Regional Integration: Choosing Plutocracy

Regi onal Integration

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Regi onal Integration C h oo s in g Pluto cracy

Kathleen J. Hancock

REGIONAL INTEGRATION

Copyright © Kathleen J. Hancock, 2009. All rights reserved. First published in 2009 by PALGRAVE MACMILLAN® in the United States - a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978-0-230-61673-8 Library of Congress Cataloging-in-Publication Data Hancock, Kathleen J. Regional integration : choosing plutocracy / Kathleen J. Hancock. p. cm. ISBN 978-0-230-61673-8 (alk. paper) 1. Regionalism (International organization) 2. Plutocracy. 3. International economic integration. I. Title. JZ5330.H36 2009 341.24—dc22 2009013914 A catalogue record of the book is available from the British Library. Design by Macmillan Publishing Solutions First edition: December 2009 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

For their unwavering love and support, this book is dedicated to Mom & Dad and John, Min, & Willa

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Contents

List of Figures and Tables

ix

Acknowledgments

xi

1 Introduction

1

2 How and Why States Economically Integrate

17

3 Theory of Plutocratic Delegation

35

4 Uniting the Germans: Prussia and the Zollverein

61

5 The Eldest: The Southern African Customs Union

97

6 The Newest Member: The Eurasian Customs Union

125

7 Conclusion

165

Notes

177

Bibliography

211

Index

231

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L i st of Figu res and Tables

Figures 1.1 4.1 5.1 6.1

Types of integration in trade and money Map of Prussian Zollverein up to 1834 Map of Southern Africa Map of Russian Pipelines

6 69 102 144

Tables 3.1

Examples of trade integration, organized by governance structure 3.2 Examples of monetary integration, organized by governance structure 6.1 Changes in GDP in select post-Soviet states, percentage, 1992–1996 6.2 FDI, net inflows, 1992–2006 (current US$ million)

42 43 138 150

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Acknowledgments

This book was built over many years, with the intellectual guidance, research and writing assistance, emotional support, and generosity of many scholars, practitioners, friends, and family members. Those named below, and undoubtedly some whose names now escape me, have played critical roles in creating this final product. My work builds on the foundation of principal-agent delegation and hierarchy models as developed by political scientists, particularly international relations scholars. My greatest intellectual debt, and a substantial personal one, is to David A. Lake. He laid the intellectual basis for many aspects of my theory; provided countless insightful comments; pressed me to adhere to his high standards; accepted all my phone calls, visits, and e-mail messages; played the role of editor and occasional cheerleader; and exhibited unending patience throughout this process. I could not have asked for a better mentor. In addition to David, I have been most inspired by the scholarship of Terry Moe, Walter Mattli, Beth Yarbrough, and Benjamin J. Cohen. Terry Moe’s seminal article on delegation theory is an indispensable guide for anyone using this model. Through his excellent book on the logic of integration, Walter Mattli introduced me to the Zollverein, which proved to be both a fascinating historical case and a goldmine for my research. Beth Yarbrough and Robert Yarbrough’s book on cooperation in international trade, which I read as a new graduate student, made a lasting impression on me. Jerry Cohen’s meticulously researched books revealed to me that the plutocracy I identified in trade relations has a counterpart in monetary integration. Walter Mattli and Mike Tierney encouraged me to pursue the principal-agent delegation model more fully than I had done in earlier drafts. Their specific comments on how to do that were invaluable in strengthening my argument. I have found each of these scholars to be brilliant, kind, and generous with their ideas and time. A key assumption of my theory is that political leaders most want to remain in office. Although many scholars before them have used that assumption, Bruce Bueno de Mesquita and his collaborators have written a highly lucid and detailed account of the logic of political survival. Their book provided an excellent source for this part of my theory. My thanks to Mike Tierney for pointing me in that direction.

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In addition to those named above, Vinod Aggarwal, Leslie Elliot Armijo, Michele Chang, Jeffrey T. Checkel, Peter A. Gourevitch, Stephan Haggard, Miles Kahler, Tim McDaniel, Paul A. Papayoanou, Mark Pollack, Philip G. Roeder, Etel Solingen, and Boyka Stefanova offered constructive comments on draft chapters and related conference papers. Lon Maxey, Celina Peña, and Deanna Ramon provided valuable research assistance and general support for the project. Teresa Lawson provided excellent substantive editorial comments, which led to a significant reworking of the introductory chapter. I recommend her to all scholars who want professional guidance in strengthening their writing. All of these scholars and professionals helped me improve my argument and writing; the gaps and errors that remain are my own. My former colleagues at the University of Texas, San Antonio, provided guidance and general encouragement for my work. Steve Amberg, Dan Engster, Patricia Jaramillo, Mel Laracey, David Romero, and Rudy Rosales were particularly supportive. The Institute on Global Conflict and Cooperation/MacArthur Fellowship and the Institute on International Education provided funding for field research in the former Soviet Union and in the United States. A grant from the Institute for Security and Development Policy (Stockholm) gave me the opportunity to think more about the role of China in Eurasia. Among the many people in the former Soviet region who generously gave their time and expertise, special acknowledgment goes to Pavel Kutuev, Zbig Iwanowski, Michael Biddison, and Mark Berenson. Emily Sperry, a New York artist and my cousin, created the original artwork for the book cover. I look forward to collaborating with her again. Paul Rascoe and Brett Bays at the University of Texas, Austin’s Perry-Castañeda Library, patiently modified to my varying specifications the three maps used in the book. Toby Wahl, my original acquisitions editor, showed interest in the research project three years before its completion. His always positive messages encouraged me during the review process. My family was and remains a critical support network. My parents—Jo Martin and Jim Hancock—and my siblings—Julie Dunkle and Scott Hancock—expressed unending faith in me as well as financed a computer, dinners, and vacations and other reprieves from work. My mother-in-law, Dianne DeRose, made every effort to support me from afar, often inquiring about the details of the book. Kathi Hancock and Billy Martin played key supporting roles. Tecate, Chica, Stanley, and Pookie, all of whom were oblivious to the fact

Ac k n ow l e d g m e n ts

xiii

that I was working on a book, gave me their (mostly) unconditional love. Nicole Boles, Cristina Brun, and Allyson Mays enabled me to pursue this effort with the peace of mind that the most important beings in my world were in their loving care. Most of all, I thank my husband and children, who have loved and supported me throughout this endeavor. John bravely committed to spend his life with me when I was a stressed-out Ph.D. student with no firm graduation date. He grandly celebrated the most minor of my victories and never lost faith. My children, Min and Willa, have brought great love and laughter into my life and have become big advocates of “Mommy’s book.” I have accumulated a great debt to my husband and children, and myself, for all the days and nights that I spent with a computer instead of my family. That is a debt I relish repaying. Kathleen J. Hancock Golden, Colorado

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Chapter 1

4

I ntrodu ction

In 1828, an economic negotiator for the German state Hesse-

Darmstadt, which was in the midst of a severe recession, met with Prussia’s finance minister to propose a trade treaty. Having been rebuffed two years earlier, he had low expectations for a close relationship with the wealthy Prussia. To his surprise, the finance minister embraced not just a preferential trade treaty but a customs union, a much deeper form of economic integration. There was a catch: as a first step to integration, Prussia alone would set the tariff levels the two states would charge importers. In exchange for a share of the collected tariffs that significantly exceeded what it could have earned on its own, Hesse-Darmstadt readily agreed to this stipulation. Recognizing that the smaller state’s leader faced challenges from political forces at home that favored liberal institutions over monarchies, and wanting to attract an even more important member state, Hesse-Kassel, Prussia agreed that subsequent tariff decisions would be made under rules that gave member states an equal voice in policy making. These same two rules applied to states that subsequently joined the customs union, which eventually became the 1834 Zollverein (literally, toll union). By 1871, when the German Empire was created after the Franco-Prussian War, nearly every German state had joined the Zollverein. The first step of the Zollverein agreement, when members matched their tariffs to Prussia’s, is an example of a governance structure based on plutocracy—rule by the wealthy. Under these plutocratic structures, states delegate policy-making authority to the wealthiest member state. Scholars of economic integration—as well as those who study international organizations using delegation models—have generally overlooked plutocratic governance structures.

2

R e g i o n a l I n t e g r at i o n

Yet, plutocracies are a logical choice for a great state. They offer the following three primary advantages for the state to whom others delegate: ●

●

●

The great power does not have to delegate policy making to another institution, as occurs in supranational organizations. It has sole veto authority. By controlling policy making for the entire integration region, the great power can more fully benefit its domestic constituents. For example, it can set high tariffs to protect its automobile industry, even though this may force other members to purchase more expensive or lower-quality cars. Governing an integration effort can bolster the state’s regional great power status, which may satisfy a nationalist coalition at home. The state’s improved status may in turn have a spillover effect, leading states to delegate policy making in other areas, such as military issues. Given these benefits, a great state would surely prefer controlling policy making over delegating to a supranational organization or enduring endless debates in intergovernmental meetings.

Recognizing these benefits, other states have formed customs unions using plutocratic structures: Bavaria, 1828; Hanover, 1834; South Africa, 1910 and 1969; and Russia, 1995. Collectively, 29 states joined these plutocratic integration accords. These cases raise an important and previously unexplored question, what explains regional plutocracy? More precisely, when should we expect to see economic integration accords with plutocratic governance structures? To answer this question, I draw on the logics of principal-agent delegation and political survival to develop a theory of plutocratic delegation. In brief, I argue that leaders of regional great powers—Designers—will create plutocratic structures as long as (1) they can find smaller Joining states that are in economic crisis and will gain immediate, easily measured economic benefits from integrating with the Designer, (2) these benefits cannot be matched by other options, and (3) the Designer’s political coalition does not oppose governance structures that formalize its dominant position relative to the other member states.1

The Importance of Plutocracy Plutocracy is one of three optional governance approaches for economically integrating two or more states; the other two are

Introduction

3

intergovernmental and supranational accords. Though scholars have largely ignored the plutocratic path to integration, it remains an option open to political leaders designing new accords or amending old ones. This is particularly true when member states want to deeply integrate their states, by which I mean moving past preferential and free trade accords and into customs, monetary, economic, and even political unions. The three governance structures can be defined using the logic and language of principal-agent delegation models. In his seminal article, Terry Moe writes, “The principal-agent model is an analytical expression of the agency relationship in which one party, the principal, considers entering into a contractual relationship with another, the agent, in the expectation that the agent will subsequently choose actions that produce outcomes desired by the principal.”2 The delegation must be voluntary and revocable.3 Under an intergovernmental accord, member states retain policymaking authority, but delegate other tasks, such as implementation and monitoring, to a bureaucracy formed and controlled by the states. Under supranational accords, states delegate to a policy-making agent created by the states, but with significant autonomy from the principals. Finally, under plutocratic structures, states delegate policymaking authority to a wealthy state. It is important for analysts and political leaders to recognize this third structure for four reasons. First, although plutocracies resemble empires—a point I elaborate on later in this chapter—they are not the same thing. Political leaders should not jump to the conclusion that states using plutocratic structures will necessarily create empires. Instead, these accords should be evaluated alongside other integration efforts and given legitimacy as such, as long as the great powers are not coercing the smaller states into integrating with them. There are rational reasons to join these accords, based primarily on the logic of political survival. If these structures are confused with empire, foreign leaders’ policies toward the plutocrat may differ significantly than if the accords are understood to be voluntary. Leaders may turn too hastily to military action to prevent a perceived empire from forming. Second, if state leaders want to prevent or unravel an integration accord that uses plutocratic delegation, they will need to understand what conditions create these structures. Once they understand this, they can attempt to undermine these causes. Third, political leaders designing integration accords might want to consider plutocratic structures. Like supranational structures,

4

R e g i o n a l I n t e g r at i o n

they streamline policy making, by giving authority to the wealthiest state. Although there are political reasons why states considering joining the accords may be put off by these structures, if the agent (plutocrat) has trade preferences very similar to those of the principal (the smaller state), the principal may prefer to delegate authority rather than haggle over each of the specific tariff levels, in the interest of speeding up the integration effort. For regions bogged down in integration efforts, plutocracy could be the best choice. To preserve their autonomy, whether for political or personal reasons, the leaders of the smaller states could insist on intergovernmental or supranational structures for future policy making, a hybrid option used by the Prussians.4 Finally, recognizing the plutocratic option reveals new research questions. In evaluating governance structures, integration scholars need to include three choices—plutocratic, supranational, and intergovernmental—rather than the usual set of the last two. In addition, the international relations delegation literature tends to assume states can choose to delegate to a committee of all members or some members, or to an external third party, leaving out the option of a committee of one member, of which plutocracy in an integration accord is one example. This is not an insignificant omission. Without the full range of options specified, we may be missing important cases that will give us further insights into world events. For political leaders, using the plutocratic option for a variety of issue areas may suggest new strategies for achieving their goals. Why Plutocracy Has Been Overlooked Scholars of regional integration have predominantly focused on the European Union (EU), indisputably the most ambitious integration effort since the Prussians designed the Zollverein. This focus largely explains how analysts missed this third governance option. As European integration has deepened, scholars have sought to explain the variation in governance structures within the EU. With the power of the European Court of Justice, the European Central Bank, and the European Commission, the EU is undeniably, though not exclusively, governed by several significant supranational structures. Using assorted theoretical lenses, scholars of the EU have identified numerous factors and actors—grand leaders with grand ideas, economic coalitions, supranational entrepreneurs—that played critical roles in moving the EU from governance primarily by intergovernmentalism to the strong supranational organizations of today.5

Introduction

5

Frenchmen Robert Schuman and Jean Monnet were the architects of the first European Community, the European Coal and Steel Community. The governance structures they created, which are the foundation of today’s EU, were the supranational High Authority (the predecessor of today’s European Commission), the European Court, and the Common Assembly (now European Parliament) and the intergovernmental Council of Ministers.6 Plutocracy was not an option because the first condition—a single wealthy member state to whom others will delegate—was not met. The French Designers’ primary goal was to restrain Germany with a web of multilateralism. This desire meant that Germany was their target Joiner. Without Germany, the purpose of the accord would evaporate. A plutocratic accord between France and other European states would not have served the purpose of binding Germany. Both France and Germany had to be part of the accord. Yet, neither was clearly the wealthier state; both had been ravaged by war. In addition, there were no immediate and easily measured economic benefits that one state could give the other in exchange for delegating policy making. Furthermore, for nationalist and historical reasons, German leaders would never have agreed to delegate authority to France, nor French leaders to Germany. Plutocratic structures were never on the table and thus have not been studied by scholars of the EU. The goal behind the European case, however, is rare. Few Designers have a primary goal of harnessing a single state in multilateralism. They usually have a broader range of prospective Joiners and can find one or more states beside whom they would be the undisputed plutocrat. In most regions, a single state could be the center of the accord: South Africa in southern Africa, the United States in North America, Russia in Eurasia, Saudi Arabia in the Persian Gulf peninsula, and China in a variety of sub-regions, such as Central Asia or Southeast Asia. Even where there are two states that might vie for plutocrat, a Designer can simply exclude its rival. Prussia adamantly refused to allow its rival—Austria— to join the Zollverein. Even a globally small state can be the plutocrat with the right crowd. Less wealthy when compared with Prussia, Bavaria formed its own customs union with a smaller German state in 1828, as did Hanover in 1834. To use a modern example, Venezuela is the plutocrat if the other members are Colombia and Guyana. It is all relative.

Categorizing Regional Integration Plutocratic delegation theory explains plutocracy in a subset of integration cases, customs unions. Before saying more about the

6

R e g i o n a l I n t e g r at i o n Political Union

Depth of Integration

Economic Union Common Market

Monetary Union (Dollarization)

Customs Union Free Trade Area

Currency Board

Preferential Trade Area

Pegged Currency

High Trade Levels

High Levels of Foreign Currency

Trade

Money

Figure 1.1 Types of integration in trade and money

theory, it is important to consider what integration cases I am not explicitly addressing and why the logic of my theory may not be applicable to these other cases (Figure 1.1). The two primary categories that scholars of regional integration use to divide integration accords are issue area and depth. First, the two main issue areas are trade and money. While some integration accords include both, many do not. North American Free Trade Agreement (NAFTA) members have no plans to create a single currency, or to delegate monetary policy to the United States, and Ecuador’s decision in 2000 to use the U.S. dollar as its only legal currency did not accompany a free trade agreement. The logic of monetary and trade accords may well differ. Depth is the second categorization, ranging from shallow to deep integration. Shallow accords include preferential and free trade agreements and bi-monetary relationships (in which a state accepts a foreign currency as legal tender). Moderately deep agreements include customs unions, pegged currencies, and currency boards. Deep agreements include economic and monetary unions and official dollarization (in which a state uses only a foreign currency). At the maximum level of integration, states unite into a single political unit. In describing and explaining economic integration, scholars and political leaders should clarify their terms, making sure to articulate the depth and issue(s) they are covering. A theory that can explain monetary delegation may not be appropriate for trade delegation. On the other hand, it might. For example, scholars of integration generally concur that smaller states delegate monetary policy making to demonstrate their commitment to fight inflationary pressures. Although it has not been used this way, one could extend the logic to

Introduction

7

argue that states delegate trade policy making to commit to specific tariff rates. Only by consciously segregating the two issue areas can we think about whether or not the logic should and does apply. In this volume, I focus on trade issues at the depth of customs unions. A potential next step would be to test the theory on cases of monetary and economic union. The highest integration level is political, a point that raises a key issue about plutocracy: its relationship to empire. Plutocracy’s Path to Empire? Each of the three governance structures have different implications for political union, the ultimate form of trade and monetary integration. Intergovernmental structures can never reach beyond the customs union or monetary union stage; deeper integration requires complex and frequent decisions, which in turn rely on governance structures that can reduce the associated transaction costs. Frequently convening intergovernmental bodies, whose representatives must constantly check back with their home states and whose commitments lack credibility, constrain states from reaching the deepest levels of integration. In contrast, supranational and plutocratic structures are well suited to deep integration. Each streamlines policy making, allowing the member states to move from customs and monetary unions to economic union and finally to political union. Yet, these governance structures suggest differing types of political units: supranational economic accords resemble federal political systems—as the moniker “United States of Europe” connotes—while plutocracies resemble empires. A defining difference between a federal state and an empire is the locus of control over policy making not specified in the governing contract, or constitution. In David Lake’s terms, where the residual rights reside determines the type of unit.7 In a federal system, the central power has decision-making authority only over specific areas identified by the constitution. All other policy making falls to the subunits, whether called provinces, states, cantons, or Länder. Conversely, in an empire, the subunits have authority only in those arenas permitted by the central authority. A second factor separating empires from federal systems relates to interactions between the subunits, a point made by Alexander Motyl.8 In the “rimless wheel” of an empire, the center mediates significant interactions between the subunits, with a primary function being to collect resources from the subunits and then redistribute them as it sees fit.9 In empires, all roads lead to Rome or Moscow or Paris.

8

R e g i o n a l I n t e g r at i o n

Recognizing that a plutocratic governance structure taken to its maximum level of integration ends in empire—a political form Joining state leaders would presumably wish to avoid—enhances the mystery of why states would choose to join such a scheme. Furthermore, the belief that plutocratic accords inexorably lead to empire lies behind the fear of many political analysts that Russia is in the process of rebuilding a Eurasian empire. What these pundits have missed is the voluntary nature of the accords. What they get right, however, is the logical connection between plutocratic integration and empire. From a policy perspective, Western states should assess whether a recreated Russian empire is an outcome they strongly oppose. If so, they will need to understand what conditions are necessary for plutocracy. With this knowledge, they can create policies to help derail the plutocratic structures, by either persuading states to leave the Russian accords or helping convince Russia to design different governance structures.

Theory of Plutocratic Delegation What explains regional plutocracy? To answer this question, I develop a theory of plutocratic delegation that draws on insights primarily from principal-agent delegation. I argue that integration agreements are the result of a strategic interaction between two categories of states: Designers and prospective Joiners. The Designers are wealthy states that have the power to form their own accords. For any integration agreement, there will be one primary Designer, the state that takes the lead to create the accords. The Joiners are the smaller states, relative to the Designer, who are considering joining the accords. In plutocratic governance structures, the Joiners (principals) delegate policy making to the Designer (the agent). To appeal to critical Joiners, the Designer must create an attractive integration package, including governance structures and economic benefits. The leaders of both the Designing and Joining states are assumed to be rational actors, who want, first and foremost, to remain in political office; as long as they have secured this primary goal, they next prefer to make policies of their choosing. The leaders are not omniscient. They live in an uncertain environment; mistakes are made. However, as they receive information indicating that they have erred, they correct course and continue to seek the best strategy for attaining their goals. The leaders are chosen by the selectorate, the group of individuals who are given authority within a particular state to select the leadership. This may occur through formal elections or through informal procedures developed within the state. The members of

Introduction

9

the selectorate who support the incumbent are called the winning coalition. Because leaders of all regimes, whether authoritarian or democratic, must retain the support of their winning coalition, their actions are constrained at both the domestic and international levels. Regardless of their own deeply held beliefs, they will not enact policies or sign integration accords that are strongly opposed by their coalition and thus threaten their political positions.10 Taking into account these assumptions, I argue that we will see plutocratic structures in integration accords when five conditions are met: 1. Single Plutocrat: There must be a single wealthy state—the Designer—to whom the others would delegate policy making. 2. Coalition Permission: The Designer must have the permission of its winning coalition to use plutocratic accords. That is, the leadership’s political coalition must acquiescence if not outright advocate a regional accord that formalizes the Designer’s superior position vis-à-vis the other members. 3. Economic Crisis: The Joiner must be facing an actual, or expected, economic crisis. This is the exogenous shock that pushes the leader to constrain his or her own ability to make independent decisions. The economic crisis threatens the leader’s political survival. Thus, in the name of preservation, the leader agrees to delegate some policy-making authority to another state. 4. Immediate Benefits: The Designer must be willing and able to provide immediate, easily measured economic benefits to the Joiner, who cannot wait for long-term uncertain gains. One particular source of high-value economic gains is relation-specific assets (RSAs), a concept used in hierarchy approaches.11 These assets are durable investments that bind together two or more states. Notable examples include oil and gas pipelines and electricity grids. The Designer can use these assets as economic benefits to prospective Joiners. 5. No superior options: The Joiner must lack superior alternatives to the Designer’s integration offer. Alternatives may include other regional integration accords or benefits offered through global integration, such as foreign direct investment from multinational corporations.To derail the plutocratic structures, the options may be superior to the Designer’s offer in one or more of the following three ways: a. Compensation: They may offer more immediate and significant economic benefits than those offered by the Designer.

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R e g i o n a l I n t e g r at i o n

b. c.

Delegation: They may require less delegation or use more easily controlled agents. Reputation: They may have a better reputation as a trustworthy agent than the Designer.

If the fifth condition is not met—in other words, if there are superior alternatives—the Designer may attempt to sweeten its integration deal, by improving the economic benefits it offers, more tightly constraining itself, or engaging in behavior meant to signal that it can be trusted. These three actions are all viable strategies for an agent interested in persuading a reluctant Joiner to delegate authority. However, if the Designer crosses the line into coercing Joiners, we move outside the delegation model. The principal (the Joiner) must be able to revoke its delegation to the agent (the Designer). Plutocratic structures are relatively rare because these five conditions are difficult to meet. Yet, these structures do exist and have played important roles in regional integration. Furthermore, understanding the conditions under which they emerge can help political leaders thwart those efforts they consider threatening. For example, Russia has designed a customs union with plutocratic structures. If the United States and Europe want to break up these integration efforts, or prevent more members from joining, they must first understand the conditions they will need to change. Implications of the Theory The plutocratic delegation theory raises a number of issues and makes several predictions about state behavior. I discuss these in general terms here and then revisit them in Chapter 7 to see how well they are supported by findings from the three empirical chapters: Chapters 4, 5, and 6. 1. Consensual: To qualify as an act of delegation and thus trigger the logic of the principal-agent approach, the Joining states must not be coerced into becoming integration members. One strong indicator of voluntary delegation is a Joiner initiating the agreement. While the Designer might also desire the relationship, and thus offer inducements in the form of compensation, it must not resort to threatening the Joiner. As states form regional agreements, thereby excluding some states, they make clear that being outside the customs union will economically harm nonmembers by requiring them to pay tariffs. This by itself does not constitute coercion. On the other hand, should a Designer use military

Introduction

11

force to threaten a prospective Joiner, it will have crossed the line separating delegated sovereignty from surrendered sovereignty and thus out of the delegation model. Economic sanctions or blockades also constitute coercion. However, once a state joins the accord with certain economic benefits, the Designer can inform the Joiner that continued benefits are contingent on the state remaining in the integration accord. For example, the EU offers development funds to its new members with relatively weak economies. If a state accepting these funds decides to leave the EU, it will no longer be eligible for these benefits. That is not coercion. While these examples demonstrate the difference between coerced integration and delegated authority, there is admittedly no bright line. Some behavior may verge on coercion, but not quite cross that line. 2. Single Plutocrat: Each integration accord with plutocratic structures should have only one state that is clearly the wealthiest among the members. If there are proximate states with relatively equal or greater wealth to the Designer, we should see the Designer exclude its rivals from the accord. Similarly, under the plutocrat condition, if a prospective Joiner state can find a constellation of proximate states in which it would be the plutocrat, we would expect it to resist the Designer’s integration accords. 3. Immediate Benefits: If the theory is correct, Joining states will be most attracted to those integration accords that can offer immediate, easily measured benefits, rather than the longer-term, difficult-to-measure gains from trade. The theory argues that before a political leader will delegate authority to another state, that leader’s state must first have reached an economic crisis. Without such a crisis, the Joining state prefers to retain full policymaking authority. However, under the logic of political survival, an economic crisis is a political crisis. As such, the leaders cannot afford to wait for uncertain gains that may not materialize for years. Thus, the state that can offer immediate benefits has the best chance of attracting the Joining state to its integration accord. A state in dire need of rescuing its economy cannot afford to reject an integration accord, even one with plutocratic governance structures. Furthermore, we would expect to see a Designer that controls RSAs binding it to a Joiner to use these assets to provide immediate economic benefits to the Joiner; less connected states would find these benefits difficult to match. 4. Winning Coalition: Leaders in both the Designing and Joining states should at least attempt to determine what policies their respective winning coalitions would support. If the coalition signals

12

R e g i o n a l I n t e g r at i o n

that it does not support a plutocratic governance choice, we should see the leader adjust his or her course in order to retain political position. In addition, we should see the Designer paying attention to the domestic issues the Joining state leader faces. A tone-deaf Designer may find that the accords it creates are inconsistent with political incentives the Joiner’s leader faces. As a result, the integration agreement may collapse for want of Joiners. An astute Designer, however, will accurately read the signals and create structures that do not threaten the Joiner’s own political survival. 5. Role of Ideas: The theory suggests that ideas held by the leader’s winning coalition can affect which governance structure is used. If the Designer’s coalition has norms that solidly oppose it using governance structures that formalize the inequality between the Designer’s and the Joiners’ economies, the Designer will not create plutocratic structures. Given the many advantages of plutocracy, these preferences opposing it must be obvious and overwhelming to the leadership. Whether or not the leaders personally agree with these constraining norms is not relevant for this argument. As rational actors, who most values their positions in power, leaders respond to the demands of the coalition, even if they do not agree. The coalition’s preferences should be made clear through campaign promises, demonstrations, articles, speeches, polls, and other measures of public opinion. The Joining coalition’s norms, identity, or ideas may also play a role. If the coalition’s identity revolves around demonizing the Designer, then the state will not join the accords. Throughout the Soviet period, the three Baltic states had a stoutly pro-Western and anti-Russia identity. At the first opportunity, they left the Russian orbit. This kind of demonizing, however, is rare. Most winning coalitions can be persuaded to join the wealthiest state in exchange for the highest economic benefits. 6. Agent Strategies: The theory suggests that Designing states, as the agents, will find ways to attract key Joining states. We should see the Designers calculating what kind of integration package will attract the Joiners and, if necessary, improving features related to compensation, delegation, or reputation. These strategies may respond to the winning coalition’s identity, as discussed above. Some states may be grappling with domestic threats that they must consider when deciding whether to join an accord. The Designer can adjust the integration package to reduce domestic threats to the Joining state. For example, a prospective Joiner with a nationalist coalition will be more politically comfortable if the Designer can soften the plutocratic nature of the accords.

