2022 Vítor Bento Strategic Autonomy & Economic Power Routledge
2022 Vítor Bento Strategic Autonomy & Economic Power Routledge
2022 Vítor Bento Strategic Autonomy & Economic Power Routledge
This book examines the effect of economic power on a state’s strategic autonomy.
Strategic autonomy is a fundamental condition for the availability of strategic
options in the interaction of states. This book provides the first clear operational
definition of the concept and offers an analysis of the relevance of the national
economy to strategic autonomy. The main sources of economic power – size of
the economy, position in trade and technological networks, savings, wealth, and
finance – and their impact on strategic autonomy are analyzed in depth. The
strategic governance of the national economy is also addressed as a way of
ensuring that national economic power can work as strategic power for a coun-
try, providing it with strategic autonomy. The strategies pursued by China –
which in under four decades has gone from an underdeveloped state to the main
challenger of the dominant world power – and Germany – which, despite being
defeated in World War II, having no nuclear weapons and having chosen to be a
“civilian power”, became the dominant power in Europe – are analyzed in
depth, as two paradigmatic examples of the theory developed by the book.
This book will be of much interest to students of strategic studies, economics,
foreign policy and International Relations.
Vítor Bento has a PhD in Strategic Studies (2020) from the University of
Lisbon.
Routledge Advances in Defence Studies
Series editors: Timothy Clack, University of Oxford, UK, and Oliver Lewis
Rebellion Defence and University of Southern California, USA
Vítor Bento
First published 2022
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List of figures ix
List of tables x
List of abbreviations, acronyms and symbols xii
Introduction 1
PART I
On strategy 13
1 The historical evolution of the thought on strategy 15
2 A modern perspective 31
3 The economy as a strategic theater 43
PART II
On strategic autonomy 57
4 Strategic autonomy: A Proposed Framework 59
PART III
Economic power and strategic autonomy 77
5 On economic power: Overview 79
6 Size matters 83
7 Worldwide webs: Trade and technology 100
8 Saving, wealth and finance 127
viii Contents
PART IV
On strategic governance 149
9 National strategy and its governance 151
10 The challenges of strategic economic governance 160
PART V
Two paradigmatic cases: China and Germany 171
11 Why these cases 173
12 The case of China 178
13 The case of Germany 195
Conclusions 209
The main objective of this book is to analyze the relevance of its national
economy for the strategic autonomy of a state. And, complementarily, to dis-
cuss the importance that, in the prevailing world conditions, the economy
assumes as a strategic theater with deep implications for the changes of relative
power between countries and, consequently, in their ability to influence world
affairs and world balances.
It is true that the strategic relevance of a country’s economy has already
been recognized in strategic studies, albeit in a scarce way. But such
acknowledgment has been mainly as an instrument for leveraging other forms
of hard power, especially of a warlike nature, and sometimes even as a direct
instrument of hard power in interstate tougher or smoother confrontations.
Geoeconomics and “economic statecraft” have been examples of such
acknowledgment of the role that the economy may assume within the context
of a country’s strategic action or reflections.
All these approaches, however, tend to work under the underlying view of the
economic apparatus as an intentional direct or indirect instrument of con-
frontation – or, to use a sports metaphor, of frontal matches (like football) –
between states. Baldwin (2020), for example, refers that “the focus of Economic
Statecraft is on how to think about economic tools of foreign policy” (loc. 202,
Preface) and that “it must be if it is to subsume all of the economic means by
which foreign policy makers try to influence other international actors” (loc.
1377, Chapter 3). And, with regard to geoeconomics, Luttwak, recognized as
the creator of the term, with a seminal work on the subject (Luttwak,1990),
came to define it as a “new version of the ancient rivalry of the states,” now
expressed “chiefly by economic means” (Luttwak, 2000, p. 128). The definition
was further refined by Blackwill and Harris (2016) – whose title, War by Other
Means, is in itself rather suggestive of a confrontational assumption – as the
“use of economic instruments to promote and defend national interests, and to
produce beneficial geopolitical results” (p. 1). And Baracuhy (2018), in an
insightful review of the evolution of the concept over time, also makes clear
that geoeconomics, like geopolitics (which he considers to be two sides of the
same coin), is an expression “of the geostrategic competition among great
powers, acquiring relevance and meaning in foreign policy” (p. 14).
DOI: 10.4324/9781003248392-1
2 Introduction
The point that I am trying to make is that the role of the economy as a
relevant strategic theater to the states has not been sufficiently recognized in
Strategic Studies. This much is even acknowledged in some of the works
mentioned above, like Baldwin (2020), who refers that one of the “most sali-
ent characteristics of the literature on economic statecraft are scarcity” (loc.
1781, Chapter 4), or Scholvin & Wigell (2018), concurring that “the way
states use economic power to pursue geostrategic aims remain an under-
studied aspect of contemporary international relations” (p. 1). Moreover, and
even more important, the admittedly scarce approaches to the subject tend to
be developed under a largely confrontational perspective (the frontal matches
to which I alluded above), when most of the countries’ economic activity, and
their economic interactions, are developed in a predominantly competitive
context, that is – returning to sports allegories – as races where competitors
run on parallel tracks instead of facing each other from opposite sides (like a
marathon or a speed race).
Putting it in a different way: in Strategic Studies, Strategy is approached
mainly from a confrontational perspective (frontal matches) and concerned with
security issues, while in Economics, Strategy is studied mostly from a competi-
tive point of view (racing) and aiming at prosperity. But this competition, none-
theless, is also adversarial, as players dispute resources and markets, which are
scarce by nature. The main difference between the two kinds of games – con-
frontational and competitive – is that the former tends to be zero-sum, while the
latter tend to be positive-sum games, as competition generates growth and
thereby expands the ground of the dispute, with improvements available to all.
Another important difference is that the “conventional” approach tends to focus
on state actors that pursue state interests, while the economics approach involves
also a multiplicity of actors, mostly private agents in the pursuit of their own
private interests, but whose actions very much interfere, sometimes in a very
powerful way, with the ambitions and strategies pursued or envisaged by the
states. And this multiplicity of private players – e.g., consumers, business inves-
tors, fund managers, financial investors, analysts, rating agencies – sometimes
simply dubbed “market players” or “market forces”, are crucial actors, to be
reckon with, in the strategic theater of the economy where states act.
The evolution of the strategic role played by the economy in interstate
disputes can be seen by the way it intervened in the outcome of the two hot
World Wars and of the so-called Cold War. In the two hot wars, the economy
played an accessory, albeit essential, role in enabling the military victory, but the
final outcome of the wars was decided in the military theater, that is, in the
“conventional” strategic theater of war. Hett (2018), for instance, credits the
Germany’s defeat in WWI to “the overwhelming economic power of Great
Britain, the United States, and France” (p. 232), and Broadberry & Harrison
(2018) also associates the allied victory in World War II (WWII) with the eco-
nomic superiority of the Allies (p. 14667). But, as it is undisputable, the wars
were won in the military theater. The Cold War, however, was different as its
outcome was decided, not in the military theater – where the two sides were, at
Introduction 3
most, tied (possibly with a slight advantage for the Soviet Union, the defeated
part) – but in the economic theater. This much is acknowledged by former US
Defense Secretary Robert Gates (2020), for whom “[t]he outcome of the Cold
War was determined by other forms of power. Our military played a big role,
but it was primarily in deterring and containing the Soviets” (p. 16). It was,
thus, in the purely economic theater, and more through a competitive than a
confrontational game, involving also the said multiplicity of private actors,
that the dispute became deeply unbalanced from the mid-1970s onwards –
with the USSR losing ground continuously until its fall, in economic size and
prosperity – leading to a clear and decisive victory to the western side. As
acknowledged on the defeated side:
In the mid-1980s the USSR faced a crisis in its balance of payments and
accounting system that developed into a broader economic crisis and led
to a steep decline in production and the standard of living, political
destabilization, and finally the collapse of the political regime and the
Soviet Empire.
(Gaidar, 2007, loc. 4909, Afterword)
After the Cold War was resolved and the strategic supremacy of the United
States was established, the world witnessed China’s rapid and almost stealthy
rise. From an agrarian and backward country with the tenth-largest world
economy, in little over a generation, China has become the first- or second-
ranked world economy (depending on the valuation criteria) and the main stra-
tegic challenger to US supremacy. All thanks to a clever grand strategy devised
by Deng Xiaoping, fundamentally based on rapid economic development,
unfolded in the competitive theater of the economy.
In the current circumstances, the United States’ main advantage over China
lies primarily in its superior economic efficiency – about four or five times
that of China (measured by the apparent average labour productivity) – and
technological leadership in most segments. If China succeeds in halving, for
example, its gap in economic efficiency – which, judging by recent develop-
ments, may not be far off – its economy will become twice the size of the
American economy. So, with the same social effort – share of national income
allocated to the purpose – China can double US military investment and
assemble, in a short period of time, the largest military machine (in size).
With the added advantage that the necessary financing is provided by the
country’s large savings capacity and without the recurring need to depend on
foreign resources, as is the case in the US.
This is not to contradict that military power remains crucial in power
relations, if nothing else, because it is the guarantor of the necessary condi-
tions for the economies to work properly. Additionally, the military remains a
determining source of power in the shaping of international relations. How-
ever, this is primarily a concern for countries that are, or aspire to be, world
or regional powers and, to this end, need to avail themselves of the military
4 Introduction
force that can assure them a dominant role in their geopolitical ambitions. As
such, this concerns only a small number of states.
Today, however, most existing states are out of this league, so to speak, for
practical reasons or by their own choice (as Germany and Japan, for example).
This vast set of countries, living within a peaceful environment, are what could be
called “common states” (as opposed to “power states”). They do not intend to
conquer and do not feel their existence at risk, either because strong alliances
guarantee them protection or simply because the world powers and the organized
international community have ensured a mostly peaceful world order around them.
On the other hand, the potential for destruction of the world, with the
nuclear power accumulated in the meantime, coupled with the declining will-
ingness of peoples to go to war as societies become more affluent, has sig-
nificantly reduced the prospect of war as a means to solve international
conflicts. And it was precisely because of this fundamental change in the
military context, brought about by nuclear weapons, that the Cold War was
cold and not hot, and the main confrontations of the future, between great
powers, are more likely to be also cold. In which case, the role of economic
competition gains preponderance, as it did in the outcome of the Cold War.
In such an environment, the “common states” just strive to provide a pros-
perous life for their citizens. Moreover, the wealth and the income needed for the
pursued prosperity can now be increased rapidly just by using the country’s own
resources more productively and without the need to plunder the wealth of
others (as in the past, and depending on warlike capacities). This also moved the
economy more to the center-stage of countries’ strategic activity.
To respond to their societies’ aspirations for prosperity, states must interact
in the world arena, dealing with conflicting interests, while furthering their
own interests and seeking to contain those of others. To this end, states
interact and compete in the stage of the global economy, engaging in strategic
behaviors – adversarial, but not necessarily confrontational – upon which
their ultimate success depends. These actions and interactions are reshaping
the world and rebalancing power relations, without shots being fired. These
economic interactions and the associated competition give rise to inter-
dependencies between countries, which are often asymmetrical, revealing in
some cases, and creating or amplifying in others, power imbalances.
The changes in power balances, resulting from the uneven developments of
national economies, and the asymmetrical dependencies that these develop-
ments may lead to, can eventually lead to a “Thucydides trap,” as Allison
(2017) warned, and could end up triggering a war of global consequences.
However, such a catastrophic conjecture must be viewed with some skepticism,
as the world has changed considerably in the face of the historical experience
from which the conjecture is extrapolated. Most of the examples drawn by
Allison occurred in the pre-nuclear age, when the potential power of a war to
annihilate most of the humankind did not exist. And, as seen above, the last
major confrontation between world powers – the Cold War – was already cold
because that highly destructive power had already come into being.
Introduction 5
Moreover, the greatest adversities that states face and have to respond to,
in the economic arena today, stem not from deliberate actions by other
states, but rather from the interplay of so-called market players already
mentioned. It is, then, more by interacting in the international market with
this multitude of actors, some private and some public, that the prosperity
of states finds favorable opportunities to expand. And it is the outcome of
this interactions that ends up indirectly defining the position of each country
in the distribution of economic power.
Under these conditions, the economy, with its competitive features, has to
come closer to the forefront of strategic considerations and, therefore, to
assume a vaster role within Strategic Studies, with a greater recognition of its
role as a fundamental strategic theater where countries build power and
compete for influence in world affairs.
What this book aims at, therefore, is to contribute to the articulation of
both approaches – the conventional perspective of confrontation, dominant in
Strategic Studies, and the economic view of competition, more present in
Economics – within the realm of Strategic Studies. Taking into account,
namely, that Security and Prosperity are the two main and most common
ambitions pursued by all countries and that the priority assigned by each
country to each one of them, at each moment, depends on the surrounding
circumstances present at that moment. Thus, when basic security conditions
are guaranteed, it is quite natural for countries to devote themselves mainly to
the promotion of prosperity, concentrating strategic action on the develop-
ment of their economies. And that this action, developed in the competitive
arena of the economy, may result in consequences – substantial changes in
their relative power and in the reach of their ambitions, or insecurity moti-
vated by others feeling threatened by such changes, for example – that may
activate more confrontational theaters.
However, while a peaceful surrounding environment may endure for a long
period – as it has been the case in many regions since WWII, but mainly since
the end of the Cold War – many countries – those above dubbed as “common
states” – may not need to activate those more confrontational theaters, and
rest focused on the competitive theater of the economy and on the promotion
of prosperity. But these situations should not be excluded from the realm of
Strategic Studies. Firstly, because they may materialize intentional and well-
managed national strategies, even without involving military power. Secondly,
because from these actions and these national strategies may arise important
changes in world or regional power balances that sooner or later may get
reflected in the theaters that Strategic Studies tend to be more concerned with.
And, finally, because economic success, reflected in a prosperous society, on one
hand, provides more resources – quantitative and qualitative – so that the
country can be more effective in guaranteeing its security, and, on the other
hand, a secure environment favors the promotion of prosperity. Which is to say
that security and prosperity have a dialectical connection that recommends,
from a strategic point of view, their joint study.
6 Introduction
Furthermore, on the competitive front of the economic theater, countries
compete for resources and markets through which they acquire economic
power, while at the same time they may incur in strategic vulnerabilities.
What they do with this acquired power and how both – power and vulner-
abilities – affect their strategic standing, may then shift their strategic con-
siderations to a more confrontational front of the economic theater – as in the
objects of “economic statecraft” and/or geoeconomics. Or to other con-
frontational theaters, by converting economic power into other forms of
harder power (such as military power), for instance.
The object of this book is therefore more focused on the competitive front
of the economic theater – knowing how the workings of national economies
generate power and vulnerabilities to the respective states – and on the
potential transition of this output to other strategic fronts: how economic
power can be maximized, and the vulnerabilities minimized, and how this
power, being dispersed by nature (and mainly in the hands of many private
actors), can be mobilized for the strategic purposes of the state. To be more
precise, and coming back to the beginning of this Introduction, it is focused
on the strategic autonomy for the state – loosely defined as the room for
maneuver that a strategic actor has for its action and choices, or the leeway
for strategic action (a more precise definition will be offered in Chapter 4) –
provided or curtailed by the power and vulnerabilities generated by the
workings of the national economy and the effectiveness of the strategic gov-
ernance of these factors. In this sense, it may even be said that the main focus
of the book lies before the core of geoeconomics action.
Strategic autonomy is a relatively recent term in strategic discussions and
analyzes. In essence, it can be associated with the principle of freedom of
action used in military strategy. But it is applicable to the highest levels of
strategy, especially to the national strategies of the states, and, in this context,
it is a concept with an insufficiently explored potential.
The term has been used, mostly, among some political elites in the European
Union (EU), where it has become something of buzzword. It receives mention
within many works, even assuming programmatic prominence in high-level
political proclamations. But its specific meaning remains tantalizingly undefined
and shrouded in a dense conceptual haze. The expression has been gaining more
and more currency in European parlance, having implicit, rather than making
explicit, the idea of gaining freedom of action in relation to the USA, so that the
EU can pursue strategic objectives of their own choice. However, when reading
the extensive literature on the subject, what stands out is that each author seems
to have, mainly implicit, its own meaning in mind and no clear definition seems
to be broad and generally shared or accepted.
Well understood, strategic autonomy is a fundamental condition for any
strategic actor to exercise its preferences in the strategic orientation of its
actions, either to expand the scope of the objectives it aims to achieve, or to
respond effectively to any strategic surprises that may come its way. Uncer-
tainty is, as we are all well aware, the most certain and permanent expectation
Introduction 7
on the path to the future. In such conditions, strategic autonomy – having
enough latitude to choose available ways and achievable ends – becomes the best
way to safeguard against the strategic surprises that the future will inevitably
place on a country’s strategic path. For this reason, a good national strategy
should always have, together with its final ends, both the preservation and
expansion of the country’s strategic autonomy as a necessary instrumental
objective.
The strategic autonomy of a state depends on the instruments of power that
it possesses or can resort to, and on the effectiveness, for the envisaged ends,
of each of these instruments in the concrete circumstances in which their use
is necessary. This is because certain instruments of power are more effective in
some circumstances than in others, whereby, for example, an economic power
in peacetime may have broader strategic autonomy than a military power.
And if the economy is a strategic theater and a source of power, then it must
also be seen as a source of strategic autonomy.
The national economy is the main, if not the only, generator of economic
power in a country. From the workings of the economy depend, therefore, the
accumulation or loss of economic power over time. Economic power, by itself
and for its high fungibility into other forms of power, is, thus, an important
instrument to confer strategic autonomy. And the success of this relation-
ship – from economic power to strategic autonomy – is, as with the other
instruments of power, variable with the circumstances of each moment.
Bearing this in mind, it becomes important to identify the main sources of
economic power, and associated strategic vulnerabilities, and to analyze the
extent to which they can be the object of, or condition for, the strategic action
by the respective states, which constitutes, therefore, the next step of the
book’s object. The (changeable) size of the economy, its positioning in the
global networks of trade, knowledge, and technology, the ability to develop
new technologies, and financial self-sufficiency – generation of savings and
accumulation of wealth, together with the parsimony in using external sources
of financing – easily stood out as the main drivers of this power, being ana-
lyzed with the necessary depth.
Finally, in countries with liberal democratic regimes, the sources of economic
power are very dispersed and are mostly held by a multitude of private actors
with their own particular interests. So that all this dispersed private power can
work in favor of the strategic autonomy of the state and can be effectively used as
a strategic instrument of the state, for the pursuit of that community’s social
interests, it is necessary to ensure an effective and smart strategic governance
involving government and society.
Such smart governance must ensure that the power in the country can,
from a strategic point of view, work as power of the country. This requires,
among other things, effective responses to two complementary challenges: (i)
providing the necessary conditions for the various sources of economic power
to maximize their potential for creating that power and to transform such
potential into real power; and (ii) coordinating and articulating the multiple
8 Introduction
and dispersed sources of economic power, to ensure the alignment of their
own interests with the common interests of the country, so that the power in
the country can work as power of the country and, therefore, can contribute
to its strategic autonomy.
The first response is the task of the government’s regulatory power, economic
policy, and the direct intervention of the government apparatus (including the
provision of public goods), and is part of the central fulcrum of government
activity. The second response, however, requires a more delicate political braid-
ing, with the government and society – especially its economic elite – sharing a
vision of the country’s ambitions and values, as well as of its role in the world. As
well as the ability, in compliance with the rules of economic competition, to
articulate private and social interests, with a view to enhancing, through the con-
vergence of autonomous actions into common objectives, the effective conversion
of the dispersed power in the country into strategic autonomy of the country.
Some clarification of the terminologies adopted is necessary. While the
book is about the strategic autonomy of the state, the state can be an
ambiguous concept with different meanings depending on the circumstance
in which it is used. It may refer to: (i) a politically organized society occu-
pying and controlling a territory; (ii) the set of institutions that govern and
represent such a political entity, which are distinct from other social com-
ponents, usually encompassed under the designation of civil society; or (iii)
the broad sector that comprises, besides the governing apparatus, state-owned
and administered organizations and assets, as opposed to privately owned and
managed entities. Within the first understanding, an additional complication
may arise, because a state under this definition may be sovereign or may be
subordinate to a higher political entity, usually a federal state. The apparatus
referred to according to the understanding mentioned in (ii) is usually designated
in Anglo-Saxon terminology as “government”; but, again, government, may be
also used to designate, more narrowly, the executive branch of the governing
political apparatus, to which the legislative and the judiciary branches also
belong.
To be clear, therefore, throughout the book, and unless otherwise indicated,
the following terminology is adopted. “State”, means, in line with the defini-
tion adopted by the 1933 Montevideo Convention on the Rights and Duties
of States, “a person of international law” possessing a permanent population,
a defined territory, government, and capacity to enter into relations with the
other states (Article 1). In other words, then, it is a sovereign political entity,
interacting with similar entities in the world arena and having no higher
sovereign entity to which it is subordinate. In this sense, it has the same
meaning commonly assigned to the term “country,” and for this reason both
state and country will be used interchangeably. As to the political and
administrative apparatus by which states are governed, and since the work
does not need to break down the internal structure of this apparatus, the
broader, commonly used, Anglo-Saxon designation, “government”, is adop-
ted. As for the economic sector under state ownership, this is termed the
Introduction 9
“public sector,” unless it refers strictly to the activities comprising a
government’s administrative sphere, in which case it will be called the
government sector.
As the book deals extensively with the workings of the economy, and
engages comparisons – between countries and throughout time – it often uses
economic statistics to support statements, identify relevant relationships or
demonstrate conclusions. The use of economic statistics, especially to com-
pare realities that take place in different social and historical contexts, which
are based on different monetary valuations, and which even have differ-
entiated capacities for collecting and processing information, sometimes poses
serious methodological problems and require special caution. To minimize the
possible drawbacks, the book sought to use the databases that seemed most
consistent with its purposes, while trying to use as few as possible. Thus, the
following statistical sources were fundamentally used for comparisons
between countries and/or historical periods: (i) World Economic Outlook
Database of the IMF (updated April 2021); (ii) World Bank Databank (last
accessed on April 14, 2021); (iii) Penn World Table (version 10, released on
January 2021); (iv) Maddison Project Database (2020 version). The first two
are used for more contemporary comparisons and the last two for compar-
isons covering longer historical periods. The PWT is also used for more con-
temporaneous comparisons when capital stock data and the human capital
indicator, not available on the first two databases, are necessary.
Although some of these databases, but not all, already contain values for
2020, it was decided to end the use of the statistical series in 2019, to prevent
the analysis from being influenced by the disturbances caused by the Covid-19
pandemic.
Because the information referring to the same aggregates covered by the dif-
ferent databases is not totally consistent with each other, care is needed when
comparing tables or graphs referring to the same period and the same economic
variable, but sourced on different databases. Differences – insubstantial, none-
theless – can be especially noticeable in the comparisons between the GDP of the
USA and China, on a purchasing power parity basis (PPP), since the different
databases use different forms of data valuation and aggregation.
The book is organized into five parts. Part I – Chapters 1 to 3 – deals with
Strategy, the framework for a national strategy, and why the economy should
be recognized as a relevant strategic theater. Chapter 1 looks at the evolution
of thinking about Strategy throughout History, linking it to the progress of
social circumstances, namely the complexification of societies and their inter-
relations. Chapter 2 reflects on Strategy from a modern perspective and on its
incorporation into the broad political conduct of a country´s interaction with
the world, and provides a framework for a proper national strategy. And
Chapter 3 argues why the economy has become a dominant presence in social
life and should be seen as a central theater of Strategy. Part II, which includes
only Chapter 4, deals with Strategic Autonomy, its meaning and its implica-
tions. Critically reviewing several approaches that have been made to the
10 Introduction
subject, especially in the European Union, the chapter advances an appropriate
framework for the concept, with a clear and workable definition, as well as its
practical operationalization. Part III – Chapters 5 through 8 – analyses the main
sources of economic power in a country, as well as the vulnerabilities that its
mismanagement can cause, relating them with the strategic autonomy of a state.
Chapter 5 provides an overview of a country’s main sources of economic power
and their impact on strategic autonomy, but the details of their workings, and
their specific relevance, are analyzed more thoroughly in the next chapters, with
several cross-country comparisons. Chapter 6 addresses economic size and the
main manageable factors on which its dynamic depends. Chapter 7 deals with
the positioning in trade and technological networks, highlighting the dependen-
cies and opportunities that it brings and how a smart strategic management can
help to better navigate them. And Chapter 8 tackles the fundamental importance
of savings, wealth, and finance for a country’s economic power and its strategic
autonomy. Part IV – Chapters 9 and 10 – is dedicated to the strategic governance
of the economic power generated in the country, to ensure that such power can
become power of the country and, therefore, be better used for strategic pur-
poses, namely to widen the strategic autonomy of the state. Chapter 9 addresses
the broad framework for such governance. And Chapter 10 deals mostly with the
challenges posed to the strategic governance by the foreign control of some
strategic sectors of a national economy. Then, having completed the analytical
framework that the book was intended to produce, Part V – Chapters 11 through
13 – is applied to analyze (and rationalize) two paradigmatic cases of a differ-
entiated application of the theory developed in the book: China and Germany.
Chapter 11 explains why those cases – China and Germany – were chosen and
what they have in common; Chapter 12 addresses China; and Chapter 13 ana-
lyses Germany. Finally, a Conclusions chapter summarizes the main points
raised throughout the book.
Figures (mainly graphics) and Tables, mostly shown in Appendices, were
extensively used to support and demonstrate most argumentation developed
throughout the book. Some of them, however, were considered relevant to
substantiate observations made in the text, or necessary for its comprehen-
sion, whereby they were kept in the body of the book. Figures and tables are
identified by the number of the Chapter or Appendix where they are inserted
plus a sequential number, such as Figure 2.1 or Table 6.2 for chapters and
Figure C.2 or Table A.10 in appendices.
Some developments in Chapter 6, with a more technical content in economics,
have been referred to Appendix C.
Post Scriptum (April 20th, 2022): This book was written during 2020–21,
long before the war broke out in Ukraine, and went to press before its out-
come was clear. So far, and regardless of such an outcome, the war seems to
have brought about strategic reassessments around the world and especially in
Europe. Most likely, the EU will grow its military power and this power will
gain weight in considerations of strategic autonomy in many world instances.
Introduction 11
Meanwhile, Western powers have decided to engage in the conflict through
the use of heavy economic weaponry against Russia with the view of bending
her down. Most likely, if the war does not escalate to the nuclear level, and
despite some ricochet from such weaponry, the broad outcome of the conflict
will be decided in the economic theater. The differential of economic power,
in its different forms, built up over time and its impact on the strategic
autonomies of both sides, will be decisive for this result. As the book –
namely in Part III – seeks to demonstrate.
Therefore, the ample course of this conflict not only reaffirmed the role of
the economy as a relevant strategic theater – the main thesis of the book – as
this theater may even come to gain further prominence, with the challengers
to Western dominance striving to develop alternative forms of economic
organization so as to shield or decouple themselves from such dominance.
Anyway, the most relevant implication of the new situation for the con-
tent of the book may be felt at the end of the chapter on the German case
(Chapter 13), if the unfolding of the crisis leads the country to renounce her
status as a civilian power and to equate her economic power with a similar
military position.
If the reinforcements of military power brought about by this crisis are
good or bad for European and world security remains to be seen.
References
Allison, G. (2017). Destined for war: Can America and China escape Thucydides’s trap?
Boston, MA: Mariner Books.
Baldwin, D. (2020). Economic Statecraft: New edition. Princeton, NJ: Princeton
University Press [Kindle iOS version]. Retrieved from Amazon.com.
Baracuhy, B. (2018). Geo-economics as a dimension of grand strategy: Notes on
the concept and its evolution. In M. Wigell, S. Scholvin & M. Aatola (Eds.),
Geo-economics and power politics in the 21st century: The revival of economic
statecraft. New York, NY: Routledge [Kindle iOS version]. Retrieved from
Amazon.com. Pp. 14–27.
Blackwill, R. D. & Harris, J. M. (2016). War by other means: Geoeconomics and
statecraft. London, England: Belknap Press. [Kindle iOS version]. Retrieved
from Amazon.com.
Broadberry, S. & Harrison, M. (2018). World Wars, Economics of. In S. Durlauf
and L. Blume (Eds.), The new Palgrave dictionary of economics (third edition),
pp. 14658–14676. London, England: Palgrave Macmillan.
Gaidar, Y. (2007). Collapse of an empire: Lessons for modern Russia. Washington, DC:
Brookings Institution Press.
Gates, R. (2020). Exercise of power. New York, NY: Alfred A. Knopf.
Hett, B. C. (2018). The death of democracy: Hitler’s rise to power and the downfall of
the Weimar Republic. New York, NY: St. Martin’s Griffin. [Kindle iOS version].
Retrieved from Amazon.com.
Luttwak, E. (1990). From geopolitics to geo-economics: Logic of conflict, grammar of
commerce. The National Interest 20(Summer), 17–23.
12 Introduction
Luttwak, E. (2000). Turbo-capitalism: Winners and losers in the global economy. New
York, NY: Harper Perennial.
Scholvin, S. & Wigell, M. (2018). Geo-economic power politics: an introduction. In
M. Wigell, S. Scholvin & M. Aatola (Eds.), Geo-economics and power politics in the
21st century: The revival of economic statecraft. New York, NY: Routledge [Kindle
iOS version]. Retrieved from Amazon.com. Pp. 1–13.
