Measuring Power and the Rise of East Asia

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Measuring Power and the Rise of East Asia
Eric M.P. Chiu

National Chung Hsing University
Thomas D. Willett**

Claremont Colleges

National Chung Hsing University

This chapter provides a guide to many of the most important quantitative measures of economic and financial power. We offer a brief critical survey of many types of quantitative measures that have been or could be used to analyze the economic and financial power of rising Asia. We argue that while aggregate measures are useful in terms of documenting the economic rise of East Asia, they are of quite limited use in analyzing actual power relationships which can vary tremendously from one issue area to another. We find that East Asia's effective use of power, while certainly ascendant, has generally not yet increased commensurate with the magnitude of its economic rise. We illustrate a number of areas where careful analysis shows that attention just to aggregate quantitative measures alone can be highly misleading. Quantitative analysis needs to be combined with case-specific qualitative and analytic analysis. Measures of aggregate resources must be combined with analysis of countries' political capacity and willingness to make use of their resources for power purposes.

1. Introduction

This chapter offers a brief critical survey of many types of quantitative measures that have or could be used to analyze the rising economic and financial power of East Asia and provides illustrations of the strengths and weaknesses of many of these measures. As emphasized in the Introduction to this collection, there are many different concepts of power. Data on such matters as the growth of exports, imports, GDP, and foreign investment are quite useful in documenting the economic rise of nations and regions. On such measures the bourgeoning importance of emerging market economies in East Asia, especially China, is obvious and explains the greatly increased attention being paid to the region. Our analysis finds that to date East Asia has not come close to exerting economic and financial power in proportion to the increases in its economic importance.

Given the understandable concerns from countries whose relative economic size is diminishing, it is likely quite wise that East Asian countries have so far generally used restraint in flexing their new found economic muscles. The economic rise of East Asia, while a valuable development from the standpoint of human welfare, inevitably also places strains on the operation of the global economy. Conflicts of course have and will continue to arise. That economic development and international trade are positive-sum games does not mean that everyone gains. Restraint on the direct uses of economic and financial power to resolve disputes make an important contribution to assuring that the economic rise of East Asia will be peaceful. Therefore, the question of whether the fairly limited use of economic and financial power by East Asian countries is due to deliberate restraint or, alternatively, to the failure of economic growth to translate directly into economic power is an important issue for analysis.

It is clear that part of the answer is that aggregate economic and financial measures are much less useful in capturing actual changes in power relationships than they are in documenting economic rise and decline. For example, despite all the hype given to forecasting the date when China’s aggregate GDP will pass the that of the United States, the event will have little if any substantive impact on actual power relationships. China has already grown to the size that it has become a major component of the world economy.

How aggregate economic and financial developments translate into effective power can vary enormously from one issue area to another. Substantive analysis of power relationships must be context specific. One needs to analyze power in terms of the ability to get who to do what and when (i.e., to project influence) and the power to protect oneself from various types of external events (i.e., to defend autonomy). These external events may be the actions of other countries deliberately seeking to influence a country’s behavior or the unintended consequences of policy developments abroad that were pursued for their own sake. Also of importance is the behavior of non-state actors. It has been popular to argue that globalization has sharply diminished the power of states to pursue their policy objectives. While this is certainly true with respect to many types of policies, the strength of some types of policies can actually be increased by globalization. For example high international capital mobility can help a country finance budget deficits, at least up to the point where the credibility of a country's debt comes into question. Thus the effects of globalization on the power of countries must be analyzed for specific issues. Both theoretical and empirical analyses are of considerable importance. For example, many empirical studies have found that globalization has reduced important aspects of many countries' power much less that frequently assumed.

Aggregate measures of economic and military power based on factors such as population, gross domestic product (GDP), steel production…etc have become much less useful than in the days of balance-of-power relationships during the 18th and 19th centuries. Two major developments have led to a great reduction in the usefulness of such measures – to the point we argue, that fashionable measures of overall power that combine various types of statistical indicators have become virtually meaningless – except for the attention they attract to those who produce them.