Introduction

13

7. Efficient Policy Making: Plutocracy eases policy making and thus opens the way for deeper integration where intergovernmental structures might fail. We should see states that attempt to use intergovernmental structures for moderately deep integration get bogged down in the policy-making process and eventually replace these accords with plutocratic or supranational ones or at least change voting rules to streamline decision making. 8. No Superior Options: The theory highlights the importance of available options. State leaders do not accept an agreement in isolation. They search for the best options. Joiners with no other options will accept plutocratic structures without much compensation. Those who have more options, however, can attempt to play off the Designer and alternative agents in hopes of getting a more favorable accord. We should see Joiners contemplate their options and select the best on the basis of the three features of compensation, delegation, and reputation. Of these, compensation will be most important, given that the Joining state is in an economic crisis. 9. Punctuated Equilibrium: Finally, the theory suggests that we should see significant institutional changes following a major regional economic crisis. As leaders seek ways to cope with the crisis, they are willing to accept integration accords that they might otherwise oppose. Once they implement the accords, they gain not only the immediate economic benefits offered by the Designer, but also the long-term gains from trade: market competition that makes companies more competitive, larger markets that lead to economies of scale, and reduced transaction costs. As their economies become more intertwined, states are unwilling to risk known gains for uncertain benefits that might accrue from leaving the customs union. Stephen Krasner describes this type of change as “punctuated equilibrium,” which he defines as “short bursts of rapid institutional change followed by long periods of stasis.”12 These bursts are caused by exogenous shocks—in this case, an economic crisis that risks the political leader’s survival. If punctuated equilibrium holds here, we would expect these integration accords to last a very long time.

Case Selection Using process tracing, the empirical chapters explain the governance choices made by three regional powers: Prussia, South Africa, and Russia. I selected these three states for four reasons. First, each of these states has designed both plutocratic and intergovernmental

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structures, providing variation on the dependent variable. Second, in two of the cases—Prussia and Russia—some regional states joined the accords, while others remained separate or delayed joining the integration effort for at least 15 years. Furthermore, there were precursor cases involving South Africa and Prussia, in which states could not reach agreement on any integration effort. This temporal variation within the cases, along with process tracing that shows motives and actions, increases my number of observations.13 Third, the cases collectively cover a significant period of time (180 years, from 1828–2008) and geography (Western Europe, Eurasia, and southern Africa), which allows me to test a generalized theory in a variety of settings. Finally, these three cases have been understudied in the comparative integration literature. The majority of regional studies cover the EU. More recently, with the United States on a free trade agreement spree, intergovernmental accords have increasingly been the focus of integration studies. The Zollverein, the Southern African Customs Union (SACU), and the Eurasian Customs Union have been largely ignored, particularly in comparative studies.

Book Organization In Chapter 2, I explain how trade and monetary integration accords are typically arrayed, from shallow to deep, and summarize the standard economic and political explanations for why states economically integrate. I highlight some of the problems with these explanations. For example, states rarely conduct detailed analyses to determine the long-range benefits from the regional trade. Or if they do, they necessarily have to rely on a number of assumptions that may not hold over time. As a result, immediate gains are much more attractive to prospective Joiners, even if they are ultimately smaller than what other options, such as global integration, might have brought. In Chapter 3, I fully develop the theory of plutocratic delegation. I provide details on the logic of political survival, flesh out the five necessary conditions, and briefly explore two alternative explanations: nationalism and coercion. Chapters 4 through 6 are the empirical chapters, focusing on the first major integration accord in Europe, the Prussian-designed Zollverein (1828–1871); the oldest surviving customs union, the South-African-designed SACU (1910–2008); and the evolving Eurasian integration accords designed by Russia (1991–2008). In Chapter 7, I summarize the findings and suggest future research avenues related to integration and plutocracy. I find that the five

Introduction

15

conditions were met in all cases of plutocratic accords. States chose intergovernmental accords under two circumstances: first, by Prussia, as a veil meant to cover the plutocratic nature of the agreement, which may have threatened the political survival of the Joining states’ leaders, and second, by Russia (1991) and South Africa (2004), when the Designing state’s winning coalition stood for equality among the member states and therefore would not have tolerated plutocratic accords. All of the integration agreements were consensual at the beginning, with Joining states approaching the major power rather than the other way around. The Joiners were able to win immediate economic benefits, in the form of customs collections, low-price fuel, and pipeline access. At a certain point, two of the accords veered into coercive relationships: the SACU in the 1980s when South Africa’s leadership was threatened by economic sanctions from the West, and the Eurasian Customs Union in 2002–2006 when Russia several times cut natural gas to Belarus in the bitter winters. I conclude the final chapter with suggestions for future research, particularly on (1) whether Russia is now using intergovernmental accords, (2) why South Africa took so long—ten years—to negotiate its current governance structures, (3) the use of plutocracy in nonEuropean settings, (4) the possible variation in logic for plutocratic delegation in monetary versus trade integration, and (5) other types of agent strategies in integration and other accords. This book seeks to demonstrate the importance of recognizing and then explaining plutocracy. With a fuller understanding of these governance structures, Western states should see Russian economic activity in the former Soviet arena not as empire building, but rather as a traditional approach to regional integration. When Russia does cross the line into coercion, as it did with Belarus in the 2000s, it should indeed be held accountable. However, when it accepts voluntary delegation in exchange for economic benefits to the Joining state, Russia should not be condemned. If the West determines it is in its best interest to discourage other states from joining Russia’s integration accords, then it will need to provide superior economic options. This will be particularly challenging in the case of some members, such as Belarus, which is reliant on low-cost Russian natural gas. The EU cannot replace—let alone surpass—this compensation. While it can offer a better reputation—less opportunistic—its delegation requirements are actually more extensive than Russia’s. Finally, the West should reconsider whether blocking Russia from joining the World Trade Organization (WTO) is a wise policy. When he came into office in 2000, former President Vladimir Putin made

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WTO membership a top priority. However, the United States repeatedly blocked Russia’s application. Joining the WTO could reduce some of Russia’s incentives for regional integration, such as being able to enact high tariffs for the entire customs area. Rather than trying to persuade Belarus to leave the Eurasian integration accords, which greatly benefit its economy and thus the political survival of its leader, the Western states should focus on something they can control: Russian incentives.

Chapter 2

4

How and Why States Econo mically Integrate

Since the end of the Cold War, economic integration accords have

proliferated. In a type of integration “arms race,” virtually every world region—regardless of economic development, government type, or culture—boasts of at least a few loosely specified accords. However, for analytical purposes, these accords cannot be lumped into a single category of “integration,” any more than we can combine global integration under the World Trade Organization (WTO), with its 153 members, with small regional accords that can have as few as two members. I argue that before answering the question of why states integrate, analysts need to categorize agreements by depth (shallow to deep), issue area (trade and money), and governance structure (intergovernmental, supranational, and plutocratic). Dividing agreements by depth, for example, immediately reveals an important difference in how often certain types of accords are signed: of the 380 regional integration accords registered with the WTO, only ten are customs unions. Shallow integration accords include preferential and free trade agreements and bi-monetary relationships (in which a state accepts a foreign currency as legal tender). Moderately deep agreements include customs unions, pegged currencies, and currency boards. Deep agreements include economic and monetary unions and official dollarization (in which a state uses only a foreign currency). At the maximum level of integration, states unite into a single political unit.

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Under the second categorization—issue area—integration accords are divided into monetary and trade issues. While some regions are integrated in both areas, many others are not. Combining depth and issue area, we may begin to see patterns that were otherwise obscured. For example, Scott Cooper argues that trade integration is much more common than monetary integration. But this appears to be the case only if we ignore depth.1 Customs unions and monetary unions, which are both moderately deep forms of integration, are about equally common: currently, there are eight regional currency unions and ten customs unions.2 Keeping pace with the spread of integration agreements are explanations for why states economically integrate. Economists and political scientists have offered a variety of explanations focused on economic, political, and geostrategic factors. Although analysts are not always careful to differentiate by depth and issue area, the explanations for integration may well vary according to these two factors. For example, states can sign a variety of shallow integration accords, like the North American Free Trade Agreement (NAFTA), whereas they can become members of only one customs union. Thus, the deeper form of integration requires a different political and economic calculus than the shallower one. Similarly, explanations that work well for monetary integration may not be applicable to trade integration. For example, scholars generally agree that states delegate monetary policy making to another state to demonstrate a commitment to fight inflationary pressures. This answer may not easily translate to trade issues. Along with depth and issue area, governance structures are a third way to categorize accords. The answer to the question, why do states integrate? may well differ when we consider which governance structure is being used. Recognizing that there are different types of structures reveals new empirical puzzles, many of which fit within the burgeoning field of comparative regional integration, a literature I discuss further at the end of this chapter. In Chapter 3, I show examples of integration accords arrayed by depth, issue area, and governance structure. I then develop my theory of plutocratic delegation to answer the question, when should we expect to see states delegate to the wealthiest state among them authority to make trade policy?

The Proliferation of Economic Integration Polities have long traded goods, services, and money; yet, historically, few have relied on trade as the engine behind their economic growth.3 This began to change in the mid-nineteenth century,

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when Great Britain succeeded in opening trade routes that led to its dramatic economic growth. The Prussians and a number of neighboring German states also traded a variety of goods. The Union of South Africa, having become a semiautonomous dominion in 1910, relied on trading gold and diamonds with Europeans. Despite these successes, it was not until the twentieth century that the trend in trade became global. After World War II, global tariff levels fell significantly, leading to substantial growth in international trade as well as in the requisite exchange of foreign currencies. The General Agreement on Tariffs and Trade (GATT), first signed by 23 states in 1947, played a vital role in reducing tariff levels. Today, 153 of the 192 United Nations members belong to GATT’s successor, the WTO; another 30 states are negotiating to join. Increased trade is widely seen as the central cause behind global economic growth. Trade relationships can be divided into two broad groups: those governed by market forces only and those that involve formal integration agreements. As states develop extensive trading patterns, their economies became loosely and informally integrated. This market-governed form of integration provides gains from trade without requiring the political leadership to delegate authority to an entity outside the home state. Thus, the leadership retains domestic authority over policy related to international trade and foreign currency exchange, including implementing, adjudicating, and enforcing those policies. Important formal economic alliances formed during the nineteenth and early twentieth centuries. (Two of these—the 1834 Zollverein in Europe and the 1910 Southern African Customs Union [SACU]— are the subject of chapters in this book.) Nevertheless, it was not until after the Cold War ended in 1989 that formal economic alliances proliferated the world over, leading to a modern integration “arms race.” Between 1990 and 1994, states notified the WTO of 33 new accords, more than twice the number that had previously been reported.4 As of 2007, WTO members have registered 380 regional accords, including bilateral and multilateral accords. By 2010, only three years later, nearly 400 regional accords are scheduled to be implemented.5 European states deepened their integration efforts in part out of fear that U.S. economic dominance was destroying their world position. The United States reacted to its fear of a “Fortress Europe” by going on a trade treaty spree. As of 2008, the U.S. government has implemented free trade agreements with 15 states;6 is awaiting Congressional approval on bilateral accords with Colombia, Panama, and the Republic of Korea; has signed accords with Oman and Peru;

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and is in negotiations with Malaysia, Thailand, the UAE, and the five states that comprise SACU.7 In a typical arms-race fashion, the EU, fearing that the American accords would undercut its trade prospects, responded to the 1992 NAFTA by negotiating its own free trade accord with Mexico, which came into force in 2000.8 South American states responded to the race with a customs union of their own, Mercosur, noting in the preamble that a primary reason for the accord was “international trends, particularly the integration of large economic areas.” On the other side of the world, China caught the wave of integration. Over a three-year period, between 2002 and 2005, it signed free trade accords with Hong Kong and Macao; concluded framework agreements with the Association of Southeast Asian Nations (ASEAN), Australia, and New Zealand; and began negotiations with Chile, the Gulf Cooperation Council, India, Singapore, and South Africa.9 At the dawn of 2009, it had completed two new multilateral accords—with the ten members of ASEAN and with five states in the Asia Pacific (Bangladesh, India, Korea, Laos, and Sri Lanka)—and two more bilateral accords, with Chile and Pakistan.10 The cases I analyze in this book are a subset of formal integration accords, not market-governed trade patterns. Formal accords are often categorized by their depth of integration, that is, how deeply the accords integrate the members’ economies. In the following sections, I summarize the literature on formal economic integration, including explanations for why states enter into these accords.

Depth of Integration: Trade Accords The most basic categorization of formal integration accords is by depth. Bela Balassa’s seminal work on trade concisely defines integration as “the abolition of discrimination within an area.”11 He goes on to suggest varying forms, moving from shallow to deep integration, a schematic most scholars use today. Shallow trade accords include preferential trade agreements, free trade agreements, and customs unions. Preferential trade agreements grant lower tariffs or duty-free access to signatory states. These can be broad based, covering a significant percentage of traded goods, or highly selective, offering reduced tariffs on only a handful of products. Members retain some tariff and nontariff barriers with each other. The members do not align their external trade policies. These are left as decisions for each individual state. (One state might have high tariffs on oranges for nonmembers, while another eliminates these tariffs.)

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The 1932 British Commonwealth Preference Scheme, for example, gave preferential arrangements to current and some former members of the British Empire.12 Free trade areas deepen economic integration by eliminating all barriers to trade between the members, including differences in product standards, and harmonizing trade-related laws and customs administration. Member states may impose import tariffs on nonmember states at their individual discretion. The distinction between a preferential and a free trade area is thus a matter of degree, rather than of kind. These accords vary in their coverage and depth of preferential treatment. In addition to goods, some modern agreements include preferential treatment for trade in the services sector. The most sophisticated accords include regional rules on investment, competition, the environment, and labor. The European Free Trade Association, NAFTA, Mercosur, and the ASEAN Free Trade Area are examples of free trade areas. Most states sign preferential and free trade accords with numerous states. While leaders intend for the accords to increase trade among signatories, the integration is relatively shallow and can be broken without significant economic and political costs compared with deeper forms of integration. As a result, free trade agreements dominate the number of formal integration arrangements. Of the approximately 380 regional trade agreements registered with the WTO, 90 percent are preferential or free trade accords.13 Customs unions are moderately deep forms of integration.14 By definition, they require member states to remove barriers to trade among members, like free trade accords, and also to harmonize the members’ tariffs and other trade policies that apply to nonmembers. Member states decide on a tariff, quota, or other restriction to impose on nonmembers and jointly impose this policy. Harmonizing external policies prevents nonmembers from diverting trade through the state with the lowest tariffs or other trade barriers and then transporting goods into member states with higher barriers. The 1834 Zollverein agreement was a classic example of a customs union. It eventually led to the political unification of most of Europe’s German-speaking states.15 The 1957 European Common Market was a customs union in which the original six members set common external tariffs at an average of their tariff rates.16 Britain and the Union of South Africa created SACU in 1910; it is now the oldest surviving customs union. More recently, Russia designed a Eurasian Customs Union in 1995; it now includes five additional members from the former Soviet region.17

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Customs unions differ from preferential and free trade accords in several ways. First, states sign only one customs union agreement as opposed to a variety of preferential and free trade accords. This accounts for the much smaller number of customs unions compared with free trade accords. Second, the exclusivity of these accords means that states are signaling a significant, generally long-term relationship with member states. Third, members of customs unions are contiguous with each other, whereas shallow accords often include partners in distant regions. For example, the United States has signed shallow accords with Chile, Israel, Singapore, and Honduras and is negotiating with Thailand, among others. Finally, because of the necessity of cooperating on a greater number of decisions, customs union members commit to greater levels of institutionalization. Although often used in customs unions, intergovernmental accords can become cumbersome given that negotiating leaders or their ambassadors must remain loyal to their home states. This can lead to long bargaining sessions with few results, hampering the integration effort. Supranational and plutocratic accords can streamline policy making, a point I discuss in greater detail in Chapter 3. Common markets and economic unions are significantly more extensive than customs unions and are thus considered forms of deep integration. In common markets, goods, services, investments, labor, and capital move freely among the member states. At the ultimate level of integration, short of giving up political autonomy, is an economic union in which states share a common currency and integrate other policies such as industrial and agricultural policy, taxation rates and collection, and community and regional development plans and financing. Such integration agreements may even move beyond economics, harmonizing domestic policing, armies, and other foreign policies, as the EU has done. These deeper forms of integration often signal intentions of political integration.

Depth of Integration: Monetary Accords Monetary accords can be similarly arranged from shallow to deep integration.18 At the shallowest level, states integrate through informal currency substitution in which citizens frequently use foreign currencies alongside their official domestic currency. A slightly deeper level of integration occurs when the state officially recognizes a foreign currency as having legal-tender status and permits the foreign money to circulate with the domestic currency; Benjamin Cohen calls this a bi-monetary

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relationship.19 In these arrangements, the host government plays a mostly passive role, permitting the transactions and supporting convertibility.20 At various points in the 1980s and 1990s, the percentage of foreign currency deposits to total deposits was over 70 percent in Bolivia, Croatia, Mongolia, Peru, Poland, Ukraine, and Uruguay, loosely integrating these states with the foreign currency holders.21 These accords are informal in the sense that they are not a major policy choice and do not include signed agreements between the host government and the foreign currency holders. Pegging the domestic currency to that of a foreign state constitutes the shallowest of the formal integration accords. Numerous types of pegging occur, many with anthropomorphous labels, such as forward- and backward-looking crawling pegs. The modifiers suggest how tightly the domestic government constrains itself before intervening in foreign exchange markets. States often peg their currencies to the state with whom they have the highest levels of trade; this form is known as a conventional fixed peg to a single currency. A state with several trading partners may use the average of a basket of currencies. Demonstrating the relative ease of ending such integration, states sometimes switch the currency to which they are pegged. For example, Armenia used the Russian ruble until 1993 and then switched to the U.S. dollar.22 Other states have exited a pegged system in favor of a flexible exchange rate: Mexico in 1994, Thailand in 1997, and Brazil in 1999.23 Pegged systems have recently declined in popularity. Among International Monetary Fund (IMF) members, the share of states with pegged regimes fell from 80 to 56 percent between 1990 and 2001.24 Currency boards entail even deeper integration. Currency boards pledge to support a fixed exchange rate with a strong foreign currency, called an anchor currency. This policy restricts the state from enacting its own monetary policies and is generally used to signal a commitment to restrain inflation. States select anchor currencies from states with a commitment to low inflation rates, generally the U.S. dollar, the Japanese yen, or the EU euro (previously the German mark). The currency board pledges to maintain the exchange rate and thus ties its own state’s inflation rate to that of the anchor currency’s state. Official dollarization and monetary unions are the deepest forms of strictly monetary integration. Official dollarization occurs when a state sanctions using only a foreign currency, which is not transitory, and the state has no local issuer of notes.25 Of the 100 cases of dollarization

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since the 1700s, the U.S. dollar has usually been the foreign currency of choice, giving the concept its name. However, many Middle Eastern states once used the Indian rupee, and Britain’s former colonies used sterling. Today, Northern Cyprus uses the Turkish lira, and Montenegro uses the euro. While many of the existing 32 cases involve islands and other remnants of colonization (Cook Islands, Panama) and others are the result of recent state collapse (Kosovo), the most interesting cases are those that have chosen to forsake their own currency for another, including Ecuador in 2000 and El Salvador in 2001, both of which now use the U.S. dollar.26 Dollarization is widely seen as a means of controlling inflationary pressures. Panama provides a striking example. Dollarized in 1904, Panama had an average annual inflation of 2.7 percent between 1961 and 2004, in striking contrast to 10 percent for the rest of Latin America and over 1,000 percent for Argentina and Brazil.27 Ecuador cited inflation, which rose as high as 91 percent, as the reason behind its decision to dollarize in 2000. By 2002, inflation had fallen to 9.4 percent, reinforcing beliefs about the relationship between dollarizing and economic stability.28 Monetary unions are similar to dollarization in that a single currency and central bank serve more than one state. The two types of integration differ primarily in whether states delegate policy making to a supranational institution or to a another, more powerful state. The best known, and currently most significant, monetary union is the European Economic and Monetary Union (EMU). Under the EMU, member states adopt the euro as their sole legal currency. A single central bank, the European Central Bank, issue notes and thus controls monetary policy. Also fitting the definition is the Eastern Caribbean union, with its seven island members using the Eastern Caribbean dollar and sharing a single central bank. Whereas dollarized states delegate monetary policy to another state, monetary union members delegate to a supranational central bank. The Common Monetary Area (CMA) of southern Africa uses four central banks that can act independently, making it a hybrid between dollarization and monetary union. Monetary unions do not necessarily require all members to delegate policy making to a single central bank. Two of the longest standing monetary unions are in Africa and are collectively called the Franc zone. Dating to 1945, the zone calls for the 14 member states of central and western Africa to use a single currency, the Colonies Françaises d’Afrique (CFA) franc.29 The CFA franc was originally pegged to the French franc and is now pegged to the euro. The zone is divided into

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two monetary unions: the West African Economic and Monetary Union (UEMOA) and the Central African Economic and Monetary Union (CEMAC). Each union has its own supranational central bank that sets interest rates, with the primary objective being to defend the exchange rate peg. The French Treasury underwrites convertibility by providing the central banks with an automatic loan facility.30 Because the CFA franc is pegged to the euro, the members of these two unions delegate monetary policy making to the supranational European Central Bank. The deepest form of monetary integration, short of political union, is an economic union, discussed above under the trade section. Since economic unions integrate both trade and monetary policies, they require a far more dramatic and tighter bond between the member states than a monetary union or common market. The EMU is the most significant and advanced economic union, though even it falls short of full integration. The UEMOA has also moved substantially toward a full economic union. Having long shared the CFA franc, member states have more recently harmonized external tariffs and indirect taxes, enacted regional structural and sectoral policies, and moved toward a common fiscal system.31 Numerous trade and monetary integration accords exist in the international system. As the accords deepen the level of integration, states pay higher political and financial costs of exit. The step to officially dollarize and thus abolish one’s own currency is more binding than the decision to form a currency board, which can be relatively quickly dismantled should the leadership choose to shift policy. Removing interstate barriers to trade poses fewer risks than also aligning external trade barriers, as required in a customs union. The double action of the customs union promises more significant, longer-term integration of economies than the single action of a free trade area. At the maximum depth of economic integration, the states become a single economic unit. Full political integration may not be far behind.

Why States Integrate To understand why states create different governance structures—the subject of this book—we first need to explain why states integrate at all. Given the political and economic risks of economically integrating, particularly with the forms that require delegating policy making to supranational institutions or other states, why do state leaders ever choose formal integration over market-based trade in goods, services, and money?

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Arguments for integration have traditionally focused on expected economic gains. In deciding whether to regionally integrate, a state considers several benefits derived from economic theories, some of which focus on gains from global trade and others on specific preferential accords, such as free trade agreements and customs unions.32 Many of the benefits suggested by economists are assumed to accrue to all members, regardless of their economic size relative to the other members, and from both global trade accords—specifically the WTO and the GATT before it—and regional trade accords. Major economic benefits include reduced transaction costs leading to greater economic efficiencies; greater specialization and related benefits due to a larger customer base; broadened competition that weeds out poor performers; tariffs collected from nonmembers that can be redistributed among members; lower administrative costs for internal customs houses, border guards, and other officials who regulate the borders; higher levels of foreign direct investment from nonmembers seeking to avoid tariffs and to take advantage of the larger market; and greater bargaining power due to the increased market size of the integrated states.33 Other benefits are associated specifically with regional accords, from the shallowest preferential trade agreements to deep economic unions. These accords with smaller memberships allow states to focus on economic benefits specific to the members. For example, in free trade negotiations with Chile and Singapore, the United States pushed for concessions on intellectual property rights and allowing the United States to bid on government procurement contracts.34 In his investigation of numerous integration accords, Walter Mattli finds that states integrate at deeper levels only when they are in economic crisis, when the loss of sovereignty is outweighed by the promised economic benefits of integration.35 While some scholars consider general benefits, others argue that the benefits of integration vary according to the size of the state. The wealthiest states can use power asymmetries to extract more favorable provisions from other members.36 For small and newly independent states, regional accords provide a transitional space: domestic companies become more competitive in a smaller universe, in preparation for stiffer competition from the global trading partners they will confront under an increasingly open trading system.37 Similarly, a smaller negotiating table with regional allies provides a comfortable classroom in which to learn skills needed for the global accords.38 Fewer players may simplify the path to agreements: collective action theory suggests that larger groups have greater difficulty resolving

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their differences. “When the numbers of parties to an agreement increase, there is an increased probability that members’ preferences will diverge, the core will shrink, and the probability of a bargain will fall.”39 Furthermore, in some cases—for example, SACU and the Zollverein—tariff revenues collected from nonmembers may provide government revenue needed by developing or newly independent states.40 In the twenty-first century, state leaders’ choices are affected by an additional factor: the integration “arms race.” Fear of being left out in the cold, while their neighbors form cozy, warm circles surrounded by high tariffs and other barriers to entry, drive state leaders to seek regional accords for their own states. The EU’s deepening integration and ensuing economic power have made many regional groupings eager to replicate its success. In the nineteenth century, leaders of the German states felt the pressures of a similar integration race, pushing them to sign, sometimes uneasily, accords they had rejected before they found themselves surrounded by customs unions.41

Integration Partners: Trade Once state leaders decide to join or start an integration accord, they must evaluate potential partners. Customs union theory tells us how much a state should expect to gain economically from joining another state in removing internal tariffs and in forming common external tariffs for nonmembers. Economists argue that customs unions and other forms of integration that exclude others do not necessarily increase the welfare of member states and the rest of the trading world.42 Indeed, such accords may seriously decrease a state’s welfare. While political leaders may have little concern for whether they are increasing the world’s collective welfare, they presumably do care about enhancing their own state’s welfare, if not to improve the lives of their citizens, then to increase resources for their personal coffers and political patronage.43 Economists generally concur that a customs union will be more welfare enhancing the closer it comes to meeting the following six conditions: ●

Geographically proximate members. States that share borders will benefit more from removing trade barriers than states who are distant from each other. Even without barriers, geographic distance hinders trade levels.

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High levels of pre-union trade among members. When states have historically engaged in extensive trade, their consumers are familiar with the other states’ products and will quickly increase purchases when prices fall under free trade conditions. High pre-union trade barriers. When trade barriers are already very low, removing them will have less effect than when barriers have been historically high. Low customs union barriers on trade with the rest of the world. Trade is less likely to be diverted from nonmembers when external barriers are low. A large number of members with sizable economies. Even aggregated small markets still add up to a small economy and thus insignificant scale benefits.44 Competitive (at equal levels of development) rather than complementary (some developed, some undeveloped) economies within the membership.45 When some members are more advanced than others, “backwash and polarization” can occur: advanced states attract more investments than their partners (backwash) and thus develop exponentially faster than the other members (polarization). This leads to lopsided development, exacerbating already unequal relations.