Part I
On strategy
1 The historical evolution of the thought
on strategy
Preamble
Aristotle, who stated “he who is unable to live in society, or who has no need
because he is sufficient for himself, must be either a beast or a god: he is no
part of a state” (Aristotle, 1885, p. 3), implies that human existence is onto-
logically social. Socialization, in turn, requires the cooperation of large num-
bers for survival and reproduction. However, at the same time, as human
nature is also intrinsically competitive, human beings also feel motivated to
dispute scarce resources, reproductive possibilities, territory, status, and
power. It is, then, from this “essentially competitive condition of human life”
(Gray, 2015: loc. 394, Chapter 1), that Colin Gray derives the need for strat-
egy, for in competition each contender faces the challenge of “how to cope
with the potentially greater strength of others” (Freedman, 2013, p. 50). In
order to meet the challenge, each party in the dispute must assess the poten-
tial strengths and the potential moves of their opponent or opponents and
figure out the best ways to overcome the expected difficulties arising from
such an assessment. To this end, humankind developed elemental strategic
features that tend to be present across time and space, such as deception,
coalition-formation, undermining the enemy’s alliances, and the instrumental
use of violence (pp. 3 and 71). Strategy, therefore, is what orients the behavior of
each contender in adversarial disputes, where the best course of action for each
depends on what the other does, for the decisions of both contenders are inter-
dependent, each depends on the decision of the other and on the expectations
about the other’s behavior (Schelling, 1980, p. 3).
Therefore, strategy has been practiced from time immemorial by warlords
and contenders in conflicts over power, either intuitively and experimentally
or through ponderous reflection and study. Like all human experiences, the
practice of strategy, and of the activities it enfolds, became a subject of ana-
lytical interest and systematization in “treatises” devoted to the spread of
knowledge, distilled by reflection on experience, in order to facilitate the
actions of future practitioners. But this knowledge distillation and system-
atization was not a linear or unimpeded process, for, as Freedman (2017)
points out:
DOI: 10.4324/9781003248392-3
16 On strategy
At the heart of the historical study of strategy is a tension between the
consideration of strategy as practice, which is bound up with the history
of human conflict, and strategy as theory. The theorists can draw on all
the practice, but their task is complicated by the fact that many practi-
tioners did not describe themselves as strategists or, if they did, the term
meant something different from how it is now understood.
(p. 91)
Thus, “whether or not they used the term ‘strategy’, writers since antiquity
posited that strategy should be formulated on the basis of practical experience
or theoretical reflections before being applied in war” (Heuser, 2010, p. 5).
Therefore, and although the currently recognized scope of strategy is much
broader, the earlier treatises revolve around the theme of war, describing,
analyzing, or theorizing on military preparations, maneuvers, stratagems, and
engagements. This should not come as a surprise, however, given that in those
ancient times survival and security were the primary concerns of all peoples,
notwithstanding their perceived political influence, territorial expansion, or
high level of development. And the only way to expand a country’s wealth, or
prevent it from being plundered by others, resided mostly in its capabilities to
wage and win wars.
[T]he role of grand – higher – strategy is to co-ordinate and direct all the
resources of a nation, or band of nations, towards the attainment of the
political object of the war – the goal defined by fundamental policy.
Grand strategy should both calculate and develop the economic resources
and man-power of the nation in order to sustain the fighting services.
(Hart, 1991, p. 322)
It has not been the purpose of this section to relate the history of grand
strategy. However, it is important to retain the following insights: (i) after
Clausewitz’s incorporation of politics into strategic considerations, other
thinkers followed through the door he opened and this gave rise to a higher
level of strategic thought and planning, which would be called grand strategy;
(ii) the horizon grand strategy foresaw would go beyond war, to be concerned
with peace and prosperity; (iii) its aim should be as much to win a war, if it
came to that, as to prevent the need to resort to it, and therefore war would
have a diminishing role in the settlement of international disputes; (iv) the
command of grand strategy is political, above all; and, finally (v), in the
contemporary world, the economy is central to social life, and international
trade is not only crucial for economic prosperity, but also a source of inter-
national interdependencies, whereby the economy must be central to any
grand strategy.
An opposing view to Murray’s comes from Peter Layton (2018). His view,
which originates from a medium-size state (Australia), acknowledges that
“strong states … have a considerably more diverse range of practical grand
strategic alternatives available than weak states” (p. 22). Yet, despite that, he
also affirms that “smaller states with more constrained resources may have a
greater need for a grand strategy than great powers” (p. 29), and notes how
“strong grand strategies have made states stronger” (p. 22). This is likely to
have been the course of action taken by Germany, Singapore, and Switzerland
in their efforts to maximize the effect of their scarce resources. What may
eventually reconcile the two opposing views is the concept of strategic auton-
omy, as developed in Chapter 4, which allows a view whereby Murray’s “great
states,” by the power that they can amass, avail themselves of much more
strategic autonomy than smaller states.
This said, however, most authors today acknowledge that grand strategy
belongs to the realm of politics and that it should involve all of the nation’s
resources. The main turning point in this understanding came during WWII via
Edward Mead Earle (1948), who realized that “as war and society have become
more complicated … strategy has of necessity required increasing consideration
of nonmilitary factors, economic, psychological, moral, political, and technolo-
gical.” This is why, he argued, “the highest type of strategy – sometimes called
grand strategy – is that which integrates the policies and armaments of the
nation that the resort to war is rendered unnecessary” (p. viii).
The context of international relations has changed considerably since WWII.
On the one hand, the availability of nuclear weapons and their potential for
mass destruction has substantially altered the world’s strategic landscape. This,
paradoxically, has made the world a safer place by greatly reducing the risk of
war and the inherent risk of death by the direct or indirect action of war.
On the other hand, economic prosperity has grown exponentially (Figure
A.1), and an intricate web of economic interdependencies has been built
through international trade (Figure A.2) and cross-investment between
countries, the disruption of which – caused, for example, by widespread
war – would have a devastating effect on world prosperity. This develop-
ment has not only made the recourse to war less attractive (especially
among more affluent societies) but, at the same time, paradoxically, made states
vulnerable to multiple, more frequent, and far more significant threats
than the military type. The power of states has become contestable, even
in the management of internal policy objectives, by intangible forces –
usually dubbed as markets and their agents – which operate primarily in
the economic and financial spheres.
24 On strategy
Furthermore, affluence, brought by fast-growing economic prosperity, has
made affluent societies far more attached to material goods and less prone to
violence as a way of resolving disputes. Which led Luttwak (1999) to state
that:
With a few exceptions, there are now two kinds of countries: (1) over-
populated/large-family countries such as Iran willing to accept casualties
even in huge numbers but too poor and too disorganized to keep armed
forces that can fight effectively beyond their borders; (2) high-income/
small-family countries that keep very costly armed forces that have all
sorts of theoretical capabilities which they cannot use, except for remote
no-risk/low-risk bombardment, unchallenged naval operations etc. (p.
129)
Along the same lines of argument, Bachofner (2014) considers that the
societies of the latter group, which correspond roughly to the affluent Western
world, are post-heroic, “characterized by law, trading, pursuit of prosperity,
and peacefulness,” and whose “governments assert again and again that they
never want to endanger the lives of their own soldiers.” Meanwhile, Robert
Cooper (2000), with a similar connotation, refers to the emergence of the
postmodern state, by which he means mostly Europe and Japan (p. 29), as a
state where “foreign policy becomes the continuation of domestic concerns
beyond national boundaries …. Individual consumption replaces collective
glory as the dominant theme of national life. War is to be avoided; empire is
of no interest” (p. 32).
In fact, at the end of 2014, Gallup International carried out a survey covering
63 countries in which, among other questions, respondents were asked whether
they would be willing to fight for their country (Stoychev, 2015, pp. 283–285).
Overall, only in 56 percent of the surveyed countries did 50 percent or more of
the respondents answer yes. Crossing these results with the Gross National
Income (GNI) per capita of the surveyed countries, obtained from the WB-WDI
(2021) (see Figure A.3), a clear negative correlation emerged between economic
affluence and the willingness to fight, thus confirming the thesis of the post-
heroic societies applied to economically affluent countries4. In fact, drawing a
line of affluence at 30,000 US dollars (USD) equivalent in Purchasing Power
Parities (PPP)5, 34 of the countries surveyed by Gallup (57%) were considered
less affluent and the remaining 26 (43%) more affluent.6 In 82 percent of the less
affluent countries, more than 50 percent of the respondents showed a willingness
to fight for their countries, while in only 15 percent of the more affluent countries
did more than 50 percent of respondents say they were willing to fight for the
country. The sample group average of the willingness to fight in each country
was 64 percent for the less affluent group and 34 percent for the more affluent.
Interestingly, the survey included 16 countries of the EU, a recognized area
of economic affluence. Only in three of these – Finland (74%), Sweden (55%),
and Greece (54%) – did more than 50 percent of respondents show a
Evolution of the thought on strategy 25
willingness to fight for their country. The average positive responses in these
16 countries was 33 percent, with minimum values in two of the most affluent
countries, Germany (18%) and the Netherlands (15%). In addition, it is
interesting to note that, at the world level, another country that lost badly in
WWII, Japan, presented a minimum value (11%).
Even for one of the world’s dominant powers – the US – support for the
country’s involvement in war fades quickly, as Kissinger (2011) points out:
In its practical application, grand strategy is not and never has been
simply about war or the conduct of war – in fact, war often represents a
failure of grand strategy. … It embraces all the actions and policies pur-
sued by the state as it conducts foreign and domestic economic policies in
both the short and long term.
(p. 4)
26 On strategy
Meanwhile, Brands (2014) posits that “a grand strategy is a purposeful and
coherent set of ideas about what a nation seeks to accomplish in the world,
and how it should go about doing it” (p. 3). And at a date a little earlier,
Kennedy (1991) had also concluded that:
The crux of grand strategy lies therefore in policy, that is, in the capacity
of the nation’s leaders to bring together all of the elements, both military
and nonmilitary, for the preservation and enhancement of the nation’s
long-term … interests.
(p. 5, italics in the original)
From this brief overview, maybe it is possible to conclude that grand strategy
in its broadest sense has definitely moved from the field of war and military
affairs, where the term was born, to the field of politics. Most authors recog-
nize this area of vast scope – politics – as the current location of grand
strategy in the present-day world. In this frame, it is understandable how the
view of grand strategy has changed into something along the the lines of the
definition offered by Brands (2014) and reproduced above. As Martel (2014)
asserts, the implementation “depends on marshaling the domestic foundations
of national power to strengthen the state’s long-term interests” (p. 47), for this is
what may make it “the highest form of statecraft” (Brands, 2014, p. 1). Seen in
this light, therefore, grand strategy fits in quite well in the picture of performance
shown by the three countries cited above as an example of non-military success
(Germany, Switzerland, and Singapore).
Notes
1 Heuser (2010) seems to have the chronology wrong. She attributes the chronological
primacy to Guibert (p. 4) and assigns the publication of Maïzeroy to “shortly after the
publication of Guibert’s” (p. 5), but, in fact, Maïzeroy’s translation was published in
1771 and Guibert’s Essai Général was published in 1772.
2 Searching the frequency of use of words in an extensive archive of literature managed
by Google Books and extracted with Google Ngram Viewer, a Google tool, shows
that “tactic” (or its equivalent in other languages) was used more frequently than
strategy, up to the present in German; until WWII in French, and until WWI in
English (the search begins in 1800).
3 Milevski (2016, p. 15) quotes the statement of Schorn (1783, pp. 198–199) para-
phrased above (p. 17), but assigns it to a different source: C. James (1805), pp. 862–
63. Milevski’s quote, however, is an English translation from the original French
version of Schorn (1783), as James acknowledged.
4 Regressing the log (Will to Fight) on the log (GNIpc) suggests that for each 1% of
growth in affluence (GNIpc), the will to fight decreases 0.08% (adj. R2=0.73).
5 Corresponds broadly to the lower level of an “Advanced Economy”.
6 Three of the surveyed entities were not included in this exercise (Fiji, Papua New
Guinea, and the Palestinian territories).
28 On strategy
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2 A modern perspective
DOI: 10.4324/9781003248392-4
32 On strategy
With respect to strategy as a subject of study, its intellectual framework is not
clearly defined, and its vocabulary is almost non-existent” (Wylie, 2014, p. 47).2
Not claiming that strategy was or aimed to be a science in the sense of the phy-
sical sciences, he advanced that it “can and should be an intellectual discipline of
the highest order [and] strategic judgment can be scientific to the extent that it is
orderly, rational, objective, inclusive, discriminatory, and perceptive” (p. 50).
According to which view, the study of strategy was required to take its place in
the intellectual world along with the other social sciences (p. 47).
In his 1960 book, The Strategy of Conflict, Thomas Schelling, an econo-
mist dedicated to strategic studies (winner of the Nobel Memorial Prize for
Economics in 1985), also deplored that:
The military services, in contrast to almost any other sizeable and respect-
able profession, have no identifiable academic counterpart. Those who make
policy in the fields of economics, medicine, public health, soil conservation,
education, or criminal law, can readily identify their scholarly counterpart in
the academic world.
(Schelling, 1980, p. 8)
However, in the Preface to the second (1980) edition of the same book,3
Schelling acknowledged that his previous somber picture had changed con-
siderably. This led him to write that his earlier comments “about the low
estate of military strategy in universities and military services [had turned,
by then] so obviously wrong” (p. v). In fact, the study of strategy took an
enormous leap after the 1960s, with the frequency of use of the words strategy
and strategic in English literature, and their equivalents in French literature,
multiplying three- and five-fold, respectively, between 1960 and 1990.
In the late 1960s, Bull (1968) ascertained that strategic thinking was “no
longer the preserve of the military,” and that:
[I]n the United States and to a lesser extent elsewhere in the Western
World, the civilian experts had made great inroads [in strategic studies].
They have overwhelmed the military in the quality and quantity of their
contributions to the literature of the subject. … [and] they increasingly
dominate the field of education and instruction in the subject – the aca-
demic and quasi-academic centers of strategic studies have displaced the
staff colleges and war colleges. … [And that] a peculiarity of strategic
thinking at [that time was] its abstract and speculative character.
(p. 594)
A comprehensive approach
The circumstances created since the end of WWII, and especially since the
end of the Cold War, particularly the exponential growth in affluence, trade,
and cross-border financial flows has multiplied manifold the complexity of
societies and the interdependencies between countries, making the interests of
nations far more intertwined. At the same time, the emergence and expansion
of nuclear weapons gave rise to the prospect of an end to civilization in the
event of a total war, which had the paradoxical consequence of making
recourse to war less likely to resolve interstate disputes.
These new circumstances also changed the ground and the nature of
adversarial disputes between countries. On the one hand, while these disputes
have become less militarily oriented and more economically focused, on the
other, they have ceased to be predominantly “frontal matches” (or zero-sum
games), where players face each other and play in opposite directions, like in
tennis or football. They have become much more like “racing competitions,”
34 On strategy
where players run in parallel tracks, in the same direction, such as in marathons,
speed racings, or in corporate competition, but where all players can win some-
thing simultaneously (i.e. they are positive-sum games). Take an Olympic race,
for instance: an athlete who does not win a place on the podium nonetheless
might have excelled, by competing there, in terms of his or her own record, or his
or her country’s national record, which could have been his or her reasonable
aim for entering a race with more powerful competitors from the start. The same
is true of states, in their quest for prosperity, for example. By having their
economies competing in the global marketplace, every state may improve the
prosperity of their societies, even if at different rates.
Within this new world frame, therefore, the relevant theater for the higher
level of state strategy, a true national strategy, from a perspective that
embraces all of the nation’s actors, interests, and resources, has turned out to
be a multifaceted temporal continuum where its interactions with other states
occur continuously.
Furthermore, as Paul Kennedy (2010) has shown, no state can expect to play a
dominant role in world affairs forever and, as history has also taught, it is
unreasonable for countries to expect eternal prosperity. Great powers rise and
fall and sovereign polities – empires, kingdoms, nation states – are born at some
point in history, either they emerge as new, or merge with, or split from, other
polities, to eventually die at another juncture as a result of having been con-
quered, fused with, or dissolved into other polities. On the other hand, the exis-
tence of a polity is a dialectical combination between continuity and renewal,
reflected in its self-interpretation, its existential aspirations, and the way it inter-
acts with other polities. Continuity is ensured by the sequential overlapping of
succeeding generations that guarantee the permanence of an identity culture.
And renewal results from generational succession itself, and, above all, from the
realization of the need to adapt to the ever-changing circumstances – political,
economic, and cultural (in the broadest sense) – which envelope the continued
successful existence of any country.
The point of these considerations, therefore, is that it may be pointless for a
country to set objectives too far into the future, given that the levers that
shape the results in such a distant end are largely unpredictable, and definitely
are beyond the direct control of the present abilities. However, the country, to
make the best use of its potential, should have a long-term vision to guide its
existence, including concrete ends it aims to achieve as it steers its course into
the future, and an idea of how these ends may be achieved. Basically, what
the citizens of a country desire is to be able to prosper, and in order to do that
they need the country to be both secure and capable of preserving its political
existence. It is therefore up to the government to provide the basic conditions
for these ambitions to be fulfilled. And that should fall within the scope of a
national strategy.
Material well-being alone does not confine the prosperity to which societies
aspire. Prosperity encompasses spiritual (psychological) well-being, including
the cultural values with which society identifies and which identifies it. On the
A modern perspective 35
other hand, prosperity is not an end pursued only in absolute terms; its
pursuit develops in relative terms, by comparison with other societies, which
turns the pursuit into a competition in which each country seeks to converge
towards or outperform the prosperity of other countries, in a permanent
moving target context.
Security and prosperity, together with “political existence” (or simply exis-
tence, i.e. survival or independence), which is sometimes subsumed into the
former, are the ends most sought-after by all countries, as already mentioned,
and therefore these are the main (and most common) high-level ends of
national (grand) strategies. Prosperity, by the logic of things, may have a
higher aspirational rank in the strategy, but security (including “existence”),
because it is a necessary condition for the attainment of prosperity, has a
higher practical rank, and therefore takes priority, when setting the strategic
objectives. Nevertheless, prosperity cannot be about the aspirational realm
alone, because it is upon it that ultimately the main levers of power needed to
ensure existence and security are sustained. President Barack Obama clearly
pointed this out in his first National Security Strategy: “our prosperity serves
as a wellspring for our power” (United States, 2010, p. 9). The statement by
Obama implicitly recognizes that, without prosperity, power will be difficult
to sustain and will eventually falter and without power security becomes at
risk. Therefore, ultimately, the relationship between the three main strategic
ends – existence, security, and prosperity – are intertwined in a dialectic of
interdependences.
If a country has, or aspires to, the role of a global or regional power, or if it
faces a real or potential threat to its existence or integrity, naturally security
and survival will stand out as its main strategic priorities. Should this be the
goal, then, the country will allocate a greater proportion of its material and
intellectual, psychological, and physical resources to these priorities, notably
by strengthening military capabilities. However, when a country does not
hold, or aspire to hold such a role and does not face an existential threat, it is
also natural that the pursuit of prosperity takes over as its main strategic
concern. This is the case when the country feels protected from threat, either
because it is part of a security community – i.e., a group of states “that will
not fight each other physically, but will settle disputes in some other way”
(Deutsche et al., 1957, p. 5), or simply because the world has been made
relatively peaceful by the institutions of international governance.
In this context, Japan and Germany provide good examples of countries that
project power simply by way of their prosperity, as both have transformed
themselves from defeated military powers occupied by their opponents at the
end of WWII, to leading and influential economic powers, despite choosing the
“civilian” avenue (e.g., Maull, 1990) to manifest their influence. Yet, even for
countries with power status, prosperity must be at the forefront of their strate-
gic concerns – as past US National Security strategies have shown – because
without it, this status would be at risk or increasingly out of reach. Further-
more, for those who aspire to a power status, China provides another good
36 On strategy
example of the relevance of prosperity, because it was via prosperity that the
country managed to climb from an underdeveloped status to become the main
challenger to the US.
Sometimes, countries stray from their pursuit of prosperity, due to the
dissemination of fictional political narratives about threats to national
integrity and idyllic descriptions of national achievements. Often, to support
this type of propaganda, there is rigorous control of the flow of information
within the society, such as in North Korea and Venezuela currently, for
example, or such as the case of the former Communist Bloc in the not-so-
distant past. This reversal of strategic priorities is often the result of internal
problems rather than an external threat to state security. Normally, the
situation will come about because often an unelected elite takes control of
the government apparatus and uses the said narrative, along with repressive
mechanisms, to control the rest of society and preserve its privileges. How-
ever, even in these cases, sooner or later, the lack of prosperity will tire the
community, worn down by a prolonged expectation of unfulfilled promises,
and begin to undermine the social belief in which such regimes attempt to
legitimize their existence, leading to their eventual overthrow.
Military capabilities will always be of relevance, but for the most part, and
for most countries, this will not be a primary concern. Prosperity, on the other
hand, will always tend to be at the forefront of national strategies, whereby
the pursuit of prosperity is nowadays the main ground upon which most
countries compete and interact. This competition can be, and most often is, a
positive-sum game, where everyone can gain, even if some gain more than
others do, and where cooperation in some areas can be mutually beneficial.
Cooperative competition, if it is possible to call it that, indeed is the objective of
the multilateral institutions created to promote world trade, financial coopera-
tion, and cross-border investment. However, in the end, competition cannot be
anything but adversarial, because the players – private agents or states – compete
among themselves for resources that are mostly scarce by nature. And the out-
comes of this contest may change the relative positions of contenders to a point
that their role in terms of the power they hold is affected, either in the world
stage or in certain regions, or give rise to undesirable dependencies, which may
even endanger political autonomies. In fact:
Notes
1 Please note that, although the cited publication is from 1998, the content repro-
duces a speech delivered on September 18, 1958, at the US Naval War College in
Newport, RI.
2 The first edition of this source dates from 1967.
3 First edition 1960; second edition 1980.
References
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42 On strategy
Foster, G. D. (1990). A conceptual foundation for a theory of strategy. The Washington
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Gates, R. (2020). Exercise of Power. New York, NY: Alfred A. Knopf
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3 The economy as a strategic theater
[M]an’s character has been moulded by his every-day work, and the
material resources which he thereby procures, more than by any other
influence unless it be that of his religious ideals; and the two great
forming agencies of the world’s history have been the religious and the
economic. Here and there the ardour of the military or the artistic spirit
has been for a while predominant: but religious and economic influences
have nowhere been displaced from the front rank even for a time; and
they have nearly always been more important than all others put
together.
(Marshall, 1895, p. 1)
In the same book, Marshall points out that the historical discourse has shown
“how inextricably therefore the religious, political and economic threads of
the world’s history are interwoven” (p. 351).
Coming from the collectivist political view, Karl Marx advanced that:
DOI: 10.4324/9781003248392-5
44 On strategy
Yet, although taking different routes, both authors recognized, more or less
explicitly, the determinant role the economy played in shaping social structures
and the course of history.
Later, in the mid-twentieth century, the great American thinker of strategy,
and one of the earliest to define the role of grand strategy, Edward Mead
Earle (1986) pointed out in Makers of Modern Strategy (first published in
1943) how “only in the most primitive societies, if at all, is it possible to
separate economic power and political power” (p. 217). Furthermore, in the
same volume, having discoursed on Adam Smith’s notorious Wealth of Nations
(1776), he notes that, “the forms of economic organization in large measure
determine what are to be the instruments of war and the character of military
operations” (p. 222), before concluding that “it is inevitable, therefore, that
military power be built upon economic foundations” (p. 222).
More recently, the National Security Strategies (NSS) issued by US presidents
since 1987, under the imposition of the Goldwater-Nichols Act of 1986, deserve
to be highlighted because they – coming from the currently dominant military
power – have stated repeatedly from the beginning, sometimes explicitly and
sometimes implicitly, the strategic relevance of the economy for the success of
the country.
President Reagan issued the first of these NSS documents in 1987 in the
context of the Cold War. It lists very clearly “a healthy and growing US
economy” as the second of the five “key national interests which [the] strategy
seeks to assure and protect” (United States, 1987, p. 4), specifying that among
the principal objectives to support these national interests are:
We are shaping our foreign policy to account for both the economy of power
and the power of the economy… . So, our second major area of action is to
look for ways to explore economic solutions to strategic challenges.
(Clinton, 2012, pp. 2–3; italics added).
And the US Chairman of the Joint Chiefs of Staff, between 2007 and 2011,
Admiral Michael Mullen, in a series of interventions made throughout the
country in 2010, under the heading Conversations with the Country, quite
assertively acknowledged that “the most significant threat to our national
security is our debt” (CNN Wire Staff, 2010). The Admiral explained that the
reason for this was the constraint that the high amount of accumulated
46 On strategy
government debt – largely financed by foreign sources – imposed on government
budgets and, consequently, on their capacity to divert funds from servicing
important social needs to finance military expenditure. To conclude,
according to the same piece of news, that “the strength and the support
and the resources that our military uses are directly related to the health
of our economy over time”.
The views so expressed by the military leader reflected somehow what the
then Secretary of Defense, Robert Gates, from the political realm, had said in
a speech delivered on May 3 to the Navy League Sea-Air-Space Expo:
“defense budget expectations over time, not to mention any country’s strategic
strength, are intrinsically linked to the overall financial and fiscal health of
the nation”. (Gates, 2010, p. 15). Both these comments could be seen as the
renewal of the exhortation left by George Washington in his Farewell
Address, appealing for public credit to be cherished “as a very important
source of strength and security” (Washington, 1796, p. 21).
Robert Zoellick, former Deputy Secretary of State and former President of
the World Bank, took the same line but was blunter still, writing that “today,
the power of deficits, debt, and economic trend lines to shape security is
staring the United States in the face” (Zoellick, 2012, p. 1). Warning also that
the United States “needs a fuller appreciation of the links between economics
and security to match the times” (p. 9), he pointed out how:
Emerging powers are putting economics at the center of their foreign poli-
cies, and they are gaining clout less because of the size of their armies than
because of the growth of their GDP. For the first time in modern history,
nations are becoming major global powers without also becoming global
military powers.
(pp. 1–2)
And, as Luttwak pointed out, in the same vein, and more or less at the
same time:
Therefore, it could be said that “economics has to be the main driver for
current policy, as nations calculate power more in terms of GDP than mili-
tary might” (Gelb, 2010, p. 43). Whereby, the fundamental objective in this
context “(aggrandizement of the state aside) could only be to provide the best
possible employment for the largest proportion of the population” (Luttwak
The economy as a strategic theater 51
1990, p. 20). Under these conditions, economic power gained preponderance
to the political relations between states (see Frost, 2009, p. 6).
This said, it does not mean that the world has become an Olympian paradise
of peace and prosperity where warfare, combat, coercion, and deterrence have
ceased to be important or even decisive for the balanced functioning of the
international system, far from it. The world continues to function under
anarchy, that is, a regime where there is no sovereign power above the
states, and these are, consequently, the highest level of sovereignty. Thus,
the tension between the various sovereignties tends to be the most natural
condition. In this context, therefore, despite the focus on the peaceful
resolution of conflicts, resorting to international law, negotiation, and
intervention by supranational bodies, especially the UN, military force
continues to play a critical role in maintaining the international order,
albeit dominantly used in a non-violent way, as an instrument of coercion
and deterrence. For, as Nye (2010) makes clear:
In the long competition for global power and influence that lies ahead
between the United States and China, the latter has a strong advantage in
the flexibility that its system provides to use the instruments of economic
power—in being able to leverage its economy more effectively than the
United States.
(p. 381).
Note
1 Strayer (1998), for example, refers: “Enormous investments in the military after
1965, amounting to 15–25 percent of GNP, robbed the civilian economy of invest-
ment capital” (p. 59).
The economy as a strategic theater 55
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56 On strategy
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Part II
On strategic autonomy
4 Strategic autonomy
A Proposed Framework
Preamble
Strategic autonomy is an expression that has been gaining prominence in the
discussions around the action of the European Union, but whose meaning
has never been, at least within these discussions, duly clarified. Furthermore,
its use is relatively recent and, outside of this context, it is still little used.
From an historical perspective, and as Mauro (2018) – who has recently
extensively reviewed the literature on the theme – ascertains, “there is no hint
of it to be found in Machiavelli, Napoleon, Clausewitz, Metternich or Aron.
Nor is there any trace in the writings of 20th-century thinkers such as Liddell
Hart, André Beauffre or Edward Luttwak” (p. 82).
In these times, and outside of the aforementioned European context, the
expression has also been used in some literature with origin in or focus on
India, but with a perhaps more precise sense than that applied in Europe. The
official approaches to the subject of strategic autonomy reflect the strategic
views of the actors who devised them (e.g., France, India, and the EU) and
their particular contextual circumstances.
European views
In Europe – more specifically in the EU – the use of the term has become
more frequent since the end of the Cold War1 and has intensified with the
election of Donald Trump as President of the US. And its use seems to imply
the political aspiration of the EU, and of some of its Member States, to be
able to act autonomously in relation to the USA, namely on fronts dependent
on military capability, pursuing their own political-military objectives.
However, despite the EU institutions producing a large collection of docu-
ments on the use of the term strategic autonomy, and though this has become
something of a buzzword, what stands out is a surprising imprecision of the
concept (as if there is a presupposition that the meaning is already generally
known) and an almost exclusive focus on military and defense issues. Moreover,
the EU documents also make apparent Europe’s concern (not shared by all
European countries, though) to maintain autonomy from the United States. The
DOI: 10.4324/9781003248392-7
60 On strategic autonomy
EU’s concerns have increased since the election of President Donald Trump
in 2016 according to Mauro (2018), who points out that in the two years from
Trump’s election to the time of his writing “no less than six studies have been
published” referring to strategic autonomy (p. 18). Or, as Nissen & Larsen
(2021) warn, much of the European explicit concerns have been too much
focused on “autonomy from” rather than, at it should be more appropriate
“autonomy to act”.
Within the EU, France has been the most assertive part at promoting the
idea of strategic autonomy. It was firstly mentioned in France’s White Paper
on Defense published in 1994 (French Republic, 1994), but the term has been
reutilized in almost every subsequent French Defense and National Security
Strategic Reviews, and from there it has spread to EU documents where it has
been gaining wider use. Nevertheless, the use of the term in France has been
very narrow, since “in theory, strategic autonomy is the beginning and end of
the defense policy” (Mauro, 2018, p. 27), even if, in practice, the country is
aware that “‘complete’ strategic autonomy would require budgetary resources”
significantly beyond the capabilities of the state.
