Measuring Strategic Hedging Capability of Second-Tier States Under Unipolarity
Strategic hedging is a form of behavior used by states wanting to improve their competitiveness while at the same time avoiding direct confrontation with main contenders. It is an appealing option for states facing uncertainty due to structural changes in the international system such as the present unipolarity giving way to a process of power diffusion. Under such conditions, strategic hedging becomes an attractive alternative for other strategies like balancing, bandwagoning, and buckpassing. Especially for second-tier states, it becomes a behavior of choice vis-à-vis the system leader.
The strategic hedging research program, however, is in its early stages. Previous research on strategic hedging developed without a clear account of national hedging capabilities, making it difficult to understand key reasons for successful hedging in some cases and its failure in others. This study represents the first attempt to measure the core components of a state’s strategic hedging capability and as such provides a comparative snapshot of those components by means of a composite index.
The index comprises three core dimensions (economic capability, military power and decision-making capability), which are broken down into six sub-indicators: gross domestic product (GDP), foreign exchange and gold reserves, government debt, military expenditure, growth of military arsenal, and democracy. Because second-tier states in the international system are likely to have the greatest incentives to engage in strategic hedging, the composite index developed in this study is applied to a sample of seven leading second-tier states in a comparative case study.
The results indicate that for states to score high on strategic hedging capability, they need to score high on all core dimensions. Negligence of one of the components leads to a significant decline in total hedging capacity. Such results show why China tops the strategic hedging capability index and scores significantly higher than the other second-tier states.
KeywordsStrategic hedging Strategic Hedging Capability Index Second-tier States Unipolarity Power diffusion
According to Nye (1990, 2004), a nation’s power comprises both hard power and soft power. In recent years scholars have tried to better understand the relationship between hard power and soft power. For instance, in his study about China’s policy in the Middle East, Alterman (2009: 75) stated: “Chinese power in the region is destined to become more balanced between hard and soft power over time”. In 2011, a more articulated effort was undertaken applying the concept of strategic hedging to China’s energy security strategy (Tessman and Wolfe 2011). In this study strategic hedging (by China) was interpreted as a type of second-tier states’ behavior against the system leader in a unipolar system, where the hedging state attempts to improve its competitive ability (military and economic) while avoiding direct confrontation with the system leader. What makes the strategic hedging approach particularly interesting is that it addresses a wider range of strategies than hard balancing and also has a much stronger connection to system structure than the soft balancing concept (Tessman and Wolfe 2011; Tessman 2012; Wolfe 2013).
The strategic hedging research program is in its early stages and in need of progressive development. Previous research on strategic hedging has evolved without a clear account of national hedging capabilities, making it difficult to understand the key reasons for successful hedging in some cases and its failure in others. This article discerns the core components that contribute to a state’s strategic hedging capability and develops a composite index that provides a comparative snapshot of those components. The potential of this composite index is illustrated by a comparative case study of the leading seven second-tier states, namely China, France, Germany, India, Japan, Russia, and UK.1
In the following, we first review the meaning of strategic hedging in International Relations and articulate it specifically with regard to second-tier states. Secondly, we present three dimensions together with six sub-indicators that capture a state’s strategic hedging capability. In the third section, we present the specification of the model and datasets after which we examine the leading seven second-tier states as comparative case study for the year 2013. In the last section, we analyze the results, offer some conclusions, and outline ways to improve the measurement of strategic hedging in the future.
2 What is Strategic Hedging?
Since the end of the Cold War, several second-tier states have attempted to transform the international system from unipolarity to multipolarity (Layne 1993: 9–10; Monteiro 2011: 10). These included efforts to improve competitiveness while avoiding direct confrontation with the system leader. For example, the BRICs (Brazil, Russia, India, and China) evolved from a mere concept into a more formal political grouping to maximize leverage, and to avoid negative attention by hiding in a group (Glosny 2010: 100). In response to this development, the soft balancing concept was introduced to capture uses of nonmilitary tools to delay, frustrate, confront, and undermine the system leader, for instance, using “international institutions, economic statecraft, and diplomatic arrangements” (Pape 2005: 10).