Even in a trade diverting customs union, however, the collective terms of trade may well improve for members. Particularly for developing states, even when the customs union increases import costs, the gain of a somewhat larger market, and thus greater production, may be preferable to no gain at all. “The growth in income and jobs could be regarded as sufficient compensation for the loss consumers experience because of trade diversion.”46 Whether an individual member’s terms of trade improve, decline, or remain the same depends on the details of the accord and the circumstances of the state, specifically in what sectors it has strength and how the newly unified tariffs affect those sectors.47 Many of the six conditions enumerated above do not hold in existing customs unions. For example, the EU now includes economies that are complementary rather than competitive: Ireland’s GDP per capita is $46,600; Romania’s is $11,100.48 This would appear to violate the sixth condition. This suggests that states join integration accords for a variety of reasons, many of which may be outside standard economic calculations. Geostrategic and domestic political reasons often play a critical role in a state’s decision to join an accord. I incorporate some of these alternative explanations, along with the standard economic ones, in my plutocratic delegation model.

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Integration Partners: Money Economists have also developed a theory to explain monetary integration, known as “optimum currency area theory.”49 Robert Mundell defines a currency area as “a domain within which exchange rates are fixed” and contrasts this to a system of “national currencies connected by flexible exchange rates.”50 Concluding that the whole world should not be a single monetary area and that states by themselves are not necessarily optimum currency areas, Mundell asks what is the optimal currency area. Economists now generally agree that a group of states with the following features will most benefit from monetary union: high capital and labor mobility among members, resource immobility with nonmembers, and significant structural similarities among members. Scholars explaining dollarization—a currency union in which members delegate monetary policy to the anchor currency’s state—point out that by aligning one’s own currency with a more stable one, a state can achieve the benefits of price stability, including higher rates of international investment and a local population better able to plan ahead without fear of destabilizing inflation.51 Developing economies are particularly vulnerable to inflationary pressures, which they are better able to resist when they delegate policy making to a state with a more stable currency, as occurs under dollarization. Between 1971 and 2000, 59 percent of the 145 developing economies had annual inflation exceeding 20 percent. However, among those who dollarized, only 13 percent had inflation over 20 percent.52 Political leaders in recent dollarization cases considered lower inflation the primary reason to eliminate their local currencies and instead use a stronger, more stable currency. In Ecuador, for example, after the sucre plummeted in 12 months from around 7,000 to 30,000 sucres to the dollar, Ecuador’s leaders replaced the sucre in 2000 with the U.S. dollar.53 A Newer Answer: Political Benefits The above explanations focus on economic benefits. Yet, political leaders have their own calculus. Overarching economic growth, particularly at the global level, but even at the domestic level, does not necessarily make integration a smart political choice. Political leaders must ascertain whether the accords will benefit their primary short-term goal: remaining in political office. This preference often determines the economic direction that leaders take, including routes to, or away from, regional accords.

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Political scientists have entered the debate over what drives regional integration, focusing on the noneconomic benefits that may accrue to member states. Political variables can often explain why state leaders veer from the path that a strictly economic approach would dictate. A prime example is the EU decision to institute a single currency—the euro. Given their structural dissimilarities, the EU states do not meet the conditions for a monetary union, as understood under the optimal currency area theory.54 Europe’s decision to move ahead demonstrates that straightforward economic analysis may not accurately predict or explain state action. Several political explanations for economic integration have been suggested. First, economic integration may politically stabilize some states, which in turn will pose less of a security risk to others. Arguments that free trade would reduce immigration, drug trafficking, and related security problems in Central America played a critical role in the passage of NAFTA, CAFTA-DR, and the Caribbean Basin Initiative.55 Dean DeRosa has suggested that the economic benefits of free trade could bring greater stability and security to Indonesia and the Philippines.56 States may choose to economically integrate with particular states to embed themselves in a broader political and/or security network. Because free trade requires greater transparency as well as regulated competition policy, government procurement, and customs, these agreements can promote stronger democratic institutions, an argument made by U.S. officials in favor of the Central American agreements as well as by the EU members when they admitted former Communist states of Eastern and Central Europe. 57 The U.S. treaties with Australia, Israel, and Jordan were each intended to strengthen bilateral relations outside the existing military ties.58 In extensive studies of multiple cases, Edward Mansfield and Gowa independently found that states tend to ally economically with those that are already political-military allies.59 China has deliberately designed integration agreements that further develop its “interests in wider economic, diplomatic, and strategic relationships” in the region.60 Domestic political issues may also influence whether a state joins or declines an integration accord. Ronald Rogowski demonstrates the connection between factors of production favored by comparative advantage and the lobbying position of various parties based on how free trade would affect their economic well-being.61 Numerous studies have demonstrated how large European firms pushed the EU forward, arguing that a “fragmented Europe deprived them of the scale economies they needed to be competitive,” the same argument

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that the American business community used in favor of NAFTA and the Asia-Pacific Economic Cooperation (APEC) agreement62 On the other hand, NAFTA opponents included labor groups that feared lost jobs and lower wages and environmental and health organizations concerned that their hard-won battles for higher standards in the United States would fall victim to lower standards in Mexico. Whether a state signs an integration agreement may be determined by who wins the political battle between these competing interests.

A Newer Question: What Determines Governance Structures? The question of governance structures used in integration accords has been approached in three ways. First, some analysts of the EU have sought to explain the emergence of supranational structures by explicitly or implicitly presuming that intergovernmental accords are the starting point. Since supranational accords require states to delegate policymaking authority, state leaders would presumably prefer intergovernmental accords, where they retain full policy-making authority, or what some call sovereignty. Variation from this assumed preference must then be explained.63 Many scholars of the EU have focused on just these two forms of governance. They have not addressed the question of why states might use a third option—plutocracy—in which the smaller member states delegate policy making to the wealthiest state in the integration accord. Some great powers have designed accords using these structures, including Prussia and several other German states in the 1800s, South Africa in the twentieth century, and Russia in the twenty-first century. As I discuss in Chapter 3, the advantages of plutocracy are so great for the wealthiest state, it is puzzling why we do not see more of these structures. Second, Cohen divides monetary accords into two types: hierarchies and alliances. Cohen’s monetary hierarchy is the same as my plutocracy, while his alliances are supranational structures. Cohen argues that states choose hierarchy to increase their credibility on monetary issues.64 In Cohen’s terminology, monetary hierarchies require states to “surrender sovereignty.” This phrase connotes coercion, but as I argue in this book, states often willingly choose to delegate authority.65 Even in those cases where colonial powers forced their subjects to use the imperial currency, once the colonies become independent states, they have the option of choosing a new currency, yet often reaffirm the delegation. Third, a burgeoning “comparative regional integration” literature, while moving in promising directions, is often not explicitly comparative, but instead a collection of chapters, each devoted to

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a different regional accord.66 In one of the few truly comparative studies, Francesco Duina (2006) compares the EU, NAFTA, and Mercosur. He argues that regional accords are either legally interventionist or minimalist. Though he does not use these terms, the former category can be roughly equated to supranationalism; the latter, to intergovernmentalism. His cases do not include plutocratic structures.67

Need to Explain Three Governance Structures Given the numerous economic, political, and even security benefits combined with the current impetus to integrate, it comes as no surprise that nearly 400 accords are expected to come into force by 2010. Integration agreements between non-WTO members—notably, Russia—are often not registered with the organization; adding these cases raises the integration count even higher. The extensive economic and political science literature explaining integration, both generally and with specific partners, leaves a number of issues underexplored. First, while the typology of integration depth has been widely accepted, no literature adequately addresses the plutocratic option. Second, most of the comparative regional integration literature does not explicitly compare and then explain variation between different integration accords or time periods, and it often ignores regions outside Europe. Despite having the oldest surviving customs union, African agreements are rarely included in the integration literature. In addition, despite Mattli’s important analysis of the Prussian Zollverein, scholars have not mined that accord for other interesting puzzles and insights. Few scholars have recognized the Russian accords as economic integration agreements that should be part of the larger comparative literature. Including these various accords reveals new puzzles for integration scholars to solve. Finally, most integration studies do not disaggregate the various member states and thus fail to analyze adequately the role of small states. Instead, the focus tends to be on the great states. For example, many scholars concentrate on the role of France and Germany in the formation of the Economic Community, but few note that the political and economic preferences of the Benelux states helped form the final structures.68 As I argue in the next chapter, for analytical purposes, states can be usefully divided into Designers and prospective Joiners.

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Wealthy states have the privilege of designing the accords, while Joiners—smaller states—decide whether or not to join the accord. When selecting governance structures, Designers consider not only their own preferences, but also the circumstances of the prospective Joiners. In Chapter 3, I develop my plutocratic delegation theory. I operationalize the dependent variable, noting how plutocracy differs from the other two governance structures; briefly discuss the principalagent literature and how it sheds light on my question; elaborate on the five conditions that must be met to produce plutocratic accords; and note two alternative variables that might explain integration: coercion and nationalism. I conclude by noting how my theory contributes to the delegation and integration literatures. In subsequent chapters, I test my theory on a variety of empirical cases.

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Chapter 3

4

The ory of Plutocratic Delegation

My dependent variable is plutocracy, a type of governance structure

that states sometimes use for economic integration. While two other structures—intergovernmental and supranational—are well known to scholars of integration, plutocracy—rule by the wealthy—has been overlooked. Under this third structure, members of the integration accord delegate policy making to the wealthiest state among them. My theory of plutocratic delegation, developed in this chapter, identifies five necessary conditions for plutocracy. I argue that integration accords are the result of strategic interactions involving Designers and Joiners. The Designers are wealthy states who create the governance structures. Designers target comparatively less wealthy states as prospective Joiners. As they design these structures, they try to ensure that the accord will attract the Joiner while also retaining as much policy-making authority for themselves as possible. While plutocracy has many advantages for the Designer—chiefly, policy control—if the accord cannot attract Joiners, the integration effort will fail, an outcome the Designer wants to avoid. Plutocratic structures are used when the following five conditions are met:

● ● ●

Single Plutocrat: There must be a single plutocrat among the constellation of member states; this state is the Designer of the accords. Permissive Coalition: The Designer’s domestic political coalition must favor or be indifferent toward plutocratic structures. Economic Crisis: The prospective Joiner must be in, or anticipate being in, an economic crisis.

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Immediate Benefits: The accord must bring the Joiner immediate and easily measured economic benefits, as opposed to uncertain, hard-to-calculate future gains. No Superior Options: The Joiner must lack superior options for easing its economic crisis. Options must be inferior in terms of compensation, delegation, and reputation.

In this chapter, I further define the three integration structures using concepts from delegation theory; array integration accords by issue area, depth, and governance structure; summarize examples of plutocracies; elaborate on the five necessary conditions for plutocracy; and consider alternative explanations for plutocratic structures. In subsequent chapters, I test my theory using a variety of economic integration accords that center around the regional great powers of Prussia (1828–1866), South Africa (1910–2008), and Russia (1991–2008).

Delegation and Hierarchy Models My theory builds on the new institutional economics (NIE) literature first developed by economists and now widely used by political scientists. Following seminal works by economists Ronald Coase and Friedrich von Hayek, all NIE scholars accept two basic propositions: institutions matter, and institutions should be the subject of study.1 The NIE school has spawned a vast literature with two primary branches reaching into international relations: what I call the delegation and hierarchy approaches. Although closely related and often collapsed into a single category, the language for each differs, with principals delegating decision making and other tasks to agents in the delegation model, while dominant actors absorb subordinates in the hierarchy approach.2 In delegation models, scholars tend to worry about how principals will control their agents. In contrast, scholars using hierarchy approaches tend to write about leaders of hierarchies and to contrast the costs and benefits of hierarchies versus alliances.3 Scholars tend to use one or the other approach. Despite these differences, the genesis of the two approaches is the same, with both using transaction costs, imperfect rationality, and the importance of institutions as their starting points. The principal-agent model provides a useful approach and language for understanding how governance structures vary and what explains plutocracy. In his seminal article formally introducing political scientists to the model, Terry Moe wrote, “The principal-agent model is an analytical expression of the agency relationship in which one party, the principal, considers entering into a contractual relationship with another, the

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agent, in the expectation that the agent will subsequently choose actions that produce outcomes desired by the principal.”4 In developing the following model, I draw on the recent work of international relations scholars who have used principal-agent models to explain state delegation to international organizations, such as the United Nations, the European Court of Justice, and the International Monetary Fund.5 From the hierarchy approach, I borrow the concept of relationspecific assets: durable assets that bind together two or more states. As I discuss under the fourth condition, these assets may enable the Designer to offer unmatched economic benefits to its members.

Three Governance Structures States can use three optional structures to govern regional economic integration accords: intergovernmental, supranational, and plutocratic. In each of these structures, member states (principals) delegate authority to an agent. The agent, and what type of authority it has been given, varies according to the structure. It can be (1) an implementing bureaucracy formed and controlled by the states (intergovernmental), (2) a policy-making body created by the states and with significant autonomy from the principals (supranational), or (3) a wealthy state with policy-making authority that is also a member of the accord (plutocratic). Throughout the book, I use the term policy-making authority when referring to supranational and plutocratic structures. Policy making is distinct from the broader decision-making authority. Policy is, ultimately, decision making about raising revenues and allocating resources.6 Consistent with the delegation approach, I assume that if the principal opts to enter into the contract with the agent, it does so expecting that the agent will choose actions that produce desirable outcomes for the principal.7 I assume that the authority delegated by the principal to the agent is limited in scope and/or time and that the principal can revoke this authority.8 Should the authority become irrevocable, much of the principal-agent logic evaporates. As I explore later in this chapter, when an integration accord with plutocratic structures becomes irrevocable, the states have moved from a relationship of voluntary plutocracy to empire. Intergovernmental and Supranational Structures In an intergovernmental structure, national executives of the member states are the primary policy makers. They “bargain with each other

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to produce common policies. Bargaining is shaped by the relative powers of the member states, but also by state preferences, which emerge from the pulling and hauling among domestic groups.”9 The organization serves as a forum for the states to debate and bargain, out of which comes an agreement (or not). In its purest form, each member retains its veto power. However, intergovernmental accords may also weight voting rules according to the economic power of each member. As long as no one state has veto authority, the structure would still be classified as intergovernmental. The people in the forum represent their own governments, not the organization itself. They receive directions from their home governments and ultimately report back to the state. The states, as principals, delegate implementation of their policy decisions to their agents, the international bureaucracies. The states and their representatives reserve significant policy making for themselves. They maintain authority over the bureaucracies, with the ability to hire and fire individuals and to rewrite rules and policies of the integration accord. They can even destroy the entire institution, as it is their creation. Deprived of its funds, the institution suffocates. Alternatively, the principals can restructure the relationship to restrain wayward agents or to improve monitoring. Agents in an intergovernmental structure lack legislative and adjudicative authority, which collectively I call policy making. Bureaucracies may monitor and implement policies, set agendas, collect information, and perform other tasks that require members to delegate some authority. Recent scholarship demonstrates that these bureaucratic agents have more autonomy than scholars previously understood.10 Nevertheless, their authority is limited compared with those in supranational and plutocratic structures, as discussed below. Mercosur, the Gulf Cooperation Council (GCC), Association for Southeast Asian Nations (ASEAN), and the Asia-Pacific Economic Cooperation (APEC) group are examples of accords that rely almost exclusively on intergovernmental structures. The Mercosur Council includes the foreign and finance ministers of member states, the Parliamentary Commission represents the four members’ parliaments, and the Mercosur Group comprises officials from the member states. In the GCC, a Supreme Council comprising the heads of state formulates major policy decisions. It is supported by the Consultative Council, which consists of five experts from each state. The Ministerial Council includes the ministers of foreign affairs.11 The governance structures for the ten-member ASEAN include the Summit of Heads of State and Government, annual Ministerial Meetings, and a variety

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of specialized bodies to assist in executing decisions made at higher levels. APEC, with its 21 members, boasts that “it is unique in that it represents the only intergovernmental grouping in the world committed to reducing trade barriers and increasing investments without requiring its members to enter into legally binding obligations.”12 Supranational structures, in contrast to their intergovernmental counterparts, require member states to delegate policy-making authority to the agent. The primary players in a supranational structure are beholden to that organization rather than to member states, as is the case in intergovernmental accords. Supranational organizations have jurisdiction over specific policy areas affecting the member states.13 The leaders of the member states overtly delegate policy making to the supranational structures rather than bargaining among themselves. Member states agree ex ante to abide by policy decisions reached through the structures. To qualify as supranational structures, these institutions must have legislative and/or binding adjudicative authority, two of the eight authority types identified by Curtis Bradley and Judith Kelley.14 Defined as the authority to create or amend treaties or issue binding directives, legislative authority is one of the most powerful and, consequently, the rarest authority delegated to third parties. Under adjudicative delegation, states grant a third party the authority to make binding decisions about a controversy or dispute. To qualify as a supranational structure in my model, the agent must be authorized to make binding decisions, as opposed to providing only informal mediation or advisory opinions. An increasing number of integration accords include adjudicative authority in the form of dispute settlement mechanisms that equip adjudicators with tools to enforce compliance. The European Parliament, European Central Bank, and European Court of Justice are all supranational organizations. The European Commission is not as clearly supranational as the others, as it does not set policy or adjudicate decisions. Yet, most EU scholars classify it as supranational, in part because of its quasi-legislative authority.15 Under supranational structures, and in contrast to intergovernmental ones, those with authority to make legislative and adjudicative decisions are not beholden to the member states themselves, but rather to the organization for which they work. As Andrew Cortell and Susan Peterson note, the bureaucracies of international organizations generally have staff who are similarly not obligated to represent a particular state, but rather the organization itself. The distinction I make here is between bureaucracies that implement policy decisions and agents that set or adjudicate policy.

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Member states agree to abide by the supranational organization’s decisions, even those that may push the state’s leaders into political positions they would otherwise have avoided or even actively opposed. For this reason, states are more cautious about entering into accords with supranational structures than intergovernmental accords.16 Although an increasing number of integration accords use supranational dispute settlement mechanisms, most integration accords are predominately intergovernmental. Plutocratic Governance Structures Plutocratic structures have been largely overlooked in the trade integration literature as well as in most delegation models used in international relations. Like the other governance forms, the plutocratic system incorporates the principal-agent logic. Rather than delegating to a newly created or existing international organization, the principals delegate to the wealthiest member state. To qualify as a plutocratic structure, member states must delegate legislative or binding adjudicative authority at a minimum, but may well delegate many other common agent tasks, such as implementation, oversight, and data collection. While our best-known integration accords have used intergovernmental and supranational organizations, the cases discussed in this book remind us that plutocracy is an option. As in a supranational structure, the member states of a plutocratic structure agree a priori to abide by the agent’s policy decisions. Because the relationship is consensual, the agent has incentives to give deference to the principal’s preferences. Should the agent abuse its position, the principal can withdraw from the relationship, opting to either forgo integration or select a new agent. Calling the plutocratic structure a principal-agent relationship may not fit well with some scholars’ understanding of delegation theory. This discomfort arises from the fact that the agent has more economic, and often more military, power than the principal. This, however, does not obviate the usefulness or applicability of the delegation model. Indeed, this lopsided power relationship exists in domestic cases of delegation as well. The plutocratic structure most closely resembles Moe’s voterrepresentative case of delegation. Citizens elect officials to make policy decisions on their behalf, decisions by which they agree a priori to abide. At election time, citizens assess how well their agents have served them. If poorly, they vote to remove them from office. When the citizens assess that they have been well cared for, they return the

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political leader to office. The plutocratic structure, under voluntary delegation, operates the same way. The principal-state delegates policy-making authority to the agent-state. However, unlike the voter, the principal does not have to wait for a formal election. At any time, principals can assess if the agent has served them well. If so, the relationship continues. Otherwise, the principal can essentially fire its agent, opting for either a new agent in the form of another state or a supranational or an intergovernmental structure. It can even opt to remove itself from all principal-agent relationships, electing to reject formal integration. Integration accords can use more than one governance structure and can change structures over time, introducing new ones to replace old structures or adding new structures to cover new policy areas or to complement existing structures. Although dominated by intergovernmental structures, Mercosur includes a dispute settlement organization that has authority to issue legally binding rulings, thus giving it supranational properties.17 Scholars widely consider the EU to be the most supranational of organizations in the current international system (short of political integration); yet, it includes intergovernmental features as well. In addition to the supranational organizations discussed above, the European Council and the Council of Ministers are intergovernmental organizations, where state leaders themselves or their representatives negotiate on behalf of their governments.18 Furthermore, as I show in subsequent chapters on Europe, southern Africa, and Eurasia, an integrating group can begin with one type of structure and then re-contract to change to, or include, one or more different structures. In the early to mid-1800s, the Prussians designed a plutocratic structure in which member states allowed Prussian leaders to set initial tariff levels for all customs union members. After this initial delegation, tariff policy was set by an intergovernmental organization. In 1910, Britain delegated to the newly born Union of South Africa the authority to set tariff policy for three of Britain’s Territories in southern Africa as well as the authority to collect and distribute the customs revenues. In 2004, the Southern African Customs Union (SACU) began using intergovernmental governance. In 1995, several former Soviet states delegated legislative authority over tariffs and monetary policy to Russia. The accords replaced the intergovernmental agreements that Russia had originally designed under the Commonwealth of Independent States (CIS). In addition to the cases I detail in this book, plutocracy is often seen in monetary issues, where states delegate policy-making authority to wealthy states by pegging their currencies to another state or by

42 Table 3.1

R e g i o n a l I n t e g r at i o n Examples of trade integration, organized by governance structure Governance structure

Depth of integration Political integration Economic union

Market

Intergovernmental

Supranational

Plutocratic

N/A

N/A

Federal state

Empire

Common market Customs union

European Court of Justice European Commission Commonwealth of Independent States Southern African Customs Union (2002–present)

Russia— single economic space Russia-Eurasian Customs Union (1995–present)

Zollverein General Assembly—Stage 2 (1828–1871)

South AfricaSouthern African Customs Union (1910–2002)

Gulf Cooperation Council Customs Union

PrussiaZollverein —Stage 1 (1828–1871)

Free trade area

NAFTA European Free Trade Association

MERCOSUR dispute settlement mechanism

Preferential trade area

British Commonwealth Preference Scheme ASEAN GATT N/A

WTO dispute settlement mechanism

High trade levels RussiaUkraine

N/A

N/A

Source: Various. Note: Under plutocratic structures, the state listed before the agreement is the one to whom other members delegate policy-making.

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going so far as to replace entirely their local currency with a foreign currency—a policy called official dollarization—as Ecuador did with the U.S. dollar in 2000. Tables 3.1 and 3.2 array integration accords by issue area, depth, and governance structure, revealing a wide variety of integration accords.

Table 3.2

Examples of monetary integration, organized by governance structure Governance structure Market

Intergovernmental

Supranational

Plutocratic

N/A

N/A

Federal state

Empire

European Court of Justice

Russia-Eurasian Economic Community

Depth of integration Political integration Economic union

European Commission Monetary union, dollarization

Eastern Caribbean Central Bank

US-Ecuador dollarization

European Central Bank Currency board

US-Djibouti Currency Board (1949–present) US-Argentina Currency Board (1991–2002)

Pegged currency High levels of foreign currency, bi-monetarism

Bundesbank-EC Members US Kazakhstan

IndiaBhutan

Sources: Cohen (2004), Dinan (1999), Duina (2006), Salvatore (2004), author. Notes: These are examples of the types of relationships, rather than an exhaustive list. For example, see Cohen (2004), p. 62 for many more examples of formal dollarization.

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Although plutocratic structures have been largely ignored in the literature, they could be easily incorporated into existing delegation models. For example, Bradley and Kelley refer to three options: committee of the whole, committee of some members, and third parties.19 In their phrasing, a plutocracy would be a “committee of one.” Similarly, Darren Hawkins et al allow for a single state as agent, but mention this option only in passing, presumably because of their focus on international organizations.20 The plutocratic option is not mentioned by Barbara Koremenos, but it falls within her category of internal delegation, where members delegate to a subset of the members of the agreement; in this case, a subset of one.21 Plutocracy’s Relationship to Empires Over time, a particular integration accord can deepen, become more shallow, or remain at its current level of integration. Those who suggest that the three NAFTA states will soon have a single currency assume that integration accords naturally deepen, but there are many political and economic reasons why this accord may well remain at its current shallow level. Yet, some integration groups—again, the EU stands out as a prime example—do in fact deepen their level of integration. As integration deepens, the principal delegates more authority, over more issues areas, to supranational and/or plutocratic structures. At the deepest level, the states form a political union. Taken to their logical ends, the two agents—supranational and plutocratic—become very different state structures. As depicted in tables 3.1 and 3.2, a supranational structure tends toward a federal system, while the plutocratic structure evolves into an empire. Supranational institutions resemble federal states. A defining difference between a federal state and an empire is the locus of control over decisions not specified in the governing contract, or constitution. In Lake’s terms, where the residual rights reside determines the type of unit.22 In a federal system, the central power has policymaking authority only over specific areas identified by the constitution. All other policy making falls to the subunits, whether called provinces, states, cantons, or Länder. The federal government itself resembles a supranational structure. Some imagine this will one day happen to the EU: integration will deepen to the point that the states form a federal system. In contrast, integration under a plutocratic structure appears remarkably like a junior empire. Empires are political systems in which a center governs a periphery; the subunits of that periphery have authority only

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in those arenas permitted by the central authority. A second factor separating empires from federal systems relates to interactions between the subunits.23 In the “rimless wheel” of an empire, the center mediates significant interactions between the subunits, with a primary function being to collect resources from the subunits and then redistribute them as it sees fit.24 All roads lead to Rome or Moscow or Pretoria. Given their common structures, if plutocratic integration deepens into political integration without shifting the locus of policy maker to the other members, through either supranational or intergovernmental structures, the new political entity is an empire. Because of the family resemblance between plutocracies and empires, states delegating to plutocrats worry about the agent’s reputation. As discussed below and exemplified in the Prussian chapter, great states that are cognizant of their reputations as potentially opportunistic agents may construct intergovernmental structures in an attempt to persuade reluctant Joiners to sign the integration accord.

Plutocratic Delegation Theory My model depends on some basic assumptions of how the mind and the world work. Consistent with NIE arguments, I argue that individuals are rational in the sense that they seek to reach goals, based on their own interests, which cannot be assumed to be identical to those of all other individuals.25 However, people are not all knowing. They have imperfect or bounded rationality, as Herbert A. Simon earlier called it.26 Actors intend to be rational, but have cognitive limitations and incomplete information about the situation in which they find themselves. In other words, there is uncertainty. Furthermore, individuals’ preferences are fixed. Below, I identify a primary preference for leaders—to remain in power—with the secondary preference of enacting policies of their own choosing. These preferences remain constant throughout the analysis. Observed changes in behavior are caused by changes in the situation and the information available to the leaders.27 When presented with external clues or signals, leaders update their beliefs. If this information is signaled to him in a timely and clear manner, the leader will adjust his strategy to retain his political support or enact policies of his choosing. For example, a Designing state might create a plutocratic governance structure, but if he cannot attract Joiners, the leader will update his beliefs and construct an intergovernmental or supranational accord, whichever he believes will convince the Joiner that it is safe to become a member of the accord.

