Jonathan Kirshner. American Power after the Financial Crisis. Cornell Studies in Money Series. Ithaca: Cornell University Press, 2014. 232 pp. $27.95 (cloth), ISBN 978-0-8014-5099-0.
Reviewed by Kit Waterman (University of Exeter)
Published on H-Diplo (August, 2015)
Commissioned by Seth Offenbach
Jonathan Kirshner contributes a timely and incisive analysis to the debate on American relative decline. While American Power after the Financial Crisis comprehensively deals with the fallout from the great recession in 2008, its real contribution is its placement of the crisis within its broader historical context. In addressing what he describes as the end of the “second US postwar order,” Kirshner traces his argument through the liberalization process that came to define it (p. 2). Juxtaposing it with the first US postwar order, “a Keynesian-influenced embedded liberal order,” he derides the second order as “market fundamentalist,” based on the “assumption that markets (even markets for financial assets) always know best” (p. 37). The procedural opening up of global financial markets and the consequent effects this came to have on America’s influence and reputation in the world are therefore the primary targets of his analysis.
Kirshner’s main argument is that the global financial crisis will increasingly be seen as an inflection point in American relative decline, ushering in “a new heterogeneity of thinking” about how best to organize and run the global economy (p. 2). One of the key analytical workhorses of his analysis is “hegemonic socialization,” a conceptual device borrowed from John Ikenberry and Charles Kupchan (p. 114). In essence, it is power that the United States derives from foreign nations “buying into” the American model, simultaneously legitimizing and reinforcing the attractiveness of US order. The gradual delegitimization of America’s management of the global economy, and the steady erosion of America’s capacity to “socialize” other states, takes us through the East Asian financial crisis in the late nineties, where Kirshner recounts the unexpected, and rather disastrous, collapse in the Asian 5 economies: Thailand, South Korea, Malaysia, Indonesia, and the Philippines. Of particular importance is the fact that under the advice and pressure of American-led international institutions, such as the International Monetary Fund (IMF), the Asian 5 spent much of the time running up to the crisis dismantling capital controls. Indeed, as he recalls, formal steps were taken “to make the promotion of capital account liberalization a specific purpose of the IMF” with proposals to reform the IMF’s charter tabled in 1997 (p. 66).
In this sense, the East Asian crisis is central to his narrative insofar as it marks the first major fracture in American legitimacy, particularly what appeared to be a harsh, if not opportunistic, crisis response from the IMF and the United States. With that said, Kirshner suggests that “the Asian crisis did not undermine US power—in the short run, it enhanced it”—but rather that “the ideational implications were profound” (p. 61). In particular, he argues that America’s “new order was met with skepticism in much of the rest of the world and, in much of Asia, with resentment” (p. 80). Just as important, such skepticism also dovetailed with another development: the rapid material rise of the developing nations, particularly China. To Kirshner’s mind, the dual effects of diminishing legitimacy and the erosion of material primacy work in tandem to undermine American power and influence globally. Even before the financial crisis, he argues, “trends at home and abroad were already suggestive of new macroeconomic constraints on American power” and “the financial crisis of 2007-8 was an inflection point that accelerated those underlying trends” (p. 157). In short, America was and continues to be declining relatively in material terms, yet also is increasingly subject to constraints on its ideational power. The crisis prompted a wholesale rethinking of global, if not also national, economic governance.
