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Growth, Trade, & Systemic Leadership

UNIVERSITY OF MICHIGAN PRESS

Chapter One

As we enter the twenty-first century, international political economy (IPE) concerns encompass a wide range of topics. New technology promises to make obsolete many of the conventional ways of making and doing things. If the nature of economic activity changes radically, so, too, will the nature of political economy-both domestically and internationally. Not coincidentally, signs of globalization seem literally everywhere, just as resistance to increasing economic interdependence is equally widespread. Global inequalities appear to be increasing and accelerated by the latest round of technological innovation, as embodied by the ongoing revolution in information technology. Some parts of the world are becoming increasingly wealthy and wired. Other parts of the world may be destined to being left further behind than they were earlier. Global institutions are evident but are clearly struggling to carry out their missions. Peacekeeping in Africa appears especially problematic, especially given the twin reluctance of local actors to cooperate and the most powerful states to become involved. Financial institutions such asthe World Bank and trade institutions such as the World Trade Organization (WTO) are confronted with riots outside their meetings and limited agreement on what to do within their meetings. Doubts are raised about whether the World Bank and International Monetary Fund (IMF) facilitate or hinder economic growth in the Southern Hemisphere. While considerable success has been realized in reducing tariffs and expanding trade, other types of barriers to trade have been expanded. Regional trading arrangements are proliferating, presumably to reduce further local barriers to trade but always retaining some potential for reverting to older-fashioned regional trading blocs.

In short, the problems of international political economy may seem novel, but it is doubtful that they really are. They can be reduced to the customary by-products and stresses associated with long-term economic growth and change. The degree of interdependence may be increasing quickly but the types of problems being experienced are not completely new. These changes occur within a global political economy in which there are winners and losers as a consequence of growth and change. The winners do not necessarily rule the world economy, but they do get more than their proportional share (from a population perspective) of the benefits. They also get to devise the world economy's governance rules. Yet governance at the level of the world economy and global political economy is an awkward concept. We are socialized by international relations theory to think of international politics and political economy as anarchic. That does not quite mean that international relations is a ruleless, junglelike, survival of the fittest. But it does highlight the absence of a central authority that we usually assume to be necessary to some semblance of government and governance.

In this respect, we suggest that the conventional emphasis on anarchy is at best misleading. Governance, for better or worse, does take place in the world economy and global political economy. It operates, and has operated for several centuries, without much in the way of the formal institutions of a central government. It is (and has been) supplied primarily by the system's preeminent winner in the ongoing contest over capturing the benefits of long-term economic growth. Not surprisingly, the level and type of governance supplied depends on who is preeminent and whether anyone is preeminent at any given time.

Winners bias the rules in their own favor. The United Nations, World Bank, IMF, and WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), were all created by the U.S.-led coalition that won World War II. Global combat is certainly a primitive way of determining who wins, but, so far, it has emerged as a trial-by-fire exercise for determining who governs in the global political economy-imagine what sort of institutions for governing international political economy transactions would have emerged if the opposing coalition (Germany, Italy, and Japan) had won World War II. Still, while we are aware that various battles could have turned out differently, the winning side prevailed thanks to superior resources and technology and a superior strategy for coalition building (including enlisting the Soviet Union and its important contribution to the war effort) and war making. That is what the global combat was about: not simply winning battles on land and at sea, but demonstrating superior resources, technology, and strategy or, in other words, fitness for leadership. The side that demonstrates superiority then gets to devise the rules governing growth, trade, and finance on an increasingly worldwide scale.

There are some obvious problems with this type of approach to governance. The intermittent, trial-by-fire combat is an archaic and inefficient way to "elect" new leadership. The best chances for rule and institution making follow shortly after the end of the global war when one state is relatively all-powerful and the rest of the world is exhausted. As other states begin to catch up with the system leader, the likelihood of resistance to system leadership governance increases. To some extent, then, the likelihood of successful governance depends on whether the system leader can maintain or renew the preeminence enjoyed immediately after the last global war. If its capability lead erodes, so, too, will global governance. That is one quick way of explaining many of the IPE problems being encountered at the beginning of the twenty-first century.

