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Looking for BalanceChina, the United States, and Power Balancing in East Asia$

Steve Chan

Print publication date: 2012

Print ISBN-13: 9780804778206

Published to Stanford Scholarship Online: June 2013

DOI: 10.11126/stanford/9780804778206.001.0001

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The Political Economy of Defense and Regime Strategy

The Political Economy of Defense and Regime Strategy

(p.92) 4 The Political Economy of Defense and Regime Strategy
Looking for Balance
Stanford University Press

Abstract and Keywords

This chapter proposes an econo-political explanation of why East Asian states have eschewed balancing policies. It explains that the costs of such policies are significant and made even larger by the guns-versus-butter tradeoff. The chapter compares the recent history of East Asia and the Middle East, and investigates why East Asian leaders have decided to stress economic performance based on a model of export-led development as a strategy for enhancing and keeping their political legitimacy and power.

Keywords:   econo-political explanation, balancing policies, East Asian states, guns versus butter, Middle East, economic performance, political legitimacy

Evidence presented in the last chapter suggests that there has been a general trend of declining defense burden and a reduction in U.S. military personnel deployed in the Asia Pacific. Moreover, there is mounting intra-regional trade; one manifestation of this development is that the Asia Pacific countries have become more important commercial partners for China and vice versa. The overall picture presented by these data is one of rising cooperation and receding security concerns.

This chapter seeks to explain this phenomenon. Its basic thesis echoes Thomas Berger's (2003, 389) observation that the East Asian countries have arrived at “a far reaching consensus that economic development should be the overarching national objective.” This broad agreement on the priority of promoting growth and development has become increasingly entrenched in domestic institutions and interests and, except in North Korea, has become the predominant basis for elite legitimacy and the underpinning for stable interstate relations in this region. In the following discussion, I first try to show how truly remarkable East Asia's recent history has been by contrasting it to that of the Middle East. I then present an econo-political account, suggesting that the ruling elites in these two regions have adopted decidedly different strategies to sustain regime survival and leadership legitimacy. Whereas East Asian elites have turned to economic performance as the sine qua non for their political power and popularity, their counterparts in the Middle East continue to rely on nationalism, militarization, and externalization of conflicts as the basis for political control. Third, I explain why these strategies for regime (p.93) maintenance and elite legitimacy matter for international relations, focusing especially on officials' choices between “guns” and “butter.” As discussed later, the ascendance of a political coalition with internationally oriented economic interests can be highly consequential in reducing regional tension and fostering cooperative interdependence. I conclude this chapter by delving briefly into a discussion of the “why of why”—that is, I try to offer some ideas about why, in contrast with Middle Eastern leaders, East Asian ones have decided to stress economic performance based on a model of export-led development as a strategy for enhancing and keeping their political legitimacy and power.

Contrasting with the Middle East

When one observes that East Asian countries are demilitarizing and increasing their economic exchanges, one naturally begs the question “compared to whom?” In contrast to the region's own past, there has certainly been an impressive process of dètente and conciliation since the end of the Vietnam War. The Report of the ASEAN-China Eminent Persons Group stated, “Between the inception of ASEAN in August … 1967 and the formal establishment of ties between ASEAN and China in 1991, relations between the two sides went through a process of evolution from confrontation and suspicion to dialogue, cooperation and strategic partnership based on equality, good neighborliness and mutual trust” (quoted in Qin and Wei 2008, 130–131). This statement is also generally applicable to China's relations with its other neighbors so that, for instance, Beijing's ties with Seoul, Moscow, and New Delhi are more cordial now than four or five decades ago. It has settled most border disputes with its neighbors, often on terms that were more favorable to its negotiation counterparts (Fravel 2005).

Despite premonitions that East Asia might be “ripe for rivalry” (Betts 1993/94; Friedberg 1993/94), no new Cold War, not to mention any actual hot wars, has broken out. Notwithstanding strong nationalist feelings, acrimonious histories, and shallow regional institutions, occasional disputes have been restrained by diplomatic efforts, and the region has managed to stay at peace during the past three decades. Etel Solingen (2007, 757) called attention to the declining defense burden for the region as a whole—falling from 2.6% in 1985 to 1.8% in 2001—compared with global averages of 5.4% and 2.5%, respectively. Concomitantly, intra-Asian exports rose from 30% in 1970 to 55% in 2004. More recent figures, reported in the last chapter, show a continuation of these trends. This phenomenon has led Solingen to envision a “Pax Asiatica.”

This vision offers a sharp contrast to the conditions in the Middle East, where the defense burden reached 17.3% in 1985 and 7.7% in 2001—or about (p.94) three times higher than the global average. Intra-Arab trade has remained low since the 1950s, accounting for only about 7%–10% of commerce among the pertinent countries. Low economic growth, high military expenditures, cross-border subversion, recurrent militarized disputes, and more recently, the emergence of domestic and international terrorism, have distinguished this region. Solingen (2007, 758) noted that “since 1965, the incidence of interstate wars and militarized conflicts was nearly five times higher in the Middle East” compared to East Asia. She characterized the former region as “Bella Levantina,” quoting Fred Halliday's (2005) remark that “External intervention, interstate war, political upheaval and interethnic violence are compounded by the vagaries of oil prices and the claims of military, nationalist and religious movements” (Solingen 2007, 758). The Middle Eastern countries have experienced a higher incidence of military conflicts even though, in contrast with East Asia, their region is characterized by far less diversity “regarding language, ethnicity, religion, development levels, and regime types” (ibid.)—conditions that should have promoted more peaceful relations according to conventional wisdom.

This brief regional comparison offers a point of departure for this chapter, in which I try to explain the absence of balancing policies and the emergence of regional cooperation in East Asia, as I suggested in the last chapter. Although they started from rather comparable political economies in the 1950s, East Asia and the Middle East have undertaken different development strategies and experienced different trajectories since then. In the years immediately after World War II, both regions saw the rise of authoritarian regimes dominated by conservative rulers, military officers, large landlords, and commercial interests favoring import substitution. These regimes offered domestic rents to powerful conservative interests, and generally sought legitimacy by using scapegoating tactics and by directing mass hostility against an external target. Authoritarian rule, suppression of labor and political opponents, and corruption and rent-seeking policies (including high levels of military spending) were justified in the name of national security.

From about the early 1960s on, however, the so-called newly industrializing countries (NICs) in East Asia began to turn to export-led industrialization. The ruling elites in Taiwan and South Korea, preceded by their counterparts in Japan, started a process whereby, as Solingen (2007) argued, they pivoted their political legitimacy and regime survival on economic performance rather than nationalism, militarization, and populism based on political mobilization against internal and external scapegoats. Significantly, the adoption of this strategy was followed by others in the region; in the 1970s, Thailand, Malaysia, (p.95) the Philippines, Indonesia, and eventually China and Vietnam emulated, albeit to different degrees, the initial NICs (Taiwan, South Korea, Singapore, Hong Kong, and of course Japan, as the first non-Western NIC). Success begot success in the sense that the model of export-led growth became widely accepted in East Asia, and this wide acceptance in turn gave further momentum to its acceleration and entrenchment (Amsden 1989; S. Chan 1993; Clark 1989; Deyo 1981, 1987; T. Gold 1986; Haggard 1990; Hewison 1989; Johnson 1982; Jones and Sakong 1980; Wade 1990; Woo 1991).

Some have used the analogy of the flying geese formation to describe this contagion effect, first set off by Japan's “economic miracle.” Others have noted that the more successful East Asian political economies have been characterized by both a strong competent state and one that is embedded in society (e.g., Evans 1995). In contrast, Middle Eastern countries continue to be mired in economic stagnation, burgeoning population, authoritarian rule, recurrent incursions and militarized disputes, and an inward-looking political economy dominated by inefficient state enterprises and a powerful military–industrial complex (Binder 1988; Luciani 1990; Owen and Pamuk 1999; Waterbury 1983). Seemingly small differences initially have compounded over time to become huge discrepancies between the two regions in terms of their economic growth, international orientation, and elite strategies for survival and legitimacy.

The contrasting strategies of ruling elites in the Middle East and East Asia are instructive about the interactions between their domestic agendas and their propensity for external conflict. The thrust of Randall Schweller's (2004, 2006) study of the “underbalancing” phenomenon is to focus on the domestic distribution of influence and incentives. Rather than assuming balancing as a natural outcome, one problematizes it and asks about those conditions that can affect its probability. What conditions, both internal and external, are likely to influence officials' willingness and ability (Most and Starr 1989) to pursue certain policies, such as balancing against a neighbor? I argue that one needs to tie international relations theories more closely to an understanding of domestic political economy. “Black boxing” the internal political dynamics of states and elite agendas overlooks an important source of variation in foreign policy and regional stability.