To understand the near-obsessive concern France has with the concept of
strategic autonomy, which almost exclusively focuses on military capabilities,
it is helpful to recall the memorandum written by Alexander Kojève in 1945
for General De Gaulle (Kojève, 2004). Under the circumstances of World
War II and its aftermath, what Kojève wrote revealed the dire prospect of
France becoming a strategically irrelevant “small nation” crammed between
what it feared would become the two dominant world empires – the Anglo-
Saxon and the Slavo-Soviet – to emerge from the war. With the addition of
the dangerous prospect that one of these envisaged empires might come to
aggregate Germany with its regenerated economic power. To mitigate the
resulting risks from this scenario and to gain strategic autonomy by expand-
ing its area of influence on the European continent in this envisaged post-
nations context, Kojève suggested to De Gaulle that France lead the forma-
tion of a Latin empire, or, in its stead, and as later came to be the case, a
European Community, with the Anglo-Saxons held at bay (recall how the
UK was barred from joining the European Economic Community (EEC)
during the De Gaulle period), and the acquisition of nuclear power. This may
also help to explain the tight view France seems to have taken in its approach
to the issue of strategic autonomy, which seems to focus excessively on mili-
tary capabilities, while disregarding the potential of other sources of power to
produce strategic autonomy perhaps with a broader scope.
This is a view that Sigmar Gabriel (2019), Germany’s Vice-Chancellor
between 2013 and 2018, seems to corroborate in comments that appear well
placed to meet the purposes of the current argument: “in 1954, the formation
of a [European] defense union … was rejected by the French Parliament, which
feared becoming too dependent on the US.” Furthermore, he continues,
“during the negotiations of the Élysée Treaty less than a decade later, French
President Charles De Gaulle saw an opportunity to push for more Western
Strategic autonomy 61
independence from the US.” In the same way, Ashoka Mody (2018) also
acknowledges how:
[T]he centrality given to strategic autonomy by French elites and the fact
that France championed strategic autonomy as a goal for Europe certainly
explain some of the concerns of allies in the burgeoning debate on European
strategic ambitions – simply put, the fear that France would love to commit
the EU to a Gaullist turn, pushing it to sever the transatlantic link while
bolstering French influence.
(Brustlein (2018, p. 2)
And because such view is somewhat at odds with German political philosophy,
whereby “in Germany, most people hesitate to pursue strategic autonomy for
Europe. They say it is far too ambitious and therefore unrealistic, and probably
too expensive anyway” (Puhl, 2018, p. 1). The opposition of views is also
highlighted by Gabriel (2019):
Germans should not overlook the fact that both agreements [the Élysée
and Aachen treaties] enshrine a political strategy that is at odds with
Germany’s long-standing approach of balancing the friendship with
France alongside strong transatlantic relations with the US and the UK.
(n. p.)
This notion, therefore, underlines why “France and Germany view the world
differently: Whereas integration into the Western liberal order is enshrined in
the German constitution, French foreign policy is guided by the country’s
national interests at any given time” (Gabriel, 2019). All of this may well help
explain, therefore, why European documents seem to adopt such a vague tone
when dealing with the concept of strategic autonomy.
62 On strategic autonomy
It is true that official French views also associate strategic autonomy
with freedom of political action, vesting in the political decision-makers a
wide range of options to decide upon and a variety of means to act with;
and acknowledge the need of coordination between political and civilian
instruments. However, while none of these ideas is further developed, they
nonetheless always emerge associated with military means and as a way to
leverage such capacity.
Remaining with Europe, the documents produced by private organizations,
such as think tanks, have contributed usefully to clarifying the concept of
strategic autonomy. Arteaga et al. (2016), for instance, refer to autonomy as
“capacity driven,” as do Wulf & Diebel (2015). To which Varga (2017) adds
that the required capabilities depend also upon either owning or borrowing the
financial resources necessary to mobilize them. Zandee (2017) agrees about the
importance of military power to ensure the level of autonomy desired, but sees
military might in the context of a “credible backup to political, diplomatic and
economic action” (p. 12).
Hartley (2017), in turn, provides an economics perspective on the issue. He
argues that autonomy (implying the military sort, indicated by his association
with independent action) is not an absolute value, and as such, recommends
using it as an object in trade-offs with other relevant objectives or ambitions.
For example, Hartley’s suggestion of making strategic autonomy more impli-
citly associated with the objective of security, prompts him to remind readers
that prosperity is also a fundamental objective of a country. This means,
therefore, that: providing countries do not see security as an absolute risk; they
understand major threats as distant risks; and are willing to accept varying
degrees of external protection, they will be less willing to trade-off or forgo a
degree of prosperity to divert more resources to provide their own security
autonomously. Haddad and Polyakova (2018) also take the economics per-
spective, pointing to the fact that autonomy has an economic base too, which is
why the competitiveness of national economies should not be ignored.
Prior to the contributions outlined above, the Institut Montaigne (2002)
had already stressed that strategic autonomy could not achieve everything
alone, and drawn attention to the potential of directing resources to the
development of alliances and the need to leverage internally the potential for
constructive dialogue between the government and civil society.
Anyway, the use of the term has been widespread in many documents
originating from community bodies – Council, Commission, Parliament,
namely – but without its meaning gaining enough clarity to turn it into an
operational concept. Even the ambitiously titled Shared Vision, Common
Action: A Stronger Europe: A Global Strategy for the European Union’s
Foreign and Security Policy (European Policy Centre, 2016) fails to elabo-
rate properly. The then Vice President of the European Commission and
High Representative of the Union for Foreign Affairs and Security Policy,
Frederica Mogherini, writes in the Foreword that “the Strategy nurtures the
ambition of strategic autonomy for the European Union”, without shedding
Strategic autonomy 63
clarity into the meaning of the concept. She did not go much further than
stating that “an appropriate level of ambition and strategic autonomy is
important for Europe’s ability to promote peace and security within and
beyond its borders” (p. 9), or that “a sustainable, innovative and competitive
European defence industry is essential for Europe’s strategic autonomy” (p. 46).
More recently, Josep Borrell (2020), the current High Representative of the
Union for Foreign Affairs and Security Policy (since December, 2019), retro-
spectively assigned a definition of the term to the conclusions of the Foreign
Affairs Council of November 2016, as the “capacity to act autonomously when
and where necessary and with partners wherever possible” (Foreign Affairs
Council, 2016, para. 2). However, while this quote is part of the conclusions, it
is included in a paragraph that starts with “The Council is committed to
strengthening the Union’s ability to act as a security provider” and makes no
mention to strategic autonomy. The first reference to this term comes in the
next paragraph, where the term is just mentioned, without any qualifying or
link to the “definition” of the previous paragraph. This definition, anyway, is
somehow tautological.
After that, recognizing “strategic autonomy” as a term perceived in many
EU capitals “as being anti-American,” and seeing “‘European sovereignty’ as
an equally problematic term, some authors, writing from think tanks, have
offered an alternative term: ‘strategic sovereignty.’” To Leonard and Shapiro
(2019), for example, this term suggests a “better organizing principle,” the
purpose of which is to “allow the Europeans to decide their policies for
themselves and bargain effectively within an interdependent system” (p. 13).
They continue:
Other views
Indian strategic culture has approached strategic autonomy from a broader
perspective, the origins of which lie in the policy of nonalignment set-up ear-
lier by India’s first prime minister, Jawaharlal Nehru, and which, besides
military self-reliance, also envisaged “economic self-reliance” (Tanham, 1992,
p. 58). Managed as a nonalignment policy during the period of the Cold War
as a way to avoid (over-) conditioning by the then-two superpowers, the sub-
sequent idea of strategic autonomy appears as a sort of Non-Alignment 2.0 (see
Wulf and Debiel, 2015). This policy has since been the object of much reflec-
tion, with the intention to frame it more appropriately within the strategic
context that developed after the Cold War ended.
Arunoday Bajpai, Professor of Political Science, answering an online question
on the subject, at Quora, states that “Strategic Autonomy refers to a foreign
policy posture, whereby a nation maintains independent outlook and orientation
in foreign affairs with respects to the issues defining her core strategic interests”
(Bajpai, 2016). Meanwhile, S. Kalyanaraman, from the Indian Institute for
Defence Studies and Analyses, advances an alternative definition:
The definition proposed by Bajpai is not that useful, mainly because it is too
elliptical and verges on a form of wishful thinking. But the one provided by
Kalyanaraman is the most comprehensive among all the definitions offered,
and comes closest to the definition proposed in the next section. Kalyanara-
man’s definition focuses on the state’s ability to pursue the national interest,
Strategic autonomy 65
which, in turn, depends on three fundamental things: (i) the power capabilities
possessed by the state (state capacity); (ii) the structure of the international
system (external circumstances); and (iii) the particular historical era (his-
torical circumstances). However, this picture remains incomplete, because
the capabilities on their own do not sufficiently define strategic autonomy.
Owning a strong military capability, for instance, may be of little use in
most circumstances. Therefore, accounting for the effectiveness and efficiency
of the available power capabilities is also essential to an assessment of the
degree of strategic autonomy.
Schaffer and Schaffer (2016) also mention the “maximization of one’s
options,” thus implicitly referring to the existence of constraints, because, as is
known, an optimizing exercise is bound by the constraints (externally)
imposed on the variable to be optimized. Yet, in general, albeit they refer
several times to strategic autonomy, they do not provide much of a doctrinal
contribution.
As for the US, in spite of much of the published work on strategy and
strategic studies coming from there, it is notable that the issue of strategic
autonomy is largely absent from the literature or the thinking. This is likely to
be due to the US’s perception of itself as a dominant world power, which it
has been for several decades. Thus, US thinkers may see strategic autonomy
as something that refers to the relationship with a higher or dominant power,
and consider that it is therefore meaningless for their country.
Notes
1 As can be seen, for instance, through the Book Ngram Viewer of Google.
2 Named the “troika” because the assistance programs involved a governance with
three parties (the European Commission and European Central Bank, from the
European Union, and the International Monetary Fund).
74 On strategic autonomy
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Part III
Economic power and strategic
autonomy
5 On economic power
Overview
DOI: 10.4324/9781003248392-10
84 Economic power and strategic autonomy
Power Parity (PPP) converters. PPP converters are indices calculated based on
the cost of living in each country, and this functions as a notional exchange
rate, designed to equate the income needed to buy the same amount of goods
and services in different countries. This is because the price of non-tradable
goods and services in each country is correlated with its respective living stan-
dards, whereby they are more expensive in more affluent countries, which
require a higher income to purchase the same amount of a product than in the
less affluent countries. Therefore, a lower monetary income in a less affluent
country may provide the same living standard – access to the same basket of
consumption, so to speak – than a higher monetary income in a more affluent
country. The aim of the PPP converters, then, is to make equivalent the differ-
ent levels of monetary income necessary to buy the same basket of consump-
tion in different countries. On the other hand, to compare the purchasing
power of each country’s national income in international markets – and,
therefore, its potential international power – the use of a convertible currency
(usually the USD) and market exchange rates is more appropriate (see Callen,
2007). In short, PPP valuation is better to compare living standards, while a
convertible currency is better to compare economic power.
To return to the starting point of the current argument, the size of the econ-
omy is a reasonable basis for inferences about the power and influence the state is
able to mobilize. This can be shown, for instance, by the composition of the
G202 or the voting rights on the IMF Board (see Table A.6). Indeed, the size of
the economy is, among other things, an indicator of the potential resources that a
state can assemble for its actions, including for military purposes. In turn, the
main contributing factors to the size of an economy are, on the one hand, the
productive resources available to the country – be it from natural endowments or
from acquisition and accumulation – and, on the other hand, the efficiency with
which these resources are used to generate economic output.
That the size of its national economy is a fundamental source of the
economic power of a state, and therefore an important factor underlying its
strategic autonomy, is somewhat evident, not only from what is shown in
Table A.6, but especially from the empirical evidence collected from practical
life. However, to have strategic relevance – and not just be an exogenous
variable taken into account by the strategist – such size has to be changeable,
and the change must be influenced by deliberate actions upon some identifi-
able variables on which the change depends. That economic size is change-
able, both in absolute and relative terms – that is, the relative positions
between countries vary over time – is also evident from everyday experience.
International organizations and analysts frequently report on the annual or
quarterly growth rates of national economies, showing not only that the size
changes, but also that change is different between countries. Tables presented
later in this chapter will show how the relative size of the main economies has
changed considerably over time. Therefore, this chapter seeks to identify the
relevant variables that influence the changes in economic size and upon which
strategic action can be directed to obtain an intended result.
Size matters 85
Main sources of economic size
There is an extensive literature on economic growth, which has identified many
relevant factors underlying this growth and, consequently, the changeability of
the absolute and relative size of national economies. Some of these factors are
strictly economic and easily quantifiable, like physical3 and human capital or
natural resources, and some are of a broader nature, more diffuse in their
influence and more difficult to quantify – for example, quality of institutions
and of its governance, cultural factors, or knowledge accumulation.
The objective of the analysis this chapter pursues is to identify the main
economic variables that help explaining the different sizes of national econo-
mies and therefore the variables upon which the strategic action should be
directed with the aim to change this size with the view of preserving and
widening the strategic autonomy of a state.
To this end, a sample of 133 countries with a population of over a million
people, representing more than 98 percent of the economic size of the statistical
global database (183 countries), was selected from the PWT10 database. This
database was chosen because, in addition to being widely used by economists, it
contains more relevant variables for the intended objective – namely the capital
stock and the human capital index – on a comparable basis. The data retained
for the cross-country analysis refers to 2019.
The countries in the sample were then split in different groups, according to
their similarities. The first split was between: (i) Rentiers (22) – those countries
whose GDP contained on average, over the decade 2008–2017, more than 20
percent of rents originating from natural resources in general or more than 15
percent of rents originating from oil and gas, according to data from the World
Bank; and (ii) Non-rentiers (111) – all the other countries. Then, the second group
was further split into: (iii) Advanced Economies (32) – non-rentier countries clas-
sified as advanced economies by the IMF; and (iv) Developing Economies (79) –
all the other non-rentier countries, included in the IMF group “Emerging Mar-
kets and Developing Economies”. A fifth group – Oil producers (81) – comprises
the countries, which belonging to the other groups – Rentiers (16), Advanced (21)
and Developing (44) – have in common the fact of being oil producers. Appendix
C lists all the countries in the sample, identifies to which groups they were
assigned, characterizes all the groups, and details most of the statistical analysis
applied and that underlies the summary and conclusions presented here.
To identify the main potential factors that explain the different sizes of
national economies, cross-country correlations were calculated between GDP
and each potential contributing factor: country territory (as a proxy for
available land); population (as the source of labor); oil production (as the
most tangible, relevant natural resource); physical (or productive) capital; and
human capital (whose index corresponds to the average number of years of
schooling and returns to education per worker (Feenstra et al., 2016, p. 12)4.
The summary of these correlations is displayed in Table 6.1 and the greater
detail of the exercise is shown in Table C.4.
86 Economic power and strategic autonomy
Table 6.1. Cross-country correlations between real GDP and potential contributors,
2019
Countries Human resources Physical Natural
capital resources
stock
Group Number Popula- Employ- Human Oil Terri-
tion ment capital tory
index
P L h K O T
Rentiers 22 0.385 0.449 0.413 0.946 0.934 0.474
Non-rentiers 111 0.766 0.808 0.159 0.985 0.649 0.597
Advanced 32 0.988 0.981 0.167 0.977 0.868 0.602
Developing 79 0.925 0.975 0.080 0.994 0.481 0.607
Oil producers 81 0.759 0.805 0.135 0.984 0.479 0.572
Source: Author’s calculations, based on EIA (oil production), World Bank (area) and PWT10
(rest).
Explanation:
Human capital index (h) Index based on average years of schooling and
returns to education (see Feenstra et al., 2016, p. 12)
Physical capital stock (K) Capital stock at constant national prices, based on
investment and prices of structures and equipment (expressed in 2011 USD)
Territory (T) Country Area (Km2) [Source: World Bank]
Oil (O) Oil Production (barrels/day) [Source: EIA]
The correlation coefficients – used as the first filter to select relevant vari-
ables – suggest, at first sight, that the resources with the most influence in
differentiating the size of economies are population (as a source of labor) and
physical capital – which is the accumulated investment in productive assets
(such as buildings, machines, equipment, and computer hardware and soft-
ware), deducted from annual amortizations. Natural resources seem also to
have a significant influence, and education, proxied by the HCI, shows a sur-
prisingly low correlation. However, further tests would correct this proble-
matic first impression as to the explanatory value of these two potential
contributors – natural resources and HCI – devaluing the former and giving
more value to the latter. A very high covariance between Territorial Area and
Oil Production with Capital Stock led to the fall of the former two, during the
regression exercises, and the HCI gained explanatory power in those exercises.
Also, regressions including other variables than those mentioned before
turned out to produce non-significant results. These regressions, then, pro-
vided the second filter to select the potentially relevant variables in explaining
differences in economic size between the tested economies.
Size matters 87
Having identified the main potential contributors to the size of national
economies, the next step was to carry out cross-country regressions to deter-
mine the extent of their influence. Appendix C details this exercise, the main
conclusions of which are summarized below. As explained in the Appendix,
the exercise easily converged into a typical neo-classical production function,
whose main explanatory variables are capital, physical and human, and labor,
and that can be represented by a typical neoclassical production function5:
where Y stands for GDP, K for physical capital, L for employment, and h
for human capital index (HCI). In turn, α, (1-α), and β represent the output
(GDP) elasticities of the respective factors of production: Capital, Labor and
HCI. The elasticities of the production functions are normally estimated from
time series and signify the impact that 1% growth in the production factor has
on GDP growth. In this case, however, the elasticities were estimated based
on cross-country regressions applied to a single year (2019). Therefore, their
meaning must be interpreted as the impact that the difference of 1% in the
stock of the production factor has on the percentage difference in GDP
between countries.
The output elasticities estimated within different groups of countries are
displayed in Table 6.2.
From these estimates, three interesting points may be gathered. The first is that
physical capital and education are the most relevant factors explaining the dif-
ferences in economic size, for all groups. A second point is that education – the
building-up of human capital – seems to have more relevance (higher elasticity)
in advanced economies than in developing economies. This could suggest a
higher quality of schooling in the first group of countries, but most likely it
reflects what Easterly (2001) refers to as “leaks of knowledge [and] matches of
skills” (p. 145). According to this author, knowledge leaks, whereby “people who
Y
K
d d dh
Y
L
¼ : K
L
þ : 6:3
L L
h
Table 6.3 displays the ranges in which those two main contributors to
productivity – K/L and h – vary within each of the relevant groups of
countries in the sample that has been used in this chapter, as well as the
respective elasticities, already shown in Table 6.2.
From this table, the following can be highlighted: (i) investing in human capital
(education, knowledge) has the highest marginal impact on productivity (esti-
mates for β are higher than the estimates for α in all groups); (ii) investment in
physical capital, despite having a slightly lower marginal impact on productivity,
has a greater potential for growth, so its absolute impact can be greater and, above
all, faster; (iii) as already mentioned in the previous section, regarding the high
elasticity of human capital in advanced economies, the higher the level of educa-
tion (and knowledge) of the whole society, the greater are the marginal impact of
human capital on productivity. This last take gives rise to a kind of self-enhancing
virtuous circle – efficiency breeds affluence, which in turn favors efficiency.
This virtuous circle is also an enabler of economic power, because through
greater efficiency, a less populous state can, not only grow in economic
dimension – acquiring more economic power – but, by becoming more afflu-
ent, generate more financial resources to face strategic challenges. In other
words, with all the rest constant (ceteris paribus, as the economists say),
higher efficiency widens strategic autonomy.
Economic dynamics
The analysis developed in the previous three sections was carried out in terms
of comparative statics, applied to 2019. However, the size of the economies,
absolute and relative to their counterparts, may change over time as a result
of the action – central or decentralized, planned or spontaneous – upon the
variables on which it depends. Some economies may grow faster than others
do and change their relative positions (as in any competitive race), with
some countries advancing further (i.e., gaining relative power) and others
lagging behind.
Table A.9 summarizes the dynamics of the largest economies (measured at
constant national prices in 2017 US$), between 1990 and 2019, which is broadly
the time elapsed since the end of the Cold War. The progress recorded by China
and India over these almost three decades is impressive, with both showing fast
growth rates, getting closer to the GDP levels of US. China moving in the world
rankings from 12th-largest economy to become second, when measured in USD
at constant prices (from 8th to the top, when measured in constant PPP); and
India climbed from the 13th to 5th, in USD (from 10th to 3rd in constant PPP).
The outstanding economic performance of both countries can be explained in
part by their substantial investment in capital stock and their remarkable pro-
gress in the education attainment of their workforce, which is reflected in the
progress of their apparent labor productivity.
The right-handed columns of Table A.9 simulate what could be the expec-
ted GDP growth in view of the growth recorded by the factors of production
and using the elasticities of Table 6.2, calculated for the non-rentiers group.
As these elasticities were estimated with the whole sample of non-rentier
countries, the level of efficiency they have implicit corresponds broadly to the
average level of the sample. Therefore, countries whose actual outcomes
exceed those predicted may be seen as having a higher level of efficiency than
the average; likewise, those whose actual outcomes fall short of the predic-
tions may be seen as having a level of efficiency below average. Taken at
face value, this suggests that the output growth in China was slightly
below what would have been expected from the increase in resources and
therefore, that its level of efficiency was also slightly below par. Indonesia,
South Korea, and Turkey have also recorded important progress, with the
92 Economic power and strategic autonomy
size of their economies getting between five and seven percentage points
(p.p.) closer to the size of the US economy, although with all suggesting
sub-par levels of efficiency (GDP growth based mostly on growth of
resources and less on efficiency) . With these countries getting larger
economies, in relative terms, it can be said that they widened their strate-
gic autonomy over this period. The main losers in terms of relative size –
and thereby getting their strategic autonomy narrower – were the whole
EU, Japan and Russia – with the size of their economies getting further
away from the size of the US’s economy and all showing less growth in
capital investment.
Taking a longer-term view, and resorting to the historical Maddison
Project Database, the dynamics of the same group of countries over the
last two centuries is displayed in Table A.10. In the early nineteenth cen-
tury and before the Opium Wars, China was by far the world’s largest
economy, followed by imperial Britain, colonizer of India at the time (see
the last line of the Table, “UK + India”), while the US was a smaller
economy within the group at that time.
China then underwent a steep decline up until the third quarter of the
twentieth century, when, after the reforms launched by Deng Xiaoping in late
1970s (as will be seen in Chapter 12), it began a sharp recovery, regaining first
or second place (depending on whether the evaluation is in PPP or USD
market rates). In less than a century, the US moved from a relatively small
economy (in the group) to the largest in the world, a status that it has kept
ever since, although the relative size of its economy peaked in the second half
of the twentieth century. The UK, after the efforts of two devastating world
wars in the first half of the twentieth century, and in the wake of the decolo-
nization that followed World War II, retracted from being the dominant
world empire to just being the second- or third-largest European economy
(depending on the evaluation method). Russia, having an economy smaller
than China at the beginning of the twentieth century, established itself, by the
middle of the century and during the period of the Cold War, as a world
power vis-à-vis the US, a Eurasian empire (the USSR), and the world’s
second-largest economy, with dominance over half of Europe and many parts
of Asia. In the aftermath of the Cold War, however, it saw its empire
imploding and became just a lesser world economy, albeit sustaining the role
of the worlds’ second-largest military power.
The point to address here is that economic size, absolute and relative,
matters, but relative positions can change significantly in a relatively short
time span, due to various economic dynamics. Therefore, the variables that
determine economic size are strategically very relevant, especially over the
long term, as the strategic autonomy of states depend upon them. Thus,
thanks to its astonishing economic progress in the last quarter of a century,
China has today far more strategic options at its disposal – which is to say
wider ranging strategic autonomy – than before, to the point of becoming a
challenger to the role of the US on many fronts. Conversely, Russia, having
Size matters 93
lost much of its economic influence, has seen its strategic autonomy shrink,
notwithstanding the fact that, as stated, it remains the world’s second-largest
military power. And the USA, despite remaining the dominant power, has
been also confronted with the narrowing of its strategic autonomy, as already
mentioned in Chapter 3 and has alluded to also by Allison (2020, p. 32).
(ii) social capital – “networks together with shared norms, values and
understandings that facilitate co-operation within or among groups”
(Keeley, 2007, p. 103), as well as the associated levels of interpersonal
trust; and (iii) institutional capital – institutions, their governance, and
functioning efficiency.10 If accounted for, these forms of intangible wealth
would further clarify the present potential advantage of the US and other
advanced Western economies.
One of the most fundamental inferences to be drawn from this section is
that a country’s affluence – and the relative economic power associated with
it – is the result of the accumulation, and good use, of two crucial forms of
wealth: (i) intangible human capital, as the product of investment in educa-
tion, skills, and knowledge in general; and (ii) physical capital, more tangible,
but which basically depends on the capacity to save. These are, therefore,
strategic economic variables essential to a state’s capacity to act, that is, to its
strategic autonomy. We shall return, in more detail, to the crucial importance
that savings and the financial wealth it generates have for the strategic
autonomy of a country, in Chapter 8.
96 Economic power and strategic autonomy
Summing-up
The size of its national economy is a primary source of a state’s economic
power. And since the tools of a state’s power are instruments of its strategic
autonomy, the size of the economy is also an essential source of that auton-
omy. Three natural factors – territory, population and primary resources from
nature – are the primordial constituent of this size. But the impact of these
primordial sources can be overcome by the result of human action upon other
variables, the effects of which can outweigh this impact and have a more
decisive influence on the effective economic dimension of the respective states,
and especially on the breadth and speed of its change. It is, then, these vari-
ables – because they are changeable by intentional and directed human
action, and this action has a very significant potential bearing on the eco-
nomic dimension of states – that assume strategic relevance and should,
therefore, be taken as crucial levers of national strategies. From the analysis
carried out in this chapter, it became clear that these variables were essentially
labor force (employment), produced capital (e.g., buildings, machines, soft-
ware, patents), and human capital (education, skills and knowledge).
The labor force is a derivative of the population, which, as mentioned before, is
an element associated with natural conditions (including the area of the territory)
and whose variability is limited (except in the very long term) It may change, in
some transitional circumstances, by incorporating more social segments into the
labor force (like women participation), but this change, in general, is less relevant
for the overall result. As a consequence, produced and human capital assume the
central role of actionable strategic variables to change a country’s economic size,
either in absolute terms or by comparison with other countries. This very impor-
tant conclusion, though, is unsurprisingly in line with the standard research on
economic development11. But what is worth retaining is that these economic
variables are also crucial variables for the strategic autonomy of a state.
Natural resources may be a primary source of economic size for some
countries, but generally, their power to differentiate between countries is
relatively small. Natural resources are an important given from nature and
may provide a starting differentiation of economic potential between coun-
tries. They may even endow a country with a disproportionate source of eco-
nomic power. But if the country does not have the other resources –
dependent on consistent investment and accumulation – to leverage the nat-
ural resources, it will end up dependent on those who have them, and exposed
to increased security risks. In the end, and by itself alone, natural resources
are far from being the most determinant source of economic power.
Efficiency – achieving greater and better output from the same amount of
resources – is an essential source of economic size and power, whereby states
with less resources (specifically population), can overcome their relative scar-
city and become economically larger than countries with greater amounts of
natural and demographic resources. Efficiency, it should be noted, is also
associated with investment and accumulation of produced and human capital.
Size matters 97
Furthermore, it also became clear from this chapter that the accumulation
of knowledge and skills in a society as a whole is a kind of self-propagating
public good: The more the society as whole accumulates, the more each of its
members can leverage their own abilities on the knowledge and on the skills
of other members of the society. This social accumulation also turns out to be
an enhancer of economic efficiency and prosperity, whereby all of this, if
properly oriented, can easily become a virtuous circle of prosperity, economic
size, and power.
Notes
1 A common alternative measure of economic size is the Gross National Income
(GNI). GDP measures the total amount of products and services generated within
the economy, regardless to whom (national or foreign) the corresponding income is
due (e.g., it includes the returns due to foreign direct investment (FDI)). GNI mea-
sures the total income received by the residents, regardless of where it originated,
whether domestically or abroad. The difference could be significant in cases where
the national economy has a large proportion of foreign investment (e.g., in Lux-
embourg and Ireland, GDP, respectively, is 46 percent and 30 percent higher than
GNI, in 2019). But, it is, in general, of little significance. The choice of GDP was
made for practical reasons, among which the easier availability of data and the fact
that it better represents the productive capacity of the country stand out.
2 The G20 (or Group of 20) “is an organization of finance ministers and central
bank governors from 19 individual countries and the European Union. … Estab-
lished in 1999 [the Group] aims to unite world leaders around shared economic,
political and health challenges” (Crowley, 2019). Of the twenty countries with
higher GDP levels, only Spain (13th in GDP), the Netherlands (17th), and Swit-
zerland (20th) are not part of the G20, while Argentina (29th) and South Africa
(38th), although below the “top 20,” are members to ensure geographic diversifi-
cation. Spain, however, has become a “permanent guest.”
3 In the absence of a better designation, the term “physical capital” (distinguishing it
from human capital) is adopted throughout the book to designate the set of tan-
gible (e.g., buildings, machines, vehicles) and intangible (e.g. software, patents)
assets used as a factor of production.
4 Here, human capital, as a qualitative productive factor associated to labor, was
separated from the quantitative contribution of labor proper (i.e., employment),
because the tested regressions provided better results when both contributions were
distinguished. It is frequent, though, to treat both factors together, using a com-
posite variable which embodies the quantitative and the qualitative components of
the labor contribution.
5 Regarding the split between labor (quantitative contribution) and human capital
(qualitative contribution), please see the previous footnote.
6 It is called “apparent productivity” because, although productivity depends on all the
production factors and on the way in which they are combined, this calculation only
takes account of labor as if it were the sole resource used by the productive process.
