Hegemony in an era of turmoil (July 1995) DRAFT

This is the re-print of an Essay on "Hegemony in an Era of Turmoil"

I wrote the essay in 1995, as part of my participation of a Summer School at LSE in London.

The official title of the school? The Politics of Global Finance.

Visit GettingAroundTheWorld.Net to read the essay- and the 2010 follow-up.

If you have any comments- write me

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0. Preface

Why the reprint, and why now?

First, because many of the issues that were developing in the early 1990s are still with
us- including the extensive and conflicting priorities and interests of countries and markets or
multinational companies.

The “transitional economies” are now partially members of an enlarged European

Union- an entity that is still looking to solve the same issues that I had in 1995 presented in the
“EU outline” (see http://www.scribd.com/doc/42800189, or the article containing also the mind
maps on http://tinyurl.com/322lntd or http://tinyurl.com/35jo28x).

Second, because I believe that any analyst should be intellectually honest- and present
both what (s)he was able to predict- and where (s)he was wrong: to help both her/himself and
the readers to identify the potential sources of bias that could affect her/his judgement.

If you have not been in politics or negotiations, this point would probably seem
irrelevant.

But when you make decisions (in business or elsewhere) based on somebody else's
advice, being able to understand that being human could influence their judgement (and how)
is as important as any advice that they will actually give you.

Third, because recent economic and political news made me think about then- and,
before adding something more to some articles that I posted over the last few months on
GettingAroundTheWorld.Net (or gettingaroundtheworldnet.wordpress.com), I wanted to
“travel back in time”.

If you want- I tried to use myself in 1995 as a business analyst to help myself in 2010 to
see how things evolved.

Therefore, I enclose the draft of that essay, a draft that I had to retype (floppies and
backup fail after 15 years, but paper drafts stay!), with really limited fixes to typos, but leaving
the syntactic structures that I used at the time (except when could generate misunderstandings).

Roberto Lofaro “Hegemony in an Era of Turmoil”, page 1 of 7

 Hegemony in an era of turmoil (July 1995) DRAFT

This essay will try to analize the role of hegemony in an era of ever increasing changes.

While the subject in itself would require also to analyze the relationship between both
economic and military policies, this essay will focus only on the former, hinting at the latter
only as much as needed for explaining the economic perspective.

The “turmoil” in the title conveys many meanings, and both the turmoil's positive and
negative side-effects will be briefly covered in the following sections.

The underlining thesis is simply that more than bringing a mere decline of the
hegemonic power (USA), the 90s and the first decade of the next century will probably bring
some kind of new global political and economic order. Odds are for this new order to be based
on a multilateral system of regional hegemonies, with the global hegemon, the USA, playing a
wider role (strategy and goal setting), delegating similar responsibilities to regional hegemons
if and when needed. Also, evidence will be given of a general rise of overlapping and sometime
simply conflicting loyalties/interests, that the new order should help to solve.

Obviously, this argument requires at least some supporting evidence, that will be
introduced whenever needed in the following sections of the essay:
1. Introduction
2. Economy, democracy and mass-media
3. The global reach of financial markets
4. The transnational corporations: thinking globally, acting locally
5. A new balance of power
6. Overlapping interests
7. Conclusions.

The following short bibliography, referenced through the text, contains relevant
material used as supporting evidence:

[Buzan 1994] Buzan, Barry “The interdependence of Security and Economic Issues in the 'New World Order'”, in “Political
Economy and the Changing Global Order”, eds. R. Stubbs and G. R. D. Underhill
[Cassell 1995] Cassell, Michael “Warsaw, Wales or West Java”, FT 11/7/95
[Cooper 1985] Cooper, Richard N. “Economic Interdependence and coordination of economic policies”, 1985, Handbook
of International Economics, vol. II
[Dawkins 1995] Dawkins, William “Self-confidence has been shaken”, FT 10/7/95
[George 1995] George, Susan “Le danger d'un chaos financier généralisé”, Le Monde Diplomatique Juillet 1995
[IMF 1994] International Monetary Fund “World Economic Outlook – October 1994”, pagg. 1-8, 42-45, 98-104
[Ohmae 1995] Ohmae, Kenichi “Letter from Japan”, Harvard Business Review Vol. 73, No. 3
[Vanderwicken 1995] Vanderwicken, Peter “Why the news is not the truth”, Harvard Business Review Vol. 73, No. 3
[State 1995] State of the World 1995

Other supporting evidence coming from the lectures will be referred to as in the Course
Outline.

