international political economy

Over at Politico, Eamon Javers notes an odd trend in the Drudge Report: 

On Tuesday, Matt Drudge ran a headline about the weakening U.S. dollar on his website, Drudgereport.com. In and of itself, that would be unremarkable, except that it was the 18th time Drudge had posted a link to a story about the weak dollar this month.

And October was only 20 days old.

Clearly, Matt Drudge has developed a fascination with the declining U.S. dollar.

“He’s fixated on it,” said Tom Rosenstiel, director of the Pew Research Center’s Project for Excellence in Journalism. “There’s no question that Drudge can alter what people are paying attention to.”

Market watchers say it’s unlikely that Drudge is actually moving the currency markets with his relentless attention.

“I don’t think that anyone who seriously trades currencies reads The Drudge Report before making important buy or sell decisions,” said Chris Roush, a professor of business journalism at the University of North Carolina at Chapel Hill. (emphasis added... because that's a priceless quote)

Drudge isn't the only one obsessed about the dollar.  Last week, James Pethokoukis blogged the following for Reuters: 

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

OK, let's be as plain as possible about this - as a reserve currency, the dollar is not going anywhere.  Really. 

The dollar's slide in value has been predictable, as the need for a financial safe haven has abated.  By and large, a depreciating dollar helps the U.S. trade balance (though it would help much more if the Chinese renminbi got in on the appreciation).   

Even the Chinese, who have spoken like they want an alternative to the dollar as a reserve currency, are in point of fact not doing much to alter the status quo.  Why?  To paraphrase Winston Churchill, the dollar is a lousy, rotten reserve currency - until one contemplates the alternatives. 

Because all of the alternatives have serious problems.  The euro, the only truly viable substitute for the dollar, is not located in the region responsible for the largest surge of growth.  It would be unlikely for the ASEAN +3 countries to agree to switch from the dollar to a new currency over which regional actors have no influence (the Europeans wouldn't be thrilled either, as it would lead to an even greater appreciation of the currency).  Oh, and the European Union has no consolidated sovereign debt market.  The euro is worth watching, but it's not going to replace the dollar anytime soon.  

The other alternatives are even less attractive.  Most other national currencies beyond the euro - the yen, pound, Swiss franc, Australian dollar - are based in markets too small to sustain the inflows that would come from reserve currency status.  The renminbi remains inconvertible.  A return to the gold standard in this day and age would be infeasible - the liquidity constraints and vagaries of supply would be too powerful.  There's the using-the-Special-Drawing-Right-as-a-template-for-a-super-sovereign currency idea, but this is an implausible solution.  As it currently stands, the SDR is not a currency so much as a unit of account.  Even after the recent IMF authorizations, there are less than $400 billion SDR-denominated assets in the world, which is far too small for a proper reserve currency. 

So, what's really going on here with the dollar obsession?  I suspect that with the Dow Jones going back over 10,000, Republicans are looking for some other Very Simple Metric that shows Obama Stinks.  The dollar looks like it's going to be declining for a while, so why not that?  Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now. 

The thing is, I'm not sure this gambit is going to work.  People who already think Obama is a socialist will go for it, sure, but that's only rallying the base.  I'm not sure how much fence-sitters care about a strong dollar, however.  If anything, populist movements tend to favor a debasing of the currency rather than a strengthening of it. 

Still, I'm just a political scientist -- I'm sure that, "theories on political behavior are best left to CNN, pollsters, pundits, historians, candidates, political parties, and the voters." 

So, have at it, readers!  Will the falling dollar be a source of populist outrage if Drudge links to it enough? 

UPDATE:  contrasting takes from Kevin Drum and Megan McArdle. 

Your humble blogger has a rather long essay in the Fall 2009 issue of International Security.  What's a lowly IPE scholar doing publishing in a high and mighty security journal?  Assessing whether China's massive holdings of dollar-denominated assets is a big deal or not.  The title may or may not give away my argument:  "Bad Debts: Assessing China's Financial Influence in Great Power Politics."

