CIAO DATE: 8/00
Econo-Realism: Putting Economics at Center Stage. How Does, and Should, IR Research React to Expanding Economic Interdependence?
International Studies Association
41st Annual Convention
Los Angeles, CA
March 14-18, 2000
“Realists do not give due consideration to economics; they downplay the ‘low’ politics of economic affairs while emphasizing the ‘high’ politics of diplomacy and the use of force.” 1 This traditional realist view seems to contradict the current reality in which economic interdependence is heavily influencing international politics. Not only Pat Buchanan, but also the leading mainstream GOP presidential candidate, George W. Bush, announced that “the first question I am going to ask on foreign policy is, is it good for American workers?” 2 Taking as my point of departure, Michael Mastanduno’s 1998 review and analysis of “Economics and Security in Statecraft and Scholarship,” I shall argue, in subsequent sections, the following points:
1. The Traditional Role of Economics
Since time immemorial, economics was relegated to the sphere of low politics, while security was regarded as high politics. For a distinction between the two, I follow J. Matthews’ definitions: economics addresses “trade, monetary policy, investment and other activities that have wealth as their principle goal;” security deals with “military capacity and the ability to wage war and physically defend a state against attackers.” 3 Since security is about survival and economics ‘only’ about wealth, foreign policy, concerned with primary national interests, is first and foremost security-oriented. To the extent that economics and foreign policy were integrated, the former was subordinated to the latter: economic means (foreign aid, economic sanctions, etc.) towards a foreign policy goal.
American post-war foreign policy is no exception. In the early years of the Cold War, utilizing its overwhelming economic dominance, the U.S. initiated the Marshall Plan as part and parcel of the grand strategy to contain the Soviet threat. The Bretton Woods regime was sustained to a large extent by American willingness to allow European and Japanese ‘free riding’ at its expense, in order to hold the Western alliance together. “U.S. officials consciously integrated economic and security concerns in U.S. foreign policy,” 4 by using economics to pay for security. However, this set of priorities did not change as American economic wealth and power relatively decreased. Beginning in the late 1960s, American economy had to compete against its two former beneficiaries, and “the economic and security components of U.S. foreign policy drifted apart. By the end of the 1980s [they] were in open conflict over who should take priority.” 5 Even so, as a rule, security prevailed. 6 Either when integrated, or when separated, economics was secondary. As late as 1994, John Stremlau, Deputy Director of Policy Planning at the State Department, stated that “commercial relations are still regarded in leading U.S. foreign policy circles as either separate from &-; or an instrument of – national security policy.” 9
In the issue at hand, scholarship parallels practice. While calling for an emphasis on the relationship between economics and security, Albert Hirschman devoted the bulk of his 1945 book to “Foreign Trade as an Instrument of National Power.” 8 A generation later, the relationship between the two spheres was still perceived as a “neglected area of study.” 9 Matching the drifting apart of economics and security in the practice of foreign policy during the 1970s and 1980s, “security studies and International Political Economy (IPE) progressed as separate scholarly activities.” 10 In 1985 David Baldwin wrote that “since the fields of economics and security overlap, politics may therefore be an instrument of economics [just as] economics may be an instrument of politics.” 11 There was apparently no elaboration of, or wide response to, this suggestion.
In perhaps the latest article to address the integration of economics and security, Michael Mastanduno wrote: “I emphasize the extent to which economic policies are subordinated to and supportive of security concerns. I place less emphasis on the extent to which security policies have been used to promote economic objectives.” 12 The author offers a theory that explains the variation in the integration of economics and security in American foreign policy. He claims that the two are integrated when the U.S. faces significant security challenges and enjoys economic dominance; i.e. when the integration is both needed and possible. 13 However, he identifies periods of integration (e.g. post-war) when “economic policy [is placed] at the service of national security strategy,” 14 as opposed to two periods (the aforementioned 1970s and 1980s, and the first years of the Clinton administration) when they had drifted apart. Thus, yet again, economics is either divorced from security-oriented foreign policy, or subordinated to it. It is not perceived as being potentially (perhaps conjecturally) superior to politics and served by it; not even as equal to it. However, this scholarly perception seems to be out-of-sync with changing reality.
2. Expanding Economic Interdependence
Two factors combine to enhance the importance of economics in current international relations practice. One is the rapidly changing nature of the global economy. The other factor, from the political side of the equation, is the end of the Cold War and the concomitant easing of international strategic tensions. The intersection between the two factors puts economics at the center stage of international relations.
Economic interdependence is, according to Keohane and Milner, “the exogenous easing of international exchange” of goods, services and capital, influencing policy preferences of all agents involved (individuals; groups, corporations and organizations; governments). 15 As the exchange grows “easier,” economies global-wide grow dependent to various degrees on each other and on the global market as a whole. By the early 1990s, the U.S., Japan and the EC depended about equally (a quarter of their GDP) on international trade. 16 International trade in goods and services has increased by eighty percent in the last decade. 17 Local insolvency in Brazil had ripple effects in European stock exchanges, and mismanagement of Japanese funds indirectly caused layoffs in American industries. Even socialist France is opening up its highly protectionist arms industry to trans-Atlantic cooperation. 18 The world economy is to a large extent becoming one.
