Hedging uncertainty in times of international flux.

datePosted on 21:32, June 7th, 2010 by Pablo

(Note to readers: this post has been updated as it reflects my deeper engagement with the subject within the confines of a short blog post. It may seem academic but I post it here as a first swipe at an extremely policy-relevant subject).

We are living in an international transitional moment. Transitional moments are the periods of time that occur during the change from one status quo to another. Transitional moments are, by definition, one of flux where outcomes are uncertain. Even if attempts are made to “manage” the transition, the outcome is more likely than not to be different than what was envisioned by the “managers” when the process began. This is as true for national regime change as it is for international regime change. Consider the leadership succession process in North Korea that I mentioned in a previous post–whatever the desires of the contending elites, it is likely that none of them will get exactly what they want. Or consider the post 1990 US attempts to remake the global community in its preferred image. Moreover, most transitional moments are not managed. Instead they happen, punctuated by critical choices (including paths and actions not taken), tipping points and precipitating events, all of which steer an uncertain course to an unknown outcome that cannot be determined apriori. It is only after the fact that the fluid dynamics of the shift from one status quo to another can be discerned.

As such transitional moments are inherently uncertain. What is the best defense against uncertainty? Hedging. Hedging is the practice of keeping one’s options open and balancing strategic choices until such a time as the new status quo is apparent. Hedging is more than fence-straddling, although that is one strategic option. The point is that hedging plays a vital role in transitional moments and has several modalities.

The transitional international system that began its life in 1990 is characterised by three dimensions of change. On an economic level it has seen the shift from state-centred economics to market-driven economics to, most recently as a result of the failure of largely unregulated financial systems,  a move towards increased state oversight of national macroeconomic management within a larger system of international exchange and trade. On the security dimension it has seen a shift from notions of conventional collective security amongst states to multinational cooperative security back to a asymmetric and unconventional collective security between states and non-state actors. On a systemic level it has moved from a bipolar balance of power to a unipolar world to an emerging multipolar balance of power led by the so-called “BRIC” nations and in which US preeminence is being challenged on a number of fronts.

The response to these multidimensional changes has come in the form of broad acceptance of hedging strategies as a nation’s best option. It is largely true of small and medium strength states given the power asymmetries between them and the bigger global players. But large powers also hedge, albeit in different ways than their weaker counterparts. Thus, while the preeminent strategic role of hedging is universal in the transitional international system, its specific modalities differ amongst states depending on the specific attributes, location and power capabilities. What works as a hedging strategy for Peru or South Africa may not be appropriate for Viet Nam or New Zealand. Let me give some examples of the variance using the concept of a “horizontal” Asia as a case sample (“horizontal Asia” refers to a geopolitical view of Asia as extending from the Western Pacific to Western India, south to Australia and New Zealand and North to Siberia).

One hedging strategy is power maximisation and internal (regional) balancing. States seek to maximise their power projection capabilities in order to ward off hostile intent. However, the quest for power maximisation leads to a security dilemma whereby one state’s move to acquire more power (usually by improving its military capabilities) leads neighbouring states to fear its intentions and arm themselves in response. That leads to arms races and the possibility of unanticipated conflicts due to misperception or inadvertent offense, particularly in regions with simmering border disputes and lacking in collective security institutions focused on conflict resolution. That is exactly the case with Southeast Asia at the moment, where most states are spending more than 3 percent of GDP on weapons upgrading amid ongoing territorial conflicts (including in the South China Sea) that have not been mitigated by the presence of multinational forums like ASEAN. In this instance what is individually rational as a hedging response to an uncertain and insecure security environment is collective suboptimal because it increases rather than lessens the possibility of regional conflict.

Another hedging strategy is to engage in hard (re)alingment or bandwagoning with a more powerful state or states (alignment is with one state, bandwagoning is with a number of states on specific issues). The (re) alignment strategy sees weaker states align themselves more firmly with a new or traditional stronger partner, under the assumption that an alliance with a stronger actor will dissuade potential aggressors from pressing the advantage in a regional context. This strategy has been used by Bangladesh, the Phillippines and Indonesia among others. The bandwagoning strategy is designed to combine forces with other like-minded states on given issues such as trade or diplomatic approach as a type of “force multiplier” or megaphone for a specific national interest. Brunei’s approach to trade is an example of the latter.