Roberto Lofaro “Hegemony in an Era of Turmoil”, page 2 of 7

 Hegemony in an era of turmoil (July 1995) DRAFT

1. Introduction

The hegemonic role played in the XIX century by Britain was in a way different from that that
the USA enjoyed during the “Cold War”, at least for the differing sizes of their economies, dependence
from foreign trade, and the political changes occurred in the XX century, like the advent of democracy.

The 60s saw an increase in Global Financial Markets' (GFMs) size, also to cover for the needs
of the Transnational Corporations (TNCs), increasing also the markets' independence and overall
influence on Governments' decisions.

The Cold War and the strategic issues related with it justified first financial support from the
USA to its allies (Marshall Plan), and then its policy to support their reconstruction and development,
using direct aid, FDI, and international organizations like IMF, IBRD.

The strategic hegemonic role also involved high defense costs for the hegemon 1 and allowing
allies like Japan and Germany to use the USA as a market2.

The need of Western allies to maintain free trade and democracy allowed for some “truce” in
trade relationships, also with growing trade deficits and costs needed to maintain the hegemonic role.

The 80s brought an increased ideological interest in promoting free trade and deregulation
(1978 Thatcher election in UK and 1980 Reagan), with increasing pressures on the allies for a burden
sharing of the defense role and a re-assessment of economic issues like trade and financial markets'
openness.

On the military side, “USSR's Vietnam”, the Afghan War, shows the weaknesses of the Soviet
Bloc in military, political (dissent between allies) and industrial matters, lowering the perceived
effectiveness of “The Empire of Evil” threat.

The end of the Cold War, along with the increasing power and independence of financial
markets and the aging of population in the higher developing countries plunged political economical
relationships under strain.

The “New World Order” called by Mr. Bush, then-president of the USA, has been described as a
“New World Disorder”. The financial markets seem to pursue their own objectives, sometimes also
conflicting with the state objectives of governments.

The increasing integration of the more advanced economies has shown an increased strain
imposed to the traditional stage-based political economy, along with a growing difference in economic
development between the Industrialized countries and LDCs 3. The end of the Cold War implies a lower
interest toward LDCs, with less resources available for their development, and greater instability 4 in the
periphery. Maybe we will see an increase in “economic wars” in the center, real ones in the periphery.

But what are the economical effects of these political changes?

1 [State 1995] in 1970 relative to GDP the defense expenses were: USA 7.7% vs. Germany 3.3% and Japan's
0.8% (constitutionally limited to 1%)
2 [State 1995] in 1970 USA were by far the largest market for Japan, with 31.1% of exports
3 [George 1995] the richer 20% consumes 85% of World total output (70% in 1965), while the poorer 20%
consumes a mere 1.4% (5% in 1965)
4 [George 1995] there are now 47 million refugees vs. 35 in 1990

Roberto Lofaro “Hegemony in an Era of Turmoil”, page 3 of 7

 Hegemony in an era of turmoil (July 1995) DRAFT

2. Economy, democracy and mass-media

The era of the “pax americana” was characterized by an increasing development of democracies
in the Western world, accelerating during the 80s and after the end of the Cold War, also for ideological
purposes of the hegemon. With Mr. Reagan and Lady Thatcher, this democracy meant also deregulation
and initiatives to promote private investment, while reducing the role of the nation state to a provider of
basic services, defence, infrastructures.

