Lake, David A. - Leadership, Hegemony, and The International Economy...

Leadership, Hegemony, and the International Economy: Naked Emperor or Tattered Monarch
with Potential?
Author(s): David A. Lake
Source: International Studies Quarterly, Vol. 37, No. 4 (Dec., 1993), pp. 459-489
Published by: Wiley on behalf of The International Studies Association
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InternationalStudiesQuarterly(1993) 37, 459-489
Leadership, Hegemony,and the

InternationalEconomy: Naked Emperoror
TatteredMonarch withPotential?
DAVID A. LAKE
Institute
on GlobalConflict
and Cooperation
ofCalifornia,San Diego
University
The so-called theoryof hegemonic stabilityis a researchprogramcom-

posed of two distincttheories. Leadership theorybuilds upon public
goods models and seeks to explain the productionof the international
economic infrastructure. The theoryis extended here by identifying its
necessaryand sufficientconditionsand explicatingwhen leadership is
likelyto be benevolentor coercive.Hegemony theory,subsumingthree
independent analytic traditions,focuses on the differentstructurally
derived trade policy preferencesof states and attemptsto explain in-
ternational economic openness. The core logic of each variant and
questions for future research are examined. Neither leadership nor
hegemony theory has been tested adequately by existing empirical
studies.While theoristshave generallyfailedto presenttheirarguments
in an appropriate fashion,empiricistshave not been sufficiently sensi-
tive to variationsin the theoryand have produced studies that suffer
frominadequate theoreticaland operational specificationand theoret-
ical "over-extension."At thisstage,formaltestsshould not seek decisive
disconfirmationof the research program but should aim to provide
guidance for furthertheoreticalrefinement.
For over twentyyears, scholars have been activelypursuing the link between
internationalpoliticalstructuresand the internationaleconomy.Earlier analysts
had posited a relationshipbetween predominance and peace (e.g., Organski,
1958), and E. H. Carr (1964[1939]) had noted the relationshipbetween British
economic hegemony and the rise of free trade in the nineteenthcentury.But,
it was only in 1971 that Robert Gilpin-in reaction to the emergingliterature
on transnationalrelations-firstbegan to examine systematically
the relationship
between politicalpower and internationaleconomic openness, and in 1973 that
Charles Kindleberger drew a connection between British economic decline,
Author'snote:Earlier versionsof this articlewere presentedto the XVth World Congress of the International
PoliticalScience Association,Buenos Aires,Argentina,July21-25, 1991, and Workshopon InternationalRelations
Theory of the Universityof California Instituteon Global Conflictand Cooperation, October 11, 1991. I wish to
thank the participantsin these meetings and James Caporaso, JeffFrieden, Ethan Kapstein, Wendy K. Lake,
John Odell, Robert Pahre, Simon Reich, Cheryl Schonhardt-Bailey,and Daniel Verdier for commentsand the
Officeof InternationalStudies and Overseas Programsat UCLA forfinancialsupport.
? 1993 International
StudiesAssociation.
Publishedby BlackwellPublishers,238 Main Street,Cambridge,MA 02142, USA, and 108 CowleyRoad, OxfordOX4
1JF,UK.
460 Leadership,
Hegemony,
and theInternational
Economy
Americanascendancy,and the Great Depression. By the late 1970s, thisresearch

programhad helped definethe nascent fieldof internationalpoliticaleconomy.
It had also received a catchy appellation: the theoryof hegemonic stability.'
The program's rise to prominence was based, in my view, on both its simple
causal structureand its seeming fitwithempiricalreality,explaining in concise
termsthe two greatestperiods of internationaleconomic openness. It was (and
remains) analyticallyand empiricallyseductive.
Much discussed, debated, and criticized,the research program's popularity
now appears to have peaked. At a gatheringof West Coast internationalrela-
tioniststo examine the stateof theoryin our field,myattemptto put the theory
of hegemonic stabilityon the agenda produced catcalls-a sure sign that our
collectiveattentionspan is waning.
A half-lifeof two decades is not bad in a disciplinemore prone to fads than
the fashionindustry-I say "half-life"because our theoriesare never discarded,
just relegated to our graduate syllabi. Nonetheless, consigning the research
programto the academic museum to be observedonlyby incredulousgraduate
studentsdressed in more modern garb is, I believe, premature.I too am dis-
appointed in the extent of both theoreticaland empirical progresswithinthe
research program. Yet, I believe the emperor is clothed-even if his raimentis
unstylish,incomplete, and perhaps abused. This article aims to clarifyand
reinvigoratethe research agenda. With major retailoring,some of it already
under way,the monarch'sragged garmentcan be made more elegant and given
a betterfit.
In this essay, I develop the followingarguments.The theoryof hegemonic
stabilityis not a single theory,but a research program composed of two, ana-
lytically
distincttheories.Leadershiptheory builds upon the theoryof public goods
and focuses on the productionof internationalstability,redefinedbelow as the
internationaleconomic infrastructure. The theoryis extended here by identi-
fyingits necessaryand sufficientconditionsand explicatingwhen leadership is
likelyto be benevolent or coercive.Hegemony theoryseeks to explain patternsof
internationaleconomic openness. There are threedistinctvariantshere, united
by a common focus on national trade policy preferencesbut deriving these
preferencesfromverydifferentanalyticroots. The core logic of these variants
and questions for futureresearch are discussed.
In the finalsection,I argue thatneitherleadershipnor hegemonytheoryhas
been tested adequately by existingempirical studies. Some responsibilitylies
with the theorists,who have generallyfailed to present their argumentsin a
clear, logical, and falsifiablefashion.Empiricists,however,have not been suffi-
cientlysensitiveto variationsin the theoryand have produced studiesthatsuffer
fromthe twinills of underspecificationand theoretical"over-extension."Given
the stateof existingtheory,I conclude, our ambitionat thisstage should not be
to seek decisivedisconfirmation of the researchprogrambut to provideguidance
forfurthertheoreticalrefinement.
The Research Program

The so-called theoryof hegemonic stabilityis composed of at least two distinct
variants,whichI shall referto as leadershiptheoryand hegemonytheory.These
twotheoriesare unitedbya methodologicalcommitmentto positivism,a concern
withthe functioningof the internationaleconomy,an independent variable-
lAs with many others,this appellation was coined by Robert Keohane (1980). As will become clear below, it
is actuallya misnomer.Given itswidespread acceptance, however,the label is unlikelyto be superseded byanother.
Thus, I defer to common practice.
DAVID A. LAKE 461
the structureof the internationaleconomic system,and the assumption that

states,at least in their conduct of foreignaffairs,are rational,unitaryactors.
Their differences,however,are equally fundamental.
Leadership theory is based upon the theoryof public goods and seeks to
explain the provision of internationalstability,reconceptualizedbelow as the
productionof an internationaleconomic infrastructure. Hegemony theoryfo-
cuses on the differentstructurallyderived trade policypreferencesof statesand
attemptsto explain internationaleconomic openness, definedas the sum of the
free trade and protectionistelements in the foreigneconomic policies of, at
least,the largeststateswithinthe system.2There is considerablevariationwithin
each approach, noted where appropriate below.
Practitionersoften blur their theoriesby mixingelements fromthe two tra-
ditions.3This tendency is understandable,as the theories are not necessarily
incompatible;according to at least some variants,countriescan be leaders and
hegemons at the same time. Nonetheless, the failure to recognize the distinct
nature of these research traditionsis a major source of the conceptual muddle
we now face. Progress cannot occur unless we understand and explicate the
internallogic of each theory.
This focus on leadership and hegemonytheoryis self-consciously narrow. It
excludes related research programs on hegemony and war, such as the long
cycle (Modelski, 1987; J. S. Goldstein, 1988) and power transition(Organski,
1958; Organski and Kugler, 1980; Doran, 1991) schools. While similarin struc-
ture,and plagued by many of the same problems,comparingthe international
political economy and internationalsecurityresearch programswould unduly
burden the presentessay.
Even though they are often insightfuland commonlybuild upon the early
contributionsof leadershipand hegemonytheory,I also exclude "interpretative"
accounts of hegemonyand internationaleconomic leadership (e.g., Wallerstein,
1974, 1980; Cox, 1987; Gill, 1990; Gill and Law, 1988; Rupert, 1990). Com-
paring this research program to the self-declaredpositivistprogram reviewed
here would also broaden the essay beyond reasonable limits.More important,
and reflectingdeep methodologicaland epistemologicaldifferences,I question
the utilityof interpretationsof the internationalpoliticaleconomy that lack a
clear, deductive foundation. While hegemony may provide a convenientand,
by this point, somewhat uncontroversialtool in a narrativeof nineteenthand
twentiethcentury internationaleconomic history,the ongoing difficultiesof
specifyingconcretecausal statementssuggestthattheinterpretative tool is flawed
and the account biased. Although the remainder of this essay is critical of
leadershipand hegemonytheory,these criticismsdo not,to mymind,constitute
or justifyan assault on positivistand generallyrationalisttheories of interna-
tional political economy. Rather, the criticismsbelow are intended to identify
issues and potential avenues for furthertheoreticaldevelopment. Improving
the quality of leadership and hegemony theoryis an end in itself.It may also
help us assess betterthe utilityof the concept of hegemony in other research
programs.
Finally,I do not compare the explanatorysuccess of the theoryof hegemonic
stabilityto other research programs in internationalpolitical economy-espe-
2Webb and Krasner (1989) draw a similardistinctionbut implythat the "securityversion of the hegemonic
stabilitytheory,"what I call hegemony theory,subsumes the collectivegoods argument. In my view, the logics
are substantiallydifferent(but not incompatible)and should be treatedseparately.
3For instance,Robert Gilpin workswithina public goods approach, but assumes that states pursue multiple
objectives-including political power. As I define the approaches here, Gilpin mixes elementsof leadership and
hegemonytheory.For a recent statementof his views see Gilpin (1987: especially87-88). Robert Pahre (1989,
1990) also straddlesthe fence I have constructedbetween these theories.
462 Leadership, and theInternational
Hegemony, Economy
cially those, such as endogenous tarifftheory,that focus on strictlyunit-level

attributes(see Nelson, 1988; Magee, Brock, and Young, 1989). The ultimate
testof a research program is in the marketplaceof ideas-and success, such as
it is, is only relativeto some other theory(Lakatos, 1978). Yet, the overarching
theme of this essay is that the theoryof hegemonic stability-despiteits prom-
inence over the last two decades-has not put its best possible "model" into the
competition.Progress has been made, but significanttheoreticalproblems and
issues remain. Rather than compare the theoryof hegemonic stabilityagainst
its prominentrivals,I want to focus the debate here on ways of improvingthe
research program itself.
Leadership Theory
For Kindleberger(1973, 1981, 1986a, 1986b), the exemplar of leadership the-
ory,statesare rationalegoistswho seek to maximizetheirown welfare,implicitly
defined in materialistterms. Because of the free rider problem, he argues, a
single leader is necessaryfor the provisionof the public good of international
stability.4
Variable
TheDependent
While leaving the termundefined,Kindleberger(1973:292; 1981:247) identifies
fivefunctionswhich must be performedif the internationaleconomy is to be
"stable": providinga marketfordistressgoods, producinga steadyif not coun-
tercyclicalflow of capital, maintaininga rediscount mechanism for providing
liquiditywhen the monetarysystemis frozenin panic, managing the structure
of foreignexchange rates,and providinga degree of coordinationof domestic
monetarypolicies. For analyticpurposes, it is best to eschew the amorphous
concept of stabilityand redefinethe dependent variable in termsof these nec-
essary functions-which I have summed elsewhere under the heading of the
"internationaleconomic infrastructure"(Lake, 1988:33-35). These functions
can also be reformulatedin simplerand more familiarterms.