Then there are hybrid hedging strategies. Countries may develop economic linkages to one state or group of states while pursuing military alignments with others. New Zealand is a case in point in that it has shifted its trading focus to non-Western regions while maintaining (and under National, strengthening) defense and security ties to its traditional patrons in the West (although the priority has shifted from reliance on the UK to reliance on Australia and the US in the first instance). Another hybrid strategy is to go for power maximisation and hard (re) alignment. This is arguably what has happened with Australia, Japan, Singapore, Thailand, Taiwan, Viet Nam (in the case of alignment with the US) and Burma, Laos and North Korea (in the case of alignment with the PRC).

Another hedging option is to play non-aligned or to engage in issue-balancing (where a nation’s stance on any given issue is driven by immediate strategic priorities rather than broader commitments). This strategy usually can only be played by countries with significant resource bases such as India and Russia today (and indeed, both of these nations are playing the issue-balancing strategy).

A less used by nevertheless feasible hedging option is to place priority on international or regional institution-building in the area of conflict resolution and defense and security relations. By being vehicles of first recourse when it comes to resolving potentially armed disputes, such institutions act as collectively self-limiting agencies. Although much has been said about moving forward on institutionalising regional security-building projects (such as at the annual Shangri-La Dialogue attended by Defense Ministers from the Asia-Pacific region), little concrete work has been done in Asia to date in translating the high-minded words into action.

Great powers such as the PRC and the US also hedge, but on a grander scale. The PRC has expanded its diplomatic and economic reach into Sub-Saharan Africa and the South Pacific as a means of filling the power vacuum left by US disinterest. It has begun to assert a stronger military presence in the Western Pacific region while at the same time trying to gain diplomatic leverage via multilateral fora, particularly in South Asia. Seeing that its hard power has limited utility and generates so-called “blowback,” the US is attempting to use trade negotiations as a strategic wedge against Chinese expansion (primarily via investment) in the Pacific Rim. Current negotiations over expanding the Transpacific Partnership (TPP, which includes Brunei, Chile, New Zealand and Singapore) to include Australia, Viet Nam Peru and the US are being used by the US as a strategic hedge rather than out of an interest in trade per se.

Needless to say there are more types of strategic hedging. The larger point is that in times of international transition and uncertainty, hedging becomes the most dominant geo-strategic approach adopted by nation-states as well as many non-state actors. If successful, a hedging strategy may turn into a longer term foreign policy stance, depending on the nature of the emerging international status quo. But successful or not, hedging is an immediate solution to a temporary problem born of the uncertainty of transitional moment.  It is not a long-term strategy of itself.

Like longer term perspectives, hedging strategies may be based on principle, realpolitik or some combination thereof.  However, they may not always result in a more secure geopolitical environment, especially when allies and adversaries see them for what they are and respond in non-cooperative or incongruous ways. Counterpoised hedging strategies can lead to increased rather than diminished conflict, and this is exactly the conundrum of “horizontal” Asia at the  moment. Which is precisely why the role and modalities of hedging during times of international flux need to be understood by policy-makers and the informed public alike.

19 Responses to “Hedging uncertainty in times of international flux.”

  1. SPC on June 9th, 2010 at 00:02

    My advice is that New Zealand retains its integrity and, rather than seeking to project any national self-interest in shaping the direction that change should take, advocate for the collective good.

    Something the USA could and should have done post 1990. If it had chosen to promote multi-lateralism and contribute to the collective good to build the world as it could be, it would have won a victory for the new world order of our consensus. Without that victory we have continuing uncertainty and we have no easily discernible means to find consensus from where we are now.

  2. Pablo on June 9th, 2010 at 13:32

    SPC: There is a double irony at play in your comment. The US did try a strong multilateral approach under the first Clinton administration (1992-1996), but was savaged by a majority GOP Congress for doing so and undone by the debacles in Somalia and later Bosnia and Kosovo. So the second Clinton administration backed away from the multilateral focus, and as the President’s scandals got worse, gave it little attention. Then Bush 43 came along and dropped the approach entirely in favour of unilateral preemption. Obama is now working to restore a multinational approach.

