Finance, Information and Power Author(s): Susan Strange Reviewed work(s): Source: Review of International Studies, Vol.

16, No. 3 (Jul., 1990), pp. 259-274 Published by: Cambridge University Press Stable URL: http://www.jstor.org/stable/20097226 . Accessed: 07/03/2012 17:10
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Review

of International

Studies

(1990),

16, 259-274

Printed

in Great

Britain

Finance,
SUSAN

information
STRANGE

and power

The point of this article can be quickly made: it is just that there is a big difference between the financial power exercised by the United States and that exercised by is partly explained by the role of information in the Japan, and that the difference structure. It also happens financial that this difference is a rather good global illustration of the difference between structural power and relational power. What I am comparing is the structural power to extend or restrict the range of options open to others which has been, and still is, exercised by the United States in the postwar decades, in this case specifically in the field of finance, with the relational which Japan exercises in the same field of finance by virtue of its position as the power world's major creditor country and aid donor. to the system by which credit is created, By the field of finance, I refer particularly and sold and by which the direction and use of capital is determined. bought it is hard to separate this entirely from what might be called the field of Although account of the key role in is, the exchange rates between currencies?on money?that both fields played by the rate of interest, I shall try to leave exchange rates aside as to my argument, although broadly supportive of it. unnecessary The first step in the argument will be an analytical description of the present global financial structure as it has developed over the past twenty or thirty years, and of the part played in recent changes by changes in communication systems together with the recent changes have shifted options available to ways in which these comparatively borrowers and lenders, to financial operators and to governments. The second step will be a backward-looking account of how it became like that and of the con in terms of the distribution of structural power in and over the global sequences financial system. A third part will consider the financial position of Japan in the system and the extent of its power to influence others?essentially, inmy opinion, a kind of relational combined with some specific vulnerabilities to exogeneous in the power changes system. The conclusion the foregoing analysis. merely points up the differences in power to be deduced from

The financial

structure described

It is not just, as Gilpin says, that 'international the world economy'.1 It ismore than that. The
1 R. Gilpin, The Political Economy of International Relations

finance

is a major

integration
(1987),

force in integrating of the world economy has

p. 206.

259

260

Susan Strange through Instead

the bringing together of national financial systems into one of a series of national financial linked by a few systems global across national and selling credit transnational^, frontiers and operators buying across the exchanges to another) and by a few from one national currency (i.e. so linked that they respond to each national asset markets (e.g. stock exchanges) the national markets, other, we now have a global system in which physically function as if they were one. And this global financial separated by distance, actually to the various national financial systems, system, instead of being a minor appendage been achieved system. is now both larger than any of them and more influential. The balance, in short, has shifted from being a predominantly state-based system with some transnational links to being a predominantly with some local differences. global system The unification of national financial systems into one global system has had several for the customers, there are the consequences consequences. important Firstly, want to put funds into the system (i.e. sell) or whether whether they they want to want to exchange one asset or liability for borrow from it (i.e. buy), or whether they another (e.g. debt/equity for the banks and swops). Then there are the consequences in the financial markets. other kinds of operators there are the And, finally, on whom the responsibility rests for managing for the governments the consequences national economy, regulating the money supply to it and thus to the banks and other whether private or public. To identify in each case what institutions, credit-creating are is quite a good way of describing these consequences the changes in the financial
structure.

savers who want to deposit money in a bank, these changes have offered more to escape some of the restrictions on the wider choice and the opportunity options?a rewards for saving (i.e. the price for deposits, otherwise known as the rate of interest). to savers in countries like the United This broadening of options applied particularly like the Fed's Regulation Q, were imposed during States where very strict regulations, the 1930s as a means of protecting the financial system against any tendency by the to invest long-term, banks to use short-term deposits thus reducing their potential liquidity and even perhaps their solvency in any crisis. Escape from these restrictive regulations came about first through the licensing of the Eurodollar market outside For other offshore Eurocurrency States?and and markets; subsequently secondly, through the effects of inflation on the banks, leading to the invention of new methods of attracting depositors with higher interest rates sufficient to compensate for the eroding effects of inflation on their saving.2 For borrowers, But it also too, change brought new options and opportunities. new risks through the way in which interest on bank loans in the Euro brought London Inter Bank currency market were charged at a price related to LIBOR?the Offer Rate?which varied with the state of the market. Instead of borrowing by the rate of interest is issue of bonds, in which the risk of change in the current market carried by the bondholder, loans imposed that risk on the borrower. Eurocurrency The result, therefore, of a change in the monetary strategy of the United States at the
2 There is an extensive literature on the origin and development of Eurocurrency markets, though rather in the period 1975 to the present. For the former, note the bibliography in (Blackwell, 1986). For the latter, note R. Dale, The Regulation of International 1984); M. de Ceceo (ed.), Changing Money (Blackwell, 1987) and the for University of London by S. Enkyo, 'Financial Innovation in the United

the United

less on financial my Casino Banking States

innovation

Capitalism

(Cambridge, PhD thesis unpublished and Japan'.

