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Advice on strategic issues for governments

On the hubris of inordinate size

David Skilling
27 January 2017

George Kennan, the legendary US diplomat whose long telegram from Moscow in 1946 led to the US policy of Soviet containment, observed that ‘the hubris of inordinate size’ was a key risk for large countries. He noted that large countries had a tendency to over-estimate their importance, and to make strategic misjudgements in pursuit of ‘power and glory’.

I tend to look at countries through the lens of national scale, and this insight strikes me as being at the core of the global economic and political risk outlook for 2017 – as several countries seek to challenge international institutional arrangements.

Indeed, the trenchantly ‘America first’ rhetoric in the early days of the Trump Administration has echoes of the sentiment expressed by George W Bush advisor Karl Rove: “we’re an empire now, and when we act, we create our own reality”. Just as this hubris ran into the sand, so also an aggressively unilateralist US posture would likely impose major costs on the US and the world.

My sense is that underlying the protectionist approach to ‘Make America Great Again’ is an over-estimate of the relative strength of the US in a complex, multipolar world. Although the US remains the dominant economic power – 25% of global GDP in USD terms (16% in PPP terms) according to the IMF – globalisation and technological disruption increasingly impact on the US. The US is not dominant enough to impose import barriers without deeply negative consequences, or to achieve its foreign policy goals without allies.

These are familiar debates in the US. Yale historian Paul Kennedy in his 1987 book on the rise and fall of great powers worried that the US was a victim of over-reach in the mid-1980s. But then followed the end of history for 25 years or so, in which the US had largely uncontested primacy. This led to trouble, from Iraq to some of the excesses that contributed to the global financial crisis.

The US now seems to be chafing at being in relative decline, increasingly subject to external constraints, a reality understood by President Obama (perhaps too well) but not a politically popular sentiment. Whereas Britain was a well-behaved power in decline last century, the US strikes me as less well-suited to this role. The risk is poorly-calibrated US economic and foreign policy, such as the withdrawal from the TPP or the Mexican import tax announced yesterday.

Similarly the Brexit vote and subsequent approach seems to reflect a view that the UK is more consequential than it actually is. However, at 65 million people, the UK is not a large economy and deep regional integration is a strategic imperative for achieving ‘a global Britain’. Proponents of hard Brexit – including the Prime Minister, judging by last week’s speech – do not seem to fully appreciate the constraints imposed by the UK’s limited national scale. 60 years on from the Suez Crisis, the extent of wishful thinking about the strategic heft of a post-Brexit UK continues to surprise me. This may become clearer as PM May discusses a US/UK FTA with President Trump today.

But at the same time, the UK is too large to take seriously recent calls from Mr Hammond for a ‘different economic model’ with a lower corporate tax rate. This is an economic model that works effectively in small, FDI intensive small economies such as Ireland, Singapore, and Hong Kong, but not in medium-sized countries like the UK (particularly with gross public debt of 90% of GDP). The constraints of national scale cut both ways.

In Asia, there is growing anxiety about the increasingly assertive behaviour of rapidly-growing China. China’s economic and political muscle flexing in East Asia reflects its sense of a power on the rise; Deng Xiaoping’s guidance to ‘hide your strength, bide your time’ has been jettisoned by President Xi. On both economic and geopolitical fronts, China has perhaps got ahead of itself – but this has been managed tolerably well so far (easier to do when the economy is growing at over 6.5% and when most of its neighbours are heavily reliant on China).

However, China has been bluntly teaching small economies about the realities of power politics: from Norway to Singapore, Taiwan, and South Korea, smaller countries have been on the receiving end of Chinese realpolitik. But China cannot return to its pre-Western Middle Kingdom status in a globalised world. Pushing too hard into a perceived vacuum of global leadership is risky; the tension between existing and emerging powers – the ‘Thucydides trap’ – is real.

In contrast, small countries tend not to have delusions of grandeur. Even successful small economies understand the constraints they face from capital markets, foreign competition, and so on. This competitive discipline is an asset, painful though it is. Larger countries with less immediate discipline can find it easier to persist with poor choices: France and Italy spring to mind. One of the reasons that small economies have out-performed is that they have a well-judged sense of the strategic options open to them, and adapt themselves to a changing world.

However, the risks of over-reach by the US, China and others (such as Russia) strike me as unfortunately high. Large countries pursuing ‘dreams of power and glory’, increasingly trying to loosen the constraints of international norms and institutions, will be a source of key economic and political risk in 2017. The transition to an increasingly multipolar world will be challenging.

Although it is commonly observed that geopolitical forces don’t matter for economic and market performance, I expect that this will change as large country economic behaviour increasingly reflects geopolitical intent. Economies and markets will be affected by large countries that are less willing to be bound by international institutions, increasingly see the world in competitive, mercantilist terms, and are reluctant to accept market disciplines. But large countries will encounter costs and constraints sooner than they expect, and small economies will be exposed to the resulting turbulence. It’s time to buckle up.