A stableinternational
economy requiresa mediumofexchangeand, secondarily,a
store of value. Whether this medium is gold, dollars, or seashells is, in many
ways, irrelevantas long as there is agreement among the participantsin the
market.At its root, this functionincorporatesKindleberger'sconcern withex-
change rate management and domesticmonetarypolicycoordination-both of
which influencefluctuationsin and the value of the agreed medium.
A stableinternational
economy liquidityin the long term to
musthave sufficient
allow foreconomic growth,in the medium termto counterbusiness cycles,and
in the short term to manage panics. This functionnot only subsumes Kindle-
berger's second and third requirements,but also his first,for, as he notes,
"Maintaininga marketfor distressgoods can be regarded as another formof
financing"(1973:293).
To this pairing I would add another,equally fundamentalfunction:a stable
4AlthoughKindlebergerdoes allude to altruism(1973:302, n. 13), subsequentinterpreters have largelyassumed

thatstatesare egoistic.Kindleberger(1986a:841-842) explicitlydisavowsthe termhegemony to describeleadership.
For Kindleberger,leadership is a functionof both materialcapabilitiesand willingness.Since the latteris inferred
frombehavior,thisis a tautology,but it nonethelessimpliesthata single leader may also be a sufficientcondition
forthe provisionof internationalstability.Finally,if we assume, as I believe Kindlebergerdoes in his writingson
this topic, that the law of comparative advantage holds and countries will adopt free trade if an adequate
infrastructure exists,then openness will followfromthe provisionof the public good. But this is an implication
and not the primaryhypothesisof the theory.
DAVID A. LAKE 463
international
economy mustdefineand protect rightsforgoods in transit
basicproperty
and overseas (portfolioand direct) assets. The more fullyspecifiedand secure
propertyrightsare, the more easily the wheels of commerce and finance can
turn.
Readers will no doubt recognize these functionsas necessaryattributesof all
economies at or above the stage of primitiveaccumulation.Kindleberger'scon-
tributionis merelyto extend these functionsto the internationaleconomy and
to remindus that none of the attributesof internationalstabilityexist naturally
or of theirown accord. Rather,theymust be created and activelymaintained.
Kindlebergercorrectlyposits that this internationaleconomic infrastructure,
like its domestic counterpart,is a public good, or at least produces sufficient
positiveexternalitiesso thatfor purposes of analysiswe can treatit as if it were
a public good. A medium of exchange,liquidity,and a systemof propertyrights,
once provided, can be extended to others at littleor no cost. In addition, a
countrycan be excluded from using a medium of exchange, and thus from
being affectedby the-degree of liquidityin the system,only ifall participantsin
the market collude and enforce a perfectforeignexchange embargo against
thatstate; any leakage will allow the excluded countryto enjoy (at some appro-
priateexchange rate) the benefitsprovidedbyothers.As the historyof economic
sanctionssuggests,such perfectembargoes are extremelycostlyto impose and
practicallyimpossible.5
Criticshave oftenassaulted leadership theoryforassuming that freetrade is
a public good (Conybeare, 1984:8-9; Snidal, 1985:590-593). This criticismis
generallycorrectbut misdirected.Free trade is rival and excludable and there-
fore not public, although the enforcementof trade rules-such as the uncon-
ditional most-favored-nationprinciple-is a public good prone to collective
action problems.6This criticismand subsequent debate merelyhighlightsthe
problem common to many social science theoriesof specifyingclearlywhat is
to be explained. Based upon the exemplar and properlyconceived,the depen-
dent variable of leadership theoryis not free trade or internationaleconomic
openness but stability,in Kindleberger'sterms,or the internationaleconomic
infrastructure in mine.
TheCausalArgument
The fallacyin Kindleberger'soriginalstatementof the theoryis not in treating
the internationaleconomic infrastructure as a public good but in positing"that
forthe worldeconomyto be stabilized,therehas to be a stabilizer,onestabilizer"
(1973:305, emphasis added). Defined non-tautologicallyand independentlyof
the behavior we wish to explain, however, subsequent work suggests that a
single leader is neithera necessarynor sufficientconditionfor the provisionof
an internationalpublic good.
Kindleberger'spositionis thatthe difficulties
and costsof bargainingbetween
two or more statesare likelyto thwartinternationalcooperation."Witha duum-
virate,a troika,or slightlywider formsof collectiveresponsibility," he writes,
"the buck has no place to stop" (1973:299-300).
Yet, as Duncan Snidal (1985) has most clearlypointed out, there is nothing
in public goods theorythat limits"privileged"groups, in Mancur Olson's ter-
5Baldwin (1985) presents the most optimisticview of the efficacyof sanctions. He does not discuss foreign
exchange embargoes at length.
6Gilpin(1987:34) raises this point; foran extensivetreatmentsee Gowa (1989a:314-316). On the enforcement
of rules and norms see Axelrod (1986). The severityof the collectiveaction problem is rooted in the infinite
regressof who enforcesthe rule of enforcement.
464 Leadership,Hegemony,and theInternationalEconomy
minology,to a single state.7 Using Thomas Schelling's notion of a "k" group,

Snidal has demonstratedthatit ispossiblefortwoor more statesto reap sufficient
net benefitsfor them to produce internationalcollectivegoods. In Figure la
(under the initialconditionsof payofffunctionC), state 1 formsa sufficientk
group to provide the internationaleconomic infrastructure.Since it contributes,
the leader receives a net payoffof si (measured along the verticalaxis). Other
countries,which do not contribute,enjoy a net benefitof sm.In Figure lb, two
countriesare required to forma sufficientk group.
Statemdoes
Payoffto TNC notcontribute
Ptayofto
State/
/ /C Statei does
s contribute
Si ... of
~~~~~~~~~Number
00m
L; 2States ,
Contributing
Payoffto NC Statem does

notcontribute
State
/ Statei does
Sm C contribute
Numberof
States
Contributing
b
FIG.1. K groups and the internationaleconomic infrastructure.
(Adapted fromSnidal, 1985, p. 601.)
7See also McKeown (1983), Lake (1983, 1984), and Stein (1984).
DAVID A. LAKE 465
Recent work on internationalregimesreinforcesthis conclusion,at least for

"post"-hegemonic systemsif not more generally (see Krasner, 1983). While
differentregimescan have substantialdistributionalimplications,forthistheory
the substantivecontentof the internationaleconomic infrastructure is somewhat
arbitraryin thatthe exact nature of the medium of exchange or set of property
rightsis less importantthan having some agreed-upon medium or rights.8As a
result,hegemonicallycreated regimes may solve the problem of agreementon
a subsequent focal point, therebyeasing the bargainingproblem which would
existin a "regime-free"environment.Justas the clock in Grand Central Station
provides a natural meeting place, so too does the dollar provide a "natural"
reserve asset in our post-hegemonicworld.9 Keohane (1984) goes furtherto
suggest that states may be able to constructregimes to facilitatecooperation
even in the absence of a single leader.
In short, both public goods and regime theoryclearly imply that a single
leader is not a necessarycondition for the productionof an adequate interna-
tional economic infrastructure.In theory,at least, leadership can be provided
by more than one state.
Producingan internationaleconomic infrastructure is costly,whetherbecause
manipulating an economy to provide liquidityin the short run un-
artificially
dermines a country'slong run economic health or protectingpropertyrights
requires an abilityto project force overseas. Thus, in the absence of coercion
(see below), the payoffsto countries that contributeare less than those for
countriesthat do not (see Figure 1, where si < sm; the cost of providingthe
public good is equal to the verticaldistance between NC and C). Moreover,
given business cycles,technologicalinnovations,and the like, the costs of pro-
ducing the internationaleconomic infrastructure are likelyto vary over time.
As costsincrease (NC-C' > NC-C), the size of the k group necessaryto produce
the public good also increases. This is illustratedin Figure la as a downward
shiftin the payofffunctionof contributors.As drawn, the increasingcosts of
providingthe internationaleconomic infrastructure now require, holding size
constant,thatthe two largestcountriesparticipate.Under such circumstancesa
single leader is insufficient.
The late nineteenthcenturymay provide an example of thisprocess at work.
Given the relativeconstancyin Britishpolicyduringthisperiod,it would appear
thatthe firstGreat Depression (1873-1896) occurreddespite England's contin-
ued desire and willingnessto provide internationalleadership. What changed,
in thisinstance,was not Britain'srole, whichmay have actuallyreached its peak
around this time with the near universalacceptance of the Gold Standard,but
the state of the internationaleconomy; even with its financialand monetary
resources(and policyof freetrade),Britaincould not absorb a sufficient quantity
of agriculturalproducts (the "distressgood" of the period) to avert the deep
economicdislocationscreatedin Europe by the opening of the AmericanWest.10
Similarly,the economic trauma of WWI may have done more to thwartthe
effectiveprovision of an internationaleconomic infrastructure in the postwar
period than the absence of a single leader. Exchange rate fluctuations,for in-
stance, increased by more than a factorof 100 between 1913 and 1919-1922.
Althoughthisreflectsthe failureof earlystabilizationattempts,it also highlights
8From these distributionalimplicationsit mightbe possible to predictthe choice of a particularregime,but

thisis not the task of thisarticleor the literatureit surveys.
90n focal points see Schelling (1960).
10Fora discussionof the firstGreat Depression and itsconsequences see Gourevitch(1986), Imlah (1958), and
Hobsbawm (1968).
the overwhelmingtask that confrontedBritainand the United States afterthe

war (Lake, 1988:163-182).
In conclusion,a single leader appears neithernecessarynor sufficient forthe
provision of an internationaleconomic infrastructure. It is always possible to
define any state that effectivelyproduces stabilityas a "leader" and any state
that does not as a "non-leader." Indeed, it is a fairlycommon tendencyin the
literature.But in the end, of course, this sleight-of-handproduces not an ex-
planation but a tautology.The task before us is to move beyond behavioral
definitionsof leadership and to define the necessaryand sufficientconditions
forthe productionof the internationaleconomic infrastructure.
Necessary
and Sufficient
Conditions
The literaturesummarizedabove can be captured in a simple inequalitywhich
helps clarifythe necessaryand sufficient conditionsforthe effectiveproduction
of the internationaleconomic infrastructure."I Important,of course, is the cost
of producing the infrastructure (CI) and the benefitobtained by any individual
country(Bi). When ranked according to absolute size, the benefitof the inter-
national economic infrastructure enjoyed by each successivecountrydeclines; if
smaller countries benefit disproportionatelyfrom internationalexchange, as
neoclassical economics maintains,this benefitwill also decline at a declining
rate.
