The Road to Global Prosperity
It may be true in one sense that Trade ought not to be enforced by Cannon Balls, but on the other hand Trade cannot flourish without security, and that security may often be unattainable without the Protection of physical force.
—LORD PALMERSTON, 18601
Ultimately, someone has to shoulder the responsibility for peace, security, and the framework of laws and regulations that makes trade possible.
The history of civilisation is a history of public goods. The more complex the civilisation, the greater the number of public goods that needed to be provided. . . . Unless there is a global economic collapse, an increasing number of the public goods demanded by our civilisation will be global or have global aspects.
The Three Pillars of Stability
In post-Communist Russia private businesses need what Russians call a krysha. The word means “roof,” and refers to the protection
that these businesses buy, usually from illegal, Mafia-like organizations. Just as in a house lacking a roof the inhabitants would spend almost all their time and energy protecting themselves from the elements and do little else, so, too, businesses cannot function without protection from the forcible interruption of their activities. Indeed, not only individual businesses but entire markets, whether local, national, or international, need such protection.
Normally, government provides it. Supplying protection is the first duty of government, the reason it is established in the first place.4
Russian businesses are forced to buy protection privately because the government is too weak, or too corrupt, to furnish it.
Protection is one example of what economists call “collective” or “public” goods. Others are police and fire protection and clean air. Society needs public goods, but individuals or small groups will not supply them. It is government that must do so,5
which means that international public goods are rarer, and more difficult to generate, than public goods within individual countries because the international system lacks a government. Here the global economy is in the same predicament as Russian businesses. Yet just as Russian firms are able to do business without effective local and national government, the global economy does function despite the absence of global government.
The world as a whole does not entirely lack public goods. It has had enough security for international economic activity to flourish for most of the time since the mid nineteenth century—between the repeal of the British Corn Laws and the outbreak of World War I, and then again since the end of World War II. The world has thus enjoyed one of the benefits of government without actually having one. It has received this crucial governmental service from its wealthiest and most powerful country, first Great Britain, then the United States.
In both cases the protection of cross-border trade, investment, and immigration, which worked to the advantage of all countries, emerged as the not-fully-intended consequence of British and
American policies designed to protect their own national economic and political interests. The two countries acted in the fashion of the owner of the largest and most expensive house in a neighborhood who hires private security guards to protect his home against burglary. The guards’ presence will keep burglars away from the other houses in the neighborhood as well, even though their owners pay nothing. Similarly, British and American policies protected the commerce of other countries.6
American-provided security continues in the present, so the future of the global economy depends heavily on whether the United States sustains this global role. While American military power is important for the continued functioning of the global economy, however, the globalized international economy of the twenty-first century, unlike its nineteenth-century predecessor, has two other sources of protection. The roof that shelters trade, investment, and immigration is sturdier today than it was then because it rests on three pillars rather than only one. The two others are the political legitimacy of market capitalism and cross-border economic transactions—the legitimacy, that is, of globalization—and the historically unparalleled illegitimacy of the practice against which British and American protection have shielded the global economy: war.
A government is legitimate when it is constituted according to established principles and operates in a proper way. Like ballast on a ship, legitimacy reinforces stability. A government possessing it is less likely than one without it to be actively challenged by, and more likely to command the active support of, those it governs. In traditional societies a legitimate ruler was one who was descended from a legitimate ruler. The ruling family usually owed its legitimacy to a proclaimed association with a deity. Twenty-first-century political legitimacy comes from popular sovereignty—the selection of the government by the people in free elections in which all adults may take part.
The globalized international economy also possesses legitimacy, not by virtue of its design but because of its results. It enjoys
what political scientists call “performance legitimacy” through the prosperity it has delivered. Since 1846, and especially since 1945, globalization has built up a stockpile of goodwill and trust among people and governments around the world. A worldwide consensus has formed in favor of the twin propositions that economic self-sufficiency is bad and markets are good.
The legitimacy it has earned through past performance does not make the integrated international economy immune to criticism or even opposition. From the 40,000 people who rallied (and in some cases rioted) against globalization at the 1999 meeting of the World Trade Organization in Seattle (which was convened to launch new global trade negotiations) to the first round of the French presidential elections in April 2012 when candidates receiving upward of 40 percent of the popular vote expressed severe reservations about, if not outright opposition to, full-fledged French participation in the global economy,7
scarcely a day has passed without some public manifestation of unhappiness with international trade, or finance, or immigration—or all three. The consistent, widespread, and sometimes powerful distaste for the workings of the international economy does not, however, pose a serious threat to its continuation because its legitimacy rests on something besides performance.
There is no credible alternative to it. No method of organizing economic life on the planet other than internationally integrated free markets commands anything like the political support necessary to displace the current system. No collection of rules, institutions, and practices that is new, different, and promising is available. The alternative to the current global economic order is . . . nothing. The Great Depression of the 1930s gave rise to two replacements for global capitalism: the fascist version of import-substituting industrialization, and centrally planned communism. The great recession triggered by the American financial crisis of 2008—the worst global economic downturn since the Great Depression—has not inspired or raised to prominence any alternative at all.
The legitimacy that the current configuration of the global
economy enjoys has accumulated through its own success and the failure of its rivals complements the support it receives from the policies of the United States. Legitimacy protects global economic integration from resistance from within. In the twentieth century it suffered severe damage from attacks from without in the form of the two world wars, the equivalents of a tornado that blows off the roof of a house and wrecks its contents. Now globalization has acquired a historically unprecedented source of protection from that threat.
