For much of the 1980s, absent upheavals to match the oil price shocks of the 1970s, the international political economy was overshadowed by the volatility of East-West relations. This surface calm disguised sea-changes in international economic relations, changes profound in their effects on world politics and irreversible in the medium term. Some of these changes have been glacial in pace and difficult to discern. Other events that appeared cataclysmic, such as the stock market crash of October 1987, are as difficult to assess as heat lightning in a summer sky: an illusory warning or a genuine harbinger of storms to come?

International economic trends that now seem irreversible may also disappear when nations-at least larger nations-alter their economic course. Margaret Thatcher and Deng Xiaoping, for example, have drastically changed domestic economic policies and international economic orientation after decades in which both were regarded as immovable. The plight of the Organization of Petroleum Exporting Countries during the 1980s demonstrates, however, that the economic destinies of apparently powerful actors can be strongly affected by both the strategies of other nations and the behavior of international markets.

Four sea-changes in the international political economy will be discussed in the first section of this essay. The relative absence of change in the political organization of international economic relations-the dog that has not barked-will be briefly noted in the second section. Third, changes in the relationship between states and markets will be examined, particularly the intensified internationalization of financial markets and the globalization of production. Finally, an assessment will be attempted of the importance of all these changes for both the character of world politics and the future U.S. policy.


Structural Change: Shifts in Power and Place. Two sea-changes became unmistakably clear in the 1980s-the rise of Japan and the divided economic prospects of the developing countries. The implications of two others-the leap toward further integration of the European Community and a more thoroughgoing incorporation of some centrally planned economies into the international economic order-will be fully apparent only in the next decade.

The rise of Japan has been an almost continuous process since the proclamation of the "Japanese miracle" in the early 1960s, but in its earlier manifestations, Japanese economic might expressed itself principally in a powerful export drive in manufactures. During the 1970s, that drive produced an array of trade disputes with the United States and Europe. In the decade that began with the publication of Japan as Number One,1 however, Japan's economic reach expanded into high-technology industrial sectors and international finance, an expansion that fundamentally changed its bilateral relationship with the United States. As the Reagan administration's strategy of fiscal expansion produced massive American borrowing abroad, it became clear that Japan was home to the largest pool of exportable capital in the world economy. A share of that capital served to finance a yawning American payments deficit; other shares financed both a boom in foreign direct investment (in North America and Southeast Asia) and a more active stance in the debt crisis and development lending.2

To some-let us call them the optimists-the new financial clout of Japan, added to an existing manufacturing prowess that increasingly encroaches on U.S. high-tech preserves, is not a serious concern. This group has advanced two broad arguments. A number of commentators claim that Japan's ascendancy is transitory. According to this view, Japan will gradually come to look like other industrialized countries. A stronger yen has already increased the volume of manufactured imports; external pressures (and pressures from its own consumers) may force higher public spending, a greater attention to consumer welfare and a weakening of powerful lobbies (such as the agricultural lobby) that would erode Japan's peculiar pattern of policy and its position in the international economy.

A second group of optimists argues that the international implications of Japan's rise have been overstated, since its "power portfolio"-heavily dependent on a cluster of export industries and its capital exports-is not diversified in the fashion of the United States. Hence, Japan will continue to need American military protection and American markets as much as the United States needs Japanese capital and technology. The result: an intensification of interdependence rather than American dependence on Japan.3

For many of these observers, the United States must "manage" the bilateral relationship as well as Japan's new role in the world economy until Japan's economic trajectory converges with that of other industrialized economies.

