Geopolitics in the 21^st Century

© 2003 Dennis Redmond

The dawn of the 21^st century has had the singular privilege of witnessing not just one or even two, but three world-historical revolutions, all at once. In the political sphere, the European Union and East Asia have emerged as autonomous geopolitical actors, with both the means and motive to push aside the US and its Cold War alliances for the sake of their own interests. In the cultural field, the decades-long hegemony of Hollywood and US consumerism has given way to an enormously diverse multinational media and consumer culture. In the economic realm, the US has declined from the world’s leading creditor nation to the single largest debtor on the planet, while Continental European banks utterly dominate the global banking system.¹

To compress four decades of social history into a sound bite, the US pioneered multinational capitalism in the 1960s, but the EU and East Asia perfected such in the 1990s. At the factory level, Toyota’s production-system remains the most efficient in the auto biz, Daimler continues to make the finest cars and trucks on the planet, while Nokia and DoCoMo are the mightiest players in the cellphone biz. The all-important machine-tools sector – the DNA of industrial society – is utterly dominated by the new metropoles. While Microsoft retains its monopoly over the field of personal computer software, the EU’s SAP has become the dominant provider of corporate intranet software, and Japan’s Nintendo has excelled in portable entertainment software. In the aerospace industry, Airbus has risen to become the coeval of Boeing, while even that last bastion of US dominance, the media and entertainment biz, has to contend with ferocious competition from the likes of Sony and Bertelsmann.

            To be sure, this hegemonic shift did not occur all at once. To simplify a long and complex history, whereas the twin motors of the world economy during the initial post-WW II period were US military Keynesianism and US consumerism, the key drivers of the 21^st century economy are EU expansion and East Asian industrialization. In the 1950s, the US was a huge, self-financing economy with no serious competitors, and could easily afford to spend 8-10% of its GDP on its military. At that time, US citizens were anywhere between two to eight times as wealthy in per capita terms than their European and Japanese counterparts, which meant that the US pioneered many of the characteristic features of the modern consumer society (malls, cars, TVs, mortgages, etc.). By the 1970s, however, postwar Europe’s welfare capitalism and Japan’s mercantile capitalism began to catch up with the US, and the institutional underpinnings of this model – the Bretton Woods accords, the hegemony of the US dollar, and US cultural dominance – began to erode. Not only did US firms face increasingly nimble, well-financed and efficient competitors in virtually every industrial sector, but the future EU and East Asian economies began to construct a wide variety of unique state institutions, which slowly but surely began to displace many of the key structural levers of US hegemony.

Alice Amsden, Robert Wade and Thomas Friedman have described in copious detail how East Asia’s developmental states controlled domestic financial markets, recycled savings into the industrial base, invested heavily in education and R & D, and in general rigged their economies to succeed.² Over time, East Asia fleshed out this economic strategy with key elements of the welfare state (most notably state pension plans, universal health insurance, and job-creating infrastructure projects). The EU’s strategy was slightly different: rather than exerting direct control over financial markets, the EU’s welfare states preferred to invest in a highly skilled, motivated workforce, while buffering the EU’s local economies from the lash of the market forces via a vast expansion of the state (e.g. the various EU states currently intermediate 48% of total EU GDP). Thanks to the non-market power of the state, EU citizens enjoy free schools, universal health insurance, the longest vacations in the world and civilized pensions. The growth of this state apparatus went hand in hand with the qualitative expansion of EU democracy, ranging from parliaments elected by various forms of proportional representation to workplace codetermination. At the same time, strong unions and vast networks of non-governmental organizations and civic groups provided a key counterweight to the lobbying efforts of big business.

These economic and political changes have a precise analogue in the cultural field, where the dominion of Hollywood, Madison Avenue and Tin Pan Alley has given way to a complex, polycentric cultural landscape. The national culture industries continue to exist, but are increasingly tied to multinational markets, audiences, and narratives. The cinema industry is a case in point: though US films continue to draw the lion’s share of box office receipts, the EU and Japan have developed thriving media cultures all their own. In the late 1990s, Hong Kong produced around 140 films each year while Japan produced an average of 300 films per annum; a study by Eurostat noted that the EU produced 604 films in 2000, while the US produced 764 that same year.³ Currently, the EU is investing heavily in European-wide media initiatives, while Japan has become the unquestioned market leader in the fastest-growing entertainment industry of them all, namely videogames.

