Hegeomony hurts geoeconomic favoritism – it alienates capital and decreases trust – democracy accounts for the US’s geoeconomic position – reserve currency proves
Drezner, 13 – Professor of International Politics at the Fletcher School of Law and Diplomacy at Tufts University (Daniel, “Military Primacy Doesn’t Pay (Nearly As Much As You Think),” International Security, Volume 38, Number 1, Summer 2013, pp. 52-79, MIT Press)//eek
The historical literature does not lend much support to geoeconomic favorit- ism. Jonathan Kirshner’s work demonstrates that financial interests are con- cerned with the minimization of risk. As part of ensuring global order, military hegemons frequently need to exercise their military power; such actions intro- duce the possibility of macroeconomic instability into financial markets and national economies. Kirshner shows that, historically, the financial sector has staunchly opposed initiating the use of force in world politics. Even military hegemons must therefore be wary of alienating global capital: “[S]tates,” he writes, “must be alert to the fact that by choosing a more assertive or ambi- tious national security strategy . . . they may be ‘punished’ by international financial markets, principally via capital right, pressure on the exchange rate, and greater difaculty in borrowing abroad.”34 At a minimum, this set of capital market preferences implies that hegemons receive negligible geoeconomic benefits from military primacy. The behavior of reserve currencies between the two world wars is another data point against geoeconomic favoritism. If this logic is valid, then military power should also be a principal factor in determining which state issues the reserve currency. Both the United Kingdom in the nineteenth century and the United States after 1945 meet this criterion. Because these states were also the largest economies and largest financial centers during those respective pe- riods, however, the causal factors are overdetermined. During the interwar period, however, there was a signiacant disparity between the military capa- bilities of Great Britain and the United States; the former had far greater power projection capabilities than those of the latter.35 On other dimensions—market size, financial depth—the United States and the United Kingdom were more evenly matched. Despite the British military advantage, however, the most recent economic history on this subject shows that public- and private-sector ac- tors began treating the dollar as a reserve currency as early as the mid-1920s.36 Economic and financial factors, not the military balance of power, primarily determine the location of the reserve currency. The recent economics literature on the causes of national financial strength further downplays the role of military power and favors that of domestic polit- ical institutions. While both democratic and authoritarian great powers have possessed large military establishments, this literature concludes that inclu- sive, democratic political institutions play the crucial role in allowing large states to exploit their financial power. Because these institutions can allow po- litical leaders to credibly commit, states housing such institutions are per- ceived as more likely to honor their debts.37 States with large militaries are also more vulnerable to the development of “extractive” political institutions: polit- ically powerful actors can exploit the coercive apparatus of a large military to develop political institutions that reward members of the selectorate with private goods, rather than the public goods necessary to attract inward capi- tal flows.38 History suggests that absolutist leaders with large militaries have been far more likely to repudiate their debts.39 As Daron Acemojlu and James Robinson have demonstrated, countries based on extractive political institu- tions are more likely to possess comparatively more sclerotic economies.40 For any national government, some degree of defense spending and military prowess reassures private-sector actors that their investments will be secure. Beyond that base level, however, all of the literature indicates that primacy yields little in the way of geoeconomic returns. Security is certainly a necessary condition for attracting foreign capital inflows, but predominance does not ap- pear to be a prerequisite. If anything, an outsized military, by loosening con- straints on the state to refrain from military adventurism, retards rather than enhances inward private capital flows.