For almost all of recorded history war was considered a normal, indeed inevitable human practice. War was like winter: it might be delayed, it might be mild, but sooner or later human communities were bound to experience it. In the twentieth century that attitude began to change. War came to be seen as not only undesirable but also avoidable. It was increasingly regarded—more in some places than in others—as a senseless and obsolete custom. It was put in the same category as foot-binding or dueling: once entirely legitimate but now less and less so—and a good thing, too.8
This new aversion to war has three sources.9
One is economic. People and their governments discovered that they could do far better economically by trading and investing with their neighbors than by attempting to conquer them.10
At the same time, because economic growth has made people richer, they have more to lose through war than did their forebears. The same trend that has made global economic integration popular has made war unpopular.
Political change in the decades since World War II has also contributed to the rise of war aversion. The major illiberal ideologies of the twentieth century, fascism and communism, made war central to their visions of political life. The fulfillment of their designs for remaking the world required conquest. These ideologies have all but disappeared. The closest contemporary equivalent, Islamic fundamentalism, while virulent and dangerous, has no chance of taking over powerful countries, as did fascism and communism. It will surely provoke international conflict—as it already has—but not on the scale of the two world wars or the Cold War.
In addition, more and more countries have become democracies, and democracies tend not to go to war with one another.11
Democracy goes hand in hand with an emphasis on the rights of individuals. War, because it kills people, violates individual rights in the worst possible way.
Finally, war-aversion has technological roots. The ongoing Industrial Revolution has generated ever-more-powerful machines for a wide variety of activities, including war. As war has become more destructive, it has become less legitimate. The prospect of a war using the most powerful of all armaments, nuclear weapons, is especially forbidding because a nuclear exchange on any but the most modest scale would destroy the countries waging it.
Because of the rise of war-aversion, with its diverse sources, armed conflict has become both less frequent and less deadly.12
Sovereign states have built up a resistance to it in something like the way that human beings have acquired immunity to deadly diseases. That resistance affords a measure of protection to international economic activity that supplements the protection it receives from American power and the legitimacy of globalization.
Just as disease has not vanished, however, war has not become, nor will it become, entirely extinct. The absence of a formal, effective, global government means that there is no supreme authority to prevent sovereign states from fighting each other. The kinds of political conflicts that triggered war in the past have not disappeared. War remains possible, and therefore a possible influence—in the worst case a very powerful influence—on the future of the global economy. That future thus depends on the kinds of wars that are fought during the decades ahead.
Beginning in 1996, an estimated 5 million people died in fighting in the Congo, in Central Africa.13
That terrible conflict illustrates
two features of the world of the twenty-first century. One is that the rise of war-aversion does not make large-scale killing a thing of the past. The other is that the impact of twenty-first-century wars, large or small, beyond those directly involved depends very much on their location. Not all wars are equally important, or, to the rest of the world, important at all. Deadly though it was, the Congo war changed nothing outside Central Africa. Elsewhere it barely attracted any attention. It had no discernible effect on buying, selling, and investing in the rest of the world.
War in Africa does not matter, or at least thus far has not mattered, to the global economy. What would matter are wars in the most economically dynamic regions of the world, of which Africa is not one, and especially wars involving large countries that play major international economic roles. Three such countries, Russia, India, and China, could go to war, with damaging economic consequences, in the years ahead. In all three, war-aversion is weaker than in western Europe and North America, where it has put down deepest roots.14
Each of the three has political interests that are or could be in jeopardy in the years ahead, interests for which it has fought in the past.
During the Cold War a conflict between the Russian-dominated Soviet Union and its chief adversary, the American-led Western coalition, could have visited more damage on the international economy than even the two world wars. In the twenty-first century that conflict has disappeared, but Russia’s location, bordering on the European Union, China, and the Middle East, means that any war it fights could disrupt international commerce; and post-Soviet Russia does not lack causes of conflict.
As a recently imperial power, it is susceptible to the impulse to reclaim its former territories. In some of them, notably Ukraine and Kazakhstan, millions of ethnic Russians were left outside the borders of the new Russian state when the Soviet Union collapsed, and the Russian government has proclaimed a special responsibility for protecting them. Post-Communist Russia has fought a war against
one of its new neighbors, in August 2008, with the former Soviet province and now independent country of Georgia.
While the rhetoric of Russia’s leaders has sometimes tended toward the bellicose, however, the Russian impulse for war is far from overpowering. If reluctantly, most Russians seem to have resigned themselves to the end of their country’s career as a great Eurasian empire.15
More importantly, Russia is militarily weak, especially in comparison with the strength of the old Soviet Union. Its armed forces did not distinguish themselves against tiny Georgia.16
Weakness, and the leadership’s awareness of it, constrain Russian foreign policy even where war-aversion does not. Russia is a declining power, something that cannot be said of India.
Before the twenty-first century, in global economic significance India ranked closer to Africa than to Europe. Its embrace of global integration, however, and consequent rapid growth after 1991 have made its conflict with neighboring Pakistan a threat to economic well-being beyond South Asia. That conflict centers on the Muslim-majority Indian province of Kashmir. The province’s Hindu ruler opted to join India rather than Pakistan when British India was divided into the two countries in 1947. Pakistan objected and attempted, unsuccessfully, to reverse the decision by force. The two countries fought again over the province in 1965 and 1999.
