Feature

Measuring Globalization: Economic Reversals, Forward Momentum

The fourth annual A.T. Kearney/FOREIGN POLICY Globalization Index reveals that even as the world economy slowed, Internet growth in poor countries and increased cross-border travel deepened global links. In last year's index, Ireland and Switzerland topped our ranking of political, economic, personal, and technological globalization in 62 countries. Find out who's up, who's down, and who's the most global of them all this year.

Last year's headlines offered grim commentary on the prospects for global integration. The World Trade Organization (WTO) meeting in Cancún, Mexico, collapsed when developing countries revolted over industrialized countries' refusal to reduce agricultural subsidies. Trade ministers scaled back plans for the Free Trade Area of the Americas (FTAA), sidestepping controversies over intellectual property and investment. The United States and the European Union (EU) traded diplomatic blows over free trade and the ongoing war on terrorism. Within the EU, the Growth and Stability Pact limiting budget deficits in the euro zone effectively collapsed, and political integration sputtered as Europe's leaders failed to reach consensus on a draft constitution. And the United Nations, perhaps the most visible symbol of multilateral cooperation, appeared immobilized as the rancorous debate over military action in Iraq unfolded.

Before anyone rushes to give last rites to globalization, keep in mind that we've heard it all before. In the months following the September 11, 2001, terrorist attacks, pundits were predicting the end of globalization as we knew it. The porous borders that made possible the unprecedented global movement of money, goods, people, and ideas were to be encircled by barbed wire and checkpoints, bringing trade and travel to a halt. Some doomsayers even predicted a global economic and political unraveling similar to the events preceding the First World War.

Yet, this year's edition of the A.T. Kearney/Foreign Policy Globalization Index shows that globalization endured in 2002. To be sure, it was a difficult year for global economic linkages, as a downturn in foreign direct investment (FDI) and a sharp drop in portfolio capital flows led to the lowest level of economic integration since 1998. But globalization involves far more than the ups and downs of economic cycles. That's why the A.T. Kearney/Foreign Policy Globalization Index uses several indicators spanning trade, finance, political engagement, information technology (IT), and personal contact to determine the rankings of 62 countries. We found that noneconomic drivers of global integration, from travel to telephone traffic, remained remarkably resilient in 2002, while access to the Internet worldwide continued to surge. These variables helped compensate for the weakening of international economic ties and deepened global linkages overall.

Globalization survived a period of considerable challenges in 2002: heightened travel alerts, stringent new security measures at airports, a major strike by dock workers at the busiest port in the United States, a string of high-profile corporate scandals in developed countries, financial market fallout from Argentina's economic unraveling, and jarring terrorist attacks in countries such as Indonesia and Kenya. Despite all its travails, the world was more -- not less -- integrated at the end of 2002 than it had ever been before.

ECONOMIC ANGST

Last year's index depicted a global economy stuck in reverse, with most key indicators of integration losing ground amid a world economic slowdown exacerbated by terrorist attacks. Measured as a whole, the economic links that bind countries together grew even weaker in 2002, reducing the gains from the late 1990s economic boom and -- relative to the size of the global economy -- settling below levels recorded in 1998.

The continued falloff in global capital flows, largely from the world's most advanced economies, was one of the chief reasons for this decline. Already down some 40 percent in 2001, FDI fell another 21 percent in 2002 to $651 billion, the lowest level in five years. Although the United States and United Kingdom accounted for nearly half of the drop, the trend was felt across the globe as FDI inflows declined in 108 nations. Reflecting this decline, countries worked harder than ever to attract foreign investors: 70 governments adopted a record 248 investment-friendly legal and regulatory changes, up from 208 such measures the year before and 150 in 2000.

Global flows of portfolio capital also dropped significantly when stock market losses in countries such as the United States, Germany, and Brazil erased wealth and Argentina's slow-motion economic meltdown made investors more risk averse. As funds dried up, the U.S. stock market saw its worst three-year performance in six decades, and industrial markets overall were down by about 20 percent in 2002. Throughout the year, emerging markets issued fewer equities than at any time since 1995, with China alone accounting for one third of all equity placements outside North America, Europe, and Japan.

Yet not all lights in the global economy were dim. In 2002, global economic growth finally began to recover after the shocks of the previous year. While the overall figures did not match the roaring 1990s (when global average growth was 4.8 percent per year), overall real growth inched up to 1.9 percent from 1.3 percent the year before. Developing economies got a strong boost, with growth rising from 2.4 percent to 3.3 percent even as advanced economies struggled along at less than 1.0 percent growth. Trade levels also saw a modest recovery in 2002, despite stringent new security measures at ports, airports, and border crossings. Overall, global merchandise trade rose a modest 2.5 percent, with strong growth in Central and Eastern Europe's transition economies and emerging Asian countries.

POLTICAL INERTIA

Global political connections showed little aggregate change in 2002, when international consensus across a broad range of high-profile issues proved elusive. Rising tensions over Iraq introduced new international fault lines, as U.S. President George W. Bush's strong push for an invasion exacerbated trans-Atlantic relationships already strained by steel tariffs and agriculture subsidies. At the same time, the United States, Chile, China, and Israel rejected the treaty creating the International Criminal Court (ICC), even as 38 new signatories joined to put the treaty into force.

