Hegemonic instability: complex interdependence and the dynamics of financial crisis in the contemporary international system
| Published date | 01 June 2021 |
| Author | Heather Ba |
| Date | 01 June 2021 |
| DOI | 10.1177/1354066120967048 |
https://doi.org/10.1177/1354066120967048
European Journal of
International Relations
2021, Vol. 27(2) 369 –402
© The Author(s) 2020
Article reuse guidelines:
sagepub.com/journals-permissions
DOI: 10.1177/1354066120967048
journals.sagepub.com/home/ejt
E
JR
I
Hegemonic instability:
complex interdependence
and the dynamics of financial
crisis in the contemporary
international system
Heather Ba
University of Missouri, USA
Abstract
International Relations scholars have long recognized the need to study the complex
interdependencies of the international economy in order to understand the economic
sources of national power and influence. Renewed interest in the patterns of
international economic interdependencies and the structure of globalization has led
scholars to a better, more empirically grounded understanding of the significance of
complex interdependence for the evolution of international power. This paper examines
the effect of one important and persistent characteristic of complex interdependence,
American centrality within the international banking system, and argues that changes in
the US financial cycle drive international financial volatility and crisis. These dynamics
comprise the underbelly of American financial hegemony and pose a fundamental
challenge to US leadership in the contemporary liberal international order. Financial
stability is key to economic growth, which in turn perpetuates liberal political norms
and institutions. Financial instability, on the other hand, breeds political discontent,
which may take the form of populism or nationalism. The ability and willingness of
the United States to reign in its own financial system may be key to ensuring that
the liberal international system it established 75 years ago survives and thrives in the
coming decades.
Keywords
Hegemony, complex interdependence, financial crisis, complex system, capital cycle,
hegemonic stability theory
Corresponding author:
Heather Ba, University of Missouri, Professional Building 113, Columbia, MO 65211-6080, USA.
Email: bah@missouri.edu
967048EJT0010.1177/1354066120967048European Journal of International RelationsBa
research-article2020
Article
370 European Journal of International Relations 27(2)
Introduction
International Relations (IR) scholars have long recognized the need to study the complex
interdependencies of the international economy in order to understand the economic
sources of national power (Keohane and Nye, 1977). While early IR scholars had to rely
on monadic, national-level economic indicators to evaluate power imbalances that derive
from economic relationships (Webb and Krasner, 1989), contemporary scholars have the
advantage of a variety of bilateral data, which allows them to empirically examine the
characteristics of complex interdependence in the global economy by constructing the
network of economic relationships that constitute the system. The network reconceptual-
ization of complex interdependence is a promising new theoretical development (Oatley,
2019) that has already produced new insights into a central debate in the early IR litera-
ture on complex interdependence: the status of American hegemony.1 By employing
bilateral international data to map international trade, production, energy, and financial
networks, scholars have challenged long-running speculation about the decline of
American hegemony by noting that many of these international networks are still organ-
ized asymmetrically and hierarchically around the United States (Amador and Cabral,
2017; Oatley et al., 2013; Winecoff, 2015, 2020; Zhong et al., 2016). Network studies of
the international economy suggest that comparing national level data produces an incom-
plete picture of the distribution of international power, especially of the power that
America wields via its economic relationships with other countries. Alternatively, using
network methodology to understand the structure of the complex interdependence in the
international economy illuminates specific patterns of global economic activities that act
as indicators of national power and transmission mechanisms of national influence—just
as Keohane and Nye (1977) originally proposed.
The network conceptualization of complex interdependence offers IR scholars another
advantage, in that it allows us to revisit and revise early structural theories that hypoth-
esized a correlation between particular distributions of international power and system
stability.2 Using network theory, IR scholars can craft more sophisticated descriptions
and predictions of how specific patterns of human activities that occur across geographic
borders (e.g. trade, finance, and advocacy) affect patterns of human activities contained
within geographic borders (e.g. domestic policy making) and vice versa, thereby enrich-
ing our understanding of the sources of national power and the causes of socio-political
phenomena at all levels of analysis. Recent work by Bauerle Danzman et al. (2017) is
perhaps the best example of how the network conceptualization of complex interdepend-
ence can sharpen our understanding of the sources and manifestations of international
power. They propose that America’s outsized role in the global economy interacts with
its large public debt to drive the global current account imbalance between developed
and developing countries, in turn affecting the incidence of systemic banking crises in
developing countries.
Building on this innovative research, I propose a theory of how America’s national
financial capabilities interact with its central position within the international banking
network to disproportionately influence the global supply of financing, ultimately
driving the incidence of financial crises in both developed and developing countries.
Complex interdependence implies that production, consumption, and investment all
Ba 371
occur across borders, as households, firms, and governments interact and exist trans-
nationally. Changes among actors’ interactions in one part of the system can quickly
spread to actors in other parts of the system through real and financial linkages. The
structure of complex interdependence also determines the patterns of stability and
volatility experienced by countries that participate in it. More specifically, in hierarchi-
cally organized systems, like our contemporary international economy, the conditions
of the largest and most centrally located economy, the United States, will spill over to
other economies and bring about a synchronization of financial market conditions
(Claessens et al., 2011; Strohsal et al., 2019). When US credit and private debt are
expanding and asset prices are rising, US investors and banks increase lending abroad
as they become optimistic regarding the state of their portfolios and balance sheets,
and become willing to take larger risks abroad to earn higher returns. The increased
supply of credit in peripheral economies applies downward pressure to the market
interest rates in the recipient countries and pushes them below the natural rate implied
by the productivity of the real of economy. This increases the demand for financial
products and generates a boom in asset prices, thereby facilitating credit and asset
price bubbles that lead to crisis (Borio and Disyatat, 2010).
I support this narrative with a time series analysis applied to quarterly cross-sectional
data.3 I present evidence that changes in US financial sector conditions, which econo-
mists term the US financial cycle, correlate with gross capital inflow surges, capital
inflow stops, and financial crises.
These dynamics have several implications for the contemporary international distri-
bution of power, which I elaborate in the conclusion. But most importantly, these dynam-
ics present a critical challenge for US global leadership of the liberal economic order 75
years on. Instability within the international financial system is one of globalization’s
great discontents and is one plausible contributing factor to the current resurgence of
protectionism, populism, and nationalism. After more than 30 years of increasing volatil-
ity, culminating in the second largest financial crisis in history, promoting international
financial stability is one of the greatest challenges to US leadership in the 21st century.
A robust, stable financial system is critical to making a liberal, capitalist economy func-
tion. A growing economy reinforces and promotes liberal political values and institutions
(Friedman, 2006, 2010). Financial instability, on the other hand, exacerbates inequality
and sows uncertainty, fomenting political discontent (Ahlquist et al., 2020) that may take
a politically repressive form.
Ensuring that the contemporary liberal order remains politically palatable will help to
preserve the prosperity gained throughout the world over the past 75 years and to con-
strain the creeping influence of alternative economic models premised on illiberal politi-
cal systems. For the United States to maintain the liberal order it established, as well as
its own international power and prosperity, it must balance competing interests; it must
preserve widespread, global popular support for the policies that created the current sys-
tem of complex interdependence while protecting the interests of its global financial
institutions that preserve the United States’ position at the center of it all. The extent to
which US leaders view these competing interests as fundamentally incompatible rather
than as a beneficial juggling act may determine the prospects for peace, prosperity, and
democracy around the world in the coming decades.
To continue reading
Request your trial