The dramatic growth of technology has made traditional measures such as population size almost meaningless as a component of military power among major nations. Nor does aggregate GDP give an adequate measure. The time needed to convert general economic resources to military uses are much greater today than in the vastly less technologically advanced days of the 18th and 19th centuries when balance-of-power analysis became popular. Furthermore changing attitudes about the legitimacy of using military force has greatly reduced the transfer of such power to economic and financial areas. Of course, the ability to use economic resources to promote economic, financial, and security goals is still quite important. Capacity measures of power are still useful, but only when they are combined with analysis of the ability and willingness to use such resources in specific situations. This in turn depends heavily on domestic political considerations. While the realist tradition in international relations has tended to focus on the external strength of nations, recent developments in the study of international political economy have focused attention also on the importance of the domestic strengths of governments and how these are influenced by political and institutional factors.

The decline in the role of military power in influencing economic and financial power is a vivid illustration of how norms about acceptable behavior can influence crucially the use of power. Also of considerable importance are other aspects of the world views or mental models that influence countries' behavior both in terms of their normative goals and their perceptions of how the world works.

In section 2, we offer a brief critical survey of various types of aggregate measures of power. We argue that aggregate measures are useful in terms of illustrating the economic rise of East Asia, but are much less useful for analyzing effective power across different issue areas. Measures of the political capacity to translate resources into actions are discussed in section 3. In section 4 we discuss measures of microeconomic sources of power and vulnerability primarily in terms of the use of economic sanctions. In section 5 we turn to the uses and limitations of macroeconomic and international financial measures of power for East Asia relative to the United States. In a number of instances we discuss methods of quantitative estimation of relationships in addition to basic data. Section 6 concludes.
2. Some Aggregate Measures of Power
2.1. Issues of Measurement

Obtaining measures of economic growth is fairly straight forward compared with many of the other measures to be discussed. For most countries basic economic data such as rates of economic growth, inflation rates and, exchange rates are easily available from a number of sources such as the International Financial Statistics of the International Monetary Fund (IMF) and the World Bank’s World Economic Indicators. Not all countries' statistics are of equal quality, however. China's inflation and economic growth statistics have been the subject of particularly strong criticism, with many experts arguing that official growth rates tend to be systematically overstated while inflation rates are understated (Rawski 2001; Wang and Meng 2001). Focus should clearly be on real rather than nominal economic growth, and there are several different types of price indices that are used to convert nominal into real growth rates.1 For example, real GDP equals nominal GDP divided by consumer price index (CPI) or producer price index (PPI), or Wholesale Price Index. CPI measures the average change over time in the prices of a basket of goods and services. Due to national differences in the selection of a basket of goods and services, using CPIs can cause bias in cross-national comparisons. There is also an issue of the importance of aggregate economic growth that includes the effects of population growth versus per capita growth that correlates highly with the growth of productivity.

The same types of issues affect the measurement of the aggregate size of economies. A particularly vexing issue concerns the problem of converting economic and financial magnitudes into different currencies for purposes of comparison. While this also affects calculations of growth rates, the magnitudes of the differences in the figures from different methods are of course much greater when comparing the overall size of economies. The easiest method of comparison is to translate at current exchange rates. One difficulty with this method is that exchange rates can often vary substantially over short time periods. Hence averages of exchange rates are often used. Another problem occurs when governments' maintain exchange rates at disequilibrium levels. This has been a major issue with respect to China's heavily managed exchange rate. There are many different methods for calculating equilibrium exchange rates and no consensus on which one is best. Thus, not surprisingly, estimates of the extent of undervaluation of the RMB vary substantially.2

A more subtle issue is that different levels of income and rates of productivity growth can substantially affect the relative prices of traded versus non-traded goods. Due to the Balassa-Samuelson effect, the use of equilibrium market exchange rates can substantially underestimate the real purchasing power of individuals in low income and high growth economies such as China. For measuring individual welfare and how well economies are performing, there is a strong case that some forms of purchasing-power-parity (PPP) adjusted comparisons are the most relevant. Data from the Penn World Tables is often used for this purpose. However for looking at the magnitude of a country’s direct influence on the global economy, a measure based on nominal exchange rates is more appropriate. Thus the best measures for internal and external issues differ once again.