Despite this acrimony, nations managed to find common ground on a broad range of antiterrorism measures, such as sharing banking data to combat money laundering. And the industrialized countries took a brief timeout from their bickering over Iraq to address global poverty at the International Conference on Financing for Development in Monterrey, Mexico. Participating nations pledged to boost aid to the world's poorest countries by a third over the next five years and succeeded in raising actual assistance by 4.9 percent in 2002 alone. Among the strongest improvements was the 11.6 percent increase in assistance from the United States, whose Millennium Challenge Account program aims to increase aid by more than 50 percent by 2005.

Moreover, in spite of several high-profile trade disputes, the principles of open global exchange gained ground in 2002. Not only did China complete its first full year of membership in the World Trade Organization, but 14 new bilateral or regional free trade agreements were signed, with a number of other agreements, including the U.S. free trade agreements with Singapore and Chile, waiting on the legislative docket.

Governments also continued dedicating resources to global peacekeeping efforts. Although financial and personnel contributions to U.N. Security Council missions dipped slightly in 2002, the total was still four times higher than in 1998. Overall, 89 countries contributed more than 39,000 personnel to 15 active missions around the world, including new commitments in East Timor and Afghanistan. Peacekeeping was one area in which developing countries led the pack: Bangladesh, Pakistan, and Nigeria were among the top contributors of personnel to U.N. missions.

A TRULY 'WORLD WIDE' WEB

If economics and politics put the brakes on globalization in 2002, Internet connections were among the most powerful accelerators. Despite tough economic times, Internet use and access around the world expanded rapidly. More than 130 million new Internet users came online in 2002, bringing the total to more than 620 million, representing 9.9 percent of the total world population, up from 8.1 percent the year before. By at least one estimate, the World Wide Web now contains a volume of information that is 17 times larger than the print collections of the U.S. Library of Congress, with new information equivalent to the holdings of an average academic research library being added every day.

Unlike previous years, however, growth in developing countries was the key force behind the expansion of the Internet. While some developed markets neared saturation, developing countries added Internet users more than three times faster. Declining costs of connectivity and personal computers, coupled with high population growth and an increasing proportion of savvy young people, helped fuel rapid technology adoption and consumer demand for Internet access -- especially in the world's largest countries. In China, the number of Internet users rose 75 percent in 2002; in Brazil, 78.5 percent; and in India, 136 percent. The Middle East remained among the world's least connected areas, but saw the number of Internet users jump by 116 percent as residents turned to online sources for information on critical events unfolding in their geopolitical backyard. The U.N. Conference on Trade and Development estimates that, if these rates continue, Internet users in developing countries could constitute more than half the world total within five years.

Yet, if the digital divide between Internet users was narrowing, the infrastructure divide showed few signs of diminishing. In 2002, the world's total number of Internet hosts (computers permanently tied to the Internet) inched up at less than one tenth the rate of the previous year. Although 3.3 million new hosts were added, developing countries still had less than 10 percent of the total. This trend suggests that users in developing countries are competing among themselves for access to a much smaller number of computers connected to the Internet and probably have little access to local Internet content. Being an Internet user in Egypt or China is still a very different experience from being one in the United States or the Netherlands.

STAYING IN TOUCH

The proliferation of other forms of communication also allowed people to interact with one another around the world. International telephone traffic continued to grow, up 9 billion minutes to a total of 135 billion minutes in 2002 -- more than 21 minutes per person on the planet. Developing countries such as Botswana, Hungary, Indonesia, and South Africa became better connected than ever before, as the rapid buildup of wireless networks allowed customers to leapfrog over poorly developed fixed-line infrastructure directly into mobile telephone service. In 2002, for the first time, the number of mobile phones per capita ("mobidensity") worldwide exceeded that of main telephone lines, with 18.98 mobile subscribers per 100 inhabitants compared to 17.95 fixed-line subscribers.

Growing telephone communication was but one key driver of personal contact. Whereas in 2001, travel and tourism suffered the first global contraction since the Second World War, 2002 saw a rebound of international travel that beat the grim predictions offered by industry leaders. Nearly 22 million more people traveled across international borders in 2002 than in 2001. Asia showed impressive growth, with China attracting 36.8 million visitors and ranking among the world's five most popular tourist destinations. Surprisingly, the strongest growth was seen in the Middle East, where travel increased by more than 15 percent as countries made a substantial investment in luxury hotels, airports, and other infrastructure in a bid to diversify away from oil. The Americas was the only region where tourism declined, as the economic slowdown and international turmoil drew fewer visitors to the United States and persuaded more Americans to travel domestically.

Amid sluggish economic growth, support networks of family and friends living and working abroad continued to provide a lifeline for developing nations in Asia, Latin America, and Africa. Even as nonresident guest workers came under increased pressure in host economies such as Malaysia (which deported 124,000 foreign residents in 2002) migrants worldwide sent nearly $80 billion home to developing countries -- almost as significant a source of income as the $100 billion those nations received through FDI. The Philippines, with nearly a tenth of its population abroad, ranked as the world's top beneficiary of remittances, which accounted for more than 8 percent of the country's gross domestic product (GDP).