Kashmir’s status is important enough to both countries to be a cause of war because each sees the territory as integral to its national identity. For Pakistan, a country created as a home for South Asian Muslims, its separation from adjacent Kashmir violates its very reason for existence: if large groups of Muslims can live comfortably in India, after all, why should there be a Pakistan? The Pakistani military and its security services have an additional interest in sustaining the conflict with India; it ensures that they remain politically powerful and handsomely funded. India, by contrast, was established as an explicitly secular country. Including within its borders Kashmir, its only constituent state without a Hindu majority, validates that
principle. Furthermore, India, like virtually every other country, is loath to surrender territory that it already governs.
The issue remains explosive. True, as a full-fledged democracy, India has incorporated some of the democratic inhibitions against war. It is also stronger than Pakistan. But although it has been stronger since 1947, this has not prevented Pakistan from attempting to pry Kashmir away from India militarily. Pakistanis have also planned and launched terrorist attacks within India, notably a 2001 attack on the Indian national parliament in New Delhi and a deadly assault on the Indian city of Mumbai in 2008, which thus far have not triggered war but could do so in the future.
Magnifying the potential global economic damage of another Indo-Pakistani conflict is the fact that, since 1998, both countries have possessed nuclear weapons. South Asia is probably the likeliest site of the world’s next, and second, nuclear war—the first being the American nuclear attacks on the Japanese cities of Hiroshima and Nagasaki at the end of World War II. The next nuclear shot fired in anger would cause a psychological shock far beyond South Asia, with unpredictable but hardly positive effects on the world’s markets. A global-economy-shaking war on the Asian subcontinent is not inevitable, but as long as the status of Kashmir remains contested, it is possible.
Also possible, and with wider ramifications for the global economy than a conflict waged by India or even Russia, is a war involving China. China has the second-largest economy in the world, is a leader in international trade and manufacturing, and owns the largest store of foreign-currency reserves. If anything, those rankings understate China’s significance. It stands at the center of the multinational manufacturing networks known as supply chains, as the assembly point for many of the world’s manufactured products. A war involving China could disrupt these networks, with severe consequences for all the countries that are part of them and that buy their products.
How likely is such a war? According to one version of international history, it is all too likely. This view, encapsulated by the term “Wilhelmine China,” sees history as the ongoing rise and fall of powerful countries,17
with conflict breaking out when a rising power confronts one already ensconced in a dominant position. Germany under Kaiser Wilhelm was a rising power at the outset of the twentieth century, and its growing strength, combined with its expanding ambitions, led to a conflict with the incumbent dominant power, Great Britain. The result was World War I.18
Happily, the world has changed in the century since the outbreak of the First World War and the present. The three ingredients of war-aversion—the economic gains from peace, the war-repelling features of democratic government, and the enormous destructive power of modern weapons—were far weaker then than they are now. Economics in particular affects China’s foreign policies. The Chinese have a great deal to lose from anything that injures the global economy, as a war in which they took part surely would.
On the other hand, like Germany a century ago, China in the second decade of the twenty-first century has achieved rapid economic growth, has used some of its new wealth to build up its armed forces, and harbors ambitions for greater power and influence—certainly in its home region and ultimately, perhaps, beyond East Asia. A civilization as old and proud as China’s is not likely to consign itself permanently to a mere supporting role in world history. Moreover, several issues have the potential to entangle China in hostilities with its neighbors and with the United States.
China claims sovereignty over waters off its coast that conflict with the claims of Japan, Korea, Vietnam, Thailand, Brunei, Malaysia, and the Philippines. The parts of the seas and oceans over which sovereign states assert control are called their “territorial waters.” That is, countries consider them parts of their territory, and the defense of territory remains a universally accepted reason for going to war. Although stopping short of outright conflict, China’s armed forces have, in asserting its claims, bumped up against the military
forces of rival claimants. The Sino-Japanese dispute over the ownership of five tiny uninhabited islands in the East China Sea, which the Japanese call the Senkakus and the Chinese the Diaoyu, became particularly heated in 2012 and 2013.19
Nor do these competing claims have merely symbolic significance. Under the disputed waters lie valuable mineral deposits, including oil and natural gas.
To protect the offshore acreage that it claims, China deploys a “white-water” navy, one capable of patrolling coastal regions but not operating in the open seas. It has good reason to develop a wider-ranging “blue-water” navy for patrolling the world’s oceans because it depends heavily on seaborne commerce. Ships carry the petroleum that China needs, and the products it makes and sells, over great distances and far beyond the Pacific Ocean. An interruption of that commerce would stifle the Chinese economy; yet, lacking the requisite naval forces, China has no way of preventing this.
To protect its economic lifelines China depends on the world’s leading naval power, the United States. If China were to build a fleet comparable to the American one, complete with aircraft carriers, it would pose a serious threat to American naval supremacy, for naval power is a zero-sum game. Either the United States controls the world’s sea-lanes or China does; sharing control is not feasible. The German decision to build a high-seas fleet to challenge that of Great Britain contributed to the political tension that led to World War I.20
A comparable twenty-first-century Chinese decision would raise the specter of a Wilhelmine China. Despite the dangers, China has strong incentives to avoid relying on American naval power to safeguard its maritime trade. The two have radically different political systems, which feeds mistrust on both sides, and the Communist authorities suspect the United States—correctly—of wishing to promote the “peaceful evolution” of the Chinese regime in a democratic direction. Even more importantly, on an issue of central importance to the Chinese—a fundamental territorial issue, as they define it—they are at odds with the United States.