    As for NZ, after a 30 year history of independence in foreign affairs it is now trying to straddle the fence between the PRC and US by kissing up to the Chinese and other non-Western autocracies on trade issues while strengthening defense ties with the Yanks and Oz (the Yank’s deputy sheriff in the SoPac). This is classic hedging but it is untenable over the long term as the PRC and US will eventually come head to head on who shall exercise regional primacy. At that point the small fry will have to pick sides and whatever the decision, there will likely be negative consequents to it.

  3. SPC on June 9th, 2010 at 16:28

    Pablo, my advice for what course New Zealand should follow stands as I wrote it.

    You say the Americans are returning to a multi-lateralism course – really? They committed to providing .7% GDP in foreign aid back in the 1970’s – when they deliver, they are beginning the journey to adopting multi-lateralism.

    Our own rhetoric aside, we have not delivered either.

  4. Pablo on June 9th, 2010 at 16:43

    SPC: I was not criticising your prescription for NZ, just pointing out how far from that NZ’s current approach to foreign affairs is.

    As for the US. I doubt that we will ever see that 7% GDP/aid figure again. That happened under Jimmy Carter in a brief moment of enlightment that is now a distant memory. The hard truth is that although Democratic administrations repeatedly try to pursue multilateralism as a first option (which Obama has tried to do), they are continually thwarted by a rabid collection of nationalists and unilateralists grouped in the GOP, Tea Party movement and right-wing media outlets. This gives multilateralists little room for maneuver whether in or out of office, and in fact places them constantly on the defensive when confronting accusations that they are “un American,” “UN-lovers,” “terrorist coddlers,” “traitors” “commies” and, worst of all “French.”

    With the terms of foreign policy debates defined under such conditions, US multilateralism appears to be more rhetorical than substantive. The irony is that the US increasingly needs international support for many of its international initiatives, so the nationalist-unilateralist option is counterproductive to US interests over the long term. But tell that to Glen Beck…

  5. Tom C on June 9th, 2010 at 16:53

    “But successful or not, hedging is an immediate solution to a temporary problem born of the uncertainty of transitional moment. It is not a long-term strategy of itself.”

    Would you consider the economic integration between the PRC and US a hedging tactic (for both – to dissuade each other from conflict) or a long-term strategy?

    This question is two-fold in that I’m also interested in whether you would consider a symbiotic move – like economic integration – hedging in the first place. Or, in other words, can two great powers use the same hedging move to protect themselves temporarily from each other?

  6. Pablo on June 9th, 2010 at 17:10

    Tom:

    It seems to me that for the PRC economic integration with the US is a hedging strategy, whereas for the US it is a long-term objective. The PRC must see the US as in decline and itself on the rise but knows that it cannot challenge US preeminence any time soon and does not know how the post-US world is going to look anyway (or if the US can somehow rebound and re-establish its preeminent position in international affairs). So economic integration allows it to grow using US investment and technology, all the time allowing deeper penetration of the US market as a means of educating its managerial class and gathering market, military and diplomatic intelligence as well. Once the US decline becomes irreversible then the PRC can adopt a longer term approach that is less dependent on economic engagement with it.

    For the US economic integration with the PRC is designed to bring the latter into the US orbit or if not, the wider community of capitalist nations. Making the Chinese dependent on foreign trade and investment for their collective growth is seen as a way of tempering their military ambitions because any conflict that disrupts the flow of investment, goods and services to the mainland would be deleterious to overall economic progress at a time when popular expectations of material reward are growing throughout the Chinese mainland. We might call this the “heroin approach” to foreign economic relations: make them dependent on US led investment and demand in order to render them subordinate on a broad strategic level. Imagine the domestic repercussions if foreign investment in China and demand for its exports dried up in the event of a serious international conflict or confrontation with the US. Does the Chinese leadership really want to confront such a scenario by directly challenging the US? At this point and for the foreseeable future the answer is no.

    So the short answer to your question is that there are mixed motives at play.

  7. Ag on June 9th, 2010 at 18:18

    The hard truth is that although Democratic administrations repeatedly try to pursue multilateralism as a first option (which Obama has tried to do), they are continually thwarted by a rabid collection of nationalists and unilateralists grouped in the GOP, Tea Party movement and right-wing media outlets.