AND THE WINNERS ARE...

For the third year in a row, Ireland ranks as the most globalized country in the world. In 2002, the nation defied the downward investment trend throughout most of Western Europe, registering its highest-ever FDI inflow of $24.7 billion, including notable new investments in the high-growth IT and pharmaceutical sectors. Intel, for instance, announced that it would spend an additional $2 billion in Ireland over the coming years to manufacture new-generation semiconductor wafers. However, Ireland's lead over other countries shrank in 2002, as portfolio capital investment dropped by a quarter from 2001. Nevertheless, a strong showing in noneconomic facets of global integration helped sustain the country's top position. For example, Ireland once again proved to be a leader in technological connectivity, ranking seventh worldwide in the number of secure servers per capita.

Singapore ranks as the second most globalized nation, up from fourth place last year. Despite difficult economic conditions, Singapore topped the rankings in trade, with total exports and imports reaching 340 percent of the country's total economic activity. Exports rebounded slightly after the drop-off from the previous two years, driven by a strong demand for electronic products, which accounted for around 60 percent of Singapore's exports. The anticipated bilateral free trade agreement with the United States (eventually signed in 2003) helped to boost global confidence in the economy. Singapore also ranked as the index's most talkative nation, with the average resident engaging in almost 13 hours of international telephone calls in 2002.

Western Europe
Western Europe claimed 6 out of the 10 most globally integrated countries in 2002 (Ireland, Switzerland, Austria, Finland, the Netherlands, and Denmark). On the political front, European countries remained the most engaged participants in the international system. The top 10 aid donors in 2002 (as a percentage of GDP) were all countries in Western Europe. The official introduction of the single European currency, the euro, on January 1, 2002, marked deepening regional integration and promised long-term economic benefits by increasing stability, lowering interest rates, and removing exchange risk. Despite a sluggish economy, foreign-investment inflows to the region fell only about 20 percent in 2002, versus some 60 percent for North America.

The Scandinavian countries -- traditionally among the index's top performers -- slipped in 2002 (except Finland, which surged from 10th to 5th place). Although the region continued to perform well in technological and political integration, economic integration retreated. Sweden exited the top 10 for the first time, falling from 3rd to 11th place. Portfolio investment fell by nearly 70 percent as a result of the continued slide on Sweden's technology-centered equities market. Trade remained weak as telecom exports, the driving force behind Sweden's rapid growth in recent years, decreased again in 2002.

Greece was the region's worst performer, falling from 26th to 28th place as trade deficits widened and inward FDI dropped off after two years of exceptionally high volumes, despite the run-up to the 2004 Olympic Games. However, Greece maintained a relatively high score in political integration, owing in part to its active engagement in peacekeeping efforts in the Balkans.

North America
The United States broke into the top 10 for the first time, jumping four slots to seventh place. Technology drove this leap, with the United States again topping the ranks for Internet hosts and secure servers per capita. However, the country was notably absent from many of the key international treaties signed over the last decade, such as the ICC and the Anti-Personnel Landmine Treaty. As a result, the United States ranked 60th in terms of signing international agreements -- only a step ahead of Taiwan, whose ambiguous status renders it unable to sign most multilateral treaties.

At sixth place, Canada remained the region's top overall performer and ranked as the most globally linked economy in the Western Hemisphere, after Panama. Although Canada also experienced a decline in inward FDI, Canadian companies provided consistently high investment outflows, supplying 6.5 percent of total global FDI. Mexico rose six spots, but at 45th place, it continued to rank well below its partners in the North American Free Trade Agreement. The country's remittances from foreign workers totaled $9.8 billion in 2002, which is twice the value of its annual agricultural exports.

Australasia
Australasia saw levels of integration climb, as economic and technological connections between the region and the rest of the world deepened in 2002. New Zealand entered the top 10 for the first time, rising from 16th to 8th place. E-commerce surged after the enactment of strong legal protections for online transactions, helping to push New Zealand to the second-highest number of secure servers per capita in the world, just behind the United States. Moreover, New Zealand ranked first in financial and personnel support for U.N. peacekeeping operations (relative to the size of its population and GDP), with troop contributions to missions in East Timor, Kosovo, Sierra Leone, and the Middle East. Neighboring Australia entered the top 20 in the index, rising from 21st to 13th place as FDI inflows more than doubled to reach $15.7 billion, quadrupling Australia's share of global FDI. Automobile companies such as Ford and Mitsubishi Motors selected Australia for their regional operations and research and development centers, reflecting the country's attractive combination of high productivity and low operating costs.

Southeast Asia
Within the developing world, Southeast Asia remained the most globally integrated region, despite being buffeted by the global economic slowdown and a major terrorist attack. Besides Singapore, Malaysia also made it into the upper tier of this year's index, ranking at 20th place. As Mahathir Mohamad prepared to step down after more than 20 years as prime minister, Malaysia's economy had become more open, as evidenced by its eighth place ranking in economic integration. Buoyed by global demand for electronic goods, Malaysia exported more than Australia, whose economy is four times as large. Malaysia also continued to generate high travel flows relative to its population size, reflecting rapidly growing tourism from China and elsewhere.

