Changing the Calculus

How Security Displaces Efficiency in Global Economics

I. The old and new calculus

Efficiency and security


Since the mid-2010s, we see a ‘growing confidence in governments’ ability to reshape their economies for the better’ (Wolf, 2023) and a declining confidence that markets ‘always allocate capital productively and efficiently’ (Sullivan, 2023). ‘These policies […] are driven by straightforward national security considerations. We will not comrpomise on these concerns, even when they force trade-offs with our economic interests’ (Yellen, 2023).

The argument: efficiency reloaded



What is considered to be ‘good’ economic policy and good business strategy is remolded through economic security considerations.


The efficiency calculus The security calculus
Main justification Factor endowment and efficient resource allocation Providing economic security
State strategy

Carving out competitive niches

Moving up the value chain

Pursuing technological sovereignty

Integrating the value chain

‘Feasibility space’ for democratic

decision-making

Circumscribed by technocracy Circumscribed by national security
Business strategy Last-mile efficiency (Just in Time) & spatially ‘blind’

Geopolitical risk minimization (Just in Case) &

spatially conscious

The paper



  1. Literature review: combining IR and IPE

  2. Theory: efficiency reloaded

  3. Case studies on U.S. and EU turn towards economic security in trade and industrial policies

  4. Quantitative analysis of all corporate earnings calls that mention ‘geopolitics’ (n=13.875) as a way to study firms’ revealed preferences (cf. Weber and Wasner, 2023) using GPT-4.0 Turbo.

  5. The Janus-faces of economic security (democratic choice, lock-out for emerging economies)

II. Empirical dive

Empirical dive: earnings calls


All earnings calls with statements about ‘geopolitics’ (or related terms) since 01-01-2016. Source: S&P’s Capital IQ.


III. Wrapping up

Conclusion


  • Re-interpreting economic policies through the lens of security sheds light on government strategies and empirical trends (geoeconomic fragmentation, but no full-scale deglobalization).

  • There is a need to create new frameworks to not only understand economic policies and firm choices, but also to evaluate them.

  • Janus-face #1: depoliticization and technocracy were the hallmarks of neoliberal globalization. Will it now be replaced by another form of depoliticization?

  • Janus-face #2: while some countries will benefit from the shift from JIT to JIC (Mercurio, 2024), countries buried under debt gluts will struggle to bear the adjustment costs (Mackenzie and Sahay, 2023).

Appendix I

Appendix II



Information on earnings call data set
#ID Company Date Language
Unique observations 14564 4839 01-01-2016 - 01-06-2024

EN: 13875

JP: 488

CN: 201

Missing 0 0 234 0

Appendix III

system_msg = f"""
    You are a research assistant to a social scientist. You will be provided with texts from corporate earnings calls 
    that mention 'geopolitics'. \
    Classify the following text into one of the given categories: {categories}\n{definitions} \
    Only include the selected category in your response and no further text."
    """
messages = [
    {"role": "system", "content": system_msg},
    {"role": "user", "content": review}
]
categories = ["1", "2", "3", "4"]

definitions = """
You will categorize the text as 1 when Geopolitics and geopolitical factors such as war, sanctions, and regulatory uncertainty are flagged as general headwinds that make the business environment more challenging and uncertain, even if corporate performance remains strong. (Example sentence: delivered another quarter of strong financial results despite market concerns about slowing demand, broader macroeconomic challenges and the various global geopolitical issues. In fact, indicators of demand both from customers and in the market generally remain healthy.)
You will categorize the text as 2 when Geopolitics and geopolitical factors such as war, sanctions, and regulatory uncertainty are flagged as general opportunities or tailwinds. (Example sentence: Today, global defense spending is on the rise, driven by the Ukraine war, shifts in geopolitical dynamics and the U.S. Department of Defense modernization priorities. Allison is poised to capture growth in this cycle by continuing our long-standing partnership with the U.S. Department of Defense, while diversifying our revenue sources by increasing our international sales.)
You will categorize the text as 3 when Geopolitics and geopolitical factors such as war, sanctions, and regulatory uncertainty are flagged as reasons directly imacting business and investment decisions. (Example sentence: The geopolitical tensions may amplify the supply chain challenges mentioned above, which we address with our supplier risk mitigation strategy, buying key products from multiple regions and manufacturers. The Chinese COVID policy may lead to further lockdowns in the country.)
As an absolute last resort, you will categorize the text as 4 when no clear sentiment towards geopolitics can be detected.
"""

References

Mackenzie, K., and Sahay, T. (2023). The Gigantic Austerity Drive Underway Kate Mackenzie & Tim Sahay. Phenomenal World.
Mercurio, B. (2024). The Demise of Globalization and Rise of Industrial Policy: Caveat Emptor. World Trade Review 23, 242–250. doi:10.1017/S1474745623000496.
Sullivan, J. (2023). Remarks by National Security Advisor Jake Sullivan on Renewing American Economic Leadership at the Brookings Institution. The White House.
Weber, I. M., and Wasner, E. (2023). Sellers’ Inflation, Profits and Conflict: Why can Large Firms Hike Prices in an Emergency? doi:10.7275/CBV0-GV07.
Wolf, M. (2023). The new interventionism could pose a threat to global trade. Financial Times.
Yellen, J. (2023). Remarks by Secretary of the Treasury Janet L. Yellen on the U.S. - China Economic Relationship at Johns Hopkins School of Advanced International Studies. U.S. Department of the Treasury.