Sanjaya Baru: The age of geoeconomics

Last Updated: Sun, Aug 07, 2011 19:40 hrs

If the United States economy is in dire straits and has been paralysed by a fiscal crisis, what will happen to US power and influence? Economic and geopolitical analysts will recall in days to come the theory of “imperial overstretch” and the economic foundations of the decline of American power put forth over two decades ago by British historian Paul Kennedy (The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000, Random House, 1987). Professor Kennedy was only building on an ancient principle of wealth and power enunciated by Kautilya in his Arthashastra.

“Strength is of three kinds,” wrote Kautilya, “the power of deliberation is intellectual strength; the possession of a prosperous treasury and a strong army is the strength of sovereignty; and martial power is physical strength.” No other nation has understood this inter-connection between the power of knowledge, or “intellectual strength” as Kautilya put it, the prosperity of the treasury and the “strength of sovereignty” better than the United States. When its sworn adversary in the second half of the 20th century, the former Soviet Union, chose to engage the US on the plane of military power, building nuclear arsenal and arming itself to the teeth, the ideologues of Soviet power forgot what Winston Churchill had told a Harvard University audience at the height of World War II: “The empires of the future are the empires of the mind.”

The US won the Cold War by investing in its knowledge economy and building one of the most creative and enterprising economies ever known to man. China learnt this simple lesson well when its post-revolutionary leader Deng Hsiao Peng launched the Four Modernisations and chose to build a strong treasury, a strong intellectual base and a strong army, avoiding the Achilles heel of “military overstretch” that finally resulted in the implosion of the Soviet Union.

Ironically, the US itself forgot this basic lesson and allowed fiscal overspending and excess consumption to subvert the strength of its treasury. As another British historian, Niall Ferguson, noted in his classic on money and power, (The Cash Nexus: Money and Power in the Modern World, 1700-2002 , Basic Books, 2002): “Economic resources are important, of course, but they are not the sole determinant of power. A state’s means of destruction consist more than the output of its steel industry ... a state can defeat an economically superior foe if it has better strategic, operational and tactical ability. Nor is the effectiveness of military mobilisation sufficient. We also need to take into account a state’s financial sophistication: its ability to appropriate resources from taxpayers and to borrow from investors.”

In failing to arrive at a political consensus on a fiscal strategy that would empower the American “state”, the political leadership in the US, cutting across political parties, has put the international community on high alert. What are the likely geoeconomic consequences of the fiscal crisis and the military overstretch gripping the US? The answer to this question will define the global balance of power in the next decade, if not more.

I do not subscribe to the view that there is anything inevitable in the course that human affairs take. Such historical and economic determinism was in high fashion in the 1960s and 1970s when the world was being asked to prepare itself for the coming collapse of Western-style capitalism and the inexorable and inevitable rise of Soviet power. One of the world’s fastest-growing economies in the early 1970s was East Germany!

Those who draw dire conclusions about the future of America’s power based on the predicaments the US economy currently faces have not learnt the lessons of history. At the same time, it must be emphasised that the lesson for US political leadership, as indeed for European and Indian political leadership, is that the foundations of power in the modern world are built in the sinews of the economy and not through military muscle. The age of geoeconomics is upon us.

In an inter-dependent and globalised world economy the travails of one country impinge upon the fortunes of another. There is, in that sense, no strict decoupling. However, to the extent that the global economy is a sum of many parts, it has always benefitted from the multiplicity of cycles of production at play at any given time. As one economy slows down, another gathers momentum. That is how global growth sustained itself in the pre-industrial and industrial era.

In the age of finance capitalism these multiple cycles coalesced but, as the Asian financial crisis of 1997-98 showed, a crisis and a slowdown in one part of the world did not envelop the entire global economy. Indeed, this has been true even with the trans-Atlantic financial crisis. Given the US economy’s size and global links, the trans-Atlantic financial crisis did result in a global economic slowdown. But it must be remembered that many so-called “emerging markets”, mainly the “re-emerging economies” of Asia (China and India), sustained global growth and offered safety nets for investors.

Neither China nor India, nor indeed much of south-east and east Asia, Africa and Latin America, has lost its momentum, even if many (like India) have slowed down. Differential economic performance is good for global stability and if national governments pursue policies that seek to stabilise growth at home, these should not be frowned upon by the globalisers of the era of finance capitalism. Rather, it is best to allow new centres of growth to stabilise themselves and provide new opportunities for global growth in the future.

The new geoeconomics of growth will have geopolitical consequences. But never underestimate the ability of a “global” power like the United States to benefit even from a shift of power from the West to the East. After all, the US has declared itself an Asian power!

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