Nevertheless, this book is not about explaining or even addressing all of the current IPE problems that we are experiencing. We wish to focus more on some of the implications of the centrality of systemic leadership to IPE governance. Our view on the salience of systemic leadership is not without its controversies. These controversies persist in part because it has not yet been demonstrated conclusively enough that the asserted salience is indisputable. 1 The primary mission of this study is to contribute to the demonstration that systemic leadership matters and that it matters quite significantly in IPE processes. Since we cannot take on all IPE processes at one time, some selectivity is in order. We have chosen to focus on economic growth, protectionism, and trade this time around. Subsequent studies will take on a host of other topics including North-South conflict, Southern debt problems, global inequality, and the prospects for economic convergence on a worldwide scale.

The Growth-Trade-Leadership Nexus

The title of the present study, Growth, Trade, and Systemic Leadership, implies that we think these three topics are related in some way. We most certainly do think they are not only related but also highly interdependent. It is of course common to link economic growth and trade. As economies grow and become more complex and affluent, trade is likely to expand. Conversely, trade is thought to promote economic growth. New tastes are acquired, which can lead to increased demand. New demands from abroad can expand domestic efforts to supply those demands. This reciprocal relationship is therefore not particularly controversial. More controversial, however, is the third component of our featured trio. We argue that economic growth and trade fluctuations take place within a politicoeconomic context constructed by systemic leadership. Unless we appreciate the nature of the context, we are unlikely to develop accurate growth and trade interpretations. Hence, an appreciation for systemic leadership is absolutely necessary for an understanding of growth and trade.

Our argument is doubly controversial because we do not simply assert that growth and trade processes work differently in the presence or absence of systemic leadership. That is only part of the argument. Rather, we think that systemic leadership processes actually generate the long-term sources of economic growth and trade. Politicoeconomic leadership at the systemic level is predicated on radical technological innovation, which brings about long-term economic growth, influences the incentives for trade (and barriers to trade), and also pays for the politicomilitary expenses associated with systemic preeminence. These processes are hardly constant. Systemic leadership is not forever. Economic growth is not continuous. Trade is also capable of contraction. The awkward and destabilizing transitions from one cluster of technological innovation to the next depress economic growth. They encourage national political intervention into the international exchange of goods and services. These same transitions also represent opportunities for new system leaders to emerge and old system leaders to be supplanted. Thus, as systemic leadership waxes and wanes, so do the prospects for economic growth and trade. This bring us to the main or meta-proposition of this examination.

H1: World economic growth, trade, and systemic leadership covary causally and significantly.

Supportive evidence for this assertion is suggested by the data arrayed in table 1.1. Figure 1.1 summarizes the nearly three hundred years worth of trade and industrial growth data listed in the table. The table's observations are not evenly dispersed, which renders the figure a bit more subjective than might otherwise be the case. To aid in the visualization, we filled in missing data between any two given points using linear interpolation. But the observations, for the most part, are for the same time-intervals, which aids comparison immensely. The two series clearly appear to be related. Industrial production began to accelerate in the second half of the eighteenth century until it peaked toward the middle of the next century. A brief interruption in industrial expansion is noted around the 1870s, with a second peak taking place just before World War I. Slow industrial growth characterized the interwar years, with a very strong surge following World War II. That surge had peaked by the early 1970s. A period of slow growth marked the 1970s and 1980s until the most recent upturn of the 1990s.

The first trade expansion peak occurred only after the mid-nineteenth century. It also is followed by a second pre-World War I peak, although in the case of trade the average rate of expansion was much less impressive than the rates attained in the first peak. Little expansion of trade occurred until after World War II. The next expansionary peak parallels the industrial expansion profile, although the heights attained are something less than double those reached in the mid-nineteenth century. After the early 1970s, the rate of expansion slowed, much as in the case of industrial production, before also returning to an upward trajectory.