I. The New Metropoles

How wealthy are the new metropoles? Based on 2001 data from the European Commission and 2003 exchange rates (€1 = $1.07), the core continental European (defined as the Eurozone plus Sweden, Norway, Switzerland and Denmark, but minus the UK) have 329 million people and a GDP of €7.7 trillion, while the East Asian core region (defined as Japan, Singapore and Hong Kong) has 138 million people and a GDP of €4.2 trillion. At first glance, both regions seem outclassed by the US, which has 280 million people and a GDP of €9.4 trillion,

However, these figures understate the economic muscle of the new metropoles, for three main reasons. First, the US has consistently run vast current account and trade deficits with continental Europe and East Asia. Though short-term deficits are nothing to worry about, the US has been accumulating such deficits since 1982, and has become the single largest debtor nation in the world (the largest creditors are, unsurprisingly, East Asia and continental Europe). The current net international investment position of the US is minus $2.6 trillion, or roughly 25% of US GDP.⁴ Such deficits suggest that the real value of the dollar is somewhere between $1.10 and $1.20 per euro, rather than its current $1.07 per euro.

Second, the new metropoles invest significantly more in their own economies, expressed as a percent of GDP, than the US. According to OECD figures, EU investment rates averaged 20-21% of GDP during the 1990s, the East Asian core economies averaged roughly 30% and the US averaged 17-18%.⁵ While the investment rate for any given year isn’t terribly significant, sizeable investment deficits over time matter a great deal. Since inflows of foreign capital make up a huge chunk of US investment – foreign direct investment in the US totaled $307.7 billion in 2000, or about one-eighth of all domestic US investment that year – the US economy is vulnerable to the sort of capital flight which devastated Southeast Asia in 1997-1998 and Argentina in 2001.⁶

Third, official measurements of total GDP can obscure the true measure of an economy’s productivity, namely labor-time or value per hour worked. The US has one of the longest workweeks of any industrialized country, but this fact is not reflected in its official GDP figures. According to the ILO, Central Europeans work approximately 20% fewer hours (about two and a half months) each year compared to their US counterparts. To make a long story short, Central Europe is at least 20% more productive per hour than its nominal GDP figures indicate.⁷

Even granting these points, there is an argument to be made that the US will remain the single most dominant economic power for some decades to come, due to sheer institutional inertia, the accumulated symbolic and political capital of the US, a fearsome military machine and a range of preexisting alliances and networks. This was certainly true during much of the 1990s, mostly because the European Union was still in gestation and Japan was immobilized by the fallout of a busted financial bubble. What has changed since then, however, is the posthaste arrival of multinational geopolitics.

II. The EU Semi-periphery

One of the clearest examples of this is the planned EU enlargement of May 2004. The result will be a continental European economy (defined as the 10 new accession countries, the 12 existing Eurozone countries, plus Sweden, Norway, Switzerland and Denmark, but minus the UK)⁸ with 403 million people and a GDP of €8.1 trillion. Nine new languages will be added to the roster of official EU languages, while the total EU population will increase by 20%. The EU also has the potential to expand by an additional twelve members. Here are the twelve likeliest candidates, with their earliest estimated date of entry:

Table 2. Potential Accession Countries 2007-2015

Data: Eurostat, European Commission

In the not-too-distant future, the EU may encompass anywhere from 437 million to 739 million citizens. Though these 336 million potential new citizens currently produce only €522 billion of annual output, it’s entirely possible the former Eastern bloc countries could become the hub of an extended wave of accumulation, similar to the 1950-1975 boom which transformed Central Europe from a bombed-out heap of rubble into an industrial powerhouse. The present and future accession countries are well-educated, urbanized societies with a long history of industrialization and outstanding traditions of science and innovation; what they lacked in the past were accumulation structures capable of effectively utilizing those skills.

One of the central goals of the EU is the creation of such structures, by means of the so-called “acquis communautaire”. The acquis is not a single, uniform set of national laws, so much as an enormously complex and multi-layered assemblage of legislation, social protections, juridical bodies and procedures – the juridical endoskeleton of modern, democratic welfare states. Drawing the appropriate lessons from the integration of Ireland, Greece, Spain, Portugal and eastern Germany into the EU during the 1980s and 1990s, the EU is taking pains to match the superstructural transformation of its new members step for step with formidable amounts of economic investment.

