The Financial Statecraft of Emerging Powers

Shield and Sword in Asia and Latin America

L. Armijo, S. Katada, L. Armijo, S. Katada

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137429384
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

Financial statecraft' goes beyond sanctions against rogue states. The aims of financial statecraft may be defensive or offensive, its targets bilateral or systemic, and its instruments financial or monetary. Regions and countries profiled include Argentina, Venezuela, Brazil, India, Southeast Asia, China, and Japan.

1

New Kids on the Block: Rising Multipolarity, More Financial Statecraft

Leslie Elliott Armijo and Saori N. Katada

With a rise of emerging market economies such as China, India, and Brazil, the distribution of global capabilities is shifting. In 2011, a newly inaugurated World Bank annual report, Global Development Horizons 2011, began with the following bold assertions:

The inaugural edition of GDH addresses the broad trend toward multipolarity in the global economy ... By 2025, the most probable global currency scenario will be a multipolar one centered around the dollar, euro, and renminbi ... [In the postwar era,] in exchange for the United States assuming the responsibilities of system maintenance, serving as the open market of last resort, and issuing the most widely used international reserve currency, its key partners, Western European countries and Japan, acquiesced to the special privileges enjoyed by the United States – seiniorage gains, domestic macroeconomic policy autonomy, and balance of payments flexibility ... [Today] three conventional pillars [of global economic governance] need to be reappraised: the link between economic power concentration and stability, the North-South axis of capital flows, and the centrality of the U.S. dollar in the global monetary system. (World Bank 2011: xi–xii; 2)

This is quite striking language from the World Bank, suggesting as it does that global inequality might be a source of economic volatility, that major emerging powers might become senders rather than recipients of international investment, and that the U.S. dollar could gradually yield its position as the anchor currency for the world economy. Increasingly, such once controversial themes also figure prominently in the elite global business press. London’s Financial Times observed that, “The old notion of rich countries funding poor countries is no longer appropriate, as emerging markets rise in economic clout and are as much sources of development cash as they are recipients” (Politi 2012).

This ongoing and underlying transition became particularly apparent following the global financial crisis (GFC) initiated in the housing finance markets of the United States in 2007, which intensified in the aftermath of the shock associated with the failure of Lehman Brothers investment bank in September of 2008, and was followed by a lingering European sovereign debt crisis from 2009 into 2013. The GFC has been a significant blow to the international influence of the neoliberal economic paradigm and of leading advanced capitalist democracies, exposing their underlying fiscal and banking fragilities, which have continued to roil markets and unseat incumbent governments. Governments of many of the larger emerging economies perceive in current conditions the opportunity to exert themselves more actively in international affairs, including via financial statecraft (FS).

“Financial statecraft” is defined as the intentional use, by national governments, of a country’s monetary or financial capabilities or conditions for the purpose of achieving ongoing foreign policy goals, whether political, economic, or financial. In this book, which builds on earlier theoretical work by the editors (Armijo and Katada in press), we focus on the FS strategies of key emerging powers in Asia and Latin America. These countries have for several decades struggled to implement market-oriented economic reforms while experiencing their share of financial crises stemming from international borrowing or cross-border investment, crises that repeatedly disrupted development plans, temporarily halting or even reversing countries’ economic growth. In the first decade of 21st century, however, we observe their comparative financial and economic rise, and associated with it, the use of their financial powers to protect their economies and assert their political and commercial objectives. The questions we ask in our collective study include these. Has the increase in the overall material capabilities of previously marginal players in Latin America and Asia translated into more active FS by these countries? What motivates the players? What tools do they use to engage global finance, and for what political purposes? To set the stage, this chapter introduces the main sources and instruments of FS around the Pacific Rim (defined broadly to encompass Brazil and India) and begins the inquiry into how they might be employed in the cause of global rebalancing, particularly in the post-GFC world.

The chapter’s first section suggests that the underlying interstate distribution of capabilities is shifting, and that the governments of many emerging powers have taken this as their cue to engage more actively in the exercise of FS. Section two theorizes the concept of FS and sets out hypotheses about how it has evolved among the set of emerging powers. We conclude with brief summaries of the chapters to follow.

Shifting capabilities, rising aspirations

Are there indeed “new kids on the block” among the world’s major financial powers? The discussion of the use of international financial statecraft by new global and regional players rests on the assumption that the distribution of capabilities among sovereign states itself is in flux. This shift eventually should transform global influence over international political and economic outcomes.