Here's the abstract: 

Commentators and policymakers have articulated growing concerns about U.S. dependence on China and other authoritarian capitalist states as a source of credit to fund the United States' trade and budget deficits. What are the security implications of China's creditor status? If Beijing or another sovereign creditor were to flex its financial muscles, would Washington buckle? The answer can be drawn from the existing literature on economic statecraft. An appraisal of the ability of creditor states to convert their financial power into political power suggests that the power of credit has been moderately exaggerated in policy circles. To use the argot of security studies, China's financial power increases its deterrent capabilities, but it has little effect on its compellence capabilities. China can use its financial power to resist U.S. entreaties, but it cannot coerce the United States into changing its policies. Financial power works best when a concert of creditors (or debtors) can be maintained. Two case studies—the contestation over regulating sovereign wealth funds and the protection of Chinese financial investments in the United States—demonstrate the constraints on China's financial power.

Read it and weep. 

Back in the spring, I hinted that I would be willing to produce a top ten list of must-read books on the international political economy/global political economy (IPE or GPE for those in  the know), provided there was sufficient demand. 

Judging by the e-mail response, the demand is robust and quite persistent.  So I've decided... to postpone that list for another month or two.

Because you're not ready yet. 

Let's face it, if you have read this far in the post, it means you're either: 

• A curious professor ready to minimize this page if anyone walks in;
• A grad student seeking the keys to success in the profession;
• An intense undergraduate student who really wants to study IPE. 

This is great.  The thing is, most graduate programs in political economy don't give you that much historical background before throwing the cutting-edge theory and methodology at you.  This year I was lunching with some Ph.D. students at one of the top IPE schools in the country, and the students (and some of the professors) made it pretty clear that they didn't know all that much about the topic beyond the tricks of the trade - formal modeling, econometric techniques, etc. 

If you're expecting me to go off on a rant here about the uselessness of these tools, well, you're going to be sadly disappointed.  There are some pretty good reasons to learn these techniques - among other things, they'll help you to separate the wheat from the chaff when it comes to what blogs, pundits and public intellectuals are saying about the global economy. 

That said, the opportunity cost can be significant - a failure to learn anything about global economic history beyond the stylized facts contained in the most-cited articles.  This would be a weird collection of scattered knowledge, ranging from the 1860 Cobden-Chevalier Treaty to the 1934 Reciprocal Trade Agreements Act to the birth of the Washington Consensus. 

Soooo..... before you are ready to ready the ten books in IPE that you have to read, you should first read these ten books on global economic history.  I'm leaving a lot out here (North and Thomas' The Rise of the Western World; Karl Polanyi's The Great Transformation; anything and everything by William McNeill, Joel Mokyr, David Landes, Alfred D. Chandler, Jr., Joseph Needham; some things by Niall Ferguson, etc.).  That's partly because I've slanted this list towards more recent scholarship, and partly because while these books are excellent economic histories, they don't focus as much on the international dimension. 

[There are some other newly-released books, such as Liaquat Ahamed's Lords of Finance or Justin Fox's The Myth of the Rational Market, that might very well belong on this list.  I'm still in the middle of reading them, however, so the jury is still out.]

Once you imbibe the (sometimes contradictory) information contained in these books, you can look at what the stylized facts contained in IPE books with a much more astringent perspective.  It's not a coincidence that the foundational IPE texts are by the twentieth century's greatest economic historians - Eli Heckscher, Albert Hirschman, Charles Kindleberger, and Jacob Viner.  Trust me - you will feel much the wiser for it. 

The following would be my preferred order of how to read them, but it's hardly the only way to do it: 

1.  Gregory Clark, A Farewell to Alms:  A Brief Economic History of the World (2007). I've already tagged this book as an interesting read.  If nothing else, the first chapter of this book - "The Sixteen-Page Economic History of the World"  - actually matches the audacity of the title.  As I said, I don't completely buy Clark's explanation of Malthus + genetics = Industrial Revolution in Great Britain.  His attempt to explain away the irrelevance of institutions doesn't hold up to scrutiny.  Still, I will say I better appreciated the heyday of mercantilism after reading Clark. 

2.  Nathan Rosenberg and L.E. Birdzell, Jr., How the West Grew Rich (1986).  Perfect when paired with Clark, because Rosenberg and Birdzell present the classical argument for why Western Europe was the birthplace of the Industrial Revolution. 

3.  Jared Diamond, Guns, Germs, and Steel (1997).  The third leg in the triad of "why did Europe dominate the globe?" explanations.  If Clark focuses on genetics/culture, and Rosenberg and Birdzell focus on institutions, Diamond proffers a geographical determinism.  Simply put, he thinks the temperate climate of Eurasia was bound to produce the most sophisticated societies with the most advanced animals, germs, and technologies.  Diamond's argument complements rather substitutes for the institutions and culture arguments.  If nothing else, it is impossible to read this book and ever buy the ending to War of the Worlds.

