A Pre-Westphalian World Economy

9 april 2010

Timofey Bordachev - Director of the Center for Comprehensive European and International Studies at the National Research University–Higher School of Economics, and Director of the Eurasian Program at the Valdai Club Foundation. He holds a Doctorate in Political Science.

Resume: Establishing global governance institutions such as an Economic League of Nations might offer a response to the challenge that arises from the growing independence of the global economy. Such institutions should regulate the entire world economy in the same way that they regulate individual economic sectors.

It is quite possible that the global economic crisis, which began in 2008, provides the latest testimony to the fact that the world economy is acquiring an ability to act independently; i.e. to determine its own development and the behavior of its constituent elements. If this is true and if these elements are not states, then all current attempts to pull the world economy out of the crisis will produce only a temporary stabilization at best.

Although everyone acknowledges the emergence of a global economic system, we are still unable to clearly define elements forming its structure. But unless we define them as points of reference for our analysis, all political and scientific discourse about ways to reinvigorate the global market will turn into a discussion of peripheral issues, while the problems that must be resolved in earnest are far from being peripheral.

It has long been recognized that the system of international political relations can act independently and sovereign states play the role of its constituent elements. This role was granted to them legally by the agreements that brought the Thirty Years War (1618-1648) to an end and generally completed the political picture of the world. The arrival of numerous non-state players in the 20th century – international institutions, multinational non-governmental organizations and others – did not bring any dramatic changes to the situation.

The state remains the only international player that has the right of force. The fight against international terrorism has clearly shown what happens to those who claim to perform the same functions. An attempt by a non-state player – Al Qaeda – to effectuate a mass killing of peaceful civilians, that is, to make a claim to an exclusive prerogative of the state and establish control over a sizable territory, albeit located in the backwoods of the Middle East, resulted in a hitherto unseen unanimity among different countries regardless of the diversity of their internal political organization.

Another axiom is that national security as the main concern of any state is a derivative from international relations. The steadier the state’s structure; i.e. the more reliable the position of the element-states and the correlation of forces between them, the smaller the threat the structure poses to the survival of each country. Is it possible to raise the same question with regard to the world economy and is the viability of each separate economic agent (as the closest analog to a country’s national security) a derivative from the structure of the global economy? This remains to be seen.

SYSTEM AND STRUCTURE

The rise of the notions of ‘system’ and ‘structure’ as phenomena in their own right – that is, independent of the will of states and state leaders – led to the modern science of international relations. A resolute step towards separating international relations from foreign policy science became possible due to the recognition of the fact that the system of international relations has its own laws and rules (U.S. political scientist Kenneth Waltz was a trailblazer in the area). These rules can be comprehended in a theoretical discussion which actually makes the theory applicable to practical reality. Yet these rules are not directly related to the individual preferences of countries and politicians, which, in turn, facilitates scientists’ efforts.

The recognition of the world economic system as an actor with analogous properties may form the foundation for a new field of research that will enable researchers to give up an exclusively national perspective and go over to a higher level of abstraction. The importance of this is obvious, as the absence of a general theory makes analysis haphazard and unable to address crucial questions.

At present, however, any freshman student of economics will state with confidence that the global economy is the sum of national economies augmented with globalization and the international division of labor. Even the most authoritative scholars analyzing the causes and the development of the current economic crisis tend to describe the mistakes and successes of the economic policy of separate countries, and mention the so far poorly-studied, but apparently bad impact of financial globalization.

There also exists an understanding of the world economy as a general universal interconnection between national economies or as a system of international economic relations. In this case the world economy that has a universal character is seen only as a type of relations between states (national economies) and hence functions according to the laws of international political relations.

In the meantime, even a beginning political scientist knows that the definition of international relations as the combination of foreign policies of all countries, or a sum of political relations between countries, could only have been possible in Machiavelli’s time. Over the 500 years that have elapsed since the days of the great Florentine, the world and our perception of the world have become extremely sophisticated: there emerged norms and notions shared by significant scientific communities. Yet modern economic science does not have even a vague understanding of the general laws of global economic development.

CHAOS AND ORDER

The main thing that amazes an expert on international political relations as he watches the discussion of the ways to overcome the global economic crisis is the chaotic character of the debates. No one, including Nobel Prize winners, seems to be able to provide a comprehensive explanation of why the crisis has stricken the entire globe or of what factors make sectoral and regional problems spread beyond their natural borders.

Even less certainty can be seen in what concerns the recipes that experts propose. As a rule, the proposals boil down to recommendations to act exclusively within the bounds of a regional or an economic sector. The policies pursued by various countries do not show any larger degree of integrity. Decisions made at G-20 meetings – the ‘concert’ of 21st century economic powers – can at the very best lead to a coordination of national policies. Incidentally, this only increases the scale of the government’s intervention in the economy and the sovereignization of markets.

