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Special Issue: Europe and the World: Global Insecurity and Power Shifts This special issue of Global Policy, guest edited by Helmut K. Anheier and Robert Falkner, brings together contributions from the Dahrendorf Symposium 2016 ‘Europe and the World – Global Insecurity & Power Shifts’ held in Berlin in May 2016.

An Economic Perspective on the International System: Demand, Supply, and a Rational World Order

Danny Quah - 4th May 2016
Demand, Supply, and a Rational World Order

Danny Quah brings an economic perspective to the international system, and asks us to examine the demand for a world order alongside its supply.

World order is the global community of nation states placed in a setting to reveal two features: (1) the distribution of power across individual nation states and (2) the understood relations between those states. In a specific world order, each nation state has an understanding of its relative status in the world; each comes to some settlement on how it deals with the other nation states that matter to it. Thus, world order defines the set of choices available to nation states; it circumscribes the rules of the game. The constellation of these understandings and arrangements, taken in their entirety, helps determine and is in turn determined by shared norms and expectations, and patterns of global priority and regional authority.

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Figure 1 Do nation states and geopolitics matter?

Where people live and work. This map shows the distribution of lights in the night-time sky and illustrates how the firmly Trans-Atlantic concentration of human activity. However, it is a map from 1980. The question is, how has the global landscape of humanity changed since? Source: DMSP data courtesy Marc Imhoff of NASA GSFC and Christopher Elvidge of NOAA NGDC. Image by Craig Mayhew and Robert Simmon, NASA Earth Observatory.

Global governance—strong or weak, secure or absent, multilaterally benevolent or unilaterally self-serving—is one of the principal outcomes of a given world order. International and regional security agreements are yet other implications of the global system: Who is responsible for defending sovereignty when a rogue state goes belligerent against its peaceful neighbors, not least if those neighbors have historically emphasised priorities other than national defense? How does a group of nation states best organise against ideologies and aggressions driven by extremism and terror, and how do they decide on the margin between separatism and existential threat? Who determines when national self-determination conflicts with international core values, and when does that conflict call for international action?

Conventional narratives on world order focus on power and capacity. Among the questions these address are: Which nation state is number one, and will it continue to be that? How will rising powers that challenge the global leader manage a peaceful transition, and what will they write for the new rules of the game? How should small states respond to specific international proposals, since such nations have neither the power nor capacity to stand on equal footing alongside the great powers in decision-making?

Conventional narratives focus on the supply of world order. They ask who can provide world order and what form that provision will take. In such discussions, a global power shift is a handover from one nation state to another, from one previously endowed with greater power in economics, military, cultural affinity, technology, and status, to another now agreed to be better resourced on all these dimensions. Thus, in such discussions, global power shift is simply a switch between providers of world order, different nation states best equipped to supply world order.

Absent from consideration in those discussions is what factors might drive the demand for world order. What do the seven billion people on earth want in a world order? Which nation states benefit most from being able to write the rules of the game? Conversely, which ones are disadvantaged from a given world order?

The reason for asking this alternative set of questions is not mere idle curiosity. From economics, we know that, under appropriate conditions, when demand meets supply, the result is efficient, i.e., it provides the greatest good to all at minimum cost. Of course, relative to conventional discussion, none of these—the greatest good, minimum cost, benefits distributed how to whom, costs allocated in what way to which global actors—is yet tightly defined. But the idea to apply economic calculation to reshaping world order is suggestive. If the notion can be made empirical and concrete, then there is a different way to consider world order: we can put together demand and supply, and draw on insights provided from economics. We can then ask the optimality question: what feasible world order most efficiently serves the collective needs of all of humanity? What is a rational world order?

