How do you deal toughly with your banker?”30 Similarly, in 2012, prominent Chinese international relations scholar Wang Jisi summarized the worldview of the top Chinese leadership, “The rise of China, with its sheer size and very different political system, value system, culture, and race, must be regarded in the United States as the major challenge to its superpower status.”31

  If there is a strong consensus that China’s power has increased vis-à-vis the United States, there is less clarity about the extent of the redistribution. The 2013 iteration of the Pew Global Attitudes survey covered a wider array of developing-world countries, and the results were more favorable to the United States. Pluralities in both North America and Europe still believed that China was the most powerful economy in the world. In every other region in the globe, however—Asia, Latin America, Africa, and the Middle East—a plurality or majority of respondents said the United States. It is particularly striking that the Chinese did not agree with the assessment that China is the world’s most powerful economy. In the 2013 Pew survey, 46 percent of Chinese respondents believed the United States’ economy was the most powerful, whereas only 30 percent said China.32 The Chinese public may well be correct. China’s per capita income remains about one-sixth that of the United States. If one relies on the UN human development indicators or the Legatum Prosperity Index, China and the rest of the BRICs lag far behind the United States.33 Furthermore, there are excellent reasons to doubt the straight-line extrapolation of China’s continued economic ascent.34

  The lack of clarity in the conversation reflects, in part, the evolution of the discussion in policical science of power as a concept. The attempts to define power stretch back to the very origins of the field, and the debate continues to animate international relations scholars.35 It started with a narrow, coercive definition—Robert Dahl’s famous contention that power is the ability of actor A to get actor B to do what B would otherwise not want to do. Later generations of political scientists expanded the concept beyond coercion to focus on the ways in which power can affect the preferences and perceptions of other actors. Robert Gilpin discussed the significance of having a “reputation for power.”36 Susan Strange has emphasized the ways in which structural power can empower its architects more than other actors.37 Joseph Nye’s concept of “soft power” focuses on how actor A can get actor B to want what actor A wants.38 Some scholars have talked about the power of discourse to socially construct common worldviews among actors.39 Others have emphasized the role that networks play in concentrating or exercising power.40

  This evolution in the discussion of power reveals the ways in which state actors must contend with powerful structural forces in the global political economy. The global political economy comprises material and social structures that constrain all actors in the system. Capital markets, global civil society, and voting selectorates shape and limit the ways in which governments exercise power in the world. States’ ability to affect, alter, or resist these structures in ways that advance their own interests is also a clear sign of their power. Indeed, as noted in chapter 1, one of the primary reasons for the skepticism about the future of global governance is the belief that global power is diffusing, shifting away from all the historically significant actors and stripping them of the ability to set agendas, negotiate rules, or implement regulations.41

  In my previous work, I have stressed effect of market size on global regulations.42 When it comes to setting standards, having power over the demand side matters far more than having power over the supply side. For global economic governance more generally, however, other metrics also come into play. Producer power—control or ownership of key production capabilities—might matter in some instances. In trying to coordinate or enforce global rules or regulations, state capacity can be significant as well. Governments that command greater expertise, experience, or network centrality with respect to the issue at hand often carry that advantage into international negotiations.43

  There is another set of useful metrics to consider—the response of private-sector actors to public policies. Is the dollar still being used to invoice most of global trade? Have sovereign borrowing rates changed over time? Unlike public opinion surveys, in which respondents frequently have a low level of information, market participants have a vested interest in making sure that their judgments are grounded in a high level of information. Therefore, market evaluations of national economies—through such measures as sovereign borrowing rates, FDI inflows, and the ratings of outside market observers—represent a complementary means to measure economic power.

  A Power Audit

  Figures 5.5 and 5.6 show shares of global economic output measured using purchasing power parity and market exchange rates for the United States, the European Union, Japan, and the BRIC economies. Even a glance at these figures makes three facts abundantly clear. First, commentators are correct in observing that China’s power is rising. In just a dozen years, China has moved from being a middle-rank economy to being one of the biggest in the world. When measured by purchasing power parity, China has moved much closer than the other emerging markets to the United States and the European Union. Second, despite lagging growth since the start of the Great Recession, the United States and the European Union are still the two largest markets, regardless of whether one is measuring GDP by market exchange rates or purchasing power parity. If one relies on market exchange rates, then the United States and the European Union still exercise outsized influence compared to the other candidate countries. This matters because both economists and political scientists argue that using market exchange rates is more appropriate when thinking about relative power in the global economy.44 The third observation is that only the United States, the European Union, and China stand out. The other BRIC economies and Japan look like middle-range powers in comparison. At no point in the post-crisis era has any of these economies possessed even half the size of either the United States or the European Union when measured using purchasing power parity. Using market exchange rates, the gap is even greater.