4.  John Nye, War, Wine and Taxes (2007).  David Ricardo's classic example of comparative advantage was English wool for Portuguese wine.  Nye explodes the "natural" aspect of this trade, demonstrating how high tariffs against French wine proved a boon to both the Portuguese and English beer distillers.  Nye stretches his argument too far at times, but the interrelationship between war, protectionism, and statebuilding is pretty damn fascinating. 

5.  Douglas Irwin, Against the Tide:  An Intellectual History of Free Trade (1996).  Irwin's book is more a history of economic thought than economic history, but nevertheless tells a remarkable story:  how did the idea of free trade knock off mercantilism, protectionism, strategic trade theory, and other doctrines?  

6.  Kevin O'Rourke and Jeffrey Williamson, Globalization and History (1999).  A lucid, detailed and fascinating study of how the nineteenth century of globalization went down.  When anyone argues that the current (fast fading?) era of globalization is historically unique, take the hardcover version of this book and whack them on the head with it.  Special bonus book:  people who liked this should go on to read Power and Plenty by Kevin O'Rourke and Ron Findlay). 

7.  Jeffry Frieden, Global Capitalism:  Its Fall and Rise in the Twentieth Century (2006).  This book is to the twentieth centiury as Williamson and O'Rourke's book is to the nineteenth - except it's written for a wider audience, so it's a more accessible read.  Accessible doesn't mean simple, however - this book is chock full of interesting arguments, cases, and counterarguments.  

8.  Barry Eichengreen, Globalizing Capital:  A History of the International Monetary System, second edition (2008).  A more narrow work than Frieden's, Eichengreen's book is the starting point for understanding the classical gold standard, the Bretton Woods regime, and whatever the hell system we have now the Bretton Woods II regime. 

9.  Daniel Yergin and Joseph Stanislaw, The Commanding Heights (1997).  Yergin and Stanislaw tell a cheerleader's tale of how the Washington Consensus displaced the old quasi-Keynesian, quasi-socialist economic order that had its apogee and downfall in the 1970s.  What's particularly interesting is their argument that what mattered was the content and spread of the ideas themselves, and not some coercive power, that led to the re-embrace of markets.  

10. Paul Blustein, The Chastening (2001).  Blustein, a reporter for the Washington Post, tells the you-are-there version of the Asian financial crisis and the reaction from the U.S. Treasury Department.  If you want to know why Pacific Rim economies started hoarding foreign exchange reserves beginning in 1999, read this book. 

OK, readers, which books would you recommend? 

There's a lovely passage in John Le Carré's The Secret Pilgrim in which George Smiley explains why governments don't simply rely on open source information instead of spending gazillions on their own intelligence operations:  "governments, like anyone else, trust what they pay for, and are suspicious of what they don't." 

Oddly enough, in studying the global political economy, the sentiment often works in reverse in the academy.  Scholars, understandably, tend to prefer open source research while looking askance at private sector work that requires $$$ to unlock. 

I'm genuinely on the fence about this kind of question.  In writing about sovereign wealth funds, for example, I found the private sector stuff far superior on the empirics to the open source research.  The private sector stuff is also usually published before academics enter the breach (a good rule of thumb for aspiring IPE types -- if your literature review consists mostly of corporate research, then you are ahead of the academic curve on a new issue area).  On the other hand, the private sector work often lacked the analytical bite of scholarly work.  For some of it, I could not escape the sense that someone was trying to sell me something. 

I raise this conundrum because Martin Wolf's latest column is essentially a precis of a Goldman Sachs report that requires cashy money to read.  Wolf's summary: 

The paper points to four salient features of the world economy during this decade: a huge increase in global current account imbalances (with, in particular, the emergence of huge surpluses in emerging economies); a global decline in nominal and real yields on all forms of debt; an increase in global returns on physical capital; and an increase in the “equity risk premium” – the gap between the earnings yield on equities and the real yield on bonds. I would add to this list the strong downward pressure on the dollar prices of many manufactured goods.

The paper argues that the standard “global savings glut” hypothesis helps explain the first two facts. Indeed, it notes that a popular alternative – a too loose monetary policy – fails to explain persistently low long-term real rates. But, it adds, this fails to explain the third and fourth (or my fifth) features.

