The Competitiveness of Nations
in a Global Knowledge-Based Economy
H.H. Chartrand
April 2002
Aaron L. Friedberg
The Changing Relationship between Economics and National
Security
Political Science Quarterly,
Volume 106, Issue 2 (Summer, 1991), 265-276.
Index
The Impact of National defense on Economic
Performance
The Impact of Economic Change on National
Security
National and Economic Security
Since ancient
THE IMPACT OF NATIONAL DEFENSE ON ECONOMIC
PERFORMANCE
The first cluster of concerns has to do with the impact
of war - broadly defined in the Hobbesian sense to include both actual fighting
and preparations for it - on national economic performance. Since the end of the World War II it is
the second part of this problem that has most concerned the two superpowers,
locked as they were in an armaments competition of unprecedented scope and
seemingly limitless duration. Over
the last forty-five years the United States and the Soviet Union have built and
discarded generation after generation of new weapons, but
AARON L. FRIEDBERG is assistant professor of politics
and international affairs at
265
thanks largely to the very destructiveness of those
devices, they have never gone to war with one another.
Prior to 1945 the
The correlation between the defense build-up that began
in the late 1970s and peaked in the mid-1980s and the apparent collapse in
American international economic competitiveness that accompanied it caused some
to conclude that these two developments were directly linked. As the decade wore on and the trade and
federal budget deficits grew, there was increasing concern that the
Just how bad, on balance, cold war defense spending was
for the American economy is still open to debate. It is likely, however, that those who
have emphasized military burdens as the prime cause of
If any country became overextended in the course of the
cold war, it was not the United States but the Soviet Union, which may actually
have been directing over one quarter of its GNP to defense, far more than was
generally assumed to be the case and as much as four times more than the burden
being borne by the United States. This fact may have escaped the attention
of most Western analysts, but it had a powerful impact both on Soviet reality
and on the perceptions of a new generation of Soviet leaders. 4
Determining exactly how and to what extent the exertions
of their military
1. See, for example, Lester Thurow, “How to Wreck the
Economy,” The New York Review of Books,
2. See David Calleo, Beyond American Hegemony
(New York: Basic Books, 1987); also Paul Kennedy, The Rise and Fall of
the Great Powers (New York: Random House, 1987). For an elaboration of this argument see
Aaron L. Friedberg, “The Political Economy of American Strategy,” World
Politics 41 (April 1989): 381—406.
3. See the essays in Henry Rowen and Charles Wolf, eds.,
The Impoverished Superpower (San Francisco: Institute for Contemporary
Studies, 1989).
266
competition contributed to the respective economic
problems of the two superpowers is an important historical question. Nevertheless, in its more immediate and
practical form, the overextension debate has now been overtaken by events. With the collapse of Soviet power the
question for both sides is no longer, “What are the effects of continued high
levels of defense spending?” Rather, “what will be the impact of real
and deep defense cuts on long-term economic performance?”
Both superpowers now face the challenge, which is as
much political as it is economic, of redirecting resources freed from defense
into uses that will strengthen productivity and stimulate growth. For the Soviets, who struggle to convert
a heavily militarized, centrally planned economy into a smoothly functioning,
civilian-oriented market system, this is quite literally a matter of life and
death. For the
The answer to this question will depend on where the
resources freed by defense cuts go. That, in turn, will depend partly on
certain political decisions. 5 Reductions in defense spending could lead to smaller
budget deficits, lower interest rates, and increased private investment. But given the politics of the budget
process, such savings could also be applied to other uses, such as expanding
nondefense government programs. Some of these, like spending for
education and infrastructure improvements, could enhance productivity. But others, like more entitlement
benefits for the middle and upper classes, would not contribute as much to the
nation’s long-term economic well-being.6
Cuts in military spending - including reductions in
defense-related research and development (R&D) - could reduce overall demand
for skilled scientists and engineers, thereby holding down their wages and
making it easier for civilian industry to employ them in conducting commercial
R&D. 7 But there may be a variety of reasons why corporations
have not been investing more in R&D. Some of them having nothing directly to
do with the cost of skilled labor. 8 Merely
5. For a fuller discussion, see Aaron L. Friedberg, “In
Search of the Peace Dividend,” The Wilson Quarterly 14 (Autumn 1990):
78-9.