Strategies of Regime Survival and Legitimacy

Obviously, leaders face the constant challenge of two-level games (Jacobson, Putnam, and Evans 1993; Putnam 1988); that is, they have to address domestic and foreign constraints and incentives concurrently. When deciding whether (p.96) to pursue balancing policies, they are not unmindful of the implications that their decisions can have for their domestic political fortune—more specifically, the implications for their own political longevity and popularity. Recognizing that officials care about multiple goals draws attention to the fact that armament and alignment options can have undesirable side effects. Internal and external balancing intended to maximize national security can impinge on domestic economic performance and may cause a decrease rather than an increase in this security in the long run, such as by stimulating an arms race and exhausting one's financial capacity. Paul Kennedy (1987) warned about the danger of “imperial overstretch” that has repeatedly confronted great powers in the past.

Pervasive instability in the Middle East and increasing cooperation in East Asia can be traced to their respective elites' grand strategies to ensure their political tenure and legitimacy. Introducing the distinctive domestic models of political survival characteristic of the two regions, Solingen (2007, 758) observed, “Leaders in most East Asian states pivoted their political control on economic performance and integration into the global economy whereas most Middle East leaders relied on inward-looking self-sufficiency, state and military entrepreneurship, and nationalism” (emphasis in the original). Naturally, there is considerable variation among countries located in both regions. Just as Burma (Myanmar) and North Korea are “outliers” in East Asia, Lebanon, Morocco, and Turkey often present exceptions to generalizations about the Middle East. But by and large, compared to Middle Eastern countries, East Asian countries have smaller public sectors relative to their domestic economy, capture a much larger share of international investment capital, export a much higher percentage of manufactures in their overseas trade, bear much lower defense burdens, and experience fewer militarized conflicts with their neighbors.

These contrasts suggest that East Asian and Middle Eastern countries have generally followed separate paths that approximate the distinction Richard Rosecrance (1986) made between “strategic” or “territorial states” on the one hand and “trading states” on the other. Domestic interest groups forge ruling pacts and develop grand strategies that respond to their existing internal political and resource conditions and the opportunities and challenges emanating from abroad. When those preferring economic and political openness prevail, they seek international integration and cooperation. They oppose policies that would cause market closure, impede capital flows, and destabilize financial institutions. These preferences in the long run tend to embed themselves politically and institutionally, and when such incentives and practices spread to neighboring countries, they increase the prospects of regional stability.

(p.97) Naturally, the reverse can also be true: distribution coalitions consisting of sprawling military–industrial complexes, large state enterprises, bloated bureaucracies, and import-substituting firms can become entrenched, making a change of regime strategy more unlikely the longer these distribution coalitions have dominated the domestic political economy. These groups have a vested interest in exaggerating foreign threats and hyping nationalism in order to sustain support for funding a large state apparatus. These proclivities in turn are likely to exacerbate and perpetuate regional tension, whether as an unintended side effect or as the direct result of deliberate policy.

How would turning to an export-led growth model and, more generally, to a regime strategy of pivoting political legitimacy and survival on economic performance influence regional relations? Such a turn would point to an overall tendency, though it would hardly always be a fait accompli, for those with an internationalist outlook and interests to be put in charge of domestic and foreign affairs. This internationalist orientation typically favors open access to foreign markets and the liberalization of domestic ones, stable and low currency values facilitating exports, free movement of capital and low borrowing costs, and efficient allocation of production factors according to a country's comparative advantage. There is also a general tendency to emphasize the production of consumer goods rather than the development of capital-intensive, large-scale heavy industries that are usually preferred by the military–industrial complex, and the investment in both physical infrastructure and human assets. Barriers to trade and investment—such as entrenched rent seekers, government regulations, high tariff and nontariff restrictions, and institutionalized forms of graft, corruption, and other inefficiencies—are likely to encounter objection from an internationalist coalition. Given this coalition's priorities, its policies understandably seek to lower international tension and promote economic interdependence. The ascendance of such a coalition to ruling position tends to dampen the logic of balancing and power competition and to lessen the usual impediments that hamper commerce between adversaries. Scott Kastner (2009) studied trade across the Taiwan Strait as a paradigmatic example of how economic interdependence can thrive even between ostensible adversaries when dominant coalitions on both sides have an internationalist orientation stressing economic performance.

Recent scholarship on the pacifying effects of economic liberalism provides further theoretical underpinning for my arguments. Two causal mechanisms are particularly pertinent in connecting a state's political economy to peaceful international relations, and both of these suggest that market-based exchanges rather than democratic institutions are more fundamental reasons for (p.98) international peace (McDonald 2007, 2009). These mechanisms refer respectively to the extent of state control over public properties and that of barriers to international economic competition. With regard to the first mechanism, large state enterprises and monopolies enhance ruling incumbents' fiscal discretion. The funds from these sources enable them to reward political cronies (thereby to consolidate their domestic rule) and to bypass the necessity of seeking the consent of (or making concessions to) a larger number of constituents who would otherwise have to be taxed to raise this money. The latter condition is critical in many classical liberal explanations as to why public control of the purse strings, such as that exercised by an informed electorate or a representative legislature, can restrain international bellicosity. In the words of David Ricardo (quoted in McDonald 2009, 51), “There cannot be a greater security for the continuance of peace, than the imposing on ministers the necessity of applying to the people for taxes to support a war.” A state's access to funding by virtue of its control of public assets removes this constraint of popular approval, accounting in part for the phenomenon that relations among those states with a larger public sector tend to be less peaceful.

This generalization implies two corollaries. First (as suggested later), countries with large stores of natural resources such as minerals are more likely to have nationalized enterprises, which gives the incumbent elites a freer fiscal hand without being compelled to seek the consent of citizens whose income would otherwise have to be taxed for armament or foreign expansion. Second, to the extent that a state wages war without raising taxes, it can dampen public opposition to this conflict by concealing the conflict's short-term economic costs. One common way to escape from the constraint of popular approval is to finance war by borrowing rather than taxing—as the United States has done in funding its Iraqi and Afghan campaigns. The burden of debt payment is shifted to future generations.

The second mechanism refers to a state's trade policies, which tend to be both a reflection of its peaceful disposition and a cause for this disposition—both tied, yet again, to a country's domestic distribution of influence and interests. Protectionist policies are supported by internationally uncompetitive industries. These industries are beholden to the incumbent elite imposing trade barriers because they would otherwise be unprofitable undertakings destined to fail under competitive pressure. They are inclined to curry political favor from the state rather than to develop their economic competitiveness. Moreover, they are more willing to pay a price in supporting belligerent or expansionist foreign policy in the hope that they can make economic gains abroad due to their government's political protection rather than to their own (p.99) competitiveness. Opposite tendencies prevail when a government eschews protectionism. Free trade favors those firms that are competitive internationally, which means, by definition, that they do not need to rely on their government to be profitable at home or abroad. Indeed, if they are already competitive internationally, why would they want to pay the added cost of a higher defense burden and risk being shut out of foreign markets if their government pursues belligerent or expansionist foreign policy?

To the extent that officials pivot their political tenure and regime popularity on economic performance, they will adopt grand strategies that are internationalist in orientation and that tend to have the intent and effect of curtailing armament, nationalism, and the military–industrial complex. They prefer fiscal frugality, macroeconomic stability, and open market access—conditions that would be jeopardized by armed conflict and regional tension. A strategy that hinges on economic performance to maintain regime survival and legitimacy, though initially motivated by domestic incentives and focused on internal conditions, is nonetheless consequential for regional and international relations. This is not to say that the genesis of this strategy did not have anything to do with the challenges and opportunities presented initially by the external environment. Although this strategy was surely formulated by East Asian NICs originally when the United States assumed a central role, over time they became less obsessed with the United States as a provider of credit, investment, technology, managerial expertise, and military protection, and as a destination for their exports. This diversification away from a U.S.-centric economic network is shown by the ongoing trend toward greater intra-Asian commerce.

Significantly, as the number of states pursuing a strategy of regime legitimacy that favors economic performance grows, they are drawn by their own internal political logic, rather than an external compulsion induced by balance-of-power dynamics, to enter into cooperation. “Therefore, there is a virtual built-in guarantee that like-minded internationalizing coalitions will be, ceteris paribus, reluctant to defect through militarized strategies or to exacerbate territorial or ethno-religious disputes. The potential for armed conflict and extensive military buildups threatens the economic and political fundamentals—fiscal conservatism; macroeconomic, political, and regional stability; global access—that an internationalizing strategy requires” (Solingen 2003, 65). This observation about the linkages between domestic and foreign policies and about “a virtual built-in guarantee” for like-minded states to cooperate is very important and germane to my thesis. It points to the associational logic of international society mentioned in Chapter 2, but these states can also be motivated in part by competitive logic, as discussed below.

(p.100) When a state makes decisions about how much money to devote to consumption and how much to defense, it incorporates its anticipation of its counterparts' similar allocations. The choices states make are therefore interdependent or mutually contingent (Powell 1999, 40–81), and extend beyond bilateral ties to considerations of competitiveness relative to other relevant states. Consumption, in Powell's formulation, is the intrinsically valued end, whereas defense spending is a necessary expenditure to guard against being attacked. The more a state spends on one item, the less it is able to spend on the other. I will return to discussing guns-versus-butter tradeoffs in the next section.