Finance,

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and power

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beginning of the 1980s from a loose inflationary policy to a tight deflationary strategy of monetary resulted in a restriction of the supply of credit targetting immediately and a rise in its price?the real rate of interest. Everyone is familiar with the this had for heavily indebted Latin American and East European consequences loans cost them governments who found both that the servicing of their Eurobank more dearly and that the available supply of new credit had shrunk dramatically. The price, in short, of an extended range of options at the hands of the financial system turned out to be increased vulnerability to the volatilit?s over of capital markets which they had little control. Integration in one global Eurocurrency banking system as one might say, to 'take their overdraft across the also meant that the opportunity, street' that is, to look to another source of credit when the usual one dried up was taken away from them. Equally, however, the changes in the international financial loans predominated for developing system from one inwhich official intergovernment to one in which bank countries meant loans predominated that the borrowing countries were freed to some extent from politically determined financial vulnerability of one creditor country. This had been the plight of Tsarist Russia in the nineteenth of the century and was true in the post-1945 period of such dependents United States for official aid as Taiwan or the Philippines. Yet freedom was still not theirs. Instead of the chains to particular national creditors, most developing countries who wanted foreign credit now found themselves chained to the decisions to the whims of the International Monetary Fund, without whose seal of approval the commercial banks were unwilling to give them new credit. For other would-be borrowers, notably large economic enterprises whether pub the globalization of banking and the innovation of new licly or privately owned, credit instruments by the banks greatly enlarged the choices they had for the financing of new investments, in the assets of other corporations. The including investments on the say-so of banks in its typical business enterprise was freed from dependence own home state, or to some extent on the state of the stock market in its own home state. Not only was there the Eurobond market through which funds could be raised, there was also the possibility of syndicated Eurocurrency like loans, or of innovations bonds which could be marketed on the often dubious promise that the merger or junk so financed would be profitable to carry the financial costs acquisition enough the globalization of the of cosy, national cartel in which governments, in an essentially political bargain, exchanged a arrangements measure of protection for the acceptance against unlicensed competition by the operators of restrictions on what they could and could not do, and how they could do it. In some countries like the United States, the restrictions were statutory and legal. In others like Britain were predominantly and unwritten, self they customary administered of the protected whether discount houses or by the members group, In yet others, they were a mixture of both forms of stockbrokers. regulation. In either case, the system relied on functional fences between the different groups of operators who were not allowed to poach on each other's territory. has been a great increase in competition between the obviously, the stakes for all players of staying in the game. Syndication was operators, raising one strategy adopted by banks to minimize the risks consequent on their vulnerability to competition. Another was the development, for their own benefit and for that of result, The involved in the bond issue. For the operators, the big change brought about by financial structure has been the wholesale disappearance

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their customers of markets in all types of futures?forward markets for foreign in stock indexes for particular stock markets or for futures in commodities, exchange, a basket of multinational markets. On the whole, over the last fifteen years or so, such the salaries and perks they have increased the profits made by banks?and changes in banking in the 1950s and 1960s. The offer?far above the kind of money made in banking, to the those employed price of higher profits has been higher risks?to banks as corporate enterprises and, not least, to the governments for their responsible In the last resort, this has meant that the taxpayers regulation. (and holders of bonds and treasury bills) have had to stand prepared to bail out banks government that took risks in the pursuit of profit that they were not really in a position to sustain. As shown by the US government's of the Continental Illinois crisis handling of liquidity in the mid-1980s and more recently of the troubled Savings and Loans, for example, this has had the consequence for governments of making itmore difficult to their role of impartial ringholders, standard rules to all and applying so far as possible. in the market processes intervention Just as borrowing avoiding found that they had to take over the liability for debts incurred by local governments state enterprises and national companies when these were denominated in authorities, so the governments of creditor banks have had to assume new foreign exchange, their jurisdiction which had acted rashly liability for the activities of banks within beyond it. in the 1970s and early 1980s by increased volatility The system was marked of rates, interest rates, oil and other commodity exchange prices. This led both, as to evasive, risk-avoiding action by the operators, and to a already mentioned, on their part for short-term transactions or where long-term ones were in preference demand the transfer to others or a limitation of their own liability for the of unforeseen this risk aversion, the system consequences developments. Reflecting costs of short-term operations, lowered the transaction and these came to occupy ones. A necessary in it than long-term condition for the greater prominence for to keep

of all kinds of short-term has been, of course, transactions the proliferation in the systems of communication information about the by which improvement to each other. A large number of wishes of the parties could be communicated short-term deals across frontiers and exchanges requires better systems of commun ication than a smaller number of long-term deals, even though the total sums involved might be the same. Since the system had changed from a national one with links added on to a global one with minor international local variations in market conditions and state regulations, the communication system necessary and appro priate to the change also had to be swift, efficient and low-cost. the system of communicating information that we now turn. It is to the changes in

Systems

of communication

on three levels, between human beings are differentiated Systems of communication or in three ways: by the mode of communication; by the means of communication; are The three main modes of communication and by the channels of communication. and words; and by the numerate mode by signs, by literate modes, using language