Peter Gourevitch maintains that the phenomenon is not new. Citing examples of sixteenth century international trade, he claims that economic interdependence “existed in extremely powerful forms four centuries ago. There is therefore no reason to associate different modes of explanation for differing periods according to the degree of interdependence.” 19 I beg to differ. While every instance of international trade may be construed as an expression of interdependence, the degree of interdependence is the very essence of the term. I leave it to professional economists to define by some kind of criteria when the global economy turned the corner. Perhaps it was in the late 1970s, between the oil crisis that held world economy hostage, and the achievement of Japanese superiority in certain economic spheres. Be that as it may, the degree of present economic interdependence is such, that markets and therefore governments (and other actors) are economically sensitive to any and all international developments. Hence, economics as low politics moves higher.
The second factor enhancing the importance of economics in international relations is the end of the Cold War. As long as the Soviet menace was perceived as a physical or political survival threat, it was the overriding issue in international relations. When this omnipotent factor to a large part disappeared, the security factor receded. I do not claim that the world nowadays is free of security threats; there are, unfortunately, no shortage of examples of ongoing and potential military conflicts. I do however contend that for a large number of states, including all the leading economic and military powers, the threat of war, and therefore the importance of military power, have been greatly diminished. Reduced military budgets are perhaps the most tangible symptom of this state of affairs. “The [end] of the Cold War is steadily reducing the importance of military power in world affairs.” 20 That, however, does not mean that the potential for non-military conflicts is also diminishing. On the contrary, “the disappearance of the common enemy means that conflicting ( inter alia economic) interests that were subordinated to the common need to unite against the Soviet security” may now emerge. 21 Thus, while economics moves higher, security as high politics moves lower. “In the post-Cold War world, low politics is becoming high politics.” 22
The pattern was there to be seen even before the end of the Cold War, as the following four examples show. First, notwithstanding the political issue of German reparations at the end of the World War II, economics was not on the agenda at Yalta and Potsdam. Bretton Woods was constructed without the attendance of the heads of governments. On the other hand, since the 1970s, the G-7 have been meeting regularly as an economic forum. Second, as early as 1971, the arguably arch-realist President Nixon “predicted that the future of world power would be predicated on economic (not political) power...[and that Americans] would have to wage an economic war against the other four great superpowers [including Japan and West Europe].” 23 Perhaps in line with this approach, the United States at that time “linked the reversion of Okinawa to Japan to Japanese agreement to limit its textile exports to the United States.” 24 Third, the oil crisis of 1973 caused West Europe and Japan to move from neutrality vis-à-vis the Arab-Israeli conflict to a pronounced pro-Arab stand. 25 Their economic dependence on Arab oil was so crucial, that in a strategic power contest between the two superpowers on bolstering their local allies in the 1973 War, NATO countries refused use of their airfields to the American airlift to Israel. Fourth and last, in the late 1980s, “[American] economic agencies forced the national security agencies to reopen and revise a security arrangement with Japan (concerning the development of the FSX aircraft), at considerable diplomatic cost, to assure that American national economic interests were more effectively protected.” 26 Mastanduno observed that “it was not a coincidence that the year of the FSX crisis, 1989, marked the beginning of the post-Cold War era.” 27
The only major international military conflict in the 1990s – the Gulf War - was all about economics. Iraq conquered Kuwait mainly in order to control its oil and thus, both seize its proceeds, as well as enhance Iraqi influence in determining international oil prices. The West reacted forcefully only because of the importance of oil; upholding international law and humanitarian norms was at best a supporting factor, as attested to by its irrelevancy in other conflicts around the world. However, the importance of economic interdependence is evident not only in cases of brute force. Predictions were made about the eventual demise of the EC, based on the assumption that its generic raison d’être was economic integration in order to bolster common defense. Not only has it not disintegrated, but most of its members have also decided that further economic integration is worth even the price of partial/symbolic sovereignty and have therefore initiated the EMU. On a more pessimistic note, for the first time in the post-war era, a major rift between the western industrial countries caused a failure to achieve an agreement – the Uruguay Round of 1990. When the round was completed three years later, it left important economic disputes still unresolved (cultural protection, aircraft and agriculture subsidies, regulation of financial services, etc.), due to previously unknown levels of EU and American intransigence. 28
Perhaps nowhere has the shift in priorities between economics and security been more evident than in American foreign policy. Capturing the White House with the slogan “It’s the economy, stupid!”, President Clinton made international trade the centerpiece of his foreign policy, prompting one senior State Department official to approvingly term it “Dollar Diplomacy.” 29 The Clinton administration was responding both to economic indicators and to post-Cold War public opinion. In 1993, “increased trade accounted for sixty percent of the country’s overall economic growth in the previous five years, [and] one in five U.S. jobs was tied directly or indirectly to global trade.” 30 Thus, “expanding U.S. economic engagement would create millions of new and better-paying jobs, spur domestic productivity, restrain inflation and reduce trade and fiscal deficits.” 31 As early as 1990, polls showed that in the public’s eye Japan had replaced the Soviet Union as the major threat to American wellbeing. 32 By 1994, the American public perceived economic interests as more important than military or human rights interests, and demanded that “foreign policy support [the] strengthening of the U.S. economy” (emphasis added). 33 President Clinton was therefore in tune with public opinion when he “delinked” economic relations with China and the renewal of its MFN status from the Chinese human rights’ record, electoral rhetoric notwithstanding. There were also organizational aspects to the growing importance of economics. The Clinton administration established a National Economic Council, parallel to the National Security Council (NSC), and expanded the scope of NSC activities to include integration of the economic aspect into the national security policy. 34 Furthermore, the President added the secretaries of State and Defense to the Trade Promotion Coordinating Committee, chaired by the Commerce Secretary. 35 Diplomats world-wide were put to work in order to advance American commercial interests. 36 “The Primacy of Economics” had been established. 37