There are also many treatments of quantitative measures of various important components of GDP such as amount of energy used, levels of manufacturing production, amount of education offered, and number of patents obtained, etc (Fagerberg 1994; Barro 1996; Lee 2005). These also can be useful for analyzing specific aspects of power. All too often, however, they are presented as if they are self -evident measures of power without careful analysis of how they actually relate to the different major concepts of power. Especially questionable in this context are composite measures that purport to measure overall power through adding together a set of quantitative measures. We argue in the following discussion that such composite measures are virtually worthless for measuring effective aspects of power. We illustrate these concerns with a critique of one of the most recently proposed composite measures by economist Arvind Subramanian (2011).
2.2. Composite Measures

In his recent work Subramanian (2011) challenges what he sees as “a one-sided US-centric perspective” and predicts that China will soon become “economically dominant”. Subramanian bases his argument heavily on his index of economic power which combines three factors – GDP, trade, and net creditor or debtor position. These three variables are clearly important, but his claim that “No other gauge of dominance is as instructive as these three” is highly dubious. Subramanian ignores that economic relationships are often highly situation-specific. As illustrated by the concept of “complex interdependence” developed by Keohane and Nye (1977), interdependence is often asymmetrical. In the modern world effective power resources may vary substantially from one issue to another, and in the same issue area a country’s power may vary greatly in relation to different countries. Therefore, aggregate indices of economic power, while perhaps fun to debate, are of quite limited usefulness in analyzing actual issues.

Subramanian follows a tradition of constructing composite measures that include economic or financial concepts as a part of their power dimensions. Many of these measures focus primarily on military power and include economic variables as they are seen to relate to conversion into military power. One of the most widely used composite measures in studies of international relations is the Composite Index of National Capability (CINC). This is comprised of a country’s total population, urban population, iron and steel production, primary energy consumption ratio, military expenditure ratio, and military personnel ratio. The National Power Index (NPI) is another measure combining weighted factors of GDP, defense spending, population, and technology. It is calculated by the International Futures computer model and purports to measure a country’s relative share (percentage) of all global power. Comprehensive National Power (CNP) is a power index developed in China. It takes both military factors (hard power) and economic and cultural factors (soft power) into consideration. As we argued above, such aggregate measures are of quite limited value for serious analysis since they fail to recognize the issue-specific nature of many types of power in a world of limited transfer of power across different issue areas and also fail to capture the willingness or ability of various countries to translate power capacities into effective actions.3
3. Political Transformations

Having great economic capabilities yields a country power only to the extent that it has the political capacity to exploit these resources. This in turn depends heavily on the political strength of the government. There are a number of important dimensions to government strength or weakness. One of the most important is a government's ability to implement the policies that it desires. The stronger are domestic institutional constraints on what the executive branch can do without requiring approval from the legislature, the less freedom of action an executive has. And for policies that must be approved, how easy or difficult this will be can depend both on the forms of government -- whether the executive has a majority in the legislature -- and how strong is party discipline. There may also be a broader range of veto players and interest groups that can block positive actions or pressure governments to take actions that they would prefer not to undertake. Underlying the power of such pressures are the natural concerns of government leaders to keep themselves and their party in power. In stable democracies such concerns take the form of efforts to win elections. In authoritarian and less stable democratic regimes the threat of coups is also relevant.

Governments have more scope for action the greater is their popularity and the further away are the next elections. Concerns about staying in power can substantially influence a government's scope for action and often induce it to adopt policies that are winners over short time horizons, but which may undercut a country's economic strength over the longer term. Excessive deficit spending is a prime example. Ability to tap financial markets to supplement tax revenues in response to a new challenge is an important aspect of economic power. A weak government typically finds it difficult to fight off the demands for increased spending and reduced taxes that lead to fiscal deficits. Once deficits have accumulated to the point where a country’s ability to honor its debts comes into question, its scope for action can become severely limited. While the willingness of investors to buy additional sovereign debt has a strong psychological component, there are quite a number of various types of quantitative measures that can be quite useful for assessing a country’s “fiscal space” (Heller 2005; Heller et al. 2006; Nooruddin and Chhibber 2007). Their stronger financial positions played an important role in the ability of Asian countries to minimize the adverse effects on their economies of the global financial crisis in comparison with the Asian crisis of 1997-98.

While taking more complex forms, interest group and popular pressures appear in authoritarian as well as democratic political systems. For example, even though China has an authoritarian political system the government is quite concerned about social instability; fears about possible adverse effects on export industries have been a major factor strongly limiting the government’s willingness to appreciate the RMB. More generally the Chinese leadership fully understands the need for a rebalancing of the economy toward more consumption rather than an export-led model, but the slowness with which this is being accomplished has been due in no small part to the power of entrenched interests to block reforms that would harm their positions.