When one multilateralizes the context of these tradeoff decisions among many states in a region, the contagion of a strategy of pivoting regime and elite legitimacy on economic performance tends to foster a sense of generalized reciprocity. Reduced defense spending by one state, when reciprocated by others, not only lowers tension and builds confidence generally, but also permits more resources to go to consumption—and even more importantly, to investment, which can in turn produce more resources in the future. The prospects of these future resources provide positive reinforcement for further cooperation and tension-lowering policies, including a renunciation of internal and external balancing.

The survival and legitimacy strategy of East Asian leaders inclines them to make an intertemporal tradeoff that favors reducing defense spending and indeed, foregoing current consumption in general, in favor of more investment to grow resources for future consumption and still more investment. The larger domestic resource bases created by these decisions and the experience of economic cooperation promoted by them, in turn, give these leaders' states bigger stakes in the status quo, making balancing policies less necessary and more counterproductive. In Chapter 7, I will return to this idea, arguing that this dynamic produces self-enforcing agreements which do not need to depend on external authorities for cooperation to occur. The benefits of current cooperation—and the forfeiture of these benefits in the event of noncooperation—serve in themselves as a bond or credible commitment to refrain from conduct that can undermine cooperation. Moreover, these returns create vested interests that have a stake in furthering cooperation, and entrench and legitimate successful strategies as “winning ideas”—thus fostering, again, a self-sustaining process.

I have just mentioned the effects of path dependency, suggesting that policies and institutions tend to become entrenched over time. It is germane to add that with respect to commerce, it is much more politically challenging (p.101) to terminate or reduce ongoing ties than to eschew these ties when they have never existed. In other words, commerce creates stakeholders who will lobby for the continuation and expansion of economic relations (Long 1996). Therefore, once begun, it takes considerable political effort and capital to roll back these relations. In contrast, it is easier for a state to stop its firms from trading with an adversary when they have never done so before (Mastanduno 1992). Thus, the default tendency is for commerce to expand in the absence of states acting to reverse it. This, in turn, means that the more natural course is for regional economic exchanges to intensify. Significantly, these expanding economic exchanges increase the opportunity costs to those states that decline to join.

States that pursue import substitution, subsidize inefficient public enterprises, and support large military establishments have trouble keeping up with competitors that follow an alternative model of export expansion, market liberalization, and global integration. Because of its chronically poor economic performance, the Soviet Union found itself falling further and further behind the United States during the Cold War. The Soviet economy reached only half the size of the United States, even when it was at its height. Due to the sharp and steady decline in Soviet economic capacity throughout the 1970s and 1980s, it became increasingly difficult for Moscow to sustain its military expenditures, which were consuming about 40% of its budget and 15%–20% of its gross domestic product (Brooks and Wohlforth 2000/2001, 22–23). Mikhail Gorbachev was disposed to undertake reform and retrenchment in light of his country's severe economic deterioration. He faced serious difficulties in continuing Moscow's competition with the West because the Soviet Union's defense burden threatened to collapse the economy. He remarked forthrightly “our goal is to prevent the next round of the arms race. If we do not accomplish it, the threat to us will only grow. We will be pulled into another round of the arms race that is beyond our capabilities, and we will lose it, because we are already at the limit of our capabilities. Moreover, we can expect that Japan and the FRG [West Germany] could very soon join the American potential … If the new round begins, the pressure on our economy will be unbelievable” (ibid., 29).

Gorbachev's statement makes an important point, namely that the influence of external pressure can force a regime to initiate fundamental policy change. This influence stems, to a large measure, from the competitive logic of the interstate system. That is, the motivation to reform comes largely from the realization that one's country is falling further behind strategically and economically, and in order to catch up, a basic change in policy has to take place. (p.102) Perestroika and glasnost—as well as Vietnam's economic renovation (doi moi) and China's economic reforms launched in the late 1970s—stemmed from the realization that continuing “business as usual” would jeopardize both elite survival and national security.

Another point to be underscored from this example of Soviet decline and reform is the influence of ideas—collective beliefs about which policies work, or do not work, in contributing to national security, economic capacity, and elite authority. Old ideas, such as those propagating central planning, state enterprises, and an inward-looking economy become discredited when they fail consistently to deliver the promised results. They become susceptible to being dislodged by replacement ideas when the latter's advantages are demonstrated successfully by neighboring countries.

Just like interests and institutions tend to become entrenched, ideas about how a country should go about managing its security and economic well-being are “sticky” (Legro 2005, 2007). Existing grand strategies and elite models of control tend to be perpetuated unless and until they lose their credibility and when an alternative set of ideas gains widespread support. The other implication of this discussion is that ideas can have a contagion effect. The successful ones tend to be emulated by neighboring countries, in part because of the logic of competition—that is, the defensive motivation to replicate successful models, lest one fall behind strategically and economically.

Furthermore, the above account of the Soviet predicament draws attention to an important distinction between capability and motivation as competing plausible reasons for downsizing a country's military. Low defense spending may be due to either economic decay and financial exhaustion, or policy incentives and programmatic preferences. The declining defense burdens of East Asian countries reflect the latter situation. With their expanding economies, many of them could have spent more on their military, but they have not. That they have eschewed higher military expenditures because of their policy choices rather than their dire circumstances is significant. If dire circumstances were the reason for their restraint, they would have returned to armament pursuits when their economies improved.

Although not nearly as dire, China faced a situation similar to the Soviet Union's before Deng Xiaoping's enactment of economic reforms (Harding 1987). It was lagging seriously behind the economic performance of its neighbors, such as Taiwan and South Korea, not to mention Japan. Persistent economic underperformance has serious security consequences. Some realists see or advise that security concerns should always trump economic interests, whereas others are willing to make an intertemporal exchange in favor of (p.103) expanding current economic capacity for the sake of improving long-term security prospects (Brooks 1997; Kirshner 2003).

The examples just offered about Russia's and China's turn to economic liberalization and political reorientation suggest that another powerful force is at work. States are sometimes influenced to make basic policy adjustments simply because their economic incapacity will not permit them to continue business as usual. In order to compete more effectively in the international system, regimes have to emulate their more successful counterparts abroad (Huntley 1996). Thus, good practices tend to drive out bad ones, forcing regimes to alter their survival strategy for the sake of improving or simply avoiding a loss in their international and, more importantly for them, domestic position. They may temporize (as the Soviets did long after their serious economic decline had become evident), but they cannot put off the necessary changes indefinitely.

This proposition in turn raises the question of why East Asian states were able to switch to a strategy relying on export-led growth after an initial period of following import substitution whereas, in contrast, Middle Eastern countries have by and large persisted in their alternative model of regime survival stressing nationalism, a large public sector, and mobilization against internal and especially external enemies. As discussed later, oil revenue or foreign remittances, and the massive and continuing infusion of U.S. aid contributed to disguising the reality of economic stagnation, and encouraged procrastination to put off tough decisions in the Middle East. Additionally, Middle Eastern proponents of the existing regime strategy have been in a stronger political position to resist reform because they did not experience the devastation or the threat of destruction that supporters of some anciens régimes faced in East Asia from communist revolutionaries and insurgents.

As suggested above, current or former communist countries such as Russia, China, and Vietnam have switched from relying on nationalism, central planning, large public enterprises, collectivist ideology, and political and military competition with the West as strategic pillars for their regime survival and legitimacy. They finally came to accept the logic of “if you cannot beat them, then join them.” This change reinforces the contagion, or diffusion, in East Asia of a regime strategy that gives priority to economic performance. This is a significant development because, again, it has dampened incentives to undertake balancing policies by resorting to armament and alliance. East Asian states have actually downsized their military establishment and pursued open regionalism—the reverse of what one would have expected if they were seeking to balance against rising Chinese power. The available evidence suggests (p.104) that a virtuous cycle of demilitarization and economic interdependence may have taken hold. As Solingen (2003, 66) remarked, “Reciprocal incentives to cooperate are highest where internationalizing strategies are more fully in place and their political agents more strongly entrenched, conditions that are, of course, interrelated. Thus, internationalizing coalitions beget the conditions of self-sustained, rather than externally imposed, regional cooperation.”

This discussion contributes to the broader debate about whether trade promotes peace (e.g., Barbieri 2002; Russett and Oneal 2001). It also raises the reverse possibility: states that are peacefully inclined choose to trade and enter into other forms of commercial relations in the first place. Trade is endog-enously determined, and as I have tried to show in the last chapter, “trade itself reflects interstate cooperation and conflict” (Stein 2003, 112). Peaceful disposition and economic interdependence are characterized by Granger causality. They have a reciprocal and positive effect on each other. The point about endogeneity is worth repeating; it is a reminder that states “select” themselves into what they expect to be rewarding interactions. This selection is highly significant because it discloses their assessments of situations and signals their future intentions. Thus, for instance, when states become involved in extensive trade and make asset-specific investments in each other, their behavior communicates their preferences and intentions (a point that will be taken up again in Chapters 5 and 7). They would not take these steps if they expect imminent or even probable conflict.