This investment program takes three main forms. First, the EU structural funds program directly redistributes money from the richer to the poorer countries. Second, the European Investment Bank offers low-cost loans to EU countries and their neighbors. Third, the Europe Agreements offer preferential market access to the EU via a dense network of trade, aid and finance covenants. Though the Agreements do somewhat limit the economic options of the semi-periphery, the EU has provided generous compensation, via a tidal wave of low-cost loans and grants. In 2002 alone, the EIB disbursed €42.89 billion in loans to EU countries, €6.589 billion in the accession countries, and €3.344 billion in partner or pre-accession countries. Beginning in 2004, these loans will be supplemented by grants from the EU structural funds, which will funnel €23 billion to the accession region during 2004-2006 (about €7.67 billion a year, or 1.9% of accession GDP). All told, EIB loans plus EU structural funds will equal 3.5% of accession GDP.

This may seem unduly low, but there are quite sensible reasons for limiting total EU support to this level: any less would not have the desired impact, but any more would overwhelm indigenous accumulation structures or spawn the sort of ruinous financial bubbles which pummeled Southeast Asia during 1997-1998. This level of public-sector assistance is consciously designed to balance the private-sector flow of remittances and foreign direct investment: at least 1% of GDP will be sent to the accession countries from emigrants who have settled in the EU and the US, while Eurostat figures show that annual foreign direct investment into the accession region averaged 3-4% of accession GDP during 1997-2001. All in all, the total public and private fiscal stimulus to the accession countries from EU membership will amount to somewhere between 6.5-7.5% of annual GDP. In proportional terms, this is approximately the same amount which Greece, Ireland, Spain, Portugal and eastern Germany received from the EU in the 1990s – resulting in above-average growth in all of these countries and regions, and a genuine boom in Ireland.

The EIB is not only the single largest source of capital to the accession countries, it is also financing the reconstruction of the Balkans: total EIB loans to Croatia, Yugoslavia, Albania, Bosnia-Herzegovina and Macedonia tripled from 1998 to 2001, from €92 million to €319 million. Thanks to the European Commission’s Euro-Med initiative, the EIB has also embarked on an extremely far-sighted strategy of pumping significant amounts of capital into the Maghreb and Mashreq regions:

Table 3. EIB Loans in the Maghreb and Mashreq

Data: Eurostat, EIB

All told, the EIB is providing €1.5 billion of annual assistance to the Maghreb/Mashreq region, a total which will increase to €2 billion in the near future. It’s important to stress that all of these countries have significant numbers of immigrants living in the EU, who remit large quantities of funds (at least 1% of the host countries’ GDP). These funds, plus EU foreign direct investment, total somewhere between 3-4% to 5-6% of the host countries’ GDP. The net result is to give these countries the sort of access to stable, long-term financing which only one other major semi-periphery on the planet currently enjoys, and that is East Asia.

III. The East Asian Semi-periphery

Over the past three decades, a vast semi-periphery has emerged around the East Asian core economies of Japan, Singapore and Hong Kong. Based on per capita GDP figures, financial links and trading flows, the current semi-periphery can be defined as South Korea, Taiwan, Malaysia, Thailand, the ten richest Chinese provinces, and the metropolitan areas of Jakarta, Manila, Hanoi and Ho Chi Minh City. Though not quite as wealthy as its European equivalent, the region has compensated by spawning a sophisticated array of developmental states and regional trade networks. All in all, the East Asia core plus the semi-periphery has a population of 620 million and an impressive GDP of €5.8 trillion.

The main distinction between the East Asian semi-periphery and its European counterpart is the former’s far greater exposure to US markets. The EU economy is relatively sheltered from external trade, while the euro has created a vast internal market which is immune to foreign exchange fluctuations. Though East Asia is highly integrated in terms of trade, it lacks a common currency or multinational institutions capable of protecting its smaller, weaker members against fickle markets. Classified by individual countries and regions, East Asia’s trade patterns are as follows:

Table 4. Shares of Total Trade (Imports + Exports) by Region, Average during 1990-2000

Data: Eurostat, IMF Direction of Trade Statistics

While Japan and China are both autonomous economies blessed with powerful developmental states and massive foreign reserves, South Korea and other East Asian semi-peripheries are heavily exposed to the vagaries of US markets. However, it’s important to stress that the absolute amount of total trade in these economies is smaller than one might think. Here are the figures for total trade, expressed as a percent of country or regional GDP (note that Singapore and Hong Kong are excluded from the following chart, due to their status as entrepot economies, which makes trade-to-GDP figures virtually meaningless).

Table 5. Trade Exposure as % Country/Region GDP in 2000, By Region

Data: Eurostat, IMF Direction of Trade Statistics