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Economic interdependence, bargaining power, and political influence

  • R. Harrison Wagner (a1)

Bargaining theory is used to evaluate the proposition that asymmetrical economic interdependence among states is a source of political power. It is shown that asymmetrical economic interdependence does not imply that less dependent actors will be able to exercise political influence over more dependent ones. The use of economic interdependence for political influence requires, instead, that the exchange of economic resources for political concessions make both parties to a relationship better off than they would be if they bargained over the distribution of the gains from the economic relationship alone. Whether this is true is independent of the degree of asymmetry in the economic relationship, or its direction. An explanation is given for the fact that other scholars have reached different conclusions, and the implications of these results for our understanding of a variety of types of relations among governments are derived.

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1. Knorr, Klaus, “International Economic Leverage and Its Uses,” in Knorr, Klaus and Trager, Frank, eds., Economic Issues and National Security (Lawrence, Kans.: University Press of Kansas, 1977), p. 102.

2. Keohane, Robert O. and Nye, Joseph S. Jr, Power and Interdependence: World Politics in Transition (Boston: Little, Brown, 1977).

3. Hirschman, Albert, National Power and the Structure of Foreign Trade (Berkeley: University of California Press, 1945).

5. The clearest statement of these aspects of Hirschman's argument is to be found on pp. 41–52.

6. Ibid., pp. 26–29.

7. Ibid., pp. 34–35.

8. The fact that the distributive effects of trade will influence governments' preferences is claimed by some writers to imply that bargaining models cannot be applied to the analysis of interstate influence at all. (See, for example,Burdette, M., “Nationalization in Zambia: A Critique of Bargaining Theory,” Canadian Journal of African Studies 11 (no. 3, 1977), pp. 471–96; and Duvall, R. D., “Dependence and Dependencia Theory: Notes Toward Precision of Concept and Argument,” International Organization 32 (Winter 1978), p. 64.) These claims do not distinguish between criticisms of the preferences assumed by some bargaining models, and the proposition that distributive politics makes the attribution of preferences to governments impossible. Only the latter proposition would imply that bargaining models cannot be used at all. There is, of course, a large technical literature in social choice theory and n-person game theory that suggests that this proposition may be true. There is no space to discuss this difficult question here; the discussion in the text merely assumes that it is still open, which I believe to be true.

9. Hirschman, , National Power and the Structure of Foreign Trade, pp. 4546.

10. For discussions of recent work on bargaining theory, see Roth, A. E., Game-Theoretic Models of Bargaining (New York: Cambridge University Press, 1985); and Binmore, K. G. and Dasgupta, P., eds., The Economics of Bargaining (New York: Blackwell, 1987).

11. See Binmore, K.G., “Nash Bargaining Theory II,” and “Perfect Equilibrium in Bargaining Models,” in Binmore and Dasgupta, eds., The Economics of Bargaining, pp. 61105. This modification of the Nash solution was first suggested, with quite a different rationale, by two economists named Bishop and Foldes, writing independently of each other in the 1960s, and is thus sometimes known as the Bishop-Foldes solution. See Bishop, R. L., “A Zeuthen-Hicks Theory of Bargaining,” Econometrica 32 (07 1967), pp. 410–17; and Foldes, L., “A Deterministic Model of Bilateral Monopoly,” Economica 122 (05 1964), pp. 117–31. For a useful discussion of the Nash solution and its competitors, see Ståhl, I., Bargaining Theory (Stockholm: Stockholm School of Economics, 1972).

12. See Binmore, K. G., Rubinstein, A., and Wolinsky, A., “The Nash Bargaining Solution in Economic Modelling,” ICERD Discussion Paper 85/112, London School of Economics, 1985. While it is important to note the potential effect of differences in discount rates, this feature of the solution will not play a role in the subsequent discussion.

13. Actually, the only property of this bargaining solution that is necessary for the main conclusion of this article is that the outcome of bargaining must be Pareto optimal relative to the no-agreement outcome.