A recurrent theme in the book is, unsurprisingly, China. Always a cautious recipient of American economic wisdom, it grew increasingly critical and hostile to many of the ideas underlying neoliberalism after the Asian crisis. Most important, of course, it has also experienced sustained and exceptional economic growth for over thirty years. Indeed, at the end of the Cold War the Chinese economy was only 7 percent of the size of America’s, whereas by 2013 it was 56 percent. This, in itself, is emblematic of a relative decline in the United States’ material position, yet, as Kirshner continues, it has been further compounded by an ideational estrangement. The calcification of this estrangement took a significant inflection point after the financial crisis, not only because the system clearly exhibited some major instabilities but, and relatedly, also due to a significant sense of “buyer’s remorse.” China was left holding over a trillion dollars of US assets when the crisis hit, unsure of their future value. Kirshner, in keeping with many other observers, highlights the comments then governor of the People’s Bank of China, Zhou Xiochuan, made in early 2009 in his speech entitled “Reform the International Monetary System” as symptomatic of the views and intentions of the Chinese state. In essence, the document called for a de-dollarization of the international monetary system, suggesting the gradual movement toward a “super-sovereign” reserve currency which would help fix the problems he believed were associated with a national currency acting as international money.
It is within this context that the internationalization of the Chinese currency, the Renminbi (RMB), is introduced. Kirshner argues that China has “the desire for some insulation from globalized financial markets, and a preference to foster an ideological alternative to the American model” (p. 122), which he believes it is beginning to realize through the gradual encouragement of RMB usage abroad. He is correct to point out, for instance, that China has increasingly begun to widen the international usage of the RMB, including opening up a number of swap facilities with other central banks, as well as authorizing limited RMB clearing in London and Singapore. However, despite such efforts at internationalization, RMB foreign exchange turnover sat at 2.4 percent of the global total as of early 2014. Yet the potential, which is the object of Kirshner’s analysis, is more clear: 90 percent of Chinese trade is currently settled in US dollars, leaving ample room for RMB growth. While ideological hostility, not to mention ambitions for greater influence, is a significant driver for this process, the obvious roadblock to this line of argument is the Chinese political economy itself.
In keeping with other mercantilist economic models, the Chinese economy has been sustained by considerable state-directed credit allocation, particularly after the financial crisis. The state banks, for instance, are often ordered to finance Chinese companies and local government, even those that are deemed insolvent. Liberalizing financial markets, especially through the requisite opening of its capital account, so as to support the transition of the RMB to a reserve currency, would contribute to significantly undermine this mechanism. It would entail removing control of the domestic financial system, and the value of the RMB, from the Chinese state and placing it in the hands of the market. This would definitively circumscribe China’s capacity to intervene in its exchange rate, one of the pillars of its mercantilist model for the last thirty years. Yet it would also strip the Communist Party of key components of its coercive power, with the state apparatus unable to keep funds, and therefore wealth, from exiting the country. While it has recently ceased intervention (partially because persistent capital outflows are inducing the same effect), there would be strong incentives to revert back to intervention in the case of a “hard landing” of its economy. Would they want to give up such flexibility?
The other notable omission in American Power after the Financial Crisis is the absence of geostrategic considerations when contemplating future developments in the maturation of the international political economy. There is no mention, for instance, of the strategic motivations driving the Trans-Pacific Partnership negotiations. Nor, therefore, is there much comment on how “heterogeneity” may be undermined, or perhaps reinforced, by concerns over international security. There is a sizeable literature on the manner in which the United States has used its military preponderance to extract and incentivize concessions from states favoring its strategic presence in their neighborhood, but little elaboration on how this may come into play in the future. While until quite recently the global strategic environment has been rather benign, growing tensions in the Ukraine and East Asia are beginning to pull states back toward America’s security umbrella. Such developments thus pose significant questions for any analysis of American power to consider.
With that said, an underutilized component of Kirshner’s argument, and an understated feature of Chinese power more broadly, is the rapid increase in Chinese imports from the rest of the world. In particular, “China is now the most important export market for the key US military allies in Asia: Japan, South Korea, and Australia” (p. 144). This suggests that “in international institutions and bilateral relations the United States, to its consternation, will find other states increasingly sensitive to how outcomes and agreements will affect their relations with China” (p. 145). The importance of these developments is hard to overstate, yet the description and analysis are allocated only a page and a half in the entire book. This is surprising because, in many ways, these insights into growing Chinese structural power in the global economy are far more profound than the work on monetary affairs, not to mention far less circumscribed by potential caveats and assumptions. Who would doubt, for instance, that Chinese imports will grow as its wealth increases?