In addition, the transactionscosts incurred by each countryin negotiating
and enforcing an agreement among the k group (Ti) and the efficiencyor
efficacyof the agreementso reached (Ak) are also important.Transactionscosts
representthe resources divertedfromother possible uses in order to negotiate
and enforce an (explicitor implicit)agreementamong the k group. Such costs
arise frommany diverse activities,includingthe time and energyof diplomats
used in searchingforand consultingwithother possible providersof the public
good, the resources devoted to monitoringparticipants,and the welfarefore-
gone when it is necessaryto sanctionviolatorsof the agreement.Transactions
costs are likelyto rise at an acceleratingrate with each new member of the k
group. Given that "perfect"contractscoveringall eventualitiesand safeguards
against all possible formsof opportunismare virtuallyimpossibleto negotiate,
the efficiencyof agreements is also likelyto vary, both with the underlying
uncertaintywithinthe systemand the numberof partiesto the accord.12In this
sense, I-Akrepresentsthe expected "failure"rate of an internationalagreement
or the probabilitythat countrieswill defectfromor otherwisecheat on the best
agreementcountriescan negotiate.As the incentiveto freeride in the provision
of public goods increases with the number of providers-and the greater the
incentive,the greater the likelihood that countrieswill find ways around the
best or most "airtight"agreements-the efficiency of an agreementwilldecrease
at an acceleratingrate witheach additional participant.
Combining these factors,the internationaleconomic infrastructure will be
produced only when some group of countriesk satisfiesthe inequality
"lAlt, Calvert, and Humes (1988) present a similar and, in some ways, more sophisticatedgame-theoretic
model. Yet theirmodel, focused on the question of the benevolentor coercivenature of hegemony,is developed
only forthe case of a single leader and not forthe general case of an n-countryk group. While decision theoretic
in structure,the formulationpresented here allows for variationsin (1) the size of the k group, (2) the costs of
providingthe internationaleconomic infrastructure, (3) the transactionscosts of formingan agreement among
membersof the k group, and (4) the efficacyof the agreement.As demonstratedbelow, it can also be extended
to duplicate some of Alt, Calvert,and Humes's insightsabout benevolentand coercive hegemony.
120n contractingsee Williamson(1985) and Eggertsson(1990).
DAVID A. LAKE 467
C, < Ak 1 (Bi- Ti)

0-k
When the individual countrybenefits,minus the transactionscosts of negoti-

ating and enforcingthe agreement, weighted by the efficacyof the group's
provision,are greater than the cost of producing the internationaleconomic
infrastructure, the k group is both necessaryand sufficientforthe provisionof
effectiveinternationalleadership.
A single leader constitutesa special case of a k group, as there is no inter-
national agreementto be negotiatedand enforced(T = 0) and no reductionin
the efficacyof the state'sactions (A = 1). Whetherthe infrastructure is provided
in this case depends solely upon the leader's benefitsrelative to the costs of
producing the infrastructure. Whethera k group of more than one stateexists,
on the other hand, depends not only on the absolute costs and benefitsof the
infrastructure but also on the transactionscosts and effectivenessof the agree-
ment undertakenby the group. An effectivek group of more than one state is
favoredthe smaller the (a) fall in per state benefits(or the absolute size of the
countries),(b) rise in transactionscosts,and (c) decline in efficacy.
Benevolent
and CoerciveLeadership
There has been a lively debate in this literatureon whether the leader acts
benevolentlyor coercively.'3 Indeed, Beth Yarbrough and Robert Yarbrough
(1992:50) have recentlywrittenthat "the main source of disagreementamong
analystsin the hegemonic stabilitytraditionconcernsthe extentof benevolence
or exploitation by the hegemon." When benevolent,the leader provides the
internationaleconomic infrastructure unilaterally,or at least bears a dispropor-
tionatecost of providingthe public good, and therebygains relativelyless than
others. When coercive, the leader forces other, smaller states to contributeto
the internationaleconomic infrastructure and, at an extreme,to bear the entire
burden. This theoreticaldivide is often used to distinguishbetween the litera-
tures reviewed in this and the next section. This is a plausible reading of the
arguments, but it does not, I believe, capture fully the differencebetween
existingtheories.Despite the prominence of thisdistinctionin the literature,it
is actuallya second-orderquestion withinleadership theory.
Non-k group members have no incentive to contributevoluntarilyto the
productionof the internationaleconomic infrastructure. While theybenefitfrom
its provision,theyexpect to free ride on the contributionsof others.They will
contributeonly if coerced by others, with the coercers logically limited to k
group members.Ceterisparibus, theircontributionsare a functionof the quantity
of resourcesdevoted to coercion by the k group and the effectiveness withwhich
such resources are wielded; or,
13Snidal(1985) draws the basic distinction.Alt,Calvert,and Humes (1988) develop a game-theoreticapproach

to this issue that makes several of the points below. For continuityI extend the decision-theoreticmodel above
ratherthan reiteratetheircontribution.The centralinsightcaptured in Alt, Calvert,and Humes, but not below,
is that in equilibrium all states must play mixed strategies.As a result,non-hegemonicstates may contributeto
the public good out of fear of punishmenteven when actual sanctions(Li below) are zero and hegemons may fail
to punish even though actual contributionsof others (cm below) are zero. This insightcan be partly,but not
wholly,incorporated into the model here by reinterpretingthe variables below as average contributionsand
sanctions over multiple periods. Alt, Calvert, and Humes also find that there is nothing qualitativelydistinct
betweenbenevolent and coercive leadership and thatthe choice of one or the other depends upon the efficacyof
coercion.
n
cm=a a Li
0-k
wherecmis the contributionof a non-k group state,Li are the resourcesdevoted

to coercing state m by each k group member,and a is an efficiencyparameter.
This functioncan be integratedinto the inequalityabove. The international
economic infrastructure will be provided when
nI n
+
CI c<Ak E: (Bi - T -Li) ECm
0-k 1-n
If Li = 0, and by implication cm = 0, leadership is benevolent. If Li > 0,

coercion-however effective-is being employed.
Beyond this purely definitionalexercise, two relevant conclusions emerge.
First,the basic formof the firstinequalityabove remainsintact.There is nothing
qualitativelydifferentabout the provision of public goods with and without
coercion. Most important,k groups greaterthan one are theoreticallypossible
even when coercion is exercised.
Second, whetheror not coercion is used depends on the efficiency withwhich
resourcesare employed. If a = 1, then the k group uses one unit of resources,
ceteris
paribus,to elicitone unit of contribution.Coercion "pays" only when the
k group's leverage is particularlyeffective(a > 1). The efficiency
of coercion is
likelyto vary across time, across k groups (depending on the nature of the
resourcestheycontrol),and across targetstates(as a resultof theirdependence
upon the k group). The answer to the question of whetherleadership is benev-
olent or coercive lies not in the distributionof benefitsfromthe public good
but-at least in part-in the efficacyof internationalleverage.
ResearchAgenda
As we shall see, leadership theoryhas enjoyed greaterprogressthan its cousin,
hegemony theory.This is due, perhaps, to the intellectualarbitragethat has
frequentlyoccurred between internationalrelationistsand public goods theo-
rists.Nonetheless,significanttheoreticaland operational problemsremain.
Future research should focus on the (1) components of the international
economic infrastructure and theircosts of production; (2) cross-nationaldistri-
bution of the benefitsof thisinfrastructure;(3) transactionscostsof negotiating
and maintainingagreementsamong groups of various sizes; (4) effectivenessof
differentagreements;and (5) efficacyof internationalleverage.
Given the difficulty
of definingpreciselyand measuringthese variables,direct
tests of the necessary and sufficientconditions identifiedhere are not likely.
Through the use of comparativestatistics,however,analystscan predictbehavior
based on changes in the direction (rather than magnitude) of the variables.
Hypotheses can then be assessed against the historicalrecord; Barry Eichen-
green's (1989) study of internationalmonetaryleadership since the late nine-
teenth century is exemplary in this regard. Moreover, since international
structureschange slowlyand singleleaders willingto bear the costof unilaterally
producingthe internationaleconomic infrastructure are relativelyrare,analysts
seeking to test leadership theoryshould look beyond monetaryand financial
issues to other public goods. There is an immediateoverlap, which should be
more fullyexploited,betweenleadershiptheoryas describedhere and emerging
workon the internationalenvironment.
DAVID A. LAKE 469
Hegemony Theory
In hegemony theory, states are presumed to possess differenttrade policy
preferencesderived from their varyingpositions withinthe internationaleco-
nomic structure.By emphasizing differencesin preferences,hegemonytheory
breaks with the law of comparative advantage-which posits that all countries
benefitfromand share preferencesforunilateralfreetrade (Frey,1984:15-20).
Here, states may preferfree trade or protectionand theirpreferencesmay be
in harmonyor conflict.In all cases, the openness or closure of the international
economy,the dependent variable, is the resultof the strategicinteractionand
bargainingof self-interested states.
Although free trade or economic openness is not necessarilypreferredby all
countries,it is stronglydesired by the hegemon. Openness arises, in this view,
when the hegemon-or, in some versions,a coalitionof middle-sizedpowers-
altersthe trade policies of other states.Thus, hegemonyis necessarilycoercive
and based on the exercise of power; the hegemon must effectively change the
policies of others to satisfyits own goals. Whereas leadersmay use coercion to
overcome the free rider,problem,hegemons must use it to reconcile conflicting
national trade policy preferences.The leverage exerted by the hegemon may
take many differentforms,includingnegativesanctions(threats),positivesanc-
tions (rewards), the restructuringof marketincentives,ideological leadership,
or simplysuccess worthyof emulation.14The issue of how the hegemon alters
the policies of othersis a second-orderquestion. The instrumentsof power are
less importanthere than the role of power in creatingand maintaininginter-
national economic openness.
Thus, in hegemony theory,internationaleconomic openness is not stymied
onlyor even principallybycollectiveaction problems.As noted above, freetrade
is inherentlyexcludable and rival and, therefore,not a public good. Although
it is not necessarilyinconsistentwith leadership theory,hegemony theory,in
turn,is not built upon a public goods model and freeridingis not the principal
political problem. Rather, in this theoreticalview, the politicsof international
economic relationsarise fromthe differentstructurally derivedpreferencesover
trade policy possessed by competingstates.
Unlike leadership theory where a single, unified theoreticalapproach has
graduallyemerged, hegemonytheoryis characterizedby threedistinctvariants.
The firstassumes that statespossess multipleobjectives,at least one of which is
political power or security.I refer to this as neorealist hegemony theory. It
followsthat free trade may not be optimal when states pursue goals different
fromthose assumed in neoclassical economics. The second variantdraws upon
strategictrade theoryto suggest that free trade may not be the optimal policy
for all countries under all circumstances.Specifically,this variant focuses on
marketimperfections-a misnomer widely used in economics to describe de-
parturesfromthe model of pure competition-and relaxes the assumptionsof
small size and constantreturnsto scale typicallyused in the "old" trade theory.
The thirdvariantexamines the linkbetweeninternationalpositionand domestic
politicsand builds a "second image reversed"logic fortrade policypreferences.
Here, the concepts of the state and the "national interest"are unpacked and
decomposed into domesticactorsand theirinterests.National trade policypref-
erences are then derived fromthe endogenous equilibriumof competingsocial
groups. The remainderof this section surveystwo of several possible examples
of each variant,examines theirstrengthsand weaknesses,and poses issues for
furtherresearch.
140n the formsof power see James and Lake (1989), Ikenberry(1989), and Ikenberryand Kupchan (1990).
NeorealistTheory
Neorealisthegemonytheoryassumes thatstatespossess complex utilityfunctions
thatinclude such relativegoals as power or security.How statesmaximizeacross
theirmultiple and possiblyconflictingobjectives,in turn,depends upon their
positionswithinthe internationalsystem.