    This is the elephant in the room: the increasing derangement and right wing authoritarianism of US politics. I personally do not like the Chinese Communist Party, but they are in comparison quite rational.

    Don’t take this the wrong way, Pablo, but I think your country has gone kind of nuts.

  8. Pablo on June 9th, 2010 at 20:10

    Ag:

    I can’t say that I disagree with you assessment, but most of the crazies are to the right of the ledger. There are plenty of open minded, well meaning folk in the centre and left, and they have nowhere as many nutters in their ranks. They just are not as vocal and vicious, which I see as a measure of the Right’s desperation as they see the US changing demographically and socially under their feet.

    Personally, I believe that the best hedging strategy for American rightists is to intermarry or at least mingle with Hispanics, who are not only the fastest growing part of the US population but also one of the most socially conservative. But as is clear, that thought is anethema to the Right’s dream of a continuing WASP dominant culture. In 30 years it won’t be anyway.

  9. Ag on June 10th, 2010 at 02:18

    I can’t say that I disagree with you assessment, but most of the crazies are to the right of the ledger. There are plenty of open minded, well meaning folk in the centre and left.

    I agree, but their centrist instincts keep dragging the Dems to the right, and they don’t seem to know how to stop. The radical right always push too hard, and end up being punished, but every time they manage to push things just a little further.

  10. Hugh on June 10th, 2010 at 11:12

    Pablo

    The GOP has periodically tried to reach out to the Latino community, perceiving its economic aspirationalism and social conservatism as potential vote fodder. It was one of the strongest reasons behind Hispanophone and generally Hispanophile George W Bush’s selection in 2000.

    From what I understand the reason this attempt failed is that immigration reform is both a prerequisite for Latino support and utterly unacceptable to the majority of the GOP’s white supporters. Until the GOP can square this circle – something they tried in 2005-06 and spectacularly failed to do so despite sitting on a mountain of political capital approximately the size of Denali – I don’t think this advice will really carry water.

  11. Pablo on June 10th, 2010 at 12:55

    Hugh: You are essentially agreeing and elaborating on what I said about Hispanics so I am not sure what the point of difference is. The white backlash is what makes immigration reform impossible, pure and simple. It is therefore a non-starter for the GOP and Tea Baggers.

    That does not obviate the fact that if they could get over their xenophobia and racism, the US Right would have a natural ally in a large portion (not all) of the Hispanic vote, which given the demographic trends would assure them pride of electoral place in a number of important states (including all of the south as well as other places with large concentrations of Hispanic voters such as Illinois).

    Now, can we return to the topic of the post?

  12. Phil Sage on June 10th, 2010 at 21:21

    Pablo – Bush 43 was slightly isolationist for his first 8 months in power. Something happened in September 2001 to change that approach.

    Would you consider the economic integration between the PRC and US a hedging tactic (for both – to dissuade each other from conflict) or a long-term strategy?

    Your answer to that question is right on the button. Chinese holdings of US Treasury Bonds are obviously part of that and could be used at any point in the future for China’s benefit.

    You have missed the realignment in India in your assessment. It is definitely hedging its strategic weaknesses vis a vis China and Islamic neighbours by getting closer to the United States. India is the destination for a great deal of outsourcing of transactional processing and technology support from Europe and the US. It started from further back but I am certain the recognition of how far behind it was falling lead it to the change in stance.

    As far as New Zealand “integrity” is concerned the only position of integrity is to recognise that our security has been and will be guaranteed by Australia and the US. Without American entry to the second war New Zealand would certainly be a colony of Japan right now.

    Suggesting that we “advocate for the collective good” is going to be as successful as the Obama pre-election approach to Iran. “Let’s talk”. Harsh reality has now intruded with the news that harsher sanctions have been agreed by the Security Council.

    A more activist approach to our interests, our security and our values is in both our own strategic interest as an independent country and in the interests of those in the world who do not have our freedom and our prosperity.

  13. Pablo on June 10th, 2010 at 21:36

    Phil:

    Excellent points about the Indian hedge. In fact, from what I have read the Indians believe that they are in a good position to overtake China over the medium to long term in terms of strategic influence, and the current hedging strategy is part of that plan. But remember that their reapprochment with the US is not complete: India still largely buys its major weapons systems from the Russians (planes and carriers) and Europeans (armour and subs). So there is a hedge there as well, both diplomatically as well as in terms of weapons suppliers.

