Ten Theses on Political Economy and Foreign Policy

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Alexei Nikolsky, Sputnik, Kremlin Pool Photo via AP

The consensus in American foreign policy over the last 40 years is under increasing strain. Despite important disagreements, both neoconservatives and liberal internationalists supported an aggressive role for America abroad with respect to democracy promotion and economic liberalization. But between the Afghanistan and Iraq wars, the global financial crash, and widening inequality, the consensus positions have become less and less viable. Foreign-policy analysts are now shifting their focus to the return of great-power politics, as countries like China and Russia flex their muscles.

Both the old consensus positions and the new emphasis on the return of great-power politics suffer from not taking political economy seriously enough. A political-economy approach holds that economics and politics are inseparable. Politics structures the economy and is in turn shaped by economic relationships. Liberal internationalists and neoconservatives considered economics in their foreign policies, but they adopted a rosy and highly unrealistic view that democracy and neoliberal economics would go together and produce flourishing, equitable societies. Today's commentators on the rise of authoritarianism and the return of great-power confrontation, in contrast, simply have little to say about economics in their analyses.

These ten theses are an attempt to take seriously political economy in thinking generally about contemporary foreign policy. They are stylized for emphasis and effect, leaving out the inevitable qualifications and nuances that attend specific situations. But they illuminate some central principles and implications of approaching politics and economics as inseparable. Ultimately, we have to understand both, their interplay, and their particular configurations if we are to understand the world as it is—and as it could be.

(1) Economic power is political power. This is well understood in international affairs: A country's economic power affects its geopolitical power. This is also true in domestic affairs, where the economic power of an individual or interest group can be political power.

(2) Economic power has opposite consequences for democracies in the domestic and foreign-policy realms. Domestically, concentrated economic power threatens democracy, as private individuals or entities can capture government, transforming it into an oligarchy. As a result, democracies must break up or regulate economic power internally. In foreign policy, however, the nation as a whole needs significant economic power to protect democracy from adversaries who would use their economic and political power to oppress the country or undermine democracy. As a result, democracies must gain and project economic power externally. This principle falls short of being a paradox, but its implications are clear: Democracies need economic power, but they cannot rely on barely regulated or unregulated private corporations (“national champions”), whose economic power can undermine democracy.

(3)

What's good for big corporations is not necessarily good for democracy.

Domestically, concentrated corporate power can undermine democracy; it therefore needs to be broken up or tamed through regulation. Internationally, corporations may kowtow to foreign oligarchs and autocrats to gain market access—at once strengthening those regimes, giving them access to the corporation and its knowledge, and introducing a vector for leverage and influence. As corporations become more global, the pursuit of profits for shareholders might even push them to advocate for the interests of foreign states over democracy.

(4) Nationalist oligarchies, countries like China and Russia that are also called state capitalist or authoritarian capitalist regimes, have as their central feature the fusion of economic and political power. Their economic entities should generally be understood as political, either arms of the state or infected by the state’s political influence. These regimes face no opposition between domestic and foreign economic power: Economically powerful corporations strengthen the state, and the state strengthens them. In foreign policy, economic power and political power are aligned.

(5) International economic institutions will only be good for democracy if they do not undermine economic democracy. If international institutions adopt rules that concentrate economic power and deepen inequality, this can undermine political democracy at home. If international economic institutions are captured by economic elites, their policies can undermine democracies around the world. International institutions therefore cannot be defended uncritically; the substance of their policies is as important as their existence.

(6) International engagement can lead to “reverse entanglement,” which, in other forms, has been called “weaponized interdependence” or “geoeconomics.” Many think that global integration will lead to economic and political liberalization. But when nationalist oligarchies are integrated into international economic institutions or become economically integrated with democracies, they can instead gain power to coerce countries and achieve their geopolitical aims. When a state's corporate entities are arms of the state, economic integration gives the state leverage—pathways for the exercise of political power. By seeking to entangle nationalist oligarchies, democracies can themselves become ensnared. Enthusiasts of China's entry into the WTO wishfully predicted that membership would cause China to become more like the West. But instead, the West has become increasingly dependent on China.

(7) Democracies should engage with each other economically, but they must combine liberalization with robust policies to maintain political and economic democracy at home. Integration between democracies is critical because it builds their combined international economic power vis-à-vis that of nationalist oligarchies. But integration must simultaneously prevent the concentration of economic power at home. International engagement must focus as much on rebuilding unions, enforcing antitrust laws, adopting smart regulations, closing tax havens, and restricting the money power from politics as it does on lowering barriers to trade. Without such policies, the pursuit of international economic power will undermine democracy at home.

(8) Democracies integrating economically with powerful nationalist oligarchies are in great danger, unless they are careful. Economic integration gives nationalist oligarchies leverage to pressure, blackmail, or hold hostage democracies and their major corporations, and can lead to corruption seeping into and undermining democracy. Democracies should therefore begin to engage in selective disentanglement to protect themselves from dependence on these countries.

(9) Democracies entangled with nationalist oligarchies must also diversify their economic relationships, seeking out opportunities to build bridges with other democracies, in order to counter the political influence nationalist oligarchies might have—and to strengthen their resilience in the event of economic conflict. This means deepening interdependence with other democracies, strengthening democratic alliances, and helping allies disentangle themselves from nationalist oligarchies as well.

(10) Democracies must have a development policy, an internal industrial and innovation policy. Development makes a country independent and increases resilience in the face of economic threats, reducing the leverage that nationalist oligarchies might have in the future to pressure democracies. A development policy must be active and aggressive, building national economic power throughout the country—it cannot be implemented through policies that focus on lightly regulated or unregulated national champions. Democracy requires dispersing and restricting economic power internally—so too must its strategy for development.

Economic power is exercised within and across borders, and it acts as a vector for political power and influence. It is and has always been a threat to the existence of democracy. The post–Cold War project of promoting neoliberal capitalism deepened this danger by eroding democratic controls on economic power. It cannot be the path forward, even if modestly reformed. Nor does Cold War containment provide an off-the-shelf strategy: In that era, the Soviet Union was not integrated into the global trading system. What is needed now is a different way of thinking about foreign policy, one that both integrates politics and economics seamlessly and is hard-headed about the uses and abuses of economic power.