6. Many early, optimistic estimates of the
macroeconomic impact of defense cuts simply assumed that all such reductions
would be applied to lowering the budget deficit. See “The High Cost of Olive Branches,”
7. See, for example, the discussion in Seymour Melman,
The Permanent War Economy: American Capitalism in Decline (New York:
Simon and Schuster, 1974).
8. Thus, for example, a recent survey by the National
Science Foundation found that corporate spending on R&D had not risen very
much during the latter half of the 1980s in part because the large [numbers of firms involved in mergers or acquisitions
during that period tended to reduce their research budgets. See “Slow R&D
Spending Growth Continues into 1990s,” Science Resources Studies Highlights,
National Science Foundation Newsletter 90—307 (March 1990). For further discussion of the impact of
mergers and acquisitions on corporate R&D, see Office of Technology
Assessment, Making Things Better: Competing in Manufacturing, OTA-ITE-443
(Washington, DC: U.S. Government Printing Office [GPOJ, February 1990),
46-7.]
HHC: [bracketed] displayed on p. 268 of
original.
267
cutting back on defense research may not have a very
large effect. Other government
policies (like changes in the tax laws) could be needed to stimulate commercial
R&D. Unless other forms of
research activity increase, reductions in defense R&D could lead in the
short run to an underemployment of the nation’s human resources and, in the long
term, to a smaller pool of highly skilled scientists and
engineers.
It is sometimes claimed that if the government had spent
less over the years on defense-related R&D, it might have been able to spend
more federal money on research with direct commercial applications.
9
The end of the cold war, in this view, provides a unique
opportunity for government to shift its priorities and to do more to bolster
national competitiveness in a variety of civilian sectors. Whatever the merits of the case may be,
this argument overlooks a crucial political fact: throughout the postwar period
direct government support for developing civilian technology has been scarce,
not because of resources, but because of ideology. As one French observer has explained it,
in the United States there has been widespread agreement that, while the federal
authorities had a part to play in supporting basic scientific research and
funding work of immediate military importance, it was “not the government’s role
to become involved with commercial technological development, which [was] a
matter for private firms.” 10
Consensus on this issue has now begun to break down, and
the question of the state’s proper role in promoting technical development has
become an increasingly contentious political issue. For the moment, however, there is little
prospect of a substantial shift toward government spending on commercial
research, no matter what happens to the size of the defense
budget.
THE IMPACT OF ECONOMIC CHANGE ON
NATIONAL SECURITY
The second way in which economics and national security
will remain linked is through the effects of global economic change on the power
and position of individual states. There are three distinct issues here, the
first and most fundamental of which has to do with the implications for
international politics of the process of uneven national growth. As some economies expand more rapidly
than others, the distribution of wealth among states begins to shift; and with
these shifts in wealth come, eventually, changes in the distribution of
political power. Such changes are
often accompanied by considerable turmoil and some-
9. Melman, Permanent War Economy,
95.
10. Jean-Claude Derian, America’s Struggle for
Leadership in Technology (Cambridge, MA: MIT Press, 1990),
104.
268
times even by war, as rising states begin to throw their
weight around and declining ones seek to hold onto their previous privileges.
11
Since the end of World War II the worldwide distribution
of economic resources has changed substantially. Although the
Among its other effects, the end of the cold war will
crack the crust that has been holding existing alignments in place and hasten a
fundamental restructuring of the international political system. In particular, the implosion of the
Soviet empire will, loosen the ties that bind the present Western alliance
together and make possible the reemergence after forty-five years of Japan and
Germany as major and much more independent world powers. The events of the late 1980s will permit
these two countries to step more easily into the political roles to which their
economic success has seemed increasingly to entitle them. Often announced and long anticipated, the
transition from bipolarity to something more closely approximating true
multipolarity seems finally to be at hand. The central political questions of the
coming era are whether this transformation can be managed without serious
disruptions in relations among the central actors, what the characteristics of
the new system will be, and in particular whether it will be as stable as the
one it is replacing.
In the past, changes in the distribution of wealth have
always been accompanied by shifts in the distribution of military capabilities,
because it is largely through the possession of such capabilities that states
have secured their interests and exerted political power. At present there is a sharp discontinuity
between the economic stature of two of the major powers
(
11. See Robert Gilpin, War and Change in World
Politics (New York: Cambridge University Press, 1981).