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can be employed for either literate of communication using numbers. The means or numerate modes. They include speech, both face-to-face and at a distance modes as by telephone, and writing both by hand and by various kinds of machine beginning with printing presses and going on to typewriters and computers. The channels of are the systems by which from communication speech or writing are transmitted or mail to person when these are not face-to-face?whether person by pony express or by geo-orbital satellite. Just coach, by telegraphy cables, by radio transmission, these leads to a realization of the rapid changes inmodes, means and channels listing of financial markets which have compressed the globalization into such a short space of communication, there have been two revolutionary changes: the over the literate mode expansion of the numerate mode through the use of digital systems used in computers; and the spread of one international common language? all other national and sub-national languages, as the prevailing English?alongside for international science mode of communication commerce, business, government, costs have been drastically cut In the means of communication, and the professions. and opportunities enormously of telex and fax machines, distant computers physically expanded by the spread of telephones (and television), and other systems by which and by data networks even without the from each other can communicate, have been operators. These new channels of communication of time. In the modes

intervention of human so much faster, so much cheaper in terms of unit costs of messages, and so much more the functioning of global reliable and accessible that they have made possible in which, potentially, financial markets all operators are in touch with each other all over the world at all hours of day or night. Since a market is defined by the possibility on demand, of buyers and sellers (and intermediaries) information communicating

supply and price to each other by whatever modes, means or channels, we can see why a leading banker likeWalter Wriston has observed that, today, money is information. That is to say, it is not gold, silver or copper, nor yet banknotes, cheques, letters of or debiting accounts It is electronic messages in credit or bills of exchange. crediting financial institutions. The changes have computerized recording systems operated by been made possible only in part by technological progress inmeans and channels. The to adopt them?to has learn English or to operate the new machines? willingness been powerfully motivated the demands of commerce and the desire to exploit new by for profit on the part of bankers and financial brokers. opportunities But it would be wrong to suppose that these opportunities opened up by chance. were opened up by a combination of conscious policy decisions by govern They ments, especially on the regulation of financial markets and banking institutions, and in turn, the creation of politically determined laws structure?itself, by a production was predominantly and administrative decisions?which 'capitalist' (i.e. pro-market) so organized as to encourage and reward technical therefore was The most of these policy decisions were those taken by significant States. This was because the US was of the United successive postwar governments in the world market economy. the authority in control of the dominant Top Currency to hang on to in the 1960s and 1970s the US managed much mismanagement Despite in which the dollar was the preferred international medium of exchange this position and which innovation. and for many foreign investors. and the preferred store of value for governments in detail. Nor is it necessary to do It would take too long to describe these decisions more than list the main ones since there is an extensive literature in international

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monetary deducible

history that can be referred to.3 One of the first and most important?and more by inference than by reference to any specific act or document?was to liberalize international the decision capital movements by putting pressure on to make to lift America's their currencies freely convertible, allies and dependents controls as soon as possible and to allow free entry to foreign investors. exchange This pressure was exercised generally on the Europeans through the IMF, through the OEEC, and also in bilateral relations, as with Japan. Although inconsistent with the Bretton Woods Articles of Agreement which only provided short-term IMF on current account, it was part of a much broader US postwar assistance for deficits than that of the economy strategy of creating a more open, liberal world market this broad strategy, an important complementary 1930s. Within post-depression surely the refusal to take any inhibiting steps against the flight of countries when these found themselves caught in capital from distressed developing over debt in the 1980s. In the United it was difficulties States, implicitly and waves assumed that the prevention of tidal of capital flight was unthinkingly exclusively a problem for the exit countries and that there was no need for the entry non-decision was

countries to take action.4 A second, supporting policy decision, for which British consent and connivance was necessary, was to allow the development of London as an alternative location for in Eurodollars that were not counted as part of high-powered US banks dealing in the US and were therefore not subject to Federal Reserve System rules and money of interest on the holding of reserves and the payment restrictions regarding then became a kind of adventure playground for British short-term deposits. London ones to profit from uncontrolled and other European banks as well as American intermediation between dollar depositors and corporate or public borrowers of large loans. If London had not shown the way for other financial centres, Eurocurrency for short-term financial transactions on there would be no global network of markets the vast scale that exists today. there was the area of domestic bank regulation where state and federal Thirdly, to check the slow erosion of New Deal regulators proved unable and/or unwilling statutes interstate banking. This was like the Glass?Steagall Act banning the from wall within which banks enjoyed protection against competition protective outsiders. This erosion allowed some little local banks to get into dealing in London and New York; the ill-fated Franklin Bank from Long Island that failed in 1974 was to cross functional and investment houses such a one.5 It also allowed non-banks dividing the business they did from that done by others. in 1975 to allow competitive A fourth landmark was the US decision fixing of fees stock market dealers. The increased competition for business on Wall Street, both by and others, cut profits but also gave stock exchange members between the established frontiers
3 Note F. Block, The Origins of International Disorder Economic 1977); (Berkeley, particularly, R. Parboni, and its Rivals (London, Verso, The Dollar 1981); S. Strange International Monetary E. Versluysen, The Political Relations 1976), and Casino Capitalism-, Economy of International (Oxford, Finance Woods 4 1982). See D. 1981); M. Moffitt, (Farnborough, to the Brink of Insolvency (London, The World's Money: International Banking from Bretton The Imperious Economy 1984); and D. Calleo, (Harvard,