7 The top 20 countries in GDP measured in USD, which, as mentioned above,
represents better the countries’ economic power for international comparisons.
8 The Income groups are those defined and used by the World Bank.
9 Net foreign assets are excluded from the world share calculations, because the
world total should be zero, by definition. In practice, and due to accounting pro-
blems, the statistics show a relatively small negative balance, with all the groups
98 Economic power and strategic autonomy
also showing relatively small figures. Therefore, and because its content would be
meaningless, the column corresponding to this form of wealth was omitted from
the table
10 Platje (2008, p. 145) presents another definition – “institutions, ‘institutional
governance’ and governance structures that reduce uncertainty, stimulate adap-
tive efficiency (i.e. the ability of a system to adapt to changing conditions) and
stimulates the functioning of the allocation system and sustainable production
and consumption patterns.”
11 It is not surprising that the results of the section on the main determinants of
economic size fell in line with standard knowledge of the Economics of Growth,
since the analytical exercises carried out never intended to compete with the lit-
erature on the subject or to break ground in this area. But it is comforting, for the
purposes of the book, to note that they tended to align with research in the area.
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Size matters 99
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7 Worldwide webs
Trade and technology
DOI: 10.4324/9781003248392-11
Worldwide webs 101
In the Middle Ages, benefiting from a number of favorable circumstances
(see Thorndike, 1917, p. 342), some Italian cities, notably Venice, came to
dominate Mediterranean trade and to establish trade links with Northern
Europe (Maddison, 2001, pp. 52–53). Furthermore, anchored within such a
domain, they were able to build powerful states with vast geographical reach,
which prevailed until the seventeenth century.
To avoid dwelling too much on history, what it is important to note is that
trade and the mastering of navigation techniques were, in these cases, the
bedrock of state power and international influence. It was the pursuit of new
trade routes, and their control, as well as the access to highly valuable, exotic
products in Europe, which led the Portuguese, first, followed by the Spanish,
Dutch, and the English afterwards, to engage in the “Epic of the Dis-
coveries”. This was aimed at breaking the trade monopoly of Venice and the
links with Mamluk Egypt (Findlay & O’Rourke, 2003, p. 16), and it gave rise
to new world empires between the sixteenth and twentieth centuries.
The purpose of this short historical digression on world trade has been to
point out that, besides its direct economic implications, international trade
has always been politically and strategically relevant. Such strategic relevance
became accentuated by the mercantilist doctrine that prevailed in Europe
from the sixteenth to the eighteenth century, which stated that wealth was the
main source of power and that more wealth, in the form of gold, could be
accumulated from trade by maximizing exports and minimizing imports (see
Magnuson, 2003). The much-quoted statement of Colbert epitomized the
relationship: “trade is the source of finance and finance is the vital nerve of
war” (Earle, 1986, p. 217). Trade’s importance was acknowledged in many
epochal writings too. For instance, in one of Bolingbroke’s letters in On the
Idea of a Patriot King, he reflected on the “situation of Great Britain, the
character of her people, and the nature of her government [all of which] fit her
for trade and commerce” (Bolingbroke, 1749, p. 184). This author concludes
that “by trade and commerce we grew a rich and powerful nation,” because
“[a]s trade and commerce enrich, so they fortify our country” (p. 184). There
were also declarations of war made to force trade upon other countries, such as
the war King William III of England declared on Louis XIV’s France, where,
among many other motifs, it was mentioned that:
This was also true of the Opium Wars that Great Britain and France imposed
on China (see Pletcher, 2019, n. p.).
102 Economic power and strategic autonomy
Contemporary relevance of trade
Nevertheless, generally up until the nineteenth century, economic life
remained little more than a domestic affair, with exports representing less
than 5 percent of the world’s GDP (see Estevadeordal et al., 2002 p. 37;
Vanham, 2019). However, in the nineteenth century, world trade experienced
a sizable boost. In the sequence of the Industrial Revolution’s technological
developments, the links established by the new European-based world
empires, progress in transportation – with the introduction of steamships,
railroads, and the lowering of transportation costs (Findlay & O’Rourke,
2003, pp. 35–37), and the easing of trade barriers – namely tariffs (Bordo,
2002, p. 22), world trade experienced a strong boost. This progressed in two
waves, corresponding to the so-called two waves of globalization (see Baldwin
& Martin, 1999): The first wave came from the mid-nineteenth century to the
outbreak of World War I, and the second was from the 1970s to the present,
as Figure A.9 illustrates.1
With these two waves, trade ceased to be a residual part of national
economies and became a crucial component, closely associated with the
expansion of the economies themselves and with the welfare of the corre-
sponding societies, as evidenced by Figure A.10 and Table A.12. However,
more importantly, the exponential expansion of trade gave rise to an
intricate web of commercial relations and interdependencies among world
nations, offering them a wider market to absorb the expansion potential of
their economies, as well as vaster and more diverse sources to satisfy their
demand for goods and services, and so making the world economy more
integrated.
Trade between countries allows each one to specialize its production in the
goods and services where it may hold comparative advantages. Either because
the production of such goods and services uses relatively more of the resour-
ces – e.g., capital, labor, land – that the country has more abundantly; or
because the country may acquire greater efficiency in such products by scaling
up the production processes. In fact, a comparative advantage in the produc-
tion of a good arises when the opportunity cost of such production in one
country (i.e., the goods competing for the same resources whose production
has to be foregone) is lower than it is in competing countries. On the other
hand, trade also widens each country’s range of possibilities for consumption,
either in quantity or in product diversity.2
Benefiting all countries engaging in it, trade is particularly advantageous
for smaller countries, because the larger ones may already have a domestic
market wide enough to absorb the scale of production necessary for the
maximization of the productive efficiency of domestic industries, whilst still
providing a wide spectrum of goods and services. However, the opportunity to
trade in a globally integrated economy provides smaller countries with a scale
big enough to optimize their productive efficiency, and thus to overcome the
constraining dimension of their smaller domestic markets.
Worldwide webs 103
Trade, then, has become a key arena where countries compete and interact
among themselves. In this arena, countries dispute the world purchasing power
and compete for market share in order to expand the size of their economies and
improve the welfare of their societies. Through trade competition, countries dis-
pute a (naturally) scarce resource – world purchasing power or world
demand – while transforming this dispute into a positive sum game. This is
so, because with the expansion of their own economies, by competing to
preserve or increase their market share, countries also expand the world
demand pool and create more opportunities for everyone to expand their
production, making competition, fierce as it may be, into a virtuous circle
that can benefit everyone. Figure A.10, already mentioned above, illustrates
the result of this spiral process very well.
A country may gain a competitive advantage, a crucial lever to gain market
share, by becoming more cost-efficient or by offering products that are more
desirable to the potential market. Cost efficiency, in turn, can be obtained in a
number of ways: by lowering the cost of resources – namely labor, which is
highly mobile between the country’s sectors; by increasing their productivity –
less resources needed per unit of product; or by using a combination of both.
It is the second of these ways that better favors simultaneous progress in the
size of the economy and in the welfare of the society. The offer of more
desirable products may result from better product quality and/or from pro-
ducts more in tow with the taste of consumers (see Benkovskis & Woerz,
2015). Furthermore, the evolution of relative supply and demand in the world
market may imply exogenous price changes of products in which a country
trades, regardless how efficient the country may be (the country, in such case,
has no power to influence world prices and becomes what economists call a
“price taker”). These changes may benefit or harm the country, depending on
how they are reflected in its terms of trade (the ratio of its export and import
prices). However, despite the exogeneity of the shock, it will be up to the
country to adapt, adjusting its economy to the new market signals, so as to
maximize benefits or minimize harm.
It has been recognized that international trade is mutually advantageous
for all participants and for the world economy as whole. Because of this,
countries – especially after World War II (WWII), with the creation of the
General Agreement on Tariffs and Trade (GATT), in 1947 – engaged
themselves actively in multilateral initiatives to promote trade by eliminat-
ing or lowering the barriers that may curtail its progress (see Van Grasstek,
2013). It was thus in the wake of the importance gained by international
trade that Germany and Japan became export-oriented economies after
being heavily defeated in WWII, expanding their economies, and developing
their technological skills to assume world-leading roles. Furthermore, it was
through the same route that China moved from a backward economy, less
than 40 years ago, to become the world’s second largest economy and the
main technological challenger to the US in both sophistication and
leadership.
104 Economic power and strategic autonomy
Openness to trade tends to favor all countries, as already shown, and as it is
generally accepted in the mainstream economic literature: “conventional neo-
classical theory demonstrates that the greater the degree of openness in the
international trading system, the greater the level of aggregate economic
income … regardless of [the state’s] size or relative level of development”
(Krasner, 2003, p. 21). Thus, engaging in trade increases the potential possibi-
lities and available choices enjoyed by a country, providing it with a higher
capacity to expand its economic power, and therefore its strategic autonomy.
Germany, Japan, and especially China present very vivid examples of how it is
possible to realize such potential by successfully engaging in export activities.
These examples can be extended easily among others to, for example, South
Korea, Taiwan, or Singapore. On the opposite side, North Korea, Cuba, and
most of the former communist countries provide sound testimony to demon-
strate how the closing of economies results in relative impoverishment and in
the narrowing of available choices.
Table 7.2. Percentage of population living in poverty (less than $1.90/day, 2011 PPP)6
2017–1999 1981 1990 1999 2010 2017 1981– 1999–2017
1999(*)
High income 0.7% 0.6% 0.7% 0.5% 0.7% 0.0% 0.0%
Upper middle- – 17.8% 14.9% 5.4% 3.0% –2.8% –12.0%
income (**)
Lower middle- 50.4% 44.7% 38.1% 25.2% 12.4% –12.3% –25.7%
income
Low income 56.1% 58.5% 61.9% 48.5% 45.6% 5.8% –16.3%
China – 66.3% 40.3% 11.2% 0.4% –26.0% –39.9%
World 42.7% 36.2% 28.8% 16.0% 9.3% –13.9% –19.5%
World without 28.0% 25.8% 17.1% 11.3% –2.2% –14.5%
China
Source: WB-WDI (2021).
Notes: (*) Italic means that the difference refers to 1999–1990
(**) Excluding China
The first industrial revolution of the 18th and 19th century moved value
creation from the direct application of human labor to tangible assets like
industrial plants and machinery. … Over the last several decades … the
source of value has been shifting from tangible assets to intangible assets
at an accelerating pace.
(p. 699)
Haskel and Westlake (2017) took this argument further by noting that “the
type of investment that has risen inexorably is intangible: investment in ideas,
in knowledge, in aesthetic content, in software, in brands, in networks and
relationships” (p. 15). Furthermore, many statistics confirm the growing
114 Economic power and strategic autonomy
intangibility of capital and economies: For one, in 2006, the April IMF WEO
estimated that for all of the G-7 economies, intangibles accounted for nearly
30 percent of their stock of all long-term assets (IMF, 2006, p. 150, Figure
4.7). More recently, another IMF study puts the US’s corporate intangible
assets above tangibles, and a specific sample of 73 relevant firms showed “an
intangible capital ratio (to book assets net of cash) of 67.8%” (Dell’Ariccia et
al., 2017, pp. 10, 26). Interestingly, though, a clear world segmentation is
emerging in this dichotomous investment trend, with the intangible assets
“overwhelmingly concentrated in advanced market economies” (Mudambi,
2008, p. 709). Within advanced market economies, “the Mediterranean
countries … [are] at the bottom of the intangible investment pack, … the
Nordics, the United States, and UK at the top and the rest of Continental
Europe in the middle” (Haskel & Westlake, 2017, p. 27). Domestic institu-
tions contribute further to this division, as “countries with more restrictive
hiring and firing [of labor resources] invest more in tangibles, but less in
intangibles” (p. 32). The size of the domestic market is another determining
factor, which reveals a particular adversity for smaller economies (p. 34).
This trend, whereby value creation is becoming increasingly dependent on
intangible assets, has “made it possible to disaggregate the firm’s business
processes into progressively finer slices” (Mudambi, 2008, p. 704), which in
turn favors the split of value allocation associated with the “smile curve” of
GVCs, already seen in the previous section. In fact, in some sectors “there are
pervasive links between intangible investment, market power, and productiv-
ity gaps” (Crouzet & Eberly, 2019, p. 6). This “can generate scale economies
and enhance productivity, creating ‘superstar firms’… [and] can also differ-
entiate products and exclude competitors (branding, patent protection), which
can confer power” (p. 7). Moreover, evidence “suggests that the accumulation
of intangible capital has occurred hand-in-hand with the increase in the
market share of industry leaders and the increasing concentration of US
industries” (p. 5).
Therefore, intangible capital has been associated with the acquisition of
market power and other competitive advantages, which tend to reinforce
themselves and become virtual but effective barriers to competition, creating
opportunities for a single company to dominate practically solely an entire
business segment, producing a kind of race where the winner takes all. It is no
coincidence that the companies that have become the world’s most valuable
over the last decade (according to their market capitalization), as illustrated
in Table A.13, are mostly companies that have business models created
around intangible assets and whose market value is also predominantly based
on them. And, also, that these companies are recognized as having extreme
market power. Furthermore, the heavy investment in intangible assets –
patents, brands, marketing, networks, processes, and knowledge – has enabled
firms located in advanced economies effectively to control GVCs, creating a
biased distribution of the value they generate by taking over the activities
located on the ends of the “smile curve” discussed in the previous section.
Worldwide webs 115
Meanwhile, data has become “to this century what oil was to the last one: a
driver of growth and change … [having] created new infrastructure, new busi-
nesses, new monopolies, new politics and – crucially – new economics” (The
Economist, 2017). A continuous stream of new data is being permanently
uploaded, voluntarily (although not necessarily consciously), into central col-
lections. Users connect to social networks via the Internet, using their computers
and smartphones, uploading to them a whole picture of their own life, including
highly personal aspects. Most of the data now collected and processed was
widely disparately available previously, but its utility and value have always been
constrained by what is known as the “information overload problem,” which
describes an inability to extract useful meaning when too much information is
available and there is little capacity to store and process it.
The two major transformations mentioned above – the explosive growth of
storage and processing resources – have helped to overcome this problem. A
further transformation has been the fast development of artificial intelligence
(AI), especially the development of machine learning (ML) abilities, which
enable computers to enhance their own data processing capabilities by incor-
porating acquired processing experience. As a result, the ability to store huge
amounts of raw data and to quickly process it into meaningful information,
which can be monetized or turned into forms of controlling power, has
become a powerful economic machine. Once mastered, this transformational
process of raw data, especially powered by ML techniques, makes this infor-
mation usable for the development of networks, whereby raw data services sell
the data to specialist providers for process feed. In this way, it is possible to
turn the process into a business model in which both ends – data collection
and network development – feed into each other in self-sustaining spirals that
are hard for competitors to challenge, and which naturally lead to the winner-
takes-all result mentioned above.
Such development feasts on the so-called data-network effect, which Turck
(2016) mentions. From the perspective of the industry leaders, what occurs is:
Summing-up
Since the nineteenth century, but especially since the end of WWII, the world
has become highly integrated, creating an imbricated web of overlapping net-
works, some of which have developed asymmetrically, but which have never-
theless promoted an enormous expansion of world prosperity and the
convergence of the poorer countries with the richer. World trade was the first of
such networks whose exponential expansion gave rise to an extensive web of
commercial relations and interdependencies among all countries of the world,
which proved to be mutually beneficial to the participants and to the world
economy as a whole, but particularly advantageous to smaller countries. As
favorable as trade is for a country’s entire economy, it has, nevertheless,
important distributional effects that can have profound social and political
consequences, becoming a determining factor in domestic power struggles.
Part of the trade expansion that has taken place over the last few decades
reflects the fragmentation of production processes, which are distributed across
various countries in the search for the optimal efficiency of each slice. However,
all the slices are linked together in a global value chain, whose links and value-
allocation remain under the control of the owners of the knowledge, technol-
ogy, and the intangible assets on which the chain depends. In turn, while the
technological-development processes have rapidly accelerated, it has vastly
increased human knowledge, our ability to do new and more sophisticated
things, and to do things generally faster, better, and more efficiently.
This strong expansion of international trade has a great impact, both real
and potential, on the strategic autonomy of States, especially for smaller coun-
tries. If used well, it favors the specialization of their economies – enhancing
their efficiency – and the faster expansion of their size and prosperity. However,
it also brings some additional vulnerabilities, because what favors specialization
and expansion also creates dependencies by making the beneficiary economy
reliant on events and developments – affecting its customers and suppliers – that
it cannot control, and which if triggered intentionally against it could undermine
its strategic autonomy. This requires, then, careful strategic management, posi-
tioning the country to better profit from trade opportunities while diversifying its
markets and suppliers to prevent it from becoming too dependent on single
events or counterparts. The net effect of these two forces on the strategic auton-
omy of a state – one favorable and one unfavorable – will depend heavily on the
120 Economic power and strategic autonomy
ability to develop a smart strategic governance of the economy, a topic that will
be discussed in more detail in Part IV of this book.
To avoid falling into a kind of middle-income trap – whereby a rise to this
income level has been facilitated by the country’s insertion into a GVC –
particular care is required by countries in a developing process, especially if
their national economies are positioned in the commoditized and low-value
added segments of the chain. In this case, rising further up the chain
becomes increasingly difficult because of an inability to climb the technol-
ogy ladder (e.g., lack of skill or knowledge) or to acquire the necessary
resources (e.g., finance, and other intangible assets) to reach the ends of the
“smile curve,” where the most valuable activities in the chain are positioned.
Technology has also been expanding at an increasingly fast pace, with
successive shortening of the obsolescence cycles of each innovation, while
bringing with it the predominance of intangibility and network effects as
sources of power and of the valuation of productive assets. This evolution has
led, on the one hand, to a concentration of the power of social control and,
on the other hand, to a process of self-feeding of the capacity to generate this
power. In other words, to the simultaneous concentration of control power
and the ability to reproduce that power, with the unavoidable dilemma posed
to the other actors: to exclude themselves from these networks that enhance
useful and valuing interconnections, thus preserving themselves from the
dependencies that they involve; or join these networks as users, benefiting
from the levers that the interconnections provide, while accepting to become
dependent on (and vulnerable to) their control centers.
This technological development has taken place, therefore, in a very asym-
metrical manner, concentrating the associated power in a reduced number of
countries (and firms), especially in the most advanced ones. As technology
evolves very quickly, this asymmetry tends to feed upon itself, and the more
so because in a fully connected world, it is possible for those who can com-
mand sufficient financial resources to develop platforms that fuel their own
expansion of network effects, which manifest themselves when “the con-
sumption benefits of a good or service increase with the total number of
consumers who purchase compatible products” (Gandal, 2018, p. 9433). This
creates a virtuous circle, in that the more users a particular platform attracts,
the more powerful and valuable it is; and the more powerful and valuable it
is, the more resources and users it attracts – the end result of which is its
being the only player on the field. Furthermore, however extended and scat-
tered the networks may be, they are nonetheless exposed to chokepoints or
narrow passages that make them vulnerable to serious disruption, also giving
asymmetrical power to those who control these straits, and especially to those
who, in addition, possess the adequate instrumentation to scrutinize and
interfere with the traffic flowing through the networks.
From these technological developments, the main threat to the strategic auton-
omy of most countries stems from their asymmetrical development – especially for
countries positioned on the unfavorable side of the asymmetry – and from the
Worldwide webs 121
asymmetrical distribution of power that it brings. This is particularly true when
this asymmetrical power is concentrated within a few actors whose platforms
(privately owned but nationally headquartered) have a worldwide reach and
dominance but whose strategic center is nationally located and dependent on the
strategic interests of the host state. In the face of this asymmetry, the more inserted
a country is in the reach of such platforms and the more its social life depends on
them, the more vulnerable it becomes to disruptions triggered by them and the
more its strategic autonomy risks being suddenly and abruptly constrained, espe-
cially at inconvenient times. Thus, designing contingency plans to prevent or
minimize the effects of such disruptions is the minimum that a national strategy
should contemplate in order to preserve the widest possible range of its strategic
autonomy.
The sharp contrast in the behavior followed by the two main challengers to
the US hegemony, the Soviet Union and China, in terms of integration in the
trade and technology networks – with the closing of the first and the opening
of the second – is paradigmatic. While the first was losing strategic autonomy,
eventually losing the Cold War, the second leveraged its strategic autonomy in
this opening, expanding it considerably, to the point of being prepared to
transform the challenge to the hegemon into a new cold war.
Notes
1 The authors plot the beginning of the second wave in 1960, but the main trade
boost was evident from the 1970s, as Figure A.9 illustrates.
2 For a more comprehensive explanation of the economics of trade, see, for example:
Krugman et al, 2018.
3 Rodrik (2011) assigns the primacy in signaling such correlation to Cameron (1978).
4 Of course, this sequence of events and the consequences had additional influencing
factors than the one isolated in this description, but what is pointed out here is
relevant enough to be singled out.
5 The Covid-19 pandemic crisis erupted during the writing of this book. It hap-
pens to provide an excellent example of the scenario described, whereby some
countries became suddenly unable to acquire essential supplies (personal pro-
tection equipment, ventilators, some medicines) for which they used to rely on
imports, because supply countries, also in need of the same products, forbade
their export.
6 The chosen years were dependent on data availability: there was no data for 1980
and 2000.
7 See https://en.wikipedia.org/wiki/Technology.
8 ZB = zettabyte = 10247 bytes; IP traffic is the flow of data through the Internet, or
using the Internet Protocol (IP).
9 Assuming 300 pages and 8 MB (i.e. 8 x 10242 bytes) per book.
10 The US Library of Congress has around 40 million pieces: (see https://www.loc.
gov/about/general-information/#year-at-a-glance).
11 FLOPS means FLoating-point Operations Per Second and the prefix E means
“Exa” (1018). Floating-point operations mean approximately single operations
(mathematical or logical) involving numbers with floating decimal places.
12 As opposed to the stated 10,000 years.
122 Economic power and strategic autonomy
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8 Saving, wealth and finance
DOI: 10.4324/9781003248392-12
128 Economic power and strategic autonomy
or a household after all their expenditures have been incurred” (Rutherford,
2002, p. 361). The sum of all individual savings made by the residents in a
country during a period of time (e.g., a month, a quarter, a year) is the national
savings of the country for that period.3
In any given period, and in terms of macroeconomic aggregates, the income
generated by an economy has to be spent in the same period. If some agents
produce (earn) more than they spend, other agents need to spend more than they
produce (earn) in that period, for the economic circuit to balance. The financial
system helps to channel the former’s surplus income to fill the latter’s income
deficit, as mentioned above. This channeling of resources can be done directly –
the surplus agent lends directly to the deficit agent; or it can be done indirectly –
the former lends its surplus to a financial intermediary, usually a bank, which
collects surpluses from various agents and then lends to deficit agents. When
borrowing from surplus agents, deficit agents acquire the right to spend the
borrowed part of the surplus agents’ income, in the current period, in exchange
for the right given to these agents to draw on the borrower’s future income.
Households are usually net savers, whilst firms and the government, most
of the time, are in need of someone else’s savings. If all domestic agents earn
more than they spend in a given period, that generates a country’s net savings
surplus that, by definition, can only be invested abroad (in the RoW). With
this investment, the country acquires drawing rights on the future income of
foreign countries. This aggregate net savings surplus generated by the country
has a direct correspondence in an equal surplus in its current account (trade
plus income transactions and net transfers) with the RoW. Conversely, if all
domestic agents spend more than they earn in any given period, the country
generates a net savings deficit, requiring the importation of foreign savings (in
the form of FDI or loans, mostly), with the country assigning to foreign
countries, in return, drawing rights on its future income.4
previous century and the current decade (the first nine years). As a yardstick,
to better assess the behavior of these countries in what savings are concerned,
the last two columns of the table display, for the same two periods, the weight
of the respective GDPs in the world GDP.
The most relevant readings from Table 8.1 are: (i) China and the oil pro-
ducers show the highest savings rates; (ii) there was a general increase in
saving rates between these two decades (3 p.p. at the world level), particularly
Saving, wealth and finance 131
significant in Saudi Arabia (21.9 p.p.), Indonesia (9.8 p.p.), India (8.4 p.p.),
Iran (7.3 p.p.), China (6.7 p.p.) and Russia (5.4 p.p.); (iii) Japan and the UK
were the most notable exceptions, with a significant reduction in their savings
rates (–4.2 p.p., each); (iv) China shows the most extraordinary enlargement
of its weight in total world savings (20 p.p.), much larger than the increase in
its share of world GDP (11 p.p.), while Japan (–14 p.p.), the EU (–7 p.p.) and
the USA (–5.8 p.p.) record the most noticeable declines; (v) Russia’s savings
volume, in spite of the gains reported above, has relatively little relevance in
the world’s total savings (2.3%); (vi) the EU, which in the 1990s had the
highest volume of savings in the world, and despite the significant loss in its
world share, still (as a group) generates the second highest volume of savings,
and the USA moved from second to third largest savings generator in the
world (in volume); (vii) in Europe, Germany, not only remained the top saver,
but also increased significantly its savings rate (4.8 p.p.); and (viii) Japan is the
main loser in relative shares of savings volume.
But, above all, for the purpose of this book, these results give a good account
of the gains and losses of financial power among this group of countries, over the
last 30 years, with the consequent impact in the enlargement or narrowing of the
respective strategic autonomies.
Wt ¼ SUM t k¼1 SNk SUM t k @ K t1 k1 ð8:2Þ
W0 ¼ K 00 =Y 00 Y0 ð8:3Þ
[K stands for capital stock and Y for GDP, while a prime (0 ) means that the
source is a different database (PWT10) than the one (IMF-WEO) used for the
other variables: S and Y].
With resort to these calculation devices – resorting to the capital/output
ratio from another database to infer wealth stocks at the starting point of the
series, and using a 4 percent annual depreciation rate (∂),8 a time series for
national wealth, measured in USD at constant 2012 prices, was built for all
countries from 1980 to 2019. Based on these constructed time series, it was
then possible to draw Table 8.2, showing the evolution of world wealth shares
for the countries (22) whose wealth in 2019 was at least 1 percent of the
world’s wealth. The first two numerical columns in the table show the world
wealth shares in 1990 and in 2019 (estimated by the methodology described
above), with the third one showing the change between these two bordering
years. The wealth share of the whole group remained largely unchanged over
the time period covered by the analysis, but within the group there were sig-
nificant redistributions of relative wealth, and, consequently, of the relative
power associated with it.
The main things to note from Table 8.2 are: (i) the EU and the US have
been losing considerable market share of the world’s total wealth, but remain
by far the wealthiest powers in the world; (ii) China has been catching up very
Saving, wealth and finance 133
9
Table 8.2. Estimated wealth shares (% world total stock)
Countries Estimated wealth shares/ (% of Estimated
World total) wealth/GDP
1990 2019 Change 1990 2019
United States 23.9% 18.4% –5.5% 3.3 3.5
China 2.3% 15.7% 13.4% 4.8 4.5
Japan 13.0% 11.2% –1.8% 3.4 9.0
Germany 7.4% 6.3% –1.1% 3.8 6.7
France 6.1% 4.2% –1.9% 4.0 6.3
United Kingdom 5.5% 2.9% –2.6% 3.8 4.2
Italy 4.4% 2.9% –1.5% 3.1 5.9
India 1.4% 2.6% 1.1% 3.7 3.7
Korea 0.8% 2.3% 1.5% 2.4 5.7
Russia 3.6% 2.1% –1.5% 5.2 5.2
Canada 2.2% 1.9% –0.3% 3.1 4.5
Netherlands 1.9% 1.6% –0.2% 4.8 7.4
Spain 2.0% 1.6% –0.4% 3.1 4.7
Brazil 1.3% 1.5% 0.2% 2.4 3.3
Switzerland 1.4% 1.4% 0.1% 4.2 8.0
Mexico 1.4% 1.3% –0.1% 3.9 4.2
Australia 1.2% 1.3% 0.1% 3.0 3.8
Iran 1.3% 1.1% -0.2% 1.8 8.0
Saudi Arabia 0.5% 1.1% 0.6% 3.4 5.5
Indonesia 0.7% 1.0% 0.4% 4.0 3.8
Sweden 1.4% 1.0% –0.4% 4.6 7.9
Taiwan 0.6% 1.0% 0.4% 2.8 6.8
Group 84.1% 84.5% 0.4% 3.5 4.9
EU27 29.3% 22.5% –6.8% 3.8 5.9
Source: Author’s calculation, based on WEO (April 2021) and PWT10.
NOTE: Underlying values in USD, at constant 2012 prices
fast and, broadly speaking, has been the primary winner of relative wealth
redistribution since the 1990s, being now the second wealthiest individual
country in the world (third, if the EU is considered as a unified bloc); (iii)
judging by the huge differences in savings rates shown in Table 8.1, China is
quickly narrowing the gap between itself and the two wealthiest powers (the
US and the EU).
Due to the aforementioned issues with the construction of the wealth
database used in this calculation, the results shown in Table 8.2 should not be
interpreted as exact values, but as orders of magnitude and trends. In any
case, in order to assess the reasonableness of this calculation, the results
134 Economic power and strategic autonomy
obtained from the constructed series were compared with the two other
wealth databases – the World Bank’s (Lange et al., 2018)10 and Credit Suisse’s
(Credit Suisse Research Institute, 2019), both of which also only have esti-
mated rather than census values. The time frames covered by these two
databases are not entirely coincident with each other: The World Bank’s
database covers the period from 1995 to 2014 (with data at approximately
five-year intervals), and Credit Suisse’s database covers the period between
2000 and 2019 (with annual data). Neither are they coincident with our own
series, which extend between 1980 and 2019, whereby comparisons cannot be
entirely overlapped.
The confrontation of values of the three sources is presented in Table A.15.