By contrast, Indonesia was the least integrated country in Southeast Asia. Hotel occupancy dropped to single digits following the October 2002 bombing in Bali, Indonesia's most popular resort. Because the tourism industry employs more than 7 million people and accounts for about 5 percent of GDP, the effects of the attack reverberated throughout the country.

Central and Eastern Europe
Central and Eastern Europe also stood out as one of the few regions to experience strong growth in economic links to the rest of the world. Bucking the global downturn, FDI inflows surged by a whopping 19 percent as countries began preparing for accession to the EU in 2004. Slovenia and Slovakia saw the most dramatic increases, fueled in part by the privatization of state-owned companies. European investors dominated, but others got in on the action -- including South Korea-based Hyundai Motor, which announced plans to build its first manufacturing foothold in the region. In addition, Slovakia, Slovenia, the Czech Republic, and Hungary also bested the global average with double-digit growth in trade flows, with Poland only slightly behind. With business transactions and tourism up, Eastern Europe overtook East Asia to post the fastest year-on-year growth in international telephone traffic.

The best performer in Central and Eastern Europe was Slovenia, which at 19th place entered the top 20 for the first time. Slovenia saw more than a threefold increase in FDI, as new lower-cost production and export platforms, fresh targets for mergers and acquisitions, and a growing internal market increased the country's attractiveness to investors. The region's laggard, at 43rd place, was Ukraine, where delayed reforms in key sectors (such as telecommunications) and perceptions of political instability and corruption alienated the country among foreign governments and investors alike.

THE LOWER RANKS

East Asia
No country from East Asia broke into the top 20 this year. Worse, the only country that saw upward movement was Japan, which went from 35th to 29th place. Japan, South Korea, and Taiwan all experienced a retreat in portfolio capital and FDI flows. Even the 2002 World Cup failed to boost the regional economy, as fans who stayed at home to root for their favorite teams left South Korea and Japan with half-empty stadiums and millions of dollars worth of unrealized tourism revenue. However, technological advances helped deepen East Asia's connectivity with the world. South Korea ranked second among the Globalization Index's 62 countries in Internet users per capita and has rapidly innovated in broadband Internet and wireless technology, while Japan continued making telecommunications devices smaller, faster, and smarter. Political drivers also helped make Japan the most globalized East Asian nation in this year's index. In 2002, Japan was among the top financial donors to U.N. peacekeeping missions -- and deployed over 600 personnel to peacekeeping operations in East Timor.

Elsewhere in East Asia, China reaped the benefits of its WTO accession and saw exports as a share of GDP surge more than 20 percent, higher than in any other country. China was also the second largest recipient of FDI, surpassing the United States. Yet, China remains the least integrated country in East Asia, falling four spots in this year's index. Like all large countries, China is less globally connected because it can draw on internal resources for many of its needs. Also, China's enormous population makes it difficult for the nation to improve its standing, since many of the index indicators are calculated as a percent of total population. The country's drop this year is due largely to its low level of political integration. China ranked near the bottom in development assistance, giving and receiving only as much aid as the tiny Czech Republic. Likewise, it participated in fewer international organizations and signed fewer international treaties than most other nations.

South Asia
South Asia continues to be the least integrated region in the world -- owing in large part to the massive size of its populations -- with Pakistan ranking at 46th place and India next to last at 61st. However, it saw the most rapid improvement of any region, driven in part by expanding economic linkages with the rest of the world. Pakistan's government leveraged the country's central position as a frontline state in the war on terror into an economic asset, successfully lobbying for the removal of U.S. economic sanctions imposed after its 1998 nuclear-weapons test. A gradual repeal of currency-exchange controls prompted a surge in FDI as the government began to revive the dormant privatization process. In September 2002, a consortium of investors from the United Kingdom and the United Arab Emirates purchased a 15 percent share of the country's state-run United Bank, the first major privatization in the financial sector since 1999.

India experienced a difficult economic year, as the slowing global market and ethnic violence in the industrial state of Gujarat (where more than 1,000 people, mostly Muslims, were killed) trimmed trade, investment, and growth. A $200-million banking fraud didn't help boost investor confidence, either. However, the country gained prominence as the world's premier destination for it outsourcing. Simultaneously, Internet growth in India exploded, with the number of people surfing the World Wide Web growing 136 percent (albeit totaling less than 2 percent of the population).

Latin America
America climbed higher in the Globalization Index this year, but what looked like deepening integration with the rest of the world was mostly the consequence of unfortunate circumstances. A key driver was steep currency devaluation in countries such as Brazil and Argentina, which saw their economies -- at least in dollar terms -- shrink by large amounts. (Argentina's GDP, for example, contracted more than 50 percent.) As a share of economic activity, the region's moderate trade and investment flows were therefore magnified, even as imports fell due to rising prices for foreign goods and services.