I think that the Reagan-Thatcher program didn't really promote democracy in the market,
because their “survival of the fittest” approach to economy reduces income distribution, expelling from
the market the less useful in economic terms, and lowering their possibility of reentering it, but the
discussion of their political economy is here relevant only for its side-effect: increasing the degree of
freedom of GFMs vs. Governments.

Anyway, the hegemonic role was played mainly defining the direction (goal setting) of this
evolution and being the first to apply it, while urging Allies to do the same. Due to the relative size of
Wall Street's market, that market relevance has been increased by the increased freedom. With the
caveat shown above, the market's democracy was also enhanced through the establishment of markets
like the NASDAQ, that allows both small companies and small investors to be players.

Another side-effect of the ideological push of the 80s was in promoting freedom of press while
the technological means allow a non-stop information flow. Nowadays, only backward countries like
North Korea are more or less able to stop information from flowing. Also , the increased quantity of
information hasn't increased its quality (e.g. reliability of sources, etc). As Vanderwicken
[Vanderwicken 1995] relates, companies can “doctor” the news exploiting the global information
network, and giving different information in different markets.

While the hegemonic role of the USA has suffered some setbacks from the internal pressure
deriving from the mass-media (Somalia, Bosnia, etc), this “democratic pressure from below” shouldn't
be considered only positive. After 7 days the front page title becomes unattractive, and some other
subject has to be considered in order to prop up the newspaper selling. Vanderwicken aptly describes
how sometimes the news are only what is published. The leadership of the USA, due to internal political
pressure exerted also through the media, sometimes has disappointed the Allies' governments, with
swinging foreign and economic politicies.

Instead, GFMs and TNCs aren't supposed to be subject to such democratic pressures, having
just only their economic objectives and market rules to comply with.

This widening gap between Governments' and GFMs' perspectives has also brought to the fore
another subject: who is supposed to intervene when some financial crisis will happen? Past experiences
with BCCI, Banco Ambrosiano, Barings have shown the risks of GFMs, but no common solution has
been devised.

Roberto Lofaro “Hegemony in an Era of Turmoil”, page 4 of 7

 Hegemony in an era of turmoil (July 1995) DRAFT

3. The global reach of financial markets

As shown in [Vanderwicken 1995] and discussed by [Strange 30/6], GFMs work on a 24 hours
a day basis, allowing transactions to be initiated in countries like Luxembourg, involving EU investors
buying US stocks or bonds, escaping the control of their country of origin.

If the markets were efficient, the information would have immediate effect on prices.
Unfortunately, while having increased their efficiency also thanks to the new communication systems,
the GFMs aren't yet so transparent, as testifies also the proposal for the new International Accounting
Standards.

The unregulated markets have been able to achieve size well above the possibilities of
individual countries, like the British Pound and Italian Lira have shown in 1992.

4. The transnational corporations: thinking globally, acting locally

As Kenichi Ohmae said, transnational companies are increasingly looking for new ways to
behave in their markets, their country of origin notwithstanding.

The obvious side-effect is that TNCs have no incentive to behave like ITT in the 60s or to act as
an Ambassador of their country of origin: mostly, they have strong incentives to “behave as good
citizens” wherever they are, looking after their own and their stakeholders' well-being.

The sheer size of the largest TNCs exceeds not only LDCs', but also some EU's countries GNP.

Source: UN Research Institute for Social Development, all data in USD Billions
GM 132.4
Indonesia 126.4
Denmark 123.5
Exxon 115.7
Norway 12.9
South Africa 103.6
Ford 100.1
Turkey 99.7
Royal Dutch/Shell 96.6
Poland 83.8
Toyota 81.3
Portugal 79.5
IBM 64.5
Venezuela 61.1
Malaysia 57.6
Unilever 43.7
Pakistan 41.9
Nestle' 38.4
Sony 34.4
Egypt 33.5
Nigeria 29.6

Roberto Lofaro “Hegemony in an Era of Turmoil”, page 5 of 7

 Hegemony in an era of turmoil (July 1995) DRAFT

5. A new balance of power

Size, democratic un-accountability, purposes: this allows GFMs and TNCs to operate outside
the interest of the global hegemon, US.