Recently, the concept of strategic hedging has been introduced in an effort to improve upon the concept of soft balancing. Strategic hedging is a form behavior used by states wanting to improve their competitiveness while at the same time avoiding direct confrontation with main contenders. It is an appealing option for states facing uncertainty due to structural changes in the international system such as the present unipolarity giving way to a process of power diffusion (Geeraerts 2011). Under such conditions, strategic hedging becomes an attractive alternative for other strategies like balancing, bandwagoning, and buckpassing (see, Tessman 2012: 192; Salman et al. 2015: 576–577). Especially for second-tier states, it becomes a behavior of choice vis-à-vis the system leader. Hedging helps second-tier states to face specific kinds of uncertainty and to improve their security position in case the relationship with the system leader would deteriorate (Tessman and Wolfe 2011: 236; Tessman 2012: 192; Salman and Geeraerts 2015; Salman et al. 2015). Strategic hedging aims to cover the ground between hard and soft power, where the hedging state seeks to improve its competitive capability (military and economic) while, at the same time, avoiding direct confrontation with the system leader. We operate under the assumption that there is a behavioral pattern, which indicates when strategic hedging is occurring in the international system and when it is not (Tessman and Wolfe 2011: 220; Tessman 2012: 193; Salman and Geeraerts 2015: 105–106). Second-tier states engage in strategic hedging when their behavior shows the following pattern: the hedging state (1) develops its economic capacity to deal with short-term domestic and international costs flowing from tensions with the system leader, including increasing strategic reserves affected by the system leader’s public good provision; (2) improves its military capability in anticipation of a possible confrontation with the system leader while, at the same time, avoiding outright provocation of the latter2; (3) coordinates decisions to do so centrally at the highest levels of government since national security interests are at stake.
3 Indicators of Strategic Hedging Capability
3.1 Economic Capacity
An increase in relative economic power tends to improve a nation’s international political influence where this economic power could be harnessed for the purposes of foreign policy (Zakaria 1998). Cheng Gao has underlined that rising powers during the industrial age sought to accumulate wealth to use this wealth in the restructuring of the international system (Gao 2011). Harrison (1998: 1–2) has also noted that the economic superiority of the Allies in the Second World War gave them an overwhelming advantage on the battlefield, and helped to defeat the Axis powers. Given the importance of economic power in the implementation of strategic hedging, three economic indicators are used to measure the strategic hedging ability (gross domestic product, foreign exchange reserves, and government debt).
3.1.1 Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time (Mankiw and Taylor 2006: 468). In fact, there is a strong correlation between GDP levels and all important factors contributing to people’s welfare, such as improving nutrition, health care, telecommunications, and life expectancy (Schepelmann et al. 2010). Lieber and Alexander (2005) confirmed the importance of measuring internal balancing in proportion to GDP. Importantly, GDP is a significant indicator of military victory in great power warfare, and plays an important role in determining future relations between great powers (Zuljan 2003). Consequently, GDP is an important criterion for measuring strategic hedging capability; it supports the national economy, helps the provision of foreign aid, and increases the ability to bear additional costs resulting from hedging policies.
3.1.2 Foreign Exchange and Gold Reserves
Foreign exchange reserves are assets held by central banks and monetary authorities. They usually consist of gold and various global currencies such as US dollar, euro, pound sterling, and yen. Central banks attempt to preserve the liquidity of foreign exchange reserves to meet payments in foreign currency and to confront financial crises (Zhang et al. 2013: 138). Importantly, foreign exchange reserve plays a significant role in hedging overall macroeconomic risks (Li et al. 2012: 1524). High volume of foreign exchange reserve and gold makes the hedging state ready to accept domestic and international costs in the short-term as part of hedging behavior. Consequently, foreign exchange reserve is used as a positive indicator to measure strategic hedging capability.
3.1.3 Government Debt
Government debt is the debt owed by a central government. The process of establishing and implementing a strategy for prudently managing this debt is called ‘Government Debt Management’. The target of this process is to ensure meeting the government’s financing needs and the needs of government borrowing (Wheeler 2004: 4). Recently, government debt relative to GDP has risen in several great powers more than at any time since the Second World War. This ratio is projected to grow for years to come. Policymakers in these countries seek to increase tax revenues and to reduce public spending, which decrease the willing to accept additional costs (MCK 2013). In the meantime, increasing government debt ratio of GDP could undermine the implementation of hedging policies. Therefore, it has been used as a negative indicator.