Panama, at 27th place in the index, ranked first in the region for the third consecutive year, due in large part to the Colon Free Zone at the gateway of the Panama Canal. Despite a slight drop in traffic in 2002, the container port maintained its status as the largest tax-free import and reexport center connecting Latin America with the rest of the world. Venezuela, again the least integrated country in Latin America, was hit hard by falling oil prices. Nationwide demonstrations -- including a two-month strike by the country's business and labor sectors that began in late 2002 against the government of President Hugo Chávez -- further stalled Venezuela's trade and foreign investment.

Middle East and North Africa
The Middle East and North Africa did not fare well in this year's Globalization Index, as every country, with the exception of Tunisia, either fell in the rankings or stayed the same. The region suffers from numerous restrictions on trade and investment, including the world's second highest level of tariff and non-tariff barriers and high levels of government involvement in the economy. Following the September 11 terrorist attacks, trade between the United States and the Middle East dropped considerably, with U.S.-Saudi trade volumes alone falling by 30 percent. The region's export performance has steadily declined over the last decade, particularly among the nations most dependent on oil exports. Among Middle Eastern countries, Tunisia ranks first in trade, thanks to its highly diversified export base. Perceptions of political instability and terrorism continue to dampen investor interest, with the region receiving only one third of the FDI expected for a developing region of comparable size, according to the International Monetary Fund. Egypt and Israel score well on government transfers, based largely on a huge influx of U.S. government aid, but the Middle East's participation in both international treaties and international organizations ranks the lowest of all regions.

Israel, ranking 22nd, is the region's top performer based on its strong personal contact ties, including high worker remittances and telephone traffic. Saudi Arabia stayed put at 41st place after several years of declining scores. But its ability to maintain the status quo masked declining competitiveness, as huge amounts of investment flowed out of the country. Egypt, meanwhile, plummeted from 48th to 60th place, as portfolio investment and FDI flows dwindled, and Western companies such as British retailer J. Sainsbury pulled out of the country after only a single year of operation. Iran was dead last for the fourth consecutive year and ranked near the bottom in most categories.

Africa
Bringing Africa into the fold has been one of the most daunting challenges of the globalization process. Economic misfortunes worldwide in 2002 offered little relief for the region. Financial flows to Africa dried up, in tandem with declining global investment. And in stark contrast to rapid growth in other regions, Africa saw some technological connections retreat. Although the number of Internet users continued to grow, Internet hosts actually declined in a few key countries such as South Africa, where new security measures and government regulations forced many small providers out of business.

However, even this sluggish region maintained key links with the rest of the world. Africa continues to be among the world's top recipients of government aid and worker remittances relative to economic size. International tourist arrivals in Africa also maintained a growth trend of about 3 percent per year, according to the World Tourism Organization.

The continent's best performer was Botswana, ranking at 30th place. Income on investments abroad amounted to more than 20 percent of GDP, reflecting heavy foreign profits from the nation's lucrative diamond trade. Relative to its economic size, the country also attracted the highest volume of foreign aid, most of it aimed at combating the spread of HIV/AIDS. (Botswana's 35 percent infection rate is one of the highest in the world.) Kenya, at 54th place, was the worst performer among African countries. Recurring droughts have devastated the country's agricultural sector, which accounts for 53 percent of its total merchandise exports. Terrorist bombings in the coastal town of Mombasa and onerous visa regulations have hurt the tourism industry, which was once the country's largest revenue earner.

CHANGING THE SUBJECT

As the worst-case scenarios concerning the future of globalization failed to materialize in 2002, the public discourse began to subtly change. The topic of discussion was no longer whether globalization would screech to a halt, but whether the positive aspects of global integration could be harnessed to offset the negative ones.

The A.T. Kearney/Foreign Policy Globalization Index aids that dialogue by painting an increasingly detailed picture of the benefits and costs that integration brings. Results in previous years challenged the conventional wisdom on such issues as income inequality, wages, environmental protection, corruption, and political freedom by showing that, on par, the most global nations are also those with the strongest records of equality, the most robust protection for natural resources, the most inclusive political systems, and the lowest corruption. Moreover, there appears to be little proof that global nations have trimmed social benefits or slashed workers' wages in an effort to get ahead. Adding to the picture, this year's results also demonstrate that the most global countries are those where residents live the longest, healthiest lives and where women enjoy the strongest social, educational, and economic progress.

Yet, a glance at this year's index suggests that those who seek to expand globalization's benefits have their work cut out for them. The bottom 10 countries in the index -- Iran, India, Egypt, Indonesia, Venezuela, China, Bangladesh, Turkey, Kenya, and Brazil -- accounted for more than 50 percent of the world's population in 2002. Although located in diverse regions, several of these nations share problems that make them more vulnerable to external shocks. Countries heavily dependent on oil exports (such as Iran and Venezuela) are subject to the whims of the erratic international energy market. Similarly, nations with large agricultural sectors (such as Brazil, India, and China) must not only deal with volatile prices in the global commodities market but must also confront trade barriers that include tariffs and agricultural subsidies in developed countries. Chronic political unrest and persistent corruption (as in Venezuela, Bangladesh, and Indonesia) discourage foreign investment and tourism.

