Great power transitions and the role of technology

I have mixed feelings about Jeffrey Ding’s Technology and the Rise of Great Powers. On the one hand, it’s an interesting and persuasive hypothesis. He argues that great power transitions such as from the UK to the US around the turn of the 20th century are driven not by the new great power commanding the technological frontier but rather by the extent to which new general purpose technologies have diffused across the whole economy. He contrasts this with the idea – apparently dominant in political science – that it is the country with control of the leading sectors that predominates.

Thus for example it was the US, not Germany, which overtook Britain because Germany commanded the chemistry frontier but the US educated chemical engineers en masse and the new chemical-enabled manufacturing techniques permeated widely. The book looks at the first Industrial Revolution – the UK’s emergence as dominant after the earlier reign of the Netherlands – as well as this 2nd industrial revolution; and also at the failure of Japan to take over from the US in the late 20th century. The book focuses on the importance of developing skills institutions that enable widespread uptake, citing for example the Mechanics’ Institutes in 19th century Britain and the spread of engineering through universities in 20th century America.

This analysis is backed up by detailed case studies – very interesting – as well as empirical work. While economists will characterise transitions involving new general purpose technologies as involving both a period of leading sector change and then diffusion across the economy, it seems very plausible to me that geopolitical transitions depend on the latter. Military and strategic strength depend on robust engineering and production capabilities; leading edge R&D is necessary but not sufficient.

The ‘other hand’ is the writing style. The text is rather repetitive and written in academic-speak. I guess the book is based on the author’s PhD dissertation, but it would have benefited from a rewrite in order not to read like a series of academic journal articles. This is a bit of a shame, as of course the argument is relevant to the relative roles of the US and China now. The book was written before the US started shooting itself in all the feet it could find in terms of sustained technical and economic progress; but in any case the author recommends the US switch its focus to developing the broad skill base needed to enable AI use across the economy if it’s serious about winning the geopolitical contest.

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Financial geopolitics & economic statecraft

Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions by Zongyuan Zoe Liu is a rather detailed book but a fascinating insight into the evolution of China’s financial policy and its strategic investments using leveraged foreign exchange reserves. The book argues that China has created a new type of fund, Sovereign Leverage Funds, created through the use of complicated debt instruments. Unlike Sovreeign Wealth Funds, they do not require a stream of profits from an activity such as the export of commodities. “SLFs are a political-economic innovation because they are the product of the state leveraging its political and financial resources to make it possible to capitalize a fund,” which can then be invested overseas for startegic geopolitical purposes – the BRI. The SLFs can influence their portfolio investments through the use of voting rights – or a threat of disinvestment.

The first part of the book traces the origins of the arrangements in CHina’s historic opening up and accumulation of massice foreign exchange reserves. The Asian Financial crisis of 1997 was a key moment in determining the leadership to ensure China built up massive reserves: “Awakened by the severity of the crisis, CPC leaders realised dor the first time that national security could not be narrowly defined only by military competences … but must also include financial security.” (I was in Hong Kong as a journalist for the IMF/World Bank meetings held there in September 1997 – an amazing experience.) The 2008 crisis was another key moment. The existence of the SLFs has allso given China’s state owned enterprises a ready source of finance for overseas acquisitions and infrastructure investment, putting them at an advantage compared to their competitors.

The book then sets out a detailed account of the SLFs and their evolution through to the post-Covid period. It argues that liberal market economies should follow China’s example and set up their own SLFs to “act as white knight investors to defend strategic industries from unwanted foreign takeovers.” Challenges like investing in the green transition will require leverage, it argues. Such funds are institutions between state and market and “can be powerful tools for the practice of financial statecraft.”

There are loads of interesting details. For instance I had never realised that many of the cities authorised to be new economic zones after April 1990 were former treaty ports: “From the perspective of the Party, its revivial of China’s former treaty ports conveyed a message to the Chineses people: only the Party was capable of leading China’s broader economic revivial and redeeming the country from its prior century of humiliation.”

I know far too little about either international finance or Chinese politics to evaluate the book’s argument, but it seems reasonable. It also seems to be a rosy perspective, given what one reads about over-leverage domestically and problems with some BRI investments. As ever, the capacity of the CPC to take a strategic view is striking  – especially in a country that sometimes seems governed from tweet to tweet. I’ve argued in a recent article for the use of long-term vehicles like soveriegn funds or investment banks to institutionalise learning in economic policy. I found the book fascinating and will look forward to reading some reviews by readers who do have the right expertise.

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