The paper argues that a massive increase in the effective global labour supply and the extreme risk aversion of the emerging world’s new creditors explains the third and fourth feature. As the paper notes, “the accumulation of net overseas assets has been entirely accounted for by public sector acquisitions ... and has been principally channelled into reserves”. Asian emerging economies – China, above all – have dominated such flows....

The authors conclude that the low bond yields caused by newly emerging savings gluts drove the crazy lending whose results we now see. With better regulation, the mess would have been smaller, as the International Monetary Fund rightly argues in its recent World Economic Outlook. But someone had to borrow this money. If it had not been households, who would have done so – governments, so running larger fiscal deficits, or corporations already flush with profits? This is as much a macroeconomic story as one of folly, greed and mis-regulation.

I'm pretty sympathetic to this argument, but I can't fully embrace it unless I can read the friggin' paper. 

Question to readers:  compared to academic work, how reliable is private sector research? 

FP readers have no doubt discerned that your humble blogger's #1 topic of interest for 2009 has been the relative rise of China, the relative decline of the United States and the effects of these power shifts on the global political economy.

That said, an emerging subtheme will be breathlessly hyped reporting that melodramatically exaggerates either shifts in China's power or shifts in Chinese preferences. 

For exhibit A, I give you the Financial Times Jamil Anderlini and Javier Blas , who report, "China reveals big rise in gold reserves."  Let's go to the lede:

China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.

Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

The news could spark interest in gold among other central banks. “When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,” said John Reade, a precious metals strategist at UBS.

The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.

Ooooh.... this could be a Very Big Deal!!  Gold could supplant the dollar!!  Hide the children in the basement!!

Well, let's crunch the numbers first.  Unless MS Excel's my math is way off, China's gold reserves are now roughly worth $30 billion.  Which means they constitute less than two percent of China's total reserve holdings.  Furthermore, China's doubling of its gold reserves in the past five years actually means that Beijing has diversified away from gold, since the total value of China's foreign exchange reserves has increased tenfold during the same period of time. 

No wonder, therefore, that buried deep down into this story you see the following passage: 

Paul Atherley, Beijing-based managing director of Leyshon Resources, said that even after the latest purchases China had a very small percentage of its reserves in gold, far below the US or other developed countries.

“Those [gold] holdings are still too low in terms of the size of its economy and the growing significance of its currency,” he said.

China's power is undoubtedly increasing.  Not every action by Beijing, however, is indicative of attempts to alter the current global political economy. 

This week in non-Foreign Policy publications I take a shiv to both American academics and American policymakers.

On the academic side, my latest essay in The National Interest online explains why the traits that make one a good international relations scholar are not-so-good traits for a good international relations practitioner: 

To borrow from Isaiah Berlin, academic scholars of international relations are rewarded for being hedgehogs—i.e., knowing one big thing. Scholarship is thought to be “interesting” when an academic generates a really big and provocative idea that challenges conventional understandings of big questions about international relations. The incentive structure of the academy also rewards the academic for repeating and rewriting their big idea as often as possible. Are these big ideas right? That’s almost beside the point. As long as their progenitors are alive, ideas never die in international-relations theory (when they do die, someone will eventually dust it off and repackage the idea under their name).

On the other hand, today's policymakers ain't what they used to be -- a point I make in a commentary for Marketplace: 

The dirty little secret inside the Beltway is that international economics either scares or bores America's foreign policy community. Although foreign affairs analysts understand on some level that economics is important, they see it as distinct from geopolitics. As a result, very few of them have the necessary experience or training to talk about international economic matters.

It was not always this way. During the Cold War, some of America's greatest foreign policy minds -- Dean Acheson, Walt Rostow, George Schultz or James Baker -- had substantive backgrounds in economics, finance or business. This allowed them to navigate the waters between high politics and high finance with a minimum of fuss.

[So, to sum up your mood this week:  America's foreign policy community stinks!!--ed.  I don't think that highly of you, either.  Actually, it's worse than that -- after reading this Jacob T. Levy post, I'm not entirely convinced that the academic side of IR should necessarily strive for policy relevance.]

A few months ago Steve Walt provided a useful guide for how IR theory can provide insights into Valentine's Day. In light of tonight being the first night of Passover, this post reverses the question -- what can this holiday teach us about international relations?   