Some signs of hope are emerging -- at least in the way we discuss globalization. Indeed, two prominent politicians with diametrically opposing views on the war in Iraq -- German Foreign Minister Joschka Fischer and U.S. Senator Joseph Lieberman -- found common ground on the question of globalization. Lieberman declared that the root cause of terrorism and poverty was not "too much globalization" but "too little." And, observing that military force alone would not win the war against terrorism, Fischer succinctly summarized the true challenge for Western countries in the years ahead: "We need a broader grasp of security -- shaping globalization in a fair way...."

Feature

America's Sticky Power

U.S. military force and cultural appeal have kept the United States at the top of the global order. But the hegemon cannot live on guns and Hollywood alone. U.S. economic policies and institutions act as "sticky power," attracting other countries to the U.S. system and then trapping them in it. Sticky power can help stabilize Iraq, bring rule of law to Russia, and prevent armed conflict between the United States and China.

Since its earliest years, the United States has behaved as a global power. Not always capable of dispatching great fleets and mighty armies to every corner of the planet, the United States has nonetheless invariably kept one eye on the evolution of the global system, and the U.S. military has long served internationally. The United States has not always boasted the world's largest or most influential economy, but the country has always regarded trade in global terms, generally nudging the world toward economic integration. U.S. ideological impulses have also been global. The poet Ralph Waldo Emerson wrote of the first shot fired in the American Revolution as "the shot heard 'round the world," and Americans have always thought that their religious and political values should prevail around the globe.

Historically, security threats and trade interests compelled Americans to think globally. The British sailed across the Atlantic to burn Washington, D.C.; the Japanese flew from carriers in the Pacific to bomb Pearl Harbor. Trade with Asia and Europe, as well as within the Western Hemisphere, has always been vital to U.S. prosperity. U.S. President Thomas Jefferson sent the Navy to the Mediterranean to fight against the Barbary pirates to safeguard U.S. trade in 1801. Commodore Matthew Perry opened up Japan in the 1850s partly to assure decent treatment for survivors of sunken U.S. whaling ships that washed up on Japanese shores. And the last shots in the U.S. Civil War were fired from a Confederate commerce raider attacking Union shipping in the remote waters of the Arctic Ocean.

The rise of the United States to superpower status followed from this global outlook. In the 20th century, as the British system of empire and commerce weakened and fell, U.S. foreign-policymakers faced three possible choices: prop up the British Empire, ignore the problem and let the rest of the world go about its business, or replace Britain and take on the dirty job of enforcing a world order. Between the onset of World War I and the beginning of the Cold War, the United States tried all three, ultimately taking Britain's place as the gyroscope of world order.

However, the Americans were replacing the British at a moment when the rules of the game were changing forever. The United States could not become just another empire or great power playing the old games of dominance with rivals and allies. Such competition led to war, and war between great powers was no longer an acceptable part of the international system. No, the United States was going to have to attempt something that no other nation had ever accomplished, something that many theorists of international relations would swear was impossible. The United States needed to build a system that could end thousands of years of great power conflicts, constructing a framework of power that would bring enduring peace to the whole world -- repeating globally what ancient Egypt, China, and Rome had each accomplished on a regional basis.

To complicate the task a bit more, the new hegemon would not be able to use some of the methods available to the Romans and others. Reducing the world's countries and civilizations to tributary provinces was beyond any military power the United States could or would bring to bear. The United States would have to develop a new way for sovereign states to coexist in a world of weapons of mass destruction and of prickly rivalries among religions, races, cultures, and states.

In his 2002 book, The Paradox of American Power: Why the World's Only Superpower Can't Go It Alone, Harvard University political scientist Joseph S. Nye Jr. discusses the varieties of power that the United States can deploy as it builds its world order. Nye focuses on two types of power: hard and soft. In his analysis, hard power is military or economic force that coerces others to follow a particular course of action. By contrast, soft power -- cultural power, the power of example, the power of ideas and ideals -- works more subtly; it makes others want what you want. Soft power upholds the U.S. world order because it influences others to like the U.S. system and support it of their own free will.

Nye's insights on soft power have attracted significant attention and will continue to have an important role in U.S. policy debates. But the distinction Nye suggests between two types of hard power -- military and economic power -- has received less consideration than it deserves. Traditional military power can usefully be called sharp power; those resisting it will feel bayonets pushing and prodding them in the direction they must go. This power is the foundation of the U.S. system. Economic power can be thought of as sticky power, which comprises a set of economic institutions and policies that attracts others toward U.S. influence and then traps them in it. Together with soft power (the values, ideas, habits, and politics inherent in the system), sharp and sticky power sustain U.S. hegemony and make something as artificial and historically arbitrary as the U.S.-led global system appear desirable, inevitable, and permanent.

SHARP POWER

Sharp power is a very practical and unsentimental thing. U.S. military policy follows rules that would have been understandable to the Hittites or the Roman Empire. Indeed, the U.S. military is the institution whose command structure is most like that of Old World monarchies -- the president, after consultation with the Joint Chiefs, issues orders, which the military, in turn, obeys.