These remarks are also germane to the debate about the role of international organizations and treaties in promoting regional cooperation. Various institutions, such as APEC, ASEAN, ARF, and ASEAN-Plus-3, have forged networks of “omni-enmeshment” and multilateral diplomacy (these acronyms refer to Asia Pacific Economic Cooperation, Association of Southeast Asian Nations, ASEAN Regional Forum, and ASEAN plus China, Japan, and South Korea). There is substantial statistical evidence supporting the view that common membership in intergovernmental organizations is correlated with dyadic peace between states (e.g., Russett and Oneal 2001; Russett, Oneal, and Davis 1998). Nevertheless, there is also strong evidence of a reverse causality, which suggests that peaceful states are inclined to join multilateral institutions in the first place, thus confirming the logic of self-selection.

The formation of these multilateral institutions in East Asia and the Asia Pacific more broadly followed rather than preceded the pertinent states' switch to economic performance as a basis for their regime and elite maintenance, and has therefore been more a consequence than a cause of this strategy. This observation again underscores the point that when states join multilateral institutions, (p.105) their decision to join broadcasts their preferences and future intentions. It also relates to the debate about whether treaties tend to only “screen” states which have ratified them, or whether they also constrain these states' behavior (Simmons and Hopkins 2005; Von Stein 2005). The proponents of the former (screening) claim that only states that have already paid the adjustment costs and that have already made a commitment to discharge their treaty obligations would join these formal accords in the first place. That is, their behavior has been predetermined and is not affected by their act of joining or ratifying the treaties. Joining treaties or multilateral institutions only serves the purpose, albeit a very important one, of publicly separating (that is, distinguishing) these norm-abiding states from others that have yet to decide whether to abide by the relevant norms.

The proponents of the latter (constraint) argue that joining treaties can actually change states' behavior, influencing them to act in a manner that they would not have in the absence of their treaty obligations. This latter argument coincides with the logic used to explain why engagement or omni-enmeshment can pay peace dividends. This claim can certainly be true. This discussion, however, suggests that the volume of cross-border trade and the number of regional institutions are in and of themselves indicative and predictive of the level of cooperation among states. They provide a gauge to assess the extent to which balance-of-power dynamics is operating and are a harbinger of how likely it is to emerge in the future.

Guns-Versus-Butter Tradeoffs

To suggest that East Asian elites have increasingly stressed a strategy of regime survival and leadership legitimacy based on economic performance offers only an incomplete explanation of why they have not gone full bore in attempting to balance against rising Chinese power. As already mentioned, leaders are not myopic. They are cautious about not setting off chain reactions that would cause counter-armament or a countervailing alignment. Given finite resources, military and civilian consumption have to involve zero-sum (even negative-sum) choices at some point. What is spent on guns cannot be spent again on butter. Moreover, public policies inevitably face choices between current consumption (both public and private) and future consumption. Resources consumed by current spending (whether for defense or other purposes) will not be available for investment, thus reducing the potential resources that future economic growth would provide. Although rising consumption can fuel additional investment, the general distinction between money spent and money saved or invested is clear, and the tradeoff is more acute if consumers (p.106) spend on imported goods manufactured abroad. These remarks echo Bruce Russett's (1970) inquiry, “what [is the] price [of] vigilance?”

The tradeoffs presented by defense spending come in direct and indirect forms. In the direct form, when the share of defense spending in a fixed overall budget goes up, the share of nondefense spending necessarily has to go down. Therefore, by definition, higher defense spending means lower nondefense spending in this direct form. Government support for health, education, and welfare (broadly defined to include a variety of civilian programs such as those intended to assist needy citizens, subsidize energy, housing, and transportation costs, and fund investment to develop or improve public infrastructure) declines in this scenario. Such broadly defined social spending naturally has large constituencies, and officials are usually wary about cutting it because they worry about alienating voters and losing popular support. Consequently, the available evidence often does not show a strong relationship associating increases in the absolute amount of defense spending with decreases in the absolute amount of social spending (e.g., Dabelko and McCormick 1977; D. Davis and Chan 1990; Peroff and Podolak-Warren 1979).

The tendency is instead for both to trend upward over time (e.g., Clayton 1976). Except for Reagan's and the senior Bush's administrations, higher U.S. defense spending in the recent decades has not necessarily come at the expense of lower social spending (e.g., Kamlet, Mowery, and Su 1988; Russett 1982; Russett, Starr, and Kinsella 2009). Weak support for this direct form of tradeoff between defense and social spending is not surprising because caring about their own political tenure, elected officials typically refuse to choose between guns and butter. They want to increase spending for both—and at the same time, avoid raising taxes in order to fund these programs. They therefore often resort to running a budget deficit and issuing public debt to cover it. This political maneuver transfers to future generations (voters who are too young to vote or who have not been born) the costs of repaying the debt (as well as the other opportunity costs), while appeasing demands from current voters for more government programs. The tradeoff between guns and butter thus takes on an indirect form—increasing current consumption at the expense of future consumption.

There is a large literature on the consequences of this tradeoff. pitting government spending on defense against the prospects of future economic growth (see S. Chan 1993, and Hartley and Sandler 1990, for reviews of the pertinent literature; and Mintz and Huang 1990, 1991, for exemplary studies on this topic). The relevant research seeks to determine the opportunity costs of defense spending, asking the implicit counterfactual question of how much faster (p.107) the economy would have grown if less money had been allocated to military purposes. As mentioned earlier in this chapter, this allocation has consumed a much higher proportion of the economies of Middle Eastern countries than of those of East Asian countries. The defense burden for Saudi Arabia, Oman, and Qatar has exceeded 10% of their respective gross domestic product, and North Korea's has been estimated at 20% (Russett, Starr, and Kinsella 2009, 349) and even at over 30% (Table 1, Chapter 3). In 2008, the U.S. Defense Department employed 670,000 civilians and another 3.6 million were working for defense-related industries, accounting for about 3% of the total civilian workforce (ibid.). In the same year, the United States spent over $600 billion on national defense and related space and energy programs, amounting to 4.2% of its economy compared to a global average of 2.5%.

The 2008–2009 recession required massive government spending to bail out failing financial institutions, stimulate the economy, and extend assistance to the unemployed (with the official unemployment rate at about 10%, and the real but unofficial rate, counting those who have given up looking for jobs, at about 15%). This massive spending, accompanied by sharply reduced tax revenues, resulted in a federal budget deficit of $1.9 trillion in 2009 (Denver Post, January 21, 2010, 7A). This deficit has been financed in part by borrowing from foreigners, including the Chinese, who have been estimated to hold more than $800 billion in U.S. public debt in mid 2009 (a figure that has risen to $1,154 trillion by February 2011). The extent to which this foreign indebtedness is a cause for security concern will be discussed in Chapter 5. Parenthetically, in the absence of more tax revenues, a mounting debt implies that a larger portion of the government's budget will have to be allocated to future interest payments, leaving less fiscal maneuver room for making adjustments to the rest of the budget. Discretionary spending now takes up only about one-third of the U.S. federal budget, with defense programs consuming about half of that portion.

Modern militaries are capital-intensive and technology-intensive and for that reason defense expenditures can influence growth prospects by affecting the supply and costs of credit and expertise. These expenditures, like other kinds of public spending, have to be financed either by government taxation or borrowing, both of which take money from the private sector. In either case, this spending has the effect of pitting the state against the private sector in competing for capital. This competition makes credit more expensive for the private sector, which has to pay a premium in order to secure funds for investment. Large, chronic budget deficits abet inflation, which encourages consumption and discourages saving. A persistently low savings rate in turn (p.108) has an adverse effect on capital formation, reducing the availability and increasing the cost of credit, thus depriving private enterprises of the necessary funds to finance expansion and innovation. These are the long-term financial consequences when fiscal policies try to “get a quart out of a pint pot,” as exemplified by the “imperious economy” of the United States (Calleo 1982). Statistical evidence from a cross-national analysis (e.g., Deger and Smith 1983) and from time-series analyses of individual countries such as Taiwan (e.g., S. Chan 1988; Ward, Davis, and Chan 1993) shows a pattern whereby, absent offsetting factors, a high defense burden curtails capital formation.

Some cross-national studies indicate a rough one-to-one negative relationship between military expenditures and total investment (R. Smith 1977, 1980). Other studies on developing and developed countries alike also report an adverse impact of the defense burden on investment, albeit sometimes in an indirect fashion and with a time lag (Cappelen, Gleditsch, and Bjerkholt 1992; Deger 1986; DeGrasse, McGuiness, and Ragen 1983; Huang and Mintz 1991). Britain's and America's primacy as global hegemons, however, has helped them to lessen the tension between defense burden and private investment. Some studies have questioned whether such a tradeoff has adversely affected them (e.g., D. Gold 1990; Rasler and Thompson 1988). They hint instead at a reverse causality, whereby declining investment and a sagging economy have dampened consumption, both public and private. Thus, these variables may have reciprocal effects—effects that can also be mediated by other factors. For instance, the interactions between physical capital and human capital may be more important for economic growth than their independent effects (notwithstanding their large cash reserves, oil-producing states have not generally succeeded in initiating autonomous, self-sustaining growth because of the relative scarcity of indigenous expertise). Moreover, the persistent “crowding out” of private investment by public consumption—whether for defense or nondefense purposes—over many years can have a cumulative effect in lowering future growth (R. Smith and Georgiou 1983). Statistical correlations between annual observations of the levels of or changes in defense spending and economic growth are unable to capture this cumulative and perhaps accelerating effect over time.