This question is impossible to avoid for someone who attends a Seder and thinks about international relations. The essence of the seder is to answer the Four Questions -- i.e., to tell the story of how the Jews escaped from enslavement in Egypt.  And while international relations scholars tend to be more fond of using ancient Greek history to inform their theories, the Passover story reveals at least four relevant lessons about politics: 

1)  Minority rights in an autocratic regime are a fragile thing. As the story begins, the Jews are treated well in Egypt, what with Joseph having been a successful prime minister and all. Eventually, however, a new Pharaoh emerges, and then there's trouble: 

[T]here arose a new king over Egypt who feared the Jews because they were different. And he said to his people, "Look at how rich and how powerful are these children of Israel. If war comes, they may join themselves to our enemies and fight against us."

Autocratic leaders can ignore institutional restrictions, and are more likely to exploit ethnic tensions if they perceive a minority group as increasing in power and influence. 

2)  Sanctions against an autocratic regime will rarely yield significant concessions. To get the Pharaoh to let the Jews go, God imposes an escalating series of sanctions against Egypt. These sanctions crippled Egyptian agriculture, health, sanitation and, er, sunlight, inflicting great suffering against the Egyptian people. Not until the first-born male children are killed, however, does Pharaoh relent for a sufficiently long time for the Egyptians to make their escape. Not coincidentally, that plague is the only one to truly hurt the autocrat personally, as his son was killed in the plague as well. Compellence strategies would seem to have a greater chance of success if they target autocratic elites. 

3)  God was not that good at bargaining. For each of the ten plagues, the following pattern recurs:

• Plague descends upon Egypt
• Pharaoh begs Moses to get God to end the plague, promising freedom for the Jews if it happens
• God lifts the plague
• Pharaoh's heart hardens, and he reneges on the deal. 

Pharaoh does this nine -- count 'em, nine times -- before God resorts to the grisly tenth plague. No wonder the Egyptian leader kept reneging -- if anything, the Pharaoh's resolve should have increased over time, because he discovered that cheap talk could get God to stop what he was doing.* 

4)  America's idiotic sugar quotas are particularly bad for the Jews.  During Passover, Jews are not supposed to eat anything that contains yeast, rice, millet, corn, legumes, wheat, rye, oats, barley, and spelt (quinoa is apparently kosher).

All well and good, except that because of America's prohibitively high barriers to most sugar imports, a lot of food manufacturers use corn sweeteners -- i.e., high fructose corn syrup -- as a substitute for sugar.  Which means that for observant Jews, an entire category of goods that in other countries would be Kashrut is off the edible list for the next eight days. 

*Yes, yes, God was the one who hardens Pharaoh's heart, but that just makes the story sound like a seven-year old boy playing both sides of a checkers game. 

For a book-length treatment of how to think about the Old Testament from a strategic perspective, I warmly recommend Steven Brams' Biblical Games: Game Theory and the Hebrew Bible.

William Thomas Cain/Getty Images

A surprising number of people are curious to know my thoughts about the political implications of the global financial crisis -- a sure sign that Martin Wolf, Niall Ferguson, and Nouriel Roubini and about 50 other people on the geopolitics "A list" are just too damn busy. 

Until recently, I had been busy thinking furiously about how the crisis affected skirt lengths, so only know am I trying to look at The Big Picture.  Which, of course, means I'm starting out by reading what other people are writing.

Quentin Peel provides a nice overview in the Financial Times of the emerging conventional wisdom -- power shifting to the East, yadda, yadda yadda.  And in The Washington Quarterly, Matthew Burrows and Jennifer Harris update the National Intelligence Council's Global Trends 2025 report to incorporate the effects of the crisis (they should know how to do that, since Burrows was the principal drafter of the original report). 

Here's where I keep bumping my head.  I by-and-large agree that a long-term implication of the crisis is that America's relative market power should shrink vis-a-vis China and India.  The thing is, an awful lot of the short-term crisis steps are not moving in that direction.  The United States is trying to boost its consumption spending. China appears to be boosting pursuing fiscal expansion as well, except a closer look at what they are doing shows that they're doubling down on an investment strategy that increases their export dependence.  Furthermore, the head of China's central bank doesn't think that Chinese consumption is going to rise anytime soon, because Confucian cultures value, "thrift, self-discipline, zhong yong or Middle Ground (low-key), and anti-extravagancy."

After a certain point, short-term trends can congeal into long-term trajectories.  So, my question to readers:  will the short-term moves actually throw off long-term projections about power trends?