Increasingly, however, a second set of arguments has been heard both in the United States and in Europe. Framed in military metaphors, such as "containment," and hedged by homilies on the importance of U.S.-Japanese ties, these new "revisionist" critics paint a more ambiguous portrait of Japanese aims and capabilities: the ambitious hegemonic power-to-be rather than the acquiescent partner. Japan not only is seen as the first plausible aspirant to that role in the economic sphere since 1945; it also is viewed as a new-model political economy, one that does not work like Western economies and one that will remain closed unless more forceful pressure is exerted by its trading partners or an entirely new structure of managed trade is created.4

A second sea-change was less apparent to Americans in the 1980s: the widening gap in economic performance within the developing world. The 1970s seemed to herald an irreversible push toward economic and political influence on the part of the Third World as a collectivity, as well as on the part of "new influential," such as Saudi Arabia and Brazil. The 1980s saw the deflation of those hopes with the collapse and only partial recovery of commodity (including oil) prices, the shocks of high real interest rates and an abrupt decline in bank lending in the early 1980s. The lingering debt crisis destroyed the image of a homogeneous Third World, an image that may never have corresponded with reality. In the 1980s heavily indebted countries in Latin America and sub-Saharan Africa experienced the worst decade in terms of economic performance since the Great Depression; the countries of Asia maintained higher growth rates and export performance. The divide is no longer between middle-income and poor developing countries (the Third and Fourth Worlds of the 1970s): India's performance in the 1980s was stronger than Peru on most measures; China's better than Brazil's.

Is this new divide the result of indebtedness, taken on in the preceding period of high commodity prices and easy credit, coupled with drastically altered world economic conditions in the early 1980s (high real interest rates, deep recession, plummeting commodity prices) that were beyond the control of developing economies? Or is indebtedness itself a principal symptom of a syndrome of national economic policies that were not successfully altered in the 1980s, an alteration made even more difficult by the burden of debt?

Whatever explanation is advanced, the North-South cleavage changed in the 1980s. Conflicts continue between successful exporters, such as South Korea or Taiwan, and the industrialized countries, responding to their threatened industries. The larger debtors have repeatedly gone to the brink with their creditors, private and public. These patterns of conflict, however, rarely overlap: developing countries no longer aspire to a unified bargaining stance across issue-areas. While some newly industrializing countries confront a transition to rich-country status, other developing countries scramble to escape decades of economic stagnation and an increasingly marginal status in the world economy.

Looking to the immediate future, two sea-changes in the world economy appear likely to occur in the 1990s. The communist states were long excluded (and excluded themselves) from full participation in the institutions of international economic management. The Cold War and the organization of their economies by central planning rather than market principles made integration with the capitalist world economy difficult. Although some socialist states (notably Yugoslavia and Romania) found their way into the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade after demonstrating their independence from the Soviet Union, it was not until the entry of Hungary and China into the Bretton Woods institutions in the 1980s that greater participation was clearly linked to a wider program of internal economic reforms. Now Poland has been tipped as a major recipient of IMF and World Bank lending, and the Soviet Union has made clear its own closer integration with the capitalist West.

The significance of renewed momentum toward closer economic integration on the part of the European Community is less clear, and it will depend in part on the future course of events in Eastern Europe and the Soviet Union. The Single European Act will clearly have a substantial impact in the area of "negative integration": removal of remaining barriers to the free movement of goods, capital and labor within the European Community. Its results in other spheres appear more conditional. Movement toward an economic and monetary union, surpassing the relative success of the European Monetary System, could founder on British opposition and German lack of enthusiasm. More important, dramatic changes in Eastern Europe could absorb the energies of Community members, particularly Germany, at a time when the inclusion of new members might slow the motor of integration in any case. In addition, the tug to the East could shift European attention from the international economic sphere, where Community institutions have reinforced common policies, to the political and strategic sphere, where joint positions have been harder to construct.


The Organization of International Economic Relations: The Weight of the Past. In contrast to these structural shifts in the centers of international economic power and the continuing evolution of market integration that is considered below, it is worth noting that international institution-building and institutional change have not kept pace. The international organizations that crowned the postwar international economic order remain in place; their persistence symbolizes that the international rules of the game have not collapsed during two decades of economic shock. Nevertheless, their role has been repeatedly questioned and even ignored during the past decade. Even such an apparent exception as the role played by the IMF and the World Bank in managing the debt crisis appears less exceptional in the most recent phase of the crisis, as banks and debtors have moved independently toward debt reduction. Throughout the crisis, the United States, attuned to the interests of its commercial banks, has announced the close of one phase of the international debt strategy and the opening of the next.