Lessard and J.Williamson, and the Policy Responses (HE, Capital Flight: The Problem and the Politics 1987) and R. Naylor, Hot Money 1987) for Washington, of Debt (New York, of this issue. discussion 5 see Joan E. Spero The Failure of the Franklin National For a good account, to the Bank: Challenge International Banking System (New York, 1980).

Finance, an

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to insider dealing and other practices that once would have been incentive and which opened the way to the Boesky/Milken affair regarded as unprofessional, and other scandals. It also pushed dealers into trying to invade other stock markets, a process of internationalization that not only integrated other stock like London, markets with Wall Street but made it almost impossible for other regulatory systems to avoid change. 'Liberalization' was often a euphemism for unregulated competition in which margins were cut so fine that banks were tempted to take on the risks in financing dubious mergers and takeovers, and highly illiquid property deals. They were motivated to look for any business from rescheduling to consultancy services for which they could charge corporate clients high fees. As one commentator remarked, become a loss leader The basic business of banking?borrowing and lending?has for more marginal financial activities'.6 is known by the seemingly anodyne name of One of these marginal activities to raise funds 'securitization'. It means that companies now go direct to the market new shares. Their commercial paper?which is really no without necessarily issuing more into creators of IOU?has made them, alongside banks, instruments, and on a very large scale, running into hundreds of billions of in the US alone. Over none of this have the regulatory authorities tried dollars are open to big to set limits. And because financial markets worldwide seriously a dutch auction of deregulation is transnational is set in motion which companies, credit of the fixed exchange rate clearly going to be hard to stop. Like the abandonment it is going to be harder to put Humpty Dumpty system, together again than itwas to let him fall. of a series of national banking cartels?in What this adds up to is the dissolution the United States, in Britain, inAustralia and to a lesser extent in other countries like France and Italy. In each country, the banks 'paid' the national monetary Germany, to prudential rules limiting how authorities for their sheltered market with obedience much credit they could create, in what form and for whose benefit. Having conceded the principle of freedom for capital movements under pressure from the United in the 1950s and the Japanese, more States?the in the Europeans reluctantly, it so easy by the 1980s to insulate their systems of bank 1960s?neither found influence of the regulation and control over credit creation from the competitive American because financial innovations like CDs (Certificates of system. Moreover, or junk bonds are not like new machines or new pharmaceuticals which can Deposit) be patented or otherwise protected against imitators, there was nothing to stop these financial innovations spreading from one financial centre to another where many of the same major banks were also players. In all these changes, the improvement of modes, means and and standardization channels of communication have played an enormously important part. Although not a sufficient condition for the rapid creation of a globally integrated financial it is abundantly clear to all the operators that they were a very necessary structure, so fast, nor condition. They confirm that none of the changes would have happened would the integration of national economies into one interdependent financial so quickly without structure have been completed the improvements ication links between players and between physically distant markets. in the commun than a short-term

John Plender,

'Mad, Mad World

of Banking'.

Financial

Times

28 January

1989.

266

Susan Strange and relational power

Structural

causes of financial integration. As to the consequences, So much for the contributory it seems fairly obvious that the structural power of the United States to change the to other governments, to foreign banks and trading corporations has options open been vastly increased. This is so whether or not on any specific issue the power has been exercised with the intention of producing particular effects. In the United States, this consequence has been somewhat obscured by the quite correct perception by Americans that their options, forces have too, have been restricted and that market on certain issues become more powerful than the wishes of policymakers. While this is not untrue, the fact is that they are hoist with their own petard: the liberalization, to market forces and deregulation that brought about this vulnerability privatization was in large part their own doing. it is logical to conclude that it is they?US Presidents and Congress? Conversely, who have the power if anyone has to reverse the process and tip the balance of power to state. back again from market of financial By far the most important consequence integration for other govern ments has been the accelerated change in the nature of the competitive game between states. Every one has become aware in the space of little more than a decade of the imperative necessity of acquiring a more or less secure share in one or another sector market. without losing too large a share to others of its own domestic financial system freedom produced by the open, relatively unregulated for national residents to shift wealth out of the country or to incur debts in foreign to balance of currencies has landed national governments with increased vulnerability payments deficits for which they, and not the private persons or enterprises who may is both to have created the problem, are held politically responsible. The responsibility of the world market The