It was not to last for long. During the second half of the 1990s, the Clinton administration, coming to terms with the realization that grave security issues still prevail in the post-Cold War era, shifted course. 38 The ongoing conflict in ex-Yugoslavia, the common interest in expanding NATO, the need to contain Iraq, the concern with North Korean intentions, and the ever-present uncertainty about the future course of China; all these are security issues that the U.S. did not face alone. Hence, the administration recognized the need “to remove the economic irritants that dominated” its relationships with Europe, Japan and China. 39 This new course was expressed, inter alia, in the NTA in Europe, in American willingness to constructively discuss China’s entry into the WTO, and in the relaxed atmosphere at the 1996 summit between President Clinton and the Japanese Prime Minister. 40
Mastanduno analyzed this new course as a re-integration of economics and security, by the traditional subordination of the former to the latter. 41 The ‘generous’ American response to the Asian financial crisis of 1997-8 is also perceived by him as motivated by security interests: the fear that economic turmoil would jeopardize both the North Korean nuclear deal, and Japanese and South Korean abilities to sustain bilateral security agreements. 42 Both the contention of subordination and the example are debatable. America’s vigorous response to the crisis could just as well have been motivated by an economic interest: the wish to avoid a more drastic effect on the American economy. And integration of economics and security does not necessarily mean that security always dominates. Real integration means putting the two on equal footing. By that I do not mean to argue that the two interests are always similarly important; I claim that in this day and age they are potentially equal, one or the other dominating according to circumstances. For example, in the case of the Asian crisis it might well be that the security interest was not the dominating one. Mastanduno assumed that Japan and South Korea would have held their security obligations expendable had the crisis worsened. Implied in this assumption is that these two countries do not integrate their economic and security policies; an unproved and unreasonable hypothesis.
Be that as it may, I do agree with Mastanduno that “the primacy of economics” – if it had ever really amounted to primacy – has been curtailed. I do not agree with him on his definition of integration: “placing foreign economic policy at the service of national security strategy.” 43 The implication of diminished ‘traditional’ security threats on the one hand, and enhanced ‘new’ economic threats on the other hand, is that a new definition of national security is needed. Of crucial importance in this matter is the impact of economic (inter)dependence on national security. Ultimately, a state’s security rests on military force, but “[m]ilitary force requires an economic underpinning:” 44 wealth, raw materials, production capacities and technology. For example, “[w]ith its economic heart in seizure, the Soviet Union’s military muscle ultimately mattered little.” 45 As a state grows economically dependent, the underpinning of its military force is increasingly threatened. External factors might arbitrarily deprive it of wealth; external actors might intentionally deprive it of raw materials or of other strategic imports. Nazi dependence on Rumanian and Russian oil is one example; Iranian and Iraqi war debts are another. In sum, economic interdependence is a security issue. (I revisit the issue in a more detailed manner in the fifth section.)
One final striking example to reiterate the point. A Washington Post’s report, on a 1999 visit of American administration officials to Beijing, read as follows: “Kenneth Lieberthal, the National Security Council’s senior director for Asia, has been pushing the U.S. effort for a deal on [China] joining the WTO. His meeting [with the Chinese Premier] focused primarily on economic matters (emphases added).” 46 True, security issues were differed to discussions with the Secretary of State, but the fact still remains that a security official was the one to deal with economic matters. Economics and security must be viewed as two interconnected variables, equal in importance.
Perhaps the most important difference between social science and physical science is the rigidity of the subject matter with which each deals. While physical science deals with fixed or repetitious phenomena, social science addresses ever-changing ones. One of the tasks of the social scientist is therefore to sketch the direction of these changes. When he/she finds his/her analytic tools outmoded he must adjust them, either by way of refinement or through an overhaul. Contra Gourevitch, I believe the impact of economic interdependence on international relations to be one of these changes. I also believe that international relations (IR) scholarship has not fully come to terms with this change. True, there is an ongoing debate between liberals and realists about the influence of economic interdependence on world politics: will it bring about more cooperation and peace or more conflict and war. However, this debate developed as a kind of a ‘side-show’, when liberals brought in the coordinating effects of interdependence as evidence that cooperation is not only possible but also expanding. Realists countered that this was no evidence since interdependence could, and in fact does, lead to conflict. Economics does not appear, either by itself or integrated with security, as a core tenet of IR theory. Examining interdependence as ‘mere’ supporting evidence obscures the possibility that it is actually in the process of becoming a part of the independent variable determining international behavior.
In the next two sections I explain how economics could be fully integrated into IR scholarship. Since it is apparently easier to do so through liberalism, I have chosen the ‘least likely’ approach – realism. In section 4, I discuss the current status of realist engagement with economic interdependence. In section 5, I show that the high degree of compatibility between the two enables a full-fledged engagement.
3. Realism and Economics
Mastanduno identified four current research agendas striving to “reintegrate the study of economics and security issues” in this age of post-Cold War economic interdependence. 47 One agenda examines the impact of security on economics. A second is interested in the use of economic instruments to serve foreign policy objectives. A third revives the study of grand strategy, but focuses mostly either on a historical perspective or on how security needs drive economic policy. The traditional bias against economics as low politics is again evident. Only the fourth research agenda deals with economics as a potential independent variable: the aforementioned debate between liberals and realists about the relationship between trade and peace.