Of course, security starts at home, and since the 1823 proclamation of the Monroe Doctrine, the cardinal principle of U.S. security policy has been to keep European and Asian powers out of the Western Hemisphere. There would be no intriguing great powers, no intercontinental alliances, and, as the United States became stronger, no European or Asian military bases from Point Barrow, Alaska, to the tip of Cape Horn, Chile.

The makers of U.S. security policy also have focused on the world's sea and air lanes. During peacetime, such lanes are vital to the prosperity of the United States and its allies; in wartime, the United States must control the sea and air lanes to support U.S. allies and supply military forces on other continents. Britain was almost defeated by Germany's U-boats in World War I and II; in today's world of integrated markets, any interruption of trade flows through such lanes would be catastrophic.

Finally (and fatefully), the United States considers the Middle East an area of vital concern. From a U.S. perspective, two potential dangers lurk in the Middle East. First, some outside power, such as the Soviet Union during the Cold War, can try to control Middle Eastern oil or at least interfere with secure supplies for the United States and its allies. Second, one country in the Middle East could take over the region and try to do the same thing. Egypt, Iran, and, most recently, Iraq have all tried and -- thanks largely to U.S. policy -- have all failed. For all its novel dangers, today's efforts by al Qaeda leader Osama bin Laden and his followers to create a theocratic power in the region that could control oil resources and extend dictatorial power throughout the Islamic world resembles other threats that the United States has faced in this region during the last 60 years.

As part of its sharp-power strategy to address these priorities, the United States maintains a system of alliances and bases intended to promote stability in Asia, Europe, and the Middle East. Overall, as of the end of September 2003, the United States had just over 250,000 uniformed military members stationed outside its frontiers (not counting those involved in Operation Iraqi Freedom); around 43 percent were stationed on NATO territory and approximately 32 percent in Japan and South Korea. Additionally, the United States has the ability to transport significant forces to these theaters and to the Middle East should tensions rise, and it preserves the ability to control the sea lanes and air corridors necessary to the security of its forward bases. Moreover, the United States maintains the world's largest intelligence and electronic surveillance organizations. Estimated to exceed $30 billion in 2003, the U.S. intelligence budget is larger than the individual military budgets of Saudi Arabia, Syria, and North Korea.

Over time, U.S. strategic thinking has shifted toward overwhelming military superiority as the surest foundation for national security. That is partly for the obvious reasons of greater security, but it is partly also because supremacy can be an important deterrent. Establishing an overwhelming military supremacy might not only deter potential enemies from military attack; it might also discourage other powers from trying to match the U.S. buildup. In the long run, advocates maintain, this strategy could be cheaper and safer than staying just a nose in front of the pack.

STICKY POWER

Economic, or sticky, power is different from both sharp and soft power -- it is based neither on military compulsion nor on simple coincidence of wills. Consider the carnivorous sundew plant, which attracts its prey with a kind of soft power, a pleasing scent that lures insects toward its sap. But once the victim has touched the sap, it is stuck; it can't get away. That is sticky power; that is how economic power works.

Sticky power has a long history. Both Britain and the United States built global economic systems that attracted other countries. Britain's attracted the United States into participating in the British system of trade and investment during the 19th century. The London financial markets provided investment capital that enabled U.S. industries to grow, while Americans benefited from trading freely throughout the British Empire. Yet, U.S. global trade was in some sense hostage to the British Navy -- the United States could trade with the world as long as it had Britain's friendship, but an interruption in that friendship would mean financial collapse. Therefore, a strong lobby against war with Britain always existed in the United States. Trade-dependent New England almost seceded from the United States during the War of 1812, and at every crisis in Anglo-American relations for the next century, England could count on a strong lobby of merchants and bankers who would be ruined by war between the two English-speaking powers.

The world economy that the United States set out to lead after World War II had fallen far from the peak of integration reached under British leadership. The two world wars and the Depression ripped the delicate webs that had sustained the earlier system. In the Cold War years, as it struggled to rebuild and improve upon the Old World system, the United States had to change both the monetary base and the legal and political framework of the world's economic system.

The United States built its sticky power on two foundations: an international monetary system and free trade. The Bretton Woods agreements of 1944 made the U.S. dollar the world's central currency, and while the dollar was still linked to gold at least in theory for another generation, the U.S. Federal Reserve could increase the supply of dollars in response to economic needs. The result for almost 30 years was the magic combination of an expanding monetary base with price stability. These conditions helped produce the economic miracle that transformed living standards in the advanced West and in Japan. The collapse of the Bretton Woods system in 1973 ushered in a global economic crisis, but, by the 1980s, the system was functioning almost as well as ever with a new regime of floating exchange rates in which the U.S. dollar remained critical.

The progress toward free trade and economic integration represents one of the great unheralded triumphs of U.S. foreign policy in the 20th century. Legal and economic experts, largely from the United States or educated in U.S. universities, helped poor countries build the institutions that could reassure foreign investors, even as developing countries increasingly relied on state-directed planning and investment to jump-start their economies. Instead of gunboats, international financial institutions sent bankers and consultants around the world.