The starkest element of Kirshner’s work, however, is the theoretical and analytical influences underlying it. Indeed, as much as American Power after the Financial Crisis is an argument about declining American power, it is also a-not-so-thinly veiled critique on the state of contemporary International Relations (IR) scholarship. Formally schooled in economics and IR, Kirshner is critical of much of modern macroeconomics. His critique can be distilled into a charge of arrogance, aimed at exposing the pretense that economic uncertainty can be ignored, relabeled as “risk,” and quantified. Driving this is, as he describes it, a “KKM perspective,” the scholarly lineage of John Maynard Keynes, Charles Kindleberger, and Hyman Minsky (p. 96). All individual contributors of classic works in economic history, their collective legacy has been to develop an intellectual skepticism toward unrestrained financial markets and notions of equilibria in economics. Indeed, in Manias, Panics, and Crashes (1978), Kindleberger was among the first scholars to highlight the systematic components inherent in most financial crises, whereas Minsky’s Stabilizing an Unstable Economy (1986) convincingly argued that deregulated financial markets were inherently, that is to say to endogenously, unstable.
The connection this has with IR theory does, at first, seem abstract. However, there are very clear linkages with classical realism, a perspective, Kirshner espouses elsewhere. Classical realism, in keeping with the KKM perspective, entertains the notion that “structure matters but is irretrievably indeterminate” while simultaneously rejecting “hyperrationalism,” “which is characterized by an extremely strict (and misguided) definition of rationality that it imposes on the actors whose behaviour it aims to model.” More important, however, classical realists are substantially less deterministic about their analyses than other IR scholars, not to mention social scientists more broadly. Indeed, there is often a modesty in classical realist work, a theme that is also replete throughout American Power after the Financial Crisis. Kirshner spends much time discussing the limitations of his assumptions, particularly how different trends and processes may come to alter the argument he has made. Yet the arguments he presents were not deterministic in the first instance; in particular, there was no firm prediction placed on when, or how, or to what extent the American order will be eroded. Indeed, Kirshner expresses to “be fundamentally skeptical of the entire predictive enterprise in the social sciences” (p. 164). Rather it is the logic of his reasoning in its broader sense that is emphasized.
The takeaway conclusion of his work, therefore, is to impress on the reader how the post-financial crisis world will begin to “bear less of an American stamp” in a world in which the United States will find its “relative power and influence eroded” (p. 172). American Power after the Financial Crisis makes a strong case.
. International Monetary Fund, “World Economic Outlook Database, April 2015,” Data and Statistics, http://www.imf.org/external/pubs/ft/weo/2015/01/weodata/index.aspx (gross domestic product, current prices in US dollars).
. Zhou Xiochuan, “Reform the International Monetary System,” Bank for International Settlements, March 23, 2009, http://www.bis.org/review/r090402c.pdf.
. Deutsche Bank, “At the Centre of RMB Internationalisation: A Brief Guide to Offshore RMB,” June 2014, https://www.db.com/en/media/At-the-centre-of-Renminbi-internationalisation--A-brief-guide-to-offshore-RMB.pdf.
. White Paper, SWIFT, “RMB Internationalisation: Implication for the Global Financial Industry,” September 2011, http://www.swift.com/resources/documents/RMB_White_paper_internationalisation.pdf.
. For a recent example, see State Council, the People’s Republic of China, “State Council Backs Funding for Ongoing Local Projects” May 15, 2015, http://english.gov.cn/policies/latest_releases/2015/05/15/content_281475108010150.htm.
. Jonathan Kirshner, “The Economic Sins of Modern IR Theory and the Classical Realist Alternative,” World Politics 67, no. 1 (2015): 156.
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