Massive government programs on defense, space, and energy also compete with the private sector for talent and expertise. Some have estimated that about half the scientists and engineers in the United States were at one time employed by these programs. If so, these programs can deprive private industries of the best brains for product innovation and cause a relative shortage and intense wage competition for human resources in research and development at (p.109) different times in the most dynamic industries of their day—such as automobiles, electronics, machine tools, information-processing, and communication systems. These industries have been involved in the fiercest competition for exports and overseas market shares, and have served as the engine for domestic growth in Japan's and Germany's post-1960 experiences. These industries also happen to require massive capital investment to capture economies of scale and to respond to rapid product cycles.

Military spending has the greatest effect of “squeezing out” both capital and talent from these leading and most innovative industries—and also from those dominating the export sector and engaging in intense international competition. Export competitiveness in manufactured products has in turn fueled the economic dynamism of some countries, such as East Asia's NICs. Historical evidence suggests that a high defense burden has tended to impair export competitiveness, causing persistent trade deficits, currency devaluation, and eventual industrial hollowing. The tendency for high military expenditures to be statistically associated with declining export competitiveness among the advanced industrialized countries is significant (Rothschild 1973). It is highlighted by Japan and Germany, with their low defense burden and high volume of manufactured exports at one end of the distribution, and the United States with the opposite attributes at the other end. It underscores the claim advanced earlier that regimes emphasizing economic performance as a basis for their popularity and legitimacy, especially those that pursue a model of export-led growth, are likely to eschew militarization and armament rivalry.

The statistical evidence associating defense burden negatively with export competitiveness points to a long-term tradeoff and does not deny salient exceptions to the rule. One should not therefore expect one year's military expenditures to cause a decline in exports the following year. Rather, a chronically heavy defense burden is likely to sap a country's export of manufactured products. Thus, it matters whether the exports in question are manufactures, natural resources, or services. One would not expect military expenditures to affect adversely a country's competitiveness in the latter sectors and, as argued below, a concentration on exporting natural resources is actually likely to encourage higher military expenditures.

Moreover, mitigating factors can ameliorate the deleterious effects that the defense burden has on manufactured exports. Foreign assistance, including subsidized credit and easy market access, can ease the defense–exports tradeoff Thus, for a long time, Taiwan and South Korea featured high growth rates in exporting to other countries even though both had rather heavy defense burdens (S. Chan 1988; Moon and Hyun 1992). These “outliers” point to (p.110) another consideration, namely, a cross-sectional analysis that takes a snapshot of the pertinent relationship between defense burden and the growth of manufactured exports is sensitive to sample size and composition (the countries or years that are included in or excluded from the sample). This cross-sectional evidence is less reliable than time-series analysis, which at least allows a more valid basis for inferring cause and effect.

Furthermore, the defense burden need not have an immediate or uniform impact on export competitiveness—that is, the adverse impact can be delayed and then suddenly accelerate. This effect is likely to be nonlinear, cumulative, and progressive. It can become visible and acute only after a long period during which the evidence showing a tradeoff may be weak or even absent. This may apply especially when a powerful country, such as the United States (D. Gold 1990; Huang and Mintz 1991; Mintz 1992), can resort to offsetting policies to ward off. even if only for a time, the negative consequences of large military expenditures. In the short and even medium term, military expenditures on research and development may actually boost the competitiveness of those civilian high-technology sectors benefiting indirectly from this funding.

The defense burden is not the only or even the most important determinant of economic performance. Its effects can be ameliorated or exacerbated when they interact with other germane policies and conditions, producing a longterm cumulative impact that is difficult to reverse once those interests and institutions favoring large military expenditures have had a chance to entrench themselves. The development models and regime strategies attributed to East Asian and Middle Eastern countries embed military spending in a nexus of other institutional and policy proclivities, and suggest strong “stickiness” because these proclivities are mutually reinforcing.

These remarks raise another important implication that pertains to the marginal product of capital—that is, the productivity gain to be made from each additional increment of capital, such as that which may be forthcoming from a switch from defense spending to investment in civilian production. Without undertaking major reforms in the other institutions, policies, or conditions that impinge on economic performance, even a fairly large reallocation of resources from defense to investment can only make a relatively small contribution to economic gain. Thus, the old Soviet economy was estimated to have a marginal product of capital as low as o. I—suggesting that a shift of 5% of gross national product from defense to net investment increases economic growth by only 0.5% (Hildebrandt 1992, 222). This illustration shows how defense spending and its consequences are tied in with other institutions, policies, or conditions, such as those dispositions favoring state enterprises, import-substituting (p.111) firms, military–industrial complexes, large-scale public patronage, and a powerful organized “labor aristocracy.” Defense spending is just one piece, albeit an important one, in this large framework of interlocking interests and influences operating on the domestic political economy. Of course, there is no guarantee that any resource savings from defense cutbacks, even if they should occur, would go to investment rather than consumption—raising the demand for manufactured imports from other countries and thereby contributing to an income shift across borders, furthering differences in trade competitiveness, and even increasing domestic inflationary pressure.

Significantly, although reducing the defense burden may promote the prospects of economic growth in the long run, military retrenchment can cause economic dislocation and political backlash in the short run. There is a long tradition of neo-Marxist analysis, claiming that advanced capitalist economies require heavy military expenditures to offset chronic underconsumption and that they use these expenditures as a countercyclical fiscal tool (e.g., Baran and Sweezy 1966; Melman 1974). Without taking on the motivations being attributed by this literature to the phenomenon of a persistently high defense burden that sometimes seems insufficiently sensitive to changes in the international environment (such as the end of the Cold War), military retrenchment can indeed produce short-term adverse consequences for local communities, specific industries, and the general employment prospects of discharged personnel (not to mention the profit margins of those firms that have become dependent on defense contracts). These short-term costs, both economic and political, can discourage incumbent officials from accepting draconian austerity measures, even though military retrenchment may have long-term benefits for the overall economy. They typically have short time horizons and are therefore reluctant to pay the price of political unpopularity and adjustment traumas currently, leaving their successors to claim credit for a healthier economy in the future.

The Why of Why

The tendency for massive public spending, including military expenditures, to have a dampening effect on future economic growth can be mitigated or exacerbated. One obvious factor is the extent to which an economy is already operating at full capacity. When there is little slack, adding government spending to the existing money in circulation can only elevate inflationary pressure.

Another factor pertains to extraordinary revenues or savings rates that can relax fiscal constraints (e.g., Frederiksen and Looney 1983; Lebovic and Ishaq 1987; Looney and Frederiksen 1988; Ward, Davis, and Chan 1993). Massive (p.112) income from oil exports and, for those countries that do not themselves produce energy, remittances abroad stemming from these revenues provide the financial wherewithal for some Middle Eastern countries to pursue increasing defense and social spending concurrently. In contrast, East Asia is generally a resource-poor region. Even though many countries in this region started the 1950s and 1960s with regimes dominated by conservative elites, powerful generals, and economic interests favoring import substitution, they subsequently parted company with Middle Eastern and Latin American countries.

They turned to export-led growth and emphasized economic performance as a basis for regime survival and legitimacy. In some ways, they made a virtue out of necessity in that their resource poverty did not provide other more attractive ways out for their regimes after the easy phase of import substitution had run its course. They could not be complacent and rely on the export of natural resources to “coast.” The only major resource that the Northeast Asian countries had to speak of was their human capital—a relatively cheap, trained, and disciplined workforce—which gave them a competitive advantage in their initial drive to expand manufactures with low technology but high labor content.

In contrast to East Asia, the Middle East and Latin America have more abundant natural resources. Different countries in Latin America and the Caribbean have relied on the export of sugar, coffee, banana, tobacco, beef, grain and, of course, minerals such as bauxite, copper, and oil. These resource endowments oriented Middle Eastern and Latin American countries in a direction whereby they continued to favor import substitution, large state enterprises, and mass consumption at the expense of mass savings (S. Chan 2001a; Fajnzylber 1990), and their belated turn to market liberalization and export expansion was impeded by greater domestic opposition and was delayed for a longer time than in East Asia. Rich national endowments in natural resources are often described as a disguised curse—the so-called Dutch disease—which promotes complacency and postpones the tough choices that a regime needs to make. This discussion points to one reason for the different strategies of regime survival and legitimacy noted earlier.