to the voters or political the foreign creditors and trade partners and politically of groups in the country who will object by any means available to the consequences failures to correct such deficits. There may be increased inflation if governments' a corresponding raises the price of imported goods without currency depreciation spending on welfare expansion of exports. Or there may be a reduction of government or subsidies in accord with recommendations of the IMF. Or there may be a controls over industry and trade which is held to slow and tightening of bureaucratic hinder enterprise and growth. To avoid all these unpleasant pressures, governments or policy cannot help but adjust the order of political priorities?their agendas, for the security shares. Instead of competing targets?in pursuit of world market sources of of territory or of access to supplies of raw materials, gained by possession or textiles (preferably by like steel, chemicals, energy or basic industrial outputs having all these located within the territorial frontiers of the state), the state's need for shares. It can rarely succeed in this foreign exchange forces it to compete for market in the market. Hence, the wholesale privatization itself as a direct participant game by inmany countries. A state is obliged to seek allies in the world of of state enterprises whether local or foreign, who will help achieve this new priority objective. enterprise, have everywhere swal Politicians formerly bitterly critical of foreign multinationals lowed their prejudices and suspicions and stood ready to negotiate deals with them which will either save on imports or add to exports. This middle almost shift in attitudes to foreign investors which has marked the universal of the 1980s in countries as far apart as Tunisia, Malaysia, Ecuador, years

Finance, Turkey and Canada has It has taken economists. on the ities consequent economies of many more not

information

and power

267

taken place in response to the preaching of monetarist place mostly because of the changes in risks and opportun of finance. The same process has made the globalization countries much more vulnerable then they were in the 1960s to slower growth in the world economy. The caveat, 'provided there is no recession in the world economy' has been the constant refrain of every economic report by the economic organizations in recent years. That is one heightened major international to which all are susceptible. Another, of course, is vulnerability to the vulnerability efforts of others to take market shares for themselves. In the summer of competitive in the Greek islands were 1988, for instance, it was reported that tourist numbers down by about 30 per cent on the previous year. Coincidentally, Turkey reported a payments surplus for 1988 largely thanks to a 40 per cent rise in foreign exchange earned from tourism. Again, in South-east the competition for help from Asia, Japanese companies engaged in electronics pits the efforts of the Malaysian govern or Singapore. The market-share ment against that of Thailand game is necessarily a zero-sum one at any given moment of time. More jobs for auto workers in Sao Paulo or Tijuana means fewer for workers in Detroit or Wolfsburg. that US strategies for global financial Here, of course, is the paradox: integration have pulled other states and their economies further into involvement with the world market economy. This has enlarged opportunities for American providers of financial and other services; but at the same time, the deliberate creation of an open world in the image of the USA has inadvertently restricted opportunities for economy bluecollar workers in the United States.7 The fact that national strategies, as in war, sometimes have consequences unforeseen that the by their creators does not mean latter are powerless, only that they cannot always see into the future, or forecast the full costs as well as the benefits of their chosen strategies.8 to exploit others, whether the power the exploitation is primarily Similarly, economic or political, is not inconsistent with the possibility that taking advantage of that power will ricochet back on its possessors to their ultimate disadvantage. If the British had not had the privileges of a reserve role for sterling in the 1960s, they would have devalued and earlier, been less tempted to play stop-go with the economy better and more promptly to their reduced status. And if the United States adjusted had not enjoyed the super-exorbitant of the post-1973 paper dollar privileges free of even the slender restraints of the gold-exchange standard, standard, they would never have been able to increase government spending and the budget deficit to the point where of two they were impaled on the horns of the dilemma one was apt to exacerbate the problem with the other. deficits?where correcting The point applies particularly to the US budget deficit as an indicator of structural power exercised through the financial structure. The damage which the build-up of this deficit has done must not obscure the fact that no other country was in so a position favourable that it could draw so heavily on other people's savings to finance its own overspending. Most of these savings have come, as we all know, from Japan. In 1980, 34 per cent
the big debate on protection for manufacturing and the role of service jobs in the US economy. See J. Zysman, Manufacturing Matters and M. Aho, Trade Talks: 1987) and J. Aaronson (Berkeley, America Better Listen (New York, 1986). 8 As N. Jequier remarks, 'The absence of imperial design does not mean that [action] is without imperial consequences', p. 237. Intelligence for Economic Development, Hence 7

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United

to US$10.8 from Japan amounting of a total capital outflow billion went to the than 12 to States. By 1987, the outflow had grown by a factor of more US$133.4 billion, and 46 per cent of itwas going to the United States. If that outflow in the form of had gone instead to the high-growth countries, whether developing less developing countries in the form loans or direct investment; or to slower-growing of grant aid, who can doubt that Third World debtors would have been spared seven very lean, hard years, and that average growth rates for the whole world economy solution for the world would have been a great deal better. But this global Keynesian has been prevented primarily by the conscious neglect or indifference of US economy to judge by the 1988 election it would seem, of US voters, politicians?and, nor most Democrats the US budget deficit. Neither Republicans campaigns?to even to contemplate were prepared remedies as tax incentives for such obvious at least have financed some government savers?which might personal spending by

US

as thus sparing the balance of payments?or, instead of foreigners, on several occasions, The Economist the imposition of a tax on petrol. suggested by Even a tax of 50 cents a gallon would have cut the deficit by a third?and, incidentally to fall.9 would have allowed interest rates world-wide that national in short, must be seen as a The high cost of servicing debt, residents self-inflicted demonstrated burden.