  FIGURE 5.5 Share of Global Economic Output as Measured by Purchasing Power Parity

  Source: International MonetaryFund’s World Economic Outlook database, October 2013, http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx

  FIGURE 5.6 Share of Global Economic Output as Measured by Market Exchange Rates

  Source: International MonetaryFund’s World Economic Outlook database, October 2013, http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx

  FIGURE 5.7 GDP per Capita, 2011

  Source: World Bank’s World Development Indicators, October 2013, http://data.worldbank.org/data-catalog/world-development-indicators?cid=GPD_WDI *Germany was used as a proxy for the European Union. This overstates per capita income in the EU.

  Some scholars have argued that when one is assessing wealth, aggregate economic size is less important than per capita income.45 According to this logic, countries with higher per capita incomes have more resources left after fulfilling subsistence needs and can thus devote more resources to projecting power. Figure 5.7 shows a snapshot of per capita GDP figures for 2011.46 The chart reveals the continued and pronounced gap between the developed world and the BRIC economies. Despite a decade of rapid economic growth, none of the BRIC economies had a per capita income level that was more than half the levels of the United States, Japan, or the European Union. Using this metric, the distribution of power has not shifted much at all.

  In terms of trading influence, figure 5.8 shows each jurisdiction’s share of global merchandise imports in 2011.47 Impo
rts represent the extent to which an actor commands an attractive market.48 The findings are similar to the data on national income. The European Union, the United States, and China are the three most significant importers. The next-largest trading state, Japan, imports less than half of what China imports. The rest of the BRIC economies are far less influential; indeed, South Korea is a more significant trading state than any of them. Network analyses of trading patterns tell a similar story—the preeminence of the OECD economies relative to the BRIC economies.49

  FIGURE 5.8 Share of Global Imports, 2011

  Source: World Trade Organization’s International Trade Statistics 2012, July 2013, http://www.wto.org/english/res_e/statis_e/its2012_e/its12_toc_e.htm

  The data for FDI inflows is somewhat more difficult to analyze, because it does not exclude intra–European Union cross-border investment. This significantly inflates the European Union figure. Nevertheless, the UNCTAD data on inward FDI paints a picture similar to that of the trade and output data, as can be seen in figure 5.9. The United States, the European Union, and China again outclass all other great-power candidates; the next-largest economy is not half as influential as the smallest of the Big Three. There are two other noteworthy trends. The rise of China is again quite clear. Its share of FDI inflows more than doubled between 2007 and 2012. The decline of the European Union is equally dramatic—its share of global FDI inflows fell by more than 50 percent. It is likely that this number overstates the extent of Europe’s fall as an FDI magnet because much of that decline likely resulted from the drying up of intra-European investment. Still, the latest figure is also the best measure of Europe’s waning market power in investment.

  The last major dimension of market size is in global capital markets. The IMF’s Global Financial Stability Report provides the most readily available data on the size of capital markets. The results, shown in figure 5.10, point to a different distribution of market power. The United States and the eurozone maintain market dominance.50 Again, both jurisdictions dwarf Japan, possessing capital markets roughly twice as large as that country’s. On this dimension, the United States and the European Union also dwarf all the BRIC markets. Indeed, the financial markets of all the emerging markets combined are still smaller than either the US or eurozone capital markets. Based on the regional breakdown, no individual member of the BRIC club—including China—is even remotely close to either the United States or the European Union.

  FIGURE 5.9 Share of Worldwide Inward Foreign Direct Investment

  Source: UN Conference on Trade and Development, World Investment Report 2013, http://unctad.org/en/PublicationsLibrary/wir2013_en.pdf

  Note: Does not exclude intra-EU investment.

  Using a network model to chart global financial flows reveals even more clearly the power of the United States. The United States is the most central actor in the network of global finance, with the United Kingdom a distant second. Indeed, the network centrality of the United States increased after 2008. As one recent analysis concluded: “the U.S. is more firmly ensconced at the center of the global financial system than commonly appreciated. … The EU’s struggles and China’s lack of financial development and extant positive feedback effects interact to keep the United States at the center of the global financial system for the foreseeable future.”51 Economist Hélène Rey argues that in a world of capital mobility, the US Federal Reserve essentially controls the global business cycle.52 This explains why the financial sanctions imposed by the United States and the European Union worked so well against Iran. The significance of these economies to global finance was so great that the costs to any bank in defying them was prohibitive.

  FIGURE 5.10 Share of Global Capital Markets, 2011

  Source: International MonetaryFund’s World Economic Outlook database, October 2013, http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx

  Some scholars argue that commanding the power of production is equally important. On this dimension, China’s exporting prowess becomes quite clear, as the WTO data in figure 5.11 demonstrate. China is the world’s largest exporter if one disaggregates the European Union, and has eclipsed the United States as an export powerhouse. This overstates Chinese trading power in two crucial ways, however. First, China’s gross export statistics exaggerate its real productive capacity. As discussed in the chapter 4, China’s export prowess rests on its being the location for the final assembly stage of production. But in the global value chains of the twenty-first century, much of the value added in manufactured goods comes from earlier stages of production. These intermediate goods are then imported by China for final assembly. In 2013, the WTO and OECD estimated export shares using a value-added calculation. Figure 5.12 shows that in 2009, the European Union remained the world’s largest exporter, with 21.8 percent of global exports. The United States was second, responsible for 14.4 percent. Using value-added calculations, China falls to third, with 10.1 percent of global exports.53 As with GDP, the trade data suggest that the post-crisis world has three—and only three—great economic powers.