As regards the general trend, all series seem to be basically aligned. The big-
gest misalignment is with Russia, for which the World Bank estimates a sig-
nificant loss of relative wealth, while the other two sources estimate marginal
gains. The other visible differences concern the size, not the direction, of the
major changes in relative wealth. All results point to considerable gains for
China and losses for the European countries, the US, and Japan. Credit
Suisse’s database estimates higher losses for Japan than our calculations sug-
gest (these calculations seem to overstate Japan’s wealth). Anyway, in trend,
both of these independent databases confirm the conclusions already derived
from Table 8.2.
It seems easy, therefore, to conclude that the savings made by the various
countries over the last three decades have led to different accumulations of
wealth. This, in turn, has produced a considerable change in the pattern of
world wealth distribution, with the consequent worldwide redistribution of the
relative power that wealth provides. This power manifests itself as much in the
potential for economic growth – and its inherent impact on the economic
dimension of countries – as in the potential of the financial capacity to influ-
ence others, either by enticement or by coercion. Accordingly, it would be
reasonable to conclude that there was a significant redistribution of the eco-
nomic power associated with wealth during this period, from the West to the
East, bringing with it a corresponding redistribution of strategic autonomy
for all the parties involved. Europe and the US will have seen the relative
autonomy derived from this particular instrument of power tightened, while
China will have seen its own autonomy broaden considerably.
However, the extent to which the state can avail itself of the power asso-
ciated with the country’s wealth for its own strategic ends – or whether the
dispersal of that power by different actors restricts its use for these ends – is a
matter that will be discussed in Part IV of the book.
But is worth noting that it was through the enormous generation and accu-
mulation of savings in this period, that China generated the financial wealth that
allowed it, not only to extend its influence into various parts of the less devel-
oped world, through loans that create dependencies, but also to launch the basis
of a wide project to reorient the world in itself and in its power, as is the Belt and
Road Initiative. In Chapter 12, we will return to this issue.
Saving, wealth and finance 135
A final word before moving on to the next section. When comparing
economies with a high share of the world economy, changes in their shares in
a few decades, however significant, have little impact on their relative posi-
tions on the world rankings (with China being a notable exception). However,
for more average economies – the “commoners” of the world economy –
share gains and losses in the same period of time can have a very significant
impact on their relative positioning in terms of world economic power. To
illustrate this point, Table A.16 displays the countries that, over these three
decades – between 1990 and 2019 – have gained or lost more relative posi-
tions in the world ranking of accumulated financial wealth or of yearly pro-
duced income (GDP). What becomes particularly striking about this Table is
that almost two-thirds of the winners are mostly located in Asia (some of
them oil producers), while the overwhelming majority of the losers are located
in Africa and Europe. Moreover, the economies of the top winners, on aver-
age, grew and invested 2.5 times more than the top losers did, also on
average.
[A]s a very important source of strength and security, they [should] value
public credit. One method of preserving it is to use it as sparingly as possi-
ble, avoiding costly occasions when cultivating peace, but also remembering
that timely disbursements to prepare for danger often prevent much larger
disbursements to repel; avoiding the accumulation of debt.
(Washington, 2000[1796], p. 21)
140 Economic power and strategic autonomy
The role of currency
Since ancient times, currency has been both a symbol and an instrument of
sovereignty, as well as an instrument for the sovereign (the government in
modern times) to finance its activities. In the modern era, it has also acquired
a central position in state policies – through monetary policy, to be more
precise – adding power and potential vulnerability to the state at the same
time. Power, because as mentioned above, it is an important instrument of
policy in the hands of the government; vulnerability because, if mismanaged,
it may expose the country to external (economic) threats and interferences
that could seriously restrict autonomy in policy decisions, domestic or foreign.
The episode of the 1956 Suez crisis, already mentioned in Chapter 3 is a
good example of the narrowing of scope in foreign policy that can occur due
to the vulnerability of the national currency. As for a change in domestic
policies forced upon a country by market pressure on its currency, many
examples could be invoked, but it may suffice to retain the reverse of policies
“imposed” on François Mitterrand, shortly after he had been elected Pre-
sident of France, in 1981, with a left-wing platform, as recounted by Sachs
et al. (1986):
The Socialist attempt to revive the French economy sank on the shoals of
rising inflation and a foreign exchange crisis by early 1983, so that the
government of the left has in the end introduced a tougher, more market
oriented programme than anything considered by the previous centre-
right administration of Giscard d’Estaing.
(p. 261, italics added)
Summing-up
This chapter has set out to demonstrate that savings are a crucial economic
variable in building and maintaining a country’s strategic autonomy. Savings
build wealth, and wealth builds power: to realize, influence, pressure, and
coerce. Furthermore, because economic growth (and with it, economic size)
depends so heavily on capital accumulation, this accumulation is made up of
investment; and savings is the means of financing investment. Therefore, to
preserve their autonomy, countries should envisage internally generating – via
households, corporations, and government – the savings needed to develop
and control their economy. Transiently, or in controllable doses that compen-
sate for the insufficient savings generated internally, a country may resort to
foreign savings as a calculated means to enhance its long-term power and the
corresponding strategic autonomy.
However, recourse to foreign savings is a double-edged sword. On the one
hand, it increases the country’s ability to achieve its immediate goals for devel-
opment and is useful for jump-starting an economy or overcoming a transient
difficulty. Yet, on the other hand, it creates dependencies that, if neglected, can
seriously constrain future autonomy or even bring lasting subordination to the
interests of others. Careful balancing and a cautious monitoring of its evolution
is crucial if the recourse to foreign savings becomes necessary. Being open to its
use can prove instrumental to achieving the intended goals, but careful planning
is essential to avoid turning it into a crippling dependency.
In particular, FDI requires a careful balancing act. It delivers technology,
innovation, and efficient processes, helps to create jobs, and facilitates the
integration of the national economy into the world economy. However, it can
also make it more difficult to align the invested corporations with the state’s
strategic objectives.
Saving, wealth and finance 145
Having a currency of its own is a source of autonomy for a country, as it
allows more freedom in the management of its domestic policies. However, as
a currency is also an inevitable source of interaction with the RoW, it
becomes a source of vulnerability, subjecting domestic policy options to for-
eign scrutiny and pressure. Therefore, making these policies consistent with a
stable currency can be a sound mechanism of self-discipline in pursuing a
long-term development strategy, a reliable option for preventing short-term
populist opportunism that is detrimental to long-term goals, and a wise way
to transform a potential vulnerability into a long-term enhancer of strategic
autonomy.
No wanting to repeat here what was said throughout the chapter, it is
important to retain, as a synthesis, that the world economic power has been
moving from the West to the East, with China standing out as a success story,
as result of a very successful economic strategy, which will be analyzed in
more detail in Chapter 12, and that in little more than a generation has
transformed the country from a backward and underdeveloped economy into
a world economic power. And that, in this broad trend, Europe has been the
main loser, without being able to put in practice a meaningful strategy to
arrest such a path.
Notes
1 Wealth may also comprise the endowment of natural resources and the build-up of
intangible assets that make up “human capital,” such as talent, knowledge, and
skills among other aspects, as seen in Chapter 6 (section on Income and wealth).
Natural resources, however, unless resulting from a new discovery of theretofore
unknown sources, are somewhat static; and human capital, being relevant for the
production potential of the country, is more difficult to express in monetary terms
(albeit the World Bank attempted to make such a calculation, as shown in the
aforementioned section) and to relate, in these terms, with other economic vari-
ables. For the purpose of this chapter, however, the relevant wealth is financial
wealth, which results mostly from savings accumulation.
2 The concept of wealth used in this chapter, as already stated in the previous foot-
note, is narrower than the concept used in Chapter 6 (section on Income and
wealth). In Chapter 6, wealth included human capital and natural resources, in
addition to produced capital and net foreign assets. In the present chapter, wealth
is only the product of accumulated savings (plus or minus the change in valuation
of the assets where wealth is embodied). It can, then, be said to be equivalent to
financial wealth, which ends up invested in the physical (productive) capital stock
of the country (in the form of equity or loaned capital) – which is close to the
produced capital of Chapter 6, in assets held abroad – equivalent to the net foreign
assets of that same chapter – or in cash.
3 In the System of National Accounts, what distinguishes the members of the
“National Economy” from the members of the “Rest-of-the-World” (RoW) is the
residence of those members and not their nationality (see United Nations, 2009,
paragraph 1.48). Therefore, economic transactions taking place within the country,
even if these transactions involve foreign residents, are accounted for as domestic
transactions. And if a foreigner (by nationality) residing in the country (foreign
resident) sells products to a national residing abroad, this is an export (i.e. a
146 Economic power and strategic autonomy
transaction between the National Economy and the RoW; see United Nations,
2009, paragraphs 4.10–4.15).
4 The previous footnote explained that the residence criterion, and not the nation-
ality, determines what belongs to the National Economy or to the RoW. However,
and regardless of such a precise definition, henceforth, for the sake of simplicity,
considering the main object of this book, “residents” will be identified with
“nationals” (even if some residents are of foreign nationality) and “non-residents”
with “foreigners” (even for nationals residing abroad). The difference is only
material for a very small number of countries and is irrelevant to the conclusions
of this book.
5 There are at least two known databases: a World Bank database, already referred
in Chapter 6, holding information from 1995 to 2014 for a wide variety of wealth
sources (natural resources, human capital, produced capital and net foreign assets);
and a Credit Suisse database from 2010 to 2018, referring mostly to financial
wealth. Both databases cover a lesser time span and are not consistent, neither
among themselves nor with data on savings.
6 There may also be a valuation effect, but it can hardly be estimated, whereby it is
omitted from the calculation with little presumed consequence for the final
outcome.
7 The World Economic Outlook (WEO) (of the IMF) database – the basis for these
calculations – does not have values for capital stock, but is more accurate for sav-
ings rates and has more recent values than PWT 10. Rough as the result of this
expedient may be, it is definitely better and more accurate than the calculation
would be without it.
8 The Capital Stock (K) was calculated in the same as the Wealth Stock (W), repla-
cing (total) Investment for Savings: Kt = SUMtk=1Ik - SUMtk (∂*Kt–1k–1). Although
the most common (macroeconomic) depreciation rate must be between 5 percent
and 6 percent, a slightly lower value was chosen to counteract some of the expec-
ted stock valuation effect. Anyway, as the objective of the calculation is to obtain
world shares of wealth (not absolute values), the used assumption should not
impact much on the outcome.
9 Countries whose accumulated wealth represents more than 1% of the total world
wealth. Notice that this refers to financial wealth (accumulated through savings),
whereby it does not coincide with the content of wealth used in Chapter 6 and
represented in Table A.11, which contains also intangible human capital and nat-
ural capital. Only “produced capital” and “net foreign assets” represented in that
table can be comparable (approximately) with the content of this table.
10 As explained before, only the components of produced capital and net foreign
assets were used from this database for the comparison.
11 Table A.17 reports net positions and not gross positions, which is more informative
because some countries offer tax advantages that make them the preferred place to
register investment. Hence, the gross flows on both sides, inward and outward, are
greatly inflated in relation to the real flows of the country proper.
12 These figures have to be seen with some caution as some net positions may be
overstated. Some countries are used as preferred location centers for tax-planning
purposes and/or for the registration of holding companies from other countries.
This likely implies an accounting overstatement of the outward flows and stocks of
FDI; or, in other words, that the reported creditor positions do not correspond to
those countries’ real ownership of foreign assets. For that reason, Luxembourg and
Netherlands, the two most obvious cases, are omitted.
13 See https://ticdata.treasury.gov/Publish/mfh.txt.
14 Actually, the net position also accounts for the valuation effects suffered by the
assets or liabilities that comprise such a position.
Saving, wealth and finance 147
15 For more specifics about the role of money and its final implications, see, for
instance, Mishkin (2004, Chapter 3).
16 Devaluation and depreciation have the same meaning, and the same happens with
revaluation and appreciation. Usually, appreciation and depreciation are used
when referring to a continuous movement, normally induced by the market; reva-
luation and devaluation more often refer to discreet movements, normally decided
by the authorities.
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Part IV
On strategic governance
9 National strategy and its governance
DOI: 10.4324/9781003248392-14
152 On strategic governance
For simplicity, analyzes of a state’s strategy generally assume that this
function is performed by a single actor – the state’s competent authorities.
Such simplification has a good pragmatic reason to be, since when it comes to
acting in world affairs, it is reasonable to assume the state government1 as a
single entity. In practice, however, and as is known, the strategic “actor” of a
state is not a singular entity, but a plural entity, whose plurality comprises
several levels. To start with, the apparently single entity is itself composed of
a multitude of actors, both institutional and personal. Institutionally, gov-
ernment, in its broad sense, is made up of different bodies: the executive body
(or government, in the strict sense), the legislative body, and the judicial
system. Furthermore, under this organic political structure, there is the
administrative machine of the government. And in addition to this political
and administrative governmental apparatus, account has to be made for
many other organizations that are influential in the workings of that appara-
tus. This is the case of political parties and civil society bodies – trade unions,
business associations, corporate representations, civic associations, and indi-
vidual holders of factual powers, such as wealth – each with their own inter-
ests, preferences, needs and worldviews, all of which seek to prevail over the
country’s governance.
On the other hand, the bodies of the governmental apparatus – political and
administrative – are composed of a multitude of individuals, each also with
their own beliefs, interests, preferences, idiosyncrasies, personalities, and alle-
giances, which are reflected in their own interpretation of reality and in a
selective understanding of their missions. This is what makes them more or less
receptive to influences from different stakeholders in their decisions. And this,
among other things, falls into a typical agency problem (see Gailmard, 2014).
Consequently, the interests pursued by the government on behalf of the
state may vary over time and even change abruptly, as a result of the greater
or lesser convergence of interests and preferences of the most influential
groups and on the relative success of each of them in the dispute – whether
democratic or not – for influence over the government. In countries with
greater social cohesion, it can be expected that there will be greater political
stability and greater continuity in the objectives pursued by the state and, of
course, in its strategic orientation. However, countries with less cohesion and/
or greater heterogeneity of social interests and preferences will be more
exposed to strategic instability.
Although it is not the purpose of this work to look too much into the field
of political organization and process, the latter can, for the present analysis,
be simplified as illustrated in Figure 9.1.
In any event, as long as the state is reasonably functional and the govern-
ment is stable, a national strategy can be designed and be set in motion by the
government apparatus. And so long as there is lasting political stability –
which is compatible with peaceful alternation at the helm of the government
and at the relative favoring of social groups, provided there is broad agree-
ment on the fundamental mission of the government, and sufficient social
National strategy and its governance 153
cohesion – broad social adherence to, and ownership of, a national strategy
can be expected. However, in the absence of such stability, this adherence may
become too short-lived to secure broad social ownership and to ensure, over
time, the consistency of objectives that go beyond the vital ends of existence
and security. Even the objective of prosperity, in such conditions, may not be
easily consensual, inasmuch as the global prosperity of a country may have
different implications for each social group.
The implementation of a strategy, once agreed upon, will be reasonably
smooth in everything that depends on the government machine, but it will be
a more arduous and uncertain task when it has to engage the multitude of
private actors that make up the society. This is not only because society con-
stitutes a decentralized, often atomized structure, which gives rise to problems
of coordination, but also because these actors, ultimately, are agents of their
own interests. These interests may conflict with the strategic interests of the
state, which may make the mobilization of such agents difficult, and may even
trigger their passive or active opposition. This scenario of difficulties is pre-
sent in particular in the economic segment of a national strategy.
Therefore, the purpose of this brief introduction on strategic governance in
general is to provide a background for a more detailed analysis of strategic
governance in the economic sphere of national strategy.
But before we proceed, and because governance is an elusive term used in
different contexts, not always with the same meaning, it may be useful to clarify
what this author understands by governance. Thus, governance is understood
154 On strategic governance
here as the set of institutions – norms, processes, bodies and functions –, practices,
culture, people and relationships that regulate, guide and make responsible the
functioning of an organization – the state, in this case –, in the pursuit of its pur-
pose, and the interaction with the various interested parties (stakeholders).
there is one and only one social responsibility of business – to use its
resources and engage in activities designed to increase its profits so long
as it stays within the rules of the game, which is to say, engages in open
and free competition, without deception or fraud.
(Friedman, 2002, p. 133; italics added)
And in a subsequent article, published eight years later in the New York
Times, he was even more specific, clarifying that “in a free-enterprise, private-
property system,” the responsibility of the corporate executive
The italicized parts of these two quotations are generally omitted when they
are invoked as theoretical foundation for “wild capitalism.”
Towards that purpose, on the one hand, the government must provide the
legal and regulatory framework for framing economic activity according to
those principles and protect propriety rights. In addition, it must provide a
proper institutional framework of governance, because, as Acemoglu and
Robinson (2012) have demonstrated, “political and economic institutions,
which are ultimately the choice of society, can be inclusive and encourage
economic growth. Or, they can be extractive and become impediments to
growth” (p. 173). Hence, “different institutions have different consequences
for the prosperity of a nation, how that prosperity is distributed and who has
power” (p. 175). This field, of institutions and culture, is generally the one, as
the authors have extensively demonstrated, whose differences best explain the
various economic performances and efficiency levels among economies that
adopt market mechanisms. This is eminently a political issue, since the choice
of the institutions that frame a country’s governance belongs within the realm
of politics. And it is also in this realm that the various social groups struggle
for control of the government and, through it, for the structure and control of
National strategy and its governance 157
other institutions in order to bias their functioning in favor of protecting their
particular interests.
Lastly, but by no means least, the government must address the well-known
market failures: (i) the creation of externalities, that is the impact (especially
when negatively) imposed on third parties; (ii) the market power, which arises
when a single player obtains a substantial influence over market prices, usually
as a result of economies of scale; and (iii) the supply of public goods, which a
private producer is unable to profitably provide, because those goods made
available to one person become available to all the others without the possibility
of the provider charging for it. The first two of these failures fall within the scope
of this legal and regulatory framework. The third, the provision of public goods,
can be addressed either by government’s direct supply of the good or service or
by giving this responsibility to private entities through concession contracts.
On the second front – economic policy – the government should use the avail-
able instruments, such as fiscal, monetary, and exchange-rate policies, incentives,
industrial policies, and direct intervention, so as to ensure macroeconomic stabi-
lity, prevent persistent imbalances and dangerous dependencies (like those asso-
ciated with debt accumulation), provide economic guidance, and to induce the
provision of savings, which ensure the domestic capital accumulation necessary to
guarantee economic development, financial autonomy, and, ultimately, national
control of the domestic economy.
The third front – economic coordination – is the most complex and may
require more skillful political management and a strong rapport between
government and society, or at least between government and the relevant
economic actors, so as to align the interests of the private actors with the
strategic interests of the state. This front should ensure the coordination of
decentralized private activity – private and autonomous decision-makers
pursuing their own interests – with the interests of the state and, consequently,
with the objectives of the government’s national strategy.
In an authoritarian regime, the alignment of objectives and interests is
facilitated by the authority of the government imposing its will on dissenting
actors. However, in a democratic regime, such coordination becomes more
complicated. First, because private interests are not necessarily convergent
with each other and the government may not be entirely equidistant to arbi-
trate the divergencies. Different policies may have different distributional
impacts for different groups, with gains for some and losses for others.
Second, because too much proximity between the economic elite and the
government can lead to the development of corruption mechanisms and the
capture of the government, eventually subordinating the strategic interests of
the state, and of the society at large, to the particular interests of that elite.
And finally, because apart from the restriction of property rights, there are
not many instruments that, in peacetime, the government can use for this
purpose without jeopardizing the economic model of a market economy.
In Figure 9.2 it should be noted that it is the rectangle on the left that gives the
process represented there the dimension of strategic management. Otherwise, the
158 On strategic governance
figure would represent only a common political process. It is the content of that
rectangle that conveys the idea that the state has a strategy (towards which the
political process is oriented), with a time horizon, and with defined ends and
means. And it demonstrates that the government is regularly adjusting its poli-
cies according to the feedback obtained from monitoring the results of their
implementation. It is this important feedback and control loop that makes it
possible to ensure that the ends of the strategy will be assured in due time.
In any case, in countries with high social cohesion, strong cultural identity,
and social alignment with that identity, on the one hand, and where, on the
other hand, the national strategy itself is sufficiently intertwined with the
society, the alignment of particular interests with the strategic interests of the
state and its strategy is easier to achieve, and the pursuit of strategic objec-
tives is more effective. A particularly important difficulty with this alignment
is associated with who controls the strategic centers of the country’s most
relevant companies for economic activity and for its strategic autonomy. As
long as these centers are located within the country and are culturally close to
the country’s vision and values, the alignment is easier. However, when these
centers are located in a foreign country and are culturally closer to that
country’s vision and values, the alignment becomes obviously more proble-
matic. Therefore, in a case where a country has become financially dependent,
and turns out to be unable to ensure the national control of those centers, it
will become strategically more vulnerable than a country that has managed to
preserve its financial autonomy.
For this reason, it is essential for the strategic autonomy of a state, that, on
the one hand, it has the necessary national capital to ensure control, at least
of the most important of those centers. This, in turn, depends on the ability of
its economic agents to generate the savings necessary for this purpose. And,
on the other hand, that national actors, especially the holders of capital, are
able to articulate their interests and their actions, within the limits of the
competition rules, in order to enhance the ability to exercise said control.
On the side of the current dominant power, for example, and notwith-
standing the liberal and market oriented structure of its economic organiza-
tion, with a broad distribution of the sources of economic power, the ability
to leverage this dispersed power into the interests of the country is very
effective, for, as Gates (2020) asserts, “[t]he business community is probably
the most significant” among the American instruments of power in “the
broad range of nongovernmental institutions that are great assets in [US]
interactions with the rest of the world” (p. 49).
Note
1 Recall that, according to the taxonomy set out in the Introduction, the state is the
political sovereign entity that interacts in international relations and which
throughout this work has often been called “country”; and government is the broad
political and administrative apparatus that governs the state.
National strategy and its governance 159
References
Acemoglu, D. & Robinson, J. A. (2012). Why nations fail: The origins of power, pros-
perity, and poverty. New York, NY: Crown Publishers.
Friedman, M. (1970, September 13). The social responsibility of business is to increase
its profits. The New York Times Magazine. Retrieved on January 4, 2020, from https://
www.nytimes.com/1970/09/13/archives/article-15-no-title.html.
Friedman, M. (2002). Capitalism and freedom (40th anniversary ed.). Chicago, IL:
Chicago University Press.
Gailmard, S. (2014). Accountability and principal–agent theory. In M. Bovens, R. E.
Goodin & T. Schillemans, The Oxford handbook of public accountability (pp. 90–
105). Oxford, England: Oxford University Press.
Gates, R. (2020). Exercise of power. New York, NY: Alfred A. Knopf.
Luenberger, D. G. & Ye, Y. (2008). Linear and nonlinear programming (3rd ed.). New
York, NY: Springer.
Moroney, J. R. & Lovell, C. A. (1997). The relative efficiencies of market and planned
economies. Southern Economic Journal, 63(4), 1084–1093.
Tirole, J. (2017). Economics for the common good. Princeton, NJ: Princeton University
Press.
10 The challenges of strategic economic
governance
DOI: 10.4324/9781003248392-15
Challenges of strategic economic governance 161
The example is intentionally extreme, but it provides a very valid frame-
work for visualizing the political consequences of economic decisions based
on pure efficiency criteria. It can be argued that the division of activities pre-
sented in the example is arbitrary, and the conditions of efficiency may lead
the split of functions to favor locations in country “B” or the filling of key
places by nationals of this country. In the abstract, this might be true, but in
practice it never is, as abundant real-life examples show, even if they result
from less clear-cut situations than the one presented in the example. First,
economic decisions are never made on the basis of pure efficiency criteria
alone or based solely on criteria that can be measured objectively. They
always involve a component of subjective judgment that is influenced, if not
bounded, by the culture and other interests of the decision-makers. Further,
this bias will be more prevalent in the decision the less clear-cut the efficiency
differences forecasted for the alternatives in hand are. As Simon (1955) poin-
ted out long ago, “there is a complete lack of evidence that, in actual human
choice situations of any complexity, these computations [of perfectly informed
rational analysis] can be, or are in fact, performed” (p. 104). Instead, the
rationality of individual decision-makers within an organization is bounded
by the organizational environment.
Second, the situation of outward economic asymmetry – country “A” is richer
(and larger by the criteria of Chapter 6) than country “B” – will tend objectively
to favor decisions leading to the division of activities stated in the example (as
seen with the “smile curve”). And third, because decision-makers in these events,
even under the guise of mere economic decision-makers, are nonetheless ulti-
mately (consciously or unconsciously) political decision-makers, influenced by
their political views of the world. Therefore, in these terms, the political view of
the decision-makers of country “A” will hardly prefer the political dominance of
country “B” and the subordination of country “A.”
In real life, situations are not as extreme or black and white as suggested in
the example, whereby the triggering conditions for cross-border investments
may be more complex and their social and political consequences may be
more nuanced. However, the general tone of the description will tend to pre-
dominate because, contrary to the simplistic view that has been associated
with many liberal positions, economic relations do not work in abstract or in
politically sanitized contexts. On the contrary, the functioning of the economy
is based on social relations which, in turn, develop themselves in concrete
social, political, and cultural contexts, being influenced by them and inducing
upon them consequences that cannot be ignored.
Capital per se, seen as an abstract variable, may be stateless, but capital does
not work or move by itself. It is mobilized and used by concrete persons (actual
or legal) who are guided by ideas, beliefs, and interests, and, more generally, by
the cultural environment to which they belong. Those persons are an integral
part of concrete political societies and are inevitably associated with their inter-
ests and contingencies. Each individual, individually considered, may wish to
assert himself or herself as independent of the political circumstances of his or
162 On strategic governance
her natural citizenship, but rarely, if ever, is this the case. However, as collective
(legal) persons, companies cannot be seen just as a mere sum of the individual
persons who compose or direct them. They have an existence of their own, pos-
sessing “a unique identity” that refers to “a ‘shared collective sense of what we
are’ or to narratives that provide a sense of organizational continuity” (Todeva,
2006, p. 52). This establishes conceptual boundaries that “demarcate a distinc-
tion between members and non-members” (p. 51) and a culture associated with
the institutional framework of their origin. In simpler terms, “cultural values and
regulatory institutions help to constitute the nature of economic actors and guide
their actions, thus affecting economic outcomes” (Whitley, 2005, p. 190). This
implies, among other things, that multinational corporations are subject to the
laws, rules, culture, and interests of their country of origin. And such umbilical
attachment to a politically defined origin, together with the obligations that such
attachment entails, may subject all activities of a company, wherever located, to
the extraterritorial scope of the judicial systems of its origin. This, for example,
may end up in the bounding of countries where subsidiaries are hosted to the
economic sanctions imposed on companies by the country of origin. In those
terms, it is, at the very minimum, naïve to consider companies, or the capital that
supports them, as stateless.
For those that may doubt that corporations – no matter how multinational
their operation is or how dispersed the ownership of its capital may be – are
not stateless, a former US Defense Secretary of the present century makes it
pretty clear with a bluntly realistic example: “While companies like Apple,
Google, Microsoft, and Facebook operate globally, everyone knows they are
American companies” (Gates, 2020, p. 43).
Therefore, the potential problem of foreign investment in a country does
not stem from the origin of capital, as an economic variable or financial flow,
but from who controls its use, and where the strategic center of that control is
located. Especially in the case of foreign-based multinational corporations, it
is known that “the control of the international business operations is usually
by the headquarters, which coordinates strategically all transactions, exchan-
ges and partnership relations” (Todeva, 2006, p. 184). Or, as Oatley (2019)
points out, the managerial control extended by multinational corporations
across borders “enables firms based in one country to make decisions about
how to employ resources located in another country” (p. 161). To put this
more simply – using the definition of strategic autonomy proposed in Chapter
4, and the considerations made therein about its meaning and scope – the
parts of multinational groups located outside the country of headquarters,
whether in the form of branches or subsidiaries, do not have strategic auton-
omy, since they do not have sovereignty over themselves or over the means
they use; nor do they have the ability to make final decisions about strategic
ends. This is why they are strategically subordinate to the interests, pre-
ferences, and needs of the respective strategic center, that is, its headquarters.
With this in mind, arguing that capital is a stateless entity whose origin is
irrelevant to the country’s strategic autonomy risks falling into grave political
Challenges of strategic economic governance 163
and strategic naïvety. For this reason, many countries, even the most econom-
ically liberal ones such as the United States, impose limits on the acceptance of
foreign investment, particularly in sectors or segments of activity that their
governments consider strategic for the fundamental interest of the country
(Masters & McBride, 2018). In fact, as Figure A.13 illustrates, it is practically
only in Europe that the naïve approach towards foreign investment seems to
prevail. However, even in this region, things might be changing (e.g., Münchau,
2018; Chazan, 2019; Leonard et al., 2019).
It is certainly no coincidence that Calomiris and Haber titled the first section
of their book “No Banks without States, and No States without Banks.” The
conditions under which banks operate – such as regulation, supervision,
enforcement of contracts – are the “outcome of a political process … whose
stakes are wealth and power,” and whose intervening parts are “those with a
stake in the performance of the banking system: the group in control of gov-
ernment, bankers, minority shareholders, debtors and depositors” (p. 13).
Taxpayers ought to be added to this list, since it is on their shoulders that the
burden of banking crises often falls.
There is another important reason, to a certain extent complementary to
the previous argument, why the control of foreign-owned banks and financial
institutions operating in a country is a matter of particular strategic sensitiv-
ity. Firms in general typically borrow capital from lenders to leverage the
owners’ equity (own capital), and, in sectors other than banking, the leverage
ratio (borrowed capital/owners’ capital) can go up to five, though it is nor-
mally below this. However, in banking and some other financial businesses
like insurance, that ratio can go up to 20 and sometimes more (see Gallo,
2015). That is, for each dollar or euro that the owners invest in a bank or in
some other financial institution, 20 or more dollars are borrowed from other
sources (mainly depositors) to use in the business, which is mostly lending to
third parties. Thus, in case the business goes bankrupt, either because of
mismanagement, or through deliberate misuse of funds, the local population –
mostly common depositors – may lose, potentially, 20 times more than the
foreign owners of the business. This cannot fail to have profound political and
strategic implications.
