Economic Interdependence

According to Keohane and Nye (2001), “interdependence affects world politics and the behavior of states” (Keohane and Nye, 2001:5) and they define it as “mutual dependence”, that is, when a state is “significantly affected by external forces”

(Keohane and Nye, 2001:7), which occur either among states or non-state actors.

Interdependence is not the same as interconnectedness, since the former depends on the effects of transactions, constraints as well as the upcoming cost, which derive from these factors. When the effects of interruption of either symmetric or asymmetric transactions are costly, then there is interdependence. On the contrary, when there are no significant costs of the transactions, then there is interconnectedness.

However, in order to give a broader definition, Keohane and Nye argue that interdependence limits autonomy; therefore, all relationships which are characterized by interdependence will always engage some cost.

In addition, as far as the politics of military security and economic interdependence is concerned, Keohane and Nye argue that there are significant differences. Thus, while there is no need for military interdependence to be zero-sum, if allies seek to enhance security levels for all of their partners and maintain the balance of power, in economic interdependence, competition exists, even when the gains of cooperation are large.

Therefore, there is no mutual dependence as an absolute concept with a strict meaning but instead asymmetries are a significant factor which affect the actors in terms of power. More specifically, the less dependent actors are more powerful than their partners who might be more dependent and, therefore, they can promote their interests on an issue or affect other issues and actors, always with regard to their interests.

40 However, Keohane and Nye argue that regarding cost, “there is no guarantee that military means will be more effective than economic ones to achieve a given purpose"

(Keohane and Nye 2001:14). That is because they distinguish two dimensions of interdependence: sensitivity and vulnerability. From the perspective of the former, interdependence can be social, political and economic, meaning that there are

“contagion effects” (Keohane and Nye, 2001:11) which can transform economic as well as political life within societies and the costs are imposed from outside and by exogenous factors. From the perspective of the latter, vulnerability interdependence applies more to economic and political relationships and “[…] rests on the relative availability and costliness of the alternatives that various actors face.” (Keohane and Nye, 2001:11), meaning that external events can have significant impacts on the cost which will be imposed on a domestic actor. These two types also define asymmetric interdependence by affecting power sources and cost on different levels and under different constraints.

Nevertheless, Keohane and Nye are opposed to Realists’ assumptions arguing that they are “an ideal type of world politics” (Keohane and Nye, 2001:20) and they can challenge all of their arguments through another ideal type which is called “complex interdependence”. According to this, societies interact through multiple channels, such as interstate and transnational relations, there are no high and low politics, meaning that there is not a clear hierarchy among issues of interstate relations but only domestic and foreign issues, and third that military force is useless for governments when interstate relations are dominated by complex interdependence because things can be more complex. However, they do not exclude the use of military force in extreme cases, when an “issue becomes a matter of life and death” (Keohane and Nye, 2001:25).

According to Gilpin (1981), on the other hand, national security has given its place to economic welfare as the main objective of societies, which can be achieved only through economic growth, international cooperation as well as the rational usage of resources. However, Gilpin does not agree that the current form of economic interdependence defines international politics because groups and states have managed to ensure and maximize their gains both at domestic and international level. In addition, in contrast to those who believe that economic growth and prosperity can gain control over war between states, Gilpin argues that economic interdependence has not managed to eliminate the struggle for power and suspiciousness between states.

41 On the contrary, when the levels of economic interdependence start rising, states become more suspicious regarding the loss of their autonomy and the costs involved, as the result of interdependence because societies care more for their gains and they are not willing to sacrifice their welfare in favor of interdependence.

According to Wagner (1988), asymmetrical economic interdependence does not necessarily imply that the stronger actor, meaning the less dependent one, will manage to impose its influence on the weaker one, that is, on the more dependent actor. That is because he distinguishes the real causes of economic dependence. More specifically, he argues that asymmetrical economic interdependence does not correspond to cases where political influence is nothing more than the exchange of mutual economic benefits. In addition, the level of asymmetric interdependence cannot be used as a tool for domestic political influence because economic interdependence is used in order to benefit both parties by mutually distributing economic resources. As Wagner claims,

“Thus most discussions of ‘asymmetrical interdependence’ involve a confusion between unexploited market power and unexploited opportunities to trade economic resources for political concessions. These two things may be associated with each other, but need not be.” (Wagner, 1988:473).

Crescenzi (2003) argues that economic ties include interdependence, globalization and integration, and that this is based on welfare gains which derive from the open access of markets and trade. He also examines the political ramifications of economic ties in the use of military force. More specifically, Crescenzi’s model suggests that economic interdependence leads to bargaining power and restricts states from making political claims. However, he admits, that economic ties, or economic interdependence, cannot deter states from using their military forces in order to resolve their disputes. He claims that “the analysis of the model reveals an interesting interaction between potential exit costs and the willingness of states to endure these costs in the event of a dispute.” (Crescenzi, 2003:89).

