Globalization and American Power.

• Author: Waltz, Kenneth N.

ASSOCIATING interdependence with democracy, peace and prosperity is nothing new. Before World War I, the close interdependence of states was thought of as heralding an era of peace among nations, and democracy and prosperity within them. In his widely read book, The Great Illusion, Norman Angell summed up the texts of generations of classical and neoclassical economists and drew from them the dramatic conclusion that wars would no longer be fought because they would not pay. World War I instead produced the great disillusion, which reduced political optimism to a level that remained low almost until the end of the Cold War--"almost", because beginning in the 1970s a new optimism, strikingly similar to the old, began to resurface. Interdependence was again associated with peace, and increasingly with democracy, which began to spread wonderfully to Latin America, to Asia and, with the Soviet Union's collapse, to Eastern Europe. In 1989 Francis Fukuyama foresaw in these pages a time when all states would be lib eral democracies, and more recently Michael Doyle projected that this would happen sometime between 2050 and 2100. [1]

Robert Keohane and Joseph Nye, in their 1977 book Power and Interdependence, strengthened the notion that interdependence promotes peace by arguing that simple interdependence had become complex interdependence, binding the economic and hence the political interests of states ever more tightly together. Now we hear from many sides that interdependence has reached yet another height, transcending states and establishing a Borderless World, the title and theme of Kenichi Ohmae's 1990 book. People, firms and markets matter more; states matter less. Each tightening of the economic screw raises the benefits of economic exchange and makes war among the more advanced states increasingly costly. The simple and plausible propositions are that as the benefits of peace rise, so do the costs of war; when states perceive wars to be immensely costly, they will be disinclined to fight them. Still, war is not abolished, because even the strongest economic forces cannot conquer fear or eliminate concern for national honor. G enerally, however, economic interests dominate and markets begin to supplant politics at home and abroad. That economics depresses politics and limits its significance is taken to be a happy thought.

The State of the State

GLOBALIZATION is the fad of the 1990s, and globalization is made in America. Thomas Friedman's The Lexus and the Olive Tree (1999) is perhaps the most exultant celebration of the American way, of market capitalism and liberal democracy. Free markets, transparency and flexibility are the watchwords. The "electronic herd" moves vast amounts of capital in and out of countries according to their political and economic merits. Capital moves almost instantaneously into countries with stable governments, progressive economies, open accounting and honest dealing, and out of countries lacking those qualities. States can defy the "herd", but they will pay a price, usually a steep one, as did Thailand, Malaysia, Indonesia and South Korea in the late 1990s. Some countries may defy the herd inadvertently (the countries just mentioned); others out of ideological conviction (Cuba and North Korea); some because they can afford to (oil-rich countries); others because history has simply passed them by (many African countries) .

Countries wishing to attract capital and to gain the benefits of today's and tomorrow's technology must don the "golden straitjacket", a package of policies including balanced budgets, economic deregulation, openness to investment and trade, and a stable currency. The herd decides which countries to reward and which to punish, and nothing can be done about its decisions. The herd has no telephone number. When it decides to withdraw capital from a country, there is no one to complain to or petition for relief. Decisions of the herd are not made; they happen, and they happen because many individual investors make simultaneous decisions on similar grounds to invest or to withdraw their funds. Globalization is a process shaped by markets, not by governments.

Globalization means homogenization. Prices, products, wages, wealth, rates of interest and profit tend to converge the world over. Like any powerful movement for change, globalization encounters resistance--in America from religious fundamentalists, labor unions and their allies; abroad from anti-Americanists; everywhere from cultural traditionalists. The "end of the Cold War and the collapse of communism have discredited all models other than liberal democracy. The statement is by democratic theorist Larry Diamond, and Friedman repeats it with approval. There is but one best way, and America has found it. As Friedman puts it, "It's a post-industrial world, and America today is good at everything that is post-industrial." The herd does not care about forms of government as such, but it values and rewards "stability, predictability, transparency, and the ability to transfer and protect its private property. The message to all governments is clear: conform or suffer.

There is much in what Friedman says, and he says it very well. But how much? And, specifically, what is the effect of closer interdependence on the conduct of the internal and external affairs of nations?

First, we should ask how far globalization has proceeded. In fact, much of the world has been left out of the process: most of Africa and Latin America, Russia, all of the Middle East (except Israel), and large parts of Asia. Moreover, for many countries the degree of participation in the global economy varies by region. Northern Italy, for example, is in; southern Italy is out. Globalization is not truly global, but is mainly limited to northern latitudes. Linda Weiss points out that, as of 1991, 81 percent of the world stock of foreign direct investment was located in high-wage northern countries: the United States, followed by the United Kingdom, Germany and Canada. She adds that the concentration of investment in these countries has increased by 12 percent since 1967. [2] Obviously, the world is not one.

Second, we should compare the interdependence of nations today with interdependence earlier. The rapid growth of international trade and investment from the mid-1850s into the 1910s preceded a prolonged period of war, internal revolution and national insularity. During the years of post-World War II recovery protectionist policies lingered as the United States opened its borders to trade while taking a relaxed attitude toward counties that protected their markets. One might say that from 1914 into the 1960s an interdependence deficit developed, which helps to explain the steady growth of interdependence thereafter. Among the richest twenty-four industrial economies (the OECD countries), exports grew at about twice the rate of GDP after 1960. In 1960 exports accounted for 9.5 percent of their national GDPs; in 1900 that figure was 20.5 percent. [3] Finding that the level of interdependence in 1999 approximately equals that of 1910 is hardly surprising. What is true of trade also holds for capital flows, again as a percentage of GDP.

Third, money markets may be the only economic sector that has become truly global. Finance capital moves freely across the frontiers of OECD countries and quite freely elsewhere. Still, with the movement of financial assets as with commodities, the present remains like the past. Despite today's ease of communication, financial markets in 1900 were at least as integrated as they are now.

Yet many globalizers underestimate the extent to which the new resembles the old. In any competitive system the winners are imitated by the losers. In...