One way to conceptualize which states are significant in global politics is to look at national control over material resources. Taking a purely “realist” position (Waltz 1979; Mearsheimer 2001), “power” in international politics may be conceptualized as deriving from countries’ relative positions in a notional global balance of capabilities, where each country’s weight is measured as its share of world totals of such dimensions as total armaments (in practice, usually measured by their purchase value, admittedly a limited assessment tool), global population, and other scarce resources, from access to blue water ports to fossil fuel reserves. Besides the means to make the country secure from attack – still today dependent on geography, although much less so than historically was the case – the most significant material asset is size of the nation’s economy, as money may be exchanged for most other goods and services desired.

In terms of the interstate distribution of material capabilities, the world is becoming more multipolar. There has been quite a dramatic shift in the shares of the global economy accounted for by the large emerging economies as compared to the major advanced industrial powers. According to the latest figures from the OECD, the combined gross domestic product (GDP) in 2005 of five major emerging and transitional economies (China, India, Indonesia, Russia, and South Africa) was about 42 percent of the size of that of the G7 group of major economies (Canada, France, Germany, Italy, Japan, United Kingdom, and United States). By 2012, the economies of these five nontraditional powers were almost 64 percent of the total of the advanced industrial powers – an increase of 22 percentage points in only seven years.¹ Armijo, Muehlich, and Tirone (forthcoming) calculate a “Contemporary Capabilities Index” (CCI), that includes the mean of national shares in global totals of: national income (GDP at PPP rates), population, telephone subscriptions (both fixed and mobile), industrial value-added, foreign exchange reserves, and military spending. By the CCI, the share of the G7 in global totals declined from 47 to 36 percent between 1990 and 2007, while that of China, India, and Brazil doubled from 10 to 22 percent, most dramatically due to the growth of China. Similarly, the U.S. government’s National Intelligence Council (USNIC 2012: v) identified as one of the five “tectonic shifts” expected between the present and 2030 the “definitive shift of economic power to the East and South.” In general, virtually any possible index of relative material capabilities shows a smaller share for the major advanced industrial countries than was the case in the late 20th century.

Skeptics mock such crude measures of relative state capabilities, which admittedly are rousingly unsubtle, including only easily quantified dimensions while excluding national capabilities that fall into the realm of “soft power” (Nye 1990; 2004), such as having a dominant culture, a globally used language, a world-class educational system, attractive market and political institutions, and a strong international reputation more generally. Yet nontraditional players also are enhancing their soft power, albeit from a low base. For example, after being humbled by the series of financial crises that hit the emerging market economies of Latin America (1980s and 1990s) and Asia (1997–1998), these countries’ governments became significantly more confident when they recovered quite swiftly from the GFC (Wise, Armijo, and Katada under review). The series of economic crises that have enmeshed the advanced economies since the late 2000s have cast dark shadows on the neoliberal economic paradigm preached by the leaders of these advanced economies. Their power of persuasion has been undermined.

Many contemporary scholars of course insist that “power” should be understood not as capabilities but instead as realized influence, as when State A persuades or coerces State B into taking actions that State B otherwise would not have chosen (Baldwin 2013; Barnett and Duvall 2005). The influence of emerging powers also has increased. The clearest example of the gradual yet perceptible shift of global influence from the major advanced industrial democracies toward nontraditional powers came in the initial G20 Summit, convened in Washington, DC following the September 2008 crash of Lehman Brothers investment bank. This was a visible indication of the inability on the part of the G7 major powers, accustomed to behind-the-scenes crisis management led (sometimes aggressively) by the United States, to cope with the global financial crisis. The G20 Summit emerged in the center stage of global financial governance as the finance ministers of the traditional powers, including U.S. Treasury Secretary Henry Paulson, realized it would be foolhardy to try to implement global countercyclical policies to stop global financial contagion without active participation from many of the world’s largest emerging market economies. Following the second G20 Summit in April 2009 in London, British Prime Minister Gordon Brown announced a “New World Order” of unprecedented multilateral cooperation.