The imposition of total governmental control over economic activity, even though it looks totally unacceptable today, seems to offer the most radical response to the situation. It is true that separate arguments suggesting that the world economic system may hypothetically rely on isolated elements appeared in discussions a year of two before the outbreak of the global economic crisis. For instance, French political scientist Thierry de Montbrial wrote: “Is a less dramatic scenario possible? I think it is. For a start, one can plug the channels for free flow of capital, and it is technically feasible.”

In terms of the degree of the clarity of notions and elements, the global economic system is now in a state similar to that of the system of international political relations a hundred years or so ago. Moreover, in the early 20th century world politics already had some clearly identifiable elements.

The all-embracing character of the economic crisis and the ensuing depression raises an issue bigger than the integrity of the world economy. Much more important is the possibility of its potential independence from national governments and top management of the largest market players and ordinary economic agents. Economic science and practice are not able to clearly define the scope of elements of the system and, consequently, to take relevant measures to stabilize them. This inevitably brings about chaos and, as recent Russian history teaches us, limits the freedom of individual and collective players as a reaction to chaos.

World War I was the result of chaos in world politics. By the beginning of the 20th century, the formation of structural elements of the system of international relations – the sovereign states – reached the final phase. In subsequent periods, the main challenge was to impose and maintain the balance in relations between the great powers and curb any attempts by one of them to establish hegemony. First a multipolar and then a bipolar structure of world politics emerged. Following a brief period of global unipolarity in the early 1990s, the multipolar structure returned to world politics.

The system of international relations per se has become an independent actor; that is, it is now able to determine its own development and the conduct of its constituent elements independently. The independent character of the system’s functioning lies in the uniformity of its elements, or sovereign states, and the main objective of the system is to support international stability – the balance of forces between leading countries. The latter, in their turn, determine the global military and political structure and ways to govern the processes taking place in it. The crucial task of this collective governance is to maintain peace and stability.

It should be noted, however, that the world’s governability – even in its most efficient manifestations – essentially boils down to a country’s ability to refrain from turning competition – an unending struggle for hegemony – into military confrontation. International treaties with limited terms of validity, indefinite-term treaties likes those that ended the Thirty Years War and went down in historical annals as the Westphalian System, international institutions, and political/legislative mechanisms have traditionally played the role of containment instruments. In all cases, their emergence was linked to the attainment of a certain balance by the international actors.

THE SEARCH FOR A RELIABLE ELEMENT

Nothing of this kind can be seen in the world economy, although the Bretton Woods system and the Western economic model of the Cold War era could have served as prototypes for a universal structure. Some signs of universalism can now be traced in individual economic sectors, specifically in finance and trade. Yet here, too, the duplicity of players and their interests – for example, in finance – impedes the formation of a unified structure. Dr. Vladimir Yevstigneyev writes: “[…] An independent player acts in the name of consumers of services, while large companies act on behalf of producers (suppliers of services), and the duplicity is insurmountable on the whole. There can never be uniformity here.”

It is precisely for this reason that universal financial institutions represent only one category of actors in the international financial system – sovereign states. They cannot claim to have features similar to those of sectoral institutions, such as the International Labor Organization (ILO), simply for the fact that there is no other actor that could have the same degree of influence on the labor market than they do, except for national governments (since it is they that set priorities for ILO policies). On the contrary, if you look at finance or trade, the degree of real influence of multinational corporations – or their private investors – compares well with or exceeds the governments’ influence in a number of cases. At this point, at least.

As a result, international financial institutions, be it the World Trade Organization or the IMF, cannot claim universality, even as an assumption. By the degree of involvement of the most significant participants in the system, they stand much closer to such political “institutions” as the inter-dynastical marriages of the Middle Ages than the Rhine Navigation Commission set up at the Vienna Congress of 1815.

Matrimonial unions between European courts only influenced the relations between the ruling dynasties and their policies towards each other, but they could not put up obstacles in any way, say, to private wars between French, English or German barons. In much the same manner, the IMF can influence the financial policies of governments, but cannot influence other aspects of state regulation that are closely related to finance, to say nothing of influencing the spheres of the global economy. A redistribution of votes between the member-states will not be of any special help here. Moreover, it may be perceived first and foremost as a political victory of the countries that do not yet enjoy formal rights. Also, treated first as “an increase in the quality of international economic governance” it may be interpreted as a “buildup of power and prestige” (by China, India, Brazil, etc.).