The GATT has served as a useful locus for agreements on trade liberalization; negotiations under its aegis have also served as a means of staving off protectionist demands in the United States and other industrialized countries. Its greatest triumph-dramatic lowering of tariffs among Europe, Japan and the United States-had been accomplished by the end of the 1970s, however, and during the 1980s, crucial trade bargains were often struck outside the GATT. (Voluntary restraints on Japanese automobile exports to the United States were only one example.) Although the most recent trade negotiations, the Uruguay Round, have widened the trade liberalization agenda to include agriculture and services as well as strengthening the GATT, the success of the negotiations remains in doubt.

Official American attitudes toward international economic institutions are certainly warmer now than they were at the beginning of the 1980s; President Bush's proposal to use the World Bank and the IMF to assist Poland is only the latest indication of this trend. Nevertheless, the overall stance of the United States and the other major capitalist countries has been measured for two reasons: their self-proclaimed fiscal bind, which (they claim) makes it increasingly difficult to extract resources from legislatures and electorates to support international institutions, and their ideological resistance to public intervention in international markets.

The most important threat to the institutional fabric, however, is neither a scarcity of resources nor ideological skepticism. The threat arises, paradoxically, from one indicator of institutional success: the growing-and increasingly heterogeneous-membership of these organizations. Developing countries, including such long-standing holdouts as Mexico, are acceding to the GATT in increasing numbers; socialist states have gained entry to the key organizations or, like the Soviet Union, are seeking membership. Apart from the challenges to cooperative solutions that sheer numbers pose for these organizations, heterogeneity of political and economic systems calls into question postwar principles of organization, such as nondiscrimination and liberalization, in a world that is no longer dominated by mixed economies of the "Atlantic" variety. Doubts about the incorporation of Japan and the newly industrializing East Asian countries were noted above; the possibilities for short-term transformation in the Council for Mutual Economic Assistance (COMECON) economies can also be viewed with skepticism.

Can an international order be created with this degree of national diversity? It is a question that was originally avoided by the self-exclusion of many developing countries and the division of the world between American and Soviet blocs. In the 1990s, the question will require an answer.


The Power of States and the Force of Markets. Underlying these concerns over the repositioning of states in the international economy and the efficacy of international institutions are the ongoing integration of international markets and the changing strategies of international corporations. Integration has grown most rapidly in the financial markets, where the growth of international financial transactions has consistently outstripped the growth of world trade.5 The level of international financial integration was clearly demonstrated in the synchronized crashes that followed Wall Street's plunge in October 1987. The interconnectedness of such markets has existed since the birth of capitalism, but the current speed of transmission, closely tied to advances in computer and telecommunications technology, and the scale of financial flows across national boundaries are clearly unprecedented and deserve the label of sea-change.

The implications of financial integration for the global economy and the international financial system are not clear: the Federal Reserve successfully reestablished financial confidence in October 1987; central bank consultation has addressed the question of an international lender of last resort. Whether such mechanisms could withstand a more severe or sustained shock is less certain. For national governments, however, the effects are not obscure: their autonomy in setting economic policies is increasingly constrained, as capital controls become less effective and financial markets read their political and economic missteps with shorter and shorter time lags. Proponents of market perfection view this as a positive development, one that will keep wayward governments on the path of policy rectitude. A less optimistic view would note the blindness of the financial markets in the years preceding the debt crisis, and their tendency to overshoot in both the optimistic and the pessimistic directions on the basis of often incomplete information.

International markets for goods were marked during the 1980s by both liberalization and greater management of trade on the part of governments responding to protectionist pressures. The early years of the decade-years of deep recession, sharp upward movements of the dollar and an unprecedented American current account deficit-witnessed a move toward greater American and European efforts to allocate international market shares in key sectors, such as steel and autos. The often predicted collapse of the trading system did not occur, however; a threat of uncontrollable protectionist pressures in the early 1980s spurred governments to open the Uruguay Round of trade negotiations. Despite rising trade barriers in certain sectors, the growth of world trade resumed after the 1981-1982 recession, and the principal targets of protectionist measures, particularly Japan and the newly industrializing countries, continued their export success. Industrialized governments also moved to lower trade barriers with some of their principal trading partners: the United States and Canada, Australia and New Zealand, the 1992 project of the European Community.