While for other companies, the borrowed resources come from banks or other
well-informed and specialized investors, in banking, most of the borrowed
money comes from the deposits made by ordinary people and represents a sig-
nificant portion of their savings. The funds so raised, in turn, are transformed
into credit to the economy, which is an indispensable input for its proper func-
tioning, without which many activities would cease. Furthermore, bank deposits
constitute the bulk of the money stock on which economies work, and by
managing the flow of payments using these deposits, which is now the dominant
form of payment in advanced economies, banks control the payment system –
one of the basic infrastructures of a country. Without the proper functioning of
the payment system, a country would find itself paralyzed.
All of these – holding savings, financing the economy, money creation, a
smooth payment system – are essential social goods, which imports cannot easily
replace. The adequate provision of these social goods depends on an intangible
Challenges of strategic economic governance 165
good, as important as it is perishable: trust. These goods, and the conditions for
their production, thus have enormous social value and are strategic resources,
which the government must guarantee to protect. Therefore, “the smooth func-
tioning of a complex interdependent financial system is necessary for the normal
functioning of the … economy; anything that disrupts financial markets has an
adverse effect on output, employment, and asset values” (Minsky, 2008, p. 48),
and therefore, on social life.
Banks, however, with their high leverage ratios, have enormous destabiliz-
ing potential that can seriously disrupt a country’s social stability. And
whenever they run into trouble, it is the country’s taxpayers who reluctantly
come to the rescue in order to prevent depositors from getting hurt, a crisis of
confidence being unleashed, or, ultimately, a breakdown of the entire country.
Therefore, having financial institutions whose strategic centers are foreign to
the host country managing a significant part of this country’s banking assets,
is to mortgage an important piece of the country’s strategic autonomy.
Moreover, the constraining effects of such a situation are felt the most harshly
in adverse circumstances, especially during a crisis. Among other implications,
in a situation such as that, although it is the foreign interests that control the
activity of the said financial institutions, they will support only a minimal
portion of the risks they create, as most of these risks and their possible con-
sequences stay within the country and, if materialized, will be borne by it.
It is not all negative: foreign control of banks operating in a country could
bring innovation, competition, and different operating perspectives, which
may result in higher economic efficiency and greater prosperity. However, it
can also take away autonomous power from the country and endanger its
stability and even its tranquility. As we are dealing with the strategic auton-
omy of the state, the articulation of the interests of the state with the interests
of companies whose strategic center is located in another country may prove
more difficult in cases of need. This is especially the case at a time when the
interests of the two states – the host of the subsidiary company and the host
of the headquarters of the group – are divergent.
As with many other situations with conflicting implications, the right bal-
ance depends on the quantity (of foreign presence) involved. Yet, one thing
seems certain according to the framework described: Allowing foreign inter-
ests to control a large part of the banking system of a country is tantamount
to shrinking the country’s strategic autonomy. Therefore, again, the final
impact of this foreign ownership on the strategic autonomy of the receiving
country will depend on the balance of the positive and negative consequences
outlined above. By leveraging national economic power, investment can
enhance autonomy, but only if an appropriate balance can be achieved, by
which the positive impact of broadening the economic potential of the coun-
try outweighs the negative impact derived from having parts of the national
economy under the strategic control of foreign ownership. This is to say, only
so long as foreign control is contained within reasonable quantitative and
qualitative limits.
166 On strategic governance
Summing-up
The power generated by a country’s economy is a fundamental instrument for
the strategic autonomy of a state. The relationship between such power
and that autonomy, however, is not linear. It depends on the “amount” of
power generated by the economy, mainly with regard to the factors ana-
lyzed in Chapters 6 to 8, which can be called “potential power.” However,
it also depends on the capacity of articulation between the government
and civil society, and especially with the economic elite, to ensure that the
potential generated by the economy is reflected in the strategic autonomy
of the state. This second part of the relationship is particularly important
in democratic regimes with market economies, since in these cases, most
sources of economic power are privately owned, dispersed, and indepen-
dently managed.
The government can indirectly influence the behavior of private agents – for
example, households and firms, consumers and investors – conditioning their
decisions and orienting them in the most convenient direction for its objec-
tives, mostly by providing appropriate incentives through the mechanisms for
regulating economic activity and the instruments of economic policy. Yet,
ultimately, what these agents in general do, and for companies in particular,
depends mainly on their specific interests, preferences, and capabilities.
Therefore, unless there is an alignment between these specific interests and the
state’s strategic interests, there is no guarantee that the economic power gen-
erated by those agents is relevant to the strategic autonomy of the state. This
is because there is not much more – without requisitioning or intervening in
underlying property rights – the government can do to ensure that this power
serves the ends of a national strategy.
This will be the particular, but not exclusive, case where a company’s con-
trol is subordinated to a strategic center located in another country. Even
simply for cultural reasons and the resulting ordering of preferences, in such
circumstances, a company’s interests will more easily align with the strategic
interest of the country of its headquarters. It is clear that the implications of
such a situation will tend to be negligible for most companies, with little
relative and differentiating importance to the host country’s economic fabric.
But it can be highly relevant for companies located in parts of the economy
that are particularly sensitive, those with great market power, or playing, in
some way, a structuring role in the economy, as in the case of vital infra-
structures and, in particular, the banking sector.
It is therefore up to the strategic governance of the state to ensure, on the one
hand, the maximization of the potential power that the economy can generate,
through: regulation favorable to economic activity and its efficiency; adequate
incentives; and a stable, balanced macroeconomic framework. On the other
hand, it must ensure the articulation of private interests with the general interests
of the country, so that the potential power generated can be reflected in the
strategic autonomy of the state and, therefore, in the conditions for the
Challenges of strategic economic governance 167
realization of its fundamental ambitions. That is to say, to ensure that the power
in the country will be reflected in the power of the country.
For this alignment, it is important that the political system is able to pro-
vide a consensus around the vision of the country’s role in the world, without
prejudice to the salutary democratic alternation in the government – and this
must be a vision which society broadly shares. Under this social consensus, it
becomes easier, almost automatic, for diverse private interests to align with
the general interest of the country, and for private interests to leverage their
share of power into a common strategic weight.
Then, it is also essential that the country as a whole – households, firms,
and government – generate the savings necessary to finance its development
(increasing its economic size) and to guarantee national control over the main
strategic centers of the national economy. Even at the risk of appearing
exaggerated, it can be said, in reinforcing the importance of this point, that
while in the past it was through military means that conquest or its preven-
tion was achieved, in the present times, it is through capital that these two
objectives can be pursued. Therefore, ensuring adequate capital accumula-
tion – which requires the necessary savings store – should be seen the most
effective weaponry of a state to defend itself from economic dominance by
foreign interests.
It is also essential that the economic elite, in compliance with the principles
of fair competition and the functioning of the market economy, also have the
ability to work together to leverage the power to control its fragmented
resources, in order to preserve national control and to foster the development
of corporations which can be internationally competitive. The concern with
national control of the main centers of economic decision-making in the
country requires, however, a careful and parsimonious definition of what is
truly relevant, from a strategic point of view, and adequate supervision of the
activity of these centers. This will prevent a legitimate strategic concern of
giving rise to rentier opportunisms, corruption, and counterproductive gen-
eralizations that can easily morph into undue protectionism.
The management of the two strands of the relationship between economic
power and strategic autonomy – maximizing the economic potential, on the
one hand, and transforming that economic power into strategic autonomy, on
the other hand – can occasionally require trade-offs: The promotion of one
can sometimes weaken the other. For example, an inflow of foreign capital
can favor economic efficiency, but if used in excess, it can jeopardize the
country’s ability to control its own economy or it can bring about the coun-
try’s subordination to the interests of other countries. However, excessive
defensive preoccupation with this inflow can excessively sacrifice economic
efficiency and, in the long run, the very prosperity of society, as well as its
long-lasting autonomy.
In any case, decision-makers should bear in mind that for the strategic ends
of the state, existence and autonomy must precede economic efficiency. Which
is to say that without its existence (and its political autonomy), economic
168 On strategic governance
efficiency is irrelevant to the state, while the state exists, economic efficiency
can always be improved. This much was recognized by the putative father of
Economics, Adam Smith, who, acknowledged explicitly that “defense, how-
ever, is of much more importance than opulence” (Smith, 1776, Book 4, Ch.
II; italics added), which can easily be understood as a warning that preserving
existence, or national sovereignty, is higher in the hierarchy of national inter-
ests than maximizing wealth.
Therefore, the objective of efficiency must be subordinate to the objective of
preserving the strategic autonomy of the state. This is a practical way of
attending to the warning of Yarger (2006), mentioned in Chapter 4: for
strategy, effectiveness is more important than efficiency (p. 78). The preserva-
tion of the strategic autonomy of the state must therefore be included as one
of the constraints of maximizing economic efficiency.
Note
1 Interestingly, the first time that this type of claim was used seems to have been by
Napoleon Bonaparte, who has often been quoted (though without identifying the
proper source), as having said that money has no fatherland; financiers have no
patriotism and no decency; their only goal is gain. Even more interestingly, the
second record of the expression’s use is attributed to Karl Marx, who, in the
German edition of the Civil War in France, in 1870, added a sentence saying that
“capital has no fatherland” (Marx, 1977, p. 34). Drucker (1993), also mentions that
“‘Money has no fatherland’ is a very old saying,” but immediately adds that “the
nation-state was invented in large part to disprove it” (p. 142).
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Part V
Two paradigmatic cases: China
and Germany
DOI: 10.4324/9781003248392-16
11 Why these cases
DOI: 10.4324/9781003248392-17
174 Two paradigmatic cases: China and Germany
The national grand strategies of both countries since the end of WWII –
although not explicitly stated by their leaders, but inferred from their prac-
tices, their official statements along the way, and the findings from other
research – can thus be compared.
Because of the different circumstances involving the two countries, the fol-
lowing analysis will also have two different focuses. In the case of China, the
focus will be on how economic power was built in a short time and from a base
of underdevelopment, and how this build-up considerably expanded the coun-
try’s strategic autonomy and was instrumental in providing it with the hard
power necessary to become a challenger to the dominant world power, especially
within its own geopolitical region. This final outcome comes more into line with
the “conventional” build-up of strategic power. Germany, on the other hand,
was already a strong economy before WWII, but had its power substantially
reduced in the aftermath of its defeat in the war and had to rebuild its economic
base in order to compete with the Allies. Therefore, and since Germany stands
out as a leading world economic power despite being defeated in the war, it is
particularly interesting to examine its refusal to convert economic success into
forms of harder power. Germany instead accepts a statute of subordination in
this field, and yet it has become the hegemon of Europe, over and above two
other powers – the UK and France – with nuclear weapons.
Common features
The two countries have many divergences, starting with the contexts described
in the previous section, running through the development stage in which they
found themselves at the beginning of the period under analysis, and right up
to their ambitions, culture, history, political regime, territorial size, and their
status at the end of WWII. But both showed that the rapid development of
their national economies was instrumental in the considerable broadening of
their strategic autonomy and in the consequent expansion of their influence in
world affairs.
For different reasons, both states had their strategic autonomy substantially
narrowed at the end of WWII. Germany, for having been defeated and occu-
pied by the Allies, and having its sovereignty under the tutelage of those same
powers. And China, which, despite its enormous size, was an underdeveloped
and relatively poor economy, was occupied by an Axis power during WWII,
and was further devastated by a ruinous civil war and the disastrous experi-
ments of the early days of its communist regime. They both realized two
things: that they needed time to overcome this limitation, and that they could
only overcome it by strengthening their economies. And they also realized
that only by lying low over the period required in order to strengthen them-
selves, could they be committed to the task of building the economic power
they needed without arousing hostility.
Then, the two countries expanded their economies largely based on export
capacity, which required maintaining highly competitive economies. Both
Why these cases 175
resorted to external financing at the beginning of their development, as a
starting boost, but quickly acquired financial autonomy through high levels of
savings. With these savings, they were not only able to respond autonomously
to the capital requirements of their fast development, but they also accumu-
lated considerable financial wealth. And, through successive external sur-
pluses, they became net creditors to the rest of the world, a position in which
they can leverage considerable influence over other countries.
Furthermore, both countries achieved a high degree of national autonomy
in their economic fabric, with practically all of their main companies having
their strategic centers located at home and controlled by nationals, with par-
ticular emphasis on those in the banking sector. The methods by which they
achieved this result, however, differed considerably. In the case of China, it
was through tight political controls and the political and administrative lim-
itation of property rights. In the case of Germany, it was through a web of
“complicities” among the economic elite, based on a widely shared culture
and a vision of the country and its role, as well as on a network of cross-
participation mechanisms used to leverage the control of companies and their
governance. In both cases, however, the exercise of these processes of control
only became possible, without seriously compromising economic efficiency,
thanks to the abundance of national capital as a result of a culture of thrift.
Another similarity is that the two countries have enjoyed considerable
political stability. Since 1949, China has had six paramount leaders and Ger-
many has had eight heads of government, while at the same time, the US has
had 14 presidents, the Soviet Union/Russia has had nine leaders (six secre-
tary-generals and three presidents), the UK has had 16 prime ministers,
France has had 10 presidents (and 36 prime ministers), Italy 29 prime minis-
ters, and Japan also a multitude of prime ministers.
A further factor in common is that the two main facets of both country’s
success – trade surpluses and high savings – having helped them to accumu-
late considerable economic power and external influence, are now seen as a
threat to world stability in general, and to European stability in the particular
case of Germany. In the case of surpluses, this is because external balances
are a zero-sum game, whereby for some countries to be in surplus, others have
to be in deficit, and whilst the former accumulate wealth, the latter accumu-
late debt and dependence (see De Grauwe, 2013; James, 2010; Krugman
et al., 2018, pp. 582–588; Bento, 2018a, pp. 5–7). Therefore, the insistence on
maintaining their high surpluses is indirectly forcing other countries to build
up dependencies. Savings at too high a level are seen as a risk because,
according to some interpretations, there is a savings glut threatening world
financial stability and risking a new major financial and economic crisis (see
Bernanke, 2005; Baldwin & Giavazzi, 2015, p. 34; The Economist, 2017;
Bento, 2018b, pp. 48–54).
These two fundamental factors of economic power – high savings and external
surpluses – have been used by both countries as a lever to exponentiate their
power and, intentionally or not, as a threat to weaken the dominant power. It is,
176 Two paradigmatic cases: China and Germany
therefore, in this light that the actions of the US Government regarding the
exports from these countries, but mainly from China, must be interpreted. They
are aimed at containing a threat and a potential adversary, and not merely the
instrument of a “trade war,” as the media appears to report the situation.
However, the main difference between the two cases lies, as already men-
tioned in the previous section, in the different uses that each country made of
the economic power they accumulated and with the greater strategic auton-
omy that this power has given them. Germany chose to share its autonomy in
a process of peaceful integration with other countries that, having started as
economic integration, may end up becoming political integration. It has
refused to engage in the build-up of military power and in the consequent
dispute for military supremacy. China chose a different path, strengthening
itself militarily, assuming a growing assertive stance of regional power, and
being willing to dispute the hegemony of the current dominant power. This
raises the fears, referred to in the Introduction, that China may be leading
itself towards the so-called “Thucydides’s trap.”
Evidently, the different paths the two countries chose did not arise solely
from the unconditional will of their respective political societies. They were
also fostered by the surrounding circumstances, notably related to their
respective concerns over national security. While Germany has its security
guaranteed by its participation in NATO and, above all, by the protective
shield of the US, under which the country has chosen to protect itself, China’s
security depends entirely upon its own capabilities. Under these conditions, it
was easy for Germany to choose to assert itself as a civilian power and rise to
the idealistic temple of Venus, even if it was existing in a Martian world, to
return to the terminology of Kagan (2004). It would have been difficult for
China – living outside the realm of the American Olympus – to renounce the
armor of Mars in a world that continues to be dominated by human passions
and where force has not yet been put aside as the ultima ratio of security.
Finally, another important point the two cases have in common is that their
experiences, albeit diverse, have shown how fundamental national economies
are for the strategic autonomy of states.
References
Baldwin, R. & Giavazzi, F. (Ed.). (2015). The Eurozone crisis: A consensus view of the
causes and a few possible solutions [eBook]. London, England: CEPR Press.
Retrieved from VoxEU.org.
Bento, V. (2018a). The Euro Monetary Union with a flawed conceptual framework. In
J. M. Caetano & M. R. Sousa (Eds.), Challenges and opportunities for Eurozone
governance (pp. 1–18). New York, NY: Nova, Science Publishers.
Bento, V. (2018b). De Portugal, da Europa e do Mundo (Of Portugal, Europe and the
World). Lisbon, Portugal: Relógio de Água.
Bernanke, B. (2005, March 10). The global saving glut and the U.S. current account
deficit [Lecture]. Richmond, VA: Virginia Association of Economists and (US)
Why these cases 177
Federal Reserve Board. Retrieved on January 02, 2020, from https://www.federalre
serve.gov/boardDocs/Speeches/2005/200503102/default.htm.
De Grauwe, P. (2013). Design failures in the Eurozone: Can they be fixed? LEQS Paper
no. 57/2013. London, England: London School of Economics and Political Science.
James, H. (2010). The history of tackling current account imbalances. In S. Claessens,
S. Evenett & B. Hoekman (Eds.), Rebalancing the global economy: A primer for
policymaking (pp. 57–60). London, England: CEPR Press.
Kagan, R. (2004). Of paradise and power: America and Europe in the new world order.
New York, NY: Vintage Books (Random House).
Krugman, P., Obstfeld, M. & Melitz, M. (2018). International economics: Theory and
policy (11th edition). Harlow, England: Pearson.
The Economist. (2017, July 8). The good and bad in Germany’s economic model are
strongly linked. The Economist. Retrieved on March 25, 2020, from https://www.
economist.com/printedition/2017-07-08.
12 The case of China
Preamble
China’s success over the last four decades is the most obvious case in support
of the arguments sustained throughout this book. In the late 1970s, Deng
Xiaoping – the great reformer of China who would be seen as the great
architect of the ensuing strategy (Cable, 2017, p. 1; Liu, 2018, p. 69) – recog-
nized China as “still one of the world’s poor countries” (Deng, 1979a).1 Such
a situation, that is, the reduced size and the backwardness of its economy,
imposed serious constraints on the country’s strategic autonomy. Although
this was not the expression used at the time, the significance of the narrow
range of options available corresponds to the definition of strategic autonomy
proposed in this book. In fact, Deng explicitly acknowledged that “to achieve
genuine political independence a country must lift itself out of poverty”
(Deng, 2012, p. 163). Furthermore, despite its solidarity with the poorer
countries of the so-called Third World, in order to provide support to devel-
oping nations, China knew that it would have to raise its Gross National
Product (GNP) per capita from around 300 USD to 1,000 USD (Deng,
1979b). It was also aware that the role played by the country “in international
affairs was determined by the extent of [its] economic growth,” and that only
if the “country becomes more prosperous, will [it] be in a position to play a
greater role in [those affairs]” (Deng, 1980a). More significantly, though, “the
return of Taiwan to [the] motherland – the reunification of the country” ulti-
mately depended on the Mainland’s ability to “surpass Taiwan, at least to a
certain extent, in economic development … Nothing else [would] do” (Deng,
1980a). And socialism, the existential purpose of the regime, could not be
built “if the economy remains stagnant and the people’s living standards
remain at a very low level for a long period of time” (Deng, 1980b).
China, according to Swaine and Tellis (2000), has pursued a grand strategy
with three interrelated objectives: (i) “the preservation of domestic order and
well-being in the face of different forms of social strife”; (ii) “the defense
against persistent external threats”; and (iii) “the attainment and maintenance
of geopolitical influence as a major, and perhaps primary, state” (p. 14). And
from this grand strategy was derived, in turn, a security strategy oriented
DOI: 10.4324/9781003248392-18
The case of China 179
toward, firstly, “the maintenance of internal stability and prosperity” and,
secondly, “the attainment of Chinese preeminence … along a far-flung and
vulnerable geographic periphery” (p. 15, italics added). And, as the same
authors states, the Chinese authorities soon realized:
[T]hat only sustained economic success can assure (a) the successful ser-
vicing of social objectives to produce the domestic order and well-being
long associated with the memories of the best Chinese states historically;
(b) the restoration of the geopolitical centrality and status China enjoyed
for many centuries before the modern era; (c) the desired admittance to
the core structures regulating global order and governance.
(p. 219)
Khan (2018) has a more parsimonious view of China’s grand strategy since
Mao, which he considers as being just “to secure the state” (p. 245). As Khan
recognizes, it is necessary to build up a solid economic base in order to secure
the state, because it is “the economy [that] undergirds security” (p. 140),
whereby “the development of national defense had to be subordinated to
economic development” (p. 137). Whether with more elaborate or more sim-
plistic intentions, after the consolidation of the new regime, China needed a
bold and ambitious strategy to multiply the size of its economy in a short
time, so as to be able to attain its other strategic objectives, for example,
reunification with Taiwan and geopolitical dominance. Within the analytical
framework of this book, those objectives did not fall within the strategic
autonomy of the country (they were not achievable), so China primarily had
to expand its strategic autonomy through the rapid growth of its economy, in
order for the grand strategy to turn those ambitions into achievable ends as
quickly as possible. This is a perfect example of the dialectic between ends
and means discussed in Chapter 2. Such a strategy was launched by the 3rd
Plenary Session of the 11th Central Committee of the Chinese Communist
Party at the end of 1978, and then reiterated by the 12th Party Congress in
1982 (Deng, 2012, pp. 7, 63).
The orientations of that plenary session set out a three-stage development
strategy, the first step of which was to double GNP during the 1980s. The
second step was to double it again during the 1990s, so as to reach 1,000
USD per capita by 2000, and then the third was to quadruple it over the fol-
lowing 30 to 50 years, to reach “a medium standard of living” (Deng, 2012, p.
182).2
Table 12.1 China and main strategic competitors – GDP and savings
Geopolitical area Values in USD (2012 constant prices) USD Current prices
GDP (billions) GDP per capita Saving (billion)
1980 2019 Avg growth 1980 2019 Avg growth 1980 2019
China 716.8 12,773.9 7.7% 726.2 9,123.9 6.7% 98.9 6,317.6
USA 6,759.2 19,091.6 2.7% 29,694.9 58,124.5 1.7% 630.1 3,988.3
EU 7,819.8 13,928.0 1.5% 20,808.0 31,289.7 1.1% 744.2 3,957.7
SUM 15,295.8 45,793.5 2.9% 9,751.8 21,506.5 2.0% 1,473.2 14,263.6
Share in the group (%)
China 4.7% 27.9% 4.8% 7.4% 42.4% 4.7% 6.7% 44.3%
USA 44.2% 41.7% –0.2% 304.5% 270.3% –0.3% 42.8% 28.0%
Two paradigmatic cases: China and Germany
stated. More immediately in its direct “backyard” – the South China Sea; and
in a longer time-horizon, throughout the Belt and Road Initiative (BRI)
expansion route.
It is, therefore, in light of this new context, and taking into account the
expansion of its strategic autonomy achieved through economic means, that
some of China’s strategic initiatives have to be understood: primarily the Belt
and Road Initiative (BRI) and the Made in China (MIC) 2025 plan. Rising
above the close detail of BRI – its infrastructure projects and the rhetorical
cultural envelope, namely – and apposing its graphic representation onto the
world map, it becomes clear that there is a deep strategic reach to the project.
Such apposition becomes the graphic representation of a new Chinese grand
strategy: the creation of a new world centrality – for the world to come in the
future – an alternative world view, opposed to the Western centrality that has
dominated the world over the past two or three centuries. Maçães (2018) goes
even further, stating that BRI “is the Chinese plan to build a new world order
replacing the US-led international system” (p. 6), and “is by design a project
meant to encompass the whole world and the totality of human life” (p. 8).
China, over the past few decades, has amassed considerable potential power –
economic, technological, and military – thanks to its enormous economic success,
and has been turning this power into world influence and strategic assertiveness.
As the country with the second largest savings pool created every year and the
largest accumulation of external surpluses against the rest of the world over the
last quarter of a century, China has mustered considerable financial power. This
power it has been employing to project its influence in the world and to dispute the
Western dominance that has characterized international financial relations. Some
of the more visible expressions of the financial capability that China has gained
186 Two paradigmatic cases: China and Germany
from its economic success and its frugality, include: Lending to developing coun-
tries; investing in the infrastructure of developing and advanced countries; and
taking controlling positions in Western companies. China has also been sponsor-
ing the creation of an Asia-based supranational financial institution with a domi-
nant Chinese influence – the Asian Infrastructure Investment Bank (AIIB) –
rivalling the West-based World Bank and Asian Development Bank; and has
supported the infrastructure investments required by BRI in many countries.
As Horn et al. (2019) point out in their working paper, the documentation in
relation to China’s “expanding role in global finance” is poor, and this has led to
a crucial lack of understanding and insight (p. 1). If everything – lending, port-
folio investments, foreign equity, and direct investment – is accounted for,
“China’s total financial claims abroad amount to more than 8% of world GDP
in 2017” (pp. 5–6), culminating in a path “almost unprecedented in peacetime
history, being only comparable to the rise of US lending in the wake of WWI
and WWII” (p. 6). Furthermore, according to the same authors, “Chinese loans
have helped to finance large-scale investments in infrastructure, energy and
mining in more than 100 developing and emerging market countries” (p. 4). This
situation creates considerable risk for some economies, because “for the 50 main
recipients … the average stock of debt owed to China has increased from less
than 1% of GDP in 2005 to more than 15% of debtor countries’ GDP in 2017, at
least.” This means that these nations’ debt to China accounts now “for more
than 40% of [their] total external debt, on average” (p. 4). What is more worrying
still about this lending is that, besides being almost all “official, meaning that it is
undertaken by the Chinese government, state-owned companies or the state-
controlled central bank” (p. 1), and being naturally “shaped by the geopolitical
objectives of the Chinese government” (p. 2), “about 50% … is ‘hidden’. Neither
the IMF, the World Bank, nor credit-rating agencies report on these ‘hidden’
debt stocks, which have grown to more than 200 billion USD as of 2016” (p. 4).
The scope of this Chinese financial clout is already perceived as a threat by
the US whose last NSS document complains that “China is investing billions
of dollars in infrastructure across the globe” (United States, 2017, p. 38).
Furthermore, it is felt that these investments “reinforce its geopolitical
aspirations” (p. 46), since the country is “using economic inducements and
penalties, influence operations … to persuade other states to heed its political
and security agenda” (p. 46).
The potential strategic impact of the financial power that China has
amassed with its accumulation of considerable savings was well acknowledged
by Allison (2020), according to whom:
Strategic governance
The strategic governance of the economic sphere of Chinese strategy has been
somewhat facilitated by the authoritarian nature of the regime. Of course,
there were conflicting interests and preferences throughout the course of the
strategy – from design to implementation, from ends and means to ways.
Although there were winners and losers, all disputes were somehow contained
within the governing party. Even the objective of prosperity was not con-
sensual at all points, because, as Deng reported in an interview with Frank B.
Gibney, in November 1979, the “Gang of Four said it was better to be poorer
under socialism, than rich under capitalism,” which he considered to be
absurd (Deng, 1979c). However, as mentioned before, the 3rd Plenary Session
of the 11th Central Committee of the Chinese Communist Party had already
approved the outline of the economic strategy at the end of 1978, which was
reiterated by the 12th Party Congress in 1982.
But, if the authoritarian structure of the regime and the government’s exclu-
sive ownership of the main means of production ensured effective control of the
strategy, its effectiveness, and above all the efficient use of available resources,
was seriously undermined by that same structure and the strict economic plan-
ning associated with it. To overcome such disadvantages, Deng introduced and
expanded market mechanisms to regulate the economy and allowed the privati-
zation of many activities, including into the hands of foreign private investors.
Thus, with regard to both strands of the challenge of governance of the eco-
nomic strategy – power creation and power command – this tactic had a tangible
effect. Such a path opened the economy up to more efficient conditions in the
188 Two paradigmatic cases: China and Germany
first strand, that is, it created more economic power; however, in the second
strand, the coordination process necessary for the effective command of power
became more complicated, as decentralizing economic decision-making pro-
cesses meant allowing such decentralized economic decision-making to serve
other interests. However, as he explained, Deng was aware of the risks and was
confident that the path he proposed following was the most effective means to
the envisaged end:
However, as Che and Qian (1998) point out: “without secure property rights,
private enterprises played only a minor role … and by 1993 the private sector
accounted for only about 15 percent of national industrial output” (p. 467). In
1994, a new Company Law was adopted, after which “the Chinese govern-
ment began to convert SOEs [State-Owned Enterprises] to corporate forms,”
with some of the capital partly privatized, becoming “mixed-ownership firms,
where the ownership and management of the firms were shared among state
and private shareholders” (Milhaupt & Zheng, 2016, p. 4). In 2003, mixed-
ownership firms were estimated to account for 40 percent of China’s overall
economy, with the expectation that, over the following five to 10 years, this
would reach 80 percent (Yuqing, 2003). And by 2010, mixed ownership
enterprises (MOE) and privately-owned enterprises (POE) accounted for 42.9
percent and 22.6 percent of the total assets of domestic industrial firms,
respectively, and for 42.3 percent and 34.6 percent, also respectively, of the
industrial value added in the same set of firms (Meyer & Wu, 2014, p. 7).
The 3rd Plenary Session of the 18th Chinese Communist Central Commit-
tee, held in November 2013, committed to “improving the property rights
protection system” and to “vigorously developing a mixed economy.” It
acknowledged that “property rights are the core of ownership,” being neces-
sary “to improve the modern property rights system with clear ownership,
clear-cut rights and obligations, strict protection and smooth flow,” and that
“a mixed economy with cross holding by and mutual fusion between state-
owned capital, collective capital and non-public capital is an important way
The case of China 189
to materialize the basic economic system of China.” For this purpose, it
would allow
the state’s influence on firms in China extends well beyond the matter of
‘control’ in the corporate management sense. Indeed, … in China’s pre-
sent institutional environment, the state could exert influence over firms
irrespective of its direct or indirect ownership stakes.