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Because of imperfect rationality, no contract—regardless of detail and complexity—is complete. As a result, selecting the optimal agent and then monitoring and controlling that agent can be critical to the success of the relationship. Given a particularly poor agent choice, states may even opt to forego economic integration. Designers and Joiners The particular leaders of interest for my analysis are those from the states designing the integration accords—Designers—and those state leaders considering joining the economic integration accord—Joiners. Designers are plutocrats, that is, wealthy states. If the integration structure is plutocratic, they are the agents to whom the Joiners will delegate policy-making authority. The Joining states, which are by assumption smaller than the Designing state, play a critical role in determining whether plutocratic structures will be used in the integration accord. The Designer must create a governance structure that will attract prospective Joiners. Because I assume that the Designing state wants an integration accord, it must consider the preferences and domestic constraints of the potential Joiners. This sequence differs from much of the delegation literature, where the principal, as the head of the hierarchy, is assumed to design the contract for the agent or to create a new agent. For example, states (the principals) created the United Nations Security Council and then delegated certain authority to the new agent. Here, however, the Designer as a potential agent structures a contract with the intention of finding principals interested in delegating to that agent, be it an intergovernmental bureaucracy, supranational organization, or a plutocratic structure, in which the agent is the Designer itself. Political Incentives But you know I am not used to being a slave. I am used to being a master and I want to be a master in my country, without anyone above me. Ukrainian president Leonid Kuchma, 199428

As President Kuchma’s statement symbolizes, I assume that political leaders desire first and foremost to remain in office and once there to implement their policy preferences. The office-seeking goal is a widely used and well-supported assumption in comparative politics. It holds particularly well for states in transition where departing political

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leaders may be forced into exile, imprisoned, or assassinated. However, even in stable democracies, leaders are loath to leave. Candidates for the U.S. Congress occasionally promise to vacate their offices after a limited number of terms; they rarely do. Leaders of both Designing and Joining states are constrained by their supporters. Members of a polity can be divided into four groups: all residents, the selectorate, the winning coalition, and the leadership, each of which is a subset of the one before it.29 In no state do all residents have the authority to help select the leadership. Residents are excluded from the selectorate based on factors such as age, gender, race, citizenship, property ownership, mental ability, and criminal records. Those who do have the authority to choose the leadership are called the selectorate. Each member of the selectorate “has a formal role in expressing a preference over the selection of the leadership that rules them.”30 In modern democracies, the selectorate includes all individuals qualified to vote in elections. In authoritarian regimes, the selectorate may be members of only the governing party, elite families, the military, or other powerful groups. The winning coalition is the “subset of the selectorate whose support is essential if the incumbent is to remain in power.”31 The winning coalition can shift for any given leader or move from one leader to another. For example, blue-collar workers in the United States have, at various times, been members of winning coalitions for both Democratic and Republican presidents. Similarly, U.S. President Bill Clinton successfully wooed many big businesses that had traditionally been part of only Republican coalitions into his winning coalition. Some political groups, within a given polity, are always members of the winning coalition. While both democratic and authoritarian leaders often have some latitude in the exact coalition they form, they are also constrained by the particulars of the state. For example, the leader of a state whose oil exports earn nearly all the government’s hard currency cannot ignore the energy sector. In the Soviet Union, the military was part of every winning coalition.32 The smallest group, the leadership, has authority to make policy decisions about “gathering and allocating resources.”33 To remain in power, the leadership must always consider how to maintain the support of its winning coalition. Or if it seeks to remove one part of the coalition, it must add another group that will give it sufficient support to remain in office. These winning coalitions, and the selectorate from which they are drawn, can determine which governance structure the Designing state chooses. For example, as I show in Chapter 6, Russian nationalists

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eventually pushed President Boris Yeltsin into designing plutocratic accords rather than the intergovernmental and supranational structures he designed immediately after the Soviet collapse. The international environment and the domestic politics of the prospective Joiners also constrain the Designing state in selecting governance structures for the accords. For example, Prussian leaders were sensitive to the domestic politics that the Joining states faced, most notably the threat that liberalism posed to many of the reactionary leaders. The Prussians thus wisely created intergovernmental structures that were less threatening than plutocratic ones to the prospective Joining states’ coalitions. Once political leaders have ensured their places in office, they strive to enact their policy preferences in both the domestic and international arenas. States will interact with other states to reap the gains from trade, but leaders will simultaneously attempt to reduce vulnerability to states with which they fear their policy preferences will diverge. Thus, when selecting an economic partner with whom to integrate, the leader must consider whether that state’s leadership will generally match his or her preferences. In general, the better the preference match, the more likely the partner’s policies and actions will benefit the leader and the less likely that opportunistic behavior will threaten the Joiner’s leader’s own policies and political position. Five Independent Variables Designers prefer plutocracy for three reasons. First, under plutocracy, the Designer does not have to delegate policy making to another institution, as the supranational design requires. The Designer gains this enviable position by virtue of being economically, and often militarily, stronger than the principal. Under plutocracy, only the Designer enjoys veto power. Second, the Designer now controls policy for the entire integration area. This allows the Designer to more fully benefit its winning coalition. For example, under the Eurasian accord, Russia chose to raise significantly tariff levels for automobiles, thus protecting its domestic industry, which would otherwise be vulnerable to competition from more advanced states, such as Germany and Japan, as well as from other low-cost options. Under the plutocratic customs union, Russian leaders were able to expand the protected territory to cover all the members of the union. This trade diverting measure thus generated more sales for Russian companies, enabling Yeltsin to reward his coalition at the expense of customers in all member states. Finally, governing an integration effort can bolster the state’s regional superpower status. Assuming the winning coalition favors such an

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image, the role can pay significant dividends toward the state leader’s political security. Despite Designers’ preference for plutocracy, we rarely see these structures in current integration accords. I argue that this is because five conditions must be met. If even one is not present, there will be either no integration accord or an accord that is governed mainly by supranational or intergovernmental structures. Plutocracy emerges when (1) there is a single wealthy state—the Designer and plutocrat—to whom the others would delegate policy making; (2) the Designer’s political coalition supports, or at least does not oppose, an accord that formalizes the Designer’s superior position vis-à-vis the other members; (3) the Joiner faces an actual, or expected, economic crisis; (4) the Designer is willing and able to provide immediate, easily measured economic benefits to the Joiner; and (5) the Joiner lacks superior options to the Designer in terms of (a) compensation, (b) delegation, and (c) reputation. Alternatives may include other regional integration accords or benefits offered through global integration, such as foreign direct investment (FDI) from multinational corporations. Designing the accord may not be a seamless endeavor. An environment of uncertainty means that the Designing state may misinterpret what kind of accord the Joiners will accept. The Designer might write a plutocratic structure only to find that the Joining state is unwilling to delegate authority to one state, but will consider a supranational structure. On the other hand, the Designer might select an intergovernmental structure and later discover that the Joiner would have been willing to sign an accord using plutocracy. When this occurs, we should see the Designer attempt to rewrite the contract, either to attract prospective Joiners or to increase its gains by using plutocracy. Condition 1: Must Be a Single Plutocrat To get plutocracy, there must be a single state that is wealthier than other members and is interested in designing an integration accord. There is no threshold for being wealthy enough. One integration group’s plutocrat is another’s pauper. For example, if modern Spain formed an integration accord with Portugal, it would be the plutocrat. In an alliance with Germany, however, Spain is the poorer member. In the current Eurasian customs union, Kazakhstan delegates authority to Russia. However, if Kazakhstan chose to form its own integration accord with Kyrgyzstan and Tajikistan, it would become the plutocrat.

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States of relatively equal size could opt to design an integration accord among themselves, but this would preclude the plutocracy option. The leader of a state with similar economic strength to another member would hardly be willing to delegate policy making to that state. If more than one great power resides in the area, the accord would have to exclude that power, which may go against other goals.The French designers of the first European community—the European Coal and Steel Community—did not consider plutocracy, as the Germans would surely never have joined an accord that required delegating policy making to the French, and the community without the Germans obviated its raison d’être.34 Condition 2: Designer Has Coalition Permission for Plutocratic Structures Once the leadership of the Designing state has selected prospective Joiners compared with which it will be the wealthiest state, it must assess whether it has the political support from its winning coalition, or an alternative coalition it could create from the selectorate, that will actively support, or at least acquiesce in, using plutocratic governance structures. Some political coalitions will not support governance structures that formalize and thus highlight the unequal economic and (perhaps) social position of the various members. For example, the African National Congress (ANC), when it came to power in South Africa in 1994, could not support plutocratic governance structures that suggested that South Africa was superior to the other African states in the integration accord. These structures reflected the economic power of South Africa relative to its much smaller and, in the case of Lesotho, quite poor fellow customs union members. That had not changed. However, the plutocratic structures were clearly associated with the hated apartheid regime. In addition, the ANC had campaigned on the idea that South Africa was morally bound to help its African brothers and sisters. The coalition, therefore, could no longer support plutocratic structures. These were replaced in 2004 with intergovernmental structures. Similar to the ANC, President Yeltsin’s winning coalition had campaigned on a platform advocating Western-style democracy and capitalism, in opposition to the authoritarian and centralized rule of the Soviet Union. It was critical for Yeltsin and his coalition to distinguish themselves from the imperial structures of the past. The coalition’s ideals and political image were inconsistent with a CIS that used plutocratic structures and thus too closely resembled the Soviet

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Union, in which policy making was delegated to Moscow. As such, Russia designed a CIS with intergovernmental structures. For most of the period examined in my empirical cases (1910– 2008), the winning coalitions of Prussia, South Africa, and Russia gave more than permission to use plutocratic structures. They practically demanded it. Although the Prussian leaders toned down their ambition to unite all of Germany, they and the selectorate from which they came were generally reactionary and strongly nationalistic. Plutocratic structures were consistent with their worldview. South Africa’s Afrikaner leaders were overtly racist. They believed that God had made white-skinned people superior to black-skinned people, and therefore that it was natural for them to subjugate not only the Africans who lived in their state, but also the African-ruled neighboring states. Furthermore, like the Prussians, the Afrikaners hoped to politically integrate the other customs union members into a larger entity under their control. Plutocracy was consistent with these ambitions. Finally, beginning in the mid-1990s, Russia’s selectorate became increasingly nationalistic, pressing for greater economic and military control over the Soviet successor states. Plutocracy supported the winning coalition’s image of the state’s proper position in the region. Whether the political leaders are truly nationalists themselves or instrumentally nationalist is unimportant to my analysis. I assume that leaders seek, above all else, to remain in power. As rational thinkers, they are responsive to their winning coalitions, whether or not they believe what the coalition espouses. Thus, we need not know whether Yeltsin switched from truly believing in Western economic and political principles to a more nationalistic view or whether the switch was cynically designed to capture enough votes to remain in power. We need only detect that Yeltsin’s winning coalition—and in this case, the broader selectorate—became increasingly nationalistic and that Yeltsin then embraced this rhetoric and enacted governance structures that responded to his understanding of what the winning coalition demanded. Condition 3: Joiner Faces Actual or Anticipated Economic Crisis To agree to delegate authority, the Joining state’s leadership must be facing an economic crisis. Leaders whose states enjoy stable economies with at least moderate growth rates will be unwilling to delegate control over policy making, leaders’ secondary preference after political survival. Policy is ultimately about raising revenue and allocating resources. Political leaders use the revenue to create a mixture of

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public and private goods. As long as the economy is of a sufficient size to reward the winning coalition, the leadership is loath to delegate policy making. However, this reluctance melts away when something else—an economic crisis—threatens the leadership’s political survival. As Bueno de Mesquita et al. succinctly put it, “Financial crisis ⫽ political crisis.”35 Political leaders must have sufficient economic resources to sustain their winning coalition. If the winning coalition is large—as in democracies—the political leadership will reward members with public goods, such as education, transportation, and rule of law. If the winning coalition is small—as in autocracies—the leadership can supply private goods, such as pet projects and cash payments, to the coalition members. An economic crisis threatens the survival of the leadership, regardless of what mixture of public and private goods it is providing.36 If the leadership’s survival is already precarious, even a mild crisis, or an anticipated one, can persuade the leaders to delegate policy making. For example, in mid-1800s Europe, the German kings and their reactionary leaders were being threatened by liberal revolutions sweeping the continent. It was not unreasonable to fear that an economic crisis would topple them. This factor helped contribute to their decision to join the Prussian-designed plutocratic accords. Once Joining states are part of the integration accord, they consider renewing their delegation based not on whether they are in crisis, but whether they could reasonably expect a crisis if they withdrew. For example, Kazakhstan has become quite wealthy through energy exports using Russian-owned pipelines. If it were to withdraw from the Russian-designed customs union and Russia punished it with reduced access, Kazakhstani leaders could well anticipate a financial crisis and therefore a political crisis. Similarly, given a chance to leave the SACU after they gained their independence in 1969, the southern African Joiners had to contrast the uncertain but significant gains of global integration with the certain, though much smaller, gains of regional integration. If the experts who were advocating leaving the SACU were wrong about the gains the SACU members could expect from global integration, the leaders’ political survival would be threatened. The leaders thus opted to stay in the accord. Condition 4: Immediate, Easily Measured Economic Benefits Despite theories developed by economists, as discussed in Chapter 2, determining precise economic benefits that will accrue from

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integration is not a straightforward calculation. Many agreements are too loosely specified for such detailed analysis. Major decisions are left for future negotiations. Even where agreements clearly specify the rules, the actual outcome may vary over time. For example, in the SACU, the five member states divide among themselves the collected tariffs, but how they divide them has changed, at some points leading to overcompensation and at others to undercompensation.37 Similarly, for years after its formation, scholars and practitioners attempted to measure precisely the effects of the European Free Trade Area.38 In addition, leaders cannot be sure how tightly the accord will be implemented and monitored, variables that influence the effectiveness and efficiency of the accord. Finally, how deeply the members will eventually integrate remains unknown at any given period. The founders of the European Community could hardly have predicted with any certainty the powerful supranational organizations of today’s EU. Early speculation by the European Community’s French designers, Jean Monnet and Robert Schuman, was based on visions and hopes, not rigorous economic analysis. With these complex calculations challenging to calculate ex post, they can hardly be useful ex ante. Given these difficult and uncertain calculations, and the economic crisis that prospective Joiners are facing, Joining states look for shortterm, easily measured economic benefits. Long-term gains from the dynamic effects of integration, such as larger markets that force companies to compete and thus eliminate inefficiencies, play a less important role in Joining state calculations. Customs collections are one of the most easily measured short-term benefits from regional integration. Particularly for a developing state, customs can provide a significant percentage of a government’s revenue. The customs collections attracted Joiners of both the Zollverein and SACU accords. When Russia was forming its own integration accords, it was cash poor, but resource rich. As such, the Russian leadership provided customs union members immediate economic gains via relation-specific assets, generally involving natural resources that the states craved to feed their industries and keep warm their citizens. Relation-specific assets (RSAs), a concept used in hierarchy approaches, bind together states.39 RSAs include oil and gas pipelines, electricity grids, and railroads that connect two or more states. These assets can be used to provide much needed economic benefits. Russia and its customs union members share numerous RSAs due to the fact that they once formed a single state. Using these assets, Russia sold Belarus natural gas far below market value and gave Kazakhstan access to its pipelines. These were critical benefits that no other state could provide.

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Absent these, it is much less likely that the states would have accepted plutocratic accords. Condition 5: Joiner Has No Superior Options If prospective Joiners have options that are superior to those offered by the Designing state, the Designing state will not use plutocratic structures, out of concern that the Joiner will instead sign onto the more attractive accord. Alternatives to the Designer’s accord may include other regional integration accords or benefits offered through global integration, such as FDI from multinational corporations. The options may be superior in terms of compensation, delegation, and/or reputation. (1) Compensation: Other options may offer more substantial or more immediate economic benefits than the Designer can or is willing to offer. This is the most important feature. Given the assumed economic crisis and its threat to the leadership’s political survival, immediate and substantial compensation is more important than the other two variables. (2) Delegation: Other options may require the Joiner to delegate fewer policies or use more easily controlled agents. (3) Reputation: Other agents may have a reputation for behaving as a “better” agent than the Designer, who may have different preferences from the Joiner or have acted opportunistically in the past. If there are superior alternatives, the Designer may attempt to attract the prospective Joiner by improving the economic benefits it offers, more tightly constraining itself, or signaling that it can be trusted. However, the principal—the Joiner— must be able to revoke its delegation to the agent—the Designer. If the Designer coerces the Joiners, particularly by militarily threatening them, we move outside the delegation model. Compensation Compensation is the most critical factor. Since the Joiner is in an economic crisis or anticipates one, it must consider what immediate economic benefits it can get from joining a particular integration accord. The better the package offered by another organization, the less willing the Joiner will be to delegate policy making to the Designer. States with resources that can quickly attract significant FDI that exceeds what the Designer can offer are unlikely to accept plutocratic accords or any integration accord that requires significant delegation. On the other hand, prospective Joiners that are receiving economic benefits from the Designer that no other option can match are more likely to accept delegation to another state as a price worth paying. No other state,

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existing integration accord, or corporation can match the low-priced fuel that Belarus receives from Russia. Even if the current authoritarian leader stepped down and Belarus became a democracy, it would be unlikely to join the EU, simply because the Russian deal cannot be equaled. Delegation Delegation can also play an important role. An integration accord or FDI agreement that requires little or no delegation would be preferable to the plutocratic accords. A state that can match the Designer’s economic benefit package and that plans to use only intergovernmental structures may win over the Joining state. The ability to retain more policy-making authority can even trump the immediate economic benefits offered by a Designer using plutocratic structures, particularly if that Designer has a poor reputation with the Joining state’s political coalition. Reputation Designing states may have negative reputations that they must overcome to attract Joiners. Negative reputations are linked to both historical events and perceived future ambitions, such as having previously acted opportunistically against other states, having reneged on international agreements, and having ambitions to subjugate others. Designers with negative reputations face an uphill battle in attracting Joiners. Supranational structures require members to delegate authority. While it may be true that the supranational organizations will not act with malice against member states, the delegation model elucidates the ways in which the supranational organizations can act against the interests of the principals. In addition, as members integrate more deeply, they significantly raise the costs of exiting these agreements. Once a state has stopped making its own currency, dismantled its central bank, and lost expertise in money management, revoking the contract between principal and agent has significant economic and political costs. Despite these concerns, we would be hard pressed to envision supranational institutions behaving malevolently against members. The same cannot be said for states. The fear factor truly comes into play with plutocratic accords, with the potential fear intensifying the deeper the integration effort. In contrast to the supranational structure, the principal cannot kill off the agent and may have weak powers to restructure the contract.

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Therefore, coercion plays a role in plutocratic structures, while it is largely absent from intergovernmental and supranational structures. While delegation scholars argue that agent independence varies among international organizations, nothing compares to the independence of the agent in a plutocratic structure.40 As separate states, and wealthy ones at that, plutocratic agents have substantial funds of their own, over which principals have virtually no control. Many of the devises available for controlling agents, such as cutting funding, cannot be used against a plutocrat. The primary means of sanctioning the agent is exit, but this carries high costs for the principal, particularly the deeper states integrate. With this unequaled agent independence, the Designer can even choose to militarily force a recalcitrant Joiner to follow its decisions. Under such circumstances, the relationship would change from delegated sovereignty to surrendered sovereignty. This is what makes plutocratic structures risky for principals: the ability for the agent to turn the relationship on its head, with the principal subjugated to the erstwhile agent. Indeed, a plutocratic structure taken to its deepest integration point becomes an empire. This fifth condition—no superior options—may have become harder to satisfy in an era of high levels of FDI and proliferating integration accords. On the other hand, since 2008, when the world has been plunged into a global recession, which has led some pundits to predict that the EU may unravel, and when negotiations under the auspices of the WTO have stalled, we may see more cases of plutocracies, as options disappear. This is a particularly important point from a policy perspective and one on which I elaborate in Chapter 7.

Designer (Agent)Strategies Agents-states have a variety of strategies they can use to attract principals away from other options, as noted above. They can sweeten the integration deal by improving compensation, delegation, or reputation. If they cannot overcome their negative reputations, the Designers may even create intergovernmental accords that allow concerned principals to retain policymaking authority or supranational accords with greater agent control. Much of the delegation literature has focused on principal strategies rather than on those of agents. As Hawkins and Wade Jacoby argue, the focus on controls gives “us an indirect picture of agents as seen through the eyes of principals.”41 Plutocratic delegation theory elaborates on the ways an agent can affect the principal-agent relationship. Agent strategies, according to Hawkins and Jacoby, play a significant role when the agent pool is small and the cost of creating a new agent

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is high. Both conditions are met in the case of moderately deep and deep economic integration. While states can sign free trade agreements with numerous trading partners, deeper integration requires a commitment to a subset of states, almost always contiguous neighbors. Given this regional restriction, prospective Joiners generally have only one or two existing integration accords they can join and only a handful of new structures they could create with another Designer. For example, at the time of its independence, when the leadership was deciding its future economic policy, Belarusian leaders were restricted to three deep integration options: join the existing supranational EU, join the newly forming intergovernmental CIS, or create a new integration accord with neighboring states. Since its neighbors—Poland, Ukraine, and the Baltic states—were dealing with their own economic troubles, these were hardly partners worth allying with. This left only the CIS and the EU. In 1910, when Britain no longer wanted to directly rule southern Africa, and was thus looking for an agent to which it could delegate authority to set and administer tariffs for its Territories, it had only two options: to create a new supranational governance structure for the Territories or delegate to the Union of South Africa.

Alternative Explanations Since scholars have not recognized plutocracy as a third governance choice, there are no specific alternative explanations to counter. However, scholars of Eurasia have proffered two explanations for economic relationships among the former Soviet states, both of which are relevant to my cases, but are incomplete or lack supporting evidence for my particular dependent variable. Coercion Given Russia’s turn toward authoritarianism under Vladimir Putin, one might argue that the plutocratic relationships I describe are not acts of voluntary delegation, but rather the result of a great power coercing small powers into organizations that are precursors to empire.42 This argument could be made as easily about South Africa and Prussia, two states with reputations for coercion. However, the evidence does not support the claim that the Joining states were coerced, at least not in the initial acts of delegation. The smaller German states were the first to approach Prussia about a customs union, a proposal that the Prussian leaders initially rejected. The first act of delegation in the SACU was from Britain to South Africa, on behalf of the small African Territories. Britain

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was certainly not coerced. In the second act of delegation, in 1969, the newly independent African states carefully assessed their options and decided that they preferred the known, immediate economic benefits of the customs union over the unknown, distant gains of global integration. Similarly, the Kazakhstani and Belarusian leaders almost begged Russia to let them remain in an integrated union, even when it changed from the intergovernmental CIS to the plutocratic customs union. Toward the end of the apartheid regime, however, South Africa crossed a line, taking the relationship out of one of delegation and into coercion. This occurred when the United States joined others in enacting trade sanctions against the apartheid regime. Feeling squeezed and insecure, South Africa invaded some of the customs union members who were protecting members of the ANC. South African leaders also imposed crippling sanctions on Lesotho, a coercive act designed mostly to force Lesotho to stop harboring ANC members, but which also had the effect of reminding Lesotho of the economic havoc South Africa could bring on the small state. Russia may also have crossed the delegation-coercion line when it repeatedly cut energy to Belarus in the dead of winter between 2002 and 2006, an episode I detail in Chapter 6. These acts of coercion, rather than diminishing the explanatory value of the plutocratic delegation model, demonstrate the point that it is dangerous to delegate to such an independent and powerful agent as a plutocrat. It just might turn on you. Nationalism Some scholars of Eurasia have argued that national identity explains which states are economically (re)integrating with Russia. This argument does not explain plutocracy per se, but instead takes exception to my claim that Joining states mostly focus on economic gains when deciding whether to sign a particular accord. Those who focus on nationalism argue that rather than economic interests, states join integration efforts with states that share their identity. Thus, we have two Slavic states—Russia and Belarus—integrating, while the strongly nationalistic and pro-Western Baltic states join the EU. Ukraine, divided between its Western-leaning and Russian-leaning populations, has a contested identity and thus cannot make up its mind with whom to integrate.43 This explanation works well for the Baltic states and (possibly) Ukraine. However, as I argue in Chapter 6, there is substantial evidence that economic benefits, not identity, explain Belarus’s pro-Russian policy. Furthermore, it is hard to see how Muslim Kazakhstan shares an identity with Slavic Russia, and surely racist South Africa and the black-ruled

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African states who comprise the SACU do not share a common identity. The Prussian accords look more promising for the identity argument, as the Zollverein members were all German speaking. Bismarck and others clearly saw nationalism as the binding force. However, the evidence shows that the state leaders were mostly concerned with their political survival. Finally, nationalism cannot explain why Austria was excluded from the German customs union. The plutocratic delegation model argues, and the evidence supports the claim, that Prussia would not allow Austria to join because it did not want to be overshadowed by its rival. There can be only one plutocrat per accord.

Conclusion Plutocratic governance structures have generally been overlooked by scholars of economic integration as well as by scholars of international delegation. Yet, they have historically been the structure of choice for customs unions. The three great powers I explore in this book—Prussia, South Africa, and Russia—all used them. South Africa used these structures until 2004. Russia designed them in 1995 to govern Eurasia when the intergovernmental CIS failed to produce results. Prussia along with Hanover and Bavaria created plutocracies to govern their customs unions. Nothing precludes these structures from being used again. Understanding where they come from and the implications of using them may help scholars and politicians encourage plutocracy where integration has otherwise failed or prevent plutocracy where integration may work against foreign policy goals. My theory of plutocratic delegation contributes to the literature in important ways, several of which have policy implications. First, it highlights the difference between Designing states and Joining states. The benefits that may accrue to one do not necessarily accrue to the other. This is a lesson that applies to not only plutocratic accords, but more generally to explanations for integration. Second, the strategic nature of creating plutocracy applies to all governance design and highlights the importance of understanding smaller states’ preferences. Integration efforts may fail or succeed based on a Designing state’s understanding of what prospective Joiners want. Third, the theory supports delegation scholars who have argued that agents, not just principals, have their own strategies. The cases in this volume show how Designing states attempt to sweeten the integration package through economic side-payments and intergovernmental accords designed to appeal to the Joining states’ winning coalition. Fourth, the theory argues that Joining states must be undergoing, or anticipating, an economic crisis. Under the logic of political

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survival, an economic crisis is a political crisis. Because of this, Joining states need immediate, easily measured gains, rather than long-term uncertain benefits that come from global integration. If Western states want a particular state to leave a plutocratic accord—such as Belarus and the Eurasian accords—they will have to find a way to replace the certain gains that state is receiving under the plutocratic accord. A better-behaving agent, such as the EU, is not enough. Unless the EU can figure out how to replace massive natural gas subsidies that Russia offers, Belarus will remain in the Eurasian Customs Union. Fifth, the plutocratic model is part of a larger group of delegation relationships that has not been recognized in the literature: delegation to one. States can choose to delegate not only to a committee of the whole, of some, and of third parties—as Bradley and Kelley argue—but to a committee of one. Why don’t states more often choose this option? Does it appear in other issues areas? What are the differences between plutocratic delegation in monetary versus trade accords? These are all questions worthy of scholarly attention. Furthermore, a committee of one is not just a subset of a committee of some, which leads me to the next point. Sixth, a plutocracy bears a family resemblance to empire. Political leaders in the West are right to be concerned about Russian-designed accords that use this structure. Fully integrated, to the point of a political union, the Eurasian accords become a new Soviet Union, sans Communist ideology. But it does not have to end this way. South Africa never achieved its goal of politically integrating the African states. The fourth point suggests how external actors can affect the outcome. Finally, the theory reminds us that integration structures can change and that domestic political coalitions are key to that change. To move from plutocracy to intergovernmental or supranational accords, the leader of the Designing state will need a winning coalition that opposes plutocratic accords. The SACU stopped using plutocracy because the ANC stood for equality among Africans and thus would not tolerate structures that formalized inequality. The next three chapters evaluate whether the five conditions are necessary to explain plutocracy. They also demonstrate how Designers (agents) use strategies to attract reluctant Joiners (principals), with a primary focus on immediate economic gains. As predicted, political leaders’ primary preference of political survival is critical to understanding economic integration. Economic logic alone is simply insufficient.