3.2 Military Power
Military power has a dual and contradictory effect from the standpoint of hedging behavior. While strategic hedging involves upgrading of military capabilities, it seeks to avoid provoking the system leader either through increasing its military arsenal provocatively or through entering into an alliance against the latter (Tessman and Wolfe 2011; Tessman 2012; Salman and Geeraerts 2015). For these reasons, we chose two indicators, one positive and the other negative to measure the impact of military power on strategic hedging.
3.2.1 Military Expenditure
The financial management of the entire military sector is essential to protect the state and its population against internal and external threats. Military spending in the strategic hedging framework is somewhat similar to the arms race dynamic. Both of them occur in peacetime and involve a gradual increase in armaments resulting from conflicting purposes and/or mutual fears under conditions of uncertainty (Huntington 1958; Tessman and Wolfe 2011). Importantly, increases in the military expenditure lead to improvement of the competitive military ability of the hedging state. The size of military spending, therefore, is a positive indicator of the level of hedging.3
3.2.2 Growth of Military Arsenal
While improving competitive military ability is essential to strategic hedging, the hedging state should avoid an extensive arms buildup that might disturb the system leader and lead to a dispute, a crisis, or a military confrontation (Tessman 2012; Salman et al. 2015). Moreover, there is a negative causal relationship between military spending and economic growth, especially when military expenditure leads to negative economic growth (Chang et al. 2011). In this context, military spending relative to GDP is used as a negative critical indicator for measuring strategic hedging capability.
3.3 Central Government
Implementation of sovereign decision is a basic pillar of hedging behavior. Rich nations do not routinely become great powers; they need a strong central government to harness the economic and military power for the purposes of foreign policy, which explains why the United States was a minor power in the late nineteenth century although it was the richest country in the world, including military, economic, political, and diplomatic factors (Zakaria 1998). Therefore, it is mandatory to allocate at least one indicator to measure central authority.
Proportional representation (PR) electoral rules have a significant positive effect on economic growth as they lead to the expansion of government spending on education and health, property rights protection and free-trade (Knutsen 2011). Democracy also allows for a greater number of citizens to participate in the proposal and the introduction of laws, and is positively related to household income (Andersen 2012). Despite these benefits high levels of democracy lead to reduce a central authority’s capability to make decisions, and thus to a decline in coordination at the highest levels of government, which is one of the most important conditions for strategic hedging.4 Within the framework of democratic peace theory, Michael Doyle has pointed out that liberal principles and institutions hinder and disrupt the pursuit of balance-of-power politics (Doyle 1983). Accordingly, democracy is used as a negative indicator in our index.
4 Model, Data and Analysis
4.1 Sources and Description of Data
Datasets and source for hedging capabilities in 2013
GDP (US$ Billion)
Reserve of foreign exchange (US$ M)
Government Debt of GDP %
Military expenditure (US$ M)
Military expenditure of GDP%
Democracy ranking (2014)
4.2 Model and Estimations
4.3 Country Results
Total scores of strategic hedging in 2013
Reserve of foreign exchange
Growth of military arsenal
4.4 Country Analyses
The following section summarizes the results for the top second-tier states that were ranked by the strategic hedging index for the year 2013.
The rise in China’s strategic hedging capabilities in recent years has been nothing short of spectacular; showing increasing defense budgets, significant economic growth, and a strong central government, while Beijing, at the same time, is avoiding direct collision with Washington (Wang 2005; Wolfe 2013; Salman and Geeraerts 2015; Salman et al. 2015). China has a distinctive character in its international behavior, exhibiting both elements of threat and peaceful intentions (Breslin 2013; Dreyer 2007; Schweller and Xiao 2011; Salman and Geeraerts 2015; Salman et al. 2015).