As regards the world economy as a whole, experts continue to consider it as an aggregate of national economies augmented with globalization and the international division of labor. They use precisely this archaic understanding to find the causes of the crisis and to offer ways out of it. With much the same success, one could propose a marriage between the U.S. president’s daughter and the Russian president’s son as the best possible instrument for untangling the problems existing between Russia and the U.S. Simplistic solutions of this kind, whether good or bad, stopped delivering results in international politics in the late 16th century, but we can still see their semblances in the resolutions passed by the G-20 and the G8 Plus, if one compares the number of negotiating parties with the real number of actors in international economic relations.

Hence it is not surprising that these resolutions have the effect described by Dr. Sergei Karaganov, a leading Russian expert on international relations: “The Group of Twenty regularly declares that measures against protectionism should be taken. Hundreds of experts and politicians keep saying protectionism not only damages and impedes growth and economic development, but it also contains other dangers. Yet eighteen of the twenty countries have resorted to protectionist measures with the hope of defending their producers and the interests of their own population.”

The global economy has properties – uniformity and integrity – that cannot emerge in international politics in principle. Nobel Prize-winning economist Paul Krugman writes in this connection that after the disintegration of the Soviet Union “[…] we’ve been living in a world where the rights to ownership and free markets are looked at as fundamental principles rather than forcible instruments for achieving one or another goal. The unpleasant sides of the market system (inequality, unemployment, injustices) are perceived as hard facts of life. In the same way, Victorian capitalism showed viability not only because it demonstrated its successfulness, but also because no one was able to offer a reasonable alternative.”

The capitalist method of production triumphed across the board with the exception of a few marginal cases. Its integrity was multiplied by globalization in the last quarter of the 20th century, when the proliferation of IT and telecommunications really unified the global market. Financial globalization became the first challenge brought about by the rise of these technologies.

Olga Butorina, a Russian expert on international finance, points to a new quality of capital flow liberalization. “While in 1976 the obligations under Article VIII of the IMF Charter (that bans restrictions on current payments, discriminatory currency regulations and barriers to the repatriation of capital by foreign investors) were observed by 41 countries, in 2006 a total of 165 of the 185 IMF member-states fulfilled them,” she writes.

Liberalization of capital flows and the changeover of financial systems to the international digital system of communications, data processing and storage lubricated a withdrawal of the majority of financial institutions operating on the market from the sphere of state control. This is how the independence of the financial system’s operation grew, which, in turn, meant weaker sensitivity to national regulatory mechanisms.

The processes related to globalization involve more traditional spheres too. Experts say that the most significant tendency determining the dynamics of the energy market, which Russia puts considerable stakes on today, is the shrinking opportunities for controlling the prices of products on the part of the state and private corporations.

The mounting role of speculative capital, the gradual rise of financial multipolarity and the reduction of inter-governmental institutions’ capabilities forms an exclusively volatile environment. The markets’ supra-national nature (or speaking figuratively, “the end of geography”) puts sovereign states in the face of a problem of exercising the current control and, above all, strategic governing of the processes developing on their territories.

As Montbrial puts it, the freedom of movement of capital grew along with the advance of information and communication technologies; it overcame borders, simultaneously wiping out differences between the forms of capital investment and private ownership, on which monetary systems and economic theories had been based previously. This means doubts were cast not only over the ability of the world’s leading countries to keep the processes related to the movement of capital in check, but also over the very possibility of determining at the national level the principles of development of financial and some other markets in the future.

The synchronism of national and international economic cycles provides the boldest expression of the independent nature of the world economic system. Forecasts predict that synchronism will grow further in the upcoming fifteen to twenty years. The inevitable openness to the impacts of the global economy is fraught with the risk of a slowdown in growth rates and crisis phenomena that cannot stay within the bounds of a single economic sector in the current conditions. It will be impossible to keep up dynamic growth rates in the national economies if a new global crisis or recession occurs – unless different countries transfer to autarchic models of development and establish a state monopoly over all types of commodities and services.

However, the world economic system has failed to produce uniformity of elements. Unlike countries, each of which has a government, borders and a police force, world economic agents are not uniform in terms of their basic features, not least because of the international division of labor. Even if national governments do control the activity of major corporations, no economist will agree to recognize the state as the only actor on the international economic arena. Practically everyone down to an ordinary person making purchases via the Internet is an actor on it, to say nothing of large and small international corporations.

In other words, while the number of participants in international politics is limited to sovereign states, the world economic system may have billions of elements and thus it does not have the material to build a balanced structure for itself.

THE ORDERLINESS OF WORLD POLITICS

Unlike the world economy, dominated by a uniform mode of production, countries determine their social and political organization independently of each other. There are republics, various types of monarchies, dictatorships and democracies. Political institutions are not transborder by nature; regiments, divisions and missile systems cannot move from one place to another like financial flows. Democracy has failed to triumph in many parts of the globe in spite of the efforts of four U.S. administrations after the Cold War. Cultural differences remain a reliable guarantee against global political uniformity.