According to Rosecrance and Stein (1973), the term “economic interdependence”

is problematic since there is no agreed definition, despite the fact that there is a common perception, which is the interaction of loss and gain, meaning that if one state changes its position on an issue, then the other state will be affected either negatively or positively. However, in order to define “economic interdependence”, Rosecrance and Stein argue that the four sectors which are critical in understanding and defining this term are trade, investments, financial operation as well as political relations among

42 states. As far as the first sector is concerned, trade affects the state’s economic development since there is a tendency to rely upon own production and less on imported goods. However, according to Rosecrance and Stein’s data, developed countries not only continued trading with each other but also increased their levels of dependence on some countries.

The investment sector is also a significant factor of interdependence, since the gains of developed countries have risen because of Foreign Direct Investments and not from portfolio investments. In addition, technology transfers are a significant part of Foreign Direct Investments; therefore, if the cost of interrupting the growth of FDIs is high, it follows that economic interdependence is also at high levels, meaning that the cost of interruption is proportional to the level of interdependence.

The financial sector has developed since World War I and according to Rosecrance and Stein’s data, the value of world exports has increased at more than double rates and the same can be said for the rates of foreign-exchange holdings. This is an outcome which, according to Rosecrance and Stein, not only shows the increasing rates of trading goods and holding of foreign exchange but also represents a significant increase in the levels of international interdependence.

Last but not least, the political sector also plays a crucial role because of alliances.

More specifically, in the twentieth century most states used to count on their capabilities in order to reduce their dependence on others, however, after World War II, states realized that they cannot ensure their defense capabilities and in combination with the failure of ideology to deal with real social problems, leaders had to communicate more in order to solve their domestic problems, and therefore the levels of intergovernmental cooperation and interdependence increased. As Rosecrance and Stein mention, “The most satisfactory measure of interdependence is not the cost of breaking the relationship, but the degree to which economic interests are direct functions of one another. […] Economic effects are now fully comprehended within the political realm. Thus, politically significant interdependence is much higher today than it was during the nineteenth century.” (Rosecrance and Stein, 1973:12).

Baldwin (1980) does not suggest any new definition for “interdependence”, however he develops a set of rules and a framework according to which this term can be analyzed. Baldwin argues that the concept of “interdependence” has to be analyzed first by defining the conceptualization of its nature. He first analyzes the term

“dependence” in a more general sense, arguing that there are two basic meanings.

43 According to the first, “dependence” is used in a causal sense to refer to situations in which an effect is contingent on or conditioned by something else (Baldwin, 1980:475) and according to the second, “dependence” is also used to refer to a relationship of subordination in which one thing is supported by something else or must rely upon something else for fulfillment of a need (Baldwin, 1980:475).

Nevertheless, the scholarly usage of this term by economists and scholars of international relations has different aspects. The former, “think of interdependence in terms of the mutual sensitivity of economic variables” (Baldwin, 1980:477), however, there is lack of a clear definition, and so far nothing has been done by economists to include an analytical definition in their terminology. Instead, they use the term in its commonsense meaning. Economists use the term “interdependence” but its concept

“is often accused of having a normative bias and of being ill-defined” (Baldwin, 1980:482) because they cannot discern the concepts which might derive from norms or facts. In addition, scholars of international relations used the term

“interdependence” when they are referring to self-sufficiency or to the state’s vulnerability to external factors, such as international trade.

Thus, as Baldwin (1980) argues, “Conceptual analysis can help by clarifying the nature of interdependence, but it cannot answer questions regarding the magnitude, rate of change, direction of change, or consequences of interdependence. Only empirical research can do that.” (Baldwin, 1980:506)

According to Katzenstein (1975), international interdependence and international transactions are not identical because the latter is an indicator which determines the levels, the rise as well as the changes in the field of international interdependence. In addition, taking into consideration specific indicators of international transactions, international interdependence has risen in recent years. International interdependence is based on world-wide trade, capital flows, the international movement of people and international communications and its rise is mainly due to recovery from World War I and World War II.

On the other hand, international transactions are not irrelevant to domestic transactions. Katzenstein argues that the emergence of new states determined the GNP ratio which was interwoven with trade because the level of interdependence in trade, between colonies and mother countries, was very high. As he argues, “Among the most heavily trade-dependent states the trade/GNP ratio declined in six of seven cases;

44 among the least trade-dependent states the ratio increased in six of seven cases”

(Katzenstein, 1975:1033).

Hirschman (1945) argues that foreign trade is an important variable because not only does it define the national power, meaning the state’s potentials to impose, mainly economic, sanctions, but it also defines the relationships of dependence and influence and therefore it can become a strong instrument of national power. Foreign trade has two effects, the “supply effect” and the “influence effect”. First, the “supply effect”

enhances military capabilities. As Hirschman argues, “By providing a more plentiful supply of goods or by replacing goods wanted less by goods wanted more (from the power standpoint), foreign trade enhances the potential military force for a country”

(Hirschman, 1945:14). Second, the “influence effect” operates as source of power, meaning that foreign trade can supplant war, through coercion between sovereign states. “Economic warfare can take the place of bombardments, economic pressure that of saber rattling” (Hirschman, 1945:15).