Since the adoption of market-oriented economic reforms after Mao’s death, the People’s Republic of China (PRC) has enjoyed rapid economic growth. In recent years, it surpassed Germany and displaced Japan to become the world’s second largest economy in 2012. If current trends continue, China will become America’s international equal in the 2020s (Bandow 2012; Layne 2012; Schweller and Xiao 2011). To bolster its international standing, China increasingly supports multilateral diplomacy. It is willing to bear the extra cost in the short term to reach this objective. For example, to obtain a more active role in the global economy, China’s leaders have accepted several concessions to comply with the country’s WTO obligations (Aaronson 2010). China’s reserves of foreign currency have already exceeded its needs with a current account surplus and a capital account surplus for more than two decades, making China the largest creditor of the United States (Yongding 2011). China has used its economic prowess to support its position in the international community and to protect itself from Washington. Following the global financial crisis in 2008, China’s central bank suggested abandoning the US dollar as the international reserve currency, and the establishment of a new global system controlled by the International Monetary Fund (Anderlini 2009). Recently, China has proposed the Asian Infrastructure Investment Bank (AIIB) as an international financial institution that could be a rival for the International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB) (see Branigan 2015).
Top countries by sub-index scores in 2013
Reserve of foreign exchange
Growth of military arsenal
For contradictory reasons, Japan comes in the middle of the index. Economically, Japan has a huge national income, a large amount of foreign currency reserves, a diversified economy between industry and agriculture, and a great export activity (Okabe 2013). On the other hand, the Japanese economy suffers from a high level of government debt. Tokyo occupies a high position in the ranking of the world’s debtors (see, Table 1). Recently, in an attempt to rein in public debt, the Japanese government sharply raised the consumption tax to increase government revenue, which led Japan’s economy to contract dramatically (Pandey 2014).
4.4.5 EU (Germany, France, and UK)
In the first half of the last century, Germany, UK, and France were among the top great powers in the world. After the Second World War, the US has formed a strategic alliance with Western European countries. The North Atlantic Treaty Organization (NATO) has become a cornerstone in ensuring US and European security. During the years of the Cold War, the transatlantic relations have been very close with instances of tension and temporary discord such as Suez Crisis in 1957, Vietnam War in the 1960s, and de Gaulle’s decision to pull France from NATO in 1966 (Gaddis 2005; Nielsen 2013). After the demise of the Soviet Union threat, EU countries lost several competitive advantages in the military sphere, and European military spending has decreased steeply. As a result US military spending was nearly twice that of the EU25’s by the early 2000s (SIPRI 2014). The decline in the European armies’ performance has clearly emerged during the Yugoslav Civil Wars; the conflict in Kosovo did not resolve until the military intervention of the US, which carried out most of the combat operations (Dinan 2004; Nielsen 2013). Following NATO’s military operation in Libya 2011, NATO Chief Anders Fogh Rasmussen mentioned “significant shortfalls in a range of European capabilities—from smart munitions, to air-to-air refueling, and intelligence surveillance and reconnaissance”, a statement suggesting that the European countries could not have succeeded without the US’ technical support (Nielsen 2012).
While economically the European Union is the largest economic bloc in the world, the accession of its members to an economic and political union has affected their sovereign decision-making capacity. For example, although some EU countries have appeared reluctant to ratchet up sanctions on Russia, broad economic sanctions have been extended until the end of January 2016. This decision could cost European firms around €5 billion in lost sales. More importantly, serious threat has emerged with the prospect of declining energy imports of oil and gas from Russia (Norman 2015).
Politically, the different EU countries’ positions of major international issues adversely affect the EU status as a politic and economic unified bloc. For instance, Britain’s Tony Blair stood in the US grace and supported the war on Iraq, while France’s Jacques Chirac and German Chancellor Gerhard Schroder opposed the war and joined the Russian position (Peterson 2004). Recently in November 2012, the vote on Palestine’s status in UN highlighted how deeply divided Europe is on the Israeli-Palestinian conflict; 14 EU members voting in support of upgrading the Palestinian Authority’s observer status at the United Nations to ‘non-member state’ from ‘entity’, while another 12 were abstaining, and only 1 voted against the move (EurActiv 2012).