Two points need to be made about the past three hundred years of industrial and trade growth. First, as already noted, the two different processes have expanded at roughly similar rates, suggesting that they are closely related. A second point that is rather easily discernible is that neither process expanded at a constant rate. Both processes experienced intervals of acceleration and slowing down. Both also had similar periodicities, with peaks in the mid-nineteenth and twentieth centuries and immediately prior to World War I. Both experienced a major depression in the interwar years of the twentieth century and minor depressions in the mid-to late nineteenth and late twentieth centuries.

How are we to explain the timing of these phenomena? A thorough if conventional answer, labeled the "determinants of international trade," is offered by the economic historian Carl-Ludwig Holtfrerich (1989: 10-23). Holtfrerich advances five causal factors: (1) technological and organizational progress in primary production, industry, and trade; (2) fiscal innovations and the lowering of trade barriers; (3) technological and economic revolutions in transportation and communication; (4) innovations in international financial and monetary relations; and (5) innovations in international law. Of the five, the prime mover since the eighteenth century is pinpointed as the "continuously innovative process of industrialization and modern economic growth" that led to breakthroughs in increasingly capital-intensive agriculture and industry (10-11). The increases in productivity expanded the supply of commodities for exchange. To fuel their production, the new commodities also required new supplies of energy that had to be transported from their source origins.

High tariff rates in the nineteenth century were a legacy of older ideas about the desirability of mercantilistic strategies to reduce international dependence. They also were a convenient way to pay for war debt servicing. As the world economy moved into the mid-nineteenth century, these older motivations faded in significance. Tariff rates slowly declined, albeit with occasional relapses into protectionist frenzies, but still gradually reducing some of the barriers to trade expansion. Britain had led the tariff reduction process in the nineteenth century while the United States assumed the leadership of this process in the mid- to late-twentieth-century GATT negotiations.

The movement of commodities, people, and information, plus their transaction costs, were affected greatly by a series of innovations in transportation and communication mechanisms. Canals, railroads, steamships, automobiles, trucks, and airplanes reduced the time it took to move goods from one place to another. Costs declined after these innovations became increasingly routine. Telegraphs, telephones, radios, satellites, and most recently, the internet greatly facilitated the exchange of information.

Monetary interactions were made more convenient by the gradual movement toward the late-nineteenth-century gold standard that created a system in which "participating countries were de facto linked by a common currency, managed by the Bank of England as the international lender of last resort at the centre of international trade and finance in London" (Holtfrerich 1989: 18). This system broke down after World War I and was only slowly replaced by a Bretton Woods U.S. dollar-based system after World War II that functioned formally through 1971 and less formally thereafter. Similar gains came from reducing some of the uncertainties in international exchange as European commercial law diffused throughout the world (Holtfrerich's fifth causal factor).

We have no great quarrel with standard economic history's outline of nineteenth- and twentieth-century industrial and trade expansion. All of these factors, undoubtedly, were important and, for that matter, continue to be important. But one factor is definitely underplayed. It is most explicit in the treatment of tariff reductions and monetary exchange. It needs to be more explicit in the accounts of innovations in industry, transportation, and communications. It easily deserves to be a sixth general factor underlying the modern expansion of industry and trade. That factor is systemic leadership.

Industrial innovation was not widely dispersed throughout the nineteenth and twentieth centuries. At first, such innovations were highly concentrated in Britain in the late eighteenth and the first half of the nineteenth centuries. Germany and the United States competed to supplant Britain as industrial leader in the second half of the nineteenth and first half of the twentieth centuries. Transportation and communication innovations were no less concentrated in conception. Railroads, automobiles, and jet engines were developed most successfully by British and U.S. firms. Telegraphs, telephones, radios, satellites, and the internet were all British and U.S.-led innovations. As already noted, Britain led the nineteenth-century effort to lower barriers to trade, not only in terms of tariffs, but also in opening up Spain's Latin American colonies in the early part of the century. The United States championed free trade after the 1930s and pressed for European decolonization after World War II. The world economy's monetary relations increasingly revolved around the British pound as the system's central currency in the nineteenth century until it was supplanted by the U.S. dollar after World War II.

(Continues...)

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Excerpted from Growth, Trade, & Systemic Leadership by Rafael Reuveny William R. Thompson Copyright © 2004 by University of Michigan . Excerpted by permission.
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