Stephen Krasner's "State Power and the Structureof InternationalTrade"
(1976) is the exemplar of this approach.'5 He begins by identifyingthe effects
of internationaleconomic openness on four state objectivesacross two dimen-
sions: the relativesize and level of developmentof the country(see Table 1).16
Openness enhances the political power and, at least compared to others, the
social stabilityof large, developed countries,while it reduces-again, compared
to others-the national income of large states.The other effectsare ambiguous
and depend upon the structureof the internationalsystem.Systemsof small,
highlydeveloped states,he argues, will tend to be open, forwhile the effectsof
openness on politicalpower are detrimentaltheyare symmetrical, safelyignored,
and offsetby income and growthconsiderations.Structuresof large, unequally
developed stateswillbe closed, as the less developed actorswillpreferprotection.
Hegemonic systemsare most likelyto be open as the single advanced country
will preferfree trade and the others will either recognize that competing for
politicalpower is useless or succumb to the hegemon's blandishments.
Withoutaddressingthe specifictheoreticalor empiricalclaims made by Kras-
ner, whichhave already been widelydissectedin the literature,there are, in my
opinion, two general impedimentsto theoreticalprogress inherentin his ap-
proach. One difficulty inheres in aggregatingmultiple objectives when inter-
national economic openness exertsconflictingpressures.Depending upon the
weightattachedto these fourobjectives,the behavioralpredictionsof the theory
can change dramatically(see Table 1): if large, developed states weight each
objectiveequally they will incline toward free trade, but if theyhave a strong
preferencefor,say,national income theywillprefermore protectionistpolicies.
If the weightsattached to these goals varyover time and across countries,and
we have no reason to believe theydo not, general predictionswill be elusive.
To raise thisdifficulty, however,is not to argue thatthepresenceof conflicting
objectives is a problem in neorealist hegemony theoryor, more generally,a
rationalistapproach to politics.Indeed, the microeconomicapparatus that un-
TABLE 1. Statepowerand thestructure

ofinternational
trade.
Predictedeffects
ofopennessaccordingto
(direction
ofrelationship)
Largerrelative Higherlevelof
Goals size ofcountry development
ofcountry
Politicalpower + +
Nationalincome system
Economicgrowth system system
Socialstability + +
A schematic from)the
of Krasner,1976.Table shouldbe read:opennessenhances(detracts
representation
largecountries.
politicalpower(nationalincome)of relatively "System" thattherelationship
indicates depends
uponsystem structure.
'5See also Krasner (1978, 1979, 1981, 1982).

161 am indebted to Cheryl Schonhardt-Baileyfor the followingdiscussion.
DAVID A. LAKE 471
derliesthe theorywas developed specificallyto explain constrainedchoice across

multipleobjectives.Rather,the point is simplythat we must take the processof
aggregating multiple preferencesseriouslyand be sensitiveto the ways this
process is likelyto affectour predictions.'7
A second difficulty lies in the relativeand absolute nature of these national
objectives.Politicalpower, definedby the opportunitycosts of closure,is inher-
entlyrelativeor zero-sum;itcan be determinedonlybycomparingthe attributes
of two or more countries.As noted, however,Krasner also assesses the effects
of openness on national income and social stabilityin relativeterms.Free trade
benefitsall states,according to the law of comparativeadvantage,but improves
the welfareof small statesproportionatelymore; therefore,large countrieswill
preferclosure. Likewise, openness reduces the social stabilityof all states,but
has greatereffectson small, less developed countries;as a result,large, devel-
oped states will benefit from openness. But to the extent that states value
national income or social stabilityas goals in and of themselves,then the vari-
ation across countries is eliminated and, indeed, the "signs" are reversed for
large,developed states.In practice,statesare likelyto pursue both absolute and
relativegains.18How theyweightthese conflictingobjectivesis again a question
of considerable importance.If a state assesses its payoffsonly in relativeterms,
Krasner's specificationof preferencesfollows. If states weight absolute and
relativegains equally, however,the conflictingpressureswilllargelycancel each
other out and the model will fail to yield any determinantpredictions.
The difficulties of aggregatingmultiplepreferencesand absolute and relative
gains have proven to be significantbarriers to theoreticalprogress. In the
absence of a fullyspecifiedmodel, Krasner'sbehavioral predictionsappear and
are ad hoc. With a model attentiveto the question of weights,on the other
hand, no general predictionsare possible withoutaddressing the "causes" of
these weights.
Recently,several second-generationneorealistmodels have been developed.
All restrictthe national utilityfunctionto wealthand security,therebyrendering
the model more tractable,and posit that it is the tension between these two,
sometimesconflictingobjectivesthatproduces variationsin nationaltrade policy
preferences.Joanne Gowa's recent work is indicative of this genre (1989b,
forthcoming;Gowa and Mansfield,1993).19
Accordingto Gowa, trade createssecurityexternalities.These spillovers"arise
because the source of gains from trade is the increased efficiencywith which
domesticresources can be employed. This increased efficiencyitselffreeseco-
nomic resources for militaryuses" (Gowa and Mansfield, 1993:408). To the
extentthattheyare concerned more withrelativethan absolute gains, countries
preferto trade withfriendsratherthan foes,as the efficiencygains enjoyed by
a country'sallies increase the overall strengthof the coalition. In other words,
two countries are more likely to adopt free trade when the joint gains are
internalizedthroughsome long-termsecurityrelationship.
While this is true for all states, Gowa (1989b:1251-1253) asserts,it is even
more true forhegemons, which possess a unique statuswithinthe international
economy.Where most statesforgoabsolute welfareby blockingtrade withtheir
17A more serious problem is the presence of sociallyintransitivepreferences,made famous in the Condorcet
votingparadox (see Schwartz,1987, for a reviewof thisliterature).I do not address thisproblem here, except to
note thatdomesticpoliticalsystemsare likelyto develop aggregationprocedures("institutions")thatguard against
this possibilitylest they decline into "chaos" in any number of policy areas (see Shepsle, 1979, for an original
statementof the structure-inducedequilibriumapproach and Krehbiel, 1987, fora less technicalreview).
'80n the relativevs. absolute gains debate, see the essays collected in Baldwin (1993).
'9See also Pahre (1989, 1990).
enemies, she argues, hegemons reduce theirwelfareby tradingfreelywiththeir

friends.Hegemony is costly.Large states possess a positiveoptimal tariffand
theyare likelyto behave "altruistically"and forgo such benefitsonly when the
foreigngains fromtrade are limitedto theirallies.
Since securityexternalitiesare largelyunobservable,Gowa turns to alliance
patternsto derive testablepropositions.As alliances are more likelyto be stable
in bipolar internationalstructures,she hypothesizes,all states should be more
likelyto adopt liberal trade policies toward members of their own bloc when
such a systemexists. Conversely,multipolar internationalsystemsshould be
characterizedby higher,more universalisticpatternsof protection.
The point about securityexternalitiesis, I think,a largelycorrectand impor-
tantinsight,but there are two problemswiththe currentformulation.First,the
argument is ultimatelybased on optimal tarifftheory,which Gowa (1989a)
herselfhas criticizedin a related context(see below) as inadequate. For reasons
explained shortly,I am also skeptical of optimal tariffsas a foundation for
hegemony theory. Second, Snidal (1991a, 1991b) has recentlydemonstrated
that even with constant weightsattached to the value states place on relative
and absolute gains, the larger the number of countrieswithinthe system,the
less impact relativegains concerns exert on cooperation. In contrastto Gowa's
model, thisimpliesthat-at least forthe greatpowers-securityexternalitieswill
constrainfree trade less in multipolarthan in bipolar systemsand that,ceteris
paribus,the formershould be more open.
The unanswered questions facingneorealisthegemonytheoryare quite basic

and fundamental,reflectingwhatmuststillbe consideredat thistime-seventeen
yearsafterKrasner'soriginalessay-a promisingbut unfulfilledapproach. First,
what are the minimum number of goals necessary to generate theoretically
interestingand empiricallyuseful patternsof trade policypreferences?Krasner
posed four; Gowa and othershave restrictedtheirmodels to power and plenty.
As a general rule, more complex utilityfunctionswill be more accurate empir-
ically but more intractabletheoretically.The art of theory-buildingwill even-
tuallyguide the choice.
Second, when and where do the multiplegoals possessed by statesconflict?
Gowa argues that power considerationsare not salientbetween allies in bipolar
systems.Joseph Grieco (1990) claims that such concerns remain centralinhibi-
tions to cooperation. This is not simplyan empiricalproblem. We must know
whatto look foras well as where and when to look forit. Empiricalobservations
in the absence of clearly articulatedand specifiedtheories will not solve this
riddle.
Third, how does a state'spositionwithinthe internationalsysteminfluenceits
choice and the nature of the trade-offbetweenits goals? For hegemonytheory,
this is the most direct question, but it cannot be answered without greater
progresson the firstand second. Assumingthisoccurs,theoristsmust then ask,
Are hegemons qualitativelydifferentfromotherstates?Are theyless constrained
than othersfromfollowingtheirnarrowself-interests, as suggestedby Krasner,
or more constrained,as impliedby Gowa? Are therevariationsin the constraints
faced by non-hegemonicstates?Do these variationsmatter?
Finally,and relatedly,what definespositionwithinthe internationalsystem?
of statesthatexertthe predicted
What are the salientinternationalcharacteristics
effectson trade-offsand choice? What is the appropriatedimensionof variation?
What is the appropriate metric?Neorealistsmustanswer these questions before
a fulltheorycan exist.
DAVID A. LAKE 473
StrategicTrade Theory
The second variant of hegemony theory seeks to build upon the emerging
models of strategictrade policy in internationaleconomics (see Grossman and
Richardson,1985; Krugman, 1986, 1987; Helpman and Krugman, 1989; Rich-
ardson, 1990). Central to this approach is the hypothesisthat national trade
policy preferencesdo not vary because countriespursue power as a goal but
because free trade does not always maximize the absolute gains fromtrade. In
thisway,it shares the utilitymaximizationassumptionsof traditionaleconomic
theory. But by challenging the law of comparative advantage this strategic
variantrenders the pursuitof free trade problematic.20
One approach begins with optimal tarifftheory but turns the traditional
argument on its head. Both neoclassical and strategictrade theoryrecognize
that tariffsmay be welfare-improving when countriespossess sufficientmarket
power. In such cases, countries can impose tariffs,reduce imports,turn the
termsof trade to their advantage (lower import prices more than the tariff),
and improve national welfare. Given appropriate elasticitiesof demand and
supply, it is possible that optimal tariffsmay be greater than zero even after
foreign producers retaliate against the protectionistcountry(Johnson, 1954;
Riezman, 1982). It is importantto note, however,that for nearlyall countries
nearly all the time optimal tariffsare zero; most countries simply lack the
requisitemarketpower at existingelasticities.In addition,optimal tariffsmust
be assessed on a product-by-product basis, a point oftenoverlookedby political
scientists.Even if a countryenjoys an optimal tariffgreaterthan zero on some
commoditiesit is unlikelyto have sufficientmarketpower on all or most com-
modities.21As a result, optimal tarifftheoryprovides a poor foundation for
systemictheoriesof trade policy.Nonetheless,criticsof hegemonytheoryhave
argued that if positive optimal tariffsexist, they are most likelyto exist for
hegemonic states(see particularlyConybeare, 1984).