There are other reasons. Generally speaking, U.S. policies have supported conservative political stalwarts and economic oligarchs in Latin America and the Middle East, and have helped to sustain the existing political and economic system in these regions. In contrast and in large part due to its efforts to fight Asian communists and contain Chinese influence, Washington promoted political and economic reform by its East Asian allies during the 1950s and 1960s. It encouraged change versus stasis in Taiwan, South Korea, Japan, (p.113) and Southeast Asia. The massive inflow of U.S. assistance provided a source of extraordinary income for some countries and had the same practical effect as oil revenues, providing funds that could enable friendly regimes to relax gunsversus-butter tradeoffs. Except for South Vietnam, South Korea and Taiwan had received most U.S. aid in East Asia. The prospect of this assistance coming to an end, however, gave their regimes a nudge to initiate important policy adjustments away from import substitution starting at different times in the 1960s (e.g.,T. Gold 1986; Jacoby 1966). American financial aid came also in forms other than direct grants that benefitted others in the region. The Korean War and later, the Vietnam War, fostered U.S. spending and demand for various goods and services. In this way, some have argued, Japan's economy got its jump start from the Korean War. Hong Kong, Singapore, Thailand, and Taiwan also benefited from U.S. spending related to the Vietnam War. But again, as these conflicts wound down, East Asian regimes were energized to develop new strategies for economic growth and political control.

In contrast, Middle Eastern countries still continue to receive massive amounts of foreign aid. Solingen (2007, 762) noted that five countries (Israel, Egypt, Jordan, Turkey, and Iraq) received cumulative foreign assistance in an amount that exceeded $8 billion compared to only two in East Asia (South Vietnam and South Korea). Sudan received more aid than Taiwan ($4.4 billion compared to $4 billion). When factoring in Russian aid, Egypt received more foreign assistance between 1956 and 1965 than Israel, and of course, both (plus Iraq after the U.S. invasion) continue to be the leading recipients of American largesse. In addition, Saudi Arabia, Kuwait, and the United Arab Emirates have provided funds to other Middle Eastern countries. This “financial lifeline” lessens incentives to turn to export-led growth, to downsize the state's role in the economy, or to cut back on military spending. Indeed, recurrent military and political conflicts in the region have the effect of ratcheting up and keeping up the latter spending, thereby perpetuating the so-called backlash strategy of elite survival (Solingen 2003)—one that relies on nationalism, state patronage, and mobilization against external foes as a source for regime power and legitimacy. The longer this strategy lasts and its supporters have a chance to entrench themselves, the more difficult it becomes institutionally and politically to alter the existing policy course.

One can imagine another historical difference accounting for the relative reluctance and tardy response of Middle Eastern and even Latin American countries to adjust or abandon their model of economic development and elite survival. Japanese colonialism and Chinese and Korean civil wars have had a greater effect in upsetting and uprooting traditional interest groups—distribution (p.114) coalitions in Mancur Olson's (1965) well-known phraseology—in East Asia than in the Middle East and Latin America (Barrett and Whyte 1982; S. Chan 1993; S. Chan and Clark 1992; Cumings 1981, 1984, 1990; Haggard 1990). Landlords, organized labor, and even nascent capitalists suffered terribly under colonial occupiers, as a result of internecine civil war, and during the subsequent period of authoritarian rule. Precisely because these war-related shocks had weakened civil society, the states in Japan, Taiwan, and South Korea became stronger and were able to override the objections of various vested interests that could or would have otherwise obstructed necessary reforms. If they were not physically eliminated by political enemies (e.g., landlords at the hands of communists), many compradors and corrupt officials literally abandoned the anciens régimes and fled to Hong Kong, Canada, and especially the United States.

Thus, earlier political traumas and the departure of some powerful interests opposed to reform created the necessary political space for policy change. Having suffered a terrible beating administered by their communist opponents, Taipei and Seoul were finally motivated to initiate necessary reforms—simply out of fear of losing out to these opponents again. Land reforms to appease the peasants and macroeconomic stabilization to avert a repeat of hyperinflation exemplified these initiatives. Defeat in World War II and occupation by U.S. forces also enabled reforms to proceed in Japan. One sees here a fortuitous combination of circumstances and incentives (or what Most and Starr, 1989, described as “opportunity” and “willingness”) that produced a new policy orientation.

Precisely because of the perceived strategic importance of Japan, South Korea, and Taiwan, Washington was self-motivated to come to their assistance and to include them in a grand alliance to contain Chinese and Soviet communism. Rivalry with the Soviet Union, desire to secure energy supply, and recurrent Arab-Israeli conflicts had a similar effect in engaging Washington's attention in the Middle East. In contrast, because it enjoys unrivaled primacy in the Western Hemisphere, the United States has not been nearly as interested in urging and promoting social and economic reforms there—or to provide the necessary assistance to facilitate these changes. Whereas it has stood on the side of reform in East Asia, Washington has consistently sided with conservative interests in Latin America and the Middle East. Even though there have been figures such as Fidel Castro and Gamal Abdul Nasser, no one equivalent in stature to Mao Tsetung or Ho Chi-Minh has threatened to bring about region-wide revolutionary change. Notwithstanding the challenges mounted by Castro and Ernesto (Ché) Guevara, the Alliance for Progress did not pro (p.115) vide nearly as much foreign assistance to states in the Western Hemisphere as that received by U.S. allies in East Asia and the Middle East (of course, oil-rich Middle Eastern states did not need U.S. financial assistance).

This remark implies that the threat of a communist revolution and the actual experience of suffering a setback from the communists had a therapeutic effect on various East Asian regimes—even those that did not directly experience large-scale communist insurrections (e.g., Japan, Thailand) and those that successfully met these challenges (e.g., Malaysia, Singapore, Indonesia, the Philippines). Certainly, complacency is not a characterization that comes to mind in reference to Taipei or Seoul. At the same time, despite public rhetoric that might have at one time suggested otherwise, today Taipei and Seoul have little interest in resuming armed conflict to “settle the score” with their respective communist adversary. In contrast, the idea of Nakba—or cataclysm—still pervades the Arab world, motivating repeated attempts to challenge Israel. This sense of seeking a historical reversal was certainly palpable before the Camp David Accord, which eventually produced the Egyptian-Israeli peace treaty. And it continues to thrive in parts of the Middle East, thus providing continuous justification for an emphasis on nationalism and militarization. Nowadays, one never hears of an intention to roll back communism or recover the mainland in East Asia.

There is an even deeper historical origin to East Asia's—or at least Northeast Asia's—emphasis on economic performance. Ever since the times when Western powers came knocking on the doors of these countries, seeking to open them to foreign commerce, national economic revitalization has been quite literally a matter of national security and even national survival. The distinction, prevalent in Anglo-American discourse, between security as a matter of confronting military threats and economics as a matter of maximizing consumption has not been characteristic of strategic thinking in these Asian countries. Rather, the call for “rich country, strong army”—starting with Japan's Meiji Restoration—has been the hallmark of their national security agenda (e.g., Samuels 1994). Economic development has been seen as an inseparable part of and an essential basis for national security. Surely, Chinese and Japanese nationalism in the late 1800s and early 1900s was animated by a burning desire to catch up with the West economically and technologically. Since World War II Japan has given priority to the pursuit of technological and economic capabilities rather than military capabilities (Heginbotham and Samuels 1999). This orientation later also permeated South Korea's and Taiwan's strategic culture and, with Deng Xiaoping's economic reforms, it has also become evident in China's policy agenda. There is a gradual but unmistakable shift in the (p.116) strategic thinking of officials in almost all countries in East Asia (again, with the notable exception of North Korea) whereby economic power is displacing the importance of political and military power (Berger 2003). In one analyst's words (Wan 2003, 302), “economic performance has become a cornerstone of legitimacy for countries in the region,” including those in Southeast Asia (Alagappa 1995).

One final set of comments about those policies or conditions that can lessen the tension between guns and butter, and between current and future consumption, is in order. It pertains to the United States rather than countries in East Asia or the Middle East. Given the dominance of the U.S. dollar as an international currency, Washington has been in a privileged position to control global finance and credit. It has managed to run chronic and heavy deficits in its government budget and trade account by issuing debt denominated in the dollar. This policy has been tantamount to exporting domestic inflation and forcing U.S. trade partners and debtors to subsidize Washington's fiscal extravagance. When it unilaterally decided in 1971 to abandon its commitment to convert dollars into gold, it brought about a massive devaluation of the dollar assets held by foreigners. In the words of Susan Strange (1987, 568–569),

In most countries, whether the balance-of-payments is in surplus or deficit indicates the strength or weakness of its financial position. With the United States, the exact converse can be true. Indeed, to run a persistent deficit for a quarter of a century with impunity indicates not American weakness, but rather American power in the system. To decide one August [1971] morning that dollars can no longer be converted into gold was a progression from exorbitant privilege to super-exorbitant privilege; the U.S. government was exercising the unconstrained right to print money that others could not (save at unacceptable cost) refuse to accept in payment.