Technology had not undermined closure so clearly as in the financial markets, but governments did confront greater sophistication on the part of traders if their attempts to restrain trade distorted the market too greatly; in developing countries, whole sectors moved to the black market economy in part to evade import and export controls; in such sophisticated sectors as semiconductors, "gray markets" quickly developed to satisfy demand in the United States after the 1986 U.S.-Japan Semiconductor Agreement.

Although the postwar international economic order had always included an ideological commitment by the dominant powers to liberalization in the movement of goods and capital, the free movement of labor has remained a jealously guarded sphere of national authority. In the last decade, however, it has become increasingly clear that better international communication and burgeoning mass tourism have undermined barriers to immigration at a time when the disparities between rich and poor countries remain enormous. Even a society as hostile to immigration as Japan has found it impossible to stop illegal immigration when its own businesses collude to gain cheap labor. Outside the richest countries, brain drains and labor outflows become serious restraints on national governments, particularly in the developing world; economic downturns and political repression no longer produce only the temporarily unemployed or refugees who later return to their homes. Another option, permanent emigration, is now available, as Central America, Peru, China and East Germany have all learned of late.

The differing pace of integration in markets for capital, goods and labor has influenced the increasingly complex strategies of transnational corporations. The global organization of production in certain sectors, such as oil, extends back many decades; but the 1980s was the decade in which the global factory came into its own. Seeking ways to put their capital and rapidly eroding technological advantages together with low-cost labor, firms in the industrialized countries developed suppliers and production sites throughout the world. They attempted to improve their competitive position through cooperative arrangements (such as licensing agreements and joint ventures) with firms that may appear to be their rivals in other settings.

The pursuit of such strategies, by global giants as well as middling firms, has further blurred the distinction between "home" country and "host" country. These cross-cutting corporate interests have also complicated any definition of national economic interest. Should the United States encourage Japanese investment in smaller, American, high-technology firms, for example? Are American corporations in Japan part of the U.S. economy situated abroad, or are they essentially Japanese firms? Such a web of private connections at first appears to create important pressures for liberalization in government policies: the complexity of relations among firms makes efforts at international restriction less likely to be effective or beneficial. On the other hand, nationalist political responses to these new relationships-particularly foreign investment-could provoke a backlash that will create renewed pressure for controls.


Sea-Changes and the Transformation of World Politics. That this intensified if uneven integration of markets in capital, goods and labor could be reversed by some future shock-major financial crisis, global economic depression, or war-is a possibility that has haunted liberal memories since the end of World War II. A more pertinent question is whether such dis-integration could arise from the actions of governments, perhaps through unwitting exercises in economic brinksmanship that end up unraveling, in a perverse game of tit for tat, the fabric of economic openness. Few governments are willing to argue any longer for the benefits of economic closure, whatever their skepticism about the stability of markets or the effects of external liberalization on more vulnerable groups or sectors. Governments will certainly continue to shape the rules of the game to protect the interests of politically powerful and less mobile sectors of the economy. Calculated measures in favor of dis-integration, however, seem unlikely.

If the configurations described persist, some might be tempted to argue that they will constitute a sea-change in the very character of world politics, profound enough to contribute to an "end of history." Such predictions would have seemed outlandish at the beginning of the 1980s, when the newest chapter of the Cold War intensified concerns over military dangers. Today, however, one may well ask whether relations among states are not characterized by a permanent shift toward goals of economic welfare and a concomitant rise in the importance of economic resources and economic instruments in interstate competition. Such a change is linked not only to those international economic developments already mentioned, but also to reduction in superpower rivalry and widespread, if not yet universal, internal political liberalization.

Thus, without lapsing into a Spenglerian pessimism that risks becoming as fashionable as the most recent hype over the new era of good feelings, we should see changes in the international economy not as producing an inevitable resolution to age-old problems of interstate conflict, but as intimately tied to that conflict, as they have been since the birth of capitalism. The ever changing economic fortunes of nation-states affect their strategic position as well as their perception of national security. Internationalized though they may be, markets will continue to confront fragmented political authority. Whatever the sea-changes in the international economy, they will take place within these deeply embedded features of international relations, for they have not yet transformed them.