This proposition is at variance with both the core of the theory and the
historicalpractice of the United States and Britain-although American trade
policy in the early 1930s is a debatable exception (see Conybeare, 1985). In
another recent article,Gowa (1989a) reconciles this conflictand suggests that
forward-lookinghegemons should and do waive whateveroptimal tariffsthey
might have. Drawing upon limit-pricingmodels in economics, she identifies
whatmightbe called the "hegemon's paradox." Justas a local monopolistmight
lower its prices and forgo some rents to deter competitorsfrom enteringits
market,hegemons have an interestin forgoingoptimal tariffsin order to deter
foreigncompetitorsfrom"upscaling" theireconomies to compete in the hege-
mon's area of comparativeadvantage. The logic is that the hegemon's optimal
tariffsreduce the relativeprices of its imports,therebycreatingincentivesfor
the exporters of those commodities to shiftproduction into areas that have
enjoyed a relative price increase-presumably commodities exported by the
hegemon. Conversely,by forgoingoptimal tariffsthe hegemon raises (or main-
tains)the relativepricesof itsimportsand induces foreigncountriesto specialize
furtherin these commodities.22
201n addition to the two summarized below, Yarbrough and Yarbrough (1992) presenta thirdapproach that
focuses on the degree of relationallyspecificassets and the possibilityof thirdpartyenforcementof agreements
to explain the formof internationaleconomic openness (unilateral,bilateral,minilateral,multilateral).The prin-
cipal problemshere, in my view, lie in discerningthe degree of relationalspecificityover time and in integrating
privatealternativesto internationalregimes(e.g., foreigndirectinvestment).
21These qualifiers,if carefullyapplied, would allow fora rigoroustestof thistheory.
22Foran illustrationof how this process workssee James and Lake (1989).
474 Leadership,
Hegemony,
and theInternational
Economy
Whetherhegemons pursue a short-termstrategyof optimal tariffsor a long-

term strategyof free trade obviouslydepends upon their discount rates. The
more highly they value future trade advantages, the more likelythey are to
forgo optimal tariffs.This implies, however, that declining hegemons should
engage in a strategyof preemptiveprotection,switchingfroma long-termto a
short-termstrategysooner ratherthan later. In otherwords,theyshould impose
optimal tariffsbefore not aftertheyjoin the ranks of mere great powers. Yet,
historicalexperience suggests that hegemons typicallyremain wedded to free
trade long after it serves their interests.This is the problem of hegemonic
"afterglow"firstidentifiedby Krasner (1976).
I develop the second strategicapproach in Power,Protection, and Free Trade
(Lake, 1988). Neoclassical trade theories assume that all productionis charac-
terizedby constantreturnsto scale whichare fullyinternalizedby the firm.New
or strategictrade theory allows that at least some industries might possess
internal (limited to the firm)or external (extending to the sector or country)
economies of scale. With perfectlyfunctioningcapital markets (a strong as-
sumption),internaleconomies will always be exploited and captured by some
entrepreneur.In the absence of governmentintervention,on the other hand,
external economies or positiveexternalitieswill alwaysbe "underproduced" in
national welfareterms.Thus, governmentscan improvewelfareby subsidizing
or, in import-competing industries,protectingfirmsand industriesthatproduce
such externalities.If the economies of scale are large enough, government
support mightwell be justifiedforan extended period of time-a formof semi-
permanent, infant-industry protection. The possibilityof welfare-improving
governmentintervention,however,creates a problem of internationalstrategy.
An expansion of one national import-competingindustrynecessarilycontracts
its foreign exporting equivalent and reduces the externalitiesenjoyed in the
foreigncountry.As a result,countrieswill clash over who captures such indus-
triesand the externaleconomies theygenerate.
In Power,Protection, and Free Trade I postulate that (a) countries use trade
protectionto "compete" for industrieswith significantexternaleconomies; (b)
capital-intensiveindustriesand modes of production (proxied by relativelabor
productivity)produce greaterexternalitiesand, as a corollary,capital-abundant
countries (i.e., those with high relativelabor productivity)can most effectively
compete for these industries;and (c) such competitionis more acute in middle-
and small-sizedcountries,as large statesare cross-pressuredby the hegemon's
paradox identifiedby Gowa (1989a), but moderated when the number of key
playersis relativelysmall and discountrates are low. Thus, I predictthatcoun-
trieswill develop differenttrade policy preferenceson the basis of theirstruc-
turallydefined abilityto compete for industrieswith significanteconomies of
scale.
This argument rests upon an intuitionthat-admittedly-must be taken on
faith,howeverdifficultthatmightbe forsocial scientists.23 Specifically,I assume
that externalitiesincrease with the capital-intensity of production and array
countries by their national average as proxied by relative labor productivity.
The intuitionhere is that capital-intensiveproductioncreates greaterspin-offs
than labor-intensiveproduction. More productive machines and technologies
stimulatetechnologicalinnovationsand, perhaps more important,basic science.
Greater human capital has much the same effect.These innovationsand sci-
23By focusingon the "international"sources of trade policy,I also implicitlyassume that economies of scale
are prevalentand widespread. While I do not claim thatthe theorycan account forall protection,and agree that
domesticrent-seekingdoes play an importantrole, the explanatorypower of the argumentis positivelycorrelated
withthe breadth and magnitude of the externaleconomies.
DAVID A. LAKE 475
entificbreakthroughs,in turn, facilitatethe emergence of new products and

production methods in other areas of the economy, thus creating a virtuous
cycle of risingeconomic progress. Nonetheless, I cannot yet measure or dem-
onstratethese basic linkages.
This intuition is supported indirectlyby the historicdesire of states and
statespeopleto move "up" in the internationaldivisionof labor by shiftinginto
more capital-intensiveindustriesand modes of production.24This is, I claim,
an almost universal goal of economic statecraft.In the absence of external
economies,the rationaleforsuch a policyof economic restructuring disappears,
for in a world of constant returns to scale a country'sarea of comparative
advantage is unrelated to its gains fromtrade. We can testthe theorybuiltupon
this assumption by comparing its predictionsto the real world of trade policy.
If it is true that countries with higher relative labor productivitydo tend to
compete for capital-intensiveindustries through trade protectionand other
subsidies,we can have greaterconfidencein the approach. But, given the lack
of appropriate measures of and data on externaleconomies,directevidence for
or against this intuitionwill not be forthcomingsoon.
Like the neorealist variant, the strategictrade approach faces a series of

fundamentalquestions which mustdefineits futureresearchagenda. First,how
importantare the marketimperfectionsthatlead countriesto depart fromfree
trade? If optimal tariffsand externaleconomies are small,theireffecton trade
policy is also likely to be small-unless states are locked into "dilemmas of
common interest"in which small imperfectionscan nonethelessprompt coun-
tries into adopting collectivelysub-optimal policies (Stein, 1983). If they are
large, they may explain the widespread patterns of protection observed
historically.
Second, how and in what ways are these marketimperfectionsrelated to the
positions of states withinthe internationalstructure?What is the appropriate
dimension and metricof variation?Do large, middle-sized,or small statesface
greater market imperfections?Do some types of states confrontconsistently
greateror smaller optimal tariffsand externaleconomies?
Given the complexityof strategictrade theoryand its apparent sensitivity to
initialassumptions,many of the answers to these questions are likelyto come
fromeconomists.Politicalscientistsinterestedin questionsof internationalstruc-
ture and economic openness must wait for furtherprogressin the underlying
theory.Nonetheless, no more potentiallyfruitfulground for interdisciplinary
collaborationexists.Harnessing economic models of strategictrade to the polit-
ical, policy, and historicalconcerns of internationalrelationistspromises tre-
mendous insights.
"SecondImage" Theory
The thirdand finalvariantof hegemonytheorylocatesthe differenttrade policy
preferencesof countries in their varyingdomestic coalitions and institutions,
referredto here as structures.Closelyrelatedto traditionalsocietalexplanations
of trade policy, this approach parallels and is occasionally informed by the
burgeoning school of endogenous tarifftheory.25It differsfrom this school,
24Fora related reviewof the developmentliteraturesee Krugman (1993).

25For a book that cites all of the relevantliteratureand develops a state-of-the-art endogenous policy model
see Magee, Brock, and Young (1989). While most of the work in this area has focused on the contemporary
United States, several recent studies have focused on nineteenth-century Britain; e.g., McKeown (1989), Schon-
hardt (1991), and Schonhardt-Bailey(1991a, 1991b).
however,by explicitlylinkinginternationaldominance,domesticstructures,and
internationaleconomic openness. In this "second image reversed"view, hege-
mons preferfree trade not because of securityor strategictrade considerations
but because theyare characterizedbycertaindomesticcoalitionsand institutions.
At least two studies make the link between specificdomestic structuresand
hegemonydirectly.26
First,drawingupon the earlier insightsof Gilpin (especially 1975) and inter-
national economists,Richard Rosecrance and JenniferTaw (1990) argue that
net creditorcountriesmust eventuallyrun trade deficitsif foreigndebtors are
to repay theirloans. This creates domesticpoliticalpressurefromthe country's
own financialcommunityand other large holders of overseas assets to adopt
policies of greaterfree trade (see also Frieden, 1988b). Such pressure not only
characterizedBritain and the United States during theirrespectiveperiods of
hegemony,these authors argue, but will increasinglycome to the forein Japan
as its creditorposition is solidified.
Yet, how and why the internationalfinancialcommunityshould dominate
national politics in hegemonic states is a question these authors do not suffi-
cientlyaddress. Even if hegemons are relativelycapital-abundant,thisdoes not
mean thatcapitalistswill necessarilycarrythe day.27
Second, Mark Brawley (1989, 1993) offersa related but alternativefactor
based explanation.28Brawleyargues thatfactorsof productionhave twochoices:
theycan seek profitsthroughproduction for the internationalmarketor rents
throughdomestic and, necessarily,internationalmarketrestrictions.Following
the Stolper-Samuelsontheorem,he suggeststhatabundant factorsof production
willgenerallybenefitfromthe firstoption and scarce factorsof productionfrom
the second. In addition, abundant capital has a strongerinterestin free trade
than abundant labor because organizingthe internationaleconomy-or provid-
ing theinternationaleconomic infrastructure in the language above-is a capital-
intensivetask which will raise the relativereturnto capital even further.Given
the emphasis on financialtransactionsin Kindleberger'soriginallistof respon-
sibilities,this is not implausible. A focus only on factorendowments,however,
is insufficient as even abundant factorsof productioncan gain frommonopoly
and trade restrictionsif the governmentis sufficiently responsive.Brawleygoes
on to argue that because lobbyingrepresentativegovernmentsis more costly,
the level of domestic rent-seekingwill be relativelylower in democracies than
autocracies.Thus, he concludes, the stateswiththe strongestdomesticallygen-
erated interestin free trade will be capital-abundantdemocracies. If they are
also internationallypowerful,such stateswill be interestedin and able to open
the internationaleconomy. In a word, theywill be hegemonic.
This argument is provocative. Yet, it neglects the importantrole that the
domestic elasticitiesof demand and supply play in determiningthe relative
attractivenessof rent-seeking.If demand is elastic,an increase in price created
26Severalotherstudies,whichcould also be grouped here, posita less axiomaticrelationshipbetweenhegemony

and particulardomesticstructures;see Maier (1978) and Ruggie (1983). Peet (1992) develops a more statistversion
of thisbasic variant.