The liberals have highlighted economic interdependence in order to show how prevalent cooperation is, and can be, in international relations. Pursuing the traditional Commercial Liberalism strand, the liberal argument is as follows: “As production becomes more specialized and efficient and trading networks more diverse and complex, political extraction (for example, war and embargoes) become more disruptive.” 48 Furthermore, since states are rational actors seeking to maximize absolute welfare gains, the benefits of expanding trade will foster peace and deter them from war. 49 Realists have countered that increased trade means more friction, dispute and tension, and that expanding interdependence causes growing vulnerability. States are indeed rational actors, but they seek to maximize relative security gains rather than absolute welfare gains. They will therefore be driven “to initiate war now [in order] to escape potential vulnerability later,” 50 or “[in order] to ensure continued access to necessary materials and goods.” 51 Furthermore, economic growth enables states, both to develop stronger military capabilities, and to use economic power in order to threaten other states dependent on them. 52 Hence, economic interdependence means more conflict rather than more cooperation.
As often in the social studies, both contending theories have merit, and it is reasonable to assume that economic interdependence has the potential to cause both cooperation and conflict. However, in order to advance our understanding of the issue, economic interdependence should be analyzed as the study variable, and not merely as ‘supporting evidence’ in the context of the conflict-cooperation debate. Indeed, the fact that realists have engaged in this debate and have staked such pessimistic claims, more than implies recognition by them of economic interdependence as an influential factor in international behavior. This is a departure from their strict focus on pure security as the sole, or at least the prime, ‘mover and shaker’ in international politics. According to their argument, economic reasons may lead to war, either directly for economic gains, or indirectly for security gains. The implication is that economics is no longer low politics.
Realist elevation of the status of economics in international relations is not restricted to this debate. Some realist scholars have studied similar or tangent aspects of the influence of economics on international politics, regarding the former as at least equally integrated with the latter. I now review and analyze some of these studies with three aims in mind. First, to show that realism can and has engaged economics as an independent variable. Second, to learn from the insights these articles have to offer with regard to the subject matter itself. Third and most important, to extract relevant implications towards the total integration of economics into the realist approach.
I. Dale Copeland, “Economic Interdependence and War.” 53
Copeland addresses the debate between realists and liberals on the relationship between economic interdependence and the probability of war. He agrees that both more cooperation and more conflict are possible outcomes of interdependence. Cooperation, according to the liberal view, because as long as there is high potential for profits, “states would rather trade than invade” (p. 5). Conflict, according to the realist view, because “states must be primarily concerned with security and therefore with control over resources and markets” (p. 11). Copeland synthesizes these two seemingly contradictory views by inserting a new variable: trade expectations (p.7).
“Levels of interdependence and expectations of future trade, considered simultaneously, lead to new predictions. Interdependence can foster peace...only when states expect that trade levels will be high into the foreseeable future. If highly interdependent states expect that trade will be severely restricted...the most highly dependent states will be the ones most likely to initiate war, for fear of losing the economic wealth that supports their long-term security.”
The issue here is not the viability of this Trade Expectations Theory. Its relevancy to the integration of economic interdependence into the realist approach lies in Copeland’s flexibility. He, like his realist colleagues in this debate, acknowledges the importance of economic factors. More important, Copeland does so by incorporating economics into the definition of security, the sanctum sanctorum of realism. If foreign-dependent economic wealth is the basis of security, than realism not only can engage with it, it must do so.
II. John Matthews, “Current Gains and Future Outcomes.” 54
The debate on the importance of absolute versus relative gains has to a large extent converged on the more focused question of “under what conditions concern for relative gains will dominate a chance at cooperation and make it more difficult” (p. 112). There are two predominant related arguments:
“First, security affairs are more prone to concerns over relative gains [than economic affairs are]. Second, states’ relative gains concerns will vary with the degree to which another state’s relative gains can be turned into military capabilities...The arguments, then, tend to note the substantial difference between the areas of security and IPE, and to hypothesize that relative gains will be of more importance the more security is affected” (p. 113).
Matthews points out that this hypothesis cannot explain behavior based on relative gains when security is not the issue, or instances of disregard of relative gains when security is the issue. He therefore offers an alternative: a Cumulative Benefits Thesis.
“Relative gains vary in both fields [security and economics] as a consequence of the cumulative benefits that a single-round gain can provide. If ‘winning’ a current round allows a state to be in a better position to win later rounds, relative gains will be quite important. When gains do not cumulate over time, then relative gains will be less critical” (p. 123).
Matthews demonstrates the plausibility of his thesis by applying it to four cases drawn from the two fields (production and export of steel and supercomputers, and conventional and nuclear arms control negotiations). He concludes: “Although the two subfields have often been seen as quite different, cumulation effects can account for relative gains concerns in each” (p. 146). Thus, in what is considered as the most important criterion in realist explanations of international behavior (i.e. relative gains), there is no difference between security and economics.
III. Peter Lieberman, “Trading with the Enemy.” 55
Lieberman’s article addresses the connection between security and economic cooperation by posing the question “when [do] states resist relative economic gain [in order] to protect their security” (p. 148). Lieberman argues that “relative economic gains are unlikely to interfere with cooperation in multipolar international systems” (p. 149). He cites two cases of trade between states within a security-risk environment: British trade with Germany prior to the World War I, and U.S. trade with Japan in the decade leading up to World War II. In both cases:
“Nations refrained from restricting trade with threatening rivals that appeared to be gaining relatively more.....Continued cooperation in both cases suggests that sensitivity to relative gains is generally low under multipolarity, at least when compared to other incentives for trade..... Security concerns failed to obstruct economic cooperation among enemies on the brink of war...” (p. 173; emphasis added).