If one considers interdependence, which is one of the basic features of the integral world economy, it existed in politics only in the form of a mutually assured destruction of the Soviet Union and the U.S. before 1991. After the transfer of this factor into a purely theoretical domain and the emergence of new international players like China, India and some other countries, the idea of forming an integral system of international political relations has become unrealistic.

A comparative analysis of the international economic and political systems leads us to the following conclusion: the world economy is integral due to the uniformity of the participants and the large degree of their interdependence. However, it cannot operate independently as yet, at least in the way political and expert communities understand it. The international political system, in turn, has absolutely no integrity, but has a strong property of acting independently – so strong that it starts playing the same role in the field of economy, subjugating the uncustomary elements of the existing system and dictating the Westphalian rules of the game.

So far, the problem of insufficient independence of action of the global economy has been resolved through the imposing of an organizational structure of international political relations on it. It is not surprising then that as the diversity of the world’s political picture continued to grow, the states interfered in the economy more and more actively. The soil was fertilized for this during the rise of the liberal global economy. Paul Krugman said that by the beginning of the 2000s the economy had become increasingly dominated by giant corporations, run not by romantic innovators, but by bureaucrats who were often government officials.

This substitution is unlikely to bring any major benefits in the future. First, international relations are highly prone to generating conflicts and, second, the objectives of both systems and of their major participants remain very different: the world economy is aimed at meeting the demand and getting profits, while international relations focus on the balances of forces, power and prestige.

THE “BLACK HOLE” OF ECONOMIC SCIENCE

Determining the elements of the world economy – the most important ones in terms of influence on the stability of the system – is complicated by the failure of scientific discourse in this field. Despite rich historical experience, economic science has failed to comprehensively address the comprehensive crisis that has engulfed not only poorly governed states or unbalanced economic sectors, but the entire global system. It engulfed the economy that had gained considerable independence from the actions of the government or corporations even if they were quite professional.

It is hard to admit the global bankruptcy of economic science; it is still more difficult to venture a breakthrough and an expansion of the notions and theories that were formed over centuries. Yet renunciation of a search for new methods or the inability to look for them will lead to a steep rise in the role that governments play in regulating and running the world economy, which is fraught with hard consequences.

The problems facing the global economy can scarcely be resolved within existing international formats, as all institutions regulate – albeit on an international scale – separate sectors like finance, trade and so on. Or else they discuss government interference in economic activity, as was the case with the G8, the G8 Plus that emerged after the summit in L’Aquila, and the G-20. The efficaciousness of their decisions is limited by the inner controversy of joint statements and their violations on the part of participants themselves.

Dr. Sergei Karaganov said: “The G-20 has played a fruitful role in preventing panic.” Regular conferences of leaders of the major industrialized nations have convinced consumers and manufacturers that politicians closely watch the course of the economic crisis and will take joint efforts to prevent a collapse.

Yet all of the practical steps proposed within this format provide for measures to be taken either within national borders or separate sectors, for instance, in finance. They cannot influence the world economy as a whole. Attempts to restructure existing institutions through an increase in membership or through a redistribution of votes can hardly be successful. They can slow down particularly ominous processes, calm down the public quarters or raise the prestige of individual states, but all of this is only distantly related to the desired stability of the international economic system.

GLOBAL ECONOMIC RESPONSIBILITY

A span of 94 years separates World War I from the first global economic crisis in which the collapse of the mortgage loan market played the role of the “first shot in Sarajevo.” In both cases dramatic events on a global scale proved that the system of international political and economic relations had reached a degree of maturity signifying that global events are no longer the result of the actions of governments or economic agents. This means that a way out of the situation cannot be found exclusively at the national, regional or sectoral level.

Establishing global governance institutions such as an Economic League of Nations might offer a response to the challenge that arises from the growing independence of the global economy. Such institutions should regulate the entire world economy in the same way that they regulate individual economic sectors. The scope of regulation should not be limited to a narrow group of countries, be it the G-20 or the G8 with an indefinite number of participants. Today multilateral formats of global economic governance stay at the level of the European concert of powers in the first half of the 19th century. Similar changes must take place in scientific discussions and also involve the expansion of theoretical notions and research.

The degree of success of these institutions may turn out to be comparable with the catastrophic results of Woodrow Wilson’s initiative, but given the young age of the global economic system (compared with world politics), the rise of something resembling the UN in its best years will take a long time. Remarkably, world politics, too, needed the nightmare of World War II to push countries to take resolute decisions. The wars and conflicts that had happened in the previous two thousand years or more did not prove enough for this. The world economy today is showing certain signs of recovery and a global disaster might have been averted. This is good as it has always been good each time there was peace after a war. However, the bad thing is that the peace did not last for very long.

Last updated 9 april 2010, 12:38

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