270n the strugglebetweennationaland internationalcapital,see Frieden (1988a). As Rogowski(1989) correctly
notes, a focus on factorendowmentswill only reveal the patternof politicalcleavages withina society,not who
triumphspolitically.
28Brawleybills his approach as essentiallysystemic.Two of the three variableshe examines are defined at the
internationallevel: factorendowments and internationalpower. Regime type or democracy/autocracy is a unit-
level variable. While, of course, factorendowmentsare inherentlyrelative,I take a certainpoetic license here by
shiftingthe focus fromendowmentsto groups definingtheirinterestsby theirendowments.With this-I think,
appropriate-shift, Brawley'sapproach more clearlydisplaysits natural affinity withendogenous tarifftheory.
DAVID A. LAKE 477
by monopoly restrictionswill lead to an offsettingreductionin the quantityof

the good purchased and the level of potentialrents.If supply is elastic,a price
increase will elicitgreaterproduction-again, reducingthe available rents.Elas-
ticitieswill,of course,varyon a product-by-product basis and renderany general
trade policy predictionsproblematic(see Ray, 1981).
I also question whetherthe overall level of rent-seekingis actuallylower in
democracies than autocracies. The higher cost of lobbying,generated by the
sheer numberof representativeswho mustbe influencedand the lack of binding
contractson futurelegislatures,must be offsetby the greateraccess enjoyed in
a democracy. Stephen Magee, William Brock, and Leslie Young (1989) dem-
onstratethatdemocraciescan, in fact,fallinto "blackholes" of competitiverent-
seeking. I suspect thatdemocracies and autocraciesredistributesimilarlevels of
rentsover greaterand smaller numbersof groups, respectively.
Most important,however, Brawley's is an importantattemptto provide a
solid, microeconomicfoundationforhegemonytheory.There is nothingincon-
sistentin arguing that hegemony begins at home; Gilpin has reminded us of
thisfromthe earliestformulationsof his argument(see especially1977). Indeed,
one of the most pressingproblemsin internationalrelationstheory,in myview,
is the need to ground adequately the systemic-levelmotivationsattributedto
statesin the desires of individualsactingas a collectivity.
What we need, in other
words, is a macro-leveltheoryof internationalbehavior with solid microfoun-
dations. For thisreason, I believe thatthe "second image" variantof hegemony
theory,despite its near-embryonicstate,is one of the most promisingarenas in
the overall research program.
Future research in thisapproach mustfocus on clarifyingthe domesticstruc-

tures that support free trade or protectionand, in turn,how these structures
are influencedby the position of the countrywithinthe internationaleconomic
structure.Present analysts have failed to exploit fullythe existingtheoretical
and empiricalworkon endogenous trade policy.Both Rosecrance and Taw and
Brawley,forinstance,relyon a model of internationaltrade in whichfactorsof
productionare assumed to be perfectlymobile across sectorsand uses withina
single country and, as a result, tend to identifyand ally with themselves-
creating a class-based politics. If assets are specificto particularuses, on the
otherhand, factorsof productionwilltend to coalesce around industries.Rather
than observing a capital-labor divide, for instance, one might find a steel v.
electronics industrysplit. Magee (1980) demonstratesthat a specific factors
approach is more accurate, at least forthe United States around the time of its
hegemonic zenith. In reality,factorsare neitherperfectlymobile nor perfectly
immobile,but more or less mobile depending on their attributesand circum-
stances (Frieden, 1991). A fullydeveloped second image model will have to
reflectand build upon thisvariation.
The prime questions confrontingthisapproach then become, Why do hege-
mons have domesticstructuresorientedtowardfree trade? Are theirfactorsof
production more mobile and their abundant factorspoliticallydominant? Or
are they simplyblessed with relativelyfew import-competingindustries?How
do institutionalfactorsaffectthe degree of factormobilityand the comparative
politicalstrengthof protectionistand free trade forces?How does the interna-
tional structureexert its purported effects?Does internationalposition affect
politicalinstitutionsor the patternof domesticinterests?What is the dimension
underlyingthe concept of internationalstructure?What is the appropriate
measure of variationfor thisdimension?
Necessary
and Sufficient
Conditions
As leadership theorymatured, its focus shiftedfromthe existence of a single
leader to the existenceof a k group of one or more members.The presence or
absence of a singledominantstatehas retaineda more centralplace in hegemony
theory-and thus I use this termto describe the approach.
Nonetheless, several theoristshave suggested that openness can arise or be
maintained even in the absence of a hegemon. As noted, Krasner argues that
openness can be created under either hegemony or a systemof many small,
highlydeveloped states.While positingthathegemons have unique, structurally
derived preferences,I also argue that systemsof two or more middle-sizedand
highlyproductive states may produce relative openness (Lake, 1988). In the
absence of the theoreticalprogress and refinementcalled for above, these ar-
guments must be regarded as tentativeand subject to revision.Yet, it would
appear that hegemony may not be necessaryfor internationaleconomic open-
ness. As hegemony theory is developed further,it is likely to experience a
considerable broadening of its theoretical focus to include non-hegemonic
systems.
The question of how the hegemon alters the behavior of others raises the
issue of whether hegemony is sufficientto create or maintain openness. This
has obviouslybeen a "hot" topic of debate. The findingthat Britain did not
activelythreatenor rewardotherstateshas been takenas an importantempirical
critiqueof the entireresearch program (McKeown, 1983). Several recentworks
suggest that, due to specificcharacteristicsof the nineteenthcenturyinterna-
tional economy, Britain may have been able to accomplish its objectives by
unilateralactions,and that the absence of an activistforeigneconomic policyis
not surprising(Yarbrough and Yarbrough, 1992; James and Lake, 1989; Lake,
1991). Until we understandwhat statesare seekingto accomplishand how they
varyin theirrelevantcapabilities,thisparticulardebate will remain unresolved.
The importantpoint, however, is that if hegemony theoryis on the right
trackand statesdo possess differentpreferences,the resourcesrequired to alter
behavior will depend upon (a) the efficiencywithwhich resourcesare used, (b)
the structureof foreign preferences,and (c) the range and number of states
holding differentpreferences.In this case, openness will arise only when the
increase in utilityobtained by the hegemon is greater than the resources ex-
pended to influencethe behavior of others.Again, unless we define hegemony
tautologicallyas only those states that can successfullyalter the behavior of
others,stateswithidenticalstructuralpositionsmayvaryin theirabilityto create
openness depending upon the compositionof the rest of the systemand the
degree and direction of dependence between states. We must allow for the
possibilitythat hegemony,defined in termsof position withinthe structure,is
insufficientto produce openness.
As in leadership theory,hegemony may be neithernecessarynor sufficient.
Openness may existwithouthegemonyand hegemonymay existwithoutopen-
ness. Again, I must stress that significanttheoreticalwork needs to be done
before accepting or rejectingany causal statements.Nonetheless,my hunch is
thatall variantsof hegemonytheoryare likelyto evolve in thisdirection.Future
theoreticalwork will and should focus increasinglyon the preferencesof and
strategicinteractionamong statesin non-hegemonicinternationalsystems.
Leadership theorycan claim to be somethingof a success.The core theoretical

structurehas been gradually refined. Work in this traditionhas even been
somewhatcumulative,as subsequent scholarshave added bitsand pieces to the
theoreticaledificeso that it now stands as a relativelycoherentwhole.
Hegemony theoryhas been less successful.Any approach thatchallenges the
DAVID A. LAKE 479
intellectual"hegemony"of the law of comparativeadvantage faces a consider-

able hurdle; claims that free trade is not in the interestsof all countrieswill
necessarilybe greetedwithsuspicion.There also appears to be a higherpriority
on theoreticalinnovationin this variant.Although all are in theirearly stages
of developmentand thejury is stillout, workis progressingin all threedirections
surveyedabove. Yet, far more needs to be done along the lines suggestedand,
in general, toward developing logical, deductive arguments that go beyond
simple intuition.
Testing the Research Program

The currentwisdom,as I read it,is thattestsof the theoryof hegemonicstability
are (perhaps fatally)impeded by the small number of possible cases and that
close examinationof the Britishand Americanexamples failsto corroboratethe
central propositionsof the research program. If true, these conclusionswould
significantly call into question the explanatorypower of leadership and hege-
mony theoryand the utilityof additional workin thisarea.
The firstconclusion does presentan importantconstraint.An "n" of two or
possiblythree cases, if we include the Netherlandsin the seventeenthcentury,
is clearly limiting.If hundreds of cases existed, the theories could be treated
probabilistically,and tests,whether quantitativeor not, could be designed to
controlforotherindependentor interveningvariables.In the absence of a large
number of cases, however, even greater theoreticalclaritythan normal is re-
quired. This highlightsthe need for theoriststo specifycarefullynecessaryand
sufficientconditionsfor the core propositions.While decisive testswill have to
await greatertheoreticalrigor,ongoing assessmentscan nonethelessbe under-
taken and potentiallyenhanced by two research strategies:process-tracingat
the internationaland domesticlevels and, forhegemonytheory,disaggregating
internationaleconomic openness into the national foreigneconomic policies of
individualstates.
The second conclusion, in turn,is premature.Some well-designedresearch
has raised grounds forconcern; however,the evidence is, at worst,mixed. More
important,fewappropriate"tests"have actuallybeen conducted.The remainder
of thissection develops these two argumentsin reverseorder.
ExistingEmpiricalStudies
Existing empirical studies on leadership and hegemony typicallytake one of
four forms.Some have focused on definitionsand sources, essentiallyasking
the question of whetheror not the United States remainsa leader or hegemon
(Russett, 1985; Strange, 1987). Others use historyto clarifythe logic of the
research program and to raise larger analyticalissues (e.g., Stein, 1984).
Stillotherscholars,typicallystatingthe researchprogramin itsmostsimplistic
form,treatinternationalstructureas a "backdrop,"or contextforothertheories
(e.g., Odell, 1982; Lipson, 1983; Milner, 1988). The majorityof these studies
do not find evidence that the program is wrong,only that it is too broad and
general to answer the question(s) asked by the author. Rather than attemptto
refinethe core logic of one or more theoreticalvariants,as the authors cited in
the last sectionsdo, these analyststypicallyposit new variablesand causal rela-
tionshipsessential to understandingthe outcome theyobserve. While theyoc-
casionally point to apparent anomalies, these works do not constituteformal
testsof the research program.29
29Giventhe lack of clear, falsifiablepropositionsgenerated by the theoryof hegemonic stability,it is difficult
Explicit tests of the research program,the fourthgenre, are usually of two

types:longitudinalstudiesof structuraland economictrendsand detailed studies
of specificcases. Althoughusuallycriticalof the researchprogram,these studies
have actuallyproduced ambiguous results.Focusingonlyon longitudinalstudies
for the moment,Timothy McKeown (1991) has found littleevidence that he-
gemonyproduces greateropenness, althoughthe concentrationof international
trade in the fivelargesttradingnations is positivelyassociated withgreaterfree
trade. Even though based on trade flows,ratherthan trade policies where the
theorymightbe expected to apply more directly,this findingis the strongest
evidence against hegemony theory to date.30 Conversely,John Conybeare's
(1983) test of an internationalstructuralmodel finds that it performswell in
explaining 1902 tarifflevels but poorly in accountingfor 1971 tariffs;William
Thompson and Lawrence Vescera (1992), workingwithina distinctbut related
theoreticalapproach, demonstratea strongpositivelink between technological
leadership and openness; and Edward Mansfield (1992) concludes that hege-
monyis positivelyrelatedto openness under Gilpin'sbut not under Wallerstein's
periodization-suggesting that empirical assessmentsare verysensitiveto defi-
nitions.General empirical conclusions remain elusive. Neither opponents nor
proponentsof the research program should claim success.