since the middle International 1960s has monetary history effect of US policies and the state of the and again the dominant again To direction of interest rates world-wide. US economy on the upward or downward in US policy to from the present decade, the changeover take only two examples monetary by targetting which was begun under President Carter and completed shot President Reagan standing firm behind Paul Volcker at the Fed was a monetary that echoed round the world. Interest rates shot up as the global market responded to combined with a shrunken supply and corporations rising demand from governments the by raising the price. The second instance was in 1987, when on two occasions, in the dollar. Twice, itwas calmed by a show markets came close to losing confidence and market of collective central bank determination intervention, and reassured when higher interest rates in the US made it unlikely that the private capital inflow would dry up. itmust be pointed out, are the Japanese under any illusion about the extent Nor, structural power inmatters of finance. I would quote, for instance, the of American of two excellent recent volumes on the political economy of Japan by a conclusions it clear team of Japanese and some American scholars.10 These make distinguished were in the Japanese financial that recent changes system triggered by market responses
to-government

to US

monetary

strategies,

strongly

reinforced

by direct

government

pressures.

and partly because of political pressures pressures Partly because of economic in the US?Japan the Japanese financial financial agreement) (which culminated has been, and will continue to be, liberalized more speedily than anyone a few system years ago expected. This is especially true of its international aspects.11 a detailed account of the internationalization of The same author concluded
24 December The Economist, 1988, p. 14. The Political K. Yamamura and Y. Economy Transformation, of Japan. Volume 1: The Domestic and The Political International ed. T. Yasuba; economy of Japan. Volume 2: The Changing Context, 1988). Inoguchi and D. Okimoto (Stanford, 11 in Political Shinkai, Economy of Japan, II, p. 268. 10 9

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finance in Japan by noting that the more or less enforced liberalization was bound to have significant effects on the profits of Japanese banks and financial institutions. tend to produce Increased competition, he thought, would increased volatility of interest rates in sharp contrast to their customary This change (i.e. postwar) stability. alone, as noted by Shinkai, had led to a major change in the financial behaviour of and enterprises. Japanese households The share of firms' portfolios invested in instruments with market-determined interest rates (CDs, bonds, foreign currency deposits) rose from 10 per cent in 1978 and 63 per cent in 1985. In household the share of bank deposits whose portfolios, interest rates are regulated declined from 63 per cent in 1981 to 11 per cent in 1985, when computed in incremental terms.12 the same points about the combined effect of US?Japanese Precisely negotiations and market forces giving Japan no option but to adjust to liberalizing trends initiated in the United States is repeated by Koichi Hamada and Akiyoshi Horiuchi in their for the first volume, The of the financial market'. They chapter political economy note the importance of technological as a in electronic communication progress factor facilitating transnational financial transactions. They also conclude necessary that the internationalization of Japanese business finance will promote interest rate it arbitrage between domestic and foreign capital markets and that this will make to regulate domestic difficult for monetary authorities interest rates. It can do nothing institutions and businesses be barred from else, as they say, lest Japanese financial which will become increasingly important as their spheres of foreign capital markets, activities broaden'. Since Japanese banks now dominate the list of the Top Ten in terms of assets and turnover, this is an important observation.13

Japanese

relational

power

in future Thus, though Americans may be worrying about their possible vulnerability to Japanese investors' taste for, and confidence in, dollar assets, the Japanese have their vulnerability at the hands of American structural already felt and recognized the future may hold, there is little or no evidence that the Japanese power. Whatever as yet share in this form of power. Two important indicators are the international use of the Yen, and the percentages of Japanese trade invoiced in Yen. As of 1986, Yen still amounted to only 7.6 per cent of the world reserves, and of Euro holdings in Yen. Even Yen loans currency deposits only 2.3 per cent were denominated a meagre constituted 5.5 per cent of 1985 totals. And in trade, where many only industries in the United States are protected from exchange rate risks by invoicing in dollars both for exports and imports, Japanese industry has minimal in protection; 1986, only 10 per cent of Japanese imports were invoiced in Yen, and only a little more than a third (36.5 per cent) of Japan's exports. Such lack of two important bases of financial leaves only two remaining ways in which autonomy Japan might influence the financial structure. One would be to act through international economic The other would be to take an independent line on international debt. organizations. Combining
12 Ibid.

the two, Japan did make

of Japan, I, pp. 256-60.

a tentative move

at the 1988 Toronto

summit

p. 264. 13Political Economy

270 meeting United

Susan Strange to initiate more States, positive submitted action on debt. But when this was rejected by the un to force majeure. Japan has also tried?but status to justify more power for itself in creditor its initiative was Bank. Once again, Development

successfully?to

decision-making like the IMF and the stonewalled by the United States.14 In the larger organizations in building bureaucratic World Bank, itmay also have been handicapped support by a certain unwillingness to see talented Japanese make in Tokyo long-term career commitments outside the country. But that factor alone does not account for the in the IMF, for instance. The failure of Japan to influence important policy decisions Fund officials are convinced of the necessity of increasing its capital base by 50 per the Europeans?are agreed Japanese?and structure and not cushion under the whole financial countries. But Mr Brady, armed with the weighted veto the way. It seems generally agreed that the American motivated by the fact that, if the expansion were agreed, to second place, behind the US in the weighted voting cent. The that