The government in Beijing insists that the island of Taiwan, one
hundred miles off the southern China coast, is Chinese territory. The Taiwanese do not accept this claim. Taiwan was declared a province of China only in 1885, was captured by Japan ten years later, and has not been governed from the mainland in the thirteen decades since. The losing side in the Chinese civil war, the Kuomintang, took control of it in 1950. Thereafter, Taiwan became an American ally, an economic dynamo, and, in 1996, a democracy.
For the Communist government of the mainland, and apparently for many of the 1.3 billion people it governs, Taiwan’s de facto independence is illegal and unacceptable, the last vestige of the humiliating historical era in which foreigners seized parts of Chinese territory.21
For their part, the Taiwanese do not wish to be ruled from Beijing and certainly not by a Communist government. This has led to the use of force in the past: in the 1950s the Communist government shelled islands Taiwan controlled in the Taiwan Strait, and as recently as 1996, on the occasion of the island’s first democratic presidential election, conducted military operations near Taiwan.
No status for the island would satisfy both sides. The Taiwanese would prefer formal independence, but Beijing has repeatedly said that it will go to war to prevent this. For reasons of prudence, and at the insistence of the United States, the Taiwanese government has refrained from declaring itself fully sovereign, thereby remaining in a kind of limbo: effectively but not officially independent.
The island, the mainland, and the rest of the world have lived with this status for more than six decades and perhaps can live with it for the indefinite future. Peace between China and Taiwan, and therefore the stability of the global economy, depend on its continuation. But it is not certain to continue. The military balance between China and Taiwan is a dynamic one. China is steadily increasing its military might; Taiwan needs American weaponry to counterbalance Beijing’s power. Either side upon concluding that the balance was tilting against it—or in its favor—could conceivably be tempted
to try to change the status quo: China by attacking, Taiwan by declaring independence.
Moreover, if China’s economic success and the growth of its military power could trigger an armed conflict, so, too, could its economic failure. A severe economic downturn would threaten the legitimacy of Communist rule, which, like that of global integration in general, is based on its economic performance. The regime might attempt to compensate with an appeal to nationalist sentiment through a hardening of its policy on Taiwan, perhaps to the point of trying to seize it by force.
Such a course could bring China into direct conflict with the United States, and a Sino-American war could do the kind of damage to the global economy that it suffered in the two world wars. Both countries have nuclear armaments and a war in which they used these weapons would have horrific consequences. Even short of that, a war could bring trans-Pacific trade to a halt, shake the world’s markets, devastate global manufacturing, and jeopardize the monetary order on which international commerce depends. As removed as they are from the main flows of global trade and investment, Africans, too, who sell raw materials to China to feed its industrial machine, would feel the effects.
Fortunately, the economic costs of war make the Chinese government reluctant to wage one.22
The governments of India and Russia are similarly reluctant, and for the same reason: their countries, like China, benefit from the global economy. Indian and Russian leaders’ prospects for remaining in power, like those of their Chinese counterparts, rest on the delivery of economic growth, with which war would interfere. They, too, must reckon with the possibility of the disastrous use of nuclear weapons in a conflict involving their own forces.
Yet another restraint common to all three reduces the likelihood of war: the international role of the United States. American foreign policy, and the armed forces that back it up, do more to protect the
global economy than simply safeguarding the maritime highways for global trade.
American military power deters Russia and China. During the Cold War the United States said clearly and frequently that it would repel any Soviet act of aggression. In the post–Cold War era the American government does not use such language about Russia and China, but the continuing deployment of American military forces in Europe and East Asia and the close American ties with countries in those regions convey its readiness to fulfill that promise even while not expressing it as explicitly as in the past. During the Cold War the United States was the sheriff on the job; in the post–Cold War era it is the retired sheriff who still lives in town and keeps his gun well oiled.
The American forces in these two regions also reassure the countries there that a sudden, dangerous shift in the military balance will not take place, thereby fostering the confidence necessary for trade and investment.23
The American military presence in Europe reassures the Europeans that if Russia adopts a Soviet-style policy toward them the United States will be on hand to help them resist, but also reassures post-Communist Russia that Germany, which invaded its territory twice in the last century, will remain safely anchored in an American-led alliance and thus pose no threat. Similarly, in Asia the United States reassures the countries there that they will not have to face China alone while simultaneously reassuring the Chinese that Japan, as an American ally, will not pursue an independent, let alone an aggressive, foreign policy, as it did at China’s expense in the 1930s and 1940s.
Beyond deterrence and reassurance, the United States provides the peace-reinforcing service of mediation. American diplomats have worked, with some success, to limit the conflict between India and Pakistan, and to dissuade Taiwan from political steps that could precipitate a war with China. In the conflict between the mainland and Taiwan, America has practiced a combination of deterrence,
reassurance, and mediation, keeping the mainland from attacking while preventing the island from declaring independence.
Because of these American policies, and because of the effects of global economic integration, armed conflict on the scale of the two world wars, or war involving one of the major countries, are, for the foreseeable future, a remote prospect. The prospect for lesser wars, however, is not remote. Such wars have the potential to limit, if less severely than major conflicts, cross-border trade and investment. The future of the global economy depends on them as well.
The World’s Policeman
Roofs can collapse. They can also leak, making life difficult, although not intolerable, for the inhabitants of the houses they cover. So it is with the global economy. Like a deadly tornado, a major war could rip away the roof that shelters it, as the two world wars did. Fortunately, the countries capable of launching such a war have strong incentives not to do so. Lesser powers, however, have stronger motives for policies that can result in war and their policies have the potential to create leaks in the protective roof, causing disruption to international commerce. Here, too, American power shields international trade and investment. The United States has assumed the duties of plumber and roofer, bearing the lion’s share of the responsibility for confronting and containing those who are actively committed to policies injurious to the globalized international economy.