14. This is a well-known property of the Nash solution. I omit a proof of it.

15. Let us remember, however, that this prediction requires the assumption that the two bargainers have identical discount rates. Without that assumption, modern bargaining theory says that impatience as well as need plays a role; and it is not impossible that the less needy bargainer will nonetheless be the more impatient.

16. See Hirschman, , National Power and the Structure of Foreign Trade, pp. 2629 and 48–52; and Keohane, and Nye, , Power and Interdependence, pp. 1316.

17. This is a well-known property of the Nash solution. I omit a rigorous discussion of it.

18. It is important to notice that this conclusion follows from the requirement that bargaining outcomes be Pareto optimal relative to the no-agreement outcome, and thus it would be supported by any bargaining solution that has that property.

19. In this example, since both bargainers' utilities are linear with money, neither has an advantage in bargaining over its division. But the reasoning in the text holds even if this is not true.

20. Some readers of Hirschman's discussion of trade between Nazi Germany and Eastern Europe, noticing that Germany paid higher than world market prices for East European exports, have suggested that this is all he really meant. But while Hirschman concedes that such implicit subsidies can be used for influence, he is at pains to deny that they are necessary. See, for example, his discussion on pp. 20–26 and 47 of National Power and the Structure of Foreign Trade, as well as the following quotation:

… it must be remembered that the conditions which we have described as leading to power relationships are not necessarily brought about by any conscious policy at all. Indeed, the initial impetus to German policies in the ‘thirties was given even before Hitler's advent to power, not by political motives, but by the economic fact that Germany, a debtor country with a weak currency, found herself attracted to the central and southeastern European countries which were in a similar position. The important point is that power elements… are potentially inherent in such “harmless” trade relations as have always taken place, e.g., between big and small, rich and poor, agricultural and industrial countries—relations which could be fully in accord with the principles taught by the theory of international trade (p. 40).

Hirschman's book was an argument for limiting the sovereign power of states to control their own commercial policies. It is hard to see how the possibility that governments might trade economic subsidies for political influence could be made the basis for an argument that their sovereignty should be limited.

21. Like the reasoning in the literature on economic interdependence, the analysis offered above focuses on the relations between two actors. We live, however, in an n-actor world, and most attempts to exploit economic dependence for political influence are complicated by the existence of alternative economic and political coalitions. This is another reason to question the adequacy of received ideas about the political significance of economic interdependence. The analysis of bargaining among more than two actors is difficult, and controversial. Such theory as we have, however, implies that the effects of asymmetrical interdependence on bargaining outcomes would be, if anything, even less in a world of more than two actors. Thus, by examining a two-actor world, the analysis offered here focuses on the situation in which asymmetrical interdependence is most likely to be significant; if it is not politically significant in that case, there is even less reason to believe it is significant in a world of more than two actors.

22. Harsanyi, J. C., Rational Behavior and Bargaining Equilibrium in Games and Social Situations (New York: Cambridge University Press, 1977), pp. 186–89.

23. See, for example, the discussion in Knorr, Klaus, The Power of Nations (New York: Basic Books, 1975), pp. 78.

24. See, for example,Knorr, , The Power of Nations, pp. 78; and Beitz, Charles, Political Theory and International Relations (Princeton: Princeton University Press, 1979), p. 160. We do not, of course, ordinarily think of the international system as being characterized by a well-defined set of property rights. Nonetheless, there is a close similarity between the territorial sovereignty of governments and a property right, and many normative judgments that people make about events in international politics are undoubtedly influenced by a conception of property rights, even if there is no well-defined mechanism to enforce them.