Lieberman is, as mentioned, concerned with what these cases can teach us about the importance of absolute versus relative gains. The study, however, implies two other points as well. First, economics did not play second chair to politics, and trade was not subordinated to security. Quite to the contrary: trade continued even though the potential enemy states were gaining more. Furthermore, citing studies made by Grieco and Mastanduno, Lieberman states: “their evidence suggests that welfare concerns were at least as important as security concerns” (p. 157; emphasis added). Second, the author, while applying the model of relative gains in an IPE analysis, concludes that “It would be misleading to call the resulting hypotheses ‘neorealist,’.....because neorealist theory is about relative power and the pursuit of security, not about relative economic competitiveness and the pursuit of profit” (p. 175). Notwithstanding the semantic aspect, the implication is that neorealism can integrate IPE explanations.
IV. Samuel Huntington, “Why International Primacy Matters.” 56
Huntington claims in this article that “the maintenance of U.S. primacy matters for the world as well as for the United States” (p.82). His reasons are: the world always needs a hegemon; the U.S. is the only one that can assume this role; and it is also essential for American self-interest. In this context, American economic primacy is crucial, “it is now  being challenged by Japan, and it is likely to be challenged in the future by Europe” (p.71).
“The idea that economics is a non-zero-sum game...has little connection to reality. Academics who uphold this notion are blind to the fact that economic activity is a source of power as well as of well being. It is, indeed, probably the most important source of power, and in a world in which military conflict between major states is unlikely, economic power will be increasingly important in determining the primacy or subordination of states” (p. 72).
Based on this assumption, Huntington proceeds to describe Japan’s economic policy in general, and specifically towards the United States, in the following words:
“Realist theorists have focused overwhelmingly on military power. Japan has accepted all the assumptions of realism but applied them purely in the economic realm. Abjuring military power, it has acted precisely as realist theory would predict in the pursuit of economic power. In the realm of military competition, the instruments of power are missiles, planes, [etc.]. In the realm of economic competition, the instruments of power are productivity, market control, trade surplus, strong currency, foreign exchange reserves, ownership of foreign companies, and technology. These are the objectives that Japan has unremittingly pursued" (p. 73).
Huntington’s recommendation is that America should respond in kind. Relevant to my argument, however, are three other points. First, a realist acknowledgement that “economic activity is probably the most important source of power.” Second, realist theory can be applied to economics. Third, such an application has already been practiced in international behavior.
V. Paul Papayoanou, “Economic Interdependence and the Balance of Power.” 57
Realists have argued that states tend to balance against threatening powers. Yet, there are cases in which balancing does not occur. Papayoanou seeks to explain the variance by positing economic interdependence as the independent variable influencing balancing behavior. His thesis is as follows:
“Firm balancing policies are most likely when there are extensive economic ties among status quo powers and few or no such links between them and perceived threatening [revisionist] powers. These patterns and levels of economic interdependence generate societal-based incentives for state leaders hoping to mobilize economic resources and political support to oppose perceived threats. This [transparent] mobilization process influences strongly the interpretation of signals in balance of power politics, [by deterring the revisionist states]. Opposite patterns and levels of economic interdependence generate constraints on the leaders, resulting in weaker balancing postures and therefore in aggression by revisionist powers” (p.113).
Papayoanou illustrates the application of his thesis in four cases of international relations between major powers during the twentieth century. His conclusion, and the relevant implication for my claim, is that "rather than being simply a matter of low politics, economic relations are an integral part of high politics ” (p. 136; emphasis added).
A summary list of the implications I have drawn from the above realist studies is as follows:
In light of the above survey and analysis, the current state of study of the relationship between economics and security, between economic interdependence and foreign policy, is as follows. Most research agendas study the issue in the traditional manner, regarding economics as subordinate to security. To a large extent the realist paradigm is still focused on security in the traditional sense of the term. An apparently small number of realist scholars, whom I term ‘econo-realists,’ have departed from these two connected traditions by, either explicitly or implicitly, offering three main propositions. First, economic interdependence has upgraded economics to the level of high politics. Second, this upgrading can be conceptualized by a redefinition of ‘security.’ Third, this focus on economic interdependence is compatible with the realist research program. In the previous section I established the first proposition; in the next, I show the second and third propositions to be indeed valid.
Realism is not a monolitic paradigm, but rather a research program combining various strands. While debating many issues at the outer-belt of the research program, the different versions of realism share a common hard-core of assumptions and propositions. And then again, there are disagreements as to which components deserve the title of hard-core assumptions, which are ‘mere’ propositions, and which are relegated to the outer-belt. I do not intend to delve into this debate; “let a hundred flowers blossom.” For the sake of my argument it is not important which precise status each assertion attains. I have, rather arbitrarily, opted for a list of hard-core assertions compiled by Joseph Grieco: 58 (Subsequent parenthesized citations in this section are all from Grieco’s article.)
I shall now elaborate on each of these assertions in order to show the degree to which each is applicable to the integration of economics and politics, on an equal footing, in the realist research program.
I. The International System is One of Anarchy
“States coexist in a context of international anarchy, that is, the absence of a reliable central authority to which they can appeal for protection or the redress of grievances.” There is therefore an ever-present threat of war in the international arena. The implication for states is that they are “by definition self-help agents,” always aware that at the end of the day they can and must rely only on themselves. This awareness “profoundly constrains and shapes both the goals states choose to pursue (their substantive rationality) and the means they elect to pursue in order to achieve those goals (their instrumental rationality)” (p. 164).