Chapter 4

4

Uni t i ng t he Ger mans: Prussia and the Zollverein

In 1828, Prussia formed its first customs union, which later grew

into the German Zollverein, including all the German-speaking states with the exception of Austria. The economic integration that began with the Zollverein deepened into full political integration with the creation of the German Empire in 1871. The Prussian leaders— particularly Finance Minister Friedrich von Motz and Prime Minister Otto von Bismarck—brilliantly designed the Zollverein accords as plutocratic structures cloaked with a liberal intergovernmental General Congress. All member states had to initially align their tariff systems with that of Prussia, thus delegating policy making to the plutocrat. However, after that, all decisions on tariffs and related trade matters were made by the General Congress, which, for much of its existence, had extremely liberal voting procedures, giving all members equal voting power and full veto authority. In addition to offering prospective Joiners unmatched immediate economic benefits—in the form of customs duties greater than those the states would otherwise earn—Prussia created the General Congress to demonstrate it was a highly reputable agent, who should not be feared by states who did not want to delegate any more authority than necessary. The General Congress also helped appease liberal members of the selectorate who challenged the political survival of the reactionary political leaders of the German states. Prussia was willing to create these structures and incur significant short-term financial costs because of its higher ambition to unite the German states against the French threat. Earlier efforts at integration failed because

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they attempted to include two great powers: Prussia and Austria. Only when Prussia was able to exclude Austria, and thus become the sole plutocrat, did the integration accords succeed.

Introduction to the Zollverein Nineteenth-century Prussian leaders, with the backing of a powerful military, economically and then politically unified over 30 Germanspeaking enclaves, provinces, duchies, and states into an empire and then a state that became the center and source of two wars that rocked the world. The study of how this great power came to be has occupied countless historians, biographers, and military strategists, none of which incidentally has equaled the smooth and passionate narrative of Prussian nationalist Heinrich von Treitschke.1 While the military’s role in unifying the German lands has been most studied, others have turned their attention to the role of the customs union formed by Prussia, starting in 1828 and culminating in the Zollverein (literally, “toll union”), which eventually included nearly all the German-speaking states. The governance structures of the Zollverein ceased to exist when the various German states unified into the German Empire, and the imperial Reichstag and Bundesrat took control of customs policy.2

Dependent Variable: Plutocracy with Cloak of Intergovernmentalism Although the Zollverein went through several structural changes, the Prussians always used a hybrid approach, under which Joining members would (1) adjust their tariff schedules and a few economic policies to match those of Prussia and delegate to Prussia certain treaty-negotiating rights (plutocratic delegation), after which they would (2) become part of an intergovernmental structure that would make any future changes to the customs system. The structures changed only in that the intergovernmental part of the accord became more formal, after 1834, and less equitable: universal veto authority changed to a majority voting system, with votes weighted according to the state’s economic size. The Zollverein’s governance structures began as a customs union between Prussia and the relatively small German state of HesseDarmstadt in 1828, and concluded in 1871, when the German Empire was formed with Prussia at its center. Although the Zollverein lived on in name, it was now one and the same as the German Empire and therefore did not have separate governance structures.

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The life of the Zollverein can be divided into four periods: (1) a failed precursor: the German Confederation (1815–1820), (2) the Early Zollverein (1828–1834), (3) Middle Zollverein (1834–1867), and (4) Late Zollverein (1867–1871). Before the Zollverein, the German states attempted to form a customs union as part of a loosely structured intergovernmental German Confederation. This attempt failed, largely because there was no single plutocrat. Austria and Prussia were vying for that position. (See figure 4.1 for a map of the early Zollverein.) Early Zollverein (1828–1834) From 1828 to 1834, Prussian leaders created a unique hybrid integration model, using both plutocratic and intergovernmental structures. Consistent with plutocratic principles, in the first phase of implementation, Joining states were required to delegate policy making to Prussia by abandoning their own tariff structures, customs administrative practices, and domestic sales taxes and adopting Prussia’s instead. In addition, in secret agreements, the Hesse-Darmstadt leaders delegated to Prussia the authority to set customs policy for Prussia’s eastern provinces, sign commercial treaties with states that did not border Hesse-Darmstadt, and enact economic punishments against other states. After delegating this policy making to Prussia, member states joined intergovernmental structures. All future changes to tariffs and the customs administration were to be approved by both parties.3 In 1831, a second state joined the Prussian designed accords: HesseKassel. Like Hesse-Darmstadt, it followed the hybrid model, first delegating to Prussia by adopting its tariff schedule and other customs policies and then agreeing to intergovernmental policy making for subsequent changes. Middle Zollverein (1834–1867) The second period began in 1834, when Bavaria, Württemberg, Saxony, and the Thuringian states joined the customs union. In this year, the treaty took on the name Deutscher Zollverein (German Toll Union). Other German states soon joined the accord: Baden (1835), Nassua and Frankfurt-am-Main (1836), Braunschweig (1841), Luxembourg (1842), Hanover, Oldenberg, and Schaumberg-Lippe (1854), and Mecklenburg-Strelitz, Mecklenburg-Schwerin, and Lübeck (1868). Like the European Union of today, states increasingly believed they would be shut out of a powerful economic union if they did not join. Although the exact terms of each state varied slightly, generally with

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worsening terms the later the state signed on, each member joined under the same basic governance structures, requiring new members to delegate initial policy making to Prussia, by adjusting their tariff rates to match those of the Designing state.4 In 1834, Prussian leaders introduced a formal governance structure: the intergovernmental General Congress. Prussian leaders desired a more institutionalized arrangement. The Congress met annually to consider changes to tariff levels and other issues related to administering the customs system. Consistent with the definition of intergovernmentalism, ambassadors from each member state were given instructions from their governments. Each member had veto authority within the Congress.5 Despite the equality within the structure—one state, one vote, as well as universal veto authority— considerable policy-making authority had already been delegated to Prussia via the first stage, when members matched their tariff rates and other trade policies to that of Prussia. Unless Prussia itself was dissatisfied with a particular tariff due to changes in its economic structure, the status quo favored Prussia. Late Zollverein (1867–1871) The third period began in 1867, after Prussia defeated Austria in the 1866 Seven Weeks’ War and at last removed Austria as a rival for the heart of a unified German state. In its place, Bismarck fashioned a new intergovernmental Customs Council and a supranational Customs Parliament, both governed by majority voting rules and with numbers of votes commensurate with state size. The Customs Council was to act as an executive body that sent decisions to the Parliament for approval. Of the 58 votes, Prussia had 17, or nearly one-third of the total; Bavaria, 6; Saxony and Württemberg, 4 each; Baden and Hesse-Darmstadt, 3 each; and the smallest states were given between 1 or 2 votes, depending on their size.6 The Customs Council was composed of the North German Confederation’s Bundesrat plus ambassadors directly elected from the south German states, who were members of the Zollverein but not part of the Confederation. Under the negotiated treaty, the other members delegated to Prussia the authority to open and dissolve the Customs Council and responsibility for presenting Customs Council decisions to the Zollverein Parliament. As before, Prussia retained the authority to negotiate commercial treaties with states outside the customs area on behalf of the Zollverein members.7 The Customs Parliament consisted of popularly elected representatives, from the North German Confederation and from the southern

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German states. The members delegated to Prussia authority to summon, open, and close the Parliament; the Customs Council could also summon the Parliament if one-third of its members concurred. The Parliament, which served for three-year terms, met only when there was legislative business it needed to address. Its responsibilities included changing tariffs, regulating tariff collections, concluding treaties with foreign states, and regulating taxes on three important commodities: salt, sugar-beet, and tobacco. It had no authority to decide how the collected tariff money should be spent; collections were divided according to population size, as in the previous accords.8 Although the Customs Parliament had a certain democratic appeal, it was tightly controlled by the intergovernmental Customs Council. The Council had authority to dissolve the Parliament. A new one would be convened only if Prussia, or one-third of the Customs Council, approved it. The new Zollverein treaties were signed on July 8, 1867, and came into force on January 1, 1868. Failed Integration: No Single Plutocrat The first German attempt at regional economic integration failed, primarily because it attempted to unite two rival powers—Austria and Prussia—using an intergovernmental accord. Given the rivalry, little progress was made and the effort was abandoned in 1820. This first integration attempt was part of a larger political effort to unite loosely the Germans under an organization called the German Confederation that was to be governed by an intergovernmental Diet with the Austrian emperor playing a leading role.9 Each of the 11 larger states was given one vote, while the smaller states were given a combined six votes. The voting was intentionally devised such that neither one of the great states nor all the small states could override the other members. Under the Wars of Liberation, Prussia, Austria, and Russia allied at last to defeat Napoleon. In 1814, at the Congress of Vienna, the victorious states met with the goal of dividing up Europe and determining the political institutions that would govern the lands. As part of the accords, the German states were united into a new German Confederation, a grouping that proved to be the loosest of unions. During this time in European history, provinces and cities that were part of a single state were often split into parts, often with other states separating them. Prussia was itself divided into an eastern and western portion, separated by numerous middling German states. These separate cities and provinces did not necessarily all

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belong to the same institutions. In the case of the new German Confederation, the Polish provinces of Prussia and Austria as well as all of East Prussia were excluded.10 Princes of the various German states met under the leadership of Prince Klemens von Metternich of Austria. Metternich had only recently been given the title of prince, but he would quickly rise in prominence, becoming Austria’s Court Chancellor and Chancellor of State in 1821. Metternich had deeply conservative convictions, believing above all that it was critical to bring order to a Europe ravaged by war, with riots and revolts now threatening every state. “‘The first principle to be followed by the monarchs . . . should be that of maintaining the stability of political institutions against the disorganized excitement which has taken possession of men’s minds.’”11 Metternich was acutely conscious of the need to placate the various German states if this new institution was to succeed. Driven by geopolitical interests, Metternich’s primary goal, to be accomplished through the German Confederation, was to ensure that the German states would ally together, rather than being driven back into French arms, as several southern states had done, or over to the Russians.12 He did not believe that the German people should be united under a single government, only that they should be loosely allied so as to prevent any further domination by Austria’s regional rivals. Metternich was later judged to have failed the Germans in their national aspirations to be united, but the records of the time show that the individual states were unwilling to delegate to a single power, whether a state or a supranational organization. In the German Confederation negotiations, the various state leaders jealously guarded their autonomy, opposing any measures that required them to delegate policy-making authority, a point to which Metternich was sensitive.13 None of the members wanted the Confederation to have taxing powers. In the bargaining process, two states successfully defeated the idea of forming a federal court. When the Confederation formed a joint military in 1821, the states retained command over their respective troops.14 Despite three conferences in 1819–1820, the members could not agree to formal economic integration.15 The intergovernmental structure recognized the importance of the states’ newfound independence, as well as the fact that it included two great powers, neither of which would have been willing to delegate authority to the other. Furthermore, as predicted, the intergovernmental structure complicated policy making, with states vetoing any kind of deep integration. Thus, nationalism in both the Designing

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state—Austria, this time—and the prospective Joiners—the smaller states—combined with the lack of a single plutocrat willing to provide the necessary easily measured economic gains, doomed the effort.

The Five Conditions By the early 1800s, Prussia had established itself as a significant regional great power (Condition 1). Although Austria had a larger economy and military than Prussia, among the other German states, Prussia was the plutocrat. With wars a regular feature of the landscape, the Prussian winning coalition was firmly behind an assertive foreign policy with the primary goal of uniting the numerous German states (minus Austria) under Prussian authority (Condition 2). For the Joiners, Prussia was able to offer immediate benefits to address their economic crises (Conditions 3 and 4). Finally, Prussia used several strategies to ensure that it offered superior alternatives to prospective Joiners (Condition 5).

Condition 1: Prussia as the Plutocrat By the time of the major integration efforts, Prussia was clearly the plutocrat in central and northern Germany. This had not always been the case. In 1805, an adviser to Napoleon dismissed Prussia, describing it as “too small in population and territory, to poor in resources, and ruled by too timid a prince to rank as a great power.”16 Prussia’s standing changed in part because its leaders embarked on a major effort to modernize the state’s internal economy, particularly its tariff system. Throughout medieval Europe, tariffs were used simply as taxes, a way to raise revenue for the Crown, a view that continued into the early nineteenth century. Since merchants had to use roads, rivers, and seaports, state officials knew precisely where to find them. If they resisted payment, officials could simply confiscate their goods. Because of the simplicity of the system, numerous levels of authorities collected tariffs, including barons on their estates, town and province governments, and state leaders on their external boundaries.17 Prussia learned from the French not only the power of nationalism, but also of economic integration. It was Frenchman Jean-Baptiste Colbert who first saw tariffs as a way not only to raise revenue but as a state instrument for encouraging trade and industry. Under Louis XIV, he took the first steps toward reforming France’s tariff system. In 1664, he united several provinces in northern France

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under a single tariff, a significant innovation. He later enacted tariffs designed to protect growing industries.18 While France moved forward with these reforms, the German states continued with their multitude of tariffs. By the late eighteenth century, Germany was particularly unruly, or more accurately, overly ruled: an estimated 1,800 customs frontiers dotted the German lands in 1790.19 In 1817, Prussia’s tariff system remained so cumbersome that the Finance Minister wrote to King Friedrich Wilhelm III complaining that “nobody could possibly know all the tariffs, regulations, modifications, and practices.”20 Adding to Prussia’s urgency to reform its internal tariff system, three major southern states had removed their own internal tariffs: Bavaria in 1807, Württemberg in 1808, and Baden in 1812.21 At last, Prussia’s law removing internal tariffs came into force on May 26, 1818. Two tariffs were initially enacted: one for the eastern part of Prussia and a slightly lower tariff for the western provinces. In 1821, these were replaced with a single tariff.22 On the whole, Prussia had enacted moderate to low tariffs. As a largely agricultural land, the population relied on imports for many goods. Ten years after Prussia consolidated its rates, the state signed a customs union accord with Hesse-Darmstadt. Most of the provisions in this treaty would subsequently apply to the Zollverein. A brilliant and effective economist and policy maker, Prussia’s Finance Minister Friedrich von Motz played the most important role in designing the customs union that would become the Zollverein.23 Motz’s predecessor, Anton Wilhelm von Klewitz, had been an efficient but unimaginative administrator. Having served from 1818 to 1825, he oversaw Prussia’s internal economic integration that led to its first single external tariff. By 1825, however, he had still not managed to balance the budget and thus tendered his resignation.24 As Motz came into office, agriculture in the eastern part of Prussia was in an economic crisis. He lowered rents on state-owned land, but insisted on prompt payments. Over a four-year period, he sold around 3,000 acres of land, raising government revenues. He tightened tax collection. In 1818, Prussia had taken out a loan engineered by Nathan Rothschild. Motz succeeded in persuading London to lower the interest due from 5 to 4 percent, easing Prussia’s debt. Through these various measures, he succeeded in quadrupling the budget surplus.25 Prussia’s dominant position among the German states increased over time. By 1867, it was responsible for 90 percent of mining and metallurgical production, 50 percent of textiles factories, and 33 percent of the workers in the major German industries.26

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Figure 4.1 Map of Prussian Zollverein up to 1834

Condition 2: Coalition with Geostrategic Ambition There is no question that Prussian leaders viewed their state as both deserving and capable of regional dominance, so long as they wisely played their cards. The kings who ruled during the design, development, and expansion of the customs unions—Friedrich Wilhelm III (1797–1840) and Friedrich Wilhelm IV (1840–1861)—believed in this vision. The customs union’s chief architect, Finance Minister Friedrich Christian Adolph von Motz (1825–1830), was an enthusiastic supporter, and the name “Otto von Bismarck” (MinisterPresident of Prussia, 1862–1890, and Imperial Chancellor of the German Empire, 1871–1890) is nearly synonymous with a Prussiandriven united Germany. Even as they believed fervently in the goal of uniting Germany under Prussia, they were aware of the necessity of portraying Prussia as a fair, nonaggressive leader who would bring prosperity to a united German people. These key players were acutely affected by the larger strategic and ideological issues of the time. They worried incessantly about Austria as a contender to the leadership position and about whether France might again attack their lands. The historical context, in which European states were frequently at war with one another, alliances

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forming and breaking in a matter of years or even months, is critical to understanding the emergence and success of the Zollverein. The Prussian political coalition had three interconnected goals: first, it wanted to unite the Prussian lands that Napoleon had separated; second, it wanted to isolate Austria from the rest of the German states; and finally, it wanted to protect itself against both the state of France and the liberal ideas spreading from that state into the rest of Europe. Goal of Uniting Prussian Land Like many of the German states, Prussia had odd borders. Most notably, its eastern and western sections were separated by a cluster of middling states, most significantly Hesse-Kassel and Hanover. Finance Minister Motz was an early and ardent advocate of uniting the halves of Prussia and years earlier had submitted to Berlin a plan for doing so.27 In 1822, he advocated that all the Thuringian states, located in middle Germany, should join the Prussian customs system, rather than attempt one on their own.28 Though originally from HesseKassel, he had no sympathy for the small states; he instead scorned their princes’ aspirations for sovereignty, deeming them unrealistic.29 Motz’s initial response to the first state to approach him about a customs accord reveals his larger aims. In 1825–1826, faced with a declining economy and rising customs collections costs, HesseDarmstadt sent officials to Prussia to negotiate a customs union between the two states. Focused on uniting Prussia’s two halves—a feat Hesse-Darmstadt’s geography could not accomplish—Motz was indifferent. Hesse-Darmstadt’s team offered to persuade HesseKassel to join as well. Hesse-Kassel’s acquiescence would have been critical, as it would have linked together Prussia’s halves, situated as it was with borders touching both eastern and western Prussia. This offer was apparently not taken seriously, or at least not seriously enough to overcome Motz’s reservations. After all, a union with Hesse-Darmstadt would cost Prussia money in the short run, given the longer borders that it would have to protect and the limited volume of trade between the two states.30 Eventually, however, Motz was not only approachable but utterly enthusiastic, somewhat surprising the Hesse-Darmstadt negotiators. This sudden and dramatic reversal derived from a new calculation that Hesse-Kassel might well join the customs accord if it saw how well Prussia treated Hesse-Darmstadt. In numerous documents, Motz argued that Hesse-Kassel will surely join the customs union,

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as will the northern German states, thus uniting Prussia. In a message to the Foreign Office, he wrote, “I hope and believe that HesseDarmstadt, whose financial embarrassments are notorious, and who is here discovering the right medicine for her troubles, will lead the way, and that the other governments aforesaid will soon follow in her footsteps.”31 Adding Hesse-Darmstadt also meant greater political control over a neighboring state, an appealing prospect for state leaders wanting to demonstrate their regional dominance. An official at the Ministry of Foreign Affairs concluded, “Even if [an economic accord] is attained in which the financial and state-economic advantages are more on the side of [Hesse-Darmstadt] than Prussia, the inequality created thereby presents the prospect of winning a greater political influence over [Hesse-Darmstadt] and of making it more dependent on the system of Prussia.”32 Isolating Rival Plutocrat, Austria Before a state can even consider the plutocratic governance option, it must hold a preeminent economic position. At the time of the Zollverein’s creation, the only significant challenger to Prussia’s position among the German-speaking states was Austria. To deal with this potential threat, Prussia’s leaders repeatedly and cleverly maneuvered to sideline their major rival, excluding Austria from the early customs unions and then from the Zollverein. Despite occasional promises to consider its admittance, the Prussian government never showed any significant plan to include the one German state that could have vied for equal power. When Austrian leaders requested that their state be admitted to the Zollverein, Prussia instead expanded the treaty to include Hanover and Oldenberg on very generous terms and then pressured others to renew their memberships for another 12 years.33 When Austria again approached Prussia, the Zollverein’s leaders found another reason to refuse their rival, this time a Franco-Prussian accord they claimed would be violated by admitting Austria.34 The French Threat Although scholars of Prussia and the other German states are naturally drawn to the riveting rivalry between Austria and Prussia for domination of the Germans, it was France that put real fear into Prussian leaders. The recent wars with Napoleon and the experience

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of many Prussian military and political leaders who served under his rule—most notably the customs union’s architect, Finance Minister von Motz—meant that Prussian officials worried more about their survival being threatened by the French than the Austrians. “Prussian statesmen in post-Napoleonic Germany [were] obsessed with ‘the French problem.’”35 Since the end of the Middle Ages, the countless small Germanspeaking territories increasingly gained independence from governing empires. France played the final role on this long path. In a chain of military campaigns designed to consolidate French power by destroying the Holy Roman Empire, Napoleon delivered major and humiliating losses to the two most significant German powers, Prussia and Austria. In 1804–1805, as he prepared for war, Napoleon hoped to secure German allies for his battle against Austria. In exchange for their support, he promised Baden, Württemberg, and Bavaria, all southern German states, substantial territorial gains if they joined France against Austria. While these three agreed, Prussia refused to join the alliance.36 The Napoleonic Wars fundamentally reconfigured Germany: “Borders were redrawn, populations changed hands, new states emerged.”37 Baden, Württemberg, and Bavaria received the sovereignty equivalent to what Austria and Prussia had long enjoyed. These three became known collectively as the “Third Germany,” the other two being Austria and Prussia.38 In addition, Napoleon consolidated Germany’s 300-plus individual states and smaller political units into only 38. He formed a new Rhine Confederation comprising 16 German states. On August 1, 1806, the confederation announced its withdrawal from the Holy Roman Empire. Napoleon subsequently pushed the remaining 20 German states—minus Austria and Prussia—to join the Rhine Confederation. He envisioned the Rhine Confederation as a counterweight to the two regional great powers, Prussia and Austria. Less than a week after forming the Rhine Confederation, Napoleon forced Emperor Francis II of the Holy Roman Empire to lay down his crown, ingloriously ending Charlemagne’s 1,000-year empire.39 Devastated by their military defeats at the hands of Napoleon, Austrian and Prussian leaders systematically evaluated the basis for their opponent’s success. A critical ingredient, they concluded, was the newfound power of nationalism. As Prussian military strategist and contemporary of Napoleon Carl von Clausewitz later wrote, “A force appeared that beggared all imagination . . . The people became a participant in war; instead of governments and armies as heretofore,

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the full weight of the nation was thrown into the balance.”40 While the concept of citizens fighting for the state was not entirely new, the contrast with Austria’s and Prussia’s old style of warfare was profound and motivating to the German leaders. Between the fall of the Holy Roman Empire and Napoleon’s own fall (1806–1814), the German people witnessed a dramatic revolution from above. The French occupiers of the German Rhineland first smashed the old social and political order. They overthrew and abolished secular and religious princes, the tithe, monopolies, guilds, and assorted privileges and introduced religious tolerance.41 The Prussians themselves at last freed their peasants, introduced municipal self-government, and based military promotion on merit rather than patronage. To impress upon the population the importance and extent of restructuring, and thus to build a “positive Prussian patriotism with a mass base,” they systematically published numerous documents on the reforms.42 Though the ideas underlying the reforms were rooted in the enlightenment movement, Prussian officials used the concepts instrumentally, as a means to revive their state’s power.43 Prussia’s history with France played a critical role in the formation of the customs union. In a detailed 1829 memorandum laying out the reasons for the customs union, Motz argued that a military alliance with Bavaria, Württemberg, and Hesse-Darmstadt would add 125,000 men to the Prussian forces, which would help Prussia defeat France in a future war. Bavaria was particularly important, as it had played decisive roles in French campaigns against Prussia and Austria in 1805, 1806, and 1809. Although Motz also discussed Austria in his memo, he spent little space assessing this rival state; compared with France, it was not a major threat. Drawing on the lesson from Napoleon, that nationalism could play a key role in victory, Prussian Foreign Minister Christian von Bernstorff (1819–1832) argued that German nationalism would be required to repel a French attack. The path to patriotism and thus successful defense “was through ‘the foundation of common institutions for Germany, especially a system of freedom of trade and exchange embracing all of Germany.’”44 Thus, a critical goal of Prussian diplomacy, “as revealed explicitly in official documents and implicitly in the direction of state policy, [was] to strengthen Germany against potential French aggression.”45 After France’s July Revolution of 1830, discussed below, the Prussians became even more alarmed. Its king and ministers were reactionaries, a term used during this period denoting those who argued in favor of preserving aristocratic privileges and against republicanism,

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liberalism, and socialism. As reactionaries, Prussian leaders were deeply opposed to the democratic-republican ideals emanating from France. The customs union was seen as a means of uniting the German states against a future French ideological and military attack.

Conditions 3 and 4: Economic Crisis and Immediate Benefits for Early Joiners Hesse-Darmstadt (1828) and Hesse-Kassel (1831) started the ball of Prussian-led integration rolling through Germany. In contrast, Hanover was the last major state to join the Zollverein and thus provides an instructive contrast to the two Hessen states. Consistent with plutocratic delegation theory, the Hessen states joined first because they were hardest hit by the recession and had no other viable integration options. Hanover, however, was not only in better financial shape, given its proximity to the North Sea and trade with Britain, it was large enough to consider itself a northern plutocrat. It thus created its own plutocratic structure. However, Prussia ultimately proved too powerful, with so many German states now member of the Zollverein. At last, even Hanover had to admit that it could economically gain more by joining Prussia than opposing it with its own customs union. Joiner 1: Hesse-Darmstadt In 1816–1818, a severe economic depression following the Napoleonic Wars pushed economic integration to the fore. After the wars, the German states’ economies crashed. Napoleon’s Continental System of tariffs had protected the underdeveloped German industries against the advanced British exports. With the numerous competing German states no longer unified under a single tariff structure, the German industries were vulnerable. British goods flooded the markets. Compounding their troubles, in 1816–1817, the German states were hit by a famine. Too much rain had destroyed the crops. Fearing that imports were destroying their companies, businesses formed boycott clubs throughout Germany and advocated for general economic integration. Though these poorly organized lobbying groups were not particularly effective, they demonstrate the growing anxiety among business leaders at that time.46 Starting in 1819, Hesse-Darmstadt, which had been hit particularly hard by the recession, organized a series of discussions with several southern German states with the idea that they should form their own customs union. After negotiations for the southern union

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failed and Hesse-Darmstadt’s economy declined precipitously, its leaders approached Prussia.47 In 1825–1826, Hesse-Darmstadt made overtures to Prussia, but was ignored. Two years later, on January 3, 1828, after several frustrating rounds of union negotiations with south German states, Hesse-Darmstadt administrator and negotiator August Konrad Hofmann met the Prussian Finance Minister and eventual architect of the Prussian accords, Motz, to discuss the idea of a commercial treaty. To Hofmann’s surprise, Motz immediately raised the issue of a formal customs union, arguing that a commercial treaty would not bring sufficient benefits. The Prussian Finance Minister further offered Hesse-Darmstadt considerable revenue in exchange for becoming the first state to join in a customs union with Prussia, an offer he was able to make after putting Prussia’s economic house in order and consequently producing a budget surplus.48 Du Thil, the leading thinker and co-negotiator as well as finance and foreign affairs minister for Hesse-Darmstadt, argued on several occasions that small states must integrate with other states, but that a coalition of only small states would not bring benefits significant enough to turn around the states’ faltering economies. Like Prussia— and many of the other German states—Hesse-Darmstadt was split in two, with its halves in the north and south. Furthermore, it had long, winding, irregular borders that made customs administration challenging, costly, and often ineffective. These factors combined to leave state officials with few resources for customs collection. As such, the weakly protected borders teamed with smugglers, competing with legitimate trade.49 Thus, the question was a matter not of whether it should join a union, but rather with which great power HesseDarmstadt should integrate. Hesse-Darmstadt leaders further assessed that Prussia offered the greatest financial benefits, being the wealthiest state. In addition, Du Thil and Hofmann argued that moving first—becoming the first state to join a Prussian accord—might bring greater benefits than if they waited. They were correct. As the Zollverein grew in size, it became easier to attract Joiners. Prussia, therefore, had to provide fewer immediate economic benefits to later Joiners. Focused on these three strategic goals—uniting its two halves, isolating Austria, and defeating France–Prussia was willing to accept short-term losses by subsidizing Joining states. With the addition of Hesse-Darmstadt, Prussia’s customs frontier grew an additional 12 percent, from 7,472 kilometers to 8,345 kilometers, thus increasing the costs of monitoring the border and collecting tariffs.