A final important aspect of government strength is how well the authorities can implement the policies that have been adopted. This depends on such factors as the quality of the bureaucracy - the extent of corruption and the strength of the rule of law more generally. A government’s political strength or weakness can sometimes shift dramatically within a short period of time, and there is no substitute for informed political judgments about various facets of a government’s political capacity. But there are areas such a government’s ability to raise tax revenues and carry out effective administration that often change only slowly and which can be the subject of useful quantitative measures that can be a valuable complement to informed judgments by experts.

There are now available a number of data sets that attempt to measure government strength including various aspects of government effectiveness such as the concept of relative political capacity, number of veto players, and levels of political instability which have been developed. The quality of these measures varies, however, and they cannot capture all of the nuances of current political situations. Thus they should be used as complements rather than as substitutes for qualitative political analysis when investigating specific situations.

3.1. Strength of Government and Political Instability

Government strength can be measured in a number of ways. One is by the composition of the government. A single party majority government is considered as a stronger government than a coalition government. In addition, a minority government is less likely to achieve strong public performance (Huber, Kocher and Sutter 2003). This is usually referred to in terms of the number of veto players, where a multiparty government based on a fragile coalition will have less capacity to respond to challenges than the leader of a presidential system whose party also controls the legislative4; or else by the concept of divided government, where the executive body in a unified government is more capable of performing efficient policy outcomes and less likely to obstruct initiatives from the legislative body than a divided government. A unified government is therefore able to offer better performance (Lohmann and O’Halloran 1994; Edwards III, Barret and Peake 1997; Coleman 1999).

A second is that a government with a higher quality of bureaucracy will be in a stronger position to overcome political or legal obstructions, realize public policies, and translate resources into effective power. The Worldwide Governance Indicator (WGI) collected and maintained by the World Bank can serve as a good reference on this aspect. The dimension of “government effectiveness” in the WGI highlights bureaucratic efficiency and performance.5 A government that has a more efficient bureaucratic system is more likely to wield its power effectively.

A third is political instability. This is difficult to define, but in general there are two broad types of concepts. The first type looks at instability in the physical sense of riots, destruction, and coups. Many measures of political instability are constructed as functions of the number of episodes of politically motivated violence and unrest, such as riots, coups and coup attempts, revolutions, strikes, assassinations and assassination attempts, and so on.

The second type of political instability may occur within even the most peaceful environments. This is the probability of changes in government through elections or parliamentary realignments (Walton et al. 2008).

Country reports produced by the International Country Risk Guide (ICRG) are useful tools that systemically investigate the two abovementioned concepts. The report assesses a country’s situation by evaluating its political risk confronted by concerned parties. Social conditions, such as “ethnic and racial divisions” and “regional and class divisions” are included while the likelihood of political change is calculated and assessed in each country’s report. If the risk confronted is higher in a certain country, according to the ICRG’s country report, the country is more likely to be confronted with political instability.6

Analyses of such issues are often highly subjective and subject to differences of opinion among experts. A useful way to combine such subjective analysis with the rigor and consistency provided by formal modeling is to use the “expected utility” or “agent based modeling” approach developed by researchers such as Kugler, Bueno de Mesquita, and Abdollahian. Bueno de Mesquita et al. (2004) constructed a concept of political survival with game-theoretic models to evaluate changes of political leaders in a country. This approach can also be used to evaluate the ability of governments to reallocate resources within the public sector and to expand the public sector to respond to new challenges.
3.2. Relative Political Capacity (RPC)

Another useful concept is that of taxable capacity as developed by the IMF. This basic concept was expanded by Kugler and Organski (1980: 72) into the concept of relative political capacity, which in turn has gone through a number of refinements. Formulated by Kugler and Organski, this concept looks at levels of revenue collection relative to estimates of taxable capacity. This measure assumes that the more a country taxes and spends, the greater the capability of a government. For countries at low and moderate levels of income, this type of measure has proven to have considerable power in explaining economic performance (Arbetman and Kugler 1997). As income increases, however, more government is not always to be preferred. In such cases, a large gap between government revenues and taxable capacity can mean a preference at the margin for private over public sector activities rather than a weak government.

A conceptual problem, however, is that this approach implicitly assumes that more taxation is better than less. In lower income countries with modest levels of government capacity to raise revenue, this is a reasonable assumption. For the advanced industrial countries, however, levels of taxation are more a reflection of political choice than political capacity. Thus, this approach is much more attractive for application to lower income countries. Furthermore, different accounting and taxing systems adopted by different countries might distort their actual financial extraction capability as well. An unstable domestic economic situation leading to short-term fluctuations of inflation might also result in a biased measurement of government capacity.

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