269
Economic forces are changing not only the structure of
the international system, but the manner in which it functions. In recent years, analysts have noted a
marked tendency toward what has come to be referred to as globalization. As a result of improvements in
transportation and communication, countries at all levels of development are
becoming increasingly tightly interconnected - not only through the traditional
ties of trade; but also by vast and rapid financial flows, exchanges of
information, people, and technology; increases in all forms of foreign
investment; the worldwide dispersal of production facilities by large
corporations; and the formation of business alliances across national
boundaries. The possible impact of
these trends on the security of individual states has already begun to be felt
in two related areas.
At one time only a handful of countries were capable of
developing and producing the most sophisticated forms of military hardware; but
as demonstrated recently and dramatically by
The diffusion of military capabilities brought about by
globalization will make certain
12. Between 1965 and 1984 there was a
considerable increase in the number of Third World countries capable of building
fighter aircraft (from one to eight), helicopters (from one to six), and tanks
(from one to six). See Future
Security Environment Working Group, The Future Security Environment
(Washington, DC: Commission on Integrated Long-Term Strategy, October 1988),
49. On the proliferation of
ballistic missile technology, see W. Seth Carus, Missiles in the Middle East:
A New Threat to Stability (Washington, DC: The Washington Institute for
Near-East Policy, June 1988).
13. See W. Seth Carus, Chemical Weapons in the
14. On the growing access to overhead reconnaissance
information, see Ann M. Florini, “The Opening Skies: Third-Party Satellites and
U.S. Security,” International Security 13 (Fall 1988):
81-123.
270
devastating forms of attack. The course of events in the
At the same time as globalization is reducing the
military dependence of some less developed countries, it will pose serious
challenges to the continued strategic independence of the more advanced nations.
With the dispersion of centers of
production and technological development and the increased sophistication and
expense of modern weaponry, fewer and fewer states will be able at acceptable
cost to provide entirely for their own defense. Whatever their initial preferences, the
major European powers have been driven increasingly into cooperative,
multinational ventures in order to be able to afford to develop and produce
modern weapons systems. 15
Even the
For both the United States and its traditional allies,
resisting the tendency toward globalization could have considerable and perhaps
unbearable costs, especially in a period in which defense budgets are likely to
be declining rapidly. On the other
hand, acquiescing to the forces of economic change will leave countries less
fully in control of their own defense and hence of their security than they have
been accustomed to be in the past. 17
Even in a world of much lower levels of military tension
and a much higher degree of economic integration and interdependence, politics
is not going to cease and neither is political conflict. States are going to continue to have
differences, and they are going to continue to try to impose their will on one
another. In the past, nations have
often used economic instruments as a way of attempting to
15. See Andrew Moravcsik, “Defense Co-Operation: The
European Armaments Industry at the Crossroads,” Survival 32
(January.February 1990): 65-85; also see Martyn Bittleston, Co-operation or
Competition? Defence Procurement Options for the 1990s, Adeiphi Paper 250
(London: Institute for Strategic Studies, 1990).
16. For two expressions of this concern, see
Under Secretary of Defense (Acquisition), Bolstering Defense Industrial
Competitiveness (Washington, DC: Department of Defense, July 1988); also
Defense Science Board, The Defense Industrial and Technology Base
(Washington, DC: Department of Defense, October 1988).
17. For more on this issue, see Ethan B.
Kapstein, “Losing Control - National Security and the Global Economy,” The
National Interest 18 (Winter 1989-90): 85-90; also Theodore H. Moran, “The
Globalization of American Defense Industries,” International Security 15
(Summer 1990): 57-99; and Moran, “International Economics and Security,”
Foreign Affairs 69 (Winter 1990-91): 80-82.
271
influence the political behavior of their rivals (and
sometimes their friends as well). 18 Such practices could become more common in the years
ahead, as interdependence intensifies, political relationships shift, and the
utility of military power in most situations remains relatively low. National security policy may, therefore,
come to encompass measures designed to reduce a country’s vulnerability to
economic influence attempts (and, perhaps, to enhance its capacity for
exploiting the vulnerabilities of others), as well as the more traditional forms
of preparation for military defense.