Japan use its major in the Asian

this would help put a under distressed debtor just of the United States, blocked was not a little obstruction move from fifth Japan would

system. to stop Japan using its power as a major In principle, there would be nothing creditor and source of finance in the future by diverting part of its surplus to the to Latin America to do in some small measure debtor countries. This it has promised and now in 1990 to Eastern Europe. But it dare not divert more than a fraction of its States for fear of the effect which that might capital outflow away from the United rate. A devalued dollar would mean either increased have on the dollar exchange or preventive in world markets in for Japanese industries increases competition interest rates with unavoidable affecting the stability of the repercussion domestically national financial system. In practice, therefore, this is not a serious option on a scale to wrest structural power away from the United it confers is States. What the rather double-edged relational power of an aid donor over its beneficiaries. From an economic point of view, this is not insignificiant as shown by the 1983 US$4 billion to a country then 'reparation' loan by Japan to South Korea. This timely assistance for default on foreign debt was undoubtedly of high on the list of major candidates sufficient

in substantial interest to the many Japanese enterprises with joint-venture operations Korea. have extended in those same Japanese multinationals Now, operations in addition of course to Taiwan. Indonesia and the Philippines, Thailand, Malaysia, Japanese official support will surely help at least some of these 'little Asian dragons' to expand their world market shares. In a speech in July 1988, the Japanese foreign minister, Sousuke Uno, made an to massively connection between Japan's decision increase its foreign aid, explicit and upgrading and its interest in stimulating Tn 1987', Uno region. reported, 'Japan's imports of growth from the ASEAN countries rose 48 per cent over the previous manufactured goods year'. To encourage this trend, he went on, 'we expanded our GSP quota ceilings for on mineral and industrial goods last April. We also intend to continue cooperating with the ASEAN Centre on Trade, Investment and Promotion import promotion especially economic aid countries, in that Tourism'.15
14 For details, congress, 15 S. Uno,

to ASEAN

In June

1988, Japan determined

to double

its budget
mimeo toward

for foreign
for

aid for

see S. Ogata, Bank', 'Japan and the Asian Development DC. Washington ' "Engine for Development:" Japan?ASEAN Cooperation in Speaking of Japan 9, 95 (November 1988). reprinted

paper Peace

1988 IPSA

and Stability',

Finance,

information

and power

271

the five years to 1992 as compared with the previous five years, and with an annual aid budget of US$50 billion expected to become the world's largest aid donor as well as its largest creditor. In a pre-election visit to Europe in January 1990 Prime Minister Kaifu promised more aid than the United Poland US$1 billion?to States?nearly and Hungary. As with Korea, there was a strong Japanese interest both for the state in helping and for major investors the growth of domestic corporate Japanese as a base not only for local-for-local markets but also as an export production to third countries. Financial in shtart, could be used to win a circle resources, platform But of friends well-disposed to Japanese companies for world market shares. competing the aid to Eastern Europe would not gain as much influence over events there is that of either of the two super powers, although the Asian countries would perhaps constitute a prosperous bloc over which Japan could exercise some bilateral regional It would not always guarantee their leverage when and if that were necessary. or corporate with Japanese national interests?as all the history of compliance

relations amply demonstrates. But on some issues and foreign aid and international for some purposes itmight help. This sort of limited influence Iwould characterize as relational power. The following tables show the increase in Japanese official aid, and in private investment through, particularly, the purchase of shares in local enterprises and joint ventures, and the concentration of both in East Asia.

Table

1. Japanese

aid and investment by area,

in 1986 (in million

US$)

Official aid Direct

Private

investment*

Indirect

Total

Asia
M. East S. Asia E. Asia

South America N & Central America

Europe

Africa Other Total

2.588 94 1.075 1.415 160 156 73 593 276 3.846

526
-124 10

3.115
6.9

3.432
-114

639 40 2.554
-14 8.3 -5.8

246 2.862 421 694 795 433 -1 5.457

256 3.289 452 3.196 765 132

-13

3.093

7.965

includes shares in local enterprises *Indirect Investment and corporations. Totals of Private flows also includes export credits. Source: Japan Statistical Yearbook 1988.

bought

by Japanese

banks

272

Susan Strange Table 2. Japanese financial flows 1970 to LDCs (in US$ million) 1986 5.634 3.846 1.703 2.143 1.788
-724

1980 3.304 1.961

1987 5.248 5.076 2.221 2.855 2.207

-1.808

Total ODA Bilateral, of which

Grants Loans

458

372
121 250 87 694 669 387 265 265 18 3 1.824

653
1.308 1.343 1.478 1.958 74 906 660 318 26 6.766

Multilateral Other (including export credits)

Total Private credits Export Portfolio International Non-profit

Foreign direct investment

investments investments organizations

9.817 237 2.902

5.315

16.987
n.a.