(Milhaupt & Zheng, 2016, p. 5)
And the communiqué from the 3rd Plenary Session also specified that the
authorities “must unswervingly consolidate and develop the public economy,
persist in the dominant position of public ownership, give full play to the leading
role of the state-owned sector, and continuously increase its vitality, controlling
force and influence” (China.org.cn, 2014). Thus, and as noted by Elizabeth
Economy (2018), “the Chinese leadership has maintained its commitment to the
dominant role of the state as opposed to the market … [which] is reflected in the
continued use of SOEs as agents of the Chinese state” (p. 108). And, as reported
by Feng (2016) in the New York Times, “China’s top leader [President Xi Jinp-
ing] made clear … that the Chinese Communist Party had the ultimate say over
state companies.” In the president’s own words, “Party leadership and building
the role of the party are the root and soul for state-owned enterprises. … The
party’s leadership in state-owned enterprises is a major political principle, and
that principle must be insisted on.” Less than a year later, Hughes (2017) also
reported, in the Financial Times, that “China’s Communist Party is writing itself
into the articles of association of many of the country’s biggest companies in a
blow to investor hopes that Beijing would relax its grip on the market.” The
measure did not only involve SOEs proper, because on the following day another
column in the same newspaper reported that
[It] is misleading to view private firms in China as insulated from the state in
ways that set them apart from SOEs. Rather, the human agents managing
Chinese SOEs and private firms respond in similar fashion to their institu-
tional environment, fostering close ties to state bodies, seeking state largesse,
and resisting government policies that are not in their interests.
(Milhaupt & Zheng, 2016, p. 5)
[I]dentified 95 out of the top 100 private firms and eight out of the top
ten Internet firms whose founder or de facto controller is currently or
formerly a member of central or local political organizations such as
People’s Congresses and People’s Political Consultative Conferences.
(p. 10)
And by late 2018, Jourdan and Ruwitch (2018) reported in Reuters that the
official Party newspaper had said that “Jack Ma, the head of e-commerce
giant Alibaba Group Holding Ltd and China’s best-known capitalist, is a
Communist Party member.” Alibaba, it should be remembered, and as Table
A.13 shows, is the most valuable Chinese company and one of the world’s
leading technological companies.
So, all in all, and as Lucas (2018) reminds us, “even after four decades of
market-based economic reforms, the party places a high priority on main-
taining state control over the strategic uplands of the economy – from finance
to energy and media.” Moreover, strict political control of the economic
process also ensured that all major strategic centers of the national economy
remained under national control.
Therefore, the strategic governance of the Chinese economic sphere has
relied on strict political control of the decision-making process, even in what
has been apparently decentralized into private units. Under these conditions,
the alignment of strategic interests among the different levels of decision-
making becomes more straightforward. Whether this effectiveness in the
strand of power control has sacrificed efficiency in the strand of power crea-
tion remains to be seen (albeit apparently it did not). But the overall effec-
tiveness of the economic strategy, shown by the results presented above, seems
undoubtable. This raises an undeniable challenge to other forms of political
organization, whose economic effectiveness historically has been assumed to
be superior.
The case of China 191
Still a way to go
The economy has raised China to a higher strategic level, from where it is able to
dispute Western dominance over the world. Russia, having been the main Amer-
ican challenger during the Cold War, and having a high military capability, no
longer has the economy or the innovative capacity to play the main challenger’s
role. Yet, despite all of success in the recent past, China is still a middle-income
country, with a per capita GDP that is 26 percent of the US’s and 59% of Russia’s,
measured in PPP (16 percent and 89 percent, respectively, in USD) (IMF-WEO,
2021). Furthermore, as Chapter 6 discusses, the entire Chinese economy still has
an overall level of efficiency (measured by apparent labor productivity) that is
about one-fifth of the efficiency of the US’s, in spite of its already-advanced tech-
nological capabilities. And the economy is already showing signs of strain, high
levels of debt, overcapacity, and domestic imbalances (see Congressional Research
Service, 2019, p. 25; Sheng & Geng, 2018; Wolf, 2018), and after the long period of
fast growth, it is expected to slow down in the coming years. Furthermore, and in
spite of its advantage at present, Chinese demography is expected to develop in a
rather adverse way, as it is expected to have a bigger problem with an aging
population than Western nations (see Figures A.14 and A.15).
Therefore, to maintain a credible challenge to US dominance, China will
continue to depend on the success of its economic performance. Again, this
stresses the central argument of this book.
Notes
1 The quotes from Deng Xiaoping between 1982 and 1992 are extracts from the book
in the References “Deng, X. (2012),” which is the third volume of the selected
works of Deng, and which contains his writings from that time. As it was not pos-
sible to get access to the second volume, which collects Deng’s work from 1975 to
1982, the quotes from this period are gathered from an internet publication of the
volume, but for which there are no page numbers nor locations. Therefore, it was
decided to list all the cited works individually in the references.
2 This quote is from a talk Deng gave in April 1987.
3 Remember what was said earlier, in Chapter 3, about the political sustainability of
large extractions of income from society for military purposes
4 Recall what was said in Chapter 6 about comparisons in USD and in PPP: As
China is poorer than the USA, the prices of its non-tradable sector are lower than
the corresponding American prices, whereby the same basket of products and ser-
vices is cheaper in China than in the US, requiring, then, a lower income is neces-
sary to acquire it.
5 It should be noted that China joined the WTO in December 2001.
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13 The case of Germany
Preamble
Germany is a relatively recent state, the result of a process of unification of
several German-based states under Prussian leadership, the final phase of
which was led astutely by Otto von Bismark, the Prime Minister of William I
of Prussia. Already a military power, it quickly established itself as an indus-
trial power and as one of the main European economies with imperialist
ambitions, being one of the instigators of World War I. Defeated, and despite
having undergone two highly damaging economic crises within two decades –
a hyperinflation in the 1920s and a depression in the 1930s – it regained the
strength of an industrial power and reawakened those imperialist ambitions,
eventually leading Europe to another destructive world war. Defeated once
again and occupied by the winning powers, Germany was divided into two
countries, East and West Germany, separated by the “Iron Curtain,” which
came to define the split between the two sides of the Cold War.
DOI: 10.4324/9781003248392-19
196 Two paradigmatic cases: China and Germany
large parts of society and the political sphere,” under “the pledge of ‘Nie
wieder Krieg, nie wieder Auschwitz!’ (Never again war, never again Ausch-
witz) … deeply ingrained in the German public consciousness” (Weiss, 2016,
p. 61). In strategic terms, and rationalizing retrospectively, it could be said
that the objective of West Germany’s grand strategy was to gain international
acceptance by disengaging from anything that could be perceived as a threat
and engaging peacefully and cooperatively with the international community,
while building a powerful economy and waiting patiently for a possible
opportunity to reunify with the Eastern side.
The path toward economic strength itself, though, would not easily be
accepted either. It “would have been perceived as a threat,” had Germany
not integrated with other European economies in “a political arena of co-
operation” (Bulmer & Paterson, 1987, p. 7). European partners were in need
of the German economic capacity for their own development and the Wes-
tern Powers wanted to prevent West Germany from slipping into the Eastern
bloc, while fearing that allowing the country to regain too much power
would turn it into a potential threat to peace. They came to conclude that
“if you could not destroy Germany, then join her up to a European frame-
work in which she could do no harm militarily but much good economic-
ally” (Judt, 2010: loc. 2978, Chapter 4). Then, in 1952, Germany, together
with Belgium, France, Italy, Luxembourg, and the Netherlands, initiated a
European arrangement that started out as the European Coal and Steel
Community (ECSC), to be joined by the European Economic Community
(EEC) in 1957, both to be merged in 1967 into the European Communities (EC).
These grew to 12 members and then transformed into the European Union
(EU) in 1992 and was further expanded to 28 members, after the end of the
Cold War.1
Germany then took advantage of the European common market that eco-
nomic integration had put at its disposal, developing an export-led economy
with high-growth potential. In this way, it would gradually strengthen its
economic power, which would eventually impose itself on conditions that the
course of history would meanwhile render more favorable. It soon became the
largest and most powerful European economy and, because of this unavoid-
able reality, its ascendancy in European affairs was gradually and stealthily
affirmed.
For a combination of reasons – including the occupying powers’ perception
of it as a potential threat, “the burdens of the past” felt by German society, and
the conditioned sovereignty (or semisovereignty as pointed out by Paterson,
2005) – over many years, West Germany “played a much less important poli-
tical role in the EC than its economic strength suggested,” having a sort of
“split identity of ‘economic giant’ but ‘political dwarf’” (Bulmer & Paterson,
1987, p. 1). Thus, during the time of West Germany’s conditioned sovereignty,
the EEC was broadly comparable to “a Franco-German condominium, in
which Bonn underwrote the Community’s finances and Paris dictated its
policies” (Judt, 2010: loc. 7489, Chapter 9).
The case of Germany 197
Becoming an economic power
A monetary reform in 1948, aimed at resolving the monetary excesses and the
repressed inflation of the Nazi regime, and to exorcise the ghost of the
hyperinflation of the 1920s (Hetzel, 2002, pp. 20–24), introduced a new cur-
rency – the Deutschmark (DM) – and created a new central bank – the future
Bundesbank. These new creations would soon become a world monetary
benchmark and a beacon of credibility and monetary effectiveness, symboliz-
ing “everything that Germany did right after the War” (p. 28). And in a short
time-span, the German economy became a hallmark of macroeconomic sta-
bility, financial probity, thrift, industrial innovation, and export capacity that
made it one of the world’s leading economies.
By 1960, West Germany was already the largest European economy and
the third largest in the world (after the US and the Soviet Union) (Maddison
Project Database, 2020), as well as the second largest world exporter. By the
time the Cold War ended, although surpassed by China and Japan in world
economic size, Germany remained by far the largest European economy, the
world’s second largest exporter (after the US), and the world’s third largest
saver in terms of volume (after the US and Japan). Furthermore, its currency
was one of the best-respected and valuable in the world and served as the
anchor around which most European currencies had their own monetary and
exchange-rate policies defined. This strength was behind the episode told in
Chapter 3, when Jacques Attali, adviser to France’s President Mitterrand,
compared the power of the DM to an atomic bomb. So, by this time, Ger-
many had already mustered considerable economic power.
In 1991, after the communist regimes in Eastern Europe imploded, West
Germany was able to absorb the former East Germany, which the so-called
Iron Curtain had separated. Having realized the old dream of a reunited
Germany, the country automatically expanded its territory by 44 percent, its
population by 25 percent, and GDP by 14 percent (East Germany was much
less economically efficient than West Germany). This larger Germany faced a
world from which the specter of war – and mainly the imminent threat to
Western Europe – seemed to have vanished, and where the liberal principles
of free market and economic efficiency had become the beacon of economic
organization and of international economic relations. With an economic
model largely based on these principles, Germany experienced its influence
growing considerably and suddenly, and became more assertive in the use of
its potential economic power. This greater assertiveness was particularly felt
in the conduct of the EU and, above all, in the founding and subsequent
orientation of the European Monetary Union (EMU), as well as in the man-
agement of the new common currency, the euro.
To be fair, Germany was reluctant to set up a monetary union, which it con-
sidered premature in view of the state of European economic conditions, and to
which the German population feared losing their most trusted institutions – the
Bundesbank and DM – in exchange for weaker ones. The financial probity to
198 Two paradigmatic cases: China and Germany
which the country was accustomed, which was considered the basis of its eco-
nomic success, would be replaced by looser stances, more tolerant of inflation
and economic imbalances (see Heipertz, 2001, pp. 20–41). Pressed by the
political circumstances surrounding the reunification process, Germany
acquiesced to EMU, but imposed its own rules. Therefore, the parts of
Europe that joined the common currency came under the governance of
German monetary rules and culture, despite the diversity of the underlying
national cultures; inevitably contradictions emerged, complicating the func-
tioning of the union (see Bento, 2013). With the prevalence of its ideas and its
economic and financial conceptual framework over the eurozone, Germany
became a sort of hegemon of the area, in the Gramscian sense, to borrow the
interpretation of Markovits et al. (1996, p. 706).
Germany’s power over Europe was especially evident during the euro crisis
that emerged out of the international financial crisis, when, as the main pro-
vider of the funds needed to rescue the struggling countries, and seen by the
markets as the guarantor of financial stability, Germany virtually dictated the
conditionality attached to the rescue packages and controlled the whole pro-
cess. Not that these actions produced the best results, ultimately weakening
Europe economically (see Bento, 2018a), and triggering divisive political
reactions:
[This made] Berlin the target of anger among Greeks, Italians, and others
who had once blamed the EU bureaucracy in Brussels for their hardships.
Germans were angry, too, resentful at bankrolling other people’s pro-
fligate ways. Outside Germany, there was talk of an anti-German
‘common front’, and in-side Germany, there was a sense of victimhood
and a revival of old fears of encirclement by the ‘weak economies’.
(Kagan, 2019, p. 116)
However, the dissection of this exercise of power, even though it may have
had important consequences for the process of European integration, and
therefore for the role of Germany and its recognition by others, is beyond the
object of this book. What is important for the purposes of demonstration in
the current chapter is to state that the power acquired by Germany, as Table
A.20 bears witness, stems from: (i) the size acquired by its economy – the
fourth largest in the world, measured in USD, despite being only the 17th
largest population, which implies a high level of economic efficiency; (ii) its
capital stock – the world’s fifth largest; (iii) its high level of human capital;
(iv) a high reliance on exports – the world’s third largest exporter, behind
China and the US; (v) similar to the US, being one of the “most important
hubs in complex GVC networks” (Li et al., 2019, p. 9); (vi) its thrifty pro-
pensity – the fourth largest saver by volume in the world after China, the US,
and Japan, which favors the self-financing of the capital needs for the devel-
opment of the country and made it the world’s fourth wealthiest country
(according to the estimations explained in Chapter 8), and which allows for
The case of Germany 199
the strategic control of the most relevant German companies to be kept
within the country; (vii) having relied on foreign capital provided by the
Marshall Plan to help kick-start the economy after WWII, and remaining
open to foreign capital inflows, but turning itself primarily into a capital
exporter, the third largest net creditor against the rest of the world (including
Hong Kong’s balance into Chinas’s); (viii) a recognized high-level of techno-
logical capability (at least until the so-called forth industrial revolution); (ix)
an appropriate institutional framework; and (x) a strong currency based on
an industrious and financially strict culture. All of these factors in conformity
with what Chapters 6 to 8 identified as relevant contributors to economic
power and to the strategic autonomy of the state.
Strategic governance
In Germany – a democratic country and a market economy dominated by
private propriety and private initiative – strategic governance is obviously
more complex than in China. The political profile, whether at the level of
government or in the political interaction between society and government, is
more heterogeneous and more dialectical. In addition, having decentralized
economic decisions in a multitude of decision-makers with their own interests
and scopes of power, naturally makes the alignment of strategic interests and
objectives more complex. Nevertheless, the success of German strategic gov-
ernance has also been remarkable.
Beyond the institutional apparatus of political governance, it is important
to bear in mind that the German economy “is governed through a corporatist
policy consensus in which government, trade unions, and business leaders
negotiate to regulate the economy while also relying on ‘expert institutions’,
such as an autonomous central bank” (Harnisch, 2013, p. 76). Therefore, the
broad political consensus between the parties that alternate in government, on
the one hand, along with the “corporatist consensus” between the govern-
ment and the most relevant economic actors on the other hand, has been
paramount in providing political and social stability and, above all, in ensur-
ing the alignment of interests and coordination of objectives of the different
levels of decentralized decision-making with the strategic objectives of the
state. Which is to say, this broad political consensus was essential for the
effective strategic governance of the economic sphere of national strategy,
which for Germany seems to be center stage of such a strategy. This has cer-
tainly been one of the key conditions behind the enormous success of the
German economy.
Despite a highly decentralized model of economic governance, the align-
ment of objectives and interests is remarkable for having taken place without
the forced coordination of a central authority. To the success of such sponta-
neous alignment and coordination, two interrelated factors have contributed
decisively: a conceptual framework around the economy, a kind of ideology,
widely shared, that has provided a consensual cultural context that favored
200 Two paradigmatic cases: China and Germany
the alignment; and a corporate culture and organization, coupled with an
intertwining of common interests, which favored national control of the key
strategic centers of the economy.
The conceptual framework around the economy rests on two pillars:
Ordoliberalism and social market economy. Ordoliberalism is based on eco-
nomic principles stemming “from the so-called ‘Freiburg School’ of the 1930s,
a research program at Freiburg University led by economist Walter Eucken
and law scholar Franz Böhm,” whose aim “was to investigate the inter-
dependency of legal-institutional structures and economics” (Feld et al., 2015,
p. 2). Its main tenets are competition, price stability, fiscal restraint, the
importance of rules over discretionary economic policies, and the importance
of the supply side over demand management (Matthijs, 2016, p. 142; Hilleb-
rand, 2019, p. 6). In accordance with these principles, the government should
refrain from intervening directly in the management of the economy – for it
would be destabilizing – and should instead provide a set of rules and the
constitutive principles for a perfectly competitive market, under which eco-
nomic agents work and compete. The government should also seek to have
public finances balanced and on a sound path, and the central bank should
conduct its monetary policy with the sole purpose of preserving the internal
value of the currency, that is, ensuring price stability. The social market
economy, in turn, was “introduced by Economics Minister Ludwig Erhard in
1948 … and offered a socially conscious model of market capitalism” (Van
Hook, 2004, p. 1). Its scope, in addition to incorporating Ordoliberalism, was
widened to ensure social cohesion and economic co-responsibility between
capital and labor, whereby “in a society in which national identity had been
discredited, the social market economy gradually assumed a political and
cultural significance in West Germany that transcended its ostensible purpose
as a set of economic policies” (p. 1).
This broad cultural background fostered, in turn, not only the above-men-
tioned “corporatist consensus” in economic governance, but also a corporate
culture where, as pointed out by Bourgeois and Lasserre (2010), employer
and employees form a community entitled to the sharing of wealth: Without
capital, there is no work (employers’ responsibility), and without work, there
is no capital (employees’ responsibility). Further, the workers are entitled to
participate in the management of the companies they work for within the so-
called mechanism of codetermination (p. 195). All of this provides fertile
ground for the easy alignment of social and private interests, all the more so
because the German Constitution itself states that private property, being
guaranteed, entails obligations and its use must serve the public good (Art.
14). This greatly facilitates strategic coordination by the government, not-
withstanding a highly decentralized decision-making system.
As to corporate organization, Germany has also developed complex sys-
tems of ownership and control, utilizing pyramidal structures, network levers,
cross-holdings, and governance mechanisms. This has been very successful in
protecting German corporations from hostile take-overs (see Franks &
The case of Germany 201
Mayer, 2001; Moebert & Tydecks, 2007), thus preserving the main strategic
centers of business activity under national control. National banks played a
major role in this tangle of interests, entering boardrooms and leveraging
control “by combining votes from stock they own directly, stock in bank-
controlled investment companies, and securities they vote for [for] their
brokerage customers” (Roe, 1993, p. 1993; Franks & Mayer, 2001, p. 6).
These mechanisms, in addition to ensuring the national control of the key
strategic centers of business, also favor the coordination of strategic interests
and are ultimately an important instrument of effective strategic governance
of the economic sphere.
Many liberal economists, for whom the economies can work in a political
aseptic context, find these German practices to be very inefficient, which, to
some point, they may be indeed. But they disregard that they were instru-
mental in the amassing of German economic power and the wide strategic
autonomy they provide to the German state, which may, from the point of
view of the national interest, be more valuable.
Strategic culture
In view of the constraints imposed by the victorious powers, but above all by
the “Never again war” pledge, Germany chose to become a “civilian power,”
like Japan (another defeated power in WWII). This means, according to
Kirste and Maul (1996, p. 297): (i) as a power, helping to shape international
relations in a non-violent way, setting itself apart from the behavior of great
powers in terms of objectives and strategy; (ii) as a role, orienting the foreign
policy towards values aimed specifically at the process of civilization of
international politics; and (iii) as a medium, achieving a specific goal, based
on specific instruments, including the passing of some sovereignty to supra-
national bodies. Put more simply, Germany pursued a value-oriented foreign
policy rather than a calculated one, favoring nonviolent means of resolving
international conflicts and resorting to supranational cooperative institutions.
A civilian power, however, also pursues national interests, although resort-
ing to means other than the military. West Germany chose to pursue its
interests and ensure economic well-being and security through supranational
integration and a general willingness to cooperate (p. 300). Upon joining
NATO, the country took on a role as a joint security producer while, more
importantly, submitting its own security into the hands of the US. Thus, by
becoming a founder and a crucial cornerstone of European integration, Ger-
many helped to solve the German problem, binding the nation to the Western
world (and its values), while at the same time limiting “automatically …
Germany’s freedom of action” (Creswell & Trachtenberg, 2003, p. 15). Or,
translated into the conceptual framework of this book, automatically con-
straining its strategic autonomy. So, West Germany began by ceding strategic
autonomy to quietly devote herself to the development of her economy,
creating prosperity and accumulating the economic power that would grant
202 Two paradigmatic cases: China and Germany
her, in the future, a considerable expansion of strategic autonomy, in addition
to great influence in European and world affairs.
With the Treaty on the Final Settlement with Respect to Germany, signed
on September 12, 1990, by the two Germanies (West and East) and the Four
Powers – the three Western powers already mentioned and the Soviet Union,
which still had a military presence in East Germany, full sovereignty was
finally attained. The treaty recognized: that “the unification of Germany as a
state with definitive borders is a significant contribution to peace and stability
in Europe”; that “with the unification of Germany as a democratic and
peaceful state, [these Powers’] rights and responsibilities relating to Berlin and
to Germany as a whole [had lost] their function”; and that “the United Ger-
many shall have accordingly full sovereignty over its internal and external
affairs.” The unified state, though, pledged to limit its military capacity by the
“renunciation of the manufacture and possession of and control over nuclear,
biological and chemical weapons,” and by reducing “the personnel strength
of the armed forces … to 370,000 (ground, air and naval forces).” Moreover,
to settle the Eastern front and bring the Soviet Union agreement into the
reunification and into the new geopolitical situation arising from it, from
1990 to 1994, Germany eventually transferred, “to the Soviet Union (and
latterly to Russia) the equivalent of $71 billion (with a further $36 billion
going to former Communist States of Eastern Europe)” (Judt, 2010: loc.
15324, Chapter XX). From then on, however, “prosperity was to be the
answer [and] Germany would buy its way out of history” (loc. 15345).
It is important to remember that it was the economic power amassed ear-
lier, along with the role as a civilian power it assumed, that enabled West
Germany to fulfill a fundamental objective of its (implicit) grand strategy: to
bring the two sides of the former German country together. Had it become a
military power, that objective would probably have been unattainable without
a war or a threat of war. Therefore, it seems reasonable to say that Germany’s
strategic autonomy, and the practical consequences of it, in this case, were
broadened through the work of its economy more than would have been the
case by the conventional military approach to strategy.
German reunification, and the implosion of the so-called Soviet Empire that
made it possible, changed the geopolitical configuration of Europe and sig-
nificantly modified the circumstances surrounding Germany, which for a long
time had constrained its strategic autonomy and favored its passive role as a
civilian power. This paved the way for a significant change in its role in the
international political and strategic concert, and in its attitude to international
relations. As Harnisch (2013) concludes: “geopolitical changes re-created Ger-
many as a natural hegemon in the middle of Europe which would pursue an
influence-seeking strategy, maximizing its institutional power vis-à-vis other
European great powers, such as France and the United Kingdom” (p. 81).
Such changes, coupled with the extraordinary power that reunification has
put in the hands of Germany, have led some analysts to project admittedly
pessimistic scenarios for the future of Europe. This was the case, for example,
The case of Germany 203
with Mearsheimer (1990), who predicted a nuclear proliferation in Europe
and the disintegration of NATO and of the EU, with Germany becoming a
dominant nuclear power. However, despite the remarkable economic power
that in itself would qualify the country as one of the most powerful countries in
the world, Germany has continually refused to match such power with a corre-
sponding military power, and so contradicted such doomsday predictions.
Nevertheless, despite Germany’s preference for its role as a civilian power
above being a hard provider of world security, troubling challenges to its
intended role were soon confronting the country. The new geopolitical cir-
cumstances brought about by the end of the Cold War and the subsequent
Balkan disintegration, forced Germany to face the contradictions of a
“Venusian” civilian power in a “Martian” world, to use the terminology of
Kagan (2004). Limiting its participation to the “checkbook diplomacy” of
generous financial contributions (Brummer & Oppermann, 2016, p. 4), at the
beginning of the challenges to preserve the security in the region, Germany
ended up engaged in direct combat for the first time since the war, without a
mandate from the UN and in territory previously occupied by the Nazi army
(Seppo, 2017, pp. 100–130).This circumstantially dictated deviation from its
course, however, turned out to be no more than an occasional detour that did
not change Germany’s strategic culture, which remained centered on being a
civilian power focused on careful management of its economy and on ascer-
taining itself in world affairs essentially as an economic power.
This can be shown, among other examples, by the predominance that the
government has given to budgetary orthodoxy over the adequate equipping of
its armed forces, which many consider to be decrepit, as well as over the ful-
fillment of its financial responsibilities towards NATO (Buck, 2018; The
Economist, 2018). It is therefore clear that its economy and corresponding
instruments remain the main weapons in Germany’s arsenal and the main
determinants of the state’s strategic autonomy.
The choice to become a civilian power backed by its economic strength,
while foregoing a prominent military role, may not have been merely the by-
product of a culture marked by guilt and responsibility arising from Ger-
many’s confrontation with the consequences of its militaristic past (see Seppo,
2017, Chapter 5). It may have also been the best rational choice under the
circumstances with which Germany and the Western world were confronted
in the aftermath of WWII, the so-called “German Question.”
On the one hand, and up to the end of the Cold War and to the reunifica-
tion, Germany had its sovereignty restricted. Because, until 1955 it was “an
occupied state, where the three western powers possessed considerable reserve
powers, especially in the area of external relations, and Berlin was still under
a Four Power status” (Paterson, 2005, p. 262). And with the so-called Bonn-
Paris Conventions of 1952, it was subject to a kind of conditioned sover-
eignty. As an expression of this conditioned status, when incorporated into
NATO, West Germany “was expressly denied any independent strategic
planning capacity, the ability to engage in the development of ABC (atomic,
204 Two paradigmatic cases: China and Germany
biological and chemical) weapons or possession of any national units not
assigned to NATO” (p. 263). Under these conditions, a more militarized
option would have been of little value.
On the other hand, had Germany chosen to match its economic power with
a corresponding military power, such action very likely would have been
viewed as a potential threat to peace. Undoubtedly, this would have triggered
a preemptive reaction from the other Western powers (and eventually from
the Soviet Union), which would significantly have undermined its strategic
autonomy in the end. This may have made reunification unattainable and
would have seriously constrained its economic strengthening.
Thus, becoming a civilian power under the protective umbrella of the
dominant world power may have turned out to be the better choice for max-
imizing Germany’s strategic autonomy and for gaining greater influence over
international affairs in general, above all over European issues, a continent
where its leading role has become obvious. Moreover, by refusing to be per-
ceived as a security threat to the rest of the world, Germany (like Japan) may
have made a far more valuable contribution to world security than if it had
chosen to be a more active military participant. This development fosters the
conclusion that by choosing to be only an economic power and to rely solely
on its economic power, Germany succeeded in widening its strategic auton-
omy much further that if it had chosen to be a military power, by building-up
the corresponding hard power. And also validates a crucial point of the fra-
mework developed in Chapter 4, that the effectiveness of the instruments of
power is circumstantially conditioned. And as experience has taught, the cir-
cumstances prevailing since the end of WWII, have favored the effectiveness
of Germany’s economic power more than they have favored the effectiveness
of other European countries’ military power.
Note
1 As of January 31, 2020, when the United Kingdom ceased to be a member (for-
malizing the Brexit), the EU was reduced to 27 members, its current composition.
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Conclusions
3,000
2,500
2,000
1,500
1,000
500
0
1 1000 1500 1600 1700 1820 1900 1950 2018
6,000.000
5,000.000
4,000.000
3,000.000
2,000.000
1,000.000
0.000
1800
1803
1806
1809
1812
1815
1818
1821
1824
1827
1830
1833
1836
1839
1842
1845
1848
1851
1854
1857
1860
1863
1866
1869
1872
1875
1878
1881
1884
1887
1890
1893
1896
1899
1902
1905
1908
1911
1914
1917
1920
1923
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Figure A.2 World merchandise exports at constant prices (1800–2019) (indexes:
1913=100)
Source: Based on data from: Federico & Tena-Junguito (2016b) up to 1980 and WTO,
for 1981 onwards.
100%
MAR
M R
90% PAK
K
PAK
VNM
M AZE
AZE
BGD W
80% i
AFG
AF
FG IN
ND
IND GEO l
FIN
THA l
% Pop. Willing to Fight for Country
PHL TUR
R
70% ARM I
IDN CHN KAZ
AZ
AZ i
KEN ISR n
LLBN
BN PAN
AN MYS
60% UKR PER
P ER
R COL
RKS
KS RUS SWE
NGA ECU BIH MEX
E GR
GRE
50%
BRA POL USA
SRB KOR
40% DNK CHE N
ARG LTV o
MKD ROU IRL t
CAN AUS
30% FRA
ISL W
POR CZE GBR HK i
BUL BEL AUT l
20% ITA
SPA l
DEU i
NLD n
10% JAP g
10,000 5 X = 2.4%/year
8,000
6,000
4,000
2,000
0
1820 1900 1950 2018
8 000 90%
3 X = 1.6%/year
80%
7 000
70%
6 000
-7 X = -3%/year 60%
5 000
50%
4 000
40%
3 000
30%
2 000
20%
1 000 10%
0 0%
1820 1910 1950 1960 1970 1980 1990 2000 2010 2019
70 2019; 72.6
2000; 67.5
60
50
1950; 45.7
40
30 1900; 32.0
1800; 28.5
20
10
0
1800 1850 1900 1950 2000 2019
USSR USA
45000
40000
35000
30000
1978
25000
20000
15000
10000
5000
0
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1920 1925 1930 1935 1940 1946 1950 1955 1960 1965 1970 1975 1980 1985 1990
Figure A.8 Comparing economic performances: USSR and USA (index numbers)
Source: Based on data from the Maddison Project Database (2020).