25. Except for the writings of Knorr, the literature on economic sanctions ignores the interdependence literature almost entirely, and focuses instead on the domestic political effects of trade sanctions. When theory is discussed, the main focus of attention is Galtung's, J. wellknown article, “On the Effects of International Economic Sanctions: With Examples from the Case of Rhodesia,” World Politics 19 (04 1967), pp. 378416. (Galtung's article concentrates on the domestic effects of economic sanctions.) See, for example,Olson, R. S., “Economic Coercion in World Politics, With a Focus on North-South Relations,” World Politics 31 (07 1979), pp. 471–94; and Weintraub, S., ed., Economic Coercion and U.S. Foreign Policy: Implications of Case Studies from the Johnson Administration (Boulder, Colo.: Westview Press, 1982). A comparison of these two theoretical perspectives raises difficult questions, which there is no room to discuss here, about the relation between rational actor models of interstate behavior and models of the domestic political process.

26. Hirschman, Albert, “Beyond Asymmetry: Critical Notes on Myself as a Young Man and on Some Other Old Friends,” International Organization 32 (Winter 1978), p. 47.

27. For a recent critical review of this literature, see Baldwin, David, Economic Stratecraft (Princeton: Princeton University Press, 1985). Baldwin argues that sanctions are more useful than the literature implies, but this is partly because governments can have good reasons for employing them even when they do not have much effect on the policies of their stated targets.

28. Keohane, and Nye, , Power and Interdependence, p. 18.

29. Hirschman, , “Beyond Asymmetry,” p. 47. In the passage just referred to, Hirschman goes on to offer other reasons that he thinks are more cogent for doubting that the influence effect of foreign trade is as significant as his book had implied. These reasons, however, are also exogenous to the bargaining process, and thus are quite different from the ones offered here.

30. Knorr, , “Economic Leverage and Its Uses,” p. 103.

31. Ibid., p. 106.

32. See also Hart, J., “Three Approaches to the Measurement of Power in International Relations,” International Organization 30 (Spring 1976), pp. 293–94.

33. This implies that a large state that pursues an optimal tariff policy will eliminate any possibility of using its trade for political influence.

34. Bargaining theory interprets the sort of behavior we ordinarily associate with explicit bargaining as the result of incomplete information on the part of the bargainers. For an example, see Rubinstein, A., “A Bargaining Model with Incomplete Information About Time Preferences,” Econometrica 53 (09 1985), pp. 1151–72.

35. Keohane, and Nye, , Power and Interdependence, p. 30.

36. Tollison, R. D. and Willett, T. D., “An Economic Theory of Mutually Advantageous Issue Linkages in International Negotiations,” International Organization 33 (Autumn 1979), pp. 425–49.

37. I should emphasize that this discussion is a highly stylized simplification of a complex phenomenon, and is intended merely as an illustration and not as a serious analysis of OPEC. The real world is undoubtedly more complex than either the literature on “asymmetrical interdependence” or the analysis in this article allows. In particular, the bargaining model discussed earlier assumes complete information on the part of the bargainers. Moreover, like the literature on asymmetrical interdependence, it is a two-actor model; most real-world attempts to use economic sanctions involve shifting coalitions among states, and it is well known that n-actor bargaining gives rise to new and difficult problems of analysis. And as I have emphasized more than once, one must be careful about equating market power with bargaining power—government evaluations of foreign trade may be significantly different from market evaluations registered in supply and demand curves. This can mean that, because of the political influence of producer groups, governments value the gains from trade less than does the market. But when consumers are faced with supply interruptions, as in the case of oil, it might also mean that the bargaining power of the foreign supplier is greater than its market power. This is especially likely to be true when the good in short supply is allocated by some non-market rationing scheme. Finally, as these last remarks suggest, there are all the complex analytical issues concerning the relation between domestic political activity and the existence and nature of government preferences in interstate bargaining that I have studiously ignored throughout this article.

38. Compare the discussion in Maull, H., “Oil and Influence: The Oil Weapon Examined,” in Knorr, Klaus and Trager, Frank, eds., Economic Issues and National Security (Lawrence, Kans.: University Press of Kansas, 1977). Maull invokes Hirschman's analysis as a way of understanding the political significance of OPEC.

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International Organization
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