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Meanwhile, the free market space was enlarged by only 8,623 square kilometers.50 Further reducing immediate expected economic benefits was the fact that Darmstadt people were not known for their “faculty for considerable consumption.”51 Prussian manufacturers were thus unlikely to increase their economies of scale and overall sales by much. Some Prussian sectors feared the additional competition would harm them. For example, wine had a 30 percent tariff; Prussian wine growers feared additional competition from Hessian wines could ruin them. Furthermore, since the Zollverein called for allotting customs duties according to population, Prussia lost income. After joining the accord, Hesse-Darmstadt’s yielded nearly ten times the per capita allotment it had when it was not part of the customs union. With tariffs pooled and then redistributed based on population size, Prussia’s per capita take was reduced, a calculation that its leaders surely understood.52 As the customs union expanded, Prussia continued losing revenue from tariffs. Between 1833 and 1834, the per capita revenue from customs fell by 16 percent. The following year, it fell an additional 23 percent. While the Joining states fared better than ever, Prussia paid a significant but short-term economic price in exchange for the long-term benefits of political integration. It was not until 1838 that Prussians received the same per capita levels as they had in 1833.53 Thus, while Hesse-Darmstadt’s economists could not methodically calculate and then predict with any accuracy precisely how the customs union would benefit them over the long run, the political leaders were able to win immediate economic benefits in the form of collected tariffs. Joiner 2: Hesse-Kassel Although it took several more years, in 1831, Hesse-Kassel became the second major state to join the customs union. It was the most significant addition to date, as the state’s inclusion at last allowed goods to move uninhibited by tariffs between the halves of Prussia. By the late 1820s, Hesse-Kassel’s economy was “deplorable.”54 Although it had relatively high tariffs, high administrative costs from its long frontier border and smuggling destroyed potential benefits. Furthermore, traders had begun using new roads through Thuringia, bypassing Hesse-Kassel. Finally, Hesse-Kassel was one of the targets of the 1830 revolts in response to France’s July Revolution. Immediately following the revolts, and fearing for their political survival, the leaders of Hesse-Kassel sought negotiations with both

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Prussia to the north and Bavaria to the south, each of which had its own customs union. Prussian leaders refused to negotiate with HesseKassel under these conditions, an ultimatum to which the latter responded by ending talks with Bavaria. Prussia agreed to give HesseKassel slightly better terms than those granted Hesse-Darmstadt, but the small state’s economic weakness and obvious desperation meant that Prussia needed to concede little. As with the other Joining members, Hesse-Kassel’s political leadership focused on the immediate economic benefits of the customs union, without conducting elaborate calculations of precise benefits. Like the other Joiners, they were attracted by the high side-payments that Prussia would give in the form of tariff collections. The collapse of the Middle Union under Prussian pressure, as discussed below, made clear that Hesse-Kassel had few options outside joining Prussia. It joined in 1831.55 As the Hessen leaders had hoped, the customs union brought substantial economic success to their states. Between 1830 and 1860, Hesse-Kassel’s government budget increased by two-thirds and Hesse-Darmstadt’s by nearly 50 percent. The percentage of revenues from customs rose from 9 to 13 percent in Hesse-Kassel and from 8 to 13 percent in HesseDarmstadt. Revenue from direct taxation, in contrast, “increased only slightly and declined substantially relative to total expenditures.”56 As other states joined, they too saw their revenues increase. Under the Zollverein, Bavaria saw its customs collections nearly double.57 Between the Zollverein’s founding in 1834 and 1845, collected revenue for the entire membership increased by 89 percent, while the collective population had grown by only 21 percent. During the same period, the system became increasingly efficient; administrative expenses dropped from one-sixth of revenues to one-twelfth.58 As a result, Prussia had plenty of money with which to reward its members. This in turn allowed leaders of the Joining states to create public and private good to reward their winning coalition and thus improve their chances of retaining their political positions.

Condition 5: Prussia’s Agent Strategies Make It the Superior Option Keeping their economies from sinking into deep recessions was particularly critical in an international environment in which liberal ideas and liberal parties were threatening to overturn reactionary regimes. Prussia would need to prove itself the superior agent on as many of the three levels as possible. States were already approaching it because of its economic wealth and willingness to provide benefits in the form of collected tariffs. To remove any threat from potential

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competing agents, Prussia would need to show, as much as possible, that it was a reputable agent and would limit the degree of delegation required of member states. To improve its reputation as an agent, it would need to demonstrate that it would not act opportunistically. As for delegation, it needed to appease liberal factions among the selectorates in Joining states, who believed in (relatively) democratic principles, and the leaders in the Joining states, who greatly valued their independence. Prussia could satisfy the issues on delegation and reputation by creating intergovernmental structures. The Zollverein’s leaders proved masterful at creating institutions that demonstrated its superiority as an agent, on all levels. Of course, their geostrategic goal of uniting the German states drove these calculations. If they had forced integration through military might or economic coercion, they may well have pushed the German states back to France or down to Austria, ruining their chances of achieving their strategic goal. The Liberal Threat Prussia’s intergovernmental General Congress, with its liberal principles, could help quell or prevent revolts from liberals without costing Prussia too much authority. After all, the states had already delegated policy making by matching Prussia’s tariff structure. Throughout Europe, liberals and reactionaries were waging their own ideological and political wars with one another, with one side first ascendant and then suddenly descendant, kings promising liberal reforms and granting constitutions, only to later revoke them. This complex international political situation dictated that Prussia’s leaders—who were generally reactionary—tread carefully for fear of inciting liberals, both foreign and domestic, into dangerous revolts. Battles between political liberals and reactionaries were part of the nineteenth-century European landscape. These fissures played an important role in determining who would join the Zollverein and what type of governance structures the Prussians would design. Many liberals in the German states hoped the parliament created under the 1815 German Confederation would develop into a meaningful legislative body, despite the unwillingness of the state leaders to give it significant authority. Through the 1815 founding acts of the German Confederation, the various state leaders had also promised domestic reforms, most notably individual state constitutions. However, once firmly in power, most of the leaders reneged on this promise, refusing to liberalize political participation. Although some state leaders did

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grant the citizens a constitution, they rarely included liberal policies. By 1819–1820, the German governments made a concerted effort to destroy the liberal movements in their territories, which they (correctly) perceived as a threat to their hold on power.59 Liberal sentiments arising from France—another reason for reactionary German leaders to fear that state—twice led to revolts in Germany, some of which seriously threatened the monarchies. In nineteenth-century Germany’s “first period of serious turbulence,” revolts and rebellions broke out in 1830, following France’s July Revolution.60 The July Revolution was precipitated by King Charles X’s publication of restrictive ordnances. Demonstrations led to three days of fighting, ending in Charles’ abdication and the ascendancy of Louis-Philippe to the throne. The success of the French upper-middle classes encouraged citizens in other European states to attempt their own revolutions. Revolutions thus rushed across the continent, leading to massive insurrections in Poland and Italy and eventually resulting in Belgium’s independence from the Netherlands and Greece’s freedom from Ottoman rule. The reaction in Germany was powerful, revealing “how deep was the discontent brooding under the leaden cover imposed upon the nation.”61 The protestors were in part responding to horrific economic conditions for which they blamed the high tariffs that increased the cost of imported goods. They attacked the customs houses, burning documents and the tariff money, which they considered foul. Rioters in Braunschweig drove out the Duke and destroyed his castle.62 Ironically, these anti-tariff protests pushed many political leaders toward the very unions to which many were objecting.63 In 1848–1849—about 20 years after Prussia’s first customs union, and when the Zollverein was steadily increasing in size—a liberal revolution swept Europe, dethroning monarchs throughout the continent, again threatening the political stability of the German states. These factors gave the German leaders yet another reason to consider the customs union; it might bring about stability by immediately improving the states’ economies via higher per capita customs revenues.64 In January, a local revolution broke out in Sicily. In February, King Louis-Philippe was dethroned, and France again became a republic. Within a few weeks, Prince Metternich, “the foremost representative of the ancient order,” was forced to resign.65 On March 18, fighting broke out in the streets of Berlin. The following day, King Friedrich Wilhelm IV withdrew his forces from Berlin and conceded the primary demand for a constitution with an elected parliament and various freedoms associated with a liberal regime.66 The Bundestag

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of the loosely organized German Confederation dissolved itself. In its place, sprang up a National Assembly comprising eminent men who gathered to debate and determine the final vision for a united Germany. The National Assembly met in Frankfurt, in Paulskirche, and set to work writing a liberal constitution that would unite the German lands, either under Austria or Prussia. Those who favored Austrian participation were dubbed the gross-deutsche Party; those who argued for excluding Austria, the klein-deutsche Party.67 At last, the assembled men voted for a Prussian-led empire, with a single Kaiser elected by the National Assembly. On March 18, 1849, they voted for the Prussian King to become Kaiser of Germany.68 The king refused to accept a position to which he had to be elected.69 Autonomy for the Small States The intergovernmental stage of the hybrid governance structures, in which all member states had veto authority over raising tariffs and any other changes to the customs administration, was primarily for public consumption in the Joining states. Comprehending the political sensitivities of the smaller states, who had just earned their political independence, Prussian negotiator Freidrich von Motz agreed to procedures that appeared to give the leaders of Hesse-Darmstadt and subsequent Joiners equal decision-making authority. Prussian leaders were concerned that they send the right signals to the smaller states: Prussia would be reliable agent. King Friedrich Wilhelm III, who reigned over Prussia during its economic consolidation and the founding of the Zollverein, opposed any economic action that would appear to harm Prussia’s weaker neighbors. In assessing Prussia’s 1818 tariff, the King worried that it must be low enough so as not to offend neighboring states.70 Officials commented that “even if a medium state agreed to join on a basis of inequality, such a step would have been opposed by Friedrich Wilhelm III for legitimistic reasons.”71 Prussian Foreign Minister Bernstorff believed that Prussia had to become preeminent not through bullying but rather by portraying itself as a fair and competent leader of the German people. “He wrote, ‘The trusts of the governments and the good will of the people, to maintain these unshaken must remain the will of Prussia and the chief characteristic of its politics.’”72 All efforts should be made to enhance the image of the smaller states approaching Prussia first, rather than Prussia pressuring them.

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When Motz eventually agreed to Hesse-Darmstadt’s approaches, the Prussian leaders worried about the message they would send to the more geographically important Hesse-Kassel. (Hesse-Kassel bridged the two halves of Prussia.) If they hoped to attract HesseKassel to the customs union, the Prussians had to make the initial offers as attractive as possible, thus keeping secret provisions and constructing a public governance structure that gave all parties an equal say. Bismarck’s Role in Prussia’s Intergovernmental Structures Otto von Bismarck famously pronounced that German security could not be reached “by speeches, associations, decisions of majorities,” but only through “blood and iron.”73 This extravagant speech, which clearly broke with the image Prussian officials had carefully nurtured, was widely criticized. The coined phrase “blood and iron” stuck and became synonymous with Bismarck himself. Yet, it portrayed only a part of the man. Bismarck earned a reputation with both his and later generations as “the very model of diplomacy.”74 He was a lover of languages, speaking and writing in Latin, English, Russian, French, and Italian. He traveled extensively and knew well Prussia’s neighbors. By the time he was called to Berlin to lead Prussia, he “had acquired a knowledge of Europe, great linguistic ability, a mastery of diplomatic forms and procedures, and a capacity for analysis and reporting far beyond the average.”75 How can we reconcile “blood and iron” with the “model of diplomacy”? The answer is that Bismarck was a capable chameleon. An avid believer in Realpolitik, his views and alliances shifted with the necessities of the time.76 At heart, he was a reactionary, but when it suited him, he employed liberal tactics. It was his pragmatic side that allowed him to embrace the intergovernmental structure at a time when a less talented leader might have forced the Joining states into a plutocracy. Bismarck’s appointment to Prime Minister reveals much about his attitude toward constitutionalism. In 1859, the mentally ill Friedrich Wilhelm IV died. Upon coronation, the former prince regent took the title King Wilhelm I. The newly crowned king soon conflicted with his liberal ministers over military reform, which he advocated and they resisted. Bismarck was summoned to Berlin, by the strongly reactionary Minister of War, General von Albrecht Roon, to end the constitutional crisis that ensued.77 Roon saw Bismarck as the “only man who was willing, as well as able, to defy parliament, and who did not care whether

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the constitution was being broken.” Bismarck impressed the King deeply with his absolute fearlessness, his stern energy, and his unconditional willingness to serve him as a liege man serves his feudal lord.”78 He was promptly appointed Prime Minister and Minister of Foreign Affairs. In a clear violation of the treaty forming the German Confederation, of which Austria was a member, Bismarck later negotiated a short-term military alliance with Italy against Austria.79 In domestic politics, he defended royal rule and celebrated Napoleonic France. He disdained England’s liberal institutions and accompanying propaganda, which he feared would woo members of the well-educated classes, who already leaned toward a parliamentary system.80 However, when Realpolitik called for it, Bismarck would espouse liberal positions if he thought it would help him attain his goal. Even when the evidence made the propaganda rather hard to swallow, Bismarck attempted rather patronizingly to play the liberal. For example, in 1866, he proposed before the German Confederation Diet a German parliament elected directly through universal male suffrage, a more liberal voting rule than in all of the German states. In his colorful recollections, Bismarck wrote, “I had had no hesitation whatever in throwing into the frying pan . . . the most powerful ingredient known at that time to liberal-mongers, namely universal suffrage, so as to frighten off foreign monarchies from trying to stick a finger into our national omelet.” He defended the act as a “weapon in the war against Austria and other foreign countries.”81 He bargained that when all males could vote, they would support conservatives, who had given them the vote, over the embarrassed liberals, who lacked the vision or strength to give universal male suffrage themselves.82 Bismarck’s proposal was not accepted. Instead, the battle between Austria and Prussia at last erupted into the war that would end Austria’s bid for dominance of the region. Bismarck’s actions after the Seven Weeks’ War confirmed again his chameleon abilities in the name of political expediency. He had formed a new North German Confederation that included several states, such as Hanover, with long histories of contesting the monarchy. Bismarck and King Wilhelm I sought to dampen the anger and revolutionary fervor that their new population and the ousted leaders might harbor and foment. Bismarck held bilateral discussions with each of the monarchs, offering them generous financial payoffs. He then enacted electoral laws that gave voting rights to all males 21 years and older and created a Confederation Reichstag to which they would elect representatives.83 He also granted religious freedoms, including giving churches the right to govern themselves, as a means of maintaining the peace.84

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Despite Prussia’s dominance after the Seven Weeks’ War, Bismarck did not force a plutocratic governance structure in the Zollverein. Indeed, it was his idea to form the parliament and council, with voting rights for all members. Furthermore, he allowed the southern German states and Saxony to retain their independence. By not humiliating them, he hoped their leaders would ally with Prussia if France again attacked, as he feared it would.85 Allowing a semblance of equal and representative decision making allowed the leaders of the south German states and Saxony to claim that their sovereign rights were mostly intact. They would be delegating authority to a representative body rather than Prussia alone. Again, he revealed himself as a wise and patient political leader, a statesman who could be trusted to not only deliver high economic benefits through the Zollverein, but to devise a governance structure that would not destabilize or threaten other members. Some may be tempted to dismiss the role individual leaders played in designing the governance structures of the Zollverein. Yet, Bismarck’s intelligence, flexibility, and creativity were critical factors in Prussia’s decision to not overplay its hand with a plutocratic structure. Bismarck well understood the importance of pacifying the state’s former enemies rather than controlling them through authoritarian means. His absence from political life immediately after the Seven Weeks’ War demonstrates further the critical role he played in devising a tolerant regime. In the fall of 1866, Bismarck’s health failed him, and for six months he was absent from Berlin. During this time, the new Cabinet decreed all types of measures meant to Prussify the new lands. King Wilhelm I had to finally step in and stop the “legislative orgy,”86 an orgy that could have threatened Bismarck’s well-laid plans. Designer’s Frustration with Intergovernmentalism While the intergovernmental accords served their purpose of attracting reluctant Joiners, the Prussians soon discovered the cumbersome nature of these structures. Consistent with predictions about inefficient policy making under intergovernmental structures, complicated bargaining among members often ended in deadlock, meaning that Prussia had essentially won by retaining the fallback of its original tariff levels and other aspects of the customs system. Despite several stormy sessions in which members attempted to either lower or raise tariffs, the duties remained stubbornly where Prussia had set them.87 The importance of Prussia’s role as the status quo power can be seen in the tariffs set with the Netherlands. In 1816, before the

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customs union, Prussia and the United Netherlands signed an accord removing tariffs for woolens. This exemption of duties remained for the entire nineteenth century, greatly aiding the Prussian and Netherlands’ trade, but clearly unhelpful for Prussia’s customs union mates who would have benefited from tariffs to protect their own industries.88 The primary benefit to the Designing state of formulating its own governance structures is to control policy making as much as possible without alienating desirable Joiners. Though Motz’s plan of instituting a “one-state, one-vote” policy hampered Prussia’s ability to govern according to its own preferences, Prussian leaders frequently used their exclusive right to negotiate trade accords with foreign powers, including with Belgium, France, the Netherlands, and Denmark.89 In addition, Prussian officials used critical renewal periods as leverage to get the changes they sought. Nevertheless, it is critical to note that Prussia, despite its reputation for ruthlessly uniting Germany into an empire, played by the rules, demonstrating the importance of institutions in affecting outcomes. The 1834, the one-state, one-vote intergovernmental structure served Prussia well, as long as its trade preferences remained constant over time. However, as often happens in world affairs, Prussia’s economic preferences did indeed change. The Designing state’s leaders eventually desired lower tariffs than the status quo. They attempted to persuade the intergovernmental congress to accept their position. Like other states who had advocated for alterations—both free traders and protectionists, and both small and medium states—Prussia failed to win.90 The veto power given to every member, originally designed to maintain the Prussian set status quo, now constrained even the dominant state. Despite a concerted effort between 1854 and 1859, Prussia made no headway in reducing tariffs to a level it now favored. In 1859, it finally won a single reduction. In 1865, as a condition for renewing the Zollverein, Prussia at last won significantly lower import duties. The revenue distribution was recalculated, removing special privileges that some of the smaller states had enjoyed.91 The new governance structures following the Seven Weeks’ War gave Prussia greater authority and thus helped remove some of the constraints to changing the tariff schedule. Most importantly, the veto rule was removed. As predicted, the new majority voting rules sped along tariff reforms, particularly reduced duties consistent with the rise of free-traders in Prussia. Under the new governance structures, the Zollverein members quickly approved three trade treaties (with Austria-Hungary, Spain, and Rome) and reached significant

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agreements on tobacco imports and land taxes. In their second session, they reduced iron and rice tariffs, raised sugar tariffs, and rejected a proposal to impose an oil tariff.92

Options: Less Compensation or Worse Reputation Prospective Joining states do not consider whether to join an accord in isolation. Instead, they evaluate their options. The more options they have for resolving their economic challenges, the more likely the Designing state will need to design a non-plutocratic structure. The German states had a few options, but generally found them inferior in terms of compensation and reputation. The German states created two other customs unions during this period, both of which the Hessen states could have joined: the Tax Union, under Hanover’s leadership, and the Southern German Customs Union, led by Bavaria. There were two other possibilities that never materialized: the German Confederation and an Austrian-led customs union. Option 1: Hanover as Plutocrat among the Middling States Plutocrat is a relative term. Whether a state is a plutocrat depends on what other states are in the configuration. Among all the German states, Prussia and Austria were rival plutocrats. However, if we exclude these two giants, Bavaria in the south and Hanover in the north were the wealthiest regional economies, meaning they could form their own accords, with themselves as agents, which is in fact what they did. The Bavarian customs union incurred administrative costs so high, they consumed 44 percent of collected customs. The union quickly failed. Hanover, however, was economically more powerful, largely because of its access to the North Sea. Creating its own customs union, a viable option that worked for many years, explains Hanover’s late entry into the Zollverein: in 1854. Hanover’s Middle German Commercial Union (A Free Trade Accord). With the Prussia-Hesse-Darmstadt accord in the central north and the Bavaria-Württemberg accord in the south, the remaining German states found themselves surrounded by customs unions that excluded them. They would now have to pay cost of tariffs to export into either union, without the benefits of free trade with a subset of economies. Not wanting to delegate to either Bavaria or Prussia, Hanover responded defensively by designing the Middle German Commercial Union in September 1828. The other members

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included Saxony, Hesse-Kassel—which had abandoned the southern German customs union negotiations, but had yet to join the Prussian accord—and the free cities of Bremen and Frankfurt-am-Main. Although not a customs union, the treaty was meant to preserve the status quo and thus protect members from more protectionism. Members agreed not to sign a customs union until after 1834 and not to raise tariffs and other trade barriers against each other.93 Under Motz’s leadership, Prussia began an aggressive and ultimately successful campaign to destroy the union, which blocked its way to a larger customs union that would unite Prussia’s two halves, a major economic and geostrategic goal.94 To this end, Motz and other Prussian officials built trade routes that bypassed the middle states. These routes connected the customs unions led by Prussia and Bavaria and thus undermined the middle states economic advantage. The first defection occurred in 1831, when Hesse-Kassel, a key player for Prussia, left the Middle German Commercial Union and joined the Prussian-led accord.95 Hesse-Kassel had played a key role in the treaty, as it geographically connected the various members. Without Hesse-Kassel bridging the other members, the Middle German Commercial Union collapsed. Even after losing Hesse-Kassel and watching the union dissolve, Hanover’s leaders opted out of the Zollverein. Hanover’s reluctance to join the plutocratic Zollverein—it was the last to do so before war united the central and northern German states— provides a valuable contrast to the founding members. Given that others were rapidly signing Zollverein accords, why did Hanover wait so long, joining 26 years after Hesse-Dartmstadt started the trend? Hanover’s delay was certainly not for lack of Prussian desire. Not only was Hanover one of the three states that could unite the Prussian portions, it also carried the allure of access to the North Sea and thus closer proximity to England. Furthermore, gaining Hanover would isolate Oldenberg, which dipped down into Hanover, nearly severing it into two parts. This would create pressure for Oldenberg to join Prussia’s union, further expanding Prussia’s access to the North Sea. Though less significant, the small territory of Braunschweig included a narrow corridor that cut right through Hanover, connecting eastern and western Prussia. If it were to join the Zollverein, Prussia would be able to further unite its two parts. Thus, Prussia had many reasons to support Hanover joining the Zollverein. Hanover’s Tax Union (a Customs Union). Hanover continued to strongly resist delegating authority to any other state. In particular, it did not want to delegate to an agent whose preferences diverged

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from its own: while Prussia had relatively high tariffs, Hanover was a free trade state. Hanover, thus, instead chose to design another customs union with smaller states, in which it would be the plutocrat. Founded in 1834, the same year the Prussians formalized their intergovernmental governance structure, the new union was somewhat confusedly called the Tax Union.96 The Joiners were the two small neighboring states from the Middle German Commercial Union, Braunschweig and Oldenburg. The Tax Union favored low tariffs as a means of encouraging cheap manufactured articles and colonial goods to the largely agricultural states. As in the commercial union, Hanover was the significant player, far larger than its partners, boasting 14,600 square miles and a population of 1.7 million compared with Oldenberg’s 2,100 square miles and 182,000 people; Braunschweig was smaller still. Rather than delegate to Prussia, Hanover’s leaders preferred to govern their own union and even expanded it to include Schaumberg-Lippe in 1837. Hanover and Prussia negotiated several commercial agreements between their two customs unions. Some of these, particularly those focused on new roads and railways, undercut the economic interests of Braunschweig. The leaders of Braunschweig concluded that Hanover as an agent was after all not serving their interests. With the wealthier Zollverein as an option, they left the Tax Union in 1841 and that same year joined the Zollverein.97 Braunschweig’s defection from the Tax Union left Hanover with a Zollverein member cutting through its middle. With its Tax Union no longer viable, Hanover at last began negotiating with Prussia to join the Zollverein. However, initially, no progress was made due to overwhelming opposition within Hanover, from the king, the government, and the people, each of whom strongly opposed delegating policy-making authority to Prussia. They objected particularly to the higher tariffs the Zollverein had instituted; a popular ditty of the time nicely captures the sentiment:

We will not have it, ever, Their Prussian Zollverein; For all their screeching, never With them will we combine. Our coffee we’ll not let it Be kept beyond the sea; And, further, we’ll still get it, The best of China tea.