Extanttestsalso sufferfromtwoimportantfailings.First,as Mansfield'sresults
indicate,in the absence of prior theoreticaland operational specification,the
resultsare difficultto interpret,at best,or unintelligible,at worst.This problem
of underspecificationis more self-evidentin longitudinalstudies, but applies
equally to both types. Second, in the quest for richness,case studies typically
narrowtheirempiricalfocusto specificregionsor sectors.This researchstrategy,
however,tends either to produce mis-specifieddependent variables or extend
the research program in new directionsof unknown relevance to the variants
discussed above. I referto thisas the problem of theoreticalover-extension.As
in previous sections, I review examples of each approach to reveal common
tendencies.
In "Hegemonic StabilityTheory: An Empirical Assessment,"Michael Webb
and Stephen Krasner (1989) examine trendsin the positionof the United States
withinthe internationaleconomic structureand internationaleconomic open-
ness since World War II. Given this construction,their resultsare applicable
only to hegemony theoryand do not bear directlyon leadership theory.As is
correctwhen the appropriate theoreticaldimensionand metricis unclear, they
use a varietyof indicatorsforAmericanpositionand openness. Nearlyall reveal
the same pattern,increasingour confidencethattheirresultsare capturingthe
to determinejust which empirical "facts" are indeed anomalous; those that seem to have been consensually
accepted by the field are drawn disproportionatelyfrom periods of declining hegemony and derive from the
problemof afterglow.See J. Goldstein (1988) foran example.
3OAlsoimportantare the "revisionist"tariffhistorians,who claim eitherthatBritaindid not followa policyof
free trade in the nineteenthcenturyor that it was not exceptional in this regard (see McCloskey, 1980; Irwin,
1988, 1989; Nye, 1990). The firstclaim, if true, would count as strong evidence against the theory-and the
intuitionthatsupportsthe researchprogram.The second mayor may not be consistentwiththe theorydepending
upon which variant is at issue, the process of hegemonic free trade expansion posited, and how the evidence is
interpreted.On the firstclaim, Nye contends that (a) average trade-weightedtariffrevenues were actuallyhigh
in Britain (specifically,higher than in France until the 1880s), but declined over the nineteenthcentury,and (b)
the distinctionbetween revenue and protectivetariffsis meaninglessin practicedue to substitutioneffectsand
the domestic production inevitablystimulatedby a tariff.Although Nye does not appear to integratethe off-
settingrole of domesticexcise taxes into his analysis,there was, undoubtedly,some protectiveeffectfromBritish
tariffs;it is virtuallyimpossible to design a revenue systemwith no distributionalimplications.It nonetheless
remainstrue thatBritainadopted tariffsalmostexclusivelyforrevenue purposes, levyingduties only on products
with inelasticdemand and lacking substantialdomestic production (e.g., coffee,chocolate, tobacco) or on "sin"
goods (e.g., playing cards). France, on the other hand, protected broad-based industry.As always, these are
questions of degree, but the differenceremains important.
DAVID A. LAKE 481
underlyingconcepts. There was a significant"decline in US power resources

fromthe early 1950s to the early 1970s, but since the early 1970s, the overall
US position has changed little,and it still remains by far the world's largest
economy"(p. 189). While trendsin trade policyare more ambiguous,economic
flowssuggestcontinued liberalization.
Internationaltrade has continued to grow fasterthan output throughoutthe
period since 1945. Furthermore,there has been no significantdecline in the
ratiobetweenthe growthof merchandiseexportsand the growthof merchandise
production since the 1960s. Internationaltrade has continued to grow as a
proportionof output forthe major developed countries.Trade flows(including
trade in manufactures)are now at the highestlevel in proportionto national
output ever recorded for most developed marketeconomy countries.Regional
trade patterns eroded during the 1950s and 1960s and have not revived.
(pp. 193-194; referencesto tables omitted)
In short,Webb and Krasner conclude that "the internationaleconomic system

has not fallen apart over the last two decades . . ." (p. 195).
Interpretingthis evidence is a difficulttask,a problem that this article,like
the best of the genre, is sensitiveto but does not successfullyovercome. Specif-
ically,the evidence is consistentwithat least four distinctpropositionsderived
fromhegemonytheory.
1. The UnitedStatesis stilla hegemon.The continued openness of the inter-

national economy would then tend to confirmhegemonytheory.
2. The UnitedStatesis no longera hegemonbuttheinternational economy remains
openthrough"afterglow." Given its groundingin prior theory(Katzenstein,
1978; Krasner, 1983) and Krasner's(1976) originalextensionof hegemony
theoryin thisdirection,an afterglowof some (as yetunspecified)duration
would not decisivelydisconfirmthe theory.Disconfirmation willoccur only
if a "major" shock to the systemoccurs and, in the absence of any other
change, the internationaleconomy does not move rapidlytowardclosure.
3. The UnitedStatesis no longera hegemonbuttheinternational economy remains
open throughmultilateral While this tends to disconfirmearly
cooperation.
versionsof the theory,it does not count against and may possiblysupport
variantsof hegemonytheorythatallow forsmall-groupcooperation (e.g.,
Keohane, 1984; Lake, 1988).
4. The UnitedStatesis no longera hegemon.Continued openness thus tends to
disconfirmthe theory.As implied, this conclusion holds when hegemony
is a necessaryconditionforopenness.
Clearly,the interpretationplaced upon observedpatternsdepends upon one's

definitionof structureand position. How much power is necessaryto be hege-
monic? A middle-sized power? Is there a clear threshold,or is position more
continuous?In the absence of such a definition,we cannot distinguishbetween
interpretations1 and 2-4; the evidence clearlyindicatesthatthe United States
has declined, but has it declined far enough? The correctinterpretationalso
depends upon the prior theoreticalspecificationof necessary and sufficient
conditionsfor openness. Depending upon which variant of the research pro-
gramis at issue, the same evidence can tend to be confirmingor disconfirming-
as demonstratedby the contrastbetween interpretations 2, 3, and 4. As always,
data do not stand alone.31
3IMcKeown (1991) avoids several of these problems by regressingcontinuous independent variables,trade

and income concentrationsof the largestand fivelargeststatesagainst trade openness, definedby importvalues
thusreflectthe directionand degree of relationshipbetweenthese variables.
over nationalincome. The coefficients
Case studies suffer from identical problems of underspecification.Using

words rather than numbers and in-depthanalyses of singular issues or events
rather than longer historicaltrends does not avoid the problems of defining
structureand position and identifyingnecessaryand sufficientconditions.
In addition, many case studies sufferfromthe problem of theoreticalover-
extension. Fred Lawson (1983), for instance, attemptsto extend hegemony
theoryto the regional level by analyzingthe relationshipbetween local British
dominance and trade practices at three Arab ports. He concludes that the
structureof economic affairsaround the Arabian peninsula during the nine-
teenthcenturycannot be explained by hegemonytheory.In fact,in Muscat and
Aden, Britishdominance is correlatedwithtraderestrictions (Muscat 1800-1825
and 1890-1905; Aden 1839-1850) and British decline with trade openness
(Muscat 1825-1885; Aden 1850-1890); in Mocha, the thirdcase, international
politicalcompetitionis accompanied by trade restrictions(1845-1880).
However, hegemonytheoryoffersno clear predictionsof regional behavior;
in extendingthe theory,Lawson distortsthe dependent variable.32All countries
are embedded in the internationaleconomy,whethertheylike it or not; it is at
this level that hegemony theoryis intentionallystated and at which its propo-
sitionsare believed to hold. Some countriesare also closelylinked in a regional
economy and may define theireconomic interestspartlyin thiscontext.At the
regional level, however, there is no presumptionthat the predictionsof the
theorywill carrythrough as countrieswill define theirinterestswithreference
to both the local and internationalarenas.33A countrymay be "large" relative
to othersin the region,but "small" in comparisonto the internationaleconomy.
Hegemony theorywould not necessarilyexpect thiscountryto pursue policies
of freetrade. Nor would leadershiptheory,ifitwere applied in a similarmanner,
expect the "large" stateto provide public goods unless theywere strictlylimited
to the region. Nesting a regional into an internationaleconomy requires more
than a simple transferenceof systemictheories. In the language of earlier
systemstheory,an internationaleconomy is a closed while a regional economy
is an open system;this differencemust be taken explicitlyinto account in the
process of theory-building.It mightbe possible to develop yetmore variantsof
leadership and hegemony theorythat are sensitiveto this problem of nesting,
but thishas not been done and theirlogical structuresand practicalimplications
are by no means intuitive.
Although intended as a critique,Lawson's evidence actuallytends to support
the prevailingsystemicversionsof hegemonytheory.Whereas Britainwas dom-
inant in Arabia during the early and late nineteenthcentury,it was globally
dominant in the second and third quartiles. Mid-centurywas the period of
greatest internationaleconomic openness in Europe. According to Lawson's
description,the same appears to have been true forthe Arabian peninsula.
Peter Cowhey and Edward Long (1983) examine two alternativeexplanations
of change in the internationalautomobile regime-or, more precisely,the fit
Yet, thresholdscould stillexist. It is possible thatimportsor income could become more concentratedin a single
power that nonethelessfailsto be "hegemonic,"suggestingthat prior theoreticalspecificationis stillrequired for
a complete test of the hypothesis. Nonetheless, since his study covers the periods of British and American
hegemony,the absence of a relationshipbetween concentrationin the single largestpower and openness must
count as evidence against the theory.
32Foranother regional application of the theoryof hegemonic stability,whichavoids the problem of "embed-
dedness" discussed here, see Laitin (1982). For an importantintegrationof systemicand regional approaches see
Krasner (1981).
331 deal here only with the consequences of integratingregionallyderived interestsintothe systemictheory.
To the extent that such regionallyderived interestsare at variance with systemicallymotivatedones and are
consequential,then hegemonytheoryin its currentguise will also be empiricallyfaulty.
DAVID A. LAKE 483
betweenUnited Statesautomobile policyand the liberaltrade regime.They find

thatthe absence of hegemonyis a necessarybut insufficient conditionforregime
alteration;they recommend a synthesisof the theoriesof hegemonic stability
and surplus capacity.
This finding,of course, is not inconsistentwithseveralvariantsof the research
programidentifiedabove, only those thatclaim hegemonyor leadership is both
necessaryand sufficient.More critically,however,hegemony theory,with the
possible exception of the strategictrade variant,does not produce predictions
about specific sectors. Similarly,the predictionsof leadership theory can be
expected to hold only if the public good being provided-if, in fact,there is a
public good in this case-is limitedto the automotiveindustry.Hegemony and
leadership theorypredictonly the broad contoursof national foreigneconomic
policy. While the automobile industryis clearlyan importantsector,a variety
of policies in this specificarena would be consistentwith a national policy of
economic liberalism/protectionism or providing/notprovidingpublic goods. In
itspresentform,the generallypositiveevidence presentedby Cowhey and Long
is of unknown utility.Either it must be complementedby a series of sectoral
studiesthatwhen summed togethercan be takenas a descriptionof, say,United
States foreigneconomic policy or the authors must identifya second level of
necessaryand sufficientconditionsexplicitlystatingwhen and why the predic-
tions of the systemictheoryshould hold in this particularsector.