North Korea and Iran harbor aspirations the pursuit of which could punch holes in the global economy’s roof. Both are governed by regimes professing an aggressive ideology of the kind that harkens back to the fascism and communism of the twentieth century: North Korea’s is a combination of Marxism-Leninism, the cult of personality of the ruling family, and violent nationalism; Iran’s is Is
lamic fundamentalism. Both regimes seek to expand their control—North Korea’s over the entire Korean peninsula, Iran’s throughout the Middle East. Each has shown itself willing to use force to this end.24
Neither has any commitment to the integrated global economy—North Korea stands entirely outside it—and aversion to war plays no part in the thinking of the leaders of either country; on the contrary. Neither has formidable armed forces, although each devotes much of its resources to military purposes and both have worked assiduously to equip themselves with nuclear weapons: North Korea has actually detonated a nuclear device.
It is their respective locations that make each of them a threat to the global economy as, for example, the Congo is not. North Korea is situated between China and South Korea, which has Asia’s fourth-largest economy, and is within missile range of the country with the third-largest economy in the world, Japan. A war on the Korean peninsula would almost certainly do significant damage to South Korea and would shake confidence and disrupt commerce throughout East Asia. In Iran’s neighborhood, the Persian Gulf, is located much of the world’s readily accessible deposits of oil. A war there that seriously interrupted the shipment of oil to the world’s industrial powers would cripple the global economy.
The United States has undertaken to prevent war in each place through deterrence. It has stationed 35,000 troops in South Korea to demonstrate its commitment to thwarting a North Korean attack and has deployed naval and air forces in the Persian Gulf to deter Iran. American military power has helped to keep both North Korea and Iran from launching the direct attacks on their neighbors that their ruling ideologies justify, indeed encourage. It has not, however, prevented the two from practicing a different kind of aggression: terrorism.
Terrorists commit violent acts designed to shock and frighten in order to publicize their goals, to demoralize their opponents, and to turn the public against the government if, as sometimes occurs,
the government responds harshly and indiscriminately. The North Korean regime has organized the assassination of South Korean officials. The Iranian government has murdered political opponents and citizens and coreligionists of the state it seeks to destroy: Israel. The terrorist act that made the biggest worldwide impression, however, and that enlisted the United States as the leader of a global campaign against terrorism, was the work of others. The attacks of September 11, 2001, on New York City and Washington, D.C., were sponsored by the group known as al Qaeda.
Al Qaeda’s announced goal, the creation of a “caliphate” governing all Muslims, is scarcely realistic and its operatives, while present in a number of countries, for the most part lack the strength to challenge, let alone overturn, most established governments, even the weaker ones of the Middle East. Islamic terrorism does not pose a threat on the same scale as did fascism and communism. Terrorism is the weapon of the weak, an ancient tactic that has virtually never achieved the professed goals of its practitioners.25
Yet contemporary terrorism, whether state-sponsored, as in the cases of North Korea and Iran, or carried out by stateless networks such as al Qaeda, does threaten the global economy. A successful attack can shake the confidence necessary for economic activity. Estimates of the direct costs of the September 11 assaults range upward of $100 billion, and the indirect costs may have been far higher. The direct costs might have been even greater if the terrorists had been capable of using chemical weapons26
or nuclear materials. An independent group probably cannot assemble a nuclear explosive by itself27
(although it could conceivably get one from a sympathetic government, such as North Korea’s or Iran’s), but employing more easily obtainable radioactive material—a “dirty bomb”—has the potential to create widespread, market-subverting panic.
A terrorist attack would do maximal damage to economic production, trade, and investment around the world if it succeeded in disabling oil production facilities in the Persian Gulf. Terrorists
have already unsuccessfully attacked them.28
The United States has assumed major responsibility for protecting them as well.
The world runs on oil. Most land, sea, and air transport uses it. The concentration of much of the world’s accessible oil in the Persian Gulf creates two vulnerabilities for the global economy: it must be shipped over long distances to the places where it is used, including through narrow passages such as the Strait of Hormuz in the Gulf and the Strait of Malacca in the western Pacific; and its region of origin is a politically volatile place.
One day the world may not need Gulf oil. Advances in the technologies of exploration and recovery have made available previously inaccessible oil in more stable parts of the world, including North America, and previously untapped reserves of natural gas, which can sometimes replace oil. Technology also promises to provide—although it is uncertain when—sources of energy other than fossil fuels. For the foreseeable future, however, the world will depend on oil, all the more so as consumption increases in China and India.29
It will need a steady flow of oil from the Persian Gulf to distant countries, which means depending on the United States.
The American navy protects the oil tankers that traverse the world’s oceans and is prepared to resist efforts to interrupt their progress at vulnerable points in their passage. Past interruptions, such as the politically caused reductions in supply of 1973 and 1979—the first the result of an Arab embargo, the second of the Iranian Revolution—raised the price of oil and triggered economic recessions around the world.30
The United States has also assumed responsibility for protecting Persian Gulf regimes that, however distasteful their governing principles to those who hold Western political values, nonetheless can be trusted to make the oil within their borders available to the rest of the world. When Saddam Hussein, the dictator of Iraq, invaded and occupied Kuwait and menaced neighboring Saudi Arabia in 1990 and 1991, the United States organized and led a military coalition that evicted his forces. The purpose of the campaign was as much to maintain in power the
Saudi monarchy, an American client presiding over the world’s largest national supply of oil, as to restore to power the Kuwaiti royal family.31
In the twenty-first century, to safeguard the world’s supply of oil the United States bears the burden of protecting the monarchies of the Gulf—most of them small and weak, none of them a democracy, but almost all of them rich in oil reserves—against the country that seeks to dislodge their governments and control their oil, the Islamic Republic of Iran.