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R e g i o n a l I n t e g r at i o n Whenever punch we’re making, Real rum is what we need; And when a smoke we’re taking We want no home grown weed.98

The liberal threat would eventually push the leadership to seek integration with Prussia, despite diverse tariff preferences and the plutocratic structure. Hanover was one of many European sites where liberals and reactionaries were in constant battle. Popular uprisings throughout the kingdom in1833, the year before the Zollverein and the Tax Union, resulted in King Wilhelm IV granting Hanover’s people a liberal constitution. In 1837, Hanover’s reactionary King, Ernst Augustus, abrogated the constitution and dismantled far-reaching political reforms, including restricting suffrage to 1819 levels. Two years later, he issued a new constitution and called for delegate elections. Liberals boycotted the elections as illegitimate and threatened to riot. They eventually took their case to the German Confederation and lost. Between 1840 and 1847, Hanover was relatively quiet, with the king apparently enjoying widespread support.99 The 1848 revolutions sweeping across Europe changed all that. King Ernst Augustus faced numerous political demands, including for a new constitution, freedom of the press, the right to free assembly, trials by jury, and amnesty for political prisoners. Faced with determined rioters urged on by an international movement, the king approved the reforms.100 While rioting in 1830 had pushed Hesse-Kassel to join the Prussian accords, Hanover continued to resist any delegation to another state, choosing instead to remain leader of its own union. Significant economic concessions from Prussia—the easily calculated side-payments that often led states to join a customs union—at last persuaded Hanover to join in 1854. Among the many side payments, Hanover received customs revenue at a fixed 75 percent more than it would have received under Prussia’s standard formula. Tariffs on the products that had most concerned the people of Hanover— coffee, tea, tobacco, syrup, cognac, and wines—were lowered; the rails required for a railway were allowed to enter Hanover duty-free; and Hanover was exempt from Prussia’s salt monopoly.101 The middling state customs unions had all failed. Ultimately, they could not provide the same level of economic benefits offered by Prussia, particularly over time as the Zollverein grew in size. Prussia was willing and able to offer immediate economic benefits in the form of collected customs tariffs that were significantly larger than what the states could earn on their own. The idea that a “Third Germany,” comprising the

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small and middle states, could act as a balancing influence to the dualistic Prussian and Austrian hegemony remained an unrealized dream. As their options evaporated, and the Prussians continued using an intergovernmental structure that could satisfy nationalist coalitions, the middling states overcame their dislike for the plutocratic part of the Zollverein’s accession process. “Neither fear of Berlin or Vienna nor a shared sense of political values was strong enough to overcome the divisions and rivalries in the ‘third Germany.’”102 Option 2: Southern German Customs Union The two Hessen states had options other than joining the Zollverein. Indeed, they had both been critical proponents of a union focused around the southern German states. However, the primary state in this union—Bavaria—was unable to resolve differences with the other members during the negotiating phase. Although Bavaria did eventually form its own plutocratic structures, it was too late for HesseDarmstadt. Despite its significant place in history and historical accounts of integration, the Prussian-designed customs union was not Germany’s first. That honor goes to the leaders of the southern German union between Bavaria and Württemberg, who concluded their accord just one month before Prussia and Hesse-Darmstadt signed their own. In 1800, the three primary south German states were Bavaria, Württemberg, and Baden. The southerners considered themselves distinct from their northern counterparts. In terms of economics (agriculture vs. industry), geography (inland vs. coastal), religion (Catholic vs. Protestant), and character (sedate, parochial, conservative vs. active, cosmopolitan, progressive), the regions differed significantly, leading some to conclude that the southern states could and should ally as a separate political and economic force.103 With this in mind, in sideline discussions at the 1819 Vienna Final Conferences, Bavarian and Württemberg government officials advocated for a separate union that would incorporate the major southern states along with some central states. On May 19, 1820, leaders of the southern German states agreed to form a union in which members would remove internal tariffs and erect a common external tariff.104 In addition to these basics, members agreed to the unusual idea of abolishing their own customs administrations in favor of a common Customs Board that would set and administer tariffs. The Customs Board would include two representatives from each member state. Since they would retain their allegiance to their home states, the Board would be a permanent

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intergovernmental structure, a novel idea for the time. As in the Prussia-Hesse-Darmstadt customs accord, officials would distribute the collected customs to each member state based on its population size.105 In November, the states convened the Darmstadt Conferences where they were to work out the details, using the principles of the May accord. At the end of the month, Karl Friedrich Nebenius—a prominent economist serving as a councilor in Baden’s Ministry of Finance and representative to the Conference—presented a draft for the new customs union. Nebenius’s proposal included an even more innovative idea: a supranational structure would oversee implementation. Members of the supranational Customs Board would serve for life, and their home states would be forbidden to send them instructions. In a classic principal-agent monitoring scheme, state representatives would meet once a year to check the accounts, approve edicts, and pass laws. They would each have one vote, and legislation could be passed with only an absolute majority. States could send inspectors to any customs office, at any time. Governments could nominate anyone who passed the certifying exams to vacancies in the joint customs service.106 Nebenius had been an active advocate of a German customs union, and Baden’s liberal Diet had given voice to his ideas.107 Having failed to win interest in a union based on the German Confederation, which would also have used supranational structures, he had now morphed these same ideas into a regional integration accord. Many of these innovations would later appear in supranational structures in the twentieth and twenty-first centuries. The supranational scheme, however, proved premature and inappropriate for the region. Among the southern states, Bavaria was the clear plutocrat, much larger in territory and population than the other members. The leaders of Bavaria, by far the largest southern state, viewed their state as too strong a power to delegate authority to a third party, particularly in a time when this had not been tried and when Bavarian leaders had an eye on increasing, not diminishing, their regional power. Consistent with my theory, it would thus not agree to delegate authority to a third party. In November 1824, under the Heidelberg Protocol, the states agreed to an accord that removed the supranational structures, instead giving states the right to administer their own customs. Furthermore, Hesse-Darmstadt, as a smaller state with strongly nationalist views, also supported removing the supranational structure, which it viewed as a threat to its sovereignty.108 By 1825, racked with divergent views, the states ended their round of talks without concluding a regional

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accord. The supranational structure gave way to an intergovernmental one. But even this proved too demanding for state leaders constantly worrying about losing sovereignty. The impasse ended when King Ludwig I of Bavaria with his visions of a more dominant Bavaria ascended the throne in 1825. Ludwig I “was a gifted and energetic though somewhat eccentric despot.” He spent vast sums commissioning neoclassical buildings and collecting art work and moved Bavaria’s oldest university to Munich, making Munich the great cultural and scientific center for Catholic southern Germany, as Berlin was for the Protestant north.109 As a means to realizing the higher goal of an ascendant Bavaria, the King planned to unite the two split parts of his kingdom by acquiring part of the Baden Palatinate, an obsession he retained throughout his life. Although he failed, the policy revealed his larger ambitions for Bavaria.110 Furthermore, he immediately raised Bavaria’s tariffs. This action quickly brought Württemberg’s King, Wilhelm I, to his door, requesting that they revive the stalled customs union negotiations. Ludwig’s advisers recommended the union not only for economic reasons, but also for grander political ambitions: “Bavarian officials were looking forward to Bavaria leading the ‘purely German’ states.”111 For economic and geopolitical reasons, the plutocrat Bavaria resumed negotiations. The kings and their representatives resumed discussions in January 1827, signed a preliminary convention in April of that year, and one year later initiated the new union.112 In a structure very similar to that designed by Prussia, the new structure was decidedly plutocratic. Although initial plans of creating a unified administration were abandoned, Württemberg consented to basing the tariffs and regulations on Bavaria’s system. “The law, procedure, tariff, and administration of the Union were to be uniform and to be based on the existing Bavarian regulations.”113 Again mirroring the Prussian accords, in a bow to Württemberg’s sovereignty, future decisions were to be made using intergovernmental structures with virtually no agency. The primary governing body was the annual General Congress. Each state was to send two ambassadors. The chair would alternate between the two states. In event of a tie, the chair would cast the deciding vote. The General Congress had significant scope, including the right to change the fundamental laws of the union. State representatives were strictly bound by instructions from their governments. All decisions had to be ratified by member governments, giving both of them veto powers. The collected tariffs were to be divided based on population, with adjustments made every three years based on the new census.114 In January

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1828, one month before Prussia and Hesse-Darmstadt sealed their own accord, Württemberg raised its tariffs and altered its customs laws to match those of Bavaria.115 Hesse-Darmstadt, Baden, Nassau, and Hesse-Kassel had all been actively participating in the southern customs union. Why had HesseDarmstadt abandoned this effort in favor of integration with Prussia? The partial answer is that the states were unable to expand their own union in the most important way, by adding Hesse-Kassel. Despite the south’s efforts, the court of Kassel was adamantly opposed to the constitutionalist south on governmental terms and continued to oppose any policy that suggested reduced sovereignty. The final factor, however, was the Prussia-Hesse-Darmstadt customs union. Once the Prussian accord was a fait accompli, the Bavarian King, Ludwig I, and his cabinet reconsidered their position. Prussia now had one foot in south-central Germany. In addition, Austrian and French leaders had offered little assistance to Ludwig’s ambitions to unite the central states. Following lengthy informal, formal, and secret negotiations, Prussian leaders eventually prevailed on the smaller states to accept Prussia’s customs system, promising significant economic benefits. In May 1829, Bavaria and Württemberg signed a preferential trade accord with Prussia and Hesse-Darmstadt.116 Although this was not yet a unified customs union between the four states, it paved the way for such an accord, which became a reality in 1833. Even as Bavaria and Württemberg were signing onto the Zollverein, they secretly resolved to revive their own customs union if the Prussian one failed.117 Thus, the leaders of these two members saw themselves as having a viable back-up option, thus reducing any risks associated with joining the Zollverein. Options 3 and 4: German Confederation and Austria In theory, prospective Joiners had two more options: the German Confederation and an Austrian-centered customs union. The Confederation as an integrated economic, legal, or military system never developed beyond discussions. The middle states feared being absorbed by the larger states and thus objected through the Bundestag to anything they perceived as threatening their sovereignty.118 Austria never organized a customs union, which is puzzling. Had the characteristically brilliant Prince Metternich, architect of the Congress of Vienna and often de facto leader of Austria, failed to recognize an opportunity, a failure that led the German states to unite under Prussia, rather than Austria?

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Before turning to Austria’s decision not to pursue a customs union, it is important to note that Hesse-Darmstadt’s chief negotiator, Du Thil, rejected Austria as the power he feared more than Prussia. For him, despite its ambitions, Prussia was the more reputable agent. Du Thil argued that Prussia would allow Hesse to retain its independence and thus to dissolve the accord if necessary. In addition, he believed that Prussia’s ambitions might well be satisfied by HesseDarmstadt’s request to join Prussia in a union. He even guessed that Prussia would be willing to offer economic concessions in exchange for this political benefit to allying with Prussia.119 With Prussia’s economic might growing and its internal tariffs already removed, Hesse-Darmstadt officials approached Prussia with the idea of forming a customs union. During most of the Zollverein period, Austria chose to remain outside customs union discussions. Austrian leaders concluded that they would not be part of general German economic matters, choosing independence instead. Metternich requested expert analysis on whether economist Friedrich List’s idea for a customs union that would unite the German states would benefit Austria. None of the experts supported the idea, and several even raised questions about List’s loyalty and the potential damage his actions might cause in rousing liberal demands.120 Metternich henceforth actively fought List and his ideas for a German-wide customs union. When Prussia designed its own customs union, Metternich worried that it threatened the German Confederation he had created and Austria’s interests in particular. Given Metternich’s reputation for brilliant strategic thinking, he uncharacteristically missed an opportunity to thwart Prussian ambitions. Arnold Price notes that Metternich could have either attempted to break up the Zollverein or else reform Austria’s customs system to enable it to join Prussia’s accord. In a twist on Price’s first option, Austria could have formed a countervailing customs accord that could draw away Prussia’s members, as Prussia itself had done in defeating the Tax Union. However, consistent with the logic of plutocracy, Prussia would not have allowed Austria to join the union. Its economy would have dwarfed that of Prussia, ruining Prussia’s plutocratic position within the union. Geostrategic interests, in this case, were the primary reason the Austrians opted not to form their own customs union. Metternich calculatedly chose a neutral policy toward the Zollverein, hoping not to alienate a useful ally against the French, the most significant regional threat. Furthermore, he apparently believed it impossible to overcome domestic opposition from industrialists, who wanted higher tariff rates

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than those Prussia had enacted for the Zollverein. In other words, the agent’s preferences did not well reflect that of the potential principal. Although Metternich was himself more of a free-trader, he was responding to his domestic political constituency in supporting the protectionist policy. Furthermore, the south German states, in closest proximity to Austria, were noncommittal, as by this time the Zollverein had proved quite lucrative. They would only leave if Austria could promise the same or better economic value, which it did not.121 Recent scholarship demonstrates that Austria’s policy toward Prussia after 1848 was “consistent and contradictory,” as Vienna viewed Berlin as both a rival and a critical reactionary ally against liberal political forces.122 Surely, developing a customs union to counter Prussia at this point would have been highly aggressive and likely unsuccessful. Prussia had become both too powerful and attractive an ally for the smaller states to allow Austria to easily woo them away. “While Austria was virtually paralyzed by domestic revolution, Prussia’s economic strength and military power made it natural that the other German states would turn to Berlin for leadership and protection.”123 Metternich, meanwhile, had been exiled to London after the 1848 revolutions, leaving his protégé, Prince Felix zu Schwarzenberg, as Austria’s new Prime Minister and foreign policy architect. The consistent, but contradictory, policy described here was principally that of Schwarzenberg, who hoped to persuade Prussia to return “to the peaceful dualism of the past.”124 He further hoped to reinvigorate the German Confederation, where Austria still dominated, even if this meant significant concessions to Prussia. Schwarzenberg had misunderstood or underestimated a critical part of Prussian policy. He believed that Prussia would support a German Confederation with a governance structure more conducive to Prussia. Berlin, however, was uninterested. Its leaders were keen to unite Germany under Prussia’s leadership, with Austria excluded.125 At this point in history, the Prussian leaders were well on their way to reaching their goal. Nevertheless, Schwarzenberg developed extensive plans and energetically lobbied for Austria to swallow the Zollverein in 1853, when the customs union accords expired. He died in 1852, however, and with him died the energy and conviction behind the idea.126

German Political Unification What Bismarck failed to accomplish through legislation, France unwittingly succeeded in doing through war. As Prussian leaders had long feared, France declared war on Prussia in July 1870. As

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Bismarck had hoped, the south German states allied with Prussia, an act that at last united all (but the Hapsburg) German states into a single unit. With Austria sidelined after the Seven Weeks’ War in 1866 and France now defeated, the Prussian leaders at least realized their dream of uniting the German-speaking peoples with Prussia at the heart of the empire and Austria excluded from the German family. The Prussian Army absorbed the other German armed forces, and Bismarck combined the office of imperial chancellor with Prussian minister-president.127 On January 18, 1871, in the Hall of Mirrors at Versailles, the German Empire was born, and the German Confederation passed into history.128 After a 66-year lifespan, the customs union’s hybrid plutocratic-intergovernmental structures ceased to exist.129 Now united into a single political entity, the individual states had no need for a separate Zollverein governance structure; the German Bundesrat and Bundestag would legislate tariffs and trade policy.130 The new empire used the same governance structures created by Motz back in 1828, when Hesse-Darmstadt became the first state to join a customs accord designed by Prussia.

Conclusion More than the other cases in this volume, the Prussian case demonstrates how creative agents can ensure that they get the delegation they desire. Prussia’s leadership was united behind the ambitious geostrategic goal of uniting the German states—excluding Prussia’s plutocrat rival, Austria—under Prussian leadership. Because of the coalition’s commitment to this grand goal, it was willing to do whatever was necessary to attract states to join the Zollverein. In particular, the Prussians needed one or more of the small states that divided Prussia into two parts to join the customs union. If they could get one of these states to join, they could move goods and people across their lands without the cost of toll, thus helping them further develop the economy, a first step to building an empire. To attract Joiners, they offered all the things that optional agents might use to draw away prospective Joiners: compensation, delegation, and reputation. They gave the Joiners a large percentage of tariff collections, much higher than they were earning on their own. These immediate gains eased the Joiners’ economic crises, which in turn helped secure their leaders’ political survival. Furthermore, reactionary state leaders were threatened by liberal forces among the selectorate. Prussia’s finance minister, Motz, created intergovernmental governance structures that gave all states equal decision-making authority, including veto power.

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Although Prussia had first required member states to delegate policy making by matching their tariffs to Prussia’s, these intergovernmental structures were the more visible ones and thus may have helped satisfy liberals. There is evidence this was persuasive. Recall that in 1849, an assembly of men from the various German states created a liberal constitution uniting all of Germany and then selected the Prussian King as Kaiser. This suggests that they believed Prussian leaders would behave honorably in a liberal regime. Not all states met all five conditions at the same time. For about 26 years, Hanover did not meet the third and fifth conditions of economic crisis and no superior options. Because of its trading relationship with Britain, across the North Sea, Hanover was able to avoid the recession for much longer than its neighbors to the south. In addition, it was sizable enough to form its own plutocratic accords. True to plutocratic delegation theory, once political survival is secure, leaders most want to enact policies of their own choosing and will thus select to be the plutocrat if they can find less wealthy neighboring states with whom to integrate. Eventually, however, these two conditions were met, as the Zollverein grew so large as to threaten Hanover’s economic position. The Prussian case highlights the role of individuals in securing these accords. Motz and Bismarck ingeniously constructed institutions that would attract Joiners, even though it meant sacrificing both money and policy-making authority in the short run. Could the Prussian formula of a hybrid system with plutocratic delegation followed by intergovernmental accords, meant to satisfy Joining states and their winning coalitions, work in today’s environment? There is some evidence that this is precisely the formula that Russia is using today. However, note that Prussia did not resort to coercion to attract members. This would have been counterproductive to its efforts to foster a reputation as a good agent. I explore this question further in chapters 6 and 7.

Chapter 5

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The Eldest: Th e Sou ther n Afr i can Cu stoms Union

The world’s oldest surviving customs union—the Southern African

Customs Union (SACU)—located in the southern tip of Africa, has received little attention in the comparative integration literature. Celebrating its 100-year anniversary in 2010, the SACU began with plutocratic structures and then switched to intergovernmental in 2004. Until 1994, all five conditions were met. From its 1910 birth and to this day, South Africa is the clear regional plutocrat. From 1910 to 1969, it was Britain that delegated policy making to South Africa, on behalf of its three Territories. Although Britain was not undergoing an economic crisis, the Liberal Party that came to power in London in 1906 had campaigned strongly on the position that Britain should leave its colonies. The Territories would thus have faced economic collapse had Britain not found a way to fund their governments. Having South Africa set policy in exchange for administering the customs union seemed a good deal for Britain. The customs union offered easily obtained tariffs. As in the Prussian accords, this was the immediate and chief way of assessing if the member states were gaining from the customs union. In 1969, the Territories became independent states and were thus for the first time given an opportunity to delegate themselves, or not. After several economic studies, some indicating they would be better off under global integration, the SACU members all opted to remain in the accord. Their threats to leave were taken seriously by South Africa, which sweetened the deal by increasing their shares of the

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customs collections, but not the delegation terms, and certainly not the reputational terms. They remained as nasty as before. Still, the known gains of the customs union, small as they were, were preferable to the uncertain gains of leaving the union. In 1994, when the selectorate finally expanded to include residents of all races, the African National Congress (ANC) came into power. The winning coalition very much opposed anything that resembled apartheid or showed a lack of respect for its black-ruled neighbors. This had been a central theme of the ANC’s campaign. The leadership was responsive, and eventually agreed to intergovernmental accords that gave even tiny Lesotho veto authority. Thus, although none of the other conditions had changed—expected economic crisis if they left the accord, immediate benefits from the agreement, a single plutocrat, and no superior options—the winning coalition would no longer support plutocratic accords. In the conclusion, I consider how the Western states could have helped the SACU members end the plutocratic accords at a much earlier stage and thus saved these states from the economic distortions of the customs union. In addition, toward the end of the plutocratic structures, South Africa crossed the line into coercion. As sanctions squeezed the state’s economy, and violence grew, the government became fearful and more militaristic. At this point, the states had reason to fear violence if they left the accords and thus were no longer voluntarily delegating to South Africa.

Introduction to the SACU Behind the SACU are fascinating historical figures—like Cecil Rhodes, the controversial imperialist Joseph Chamberlain, and the craggy, resilient Boer nationalist Paul Kruger—failed coups; an ugly war; political intrigue in London; and gold and diamonds. The racist apartheid regime, struggling black African nations supported by Britain, and South Africa’s drive to development mark the next 50 years of the accord, bringing the states at last to an exceedingly equitable governance structure in 2002. However, with all members having veto authority, as was originally used in the Zollverein, the SACU may well stagnant, hampered by an equitable, but highly inefficient, structure. The SACU’s members include the regional plutocrat, South Africa, plus four small neighboring states that began as British Territories: Botswana, Lesotho, Namibia, and Swaziland, collectively

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referred to as the BLNS. With the Boers’ apartheid history, the African states had plenty of reasons to fear an accord with the white-ruled state, particularly one with a plutocratic structure governed by a state that had repeatedly made known its aim of politically absorbing the small territories. Yet, the small states stayed with the customs union for all of its nearly 100-year life. Furthermore, despite no change in its economically dominant position, South Africa voluntarily gave up the SACU governance structure that served it so well and opted instead for a system that gives even tiny Lesotho veto over all customs decisions. This chapter explains how these things came to be.

The Dependent Variable: Plutocratic Delegation The SACU has gone through four periods: (1) a precursor period, in which there was significant tension between the two main European groups that could have vied for plutocratic control, beginning with the Congress of Vienna when Britain gained control of Cape Colony and ending with the first SACU (1815–1910); (2) Britain delegated policy making to South Africa on behalf of the three Territories (1910–1969); (3) the newly independent African states delegated to South Africa (1969–2004); and (4) all members delegated implementation to a supranational bureaucracy and retained policy making through intergovernmental structures (2004–2008). This last structure remains in place today. In the precursor period (1815–1910), there was extreme animosity between the two European groups living in the region. This ended with the creation of the Union of South Africa, the predecessor to the Republic of South Africa, which united four former British colonies, including the Transvaal, whose gold and diamond mines had dramatically enriched the region in the 1880s. From 1910 to 1969, under the SACU, Britain delegated to South Africa policy making on tariff issues for its three African Territories—a legal construct from that era—Basutoland, Bechuanaland, and Swaziland. In the 1960s, the three Territories gained their independence. In the third period (1969–2004), the African states delegated policy making to South Africa under a renegotiated SACU. When apartheid ended in 1994, the member states began negotiating a new accord. It took them ten years. The final structure (implemented in 2004) is primarily intergovernmental, with some minor supranational components.

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No Crisis, No Delegation (1815–1910) In this precursor period, there was no economic crisis to spark an integration effort. In addition to the African-ruled lands in the region, the Europeans governed four areas: two were British colonies—Cape Colony and Natal—and two were free states ruled by Dutch settlers, known as Boers (Dutch for farmers). During this period, the two European groups continually challenged each other for control of the region. The British eventually went to war to settle the issue. The British were victorious in the Boer War (1899–1902), after which they made the two free states their colonies. The four colonies were then given the right to form a single state, which named itself the Union of South Africa. Combining the wealthy areas of the British and the Boers into one unit, South Africa was clearly the plutocrat.

Plutocratic Delegation from Britain to South Africa (1910–1969) While a new state surely drew international attention, less noticed was a briefly and loosely worded appendix creating the SACU.1 Under the economic union, South Africa would set the tariff rates and related policies and administer tariff collections for Britain’s three Africanruled High Commission Territories of Bechuanaland, Basutoland, and Swaziland, commonly referred to as BLS, after their postcolonial names, Botswana, Lesotho, and Swaziland.2 This first SACU was thus an act of delegation from Britain, on behalf of its Territories, to South Africa. Britain’s Secretary of State and former Colonial Secretary Lord Crewe noted that the accord did not explicitly prevent South Africa from imposing differential tariff duties or railway fees on the Territories. However, he warned that “any action of the kind directed against a territory under the administration of the Crown would be so grave from every point of view . . . that I do not for a moment contemplate the possibility of any such occurrence.”3 In addition to policy making, South Africa had administrative authority. Revenue from the customs duties paid for imports into South Africa and any of the Territories were sent directly to South Africa’s Treasury.4 The Treasury then distributed the money to each Territory using a preset formula. Each Territory’s percentage was based on the value of its imports, as a percentage of all imports for the SACU region in the three years prior to the accord. No provision

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was included for updating percentages based on subsequent changes in trade volume. The redistributed customs duties were expected to be sufficient to cover each Territory’s government expenditures. This included the various private and public goods that the African leaders were supplying their winning coalitions and other residents. If a Territory’s customs share for a particular year was insufficient to cover a Territory’s costs, surplus from another Territory was to be transferred to the underfunded Territory. In 1923, South Africa created a Board on Trade and Industry, whose responsibilities included making recommendations on tariffs rates, most of which were adopted by the South African leadership and thus the entire SACU. The Board, as well as its successor—the Board on Tariffs and Trade—responded to private sector interests in South Africa. With no official connection to the SACU, the Board had no obligation (and little incentive) to consider the economic interests of the three Territories.5

Plutocratic Delegation from BLS to South Africa (1969–2004) In the late 1960s, in recognition of the African members’ transition from Territories to independent states, SACU members renegotiated the accord. BLS replaced Britain as the Joiners. The new principals retained the plutocratic structures, again delegating to South Africa policy-setting authority on tariffs and trade, as well as excise and sales duties.6 The new agreement did improve the formula for revenue sharing, giving the new states a larger share than before. While South Africa did not offer better terms of delegation, the leaders conceded one minor governance point: they agreed to consult with the other members “before imposing, amending, or abrogating any customs duty with respect to goods imported into the common customs area from outside.”7 This promise was easily broken. Members of South Africa’s Board on Tariffs and Trade admitted in interviews that “decision making over tariffs takes place outside of SACU. There is precious little consultation with [the other states].”8 In 1990, Namibia joined the SACU, but no substantive changes were made to the accords. In 1994, when apartheid ended, the members began renegotiating the accord. After negotiations spanning eight years, they finally agreed to new structures in 2002; the new structures went into effect in 2004 and remain in place today. (See Figure 5.1 on next page).

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Figure 5.1 Map of Southern Africa

Intergovernmentalism Replaces Plutocracy (2004–2008) Not until 2004 did the BLNS finally get the governance structure it wanted, a mostly intergovernmental accord.9 The structure requires unanimous approval for any tariff and trade policy changes as well as specifying that all members must be present for a quorum.10 The quorum and consensus provisions collectively give every member veto power, a provision the Prussians had used in the Zollverein’s General Congress. This was a dramatic change from the days of plutocratic rule. In addition, under the current treaty, SACU states cannot negotiate commercial treaties independently, only as a single entity, much as the European Community does: “No member state shall negotiate and enter into preferential trade agreements with third parties or amend existing agreements without the consent of other Member States.”11 A new intergovernmental Council of Ministers serves as the supreme policy-making body, approving the budget as well as customs tariffs, rebates, and other trade-related issues. The intergovernmental Customs Union Commission oversees implementation, while a bureaucracy (the Secretariat) administers the SACU on a day-today basis.12 A new Tariff Board, comprising economic and industry

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experts, replaced South Africa’s tariff board. Although the Council of Ministers must approve the tariff rates and related provisions, the Tariff Board makes recommendations, taking into account all member states’ interests.13 Some provisions have not yet been implemented. For example, each state is to form a national department for investigating possible treaty violations and the impact of tariffs on their home states and making recommendations to the Tariff Board.14 For trade disputes, members delegate final and binding authority to a supranational ad hoc Tribunal.15 Using majority opinion rules, tribunals will be composed of three members, selected by the parties to the dispute, from a pool of names approved by the Council of Ministers. Cases can be brought before the Tribunal either by the Council or by the parties to the dispute.16 Although rules governing the Tribunal are currently underspecified and suggest a relatively weak agent, the Tribunal could become an important player as the states refine the rules.17 The revenue pool has been divided into two separate pools, one filled with customs tariffs and the other with excise taxes. The latter will become more important as the members reduce their tariff rates and customs collections fall accordingly. Each member’s share of the revenue pool depends on three factors: value of goods imported from within the SACU, GDP, and level of development.18 States that import high values of goods from other SACU members and/or that have high GDPs will receive more funds than those who do not. The poorer states, who will presumably import less simply because they have less to spend, will be compensated with development funds. The allocations will be adjusted regularly to account for new trade levels. Excise taxes—mostly the usual sin taxes—flow into a fund separate from the one for customs collections. From this pool, the SACU skims 15 percent off the top to form a development fund meant to boost the poorer states’ economies. While all five states receive about the same level of development funds—ranging from about $25.2 million to $29.0 million—South Africa alone will be a net contributor. Using 2002–2003 figures, the South African government estimates it will receive about 52 percent of the total $2.02 billion revenue pool. Since South Africa’s GDP comprises about 92 percent of the SACU’s total, the BLNS appears to benefit significantly under the new accord.19 Given that new tariffs and other trade policies must be approved unanimously by all SACU members, and if indeed the new Tariff Board respects BLNS interests—which it has strong incentives to do—the SACU will eliminate the discriminatory economic policies experienced by the BLNS under the plutocratic structures. The BLNS

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will then have gained twice over: greater immediate and easily measured economic compensation and a better delegation model.

