Nothing describes the evolution of the Westphalian system of ‘nation states’ that humanity has adopted better than Thucydides’ pithy observation in his Melian Dialogue.
This system is governed not by rules or by any manner of a ‘global rules-based order,’ but by an oligarchy of ‘Master States’ that, by dint of their dominance of military and economic affairs, create and impose rules as they deem fit in their own interests.
While military strength is important, the entry ticket to this elite club of ‘Master Nations’ is governed by economic influence. This means that less developed countries face an unequal global economic system where the rules are stacked against them and in favour of a few powerful states that shape it to their own advantage.
But every once in a while, geopolitical chaos roils this oligarchy and offers other countries a ladder to climb out of their pit of economic weakness and join the top ranks. The fundamental problem that a poor country faces is a lack of resources (capital, raw material, technology and others) that can be used for production, coupled with weak access to markets where these goods can be sold freely to generate surpluses.
The old Master States of Europe, as founding members of an oligarchy, solved their resource and market problem through geopolitical chaos. They led a wave of pillage, plunder and conquest in Asia, Africa and the ‘new world’ to generate surpluses that enriched and empowered them.
The British fine-tuned this formula, with their colonies serving as sources of cheap raw material and labour and also as large markets for their products. While early industrial-age innovation played a role in Britain’s success, the Raj helped it consolidate its authority as the world’s reigning hegemon.
Countries that came late to the global imperial project have used more innovative geopolitical operations to succeed. America, for instance, could not resort to empire building because of its inherent inconsistency with its Constitution and the fact that most of the world had already been colonized by European powers, but it had no qualms using slavery to cover its labour shortage.
It also used geopolitical chaos in the ‘old world’ of Europe to brazenly steal European technology while protecting its manufacturers with high tariff walls. The new world began to attract European and British capital for infrastructure development.
The English, who seemed to have developed a misguided sense of overconfidence and had pivoted to free trade, perhaps on the assumption that their manufacturing might could not be challenged, looked on indulgently as the US came up with its own factory innovations for mass production, which sent it barrelling towards success and power.
This model would be copied to some extent by another power. But more on that later.
While America was well on its way to joining this elite club by the start of the 20th century, it was the geopolitical upheaval of World War II that put America at the head of the top table. The US economy generated massive surpluses by supplying war materiel to its allies and storming the war-front after Japan’s bombing of its Pearl Harbour.
By the end of the war, its ally France was shattered and Britain was economically exhausted. No longer able to uphold the value of the sterling, a weary Britain passed the crown to the US, whose entry had turned the war’s tide against Germany and Japan.
This made the US the world’s top power, while the arrangements forged at the 1944 Bretton Woods huddle affirmed the dollar’s new status as the world’s principal trade currency.
The post-war rise of Germany and Japan can be attributed partly to the war’s repercussions. The US generously funded a Marshall Plan to rebuild Europe and West Germany served as the West’s bulwark against Soviet expansionism as the Cold War got underway.
To keep Japan under its influence, the US not only took charge of its security, but helped the Japanese economy export its way to prosperity. The US sourced massively from Japan during the Korean war and continued to do so afterwards, endowing Japan with capital, technology and management know-how that formed the basis of the latter’s success (though Japan made a few factory innovations of its own).
The US also lobbied to get Japanese exports market access throughout the world. While Britain and others refused to give Japanese exports access and ‘most favoured nation’ status, the US opened its own market to Japanese products. The rest is history.
The rise of ‘Master States’ clearly owes as much to geopolitics as it does to other factors.
The economic success of almost every such state so far has in large part been driven by its ability to harness geopolitical chaos in its favour and obtain favourable terms.
In the concluding part of this column, we will look at some other such economic ‘miracles’ and lessons for Indian policymakers.
The author is a director at Arrjavv and a ‘probabilist’ who researches and writes on behavioural finance and economics. Her X handle is @DivaJain2
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