This basic feature of international behavior applies to all spheres of activity, including economics. No economic “central authority” exists. That is why, for example, a moratorium on debt repayment by poor developing countries is a viable possibility; no international body can actually enforce the repayment of loans. There is therefore an ever-present threat of economic pressure and coercion, be it in the form of sanctions, embargoes, unilateral tariff barriers, or abuse of international codes. 59 As a result, states are keenly aware that at the end of the day they can and must rely only on themselves to look after their economic welfare. For example, during the ‘Bananas Squabble,’ the American Trade Representative said that American sanctions were imposed “because the U.S. saw no other way to get the EU to comply with multiple WTO findings that its banana import regime is protectionist.” 60
True, neoliberal institutionalists claim that international regimes and international law mitigate the problem. Realists, however, maintain that: regimes’ influence is restricted; they do not constitute an independent source of power but merely reflect the existing distribution of power; and in any case, states conform to their influence only when it suits their interests. Anarchy, the ever-present threat of unilateral action or coercion, and self-help; all are therefore the determining features of international behavior, political as well as economic. Furthermore, in at least one sense, the economic international sphere is even more anarchical than the political one. In the political realm, all the actors have ‘addresses’ and they can therefore be engaged, reasoned with, and held accountable for their actions. In the economic realm, at least one powerful actor is anonymous: the market. While, as mentioned below, states can and do influence the market, it is also highly manipulated by a multitude of other actors, motivated by rational calculations or by psychological impulses. Anarchy might therefore be more influential in economics than in politics.
II. States Are the Primary Actors in the International System
“States are the basic actors in the international system.” True, there are other actors as well, such as international institutions, multinational enterprises and transnational bodies. However, “the state is the principle actor in that the nature of the state and the pattern of relations among states are the most important determinants of the character of international relations at any given moment.” “The behavior of other actors...is conditioned and delimited by state decision and state power” (p. 164).
Despite expanding economic interdependence, and the concomitant increase both in the influence of international economic organizations and in the number of multinational corporations (MNC), states are still the primary actors in the international economy. States delimit the behavior of international organizations, such as the IMF, by virtue of being in fact their ‘board of directors.’ States condition the activities of MNCs through their macroeconomic policies: exchange rates, interest rates, deficits, and the like. MNCs cannot be perceived as totally independent even though they are multinational, because they depend upon states’ physical and regulatory infrastructure. Furthermore, “while privatization reduces the fracture of economic space that states occupy, the role of the states is increasing precisely in the economic sectors whose importance is itself increasing, sectors defined by the commercial application of the most advanced technologies.” 61
My contention, that states are the primary actors in the international economic system, is a matter of intense dispute. Those who oppose this view claim that while states set the context of behavior, individual firms are the prime actors, and that states’ powers are being eroded both from within and from without. I deal with this claim also in sub-section IV below. However, one should pay attention to what the opposing view concedes. States are the primary actors precisely because they set the context. They are a crucial component of the “invisible hand,” which, as has been remarked, while “invisible” is still a “hand.” The most important economic forum is the G7, and not a forum of MNC directors. Time Magazine anointed as “the committee to save the world” three American administrators and not three international organization officials. Individual firms are, of course, more numerous than states, arguably more visible in the market, and the global private sector today is perhaps in direct control of more assets than the public sector. Nevertheless, states are the prime actors because their powers to set ‘the rules of the game’ are stronger than powers of individual firms. These powers, for example, may be either beneficial or detrimental in respect to globalization. “How adaptation [to internationalization] occurs is fundamentally conditioned by political institutions, as well as by the character of national leadership at critical moments of transitions.” 62
III. States Are Rational Actors
States’ rationality has three main aspects. First, states are goal-oriented. Second, these goals are consistent, i.e. “state preferences are ordered and transitive,” and thus also “sensitive to costs” (p. 165). Third, states devise strategies aimed at the achievement of their goals according to the order of preferences, which is changeable in the face of shifting opportunities and constraints.
This assertion too holds for economics. Indeed, the assumption of rationality in IR scholarship was to a large extent imported from the field of economics. Furthermore, the application of these rational components is more evident in economic policy than in foreign policy. It is taken for granted that economic welfare is the primary role of the state when it is not at war. (Even in cases of authoritarian regimes, when this assertion is not valid, the government proclaims it to be so.) The goal and the strategy are yearly articulated in the state’s budget, both in great detail. The budget, comprising monetary, fiscal and supplementary components, addresses domestic and foreign economic policy. States’ economic preferences, unlike many instances of foreign policy, are almost always open to public debate, and the public usually demands a rational strategy that will enhance its welfare. Furthermore, this is also usually the case even when economics intersect foreign policy, again because economics by its very nature is transparent. A relevant example is the public debate and pressure concerning the American grain embargo on the Soviet Union in 1979-1981.
IV. States Are Autonomous and Unitary Actors
“States have sufficient autonomy from their national societies to recognize and pursue the interests of the nation as a whole, and not just those of particular powerful groups within the community......States [also] possess the capacity for unity of action, [i.e.] in a coherent manner with regard to other countries” (p.166). These two features in tandem enable states to perceive international opportunities and dangers and to respond accordingly.
Claims have been made that expanding economic interdependence is undermining, both the autonomy of the state through the forces of global markets, as well as its capacity for unitary action through the activities of non-governmental organizations (NGOs). This is obviously so; by definition interdependence makes the state less independent. However, autonomy and capacity for unitary action are not dichotomously measured. While the state has shifted on these two scales, it has still retained both features. The state’s influence versus NGOs/MNCs’ influence has been addressed above in the second sub-section. State autonomy versus the power of global market is, however, a more complicated matter.