Even afterover a decade of empiricalwork,we lack adequate empiricalstudies

of the principal variants of the research program. This is especially true for
periods of leadership or hegemony.As a fieldwe have been more intriguedby
decline.34Although I recognize that the theoryhas not been confirmedby the
available evidence, it would nonetheless be premature to conclude that the
theoryhas been disconfirmed.
Much of the responsibilityforthe generallyinadequate testsof the theory,of
course, rests with the theorists,not the empiricists.The formerhave typically
failed to state their arguments in a clear, logicallyconsistent,and falsifiable
manner. Given this ambiguity,it is not surprisingthatargumentsget taken out
of contextor misapplied; indeed, it is a wonder that theyget taken seriouslyat
all. Given the small number of cases, real empiricalprogresswillnot occur until
necessaryand sufficientconditionsare developed and more clearlyarticulated.
Empiricallyorientedresearchers,on the otherhand, have generallynot been
sensitiveto variationsin the research program. Indeed, much of the phrasing
in thissectionhas been awkward.The idea of testinga researchprogramborders
on the nonsensical. Hypotheses can be tested. Theories can be disconfirmed.
Research programscan be more or less successful-but theyare not themselves
open to direct empirical validation. Nonetheless, authors normallytreat the
"theoryof hegemonic stability"as, in fact,a single, homogenous entity.They
do not discuss whether their results apply to leadership theory,hegemony
theory,or possiblyboth. Greaterattentionto theoreticalvariationswillgenerate
not only betterresearch designs,but more valuable evidence as well.
ResearchStrategies
In the social sciences,theoreticaland empiricalprogressalmost always proceed
in tandem. Real-worldevents stimulatetheoreticalinnovation,new theoriesare
34For an exception see Kapstein (1990). Similarly,despite the now voluminous literatureon British and
Americanfinancialand exchange rate policyduring the periods of theirrespectivehegemonies,there have been
assess leadership theory.Gowa (1984) and
virtuallyno attemptsto use this historicalrecord to systematically
Eichengreen(1989) are noteworthyexceptions.
confrontedwithhistoricalevidence, anomalies generaterefinementsin the the-

ory, better theories are assessed against additional evidence, and so on. The
hegemonicstabilityresearchprogramexemplifiesthispattern.As I have argued
above, significanttheoreticalworkneeds to be done. Empiricalresearchcan best
aid this process not by seeking decisive disconfirmation but by clarifyingques-
tions, describing patterns of behavior in need of explanation, assessing the
plausibilityof new theoreticalpredictions,and identifying apparent anomalies.
Betterdata-setsthat measure key theoreticalconcepts more accuratelyare also
necessary.Theory-buildingcannot proceed withoutthis multifacetedsupport
fromempiricallyminded researchers.In conductingtheirinvestigations,how-
ever,such scholarsshould continuefollowingthe scientificmethod.The attempt
to falsifycarefullyconstructed"if-then" hypothesesremains the best way to
proceed. It is not our methods,but our aspirationsand the conclusionsthatwe
draw fromour empiricalresearch that should be scaled more appropriately.
Two promising research strategieshave also been underexploited in the
present literature.First,in addition to identifyingthe correlation(if any) be-
tween structureand outcomes, scholars should trace,at both the international
and domesticlevels, the process by which the independent variable influences
the dependent variable.35For instance,do countriesseek to free ride on the
contributionsof others?Are therenegotiationsovereconomic"burdensharing"?
Do conflictsover relativeburdens increase as the leader declines?Are countries
more forthcomingwiththeirallies?
Equally important,theories of internationalstructureshould leave "tracks"
on the domestic political landscape as national politicalleaders seek to under-
stand and cope with the problems and trade-offsidentifiedby each. This un-
derstanding,of course, need not be articulatedin modern theoreticalterms.
Nor, giventhe gap betweenrhetoricand reality,does it need to be the dominant
theme in the political debate. But at the domestic process level key political
leaders should show an awarenessof the issues centralto the theory.Are political
leaders aware of the need for an internationaleconomic infrastructure, how
their actions affect this infrastructure,and their motivationsfor or against
supportingthe collectiveeffort?Do political leaders understand that they are
in competitionwithothercountriesto secure theirexternalityproducingindus-
tries?If the answer to these and other questions is "No," I would be extremely
skepticalof the variantsfromwhich theyare drawn. If the processes centralto
a systemictheoryhave no apparent counterpartin domesticpolitics,the theory
most likelyfailsto capture meaningfulpoliticalrealities.
Second, hegemony theory can be assessed by disaggregatingthe systemic
outcome into its component parts. This research strategyis obviouslyless ap-
propriatefor leadership theory,as public goods are inherentlyless decompos-
able. As noted above, economic openness is the sum of the national foreign
economic policies of at least the largeststateswithinthe internationalsystem.
According to hegemony theory,not only should there be variation in policy
over time, the subject of most empirical investigationin this area, but there
should also be variationacross countries.By examiningthis variation,analysts
can greatlyexpand the number of cases.36
Our ability to pursue this research strategy,however, depends upon the
carefulspecificationof national trade preferencesand modelingof the strategic
interactionof states.While progressis being made, these requirementshave not
350n "process-tracing,"see George (1979) and King, Keohane, and Verba (forthcoming).As the lattersuggest,
process-tracingis a strategyfor making many cases fromfew.
36For examples of this research strategysee Lake (1988) for trade policy and Loriaux (1991) for financial
issues.
DAVID A. LAKE 485
been met by any of the variantsdiscussed above. This underscoresthe need for
additionaltheoreticalrefinementsand disciplinarypatience as these insightsare
developed. In the meantime, however, identifyingnational preferencesand
strategiesin particularcases can help to suggestthe range of possible variation
thatmust be predictedby any model.
Conclusion
Aftertwo decades of research,the fieldhas everyrightto be disappointed with
the hegemonic stabilityresearch program.Work in thisarea providesan object
lesson in how not to conduct social science. Leadership and hegemonytheory
remainpoorlyarticulated.Causal propositionsstillreston tenuous logic. Central
variables are left undefined. Empirical tests are seldom undertaken and are
prone to either underspecificationor over-extension.The list of complaints
could go on. Criticswho suggest that the emperor is, in fact,naked and that it
is timeto abandon the enterprisehave ample evidence to support theirclaim-
even if theyfail to offera persuasive alternative.
Yet, such an action,in myopinion, would be premature.The theoreticaland
empirical failings identifiedhere are not unique to the hegemonic stability
research program. The societyof, at best, partlyclothed rulersis large indeed.
More important,despite the obvious shortcomings,there has been significant
progress.Leadership theoryhas made great strides,as the abilityto pose, even
in a preliminaryfashion,necessaryand sufficientconditionsdemonstrates.In-
terestingand potentiallyprogressivework is being done withinhegemonythe-
ory; as some of these variantsnow draw explicitlyon economic theory,analysts
may finallybenefitfromthe intellectualarbitragethat has facilitatedprogress
in leadership theory.Economic historiansand politicalscientists,who were in
some cases stimulatedby early work in this area, have amassed a wealth of
relevantdata. If mined systematically and witha carefuleye towardtheoretical
relevance, far more valid assessmentsof the individual theoriescould be per-
formed.The monarch's suit may be incompleteand tattered,but it continues
to possess considerable potential.
AlthoughI am disappointed withthe currentstatusof the researchprogram,
I remain optimisticabout its future.But we must move beyond the superficial
and instinctiveand begin the hard and occasionallytiresometasksof carefully
craftingand testingtheory.
The research program skyrocketedto prominencein the 1970s largelyon its
intuitiveappeal. We must resistthe equal errorof rejectingthe theorybecause
it is boring,bloodied by a seriesof ill-placedbut nonethelesshighlyvisibleblows,
or, now, withcontinued liberalismevident in the internationaleconomy,intui-
tivelyunappealing. Perhaps more than anythingelse, the hegemonic stability
researchprogramhas sensitizedthe currentgenerationof scholarsto the inter-
national political underpinnings of the internationaleconomy. This insight
should be preservedand built upon, not ignored and abandoned.
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Leadership, Hegemony, and the International Economy: Naked Emperor or Tattered Monarch

Leadership, Hegemony,and the

The so-called theoryof hegemonic stabilityis a researchprogramcom-

Americanascendancy,and the Great Depression. By the late 1970s, thisresearch

The Research Program

the structureof the internationaleconomic system,and the assumption that

cially those, such as endogenous tarifftheory,that focus on strictlyunit-level

4AlthoughKindlebergerdoes allude to altruism(1973:302, n. 13), subsequentinterpreters have largelyassumed

minology,to a single state.7 Using Thomas Schelling's notion of a "k" group,

Payoffto NC Statem does

Recent work on internationalregimesreinforcesthis conclusion,at least for

8From these distributionalimplicationsit mightbe possible to predictthe choice of a particularregime,but

the overwhelmingtask that confrontedBritainand the United States afterthe

C, < Ak 1 (Bi- Ti)

When the individual countrybenefits,minus the transactionscosts of negoti-

13Snidal(1985) draws the basic distinction.Alt,Calvert,and Humes (1988) develop a game-theoreticapproach

wherecmis the contributionof a non-k group state,Li are the resourcesdevoted

If Li = 0, and by implication cm = 0, leadership is benevolent. If Li > 0,

TABLE 1. Statepowerand thestructure

'5See also Krasner (1978, 1979, 1981, 1982).

derliesthe theorywas developed specificallyto explain constrainedchoice across

enemies, she argues, hegemons reduce theirwelfareby tradingfreelywiththeir

The unanswered questions facingneorealisthegemonytheoryare quite basic

Whetherhegemons pursue a short-termstrategyof optimal tariffsor a long-

entificbreakthroughs,in turn, facilitatethe emergence of new products and

Like the neorealist variant, the strategictrade approach faces a series of

24Fora related reviewof the developmentliteraturesee Krugman (1993).

26Severalotherstudies,whichcould also be grouped here, posita less axiomaticrelationshipbetweenhegemony

by monopoly restrictionswill lead to an offsettingreductionin the quantityof

Future research in thisapproach mustfocus on clarifyingthe domesticstruc-

Leadership theorycan claim to be somethingof a success.The core theoretical

intellectual"hegemony"of the law of comparativeadvantage faces a consider-

Testing the Research Program

29Giventhe lack of clear, falsifiablepropositionsgenerated by the theoryof hegemonic stability,it is difficult

Explicit tests of the research program,the fourthgenre, are usually of two

underlyingconcepts. There was a significant"decline in US power resources

In short,Webb and Krasner conclude that "the internationaleconomic system

1. The UnitedStatesis stilla hegemon.The continued openness of the inter-

Clearly,the interpretationplaced upon observedpatternsdepends upon one's

3IMcKeown (1991) avoids several of these problems by regressingcontinuous independent variables,trade

Case studies suffer from identical problems of underspecification.Using

betweenUnited Statesautomobile policyand the liberaltrade regime.They find

Even afterover a decade of empiricalwork,we lack adequate empiricalstudies

confrontedwithhistoricalevidence, anomalies generaterefinementsin the the-

KRASNER, S. D., ED. (1983) International

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