13.643
n.a. n.a.

1.326 82 14.808

Total

22.726

Note:

The

countries Sources:

1987 total compares with a US gross resource flow Japanese for W. Germany of $8,843 million. of $13,193 million 1989. Yearbook, 1988, Kaizai Koho Center, Japan Statistical

to DAC

Table 3. Net official development assistance from DAC countries countries and multilateral (1975-1987) agencies: net disbursements except as indicated) 1975-77 Average 1985 9.403 3.797 5.578 2.942 1.098 1.136 1.530 1.631 840 574 29,429 1986 9.564 5.634 5.105 3.832 2.403 1.740 1.750 1.695 1.090 798 36,653 Share of GNP 1987 8.776 7.453 6.600 4.433 2.427 2.094 1.887 1.880 1.337 891 41.219 1975-77

to developing (US$ million,

(%) 1987

Share of total (%) 1975-77 1987

USA
Japan France Germany, FR

Italy Netherlands UK
Canada Sweden Norway

4.401 1.226 2.168 1.666 202

0.25 0.21 0.60 0.36 0.10 0.79 0.40 0.50 0.84 0.74 0.34

0.20 0.31 0.75 0.39 0.32 0.98 0.28 0.46 0.85 1.10 0.34

30.9 8.6 14.8 12.0 1.6 4.5 6.5 6.3 4.0 1.6

21.3 18.1 16.0 10.8 5.9 5.1 4.6 4.6 3.2 2.2

748
968

919
651 232 14.519

DAC,

total

100.0

100.0

Source:

OECD,

Development

Co-operation,

1987, Press Release

17th June

1988.

Finance, Table 4. Comparison of resource flows

information

and power (1986)

273

by type from DAC*

countries

(US$million)
USA Japan France Germany FR Italy UK DAC
total

Official Development Assistance (ODA) Bilateral ODA

Grants & grant-like

9.564 7.602 7.033 1.606

5.634 3.846 1.703 599 2.143 2.038 1.788 724 858

5.105
4.162

3.832 2.642 1.799 1.230 844 534 1.189 176

1.135

2.403
1.487

1.750
1.022

36.678 26.228 21.061

7.409

contributions Technical Assistance

3.177
1.975

1.211 412 275 268 917 125 772

-29

1.102 405
-80 -83

Development lending & 569 Capital ? 226 New Developing lending 1.962 Multilateral institutions0 UN agencies 631 349 Other Official Flows (OOF) 559 Official export credits 1.787
Grants by private flows voluntary

985 876 943 109 955

727 116 333

-13

5.167 3.829 10.450 2.688

2.124 -2.228

366 84 3.031 2.228 9.176 545 2.378 1.852 7.889

agencies
Private at market terms Investment Resource flows, total

1.753 82
1.344 2.722 12.102 9.817 9.543 14.808

11 -620

263 2.566

191 5.080 4.912 7.353

3.328 22.988 23.813 65.127

Assitance Committee (DAC) is one of the specialized committees DAC members include Australia, Austria, Denmark, Belgium, and the Commission Finland, Ireland, New Zealand, Norway, Sweden, Switzerland of EC, as well as countries shown above. aThe Development the OECD: of
Contributions to . . .

Conclusion

This disparity in power in the field of finance between the United States and Japan is one strong reason why what Gilpin calls the nichibei solution to global economic disorder (i.e. a US-Japan is unrealistic.16 Japanese power in finance condominium) is relational only whereas that of the United States is structural. The process of if it ever happens will take a long time and would involve radical reform equalization over which the US still has constitutional of the international economic organizations veto power. It would also involve some reassertion of regulatory power over national banking systems which at present seems merely fanciful. Another equally strong reason takes us back to the question of communications and information. It will be some time, if ever it happens, before the numerate mode of communication the literate mode. Within that mode, it seems as totally displaces
16 Gilpin, Political Economy, pp. 336-9.

274

Susan Strange

use of English as lingua franca has now gone too far to be though the international remains a minority reversed. Japanese, meanwhile, language even for Asians. As in common between the remarked many years ago, there is much Kindleberger international use of the dollar and the international use of the English language. Each in 1967.17 is even more unassailable today than when he made the comparison to the above, I would add my conviction that our priority of postscript By way as students of international for as far ahead as it is political economy problematic to coordinate their economic policies, possible to see is not how to get governments nor yet how to reform the international monetary system through regime changes. in the United States to use Rather it is to see how to persuade people and politicians structural power they still have in a more enlightened and consistent the hegemonic, way. To do so, as Jacques Rueff saw over fifteen years ago, would also be in the long-term interest of the Americans.18

17 of International 'The Politics C. Kindleberger, Money 1967. International Finance, 18 de l'Occident J. Rueff, Le P?ch? mon?taire (1971).

and World

Language',

Princeton

essay

in