For observers dissatisfied with the current world order, all this might seem unnecessary. Don’t supply-side considerations alone already provide powerful reasons for seeking a different international system? Who has the greater capacity now for crafting and implementing the rules of the game? The global economy is no longer centred on the Trans-Atlantic axis. The world’s economic centre of gravity, having sat for decades in the Atlantic Ocean between Washington DC on the one hand, and London, Paris, and Berlin on the other, has in the last 35 years shifted eastwards 5,000km, drawn by the rise of Asia. Emerging economies now have combined GDP at market exchange rates that has converged to within 95% that of the G7, even though that ratio had languished at only 20-40% for decades running up to 2005. For countries such as Germany, exports to Developing Asia have grown in magnitude to more than one and a half times those to the US. Even if China’s economy slowed to only 7% growth in 2015, it would still generate US$790bn in magnitude of GDP growth, almost three times what it did ten years ago—at inflation-adjusted market exchange rates; if average worker productivity continued to rise on trend, China’s labour market would generate 53mn new jobs. These observations and others like them suggest that capacity for organizing the world is no longer the sole preserve of the US or the developed West.

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Figure 2 The World’s Economic Centre of Gravity, 1980–2050. Source: Quah (2011).

The world’s economic centre of gravity, calculated from almost 1000 locations on the planet, with weights given by economic value-added, has trekked 5,000km east in the last 35 years, off its 1980 moorings in the middle of the Atlantic Ocean.

At the same time, however, it is certainly legitimate and appropriate to counter that the West remains the repository of soft power, and that US military projective power, US information technology, and the West’s history of science Nobel Prizes all remain unchallenged still.

There is an interesting debate to conduct on these measurements and counter-measurements. But all that is different from my principal argument: It is only by putting together demand and supply—what world order does humanity need, what world order best serves all humanity—that provides the most compelling motivation for and the best guide to reshaping world order. Obviously, such a view will not sit easily with those nation states who derive disproportionate advantage from a current or incipient world order. Nor do I claim that such a narrative explains the current world order. Far from it. But it is, I argue, a compelling framework for those observers who wish to stand apart from any given world order and who wish to argue dispassionately for change towards a better system.

Why the American Century Was the Right World Order

The later part of the 20th century is widely viewed to have had a unipolar world order organized around the US, the single most powerful nation on the planet—whether measured by economic size, military capability, or status as perceived in the eyes of the rest of the world. The US was undisputed world leader. It was an unstoppable economic juggernaut. The US harnessed liberal democracy and free market economics to devastating success, bringing prosperity to the American people, and admiration from and hope for all others on the planet.

Whenever it mattered, the US could take unilateral action, to benefit itself or its allies. Over the course of what became known as the American Century, the US crafted a world order that was transparent, inclusive, democratic, and rules-based.

These features should be more than enough to justify a unipolar world order. But there was yet more to recommend this particular one. Charles Kindleberger, the great economic historian who studied the world economy during and after the Great Depression of the 1930s, reckoned that having a global leader such as the US helped secure economic prosperity for all the world. The US was a hegemon that provided stability and leadership and thus space for policy coordination across the multiplicity of nation states. This idea became known as hegemonic stability theory, and helped explain the need for a unipolar world order.

For its adherents, the power of this conceit manifest in both directions, first when the US asserted its dominance, and second when it failed to do so. Following the 2008 Global Financial Crisis, the US seemed to retreat from unilateral activism, and thus from world leadership. Correspondingly, the global economy saw stagnation when there should have been recovery. Peter Temin and David Vines lamented how the world had become a “Leaderless Economy”. In that reasoning, global economic under-performance derived from failure in world leadership, just as, conversely, success required strong hegemony.

Why Change Anything Then?

If what the world needs is clear leadership, why not just restore world order around strengthened US unipolarity? After all, in the conventional supply-side narrative the US remains that nation state with the most powerful military, the most compelling soft-power discourse, and the largest economy — still twice the size of the next-largest. No other single nation state shows anything remotely close to the broad powers that have been America’s to bear for the last half-century. In this perspective on international order, yes, the world might indeed have changed; but it has not yet changed enough.

The question that a demand-side narrative adds to the mix is, Is it still the US that best serves the world as global hegemon? Two critical observations arise.

First, when the US began its period of stewardship at the head of the world order, it was mindful of how it would serve the needs of the world. The compelling case for US hegemony was never one of sheer power alone, but of power in tandem with that to which power was applied. Henry Luce spoke powerfully of the US being “the Good Samaritan to the entire world”. Subsequent versions of this idea, even if they veered a little off course into “what is good for America is good for the world” rhetoric, always kept in focus the needs of the world at large. The US was not global hegemon because it got paid, but because the American people sought “a sharing with all peoples of our Bill of Rights, our Declaration of Independence, our Constitution, our magnificent industrial products, our technical skills.” What would emerge was to be “an internationalism of the people, by the people, and for the people.”