The claim ‘against’ the autonomy of the state is, that if the state wishes to maximize its economic welfare it must conform to market rules and powers. Failure to do so will shift market flows to other states. (This notion, by the way, highlights yet again the applicability of realism to international economics, because it parallels Waltz’ dictum that states which do not behave according to systemic constraints “are left on the wayside.”) The point, however, is the state’s preference. “If the state wishes to maximize its economic welfare...” – that is a very big “if.” According to the rationality assumption, the state may prioritize goals other than maximum economic welfare. Thus, Geoffrey Garrett and others have shown that the influence of economic interdependence on states’ autonomy, varies according to domestic politics. 63 Britain has decided that its perceived sovereignty is more important than the rewards of further monetary integration within Europe. Russia has decided that short-term socio-political stability is more important than potential long-term economic gains stemming from further market integration. Malaysia has decided, in the aftermath of the Asian crisis, on a relative retreat from global markets in order to limit its future vulnerability. All three examples can be understood in realist terms because they are sovereignty/political-oriented. The bottom line is that states retain the autonomy to decide on the ‘if’ and ‘how’ of market integration. Pursuant to this decision, but only pursuant, market forces will determine to what degree the state will be able to maximize its economic welfare.
V. States’ Principal Interest is Their Security
“In anarchy, security is the highest end. Only if survival is assured can states safely seek such other goals as tranquility, profit and power” (p. 166). This assertion is of course in line with the others. Since anarchy means the ever-present threat of war and coercion, states rationally regard their survival as the first and foremost goal, naturally relegating all others to secondary status.
It is this assertion that subordinates “low” economic interests to “high” security ones. In the ‘worst case,’ economics is concerned with welfare, which means that it is totally separated from security. In the ‘best case,’ economics is part of the basis for security, which means that it is subordinated to it. However, as I have argued in the second section, this traditional view is being rendered outmoded by expanding economic interdependence. When states were economically relatively independent, Britain could face Napoleon alone. A hundred and forty years later, the Battle of the Atlantic (i.e. securing American supplies) was as least as crucial as the Battle of Britain itself. As long as economic resources for military power were a matter of domestic extraction, “low” economics did not have to intrude upon the “high” interests of foreign policy. However, since economic interdependence is transforming the economic basis for military power from a domestic issue to a foreign one, economics do and should intrude upon foreign policy. This is not a heretic departure from the realist assumption of the primacy of security; it is a necessary redefinition of security to include its more foreign-dependent economic base.
The traditional definition of security is somewhat along the following: the absence of potential threats to acquired values, the capacity to deter actual threats, and the ability to maintain these values by victory (when deterrence fails). 64 This definition focused on the control and use of military force in order to ensure state survival. 65 The “high” politics of foreign policy were oriented accordingly. However, resources necessary to military strength increasingly shift from the state’s command to the market’s control. This shift heightens the state’s vulnerabilities both directly, by its growing dependence on import of raw materials (e.g. Japan) and dual-use technology (e.g. China), and indirectly by the growing dependence of its production base on general international trade in goods, finance and services. 66 This shift must therefore be accompanied by a shift in the traditional definition of security, in order to include control of economic resources. Matthews’ definition of economics, mentioned in the first section, as addressing “...activities that have wealth as their principle goal,” is no longer valid, since these activities nowadays also have “military capacity and the ability to wage war” (his definition of security) as their principal role. Realism, as Copeland and Huntington have shown, should respond to expanding economic interdependence by refining its definition of security.
Barry Buzan has advanced a holistic definition, linking together five dimensions of security: military, political, economic, societal and ecological. 67 Following in his footsteps, I would define security as the defense of the state’s citizens, territory, political sovereignty and access to economic resources. In this interdependent age, the first three are contingent on the fourth, and therefore “high” foreign policy should address all components equally. It must be noted that this definition is not a ‘throwback’ to the Age of Imperialism, justifying military expansion. “Access to economic resources” means unfettered access to world trade in all its facets. This definition captures the nature of the interdependent age, and is compatible with the realist assertion about the primacy of security, because nowadays military capabilities cannot be separated from external economic resources.
In sum, the elevation of economics as an equal component to the status of high politics is compatible with all five basic tenets of realism. The international economy is highly influenced by the anarchical nature of international relations. States are the primary actors in this realm. They are rational actors; autonomous and unitary to a varying degree. Above all, states’ principle interest is their security, broadly defined to include the economic foreign basis for their military capabilities and political power.
I have reviewed in this paper both the traditional ‘low’ politics status of economics in the practice of international relations and in academia, as well as its elevation in practice to the status of ‘high’ politics. This elevation is due to the crucial impact of economic interdependence on the way states redefine their interests and their security. Conceptualizing this redefinition, and relying on several realist studies, I have shown that the importance of economic interdependence, long largely shunned by realists, is compatible with the hard-core of the realist research program.