  14. Phil Sage on June 10th, 2010 at 22:12

    Pablo – Its military procurement strategy is a hedge on the Alignment hedge. That and the fact Russian planes and aircraft would be substantially cheaper.

  15. Pablo on June 10th, 2010 at 22:25

    Phil:

    So what you are saying is that the Indians are playing a nested hedge game. Woah! Your usual readers at NM would have their heads spinning at this point.

  16. SPC on June 11th, 2010 at 00:10

    Phil – we lack the ability to realise more
    by advocacy for our self-interest than by advocacy
    for the common good. So why not?

    PNAC promoted intervention in Iraq during the first 8 months of the GWB first term, but there was not the possibility of getting away with such a policy unless it was under cover of the post 9/11 war against terror. The argument used for the Iraqi regime change existed before 9/11.

    The let’s talk line was always the opening gambit to obtaining a UN Security Council vote from the Russians and Chinese. It was the show of being inclusive and multi-lateral that got the token Russian and Chinese buy in. Even then all they got was the symbolism of Iran being internationally isolated – but without sanctions in place to come into effect should Iran obtain nuclear weapons capability, it changes nothing.

  17. Phil Sage on June 12th, 2010 at 21:53

    SPC – Advocating for the common good from an effective position of pacifist non-intervention will achieve little or nothing in a cynical world. An activist policy would help to bring the values and human rights that we hold dear to those who are less fortunate. I am sufficiently realistic that even the reasonably altruistic America has negative aspects and thus ensuring that our self interest is always at the forefront will reduce the negative impact on us on that path.

    In trade we must recognise that unilateral measures weaken our negotiating position. In making decisions on selling our prime agricultural land to foreign interests we should assess at great length whether that is in our strategic best interest.

    The anti-nuclear position of New Zealand has not been achieved without a degree of hypocrisy but nevertheless it allows New Zealand to be presented as something of a neutral broker. The success of the New Zealand lead efforts in Timor are a fine example of that.

    The presence of the PRT in Bamiyan is another example which should be built on rather than agonised over.

  18. SPC on June 13th, 2010 at 21:20

    Phil, I suspect we may define common good in different ways.

    You seem to be suggesting that we can only do good by using force to impose our values abroad and that my concept of common good is necessarily pacifist. It’s an artifical defining of the situation, and I do not agree with it.

    Committment to multi-lateral collective security is a common good – it is one of the expectations of members of the UN (which actually instructs us to this course). This is equivalent to the rule of law within nation states, which is also imposed by force. It is in the common good to keep the peace by deterring those inclined to uni-lateral acts of aggression. Of course, those leading this effort also have set an example of restraint of their own uni-lateral force.

    Peace keeping work and nation-building work is in keeping with the common good. As is the .7% GDP contribution in foreign aid that western nations promised back in the 1970’s.

    This is all promoting a concept of working together for the common good, which provides a path for building a tradition in the way that global issues are dealt with.

    As to trade, it’s not so much making unilateral moves (yes they can weaken our negotiating position in bi-lateral talks) – though as with our non-nuclear position they do provide some credibility and moral force to our position in WTO talks. A similar circumstance also applies in relation to ETS legislation (so even National sucked on that lemon). Here the wider issue is to promote “fair” free trade as being a common good.

    You have raised an important issue, about foreign investment. Developing nations or nations with a lack of saving need it, yet also fear the foreign ownership that can come with this. In the context of fair free trade, there is the circumstance of nations which have exploited earlier economic development (and access to markets) to acquire capital to invest in other nations. Should a nation have to allow foreign investment to participate in the global trade of goods (WTO talks)? There is no reciprocity as only one of the “two” (“north/east and south”) has the ability to make such foreign investment and wealthier nations are maintaining barriers until they are given the right to make such investment (and also propose being able to invest in private ownership of third world infrastructure). Here the west (excluding ourselves largely so we are in the other camp to some extent), is exploiting its control of wealthy market to extract concessions of developing third world nations and this is not in the common good. Here our siding with the smaller and weaker nations is also an assertion of our own national interest (we seek freer access for our agricutural products and yet have valid concern about the consequences of foreign investment in that very sector).

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