Protecting the Gulf oil states and the oil itself as it is shipped far and wide, practicing deterrence, reassurance, and mediation not only in the Gulf region but in Europe and Asia as well: these are all services that the United States furnishes to the globalized international economy, services that shield cross-border trade, investment, and migration from the disruptions that war brings. The roof over the twenty-first century’s globalized economy has two other sources of support—the political legitimacy of globalization and the strength of war-aversion—but the United States is its central pillar. The world economy’s future therefore depends heavily on how sturdy that pillar turns out to be.
The United States has been able to function as the world’s police force because of its enormous power. Historically, other countries have banded together to resist sovereign states as formidable as twenty-first-century America; but such a coalition has shown no sign of forming in this case because others know that the United States does not threaten them. Indeed, other governments often appreciate the global services America provides, although they almost never say so publicly. While American global power does not confront a serious external challenge, however, it does face threats from within. The great danger to the American role as global policeman comes not from an international consensus against it but from a lack of a domestic consensus in favor of it.
One internal threat stems from the political fatigue arising from the American wars in Afghanistan and Iraq. Neither operation made more than a marginal contribution to supporting the global
economy; but the discontent the two of them generated within the United States reduced the American public’s tolerance for policies that do.
The services the country provides to the world have another shortcoming: they lack a galvanizing rationale. In fact, Americans do not even think of themselves as providing such services. The United States launched the relevant policies during the Cold War, in order to protect itself and its allies from international communism. When communism collapsed, the policies continued. While safeguarding global commerce, as they do, is an important aim, it is not one the American public finds as urgent, compelling, and worth sustaining at considerable expense as self-defense.
The global-economy-supporting policies survived for two decades after the Cold War ended in 1991 because the United States could readily afford them; but the era when that was the case is coming to an end. The retirement of the baby boom generation—consisting of the 78 million Americans born between 1946 and 1964—will dramatically increase the costs of the country’s two most expensive social welfare programs, in which every citizen is entitled to participate: Social Security and Medicare. This will put pressure on other government programs, including those that underwrite the country’s global presence. The choice between international and domestic obligations—between guns and butter—which is a political choice, will become increasingly acute.32
In these circumstances it is likely that Americans will tend to favor domestic expenditures, which benefit them directly.33
They cannot eat guns.
Whatever the outcome of the inevitable political struggle over government expenditures, the United States will not bring all of its far-flung military forces back to North America. It will remain a formidable—for decades, in all probability, the most formidable—international power. The resources available for foreign policy over the long term will be determined by the country’s rate of economic growth, which is unpredictable: it could turn out to be high. Historically, American foreign policy has waxed and waned in response
to international events, and these, too, are unforeseeable. Americans might, in the years ahead, come to see the world, and their interests in it, as requiring the kind of policies it was carrying out in the second decade of the twenty-first century no matter what the cost.34
Still, it is reasonable to expect that the United States will do less global policing in the future than it has in the past. That would make the roof that shelters the global economy less sturdy and perhaps leakier. A weaker, poorer, less internationally active America could have an indirect effect on cross-border economic activity by making the world a politically and militarily more turbulent place. Such a development would also affect global commerce more directly.
The Factory Manager
Markets need protection in order to function properly, and government supplies that protection. In the nineteenth century that was all that governments supplied. They provided a roof, nothing more. A term came into use to describe this relationship of government to the market: the night watchman state. The government acted as the watchman standing guard at the factory gate to prevent theft or sabotage after the workers had gone home.
In the twentieth century, governments began to do more. They entered the factory and assumed a measure of responsibility for its smooth operation. Government became the manager, overseeing production, and the repair crew, fixing parts of the economy when they broke down. For economic life, security is not the only public good.
The global economy has the same need of management and repair as the national economies that compose it. Indeed, one influential account of the Great Depression of the 1930s imputes its depth and longevity to the lack of any single country willing and able to provide these services internationally: Great Britain was no longer able and the United States was not yet willing to do so.35
After World War II the United States did undertake to provide some non-security services to the global economy. It did not do all the things on an international scale that national governments do for the economies within their borders because of the convention of sovereignty—the division of the world into independent countries in each of which its government has ultimate authority. Americans do not pay for the pensions and health care of others, and the United States cannot compel other countries to carry out particular policies for international trade and investment, in both cases thanks to the prerogatives of sovereignty. When domestic interests conflict with international goals, in almost every country almost all the time the domestic interests take precedence.
The predominance of sovereignty means that, for political reasons, the world gets less economic governance than it needs. The absence of world government complicates at best and thwarts entirely at worst effective responses to what is perhaps the most serious long-term problem the world faces—global warming36
—and to what is certainly its most serious short-term economic challenge—preventing ruinous financial crises.37
Sovereignty has not, however, kept the United States from providing two important economic services—two international economic public goods—to other countries: America has offered a market for much of the world’s exports; and it has furnished the world with its most widely used currency, the dollar. The future of the global economy therefore depends on whether, and to what extent, it can and will continue to do both.