  FIGURE 5.11 Share of Global Exports, 2011

  Source: World Trade Organization’s International Trade Statistics 2012, July 2013, http://www.wto.org/english/res_e/statis_e/its2012_e/its12_toc_e.htm

  The second way gross exports potentially misrepresent productive capacity is by overlooking the issue of ownership. A large fraction of productive capacity in the European Union, the United States, and China is based on FDI. On the one hand, large FDI inflows represent a source of economic strength. On the other hand, where the profits go is also a source of economic power. Figure 5.13 shows global shares of FDI outflow. Again, this figure overstates the influence of the European Union because it includes intra–European Union FDI. The results are nevertheless indicative, and suggest a concentrated distribution of productive power. The United States and the European Union both command more than 20 percent of FDI outflows, and no other country commands even half that share.

  The distribution of productive power is likely even more concentrated than figure 5.13 suggests. Sean Starrs analyzed data on corporate ownership from the Forbes Global 2000 lists of the top twenty-five global companies from 2006 and 2012 and concluded, “Corporations domiciled in the United States continue to dominate by far the largest range of sectors, in particular, those involving advanced technology and knowledge. In fact, since 2008, American dominance has increased in key sectors such as financial services and software, with no serious contenders on the horizon, including China.” More than 45 percent of the top 500 multinational corporations are headquartered in the United States. This figure may be deceptive, because the cross-national ownership of firms can render corporate nationality less meaningful. Nevertheless, when Starrs analyzed that data, he found that in 2012 Americans possessed 41 percent of all household wealth in the world. He observed that “American citizens continue to own the predominant share of the world’s wealth—much more so than America’s declining share of GDP would suggest.”54 Starrs’s findings buttress other research on the distribution of global wealth and corporate control that finds US firms and households at the apex.55

  FIGURE 5.12 Share of Global Exports in Value Added, 2009

  Source: OECD/World Trade Organization

  There are two other relevant dimensions of productive power in which the United States has maintained uncontested hegemony since the 2008 financial crisis. The first is that the dollar remains the world’s reserve currency. Despite claims and concerns to the contrary,56 the Great Recession’s effect on the dollar’s status has been minimal. Between 2007 and 2010, for example, the dollar’s share of the international banking market increased from 41.9 percent to 43.7 percent. Between 2007 and 2013 the dollar’s share of official currency reserves declined from 64.1 percent to 61.4 percent. This is still above the dollar’s 56.8 percent share in the mid-1990s. As a medium of exchange, the dollar has shifted from being responsible for 85.4 percent of the global foreign exchange market in 2007
to being responsible for 87.0 percent in 2013.57 Multiple analyses confirm that even after the 2008 crisis, more countries peg their currency to the dollar than to any other currency.58 The dollar is still a global currency; the euro functions as a regional currency; and no other national currency has attained significance—including the renminbi, which remains inconvertible.59 Doug Stokes concludes that by all conventional measures of market concentration, “the dollar continues to remain the key global currency by a considerable margin, with no other currency even close to competing.”60 Possessing the global reserve currency carries certain structural advantages. This status helps insulate the US economy from foreign shocks while making other economies more sensitive to fluctuations in the dollar’s value.61

  FIGURE 5.13 Share of Worldwide Outward Foreign Direct Investment

  Source: UN Conference on Trade and Development, World Investment Report 2013, http://unctad.org/en/PublicationsLibrary/wir2013_en.pdf

  Note: Does not exclude intra–EU investment.

  The utility of using military power to affect the global political economy is a matter of some debate.62 Nevertheless, even skeptics of the fungibility of military power acknowledge that in some economic issue areas, the capacity to use force matters. Military power provides the ultimate means of enforcing the rules of the game.63 As with currency use, the United States retains hegemonic levels of power in its military capabilities. The Stockholm International Peace Research Institute (SIPRI) data on worldwide military expenditures show that, in 2012, the United States was responsible for approximately 40 percent of worldwide military expenditures and more than 60 percent of great-power military expenditures.64 These figures have been roughly constant for the past two decades. The distribution favors the United States more than any prior distribution of military expenditures has favored a great power since the 1648 Peace of Westphalia.65 These data do not treat the European Union as a single actor—but even if they did, the amalgamated military expenditures of the European Union would still be less than half of US defense spending.66 China’s military, while undeniably growing, remains much poorer than the American armed forces. Despite ramping up its defense budget, in 2012 Beijing spent less than a quarter of what Washington spent on defense. Even skeptics of US capabilities, such as Christopher Layne, concede that “the United States still wields preponderant military power.”67