As highlighted above, strategic hedging is a form behavior used by states wanting to improve their competitiveness while at the same time avoiding direct confrontation with main contenders. It is an appealing option for states facing uncertainty due to structural changes in the international system such as the present unipolarity giving way to a process of power diffusion. Under such conditions strategic hedging becomes an attractive alternative for other strategies like balancing, bandwagoning, and buckpassing. Especially for second-tier states, it becomes a behavior of choice vis-à-vis the system leader. In this article we present a first attempt to measure the core components of a state’s strategic hedging capability and as such provide a comparative snapshot of those components by means of a composite index that facilitates comparison between second-tier states’ capabilities for strategic hedging. This index comprises three basic dimensions (economic capability, military power and decision-making capability), which are broken down into six sub-indicators: gross domestic product (GDP), foreign exchange and gold reserves, government debt, military expenditure, growth of military arsenal, and democracy. Because second-tier states in the international system are likely to have the greatest incentives to engage in strategic hedging, we apply the composite index to a sample of seven leading second-tier states in a comparative case study. The result is a ranking of the world’s major powers according to the strategic hedging capability they command. For the year 2013 China easily wins the strategic hedging race according to our index, with a score of 5.61 points that is about 3.33 points higher than Russia’s. Russia ranks second with 2.28 points; then come India, Japan, and Germany with 2.02, 1.98, 1.82 points, respectively. France and the United Kingdom run as close sixth and seventh with 1.57 and 1.40 points, respectively. These results indicate that for states to score high on strategic hedging capability, they need to score high for all core components of strategic hedging capability. Negligence of one of the components leads to a significant decline in total hedging capacity.
Because economic capability has a significant effect on the other basic dimensions of hedging (military power and decision-making capability), attention to the economic aspect must take priority by any state wishing to set up a successful hedging policy in the long term. For example, despite the rise of Russian military expenditure, the low volume of Russian GDP makes this military spending a negative factor from the viewpoint of ‘growth of military arsenal indicator’. Another example, the high level of government debt in Japan has led to decrease the willing to implement the sovereign financial decisions and to undermine the economic policymakers in Tokyo. However, the economic potential is a necessary condition but not a sufficient one for strategic hedging. The other components also play a key role in the success of hedging policy. For example, Japan and Germany have lost important points as a result of declining military expenditure. Also, high levels of democracy, and thus low decision-making capability, put European countries at modest positions in the strategic hedging index.
This index indicates strategic hedging capabilities, and thus signals potential engagement in this type of behavior for each individual country. As such it offers a road map of possible hedging behavior, which helps to understand key factors in successful hedging and in this way contributes to the advancement of the ‘strategic hedging’ concept. Of course, the question of measurement is only a part of the strategic hedging debate. A great deal of future research is needed to better understand how strategic hedging could change the unipolar system. However, this measure provides a novel means to capture and analyze an important aspect of international relations as it stimulates case studies, as well as both quantitative and qualitative analysis.
In what will hopefully be an annual endeavor, we will attempt to improve this index by building a larger data set, and increasing the number of countries8 included as priorities for future iterations. For example, new indicators to measure military power could be used such as global militarization index (GMI), the number of military personnel, and the level of military equipment. Moreover, the indicators could be given relative weighting in calculating the final index score, e.g. GDP indicator could have different weighting from the Government Debt indicator. Such endeavor could make design of the index more complex, but it would provide more precise details for measuring components of a state’s strategic hedging capability, and would help researchers to explore the year-on-year changes in the rankings of countries.
The seven leading second-tier states were selected on the basis of their relative economic and/or military weight (except the system leader; the United States).
The provocation could follow from a dramatic increase in the military arsenal and/or joining military alliances against the system leader.
There are other indicators to measure military power such as global militarization index (GMI), the number of military personnel, and the level of military equipment. However, due to the lack of accurate figures we only use a military spending index.
Exercise Malabar is an annual bilateral naval exercise between the United States and India (some years to include Japan, Australia and/or Singapore). The exercises take place every year since 1992 until 2014 (except for a brief interregnum, 3 years, after the 1998 Pokhran II nuclear tests) (Pandit 2014).
The Yoshida Doctrine is “a strategy adopted post World War II under Prime Minister Shigeru Yoshida, in which economics was to be concentrated upon majorly to reconstruct domestic economy while the security alliance with the US would be the guarantor of Japanese security” (Chansoria 2014).
See Defense of Japan (Annual White Paper), Available at: http://www.mod.go.jp/e/publ/w_paper/.
New emerging powers could be included, such as Brazil, South Korea, South Africa, and Turkey.
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