International Economic Change and American Policy. The balance between persistence and change in the international economy confronts the United States with particular challenges. Both the goals that the United States has pursued since 1945 and the instruments that it has employed to reach those goals may be called into question. One preeminent national aim has been a liberal world economy, in which any government controls and interventions that affect the free movement of goods and capital are reduced. This goal has always been qualified: the United States not only has imposed such controls itself (whether as instruments of national strategy or as responses to domestic demands), it also has recognized that completely liberalized markets might be politically insupportable.

The goal of a liberal world economy is now questioned for two reasons. First, those who view Japan and the newly industrializing countries through revisionist eyes argue that the United States has become a liberal dupe in a world that does not operate according to neoclassical economic principles. As economic exchanges with the socialist economies grow, such complaints are likely to surge. Such criticisms could lead policy in several directions: protectionism, industrial policy or reciprocal liberalization with "like-minded" countries (for example, the free trade agreement with Canada).

The second reason for viewing liberalization more skeptically derives from the reconsideration of market deregulation that is now under way. The infallible wisdom of markets, even markets untouched by political manipulation or monopolistic behavior, is less likely to be taken for granted in the future. An economic shock (a second, more severe financial crash, for example) would only add support to such criticisms.

A global rather than a regionalized world economy has been a second overarching goal of the United States; this goal has been closely related to the multilateral structure of international economic institutions and such norms as nondiscrimination in trade. Since the economic shocks of the 1970s, some observers have predicted a world economy divided into regional blocs; some of the sea-changes described above-the consolidation of Europe and the rise of Japan-may point in that direction. The United States has endorsed certain regional groupings, particularly the European Economic Community, for their value in offsetting Soviet power. If the Soviet military threat fades and regionalization takes a form that appears damaging to American economic interests, that support may disappear. The United States may need to specify its economic interests in either a global or a regionalized economic order on purely economic grounds.

In advancing its goals in the international economic arena, the United States also faces choices concerning the instruments that it employs. The role of collaboration among governments (within or outside established international institutions) must be assessed as an alternative to either unilateral measures by the United States to impose its policy preferences (for example, threats of trade sanctions to open markets) or the avoidance of political intervention in international markets. It seems unlikely that either the immiserization of parts of the world or the integration of the socialist economies can be dealt with in the absence of sustained cooperation on the part of the major industrialized countries. Throughout the 1980s, the United States was skeptical of international institutions that were often portrayed as either bloated bureaucracies or unwanted restraints on American action. A reassessment has already begun: unilateral American action is likely to be less effective, and the workings of an untrammeled market may be less desirable than innovation (or renovation) of mechanisms for international collaboration.

In any collaborative initiatives that are undertaken, the United States faces a final choice-the claims of leadership that it will make and the price that it is willing to pay for those claims. Japan has now become the largest donor of foreign aid. The Bush administration has signaled its willingness to have the European Community lead in organizing economic assistance for Eastern Europe. Our fiscal deadlock has made it difficult for the United States to lead on issues of international economic importance. In a regionalized world economy, demands would not be so great; each major actor--Japan, Europe, the United States-would tend its own backyard. If such a fragmented world is not the future that we desire, then the United States will need economic instruments for a world in which military instruments may become increasingly unsuited. If the threat of Soviet military power recedes, then a central question will be what price the United States and its taxpayers are willing to pay in order to possess those instruments and, with them, a central role in sustaining an altered international economic order.

1 Ezra Vogel, Japan as Number One (Cambridge, Mass.: Harvard University Press, 1979).

5 Ralph Bryant, International Financial Intermediation (Washington, D.C.: Brookings Institution, 1987).

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  • Miles Kahler is Professor, Graduate School of International Relations and Pacific Studies, University of California, San Diego. This article is adapted from the author's essay in Sea-Changes: American Foreign Policy in a World Transformed, published by the Council on Foreign Relations.
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