Advocates like Luce saw extension to a world order the best features of a US style of governance. For them, it was the Lockean “consent of the governed”—a phrase that appears in the American Declaration of Independence—that needed to energise world order, just as it already did the American system.

These sentiments, however, have receded further and further into the background in current narratives on how the US needs to be the one to write the rules of the game merely because it remains the world’s most powerful nation state.

Second, conditional on the needs of humanity in a world order, where is it set down that only one nation-state can be service provider? Given the global public goods needed, why not engineer a spectrum of specialization on the supply side? Perhaps the US can be military and security officer, China can design the global architecture on transportation and energy, Singapore and the UK can provide the financial engineering framework, select small states design systems of global public housing, and so on?

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Figure 3 The World’s Tightest Cluster of People. Source: Quah (2016).
The smallest circle on our planet that has a simple majority of the world’s population is centred in Shan State, on the boundary between Myanmar and China. That circle is only 3,300km in radius, encompassing Southeast Asia, India, and China.

 

It is only an accident of history that injects into observers the idea that in a modern world order one nation state must be global hegemon on every single front: In ordinary life, why would we think that those parts of our society best at physical self-defence also be the people to whom we trust the design of new technologies or be the hackers and engineers that will keep secure our Internet infrastructure?

To be clear, asking for supply and demand side considerations be taken into account does not mean setting up a marketplace for exchange. The landscape of a rational world order needs to be one that focuses on providing global public goods. Because of externalities a competitive marketplace will fail to deliver the right outcome on that provision. Thus the demand and supply language simply provides a metaphor, not a paradigm to be taken literally.

Economic theory provides a suggestive answer on how to achieve that outcome: namely, solving an optimization program that internalises appropriately the spillovers and externalities surrounding public goods provision. The specific circumstances surrounding world order make subtle the implementation of that optimum but the analysis is a piece of research that needs to be done, not to be simply ignored. Again, that optimization program is meant to be simply metaphor. Its directives are not intended to be interpreted directly or literally. Achieving those directives, while respecting national sovereignty and the primacy of self-seeking action, is a problem in mechanism design, broadly construed.

Such a design problem needs to be distinguished from a so-called “rational choice” approach. The latter describes a mode of actions to be undertaken by individual actors. Our design problem is one that seeks to put together those modes in an optimum, equilibrium way. In contrast, individual rational choice can sometimes lead to outcomes that are far from optimum: the Prisoner’s Dilemma situation is but one such example.

Asking that nation states provide frameworks and architectures in a globally coherent way is not submitting to a displacement of the private marketplace. In the scheme I describe it will still be private businesses that drive the global economy. My proposal refers only to global public goods, i.e., features in the landscape of human activity that private enterprise does not see incentive to provide. Moreover, these are only the same elements that we already ask of the old world order. My proposal envisions no new control or encroachment on individual liberties or national sovereignties beyond what we already have in principle.

(What I describe is most closely related to Robert Keohane’s analysis of the Demand for International Regimes. The difference rests in my proposal recognizing explicitly the externalities associated with global public goods, and its focus on establishing an optimal world order, rather than on explaining the one that exists. In contrast, Keohane concentrates on transactions costs and information, and uses those to explain fluctuations in the strength and reach of observed international regimes.)

Conclusion

The trajectory of history in the development of nation states and their power configurations that has converged on our current world order is a pathway that has produced many positive, beneficial outcomes. But if we are serious about asking whether our world order is fit for purpose still, we need to put in more by way of rational design principles into that architecture. In this note, I have described in broad outline how some simple economics, based on demand and supply, can help. Making such a design concrete will of course entail considerable analysis and empirical research. But it removes the discussion from simple measurement on who has the best guns and most robust economy. And such a framework could well provide fresh perspective on what modern world order might work best for the world.

 

This essay first appeared on Danny's blog.