Sellers need buyers. Countries seeking to export must have welcoming markets for their products. Since 1945 the United States has offered the biggest and most open one, which proved to be big enough and open enough to enable Western Europe to restart economic growth in the wake of World War II partly through exports to the United States. Because they were able to sell so much to Americans, the American market also helped to make the strategy of export-oriented growth that Japan, China, and other Asian coun
tries pursued in the second half of the twentieth century a success. From 1996 to 2005, in fact, America was responsible for almost 45 percent of global growth in consumer spending.38
It might seem odd to call American consumers’ purchase of goods they desire a “service” to the rest of the world. Consumption is, after all, a self-interested activity; participants in trade engage in it because they benefit, not to confer a favor on the seller. Moreover, it is individual Americans, not the government of the United States, who buy Japanese cars, Korean electronic equipment, and Chinese clothing, household goods, and toys.
Self-interested though it may have been, American consumption did contribute more by far to global economic growth than that of any other country from the 1940s through the first decade of the twenty-first century. Others were not only less wealthy and thus less capable of buying from abroad, they were also less willing to do so: virtually all of them were less welcoming to imports than was the United States. Here again, politics shaped economics. The decisions to open and keep open the American market were political ones, and had political as well as economic motives. They were intended to strengthen America’s allies in the common battle against communism as well as enriching America’s citizens.
Those decisions had major economic effects, increasing global production, but also important political consequences. Europe’s recovery from the destruction of war and the higher economic growth of countries that emphasized exports rather than import-substitution contributed to the late-twentieth-century triumph of the market and of global economic integration. Without the access to its market that the United States provided, the economic history, and therefore the political history, of the twentieth century would have unfolded differently.
As with its contributions to international security, this American service is unlikely to be available on the same scale and with comparable reliability in the future. By the first decade of the new century, American consumption, and global economic growth, were being
financed ever more extensively by borrowing. The financial crisis of 2008, in no small part the result of that credit binge, put an end to the pattern. Individual American consumers and households, having suffered large paper losses of wealth, began to rebuild their balance sheets, concentrating more on saving than buying.
The government stepped in with spending programs financed by borrowed money to replace the demand that private consumers were no longer supplying (as well as with tax cuts intended to encourage more consumption). Overall demand fell, however, leading to low growth and high unemployment. And the rising level of debt the government incurred to try to spur economic output, as well as for other reasons, threatened the second important economic service the United States furnished to other countries: the global role of the dollar.
The participants in the international conference to reconstruct the world’s monetary order in 1944 at Bretton Woods, New Hampshire, decided not to revive the gold standard. Instead, they devised a system with the American currency at its center: all other countries set the value of their currencies in relation to the dollar, and the dollar itself was tied to gold at the price of $35 per ounce.
The United States put an end to these arrangements on August 15, 1971, when President Richard Nixon severed the dollar’s link to gold. This permitted the depreciation of the dollar, something impossible under the Bretton Woods rules. The president acted for domestic political reasons. The dollar’s elevated value had come to hurt American exporters and thus it reduced employment in the United States, which Nixon considered a political liability for his candidacy in the upcoming 1972 presidential election. Faced with a conflict between a domestic—that is a national—interest and an international obligation, the United States chose to exercise its sovereign prerogative to act for its own good rather than for the world’s benefit.39
Nonetheless, the dollar retained a central role in the global economy after the demise of the Bretton Woods system. Countries
held dollars as reserves, to back their own currencies and to use in international transactions. The price of many internationally traded goods and commodities—oil being the outstanding example—were denominated in dollars, and a large fraction of global commerce continued to be conducted in the American currency.40
The world used the dollar for the same reason that currencies originally came into use and national governments came to supply them: convenience. Without currencies, trade would be reduced to the clumsy, costly, time-consuming localized barter of one product or commodity for another, which is the way long-distance exchanges were often conducted before the beginning of globalization in the nineteenth century. Without a common international currency, cross-border trade would always require converting one national currency into another, an uncertain process when currency values fluctuate and an inconvenient one at any time since most national currencies can be used only in their country of origin.
The dollar’s global status remained secure as long as the world remained confident that it would retain its value and be accepted everywhere.41
(National currencies also, of course, have to be relatively stable in value and acceptable within the country’s borders for people to be willing to hold them.) In the second decade of the twenty-first century, however, that confidence began to waver. The severe financial crisis of 2008 called into question the American capacity to manage the financial system on which the dollar rests. The inability of the American federal government to reduce its swelling budget deficits caused particular concern globally: it raised the possibility that, faced with large national debt (the cumulative total of annual deficits), the American government would print the dollars needed for debt service and repayment, causing inflation that would reduce the value of all the dollars held around the world.42
In response to the country’s financial policies, in August 2011 the rating agency Standard & Poor’s downgraded the credit rating of the United States for the first time.
A shaky dollar should, in theory, make other currencies attractive
candidates to assume its international responsibilities. In the second decade of the twenty-first century, however, no other currency qualified.43
The euro, to which seventeen wealthy European countries belonged and that made up roughly a quarter of the world’s reserve holdings, was embroiled in a crisis so grave that its very survival was in serious doubt. Political decisions would determine whether, and in what form, the euro survived,44
as they would determine whether and when the Chinese currency, the renminbi, would join the dollar as a full-fledged global reserve.