World Exports
Constant Prices(1913=100) Exports/GDP (%)
10,000 100
1973
1,000 1982
1950
1938
100 10
1913
10
1 1
1800
1803
1806
1809
1812
1815
1818
1821
1824
1827
1830
1833
1836
1839
1842
1845
1848
1851
1854
1857
1860
1863
1866
1869
1872
1875
1878
1881
1884
1887
1890
1893
1896
1899
1902
1905
1908
1911
1914
1917
1920
1923
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
1,000
Indexes: 1913=100
1950
1929
1913
100
1890
1870
10
1
1800
1805
1810
1815
1820
1825
1830
1835
1840
1845
1850
1855
1860
1865
1870
1875
1880
1885
1890
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Figure A.10 World GDP and world exports (1913=100) (logarithmic scale)
Sources: Based on data from: a) GDP – Maddison Project Database (2020); b) Export
Volumes – Fouquin & Hugot. (2016), up to 1980 and WTO, for 1981 onwards.
Value
Added
Costumer
R&D Services
Design Markeng
Headquarter
Services Logiscs
Producon
Acvies
Sources: Maddison Database (2010), up to 1950; Maddison Project Database (2020), for 2018.
Notes: (1) From 1 to 1950: Maddison Database (2010); 2018: Applying growth rates from Maddison Project Database (2020) to 1950 values
(2) From the previous reference year.
Appendix A
229
230 Appendix A
Table A.2 Outstanding amounts of financial assets and derivatives (end 2019)
Financial instrument Source Value (tril- % World
lion USD) GDP
Stocks (a) 93.9 107.5%
Government debt (b) 70.0 80.1%
Household debt (b) 48.0 55.0%
Non-financial corporations debt (b) 74.2 85.0%
Financial corporations debt (b) 63.1 72.2%
Total (financial assets) 349.2 399.8%
Table A3. Turnover of OTC foreign exchange instruments, April 2019 – daily avera-
ges, in billions of USD
Currency Total Spot trans- Outright Swaps Currency
actions forward and structure
options (%)
Total, “net basis”1 6 590 1 987 999 3 310
% of world GDP 7.6% 2.3% 1.2% 3.8%
(2019)
By currency:
USD 5 819 1 687 883 3 007 44.2%
EUR 2 129 616 256 1 168 16.2%
JPY 1 108 360 145 539 8.4%
GBP 844 240 109 463 6.4%
AUD 445 170 53 198 3.4%
CAD 332 122 43 153 2.5%
CHF 327 86 36 196 2.5%
CNY 284 97 36 139 2.2%
HKD 233 57 26 142 1.8%
Other currencies 1 659 539 411 615 12.6%
Source: Bank of International Settlements (2019).
Note: 1 Each foreign exchange transaction involves two currencies, whereby in the breakdown by
currency each transaction is accounted to each of the two currencies involved. In the total, “net
basis”, each transaction is accounted only once. Therefore, the sum of the transactions by cur-
rency is the double of the total, “net basis”.
Table A.4 Economic size of states (GDP) and large corporations (turnover) in 2017 (billions of USD)
Rank Name Origin Eco- Rank Name Origin Eco- Rank Name Origin Eco-
nomic nomic nomic
size size Size
1 U.S.A 19 485 13 Australia 1 330 25 Belgium 503
2 China 12 143 14 Spain 1 309 26 Walmart U.S.A 500
3 Japan 4 860 15 Mexico 1 158 27 Thailand 455
4 Germany 3 657 16 Indonesia 1 015 28 Iran 454
5 U.K. 2 666 17 Turkey 853 29 Austria 417
6 India 2 652 18 Nether- 832 30 Norway 398
lands
7 France 2 586 19 Saudi 689 31 United Arab 378
Arabia Emirates
8 Brazil 2 054 20 Switzerland 680 32 Nigeria 376
9 Italy 1 957 21 Argentina 643 33 Israel 353
10 Canada 1 647 22 Taiwan 575 34 South Africa 350
11 Russia 1 579 23 Sweden 541 35 State Grid China 349
12 Korea 1 531 24 Poland 526 36 Hong Kong 342
Appendix A
231
232
Rank Name Origin Eco- Rank Name Origin Eco- Rank Name Origin Eco-
nomic nomic nomic
size size Size
37 Singapore 338 49 Volkswagen Germany 260 61 Romania 212
Appendix A
Table A.6 G20 Composition and economic relevance of its members (2019)
Country GDP Population IMF
(voting
Billion World World Million World World
rights)
USD share rank persons share rank
U.S.A 21 433 24.54% 1 328 461 4.34% 3 16.52%
China 14 341 16.42% 2 1 400 050 18.50% 1 6.09%
Japan 5 149 5.89% 3 126 190 1.67% 11 6.15%
Germany 3 862 4.42% 4 83 093 1.10% 19 5.32%
India 2 871 3.29% 5 1 367 602 18.07% 2 2.64%
U.K 2 833 3.24% 6 66 797 0.88% 21 4.03%
France 2 717 3.11% 7 64 988 0.86% 22 4.03%
Italy 2 005 2.30% 8 60 360 0.80% 23 3.02%
Brazil 1 877 2.15% 9 210 147 2.78% 5 2.22%
Canada 1 742 1.99% 10 37 534 0.50% 38 2.22%
Russia 1 689 1.93% 11 146 749 1.94% 9 2.59%
S. Korea 1 647 1.89% 12 51 709 0.68% 27 1.73%
Australia 1 392 1.59% 14 25 550 0.34% 54 1.34%
Mexico 1 269 1.45% 15 126 578 1.67% 10 1.80%
Indonesia 1 120 1.28% 16 266 912 3.53% 4 0.95%
Saudi 793 0.91% 18 34 082 0.45% 40 2.02%
Arabia
Turkey 761 0.87% 19 83 155 1.10% 18 0.95%
Argentina 444 0.51% 29 44 939 0.59% 31 0.66%
Appendix A 235
Country GDP Population IMF
(voting
Billion World World Million World World
rights)
USD share rank persons share rank
South 351 0.40% 38 58 775 0.78% 24 0.64%
Africa
Sum 68 295 78.19% 4 583 671 60.55% 64.92%
Actual GDP (PPP) Employment Labour apparent productivity Predicted real GDP
(million) (Y/L)
Billion Interna- Index Thousand Interna- Index Million Index
tional dollars (USA=100) tional dollars (USA=100) 2017 USD (USA=100)
China 23 324.1 108.8 747.907 31.186 23.4 99 482.9 464.2
Appendix A
Spain 9.2 10.5 –1.2 79.7% 100.8% 41.5% 22.8% 96.4% –17.3%
237
238
Appendix A
Country GDP at PPP (2017 prices, Total growth between 1990 and 2019 Simulation with estimated
USD) elasticities (*)
Index numbers (USA=100) Real GDP Factors of production Predicted Deviation:
(Y) GDP growth (Y–Yf) / Yf
2019 1990 Δ Physical Employment (L) Human
(Yf) (*)
capital (K) capital
index (h)
Canada 9.1 9.7 –0.5 92.5% 114.4% 45.2% 13.1% 99.3% –6.8%
Saudi Arabia 8.0 6.8 1.2 139.5% 292.9% 173.7% 35.8% 276.6% –49.6%
Australia 6.4 5.5 0.9 137.0% 113.5% 64.0% 4.1% 98.8% 38.7%
Thailand 6.0 3.8 2.2 223.6% 154.9% 30.8% 37.1% 137.8% 62.3%
Poland 5.9 4.1 1.8 191.2% 164.4% 7.1% 26.6% 127.6% 49.8%
Source: Author’s calculation based on PWT10.
Note: (*) Using estimated output elasticities of the non-rentiers group from Table 6.2 in the main text: K– 0.642, L– 0.358, h – 0.736
Table A.10 Twenty larger economies (2018, PPP): Secular changes in relative sizes
Countries GDP, 2011 International dollars
GDP shares within the group Changes in individual shares
1820 1900 1950 2000 2018 2018–1820 1950–1820 2018–1950
China 53.0% 16.7% 7.1% 14.7% 27.1% –25.9% –45.9% 20.1%
United States 4.2% 26.3% 37.6% 32.0% 27.1% 22.9% 33.4% –10.5%
India 30.9% 11.6% 5.7% 6.8% 13.2% –17.7% –25.2% 7.5%
Japan 6.4% 4.0% 4.2% 10.4% 7.3% 0.8% –2.3% 3.1%
Germany 6.2% 11.1% 6.9% 6.8% 5.8% –0.4% 0.7% –1.0%
Russia/Former USSR 11.9% 10.2% 13.2% 3.8% 5.4% –6.5% 1.3% –7.8%
Indonesia 2.3% 2.2% 1.7% 2.8% 4.6% 2.3% –0.6% 2.9%
Brazil 0.6% 0.7% 1.9% 4.3% 4.4% 3.8% 1.3% 2.5%
France 8.9% 8.0% 5.7% 5.0% 3.9% –5.1% –3.2% –1.8%
United Kingdom 11.1% 13.4% 9.0% 4.7% 3.8% –7.3% –2.1% –5.2%
Italy 8.5% 4.7% 4.3% 4.6% 3.1% –5.4% –4.2% –1.2%
Mexico 1.0% 1.1% 1.6% 3.1% 3.0% 2.0% 0.6% 1.4%
Korea 1.2% 0.4% 0.3% 2.7% 2.9% 1.7% –0.9% 2.6%
Saudi Arabia 0.3% 0.1% 0.2% 1.2% 2.5% 2.2% 0.0% 2.3%
Canada 0.2% 1.1% 2.6% 2.8% 2.5% 2.3% 2.5% –0.1%
Turkey 1.5% 0.8% 0.7% 2.0% 2.5% 0.9% –0.8% 1.8%
Spain 3.1% 2.1% 1.6% 2.7% 2.2% –0.9% –1.5% 0.7%
Iran 0.9% 0.5% 0.7% 1.5% 2.1% 1.2% –0.2% 1.4%
Australia 0.0% 1.0% 1.6% 1.7% 1.9% 1.8% 1.5% 0.3%
Appendix A
–2.3%
China 10 475.683 59.8 147 575.561 47.1 14.1 58.6% 14.0% 26.4% 1.0%
Japan 4 850.414 27.7 72 710.058 23.2 15.0 63.8% 0.7% 31.3% 4.2%
Germany 3 883.920 22.2 59 041.397 18.8 15.2 64.1% 1.1% 32.5% 2.3%
United 3 063.803 17.5 41 849.527 13.3 13.7 70.6% 1.2% 29.9% –1.6%
Kingdom
France 2 852.166 16.3 42 525.295 13.6 14.9 64.8% 1.7% 34.9% –1.4%
Brazil 2 455.994 14.0 38 924.621 12.4 15.8 65.5% 19.6% 17.0% –2.0%
Italy 2 159.134 12.3 25 985.262 8.3 12.0 56.5% 2.0% 44.0% –2.5%
Russian 2 059.242 11.7 27 140.871 8.7 13.2 48.1% 24.9% 25.9% 1.2%
Federation
India 2 039.127 11.6 23 588.627 7.5 11.6 48.1% 26.0% 28.3% –2.4%
Canada 1 803.533 10.3 36 134.358 11.5 20.0 71.9% 5.2% 22.6% 0.3%
Korea, Rep. 1 484.318 8.5 21 382.385 6.8 14.4 68.8% 0.9% 29.9% 0.4%
Australia 1 467.484 8.4 24 558.309 7.8 16.7 56.0% 17.3% 29.8% –3.0%
Spain 1 369.399 7.8 15 918.324 5.1 11.6 63.0% 3.0% 41.7% –7.7%
Mexico 1 315.351 7.5 13 851.533 4.4 10.5 53.7% 13.2% 36.1% –3.1%
Turkey 938.934 5.4 3 565.939 1.1 3.8 26.3% 27.9% 58.7% –12.9%
Netherlands 890.981 5.1 13 363.772 4.3 15.0 65.2% 1.2% 29.6% 4.0%
Indonesia 890.815 5.1 11 938.682 3.8 13.4 50.5% 20.1% 32.6% –3.2%
Country GDP (USD) Wealth (USD) Wealth structure
Billion Index Billion Index Wealth/ Human Natural Produced Net for-
USD (USA= USD (USA= GDP capital capital capital eign
100) 100) assets
Saudi Arabia 756.350 4.3 15 840.744 5.1 20.9 30.6% 49.2% 12.9% 7.3%
Switzerland 709.183 4.0 12 010.756 3.8 16.9 69.7% 0.6% 24.3% 5.4%
Source: WB-WDI (2021), for GDP and WB-WA (2018), for Wealth.
Notes: Explanation (Lange et al., 2018, p. 4):
Human capital – measured as the discounted value of earnings over a person’s lifetime
Natural capital – energy (oil, gas, hard and soft coal) and minerals (10 categories), agricultural land (cropland and pastureland), forests (timber and some
nontimber forest products), and terrestrial protected areas (for brevity, referred to simply as protected areas in the book). Marine-protected areas are not cur-
rently included. Natural capital is measured as the discounted sum of the value of the rents generated over the lifetime of the asset.
Net foreign assets – the sum of a country’s external assets and liabilities, for example, foreign direct investment and reserve assets
Produced capital and urban land – machinery, buildings, equipment, and residential and nonresidential urban land, measured at market prices. For brevity, the
term produced capital is used in the book to include produced capital and urban land.
Appendix A
241
242 Appendix A
Table A.12. Top economies’ exports of goods and services (% GDP)
Country 1960 1980 1990 2019
China 4.3% 5.9% 13.6% 18.4%
United States 5.0% 9.8% 9.3% 11.7%
India 4.5% 6.1% 7.1% 18.4%
Japan (*) 10.7% 13.1% 10.2% 18.5%
Germany 18.7% 22.9% 46.9%
Russia 18.2% 28.3%
Brazil 7.1% 9.1% 8.2% 14.3%
Indonesia 11.5% 30.5% 27.3% 18.4%
France 14.4% 21.0% 21.0% 31.8%
United Kingdom 20.2% 26.1% 22.6% 31.6%
Italy 12.5% 20.2% 18.3% 31.5%
Mexico 8.5% 10.1% 18.7% 38.8%
Turkey 2.1% 5.2% 13.4% 32.7%
South Korea 2.6% 28.5% 28.5% 39.9%
Spain 8.4% 14.4% 15.8% 34.9%
Canada 17.0% 27.6% 25.1% 31.6%
Iran 13.8% 13.7% 13.3% 25.3%
Saudi Arabia 63.5% 40.3% 36.0%
Australia 13.0% 16.4% 15.1% 24.1%
Egypt 19.9% 30.5% 20.4% 17.5%
Thailand 16.1% 24.1% 34.1% 59.8%
Pakistan 12.5% 15.5% 10.1%
Poland 55.5%
Nigeria 9.2% 29.4% 21.0% 14.2%
Philippines 11.9% 23.6% 27.5% 28.3%
Netherlands 48.9% 50.4% 54.4% 83.3%
Argentina 7.6% 5.1% 10.4% 17.4%
Malaysia 64.5% 57.7% 74.5% 65.2%
South Africa 29.6% 34.3% 23.5% 29.9%
World 11.9% 18.9% 19.3% 30.5%
Source: Author’s calculation based on WB-WDI (2021).
Note: (*) Latest year: 2018
Appendix A 243
Table A.13 Most valuable companies (stock market): 2009 and 2019
April 2009 April 2019
Company Sector Country Market Company Sector Country Market
cap cap
($B) ($B)
Exxon Energy USA 337.6 Microsoft Tech USA 904.9
Mobil
PetroChina Energy China 286.7 Apple Tech USA 895.7
Walmart Retail USA 204.6 Amazon Tech USA 874.7
ICBC Bank China 187.7 Alphabet Tech USA 818.2
(Google)
China Telco China 175.1 Berkshire Conglom. USA 493.8
Mobile Hathaway
Microsoft Tech USA 163.5 Facebook Tech USA 475.7
AT&T Telco USA 148.8 Alibaba Tech China 472.9
Jonhson & Pharma USA 145.8 Tencent Tech China 441.0
Jonhson
R.D. Shell Petro Neth 139.3 Jonhson & Pharma USA 372.2
Jonhson
Procter & Pharma USA 138.8 Exxon Energy USA 342.2
Gamble Mobil
Table A.14 Operating systems in use worldwide (market share, February 2020)
Terminals Android Windows iOS OS X Other
Smartphones 73.3% – 25.9% – 0.8%
All systems 38.9% 35.3% 15.0% 8.1% 2.8%
Source: Statcounter: https://gs.statcounter.com/os-market-share#monthly-201902-202002 and
https://gs.statcounter.com/os-market-share/mobile/worldwide#monthly-201902-202002 (acces-
sed April 1, 2020).
Table A.15 World wealth shares – comparing sources
Countries Wealth stocks (world share %) Changes
244
Japan 15.8% 8.5% 16.7% 9.3% 16.5% 12.8% 8.6% 8.0% 11.2% 6.9% –3.0% 0.1% –5.4% –9.6%
Germany 7.7% 8.7% 7.4% 8.2% 5.0% 6.6% 6.9% 5.1% 6.3% 4.1% –1.1% –1.8% –1.1% –0.9%
France 5.9% 5.2% 5.6% 5.3% 3.9% 4.7% 4.8% 4.9% 4.2% 3.8% –1.2% –0.4% –1.4% –0.1%
United 5.1% 4.0% 4.7% 4.4% 6.1% 3.4% 4.0% 5.9% 2.9% 4.0% –1.7% 0.0% –1.8% –2.1%
Kingdom
Italy 4.3% 4.8% 4.1% 4.6% 4.7% 3.2% 3.6% 4.2% 2.9% 3.1% –1.0% –1.2% –1.2% –1.6%
India 1.4% 1.1% 1.4% 1.3% 1.0% 2.3% 2.0% 1.2% 2.6% 3.5% 0.9% 0.9% 1.2% 2.5%
Korea 1.3% 1.1% 1.6% 1.5% 1.5% 2.1% 2.2% 2.4% 2.3% 2.0% 0.8% 1.1% 0.7% 0.5%
Russia 2.2% 6.9% 1.8% 4.0% 0.3% 2.2% 2.5% 0.8% 2.1% 0.8% 0.0% –4.4% 0.4% 0.5%
Canada 2.0% 2.2% 2.0% 2.5% 2.1% 2.1% 2.8% 2.9% 1.9% 2.4% 0.1% 0.6% –0.1% 0.3%
Netherlands 1.9% 1.6% 1.8% 1.6% 1.1% 1.7% 1.5% 1.0% 1.6% 1.0% –0.1% –0.1% –0.2% –0.1%
Spain 2.0% 2.2% 1.9% 2.3% 1.7% 1.7% 1.8% 1.8% 1.6% 2.2% –0.2% –0.4% –0.3% 0.5%
Brazil 1.4% 2.9% 1.4% 2.6% 0.7% 1.7% 1.9% 1.1% 1.5% 1.0% 0.3% –1.0% 0.1% 0.3%
Switzerland 1.5% 1.5% 1.5% 1.5% 1.1% 1.5% 1.2% 1.3% 1.4% 1.1% 0.0% –0.3% –0.1% 0.0%
Mexico 1.3% 1.5% 1.3% 1.5% 0.8% 1.4% 1.5% 0.7% 1.3% 0.7% 0.1% 0.0% 0.0% –0.1%
Australia 1.1% 2.0% 1.1% 2.0% 1.2% 1.3% 2.2% 2.6% 1.3% 2.0% 0.2% 0.2% 0.2% 0.8%
Iran 1.2% 1.2% 0.1% 1.2% 0.1% 1.1% 0.2% 0.0% 0.1%
Saudi Arabia 0.4% 1.3% 0.4% 1.0% 0.2% 1.1% 1.1% 0.3% 1.1% 0.4% 0.6% –0.2% 0.7% 0.2%
Indonesia 0.7% 0.5% 0.6% 0.7% 0.3% 0.9% 1.2% 0.7% 1.0% 0.5% 0.2% 0.7% 0.4% 0.2%
Sweden 1.3% 0.9% 1.2% 1.0% 0.4% 1.1% 0.9% 0.6% 1.0% 0.6% –0.2% 0.0% –0.2% 0.2%
Taiwan 0.8% 0.9% 1.6% 0.9% 1.3% 1.0% 1.1% 0.2%
Group 84.9% 83.8% 85.3% 84.6% 90.6% 84.3% 84.8% 88.4% 84.5% 88.5% –0.6% 1.0% –0.7% –2.1%
Source: Author’s calculation, based on IMF (CDIS) (with the signaled exceptions).
Table A.18 Top net international investment positions (2019)
Net creditor International Investment position Net debtor International Investment position
Countries Individual Accumulated Countries Individual Accumulated
% Total % GDP % Total % Total % GDP % Total
China (*) 22.1% 25.1% 22.1% United States 53.0% –39.6% 53.0%
Japan 19.9% 65.7% 42.0% Spain 5.0% –89.0% 58.0%
Germany 16.6% 71.9% 58.5% U. K. 4.0% –54.7% 62.0%
Norway 5.9% 246.2% 64.5% Brazil 3.5% –32.6% 65.5%
Singapore 5.3% 240.8% 69.8% Ireland 3.3% –48.1% 68.8%
Netherlands 4.9% 90.3% 74.7% Australia 3.1% –21.4% 72.0%
Canada 4.5% 43.2% 79.2% Mexico 3.1% –158.9% 75.1%
Saudi Arabia 4.0% 85.1% 83.2% France 3.0% –54.0% 78.1%
Switzerland 3.7% 88.7% 86.9% India 2.1% –16.1% 80.2%
Korea 3.0% 30.4% 89.9% Turkey 1.7% –66.2% 81.8%
Other 32.2% 22.2% 122.1% Other 18.2% –34.2% 100.0%
Total 100.0% Total 100.0%
EU 4.1% 4.4%
World trade Trade invoicing Foreign exchange reserves (2018) OTC market on FX (turnover)
Country Trade share Currency Invoice share Currency Share Currency Share (**)
(*) (*)
United States 17.5% USD 54.6% USD 62.3% USD 44.2%
European Monetary Union 38.3% EUR 36.6% EUR 20.4% EUR 16.2%
United Kingdom 5.4% GBP 2.5% CNY 1.6% JPY 8.4%
Japan 5.6% JPY 2.5% JPY 4.9% GBP 6.4%
Switzerland 2.7% CHF 1.0% GBP 4.5% AUD 3.4%
Other 30.6% Other 3.0% Other 6.2% CAD 2.5%
CNY 2.5%
Other 16.5%
Notes: (*) Does not include China for lack of data on invoicing
(**) Normalized to 100%
Sources: (i) Invoice Shares: Author’s calculation, based on Gopinath’s (2016) Annex Sheet and on WB data (average of both flows, export and import; does not
include China); (ii) Trade Shares: Author’s calculation based on WB-WDI (2021) (average of both export and import data); (iii) IMF-IFS (2019); (iv) Bank of
International Settlements (2019, p. 10)
Table A.20 World economic rankings, 2019
Rank GDP (current Capital stock (2017 Human capital index Exports (current Savings (current Net creditor position Wealth (2011 prices)
prices) prices) prices) prices)
Billion USD Billion USD – Billion USD Billion USD Billion USD World %
(1) (2) (2) (3) (1) (4) (5)
1 USA 21 433 China (*) 84 313 Singapore 4.352 China (*) 3 290 China (*) 6 408 China (*) 3 703 USA 18.5%
2 China (*) 14 706 USA 69 059 Israel 3.892 USA 2 515 USA 3 988 Japan 3 339 China (*) 15.6%
3 Japan 5 149 India 35 423 Slovakia 3.849 Germany 1 811 Japan 1 514 Germany 2 777 Japan 11.4%
4 Germany 3 862 Japan 26 139 U.K. 3.774 U.K 894 Germany 1 100 Norway 993 Germany 6.3%
5 India 2 871 Germany 20 957 Korea 3.765 France 863 India 855 Singapore 896 France 4.3%
6 U.K. 2 833 Russia 19 441 USA 3.749 Netherlands 756 France 639 Netherlands 819 U.K. 3.0%
7 France 2 717 Italy 18 900 Canada 3.721 Korea, Rep. 658 Korea 576 Canada 750 Italy 2.9%
8 Italy 2 005 France 18 013 Switzerland 3.703 Singapore 646 Russia 449 Saudi 675 India 2.5%
Arabia
9 Brazil 1 877 Indonesia 17 786 Germany 3.675 Italy 631 U.K 432 Switzerland 625 Korea 2.3%
10 Canada 1 742 U.K. 15 374 Czech Rep. 3.674 Canada 549 Italy 420 Korea 501 Russia 2.2%
11 Russia 1 689 Brazil 13 716 Norway 3.663 India 528 Canada 364 Russia 359 Canada 1.9%
12 Korea 1 647 Spain 11 734 Estonia 3.659 Ireland 493 Indonesia 348 Belgium 271 Netherlands 1.6%
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433.2
Appendix B
this exercise together with the predictions shown in Figure B.1, which incor-
porate the actual degrees of illiberality. Only the 67 most militarily powerful
(with a score below 1) are displayed.
Note
1 With the following exceptions: (i) data for North Korea refers to 2018 and was
obtained from Bank of Korea (https://www.bok.or.kr/viewer/skin/doc.html?fn=
201907260929033580.pdf&rs=/webview/result/E0000634/2019079, accessed May 18,
2021); (ii) data for Cuba was obtained from World Bank Databank and refers to 2018.
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Appendix C: Calculations to support the
research in Chapter 6
Database
Most of the calculations reported on Chapter 6, and as mentioned in the
main text, were based on a sample of 133 countries taken from the PWT10
database and comprising countries with a population of over one million
people and with data available for the necessary calculations. The sample
represents around 98 percent of the economic values of the universe covered
by PWT10. To account for different stages of development and specific char-
acteristics, countries were distributed into five groups:
Main correlations
As Chapter 6 explained, cross-country correlations between GDP and poten-
tial explanatory variables were calculated for the major groups, and the
results are displayed in Table C.4 below.
Table C.1 List of countries and their groupings
Country Group Country Group Country Group Country Group
Albania D/O El Salvador D Lithuania A/O Senegal D
Algeria R/O Estonia A Madagascar D Serbia D/O
Angola R/O Ethiopia D Malawi D Sierra Leone R
Argentina D/O Finland A Malaysia D/O Singapore A
Armenia D France A/O Mali D Slovakia A/O
Australia A/O Gabon R/O Mauritania R/O Slovenia A/O
Austria A/O Gambia D Mauritius D South Africa D/O
Bahrain D/O Germany A/O Mexico D South Korea A
Bangladesh D/O Ghana D/O Moldova D Spain A/O
Belgium A Greece A/O Mongolia R/O Sri Lanka D
Benin D Guatemala D/O Morocco D/O Sudan D/O
Bolivia D/O Haiti D Mozambique R Swaziland/Eswatini D
Botswana D Honduras D Myanmar D/O Sweden A
Brazil D/O Hong Kong A Namibia D Switzerland A
SAR
Bulgaria D/O Hungary D/O Nepal D Taiwan A/O
Burkina Faso R India D/O Netherlands A/O Tajikistan D/O
Burundi R Indonesia D/O New Zealand A/O Tanzania D
Cambodia D Iran R/O Nicaragua D Thailand D/O
Cameroon D/O Iraq R/O Niger D/O Togo R
Canada A/O Ireland A Nigeria D Trinidad and Tobago D/O
Appendix C
Legend:
A – Advanced economies (IMF criteria)
D – Emerging market and developing economies (IMF criteria)
O – Oil producer
R – Rentiers (author’s criteria)
Table C.2 Groups of countries and their shares (within the sample), 2019
Countries Human resources Monetary (PPP) Natural resources
Group Number % Population Employment Capital GDP Oil production Territory
stock (area)
Rentiers 22 17% 7% 5% 6% 5% 44% 15%
Non-rentiers 111 83% 93% 95% 94% 95% 56% 85%
Advanced 32 24% 14% 16% 47% 44% 21% 26%
Developing 79 59% 79% 79% 47% 51% 35% 59%
Oil producers 81 61% 90% 89% 92% 93% 100% 90%
Sources: Author’s calculations, based on EIA (oil production), WB (area); and PWT10 (for the rest).
Explanation:
Rentiers – Countries whose rents from Natural Resources, in general, or from Oil and Gas, specifically, were more than 20% or 15%, respectively, of their GDP,
on average over the last decade (2008–2017) (16 are oil producers)
Non-Rentiers – Countries that are not rentiers according to the definition above (65 are oil producers)
Advanced – Advanced economies, according to the IMF classification (21 are non-rentier oil producers)
Developing – Non-rentier developing countries (i.e. non-Advanced economies), (44 are oil producers)
Oil producers – Countries that in 2017 produced some amount of oil (21 are Advanced economies)
Appendix C
265
266
Appendix C
Figure C.1. Estimated GDP values and the corresponding real values, 20192
270
Table C.5 Regression results for the production function (data for 2017)
Appendix C
Notes
1 This is not a book on economics, let alone on growth theories. Thus, although there
are more up-to-date and sophisticated models and theories, this model is sufficient
and appropriate for the purposes pursued by this analysis.
2 Although all the non-Rentier countries of the sample are represented in the graph,
only half of them (in alternate order) are identified in the axis due to lack of space
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(accessed on April 14, 2021).
Index
Note: Locators in italic and bold refer to figures and tables; Locators followed by “n”
refer to endnotes.