There are basically three different kinds of situations
in which economic state-craft could play a central role. The first are those in which relatively
weak states seek to use their control over scarce resources to influence the
policies of the comparatively strong and wealthy. This, of course, is what the Arab
oil-producing countries sought to accomplish in the 1970s and in part what
Saddam Hussein hoped to achieve in 1990. With no one state able to exert control
over a decisive fraction of world reserves, the diversity of suppliers’
difficulties of coordinating their policies and the dependence of many on their
customers for protection will continue to limit the oil weapon utility in
achieving specific strategic objectives. As in the past, what is true of oil will
be even more the case for other, less critical
commodities.
A second form of economic statecraft would involve
attempts by strong states to use trade and financial assistance to shape the
political preferences of the weak. Sanctions are the most familiar
instrument for this purpose, although their successful application usually
requires the cooperation of a large number of states. It is also possible that under certain
conditions, individual countries might try to build blocs or spheres around
themselves, as
A large country’s willingness to direct private
investment and governmental assistance on especially generous terms toward its
smaller neighbors could help to make them more sensitive to its wishes. If they found their exports to other
parts of the world blocked by rising tariffs, smaller countries could become
dependent on a larger one that was willing to grant them continued access to its
domestic markets. The price
extracted by the bloc leader might be primarily economic - preferred treatment
for its own exporters and investors.
But its demands could also come to have a political component - support
for its positions in international organizations, mutual security arrangements,
access to military facilities, or simply the denial of such access to third
parties.
The final and in many ways most dangerous possibility is
that strong countries could begin with increasing frequency to use economic
instruments against one another. As
the extent to which the
18. See David A. Baldwin, Economic Statecraft
(Princeton, NJ: Princeton University Press, 1985); also Klaus Knorr, The
Power of Nations (New York: Basic Books, 1975).
19. For the
classic account of German policies, see Albert 0. Hirschman, National Power
and the Structure of Foreign Trade (Berkeley: University of California
Press, 1945).
272
especially Japanese) investors to finance its budget
deficit became clear during the 1980s, there were growing fears that the United
States might be becoming, as one writer put it, a “prisoner of foreign capital.”
20 If
Japanese investors were ever to hold back from buying U.S. Treasury securities,
it was claimed, the results could include rapidly rising interest rates (which
would lead to slower U.S. economic growth) and a drastic decline in the value of
the dollar (which would promote inflation). The mere threat of such action could
conceivably be sufficient to force American compliance with
Similar concerns have arisen as a result of the growing
Putting aside the question of whether governments would
have sufficient control over private actors to put their plans into effect, the
principal and powerful objection to all such scenarios is that relations between
big and wealthy states typically involves a considerable degree of mutual
dependence. This means that it
would be very difficult, for example, for Japan to do serious economic harm to
the United States without causing grievous injury to itself and vice versa.
Thus, if the Japanese government
were to take steps that resulted in an American recession and a collapsing
dollar, they would in the process hurt their own exporters and diminish the
value of the many dollar-denominated assets held by their investors. Similarly, if in an effort to punish
20. Felix Rohatyn, “Restoring American
21. For an attempt to sketch out such a scenairo,
see Daniel Burstein, Yen! (New York: Ballantine Books, 1990),
13-20.
22. See Defense Science Board, Report of the Task
Force on Defense Semiconductor Dependency (Washington, DC: Defense Science
Board, February 1987).
23. All of this assumes that a single foreign
government would have both the willingness and the ability to halt the flow of
critical components into the
273
Japanese-made semiconductors, one of the main effects
would be to drive up the price of the many American products into which those
components are now built.
That any attempt by one big power to use economic
instruments against another would be costly and risky does not, of course,
render it unthinkable. Indeed, the
very existence of mutual risk could encourage both sides to regard exercises in
economic statecraft as tests of strength and will from which it might be very
difficult for them to back away. 24 Moreover, the fact that a particular
course of action would be harmful to a nation’s economic well-being cannot be
said to rule it out as a real possibility, especially in situations where there
would be other important values at stake.