The renminbi has the advantage of being issued by a country with a large and rapidly growing economy. The Chinese government has expressed interest in having its currency achieve the global status the dollar has enjoyed. As matters stand, however, citizens, businesses, and governments in other countries have little incentive to hold China’s currency.
It is not freely convertible into other currencies. Even if it were, unlike the United States, China does not have deep, varied, and liquid capital markets in which foreigners can invest. And the renminbi’s exchange rate remains under the control of the Chinese government, which means that the value of the currency, and thus the net worth of all who hold it, are subject to the whims and wishes of the ruling Communist Party. Here again, politics will govern the economic future. A political decision by the Party to reduce its own power over the Chinese economy is required to build the confidence necessary for the renminbi to function as has the dollar.45
If all national currencies have drawbacks as international mediums of exchange—and they do—it would seem sensible to establish a truly global currency. Keynes suggested this at the Bretton Woods Conference, where he was representing Great Britain, but nothing came of his suggestion.46
A germ of a global currency does exist, in the form of Special Drawing Rights (SDRs). These consist of a basket of four currencies—the dollar, the yen, the euro, and the British pound47
—and are issued by the International Monetary Fund (IMF). They make up, however, less than 5 percent of the world’s
total reserves, and governments holding 85 percent of the voting power in the IMF must agree on issuing them, something that is not always easy to achieve.
The difficulty in managing SDRs points to the central obstacle to the creation of a genuine global currency, which is rooted in politics as well as in the institution of sovereignty. A genuine global authority, a kind of global central bank, would have to supervise it, and the countries of the world are unlikely to surrender their sovereign powers over their own monetary policies in order to create one. The countries using the euro did surrender this sovereign power, but their experience in so doing has not been such as to encourage the Americans, Japanese, and Chinese or anyone else to follow their example.
Here again, politics shapes economics and sovereignty obstructs the provision of an international public good. What seems economically reasonable, even necessary, is politically impossible because nations and their governments reserve the right to act in ways that serve their own interests, even at the expense of global well-being. Nor, it should be added, can this be understood simply as an instance of shortsighted human selfishness prevailing over wise, disinterested action that will ultimately benefit all: if one desirable aspect of government is efficiency, including efficiency at supplying public goods, another and perhaps even more important feature is democracy. The policies of individual sovereign states, where governments are chosen through free elections and that protect economic, religious, and political liberty, do reflect the will of the people. It is not at all clear how a global government would or could function democratically, especially since it would necessarily encompass countries that are not themselves democracies.
If the United States proves unable to supply all of the protection and economic services that the global economy will need in the years ahead, if no other single country can replace the United States in this role, and if pooling national sovereignties to create a global government to furnish these heretofore American-provided
international public goods is politically infeasible and in important respects undesirable as well, one other way of doing so still remains. It is the most promising alternative, or supplement, to the American role as the world’s quasi-government. The member states of the international system, or at least some of them, might cooperate, while retaining sovereign independence, to do some or all of what the United States has done to sustain the integrated global economy.
The Future of International Cooperation
Sustained cooperation among independent countries, both the idea and practice of it, was born in the nineteenth century and came into its own in the twentieth. Once confined to occasional, temporary military alliances formed to fight specific wars and dissolved after their conclusion, cooperation has become routine. International organizations are the vehicles for cooperation and the post–World War II era is the great age of international organizations. Most that have ever existed were established only after 1945.
The proliferation of organizations in which cooperation on a wide range of issues takes place—or is intended to take place—suggests a logical progression in the provision of services to the global economy. Just as Great Britain gave way to the United States as the world’s quasi-government in the twentieth century, so, in the twenty-first, American global leadership will yield to international cooperation for this purpose. The world will become a version of a cooperatively owned apartment building in the United States, in which each resident pays a fee for the maintenance of its common areas, including the roof.
Unfortunately, a smooth transition from an American night watchman and factory manager to a team of countries furnishing the same services is not likely. Once again, sovereignty stands in the way. International organizations and ad hoc multinational groupings, rather than requiring independent countries to give up their
sovereign prerogatives, allow them to exercise those prerogatives, which can block effective action.
For one thing, the greater the number of countries that must agree on a course of action, the more difficult it will be ever to reach agreement. At the Bretton Woods Conference, Great Britain and the United States dominated the proceedings, and the United States was by far the stronger of the two. In the second decade of the twenty-first century, the equivalent of the two of them, the group with nominal responsibility for managing the global economy, was the Group of Twenty. It is far more difficult to coordinate twenty entities than to coordinate two.48
This is so because countries can and do disagree. In 2012, for example, as popular resistance to the long-ruling Assad regime in Syria threatened a region-wide conflict that could endanger access to Middle Eastern oil, the United States and its western European allies insisted that the regime’s leaders give up power, while the Russians and the Chinese wanted Assad to remain in charge. Had they all been able to agree they might have generated the political pressure necessary for peaceful political change in Syria; but they could not agree.
Even when they do agree on goals, countries often differ on how to achieve them, thereby blocking effective multilateral action. All major countries agree that North Korea should not possess nuclear weapons. China could exert maximal pressure on the regime in Pyongyang to give up its nuclear program by cutting off the food and fuel it supplies, but despite the urgings of other countries, especially the United States, the Chinese government has declined to do so. It fears the collapse of the North Korean regime and refuses to implement policies that might bring this about, even at the cost of permitting North Korea a nuclear arsenal.
Finally, for a particular problem sovereign states may agree on both the desirable goals and the appropriate methods for reaching them but differ about which country will contribute what to the agreed soluti