In addition, gains between trading countries also play a significant role. More specifically, increased trade also indicates increased gains. Hirschman relies on Marshall’s definition about gains of trade, according to which, “The direct gain which a country derives from her foreign trade is the excess of the value to her of the things which could have made for herself” (Hirschman, 1945:18). Therefore, in order for a state to promote its influence it will expand its foreign trade and as a result, the gains will be increased as well as dependence. On the other hand, in order for a state to sustain its influence on others through foreign trade, it should take into consideration the volume of trade. If a state wants to keep a stable market, then the volume of exports and imports should not be diminishing, in order to prevent the provision of substitutes, in terms of markets and supplies. Therefore, “An increase of wealth through foreign trade leads to an increase of power relative to that of other countries” (Hirschman, 1945:5).

According to Cooper (1968), interdependence is “quick responsiveness to differential earning opportunities resulting in a sharp reduction in differences in factor rewards” (Cooper, 1968:152) because there are important economic implications on domestic policies, especially after the establishment of the North Atlantic Free Trade Area. Such agreements were the outcome of the already close economic integration among states, however, this did not mean that this was a conscious process. The continued increase in transactions had an immediate effect on the growth in living

45 standards, however, it caused serious problems in the implementation of economic policy domestically. The first reason was the balance of payments. The openness of the world economy was affecting domestic policies in the balance of payments and vice-versa. The second reason was capital movements, and especially those which were free, between states in the agreement. The free movement of capitals enabled firms to not comply with the policy requirements, taxes and labor regulations.

Nevertheless, Cooper argues that internal balance does not necessarily mean external balance and concludes that governments should promote more co-operation between themselves regarding their economic policy.

According to Waltz, the argument that close interdependence promotes peace is false because close interdependence creates similarities and therefore, the likelihood of conflict is increased. On the other hand, many economists believe that the levels of international interdependence are increasingly growing; however, they ignore its real repercussions.

For Waltz, the meaning of “interdependence” “is always a marginal affair” (Waltz, 1970:206) and “The political significance of interdependence varies depending on whether a realm is organized […] or remains formally unorganized” (Waltz, 1979:104), meaning that the units in an organized realm do not have to worry about everything; instead, they are free to develop their interests, from which others depend and therefore, the cost of breaking this interdependence would be high. However, states in the international order have similar functions, so they can be considered as homogeneous units, therefore, their differences are based upon their varied capabilities, meaning “high inequality among like units is low interdependence”

(Waltz, 1970:207). In addition, interdependence allows the development of specialization, however, this depends on the system’s structure. For example, in anarchic realms the function of the units is similar in order to maintain their interdependence and autarchy, in contrast to hierarchic realms, where the units are highly differentiated and specialized, while the process of interdependence develops.

In order to measure the levels of interdependence, Waltz focuses on trade and investments. As far as trade is concerned, he argues, that states which used to have close ties in trading goods, such as Germany and Great Britain, became the greatest adversaries in World War I. That happened because the economic and political significance of trade depends on shifts in the products of which it is comprised. More specifically, if a state relies on imports it does not necessarily mean that it is dependent

46 for four reasons. First, the state’s level on autarchy cannot be measured by imports but reliability of access is what it counts more. Second, the numbers of suppliers is also vital and not their location because the level of trade is proportional to the numbers of its suppliers. “The larger a country’s trade, in absolute terms, the larger the numbers of its suppliers is likely to be” (Waltz, 1970:211). Third, there are domestic factors and interests which try to control the reduction of prices and fourth, dependency can decrease since new technologies provide substitutes which replace the initial materials.

As far as investments are concerned, Waltz argues, that “When the Great Powers of the world were small in geographic compass, they naturally did a higher proportion of their business abroad” (Waltz, 1970:214), and mentions that the route of businesses is intertwined with the difficulties that their governments have to face. In addition, corporations which are based in a state and use the state’s capabilities and human resources, as American corporations do in the USA, promote their nation’s perspective because of the suspiciousness among them and the level of limited cooperation which can be achieved. “Nations do not easily bring their policies into concert, and that is a comfort for the nation whose operations are global” (Waltz, 1970:220).

Defining “interdependence”, Waltz argues that the differences in structure give rise to two dimensions, interdependence within and among nations, so he uses the term

“integration” to describe the condition within nations and “interdependence” to describe the condition among them (Waltz, 1979:104). According to Waltz, in a self- help system each unit tries to protect itself against others rather than promoting its goods because it only worries about its survival. As Waltz mentions, “Even the prospect of large absolute gains for both parties does not elicit their cooperation so long as each fears how the other will use its increased capabilities” (Waltz, 1979:105).

On the other hand, a precondition for interdependence is cooperation but states are suspicious and worry that the division of their gains may empower others more than themselves. Also, this cooperation may make states dependent on others, regarding transactions such as goods and services, and the more a state specializes the more it depends on others. Consequently, states seek to limit their imports and exports.

However, this does not apply to weaker states which are heavily dependent and worry how they will secure and maintain access to the goods they depend on.

Waltz also points that the behavior of states can be explained through vulnerability, which is the consequence of high levels of interdependence. That is to say that states try to control the levels of their dependence and therefore, they become more autarchic