NATIONAL AND ECONOMIC
SECURITY
If there is at present a strong trend toward greater
international economic integration, there is also, as Robert Gilpin has pointed
out, a powerful countervailing tendency towards “benign mercantilism,” an
approach to national economic policy that is designed to enable a society to
“retain domestic autonomy and possess valued industries in a world characterized
by the internationalization of production, global integration of financial
markets, and the diminution of national control.” 25 In the
At one level, appeals to this new concept are related to
the fairly familiar problems of maintaining an adequate defense industrial base.
Anxious experts point out that
globalization is eroding traditional
Although there are undoubtedly real problems, and while
some of the concern expressed over them is certainly sincere, it is also true
that economic security has become a rallying cry for special interests. Representatives for industries as diverse
as semiconductors and textiles have proclaimed their essential importance to the
nation’s defense and have called upon the federal government to
protect
24. The analogy here may be to situations of
mutual nuclear deterrence in which each side has the capacity to do terrible
damage to the other, but in which one or the other or both may be willing to
manipulate the risk of such a catastrophe in order to achieve its
objectives. The nature of this
relationship between debtor and creditor is suggested in C. Fred Bergsten,
“Economic Imbalances and World Politics,” Foreign Affairs 65 (Spring
1987): 784.
25. Robert Gilpin, The Political Economy of
International Relations (Princeton, NJ: Princeton University Press, 1987),
404.
274 Index
them against intense foreign competition.
26 Some of
these claims are clearly more serious than others. Likewise, while there may be legitimate
reasons to worry about specific instances of foreign direct investment, much of
the fear expressed over alien intrusions into the American economy is driven
more by xenophobia than by analysis. 27
Beyond any direct connection to defense, real or
alleged, there is another, less clearly defined conception of economic security
that has begun to gain attention in recent years. To an ever great degree, the wealth of
nations has come to depend on their ability to engage successfully in
international economic competition. Doing well requires staying at the
forefront of developing and commercializing new technologies and maintaining a
capacity to manufacture and market the products of scientific
progress.
On these points there is little debate. Where disagreement does arise, at
least in the
This issue is at the heart of an emerging debate, the
fourth in the last one hundred years over the proper economic role of the
American state. The first, at the
turn of the century, resulted in an expanded federal role in regulating private
industry. The second, in the 1930s
and 1940s, led to the government assuming an increased responsibility for
stabilizing the nation’s economy, using fiscal and monetary tools to limit
excesses of unemployment or inflation. The
26. See, for example, Hearings Before the Investigations
Subcommittee of the House Armed Services Committee, Mobilization Requirements
of the Domestic Textile Industry, 99th Congress, 2nd sess. (Washington, DC:
U.S. GPO, 1986); and Hearings Before the Subcommitee on Technology and Law of
the Senate Judiciary Committee, Issues Confronting the Semiconductor
Industry, 100th Congress, 1st sess. (Washington, DC: U.S. GPO,
1987).
27. For a dispassionate discussion of the national security
raised by foreign direct investment, see Edward M. Graham and Paul R. Krugman,
Foreign Direct Investment in the United States (Washington, DC: Institute
for International Economics, 1989), 73-93.
28. Whether these efforts have been successful and,
indeed, whether it is even theoretically possible for them to have been so is
the issue at stake in discussions of industrial policy and, more recently,
strategic trade policy. On the
latter, see the essays in Paul R. Krugman, ed., Strategic Trade Policy and
the New International Economics (Cambridge, MA: MIT Press, 1986); also Paul
R. Krugman, “Strategic Sectors and International Competition” in Robert M.
Stern, ed., U.S. Trade Policies in a Changing World Economy (Cambridge,
MA: MIT Press, 1987), 207-232; Klaus Stegemann, “Models of Strategic Trade
Policy, International Organization 43 (Winter 1989): 73-100; and J. David
Richardson, “Strategic Trade Policy,” International Organization 44
(Winter 1990): 107-135.
275
third, which also began during the Depression and has
continued down to the present, centers on the question of how far the state
should go in ensuring the economic welfare of individual citizens. The fourth debate, in the closing decade
of this century, will be over what part government should take in deliberately
promoting the international competitiveness of the U.S economy, thereby
presumably enhancing the nation’s relative wealth, its power, and thus its
“security,” by some definition of that notoriously slippery and expansible
term.*
* An earlier version of this paper was presented to a
conference on integrating economics and national security sponsored by the Pew
Charitable Trust,
276