This compatibility is also in line with Lakatosian criteria. Jeffrey Legro and Andrew Moravcsik have recently called attention to what they (justifiably, I believe) perceive as the degeneration of the realist research program. This degeneration is taking place though the accumulation of ad hoc propositions; propositions that erode realism by adding various exogenous factors which contradict its hard-core. Legro and Moravcsik suggest, inter alia, a reformulation of realism’s hard-core, emphasizing the centrality to realism of material powers and of the conflictual nature of international relations. 68 The proposition I have offered withstands this criticism. It is not merely an ad hoc addition to the hard-core, claiming that economics is also a factor in international relations. Rather, it is a progressive redefinition of one of realism’s basic tenets (i.e. security); a redefinition that allows realism to produce predictions of novel facts by acknowledging the increasing importance of economic interdependence. This redefinition is also in line with the two emphases offered by Legro and Moravcsik. Economic power is certainly a material one, increasingly important in the post-Cold War era. It is also part and parcel of the conflictual nature of international politics, as shown by the realists themselves in the debate over the affects of economic interdependence (section 4, above). Thus, my proposition is progressive because, in Legro’s and Moravcsik’s words, it “extends realism to new aspects of world politics...through the further elaboration of an unchanging set of core realist premises (emphasis added).” 69
Economic interdependence ‘needs’ realism and vice versa. Realism is the dominant IR paradigm, and most IR theories are developed in reference to it. As long as economics is ‘kept in its low place’ by realism, it will not be able to evolve far beyond its current role today, that of supporting evidence in the debate over the prevalence of cooperation or conflict. Furthermore, the conflictual aspect of economic interdependence will be relatively understudied if interdependence continues to be researched primarily by liberals.
Realism ‘needs’ economic interdependence because by continuing to downgrade its importance, realism risks ignoring reality. Paying a political price by antagonizing Russia for the economic goal of influence over Caspian oil is only one contemporary example of economics subordinating politics. More broadly, no less a primary actor in international politics than the President of the U.S. is challenging the realist traditional view. In a February 1999 speech defining the aims of American foreign policy, two of five goals were economic in nature. President Clinton explained that “the nation’s fate and the welfare of each citizen are affected by.....the world drawing closer together through technological advances and globalization of the economy.” 70 Realists could argue that this is only an example of rhetoric masking traditional strategic interests. This kind of argument would however only transform realism into an unfalsifiable ‘conspiratorial’ theory. Realists could also claim that if indeed these are American goals, they do not reflect the real interests of the U.S., as future international developments will prove. This claim however would imply that realism explains only how world politics should be conducted and not how it actually is conducted.
On the other hand, realism can, without reneging on its hard-core assertions, redefine security to include the foreign economic sources needed for military power. A full-fledged endorsement by realism of economic interdependence as part of the independent variable explaining international behavior, would thus put economic interdependence at center stage. (I emphasize the independent variable because economic interdependence is not ‘merely’ important, but is part and parcel of security, which is the determining factor of international behavior according to realism.) Its importance is three-fold. First, it generates economic welfare in the traditional sense. Second, it is an integral part of the basis for military capabilities. Third, a state’s place in the interdependence network is its source of power/weakness; asymmetrical interdependence opens the door to possible coercion. 71 For example, it may be safely assumed that Latin American efforts, whether token or partial, to cooperate with the U.S. in the war against drugs are influenced by American economic power. Likewise, German financial clout was instrumental in achieving Soviet acquiescence in the reunification of Germany. Thus, economic power enables a state to influence its environment.
Realist endorsement of economic interdependence has major theoretical implications. Outer-belt realist theories could be applied to explain various facets of the influence of economic interdependence on world politics. I present below only a few examples.
Brook’s “Dueling Realisms” could apply to economics. 72 Classical realism views states as short-term offense-oriented, regarding other states according to their capabilities and to how they could possibly act. Post-classical realism views states as long-term defense-oriented, regarding other states according to their intentions and to how they would probably act. These models can be applied to economic behavior, e.g. how are the U.S., the EC and Japan perceived by others and how do these perceptions influence policy. Furthermore, the models can be applied to relationships integrating economic, political and security components, for example the intersecting short and long term American and Chinese interests vis-à-vis one another. Is China paying a political price in North Korea in order to gain American economic collusion? Is the U.S. using economic policy to induce international responsibility on China’s part, or is it merely trying to gradually maximize its trade?
An ‘economic dilemma’ model, parallel to the “security dilemma” original, could be applied to explain whether states perceive legitimate defensive measures (e.g. R&D investment in targeted industries) as offensive ones, thus leading to trade wars. Growing economic vulnerability could be analyzed as actually being constructive, much as MAD was, and thus pointing to the dangers of retaliatory trade policies (as the liberals claim). Matthews’ theory of cumulative relative gains could be utilized to explain not only subsequent unidimensional rounds and gains (economic or political), but also multidimensional (alternating rounds of politics and economics or integrating both in each round of interaction and gains). American-Russian negotiations on nuclear disarmament and economic aid could also fit this mold. The debate on which kind of political-military polarity promotes stability might shed light on the influence of different kinds of economic polarities on economic stability/growth. The theory of balance-of-power within these structures of polarities can explain Japan and Malaysia balancing against the U.S. in the EAEC pre-Asian-crisis experiment, and Mexico (and Argentina?) bandwagoning with the U.S.
In sum, a realist endorsement of economic interdependence as a major factor in the independent variable explaining international behavior would enable a wide application of realist theories and thus greatly advance our understanding of current and future world politics. Realism must give economic interdependence its due and place it at the center of its hard-core. To re-quote Papayoanou, “economic relations are an integral part of high politics.”
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1. The Traditional Role of Economics:
2. Expanding Economic Interdependence:
3. Realism and Economics:
Note 57: P. Papayoanou, “Economic Interdependence and the Balance of Power,” International Studies Quarterly 41, 1997, pp. 113-136. Subsequent cites to this article, in this section, are in parentheses in the text. Back.
Note 57: J. Grieco, “Realist International Theory and the Study of World Politics,” in New Thinking in International Relations Theory, Westview Press, 1997, pp. 164-166. Subsequent cites to this article, in this chapter, are in parentheses in the text. Back.