This remark was made over twenty years ago. In the wake of the most recent financial crisis that pushed the global economy to the brink of another great depression, Washington's trade partners and debtors are expressing increasing concerns about the future value of their dollar-denominated assets. The Chinese, Japanese, Taiwanese, and Saudis are among the largest creditors to whom the United States owes money. They, the other oil producers, and the European countries are making noises about moving away from the U.S. dollar as the principal medium for settling their international accounts. Whether various proposals to develop a basket of currencies to replace the dollar are practicable or even desirable may be debatable, and in the short term there still appears to be no alternative to the dollar as the world's premier currency. It does seem, however, that the super-exorbitant privilege enjoyed by the United States in getting “a quart out of a pint pot” is not guaranteed to last forever. Huge budget deficits would cause long-term dollar depreciation (p.117) against other currencies, and the weakening dollar would in turn drive commodity prices higher. The price of gold exceeded $1,900 per ounce in August 2011, a huge increase from the days when it was fixed at $35 per ounce. In the six years before 2008, the U.S. dollar lost cumulative averages of 25%–30% against other major currencies (Bergsten et al. 2008, 18). This decline has been further exacerbated in the wake of massive federal deficit spending undertaken to stimulate an ailing economy.

In November 2010, to stimulate a lethargic economy, the U.S. Federal Reserve announced “quantitative easing” to add $600 billion to circulation. This policy had the effect, whether intended or not, of causing dollar devaluation and hurting other countries' trade competitiveness. The infusion of this enormous amount of liquidity also led “hot” money to flow to developing countries, increasing the danger of asset bubbles there. The Fed's announcement was criticized by other countries, with Germany's Finance Minister Wolfgang Schäuble saying, “It doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar” (Wall Street Journal, November 9, 2010, A15). The dollar's decline was more pronounced among Asia Pacific countries, sliding 11.4% against the Japanese yen during the period between January 1 and November 12, 2010; 10.6% against the Thai baht; 9.1% against the Malaysian ringgit; 9.0% against the Australian dollar; and 7.7% against the Singapore dollar (Wall Street Journal, November 15, 2010, C6). It fell by 5.5% against the Taiwan dollar, 3.3% against the South Korean won, and 2.8% against the Chinese yuan. By tying its currency to the dollar, China has built a dam diverting the impact of dollar depreciation to other countries.

Americans have commented, sometimes derisively, on China's so-called socialism with Chinese characteristics. With Washington's massive bailout of private financial institutions and automobile firms (including the “cash for clunkers” program), one begins to hear snickers from the other side of the Pacific about capitalism with American characteristics. That Washington supported the International Monetary Fund's demanding conditionality imposed on Asian countries after their economies were devastated by financial crises in the late 1990s, and that it did little else to alleviate their economic predicament, caused widespread resentment. That the United States refused to take its own medicine after the 2008 financial crisis caused by subprime mortgages aroused additional skepticism and even hostility. The Fed's unilateral resort to “quantitative easing” further undermined credible commitment by a hegemon to refrain from abusing its power (e.g., Ikenberry 2001; Lake 2009).

(p.118) China's political economy and its leaders' policies offer a sharp contrast to those of the United States. China's very high savings rate helped to finance its economic growth. Its savings rate reached an astonishing level of more than half of China's gross domestic product in 2006 (Bergsten et al. 2008, 106). Although at 36% of gross domestic product, China's investment was in the initial decade of its economic reform roughly comparable to that of its East Asian counterparts. This amount exceeded 40% between 2004 and 2007, and its massive anticyclical stimulus program introduced between 2008 and 2009 augured a further surge in this rate. In 2008, China's capital investment reached 44% of its economy, with consumption taking up only 35% (Reich 2009, A25). In contrast to the situation in the United States, China's high savings rate and huge foreign reserves (at an estimated $2.13 trillion in June 2009, and reaching above an estimated $3 trillion in April 2011) meant that Beijing did not have to resort to debt financing in order to pay for its stimulus program of about $600 billion. Whereas about two-thirds of the U.S. economy is estimated to be dependent on consumer spending, this figure has been about half as much for China. Fundamentally, China's economy has focused on investment and production, whereas the U.S. economy has been oriented toward consumption—both public and private. The structural differences between these two economies, and their shifting competitiveness in international trade, account for the fact that the Chinese currency, the rembinbi, appreciated about 18% relative to the U.S. dollar between 2005 and 2008 in nominal terms, and about 11% in real terms.

Fiscal capacity can ease or constrain policy choices with respect to a government's management of the macro economy and its conduct of foreign relations. This capacity, however, is itself the result of prior choices about the relative priorities to be assigned to spending on guns or butter—and more generally, to current consumption or future consumption. The Soviet Union's demise and the decline of other empires preceding it underscore the danger of imperial overstretch (Kennedy 1987)—when a country's economy becomes overextended and decreasingly capable of supporting its expansive and expensive interests abroad.

In November 2009, an intense debate took place within the U.S. administration about whether to authorize deploying an additional 30,000 to 40,000 troops to Afghanistan—a course of action that Barack Obama decided to support in the end. The cost of the Afghan war reached $6.7 billion in June 2009 alone, doubling the previous year's level. The White House's Office of Management and Budget estimated that each additional soldier sent to Afghanistan would cost about $1 million (Entous 2009), thus calling attention to (p.119) the fiscal considerations emphasized in this chapter. On its seventh anniversary (reached on March 19, 2010), the direct cost of the Iraq War had reached $712 billion according to the National Priorities Project. The total direct and indirect long-term cost of this conflict could reach $3 trillion (Stiglitz and Bilmes 2008). Both conflicts (in Iraq and Afghanistan) have been funded by borrowing rather than taxation. They have been supported largely by supplemental appropriation—that is, via the mechanism of special or off-budget funding, outside regular fiscal processes.

Further Discussion

A country's external relations are inevitably influenced by its domestic politics, most particularly by its elite's strategy for survival and legitimacy. In this chapter 1 have argued that a turn to emphasizing economic performance as the cornerstone of this strategy has promoted political cooperation and economic integration in East Asia, contrasting this region with the Middle East. Thus, the absence of overt and energetic balancing behavior noted in the last chapter has its origin in a country's domestic political economy and in the choices its leaders have made about feasible and desirable policies for economic development and political maintenance.

Timing, in the sense of concurrent events (such as the Korean and Vietnam wars), the advantages conferred on the “first mover” (in this instance, the first countries to turn to export-led growth), shortened periods of pursuing import substitution, and the recency of traumatic shocks caused by communist victories (or in Japan's case, defeat in World War II) all contributed to the greater willingness of East Asian regimes to switch to, again albeit at different times and to different extent, an export-led model of economic development. This model's popularity spread as its success compelled even the more reluctant inward-looking countries to make changes, though in some cases belatedly and slowly. In contrast, the “resource curse” produced by both oil revenues and U.S. assistance has had the general effect of retarding or impeding a switch away from nationalism, militarization, and state enterprises as a means of maintaining the ruling elites' political control and economic interests in the Middle East.

The probability of balancing policies occurring is affected by the ruling elites' attitudes toward the guns-versus-butter tradeoffs in their direct and indirect forms. The severity of these tradeoffs is influenced by internal and external circumstances, and different elites have varying propensities to accept or decline these tradeoffs given their policy priorities, strategic inclinations, and feasible alternatives available to them to lessen the impact of these tradeoffs. (p.120) The basic point about tradeoffs, however, is that they force leaders to make choices. Leaders cannot have both guns and butter and maximize both current and future consumption without having to face some constraints at some point. The fact that these constraints exist, albeit to different degrees for different countries, provides an important insight about why balancing policies do not occur even when balance-of-power theorists expect states to undertake them under seemingly propitious circumstances.

Mass political attitudes also have a role in buttressing and affecting regime strategies. They influence economic development and democratization and are in turn influenced by the latter (Inglehart 1977, 1990, 1997). In East Asian countries, “survival” values dominate, expressing concerns about economic insecurity and competitive achievement that are typical of transitional societies in the process of industrializing (Inglehart et al. 2004). Such emphasis motivates economic performance as a national priority. In contrast, in mature industrialized societies, postmaterialist values of self-expression are more prevalent, promoting tolerance for diversity and respect for human rights. Because economic development is likely to produce a culture shift toward postmaterialist values, popular attitudes in East Asia should gradually become more similar to those in postindustrial societies, as already seen in Japan.

To repeat the central point of this discussion, states' external relations are embedded in their governing elites' dominant strategy for regime survival and leadership legitimacy, and to the extent that this strategy emphasizes economic performance based on export expansion, global access, private entrepreneurship, and conservative fiscal and monetary policies, they tend to eschew moves in line with balance-of-power expectations. If a region is populated by many like-minded regimes with such an internationalist outlook emphasizing economic growth as a source of political legitimacy, we are likely to observe regional interactions approximating a situation of complex interdependence (Keohane and Nye 1977). Faced with their declining competitiveness, laggards are often motivated to join the winners, as exemplified by Mikhail Gorbachev's perestroika and glasnost, and Deng Xiaoping's liberalization and opening of the Chinese economy.