As shown by [Cassell 1995], Japan's TNCs are now using the limit of the actual balance of
power between GFMs and states by forcing them to compete for FDI.

USA, the only superpower left, act more as a catalyzer than a real single hegemon.

Also, recent experiences with Transitional Economies and Mexico 5 are probably the best
example od the new way of acting as an economic hegemon.

While, after NAFTA, also for internal US political reasons, helping Mexico is an high priority
issue, USA exerts its hegemonic influence rallying its allies in the industrialized world ehind a common
purpose. Instead, Eastern Europe and former USSR aren't so high in the priority list of USA's interests,
and the burden has been partly shared with the regional would-be hegemon, Germany (and EU).

In areas like Africa, not anymore interesting to USA, South Africa is increasingly forging new
economic links and South African TNCs are developing railways and trying to exert their regional
hegemonic power.

Japan, having no military power by itself, is using economic means (FDI, grants, etc) to assert
its relative power in South-East Asia.

On strategic issues, USA acts as a global player, its political and economical alliances
notwithstanding. In Central Asia, USA has intervened politically to support Russia's attempt to get
control of the oil coming from oil-rich Islamic countries. USA interfered with Turkey's and Iran's, in
order to defend the Russia's position as regional hegemon.

This new balance of power, yet to be stabilized, seems to involve the USA as the nly global
player, delegating to the other regional players the tasks of caring after the development of their regions.
South-Africa, expanding its financila power in the rest of Sub-Saharian Africa is virtually expelling
from the region European companies, mainly coming from France. Germany, expanding to East Europe,
founds no interference from USA.

Less clear is Asia: Japan is not strong enough, while China has already announced that Taiwan,
some islands and the Chinese Sea are to be considered its area. Recently, USA and other countries
started to analyze a new policy of “contention”, due to the overwhelming military power of China (the
rapprochement between USA and Vietnam has been interpreted as such a sign).

5 [George 1995] Recently, USA “collected” 50 bln for Mexico to cope with the crisis, in few days, while in Sept.
1994 the IMF Director, Mr. Camdessus, found less than half that amount for all the Transitional Economies

Roberto Lofaro “Hegemony in an Era of Turmoil”, page 6 of 7

 Hegemony in an era of turmoil (July 1995) DRAFT

6. Overlapping interests

GFMs' and TNCs' interests overlap with the global hegemon's interests and these, in turn,
overlap with the interests of regional hegemons.

The security role, anyway, allows US to require support from other countries, also if this
interferes with regional hegemons' order of priorities, like when US asked for financial support during
the Gulf War from Japan and Germany.

As stated in the introduction, if what happened in the first half of 90s will continue, we will see
more wars, not less, also if in the Industrialized world this will mean trade wars.

The industrialized countries are facing increasing internal problems due also to what has been
called an “age of diminishing expectations”.

The post-war economic book raised expectations of increasing levels of welfare, raising the
share of the GNP used for social purposes. The aging of Industrialized countries' citizens will probably
require a structural change in their economies, with an increasing burden due to contributions to retiring
schemes, etc. Also, a reduction of the savings rate in Japan and Germany is forecasted, due to increased
consumption by an older population.

This demographic trend could increase the US's hegemonic role vs. its former allies, due to the
immigration from Mexico and other countries, while bringing a decline of Europe. Instead, Japanese
TNCs are already “looking forward”, by shifting production outside Japan.

7. Conclusions

More than a decline of the US hegemony, I believe that the evidence given in the previous
sections can show as there has been a shift in priorities and policies.

Instead of acting as a global superpower confronting another superpower, as during the Cold
War, the USA seems now more focused on maintaining its economic power. Also, USA is the only
country that is inside every major organization in the Pacific and Atlantic, allowing it to exert its
structural power as the only global player.

The new hegemon has probably selected a role of catalyst and coordinator, setting the agenda
for the global economy, using the military leverage as a tool to assert its power.

Roberto Lofaro “Hegemony in an Era of Turmoil”, page 7 of 7