Page 159 - Global Political Economy_Understanding The International Economic Order

CHA PTER S IX
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them invariably intensifies for several reasons. In the first place, the
rise of a new economic power decreases the relative economic share
and international status of the dominant economy. A second and
closely related effect is that this shift in economic wealth and techno-
logical capability causes an economy experiencing relative decline to
be concerned over its national security. And, thirdly, as the rising
power closes the economic/technological gap, it competes away the
monopoly rents or superprofits of the more advanced economy. Un-
der these circumstances, it is not surprising that declining powers
have made scapegoats of rising powers and have charged that the
latter have played the game unfairly; this happened in the late 1980s
and early 1990s when Japan seemed to be displacing the United States
as the world’s dominant economic power.
There are several alternative strategies available to a declining eco-
nomic power. The most drastic recourse is to use military power to
remove the economic challenge and security threat posed by the rising
power; fortunately, utilization of this option is rare and usually the
result of serious political conflicts rather than of merely economic
tensions. A second option is a retreat into trade protection (even
though protectionism will most likely accelerate economic decline) or
an attempt to weaken the rising economy. The third and most desir-
able response available to the challenged country is to take policy
initiatives designed to rejuvenate its own flagging economy. This
strategy of economic adjustment can mean letting the market work
and/or implementing judicious interventionist policies to shift an
economy away from those industries and economic activities in which
it is losing comparative advantage and toward those in which it is
gaining advantage. Frequently, a challenged economy pursues a com-
bination of these strategies.
As the new theories suggest, a government can pursue specific mac-
roeconomic and microeconomic policies to strengthen its economy.
It can, for example, devalue its currency; although this choice may
temporarily increase the competitiveness of the economy, it is at best
a short-term strategy. A better strategy would be to take steps to
increase the productivity of the economy. This can be done through
improving market functioning. However, as the theory of strategic
trade and the importance of technology suggest, the government can
also take more direct actions. It is quite clear, for example, that gov-

31
Staffan Burnenstam Linder, The Pacific Century: Economic and Political Conse-
quences of Asian-Pacific Dynamism (Stanford: Stanford University Press, 1986),
90–94.
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