Behind all this activity was the United States' willingness to open its markets -- even on a nonreciprocal basis -- to exports from Europe, Japan, and poor nations. This policy, part of the overall strategy of containing communism, helped consolidate support around the world for the U.S. system. The role of the dollar as a global reserve currency, along with the expansionary bias of U.S. fiscal and monetary authorities, facilitated what became known as the "locomotive of the global economy" and the "consumer of last resort." U.S. trade deficits stimulated production and consumption in the rest of the world, increasing the prosperity of other countries and their willingness to participate in the U.S.-led global economy.

Opening domestic markets to foreign competitors remained (and remains) one of the most controversial elements in U.S. foreign policy during the Cold War. U.S. workers and industries facing foreign competition bitterly opposed such openings. Others worried about the long-term consequences of the trade deficits that transformed the United States into a net international debtor during the 1980s. Since the Eisenhower administration, predictions of imminent crises (in the value of the dollar, domestic interest rates, or both) have surfaced whenever U.S. reliance on foreign lending has grown, but those negative consequences have yet to materialize. The result has been more like a repetition on a global scale of the conversion of financial debt to political strength pioneered by the founders of the Bank of England in 1694 and repeated a century later when the United States assumed the debt of the 13 colonies.

In both of those cases, the stock of debt was purchased by the rich and the powerful, who then acquired an interest in the stability of the government that guaranteed the value of the debt. Wealthy Englishmen opposed the restoration of the Stuarts to the throne because they feared it would undermine the value of their holdings in the Bank of England. Likewise, the propertied elites of the 13 colonies came to support the stability and strength of the new U.S. Constitution because the value of their bonds rose and fell with the strength of the national government.

Similarly, in the last 60 years, as foreigners have acquired a greater value in the United States -- government and private bonds, direct and portfolio private investments -- more and more of them have acquired an interest in maintaining the strength of the U.S.-led system. A collapse of the U.S. economy and the ruin of the dollar would do more than dent the prosperity of the United States. Without their best customer, countries including China and Japan would fall into depressions. The financial strength of every country would be severely shaken should the United States collapse. Under those circumstances, debt becomes a strength, not a weakness, and other countries fear to break with the United States because they need its market and own its securities. Of course, pressed too far, a large national debt can turn from a source of strength to a crippling liability, and the United States must continue to justify other countries' faith by maintaining its long-term record of meeting its financial obligations. But, like Samson in the temple of the Philistines, a collapsing U.S. economy would inflict enormous, unacceptable damage on the rest of the world. That is sticky power with a vengeance.

THE SUM OF ALL POWERS?

The United States' global economic might is therefore not simply, to use Nye's formulations, hard power that compels others or soft power that attracts the rest of the world. Certainly, the U.S. economic system provides the United States with the prosperity needed to underwrite its security strategy, but it also encourages other countries to accept U.S. leadership. U.S. economic might is sticky power.

How will sticky power help the United States address today's challenges? One pressing need is to ensure that Iraq's economic reconstruction integrates the nation more firmly in the global economy. Countries with open economies develop powerful trade-oriented businesses; the leaders of these businesses can promote economic policies that respect property rights, democracy, and the rule of law. Such leaders also lobby governments to avoid the isolation that characterized Iraq and Libya under economic sanctions. And looking beyond Iraq, the allure of access to Western capital and global markets is one of the few forces protecting the rule of law from even further erosion in Russia.

China's rise to global prominence will offer a key test case for sticky power. As China develops economically, it should gain wealth that could support a military rivaling that of the United States; China is also gaining political influence in the world. Some analysts in both China and the United States believe that the laws of history mean that Chinese power will someday clash with the reigning U.S. power.

Sticky power offers a way out. China benefits from participating in the U.S. economic system and integrating itself into the global economy. Between 1970 and 2003, China's gross domestic product grew from an estimated $106 billion to more than $1.3 trillion. By 2003, an estimated $450 billion of foreign money had flowed into the Chinese economy. Moreover, China is becoming increasingly dependent on both imports and exports to keep its economy (and its military machine) going. Hostilities between the United States and China would cripple China's industry, and cut off supplies of oil and other key commodities.

Sticky power works both ways, though. If China cannot afford war with the United States, the United States will have an increasingly hard time breaking off commercial relations with China. In an era of weapons of mass destruction, this mutual dependence is probably good for both sides. Sticky power did not prevent World War I, but economic interdependence runs deeper now; as a result, the "inevitable" U.S.-Chinese conflict is less likely to occur.

Sticky power, then, is important to U.S. hegemony for two reasons: It helps prevent war, and, if war comes, it helps the United States win. But to exercise power in the real world, the pieces must go back together. Sharp, sticky, and soft power work together to sustain U.S. hegemony. Today, even as the United States' sharp and sticky power reach unprecedented levels, the rise of anti-Americanism reflects a crisis in U.S. soft power that challenges fundamental assumptions and relationships in the U.S. system. Resolving the tension so that the different forms of power reinforce one another is one of the principal challenges facing U.S. foreign policy in 2004 and beyond.