It is an ironic but underanalyzed phenomenon that authoritarian regimes may be in a stronger political position to undertake such volte-face than democracies with their entrenched distribution coalitions (Olson 1965). Scholars such as Samuel Huntington (1968) and S. Martin Lipset (1963) have written extensively about political institutionalization and the importance of timing and sequencing in a country's mass mobilization and economic development. The recent history of Northeast Asia's political economies points to authori (p.121) tarian regimes' emphasis on development before economic distribution and political participation. In contrast, in Latin America mass mobilization has preceded economic development, thereby contributing to more intense political conflicts over distribution and producing the earlier phenomenon of military intervention and soft authoritarianism intended to suppress a population that has already been mobilized (Collier 1979; O'Donnell 1979).

It is also worth noting that once a contagion emphasizing economic development has taken effect, a virtuous cycle tends to gather further momentum. Immersion in a fast-growing and expanded free(r)-trade zone provides a stimulus for faster economic growth and further integration (Olson 1982). Thus, we have the seeds of self-sustaining and self-reinforcing regional forces promoting further economic and political cooperation, moving away from Hobbesian dynamics characteristic of a world of anarchy and self-help. At the same time, the Soviet Union's demise serves as a dire warning against imperial overstretch and as a strong reminder to those who pay attention: “by the end of the twentieth century the increased significance of science and rapidly changing technology as determinants of relative power, including military clout, mean that security is better served by a strategy that facilitates economic development rather than one that seeks to accumulate foreign territory, resources, and population” (Goldstein 2003a, 62).

In contrast to the prevailing East Asian strategic conception emphasizing economic growth and power, the United States has followed a more realpolitik approach, giving primacy to political influence and military capabilities. According to the Stockholm International Peace Research Institute, the United States accounted for 46% of defense expenditures made by all the countries in the world in 2006, an amount that was almost eleven times larger than China's defense expenditures (Brooks and Wohlforth 2008, 29). It is odd and even ironic that having accounted for nearly half of the world's defense expenditures, the United States continues to be concerned about national security defined primarily in terms of military power. When Americans speak of keeping a balance of power, they probably have in mind the maintenance of an actual imbalance of power in America's favor. As Christopher Layne (2009a, 129) remarked, “Because of geography, and military capabilities, [the United States] has enjoyed—and even after 9/11 still does (or could) enjoy—something close to absolute security. To put it a bit differently, even if, as a general proposition, security in the international system often is scarce, for the United States it has been abundant.” Layne (2009a, 130) continued, “From an objective standpoint the American homeland essentially has been unthreatened existentially” (emphasis in the original).

(p.122) Reflecting an opposite obsession, even after they have compiled huge foreign reserves, East Asian countries continue to be obsessed with savings and exports. This divergence can be easily noticed in U.S. policy and academic discourse on balance of power, with a focus on armament or alignment to deter or contain other countries (including China)—without any sense of inconsistency, especially for those American realists who insist on intention-free analysis, that it is the United States that should be the source of others' balancing concerns if military capabilities are what is important. At the same time, East Asian governments and firms defend their market shares and currency pegs as if that is the most important thing for their national security, even if objectively speaking their industries and currencies have already become very competitive by global standards. East Asian economic conduct has caused a backlash in other countries, including the United States, because of perceptions of their mercantilist agenda. Conversely, U.S. application of “muscular” policies in places such as Iraq, Afghanistan, and Kosovo has aroused objections and concerns due to foreigners' misgivings about Washington's hegemonic ambitions. Robert Pape (2005, 9) remarked, “the Bush strategy of aggressive unilateralism is changing the United States' long-enjoyed reputation for benign intent and giving other major powers reason to fear its power.” The United States has become more unpopular abroad and more isolated in multilateral forums such as the United Nations (e.g., Bobrow 2008a; Katzenstein and Keohane 2007; Kohut and Stokes 2006; Voeten 2004).

The tension between the two strategic conceptions operating on opposite sides of the Pacific Ocean is a concern because it increasingly erodes the basis of the historical bargain struck previously by the United States and its Asian allies. Since the end of World War II, the latter have accepted political deference to the United States and its military dominance in exchange for easy access to the U.S. market and a chronic U.S. trade imbalance. The security agendas of countries on both sides of this relationship have been predicated on this linkage (Gilpin 2000). With the end of the Cold War and growth of massive U.S. trade and budget deficits, continued dollar depreciation, and such heavy indebtedness that American consumers are much less able to buy foreign imports, this link is being severely tested by the recession of 2008–2009. John Ikenberry and Michael Mastanduno (2003, 431) remarked that “the incentives for Asian trading states to embrace a U.S.-centered security order are increased to the extent U.S. officials tolerate [trade] deficits.” Naturally, the reverse can also be true. Asian states' incentives are decreased to the extent that the United States becomes more protectionist and their dollar-denominated assets become increasingly devalued—and if China displaces the United States, as it (p.123) has already done for some East Asian countries, as their most important export market and investment destination.

One may anticipate an argument being made to the effect that precisely because the United States protected them militarily, East Asian countries were able to give priority to their economic performance. A more extended form of this argument was given by former U.S. Secretary of Defense William Perry:

Some critics argue that our military presence and security alliances are relics of the Cold War. The most extreme among them say that we should pull back our forces from the region, terminate our agreements that provide security for our allies and allow normal balance-of-power politics to fill the vacuum. This is a seductive line of thought, but it has dangerous consequences. For years, the U.S. provided a secure environment which allowed the Asian Pacific nations to build their economies rather than their national defense structures … If we were to withdraw our military forces from the region, this would all change. Countries would be forced to rethink their needs, with building up defense structures at or near the top of the list. Rapid growth of military structures, plus historical animosities, would be a volatile mix that could quickly destabilize the region … dramatically increasing the risk of regional conflict (quoted in Layne 2009a, 130).

There is merit to this argument when applied to the initial turn by Japan, Taiwan, and South Korea to emphasizing economic performance and pursuing an export-led growth model. Surely, these countries' defense burdens would have been much heavier, even to the point of crushing their economies, had it not been for the subsidies they received from Washington, both directly and indirectly. Moreover, the U.S. market was certainly critical for these countries' export-based growth strategy. U.S. military protection did not have a similar salutary effect in changing Middle Eastern countries' model of political economy, however. Moreover, even though Latin American countries have faced a more benign external security environment, they did not turn to a strategy of elite legitimacy pivoting on economic development and to an export-led growth model until considerably after East Asian countries had made these choices. Finally, as a general empirical proposition, the argument that U.S. military protection enabled East Asians to give economic performance top priority needs to be tempered because this emphasis became contagious only after the height of U.S. military involvement in the 1960s. China's economic liberalization followed a period of U.S. military retrenchment after the Vietnam War, and the region-wide embrace of economic growth and interdependence really took off after the end of the Cold War. These remarks do not deny that the U.S. connection was vital for the initial switch to export-led growth by East Asia's earlier NICs. While not insignificant, this U.S. role has become less important over time.

(p.124) The U.S. security blanket provided a military protection that lessened the impact of guns-versus-butter tradeoffs for many East Asian countries, and Washington's economic assistance and ideological prodding helped to pave the way for Japan's, South Korea's and Taiwan's initial turn to an export-led approach to economic development. Sino-American rapprochement was also not irrelevant to China's changing perceptions of the Soviet threat and Deng Xiaoping's market reforms. Since these countries' initial turn to pivot regime legitimacy on economic performance, considerable power shifts in the region and occasional U.S. military retrenchment have not altered East Asian elites' fundamental policy agenda and orientation. Once this pivoting on economic performance has had a chance to embed itself in their domestic political economies, it becomes more difficult to reverse this emphasis due to the effects of distribution coalitions and institutional “stickiness.” This entrenchment signifies a domestic pact that favors external cooperation and thus sends a reassuring signal to other states. When these pacts become pervasive across countries in the region, they communicate credible commitment (even if unwritten) all around to eschew balance-of-power dynamics. Significantly, in the situation just described, foreigners can be more reassured than otherwise that balancing policies (emphasizing, as they traditionally do, armament and alliances) are less necessary, because domestic interest groups would be more effectively restraining their respective states from aggression and aggrandizement.

That Taiwan has continued its outward economic orientation and its process of political liberalization despite Washington's decision to terminate its defense treaty with the island offers a powerful indication that once an internationally oriented coalition favoring economic performance has gained power and has had a chance to consolidate itself, a reversal of policy course favoring a garrison state or military–industrial complex becomes much less likely to occur. Similarly, as will be discussed in Chapter 5, Seoul's basic policy emphasizing economic and political opening has not wavered despite fluctuations in Pyongyang's bellicosity and despite its tendency to resort to occasional saber rattling. However, institutional stasis and policy inertia can also work in the opposite direction. As demonstrated by the Soviet Union's experience, a state can continue to pursue its ostensible security imperatives, favoring guns over butter, for a long time, even after the limitations and costs of such a course of action have become quite evident. The political gridlock characterizing Washington's debate on increasing the national debt ceiling in August 2011 and the subsequent downgrading of the U.S. credit rating by Standard and Poor's again attest to the difficulty of reversing policies even in the face of a looming crisis.