Since then, the large emerging powers have come to be seen as increasingly essential partners in foreign policymaking – although there also has been pushback by the major advanced industrial democracies, unused to consulting widely when taking diplomatic action. As recently as 2010, for example, an apparently well-intentioned effort by Turkey and Brazil to play the role of honest broker by suggesting a compromise solution to the nuclear inspection standoff between the major powers and the government of Iran was met by anger and derision in Washington, DC and other major Western capitals. Yet, the United States has had to accept Brazil’s and India’s somewhat independent stances with respect to nuclear nonproliferation, a goal that all three governments strongly claim to endorse. In late September 2013, U.S. President Obama’s effort to punish or sanction Syria’s government for alleged use of chemical weapons on civilians only remained alive due to the compromise proposals unexpectedly offered by Russian President Vladimir Putin. Meanwhile, U.S. President Obama reached out to telephone to new Iranian President Rouhani when he came to New York to visit the United Nations, marking one of the closest contacts to that point between leaders of the two countries since 1989 (Erdbrink 2013).

In sum, and within a relatively short period of time, there has been a clear shift in the distribution of interstate capabilities, with major emerging powers such as China, India, Russia, and Brazil accounting for an increasing share of overall global capabilities as measured by a variety of yardsticks. In addition, over the past three decades emerging powers have reformed and modernized their domestic financial sectors, which also has contributed to their gradually increasing range of options for engaging in FS.

Following the debt crisis of the 1980s, most Latin American countries implemented pro-market reforms, which aimed to make their domestic financial systems both more efficient and more stable (Nelson 1990). Their policy choices after 2000 were, however, more differentiated. Some countries such as Mexico, Chile, Peru, and Colombia have continued to move in a liberalizing direction, while others such as Venezuela and Argentina reversed neoliberal and pro-market reforms of the 1990s, becoming visibly interventionist in their financial regulation. In both the 1990s and 2000s, Brazil on the whole liberalized financially, but at a modest (and some would say insufficient) pace. In Asia, gradual financial liberalization in the 1990s arguably invited the Asian financial crisis (AFC) of 1997. The countries that accepted IMF conditions at the time of the AFC – including Korea, Thailand, and Indonesia – were obliged to further liberalize their domestic finance. Yet, the largest emerging powers of the region, India and China, took a slow road to domestic financial liberalization and still maintain relatively high levels of capital control and state-ownership of banks and other financial institutions.

One important challenge for these and other emerging market economies continues to be that of coping with massive and volatile inflows and outflows of foreign capital. These governments want to avoid erratic capital flows and exchange rate movements that exacerbate economic and political uncertainty. In the aftermath of the AFC, most Latin American economies began to utilize flexible exchange rates as a way of accommodating their domestic macroeconomic environments to global fluctuations, while most East Asian countries (with the notable exception of South Korea) maintained a loose and de facto currency peg with the U.S. dollar at depressed rates in order to maintain their export competitiveness.

In fact, many emerging market economies that experienced devastating financial crises in the last several decades managed to establish reasonably effective financial shields despite their concurrent adoption of pro-market macroeconomic stabilization. In several cases, their leaders also have concluded that activist financial policies, including efforts to influence global financial governance practices and beliefs, may have emerged as their best strategy options, both to avoid future crises and to project influence on a variety of topics.

The FS of emerging powers: shields, swords, and new possibilities for systemic influence

Governments long have used both military and financial might to achieve foreign policy goals (Viner 1948). In particular, FS is a part of “economic statecraft.” Traditionally, “economic statecraft” has been defined as the employment by the state of economic levers as a means to achieve foreign policy ends. Thus, for example, trade sanctions may be imposed on a foreign country with the goals of pressuring its government to end human rights violations against its own citizens or cease construction of a nuclear weapon. Conversely, military or diplomatic allies may receive subsidized loans or trade preferences. Baldwin’s (1985) seminal work on the use of economic means to achieve foreign security policy goals highlights how economic statecraft – particularly via trade and other economic sanctions – can be deployed in support of state security objectives. Multiple contemporary scholars have investigated economic sanctions both in terms of their domestic political foundations and the effectiveness of such sanction decisions.²

Consistent with this usage, “financial statecraft” (FS) would refer to a national government’s use of monetary or financial regulations or policies to achieve foreign policy ends...

Table of contents

• Cover
• Title
• 1 New Kids on the Block: Rising Multipolarity, More Financial Statecraft
• 2 Who’s Afraid of Reversing Neoliberal Reforms? Financial Statecraft in Argentina and Venezuela
• 3 Brave New World? The Politics of International Finance in Brazil and India
• 4 The End of Monetary Mercantilism in Southeast Asia?
• 5 All Politics Is Local: The Renminbi’s Prospects as a Future Global Currency
• 6 Regionalism as Financial Statecraft: China and Japan’s Pursuit of Counterweight Strategies
• 7 The Financial Statecraft of Emerging Powers: How, Why, and So What?
• Index