The Five Conditions From 1910, the year that the Union of South Africa became an independent state under the British Commonwealth, there was a single plutocrat in the region. South Africa remains the dominant player in the region, thus satisfying the first condition of plutocratic delegation. Until the ANC gained power in 1994, the white selectorate strongly favored regional dominance, the second condition. This changed when the apartheid regime was replaced by the ANC, whose identity was equated with a message advocating equality for all African states. Although it took years of negotiation, the selectorate’s strong preference for an equitable system resulted in the SACU adopting intergovernmental governance structures, implemented in 2004 and still in place today. The small Territories and then independent states faced severe economic crises without the tariffs collected from the customs union. Although some of the states discovered minerals, the political leadership calculated that they could not earn enough money on the global market without duty-free access to the SACU states. Global trade was deemed too risky as a replacement for the SACU, leaving the customs union as the best option, even during South Africa’s racist era.

Condition 1: Birth of a Plutocrat (1815–1910) South Africa became a state in 1910. To understand how Britain decided to delegate to South Africa, we need to understand the historic relationship between the British and the Boers. The structure of southern Africa’s economy suggested that deep integration would lead to even more rapid growth in an area that was booming from mineral discoveries in the 1880s. Southern Africa’s European economic story begins in the 1600s. At the very tip of the continent, the Dutch East India Company founded the first European settlement in the region in 1652.20 The town’s primary purpose was to supply fresh food and water to the Dutch trading ships rounding the cape and heading toward what is now Indonesia. After the British seized the area in 1795 and again in 1806, the Dutch permanently ceded the cape to Britain at the 1814–1815 Congress of Vienna, the same gathering that produced the German Confederation. Under British rule, Cape Colony shifted from “a relatively stagnant Dutch

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imperial-commercial system to a more dynamic, expansive British one.” Over a 45-year period under British rule, maritime traffic at the Cape grew by 800 percent.21 The south was, and remains, unique to the continent. Several features made it particularly hospitable to European settlers. The southernmost edge has a Mediterranean climate. None of the diseasefilled tropical forests inhabit the south. The high steppe has few pests, making cattle breeding a viable industry. The more southern parts of the continent remained relatively untouched by the slave trade.22 Largely for these reasons, the area contained sub-Sahara’s only major European settlement; about 20,000 Europeans—mostly of British, German, and Dutch descent—lived in Cape Colony in 1806. The economy was a type of “satellite economy” with strong connections to the international economy.23 However, there were significant tensions between the British and the Boers, who had resided in the region much longer and had developed strongly nationalist views. Under their belief system, God had made white people superior to black people, and whites were supposed to subjugate blacks, a not uncommon view among other Europeans on the continent. Tensions became acute in 1833 when Britain passed its Slavery Abolition Act.24 The Boers, who had resided in the region much longer than the British, responded to what they considered an immoral policy. About 13,000 Boers left the colony between 1836 and 1846, in the Great Trek. The Trekkers, as they were known, formed two new republics to the north of Cape Colony: the South African Republic, commonly known as the Transvaal, and the Orange Free State. The Boers declared these two territories independent republics with full sovereignty, a position the international community granted them. Two key discoveries in the 1880s forever transformed the economy and politics of southern Africa, eventually enabling the Union of South Africa to replace Britain as the regional plutocrat. First, in 1867, diamonds were discovered in the Transvaal. Britain annexed the site, created the town of Kimberly to serve the industry, and forcibly incorporated the area into the Cape Colony in 1880.25 Within a few years, thousands of European and African fortune seekers flocked to the diamond mines. Two decades later, Cecil Rhodes’ De Beers Consolidated Mine monopolized the industry. Shortly after diamonds rocked the region, Europeans found another precious mineral: gold. Although Africans had mined gold in small quantities for centuries, it was not until this time that a large gold mine was discovered. As with the diamonds, the gold was found

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on Boer territory, in a region called the Witwatersrand (meaning ridge of white waters in Afrikaans), and commonly referred to as the Rand; hence, the name of South Africa’s currency. By the end of the century, £8 million or 20 percent of the world’s gold production came from the Rand, and £60 million in international funds had been invested in southern African gold mining, exceeding investments for the rest of the continent combined. Over 100,000 African laborers worked the mines. The bustling new town of Johannesburg, the industry’s center, became home to 75,000 Europeans.26 Gold rapidly outpaced diamonds as the region’s primary moneymaker. To support this new capital-intensive industry, the British possessions of Cape Colony and Natal as well as the Boer-majority Orange Free State became important suppliers of labor, food, fuel, and construction materials necessary to sustain the enterprise in the Transvaal. As discussed in Chapter 2, economic logic dictated that the territories should formally integrate their economies. The removal of internal tariffs and a common currency would significantly reduce transaction costs, thus lowering the cost of production, which in turn would lead to greater economic growth for the entire region. Indeed, some British leaders advocated for political and economic integration in southern Africa. The most far reaching of these, proposed in 1859 by Sir George Grey, Britain’s proconsul of southern Africa, called for the full political union of Cape Colony and the Orange Free State. Grey’s scheme called for a voluntary federal union under which the provinces would “have full and free scope of action” in areas related to “their individual prosperity or happiness; whilst they should act under a general federal government in relation to all points which concern the general safety and weal.”27 Although joining the federation would be voluntary, the provinces would have to delegate at least some policy-making authority to the central government. The plan, however, was rejected by Britain itself, which was unprepared to change its regional governance policy.28 Boers Lack Incentives to Integrate Economic logic alone proved insufficient to cause integration. Despite the economic logic of a customs, monetary, and even political union, President Paul Kruger of the Transvaal had no intention of sacrificing his political position. Why would the wealthy Transvaal, which was in the process of replacing the British as regional plutocrat, delegate policy making to another entity? Unless he could guarantee that

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he would be elected President, he had little incentive to join the federation. With two British provinces, he could not be certain of the outcome and thus ignored all talk of federalism. In 1875, the British attempted to force integration.29 With London’s secretly granted permission, British forces in southern Africa invaded the Transvaal in 1877, promising London that a majority of townspeople would accept British rule. To the white citizens, they pitched the union as a necessary response to security threats from “the Natives,” an unpersuasive argument given the relatively peaceful relations in the region.30 The Boers of Transvaal protested the British occupation and appealed to their fellow Boers in Cape Colony, where the Dutch were the majority ethnic group. The forced integration was soundly defeated, and the British withdrew from the Transvaal. The leader of the powerful Farmers Protection Association, a Boer organization in the Cape, wrote, “The annexation of the Transvaal has taught the people of South Africa that blood is thicker than water. It has filled the (Cape) [Boers] otherwise groveling in the mud of materialism, with a national glow of sympathy for the[ir] brothers across the Vaal.”31 Instead of acquiescing to delegating authority to a central government, Kruger schemed to break Britain’s lock on specific assets required for the gold mines, thus further strengthening his economic position. He built a rail link to Portuguese East Africa (now Mozambique) allowing him to bypass British ports. Since the Transvaal was landlocked, it required seaports to export its gold, diamonds, wool, and other products. The railway to East Africa’s Delagoa Bay, a significantly shorter distance from Johannesburg than Britain’s Cape Town or Port Elizabeth, destroyed the British monopoly on port access for the Transvaal. Regional hegemony was passing from Cape Town to Pretoria, from the British to the Boer.32 Desperate actions supported by the British deepened Boer nationalism and animosity toward the British. Two powerful individuals were exceptionally threatened by Kruger’s policies: Englishman Cecil Rhodes, Prime Minister of Cape Colony and joint managing director of Consolidated Gold Fields, one of the largest mining concerns in the region, and German Alfred Beit, one of the two managing partners of another mining company, Wernher, Beit & Company. Kruger had long been a thorn in Rhodes’ side. The industrialist and Prime Minister had watched Kruger’s Transvaal overtake his Cape Colony as the primary commercial zone while holding hostage the critical gold mines that fed his wealth and on which he had staked millions of pounds. In 1890, Rhodes offered Kruger a substantial side-payment in exchange for joining the Cape Colony’s customs union: Kruger

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could annex the British colony Swaziland. Kruger and his Volksraad (People’s Council) turned down the offer.33 Unwilling to give up on integration, Rhodes sought British support for buying Delagoa Bay, but, for complicated reasons related to imperial interests in Egypt, the government refused to bring diplomatic pressure to force the purchase.34 London concluded that a military intervention would be unwise, particularly since Britain’s policy of conciliation had only recently quieted animosity between the Boers and the British over the forced annexation of Kimberly.35 The British then attempted to change the selectorate in the Transvaal and thus through elections create a region more amenable to British interests. They calculated that if they could pressure Kruger into giving the Uitlanders (foreigners) voting rights, the minority Boer would lose political power. Too smart for that ploy, however, Kruger refused to change the selectorate.36 Further frustrating and angering the British, Kruger courted diplomatic relations with Germany and imported arms from Europe to seal his regional hegemonic position.37 Meanwhile, mining interests were incensed when Kruger approved a monopoly for the dynamite industry at a time when the mining companies required about 200,000 cases of dynamite annually.38 Desperate and out of ideas, Rhodes, Beit, and other industry figures organized an unsuccessful attack in 1895 on the Transvaal government that became known as the Jameson Raid. The two entrepreneurs had invested heavily in assets designed to extract gold over a long time period. Frustrated with Kruger’s policies that undermined them, they attempted a coup. When the Uitlanders showed little support for a coup, the Boer government easily defeated its attackers.39 Dr. Leander S. Jameson, who led the attack, was sent to prison, and Rhodes was fired from his positions in southern Africa. The failed raid strengthened Kruger’s resolve and drove a deep cleavage between the British and the Boer. The Boer in the Cape Colony now supported Kruger, further weakening the already tenuous British hold on the region. The High Commissioner for Southern Africa and governor of Cape Colony, Alfred Milner, reported that “ ‘half the white people in this Colony, indeed I fear more than half . . . are at heart fellow-citizens with the Free Staters and the Transvaalers.’ ”40 Condition 1: Britain Creates a Plutocrat The escalating animosity between the two European groups set the stage for the Boer War, which in turn set the stage for the Union of

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South Africa and the SACU. The British won the war; however, ironically, this victory paved the way for voluntary unification and ended in the British leaving southern Africa. Political incentives, for both British and Boer, would at last change and finally align with economic incentives for integration. Following the failed Jameson Raid, Britain’s Colony Secretary, Joseph Chamberlain, a charismatic, passionate imperialist, became convinced that Britain had to gain control of the Transvaal or risk losing its hold in all of southern Africa, a view known as the “imperial federationist” position. Since voluntary delegation had failed, including expanding the selectorate to enhance the power of British sympathizers, Chamberlain argued that the British must now force the Boers to surrender sovereignty. The British government reluctantly supported war.41 Between 1899 and 1902, the Boers and the British fought for dominance of the region, a war the British eventually won. Though Britain triumphed, the war was a particularly long and nasty one for the era. It lasted longer (nearly three years), cost more (over £200 million), and was deadlier (at least 22,000 British, 25,000 Boer, and 12,000 Africans were killed) than all of Britain’s wars in the century leading up to World War I.42 It was also the most degrading. The British had used a scorched earth policy that killed many Boers and Africans in the countryside. Those who fled were forced into refugee camps, where between 18,000 and 26,000 people, many of them children, died due to poor care.43 The war took a terrible toll on Britain’s ruling Conservative Party and its ally, the Liberal Unionists. Chamberlain, a talented orator, and his powerful political machine had helped propel the Conservative Party back into power in 1900, primarily by playing the imperial and nationalist card. Chamberlain had preached “not to think of persons or parties but only of imperial interests” and warned that a vote for the Liberals was a vote for the Boers. The governing party’s 1900 electoral victory was seen by contemporaries as support for the South African War and Britain’s imperial position.44 The Conservatives’ southern African colony had now drained the coffers through a costly war and embarrassed many with the British Army’s brutal tactics. The 1906 elections were a landslide loss for the Conservative Party. The Liberals won 377 seats; when combined with their allied parties (Labour and Nationalists), the new government held 513 seats against the Conservative-Unionist coalition, with only 157 seats.45 The Liberal victory again altered southern African politics. The Liberals had criticized Conservative military action in the region as having enhanced

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Afrikaner nationalism and power and consequently harmed British interests. During the war and the election campaign, the Liberal Party had espoused self-government for the southern African colonies. Acting on their promises, the Liberal leaders drafted a constitution and electoral laws for the provinces that they predicted would empower the British-born and -loyal southern Africans. They miscalculated. Southern Africa’s 1907–1908 elections brought Afrikaners to power in the Transvaal (Louis Botha) and the Orange Free State (Abraham Fischer) and an anti-imperialist in the Cape Colony (John X. Merriman). Only Natal had a pro-British government.46 At the end of the Boer War, Britain replaced several customs unions in the region with a new union that comprised six areas—the two British colonies of Cape Colony and Natal, the Boer independent states of Orange Free State and the Transvaal, and the two British African Territories of Basutoland and Bechuanaland—plus southern Rhodesia, just north of the other.47 The victory opened the door for the British to force the integration they had long sought. However, they now rejected economic integration—as opposed to political integration—as insufficiently binding. The four colonies had very different preferences for tariff levels. The British coastal provinces of Natal and the Cape Colony had been hard hit by recession and thus desired higher tariffs and railway taxes, which they relied on for government revenues; customs provided 32 percent of the cape’s revenue and 24 percent of Natal’s.48 As in their home continent, the Europeans of southern Africa thought of tariffs as primarily a way to quickly raise government revenues, as well as protect their home industries. Thus, these two colonies strongly favored high tariffs. However, the two landlocked colonies—the Transvaal and Orange Free State—had been less affected by the recession and, more importantly, received a small percentage of the customs duties and had to pay high railway fees; as such, their leaders preferred lower tariffs. There is no evidence that the British at this time considered economic integration under a plutocratic structure, as they would later do in 1910. Politically, there is no reason why they would have. Unlike the Prussian situation, the British were no longer the plutocrat in southern Africa. That position belonged to the Transvaal, which the British hoped to reign in, rather than further empower. Forces now lined up favoring political integration, each of them inspired as much by economic as political reasons. First, the British colonial rulers believed that if they could strengthen all of southern Africa’s economy through political union, they might at last attract

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enough British citizens to achieve an electoral victory for pro-British politicians. Second, the Boer rulers had long desired to unite the region and shrug off imperialist influences.49 While both favored political integration, each group—Boer and British—clearly had differing predictions of what unification would bring. In 1908–1909, a virtual “Who’s Who” of southern African politics— Botha, Merriman, even Jameson of the infamous Raid—convened at a National Conference where they hammered out a draft Union constitution.50 Three colonies’ parliaments approved the constitution while the fourth, Natal, approved the document via a voters’ referendum. Delegates then traveled to London where they met with the Colonial Secretary. With few changes, the British parliament approved the new union in 1910. In Pretoria, the former capital of the Transvaal, the Union of South Africa was announced to the international community.51 With the birth of the Union of South Africa, the region met the first condition for plutocracy: existence of a regional plutocrat. In approving the South African constitution, Britain simultaneously delegated, on behalf of its three African Territories, policy-making authority to South Africa. As plutocratic delegation theory predicts, the other four conditions had also been satisfied. First, South Africa’s white selectorate strongly supported structures that formalized what they saw as their God-given right to dominate their black-ruled neighbors. Second, with Britain withdrawing from the region, the Territories would have faced economic and political collapse without some kind of aid. Third, the SACU gave them the easily measured, immediate gains in the form of customs dues. Finally, no other options were available.

Condition 2: Racist Coalition Advocates Plutocracy The South African government had strong political backing for plutocratic structures. While Prussian ambitions to unite all of Germany may at first have been hidden, South Africa wore its desires on its sleeve. South Africa’s first Prime Minister, General Louis Botha, who had served the Transvaal government during the Boer War, and his followers believed fervently that South Africa would be incomplete until it incorporated the three Territories and Rhodesia. They were even embarrassed by the fact that, in their midst and on their borders, were lands locally governed by an inferior race.52 For this racist

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regime, the customs union was a second-best option. If they could not politically take over the lands, they could at least economically incorporate them. The Union of South Africa wasted no time in implementing policies that subjugated their own African residents. In 1911, the Union passed the Mines and Works Act, which reserved certain jobs in mining and railways for whites only. The 1913 Natives Land Act set aside a mere 8 percent of the Union’s land for Africans. The 1923 Native Urban Areas Act segregated city space. Each of these acts made clear how the Territories’ leaders and their people would be treated if forced out of Britain’s protective arms. Representing the general view, one African leader argued, “We Basuto are black Englishmen, and not Boers,” and begged not to be sent “back to the lion.” The rulers signed petitions opposing transfer to the Union where “natives have been placed under great disabilities and denied the rights and privileges of all free people.”53 Although racist policies were long practiced, the official policy of apartheid began in 1948. That year, South Africa’s National Party formally enacted a legal system of separation based on skin color that it dubbed apartheid (apartness in Afrikaans, the language of Afrikaners, who are descendents of the Boers). The system classified persons into one of four categories: white, Bantu (black African), colored (mixed), or Asian. Prior legislation, collectively called the Lands Acts, had already allocated more than 80 percent of South Africa’s land for whites only, despite the fact that whites were a small minority in the state. The state then assigned Africans to one of ten tribes, each of which had a designated territory, and thus excluded blacks from the politics of South Africa itself. This shameful history and South Africa’s long period of pariah status in the international community demonstrated the government’s immunity to charges of racism. A state built on apartheid would be unlikely to have a government moved by calls to give African states equal say in economic matters. Thus, the racist fervor of the South African selectorate strongly supported plutocratic structures. For a state that denied the vote to blacks in most provinces, and over time removed more and more rights for black citizens, it was unthinkable to give equal say to the black-ruled Territories. Once unified, South Africa consistently pressed Britain to allow it to politically incorporate the Territories that bordered it, or in the case of Basutoland, that it surrounded. Like the South Africans, British officials also assumed that South Africa would eventually incorporate the Territories. The only question was when.54 The Liberal House of Commons opposed immediately

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including the three Territories in the Union of South Africa, out of concern for the African populations. Colonial Secretary Lord Crewe argued, “We are more likely to secure favorable terms for the natives while the Colonies are still separate, and Union depends on a satisfactory issue being devised for this particular problem.”55 At the National Convention to discuss South Africa’s independence, the chairman of the proceedings announced that “the Imperial Government wished to give the delegates a free hand in everything but the native franchise and the Protectorates, since ‘it regarded itself in a special sense as a guardian and trustee of the natives of South Africa.’”56 South African leaders made many attempts over the years to incorporate the three High Commission Territories. British governments year after year refused to allow it.57 Prime Minister Botha’s dream of South Africa absorbing SACU members and thus uniting the region into a single state, as the Prussians had done with the Zollverein, never materialized. In the 1960s, the Territories won their independence. In 2002, they became fully equal partners within the SACU, a situation Botha and his coalition would surely have found unimaginable, even outrageous.

Conditions 3 and 4: Economic Crisis and Immediate Benefits In 1906, after the Boer War, the British citizens had elected the Liberal Party, which had campaigned on an anti-imperial platform. When the Liberals came into office, they began enacting plans to distance Britain from the colonies, including those in southern Africa. However, they did not want to abandon them. Had they done so, the Territories would well have collapsed economically and politically. The economic benefits that accrued to the Territories from the customs union gave Britain another reason to agree to delegate to South Africa. If the Territories could raise their own government funds, then Britain would be freed of that financial obligation. Under the 1910 customs union, South Africa surrendered 1.31097 percent of its total customs and excise revenue to the British high commissioner, who then doled out the funds according to a preset formula: of the total funds, Basutoland received 0.88575 percent; Bechuanaland, 0.276 percent; and Swaziland, 0.149 percent.58 The Territories depended heavily on these revenues, which in turn enabled Britain to remove itself from direct governance.

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Condition 5: No Superior Options Britain had two options it could have considered, neither of which was taken seriously. First, it could have set tariff policies and administered the region itself. However, this went against the Liberal policy of Britain extracting itself from its colonial holdings. The SACU would accomplish the goal of giving the Territories enough money to survive economically and politically. Second, Britain could have let the Territories set their own policies. However, Britain respected the idea, popular among Europeans at that time, that the colonies could not yet rule themselves. While the British were certainly more liberal than the Boers, the British viewed the African nations as weak and immature, unable to survive on their own. Later, under the 1919 Covenant of the League of Nation’s Article 22, polities considered ill prepared for “the strenuous conditions of the modern world” were put under the “tutelage” of “advanced nations who by reason of their resources, their experience or their geographical position can best undertake this responsibility.”59 Although the three Territories were still under Britain’s “tutelage,” even the Liberals believed that these ill-prepared lands were best ruled by a state in their vicinity. South Africa fit the bill.

South Africa as Opportunistic Agent There was no question that South Africa had frequently behaved as a poor agent, enacting policies that damaged the long-term economic prospects of the Territories and now states. Under the 1910 SACU accords, South Africa reaped significant long-term economic benefits that often came at the expense of the Territories. Two examples below demonstrate how South Africa used the authority Britain had delegated it on behalf of the Territories to impede economic development in the BLS. First, under its 1925 Customs Tariff Act, South Africa implemented a policy of import-substitution industrialization (ISI), a policy that many Latin American states enacted in the late 1930s to early 1960s.60 Under ISI, states enact high import tariffs to protect their infant industries from international competition. The new industries are initially inefficient, producing high-cost goods. However, as they gain from economies of scale and experience, they become more efficient and are able to compete in the international market. Under the customs union, not only South African residents, but also residents in the Territories were pushed to purchase inefficiently produced, high-cost goods made in South Africa.

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As customs union theory predicts, when a union includes both developing and developed state, the more advanced economy gains most of the investment and thus grows significantly faster than the others, exacerbating the inequality. This surely happened in the SACU, as foreign investment flocked to South Africa. Second, one of the primary benefits of the SACU for Swaziland and Bechuanaland was access to the wider market for their cattle. Yet, in response to declining cattle prices in 1923, South Africa imposed weight limits on the cattle the two territories could export within the union. Since Afrikaners, usually of South African citizenship, living in the territories tended to have heavier cattle, the 800-pound minimum weight mostly hurt the black Africans.61 The discrimination was so blatant, the author of a primary work on the early customs union exclaimed, “It would almost seem as if the people responsible for advising the South African Government on tariff protection did not feel bound by the 1910 Customs Agreement!”62

No Superior Options Even After Independence With the wave of democracy washing over Africa, Britain granted independence to Bechaunaland in 1966, which renamed itself Botswana, and to Basutoland, renamed Lesotho. Two years later, Swaziland gained its independence. For the first time, the BLS states would be the principals, deciding for themselves whether or not to continue the plutocratic structures. South Africa was undoubtedly an opportunistic agent. They thus took this opening to investigate whether they could find an option that was superior on one or more of the three factors plutocratic governance theory anticipates: (1) compensation, (2) delegation, and (3) reputation. The BLS considered three options to the SACU under plutocratic structures: (1) global integration via the General Agreement on Tariffs and Trade (GATT), (2) a regional integration agreement that excluded South Africa, and (3) increased trade with the European Economic Community (EEC). They found each of these wanting. Although they offered improved delegation and reputation, they were weak on compensation, promising only uncertain and distant economic gains. Furthermore, South Africa had decided to sweeten the deal, now offering BLS higher percentages of the collected customs. As the plutocratic delegation model predicts, states will often prefer immediate, easily measured gains over long-term uncertain gains.

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Option 1: Global Integration under GATT As the GATT further lowered worldwide tariffs, several regional economists assessed whether the SACU states would be better off participating in the global market rather than a regional one with South Africa as agent. In 1978, economist Paul Mosley argued that under optimistic assumptions, Botswana and perhaps Lesotho, too, would gain from leaving the customs union.63 However, these calculations were based on considerable uncertainty and necessarily omitted some variables that could significantly affect the outcome, both positively and negatively.64 Due to the difficulty in quantifying them, the analysis did not asses the possibility that South Africa would respond to a BLS withdrawal with crippling economic punishments, the unquantifiable political and economic benefits of reduced economic dependence, and the unknown entrepreneurial spirit of BLS citizens who had thus far been given no real opportunity to engage in an open market. On the final point, the evidence suggests that in developing states, significant lags occur between opportunity and action. Worrying about how long the lag might last, one analyst cited the case of a BLS rug manufacturer who insisted on importing expensive, high-tariff mohair through South Africa’s Port Elizabeth despite the fact that Lesotho was one of the world’s major mohair exporters.65 Exactly what price had BLNS paid for being a member of the SACU? State leaders, and analysts, could not easily determine precise figures for what they had lost by being part of a lopsided accord. The most obvious and easily measured gain to the smaller states were the revenues issued each year from the two sources of customs duties and excise and sales taxes. In addition, the small states gained duty-free access to South Africa’s significant supply of goods. In comparison to these easily measured gains, the precise cost of South Africa as agent was necessarily speculative, making the results of precise cost-benefit analyses debatable. Option 2: Southern African Development Coordination Conference Another option was a union that combined a larger number of economies, none of which would clearly dominate the others. In 1980, several southern African governments explored precisely this formula under the Southern African Development Coordination Conference (SADCC). The SADCC’s goal was to reduce members’ economic dependence in general. Its explicit focus, however, was on reducing dependence on the apartheid regime in particular. In addition to the three small SACU members, the SADCC included ten states, among them the relatively large economies of Angola, Democratic Republic of the Congo, Mozambique, and Zimbabwe.

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SADCC suffered from several weaknesses. The members shared little in common aside from their general economic dependence on South Africa, geographic location, and predominantly black citizenship. Each state had its own form of political organization, economic philosophy, ideology, resource base, geopolitical difficulties, and domestic problems. The transportation network in the region connected the other states to South Africa but left them isolated from each other.66 Quite intentionally, the SADCC lacked a single strong state among its membership. Without one state acting to resolve the collective action problems inherent in a large organization, the members were unable to coordinate their economies. No state was in a position to compensate the others. The member states recognized these problems. As a result, economic integration along the lines of a customs union or monetary area was never seriously contemplated for the SADCC. Option 3: European Economic Community Increased trade with the EEC offered another option when Britain joined the organization in 1971. Swaziland’s leaders hoped to capitalize on this option. With mining declining—the state’s iron ore mine was close to ceasing operations, and its primary asbestos mine had earlier reached peak production levels—sugar and other agro-business exports were poised to play an increasingly important role in Swaziland’s economy. The leaders hoped that the EEC would aid them by allowing duty-free access for its products, thus reducing dependence on South Africa. These hopes were dashed by the pro-South African forces in Europe, including the British.67 Under the 1975 and 1980 Lomé Conventions, Swaziland’s sugar, meat, citrus and canned goods, and select manufactured goods were at last guaranteed duty-free access to the EEC markets. Furthermore, Swaziland became known for its capitalist proclivities and willingness to negotiate, which appeared in striking contrast to neighbors with socialist leanings, notably Angola and Mozambique. In the 1970s, the United States played a critical role in Swaziland’s development, announcing a new policy that favored the black-ruled southern African states and increasing quotas, aid, and loans. Swaziland further benefited when the United States terminated sugar quotas for South Africa because of its apartheid policies. The small state’s quota jumped by 421 percent. U.S. corporate investment, however, remained minimal, in part because South Africa proved the more attractive market.68 In the 1980s, the actively anti-Communist Reagan administration supported the militaristic South African government via its policy of “constructive engagement.” With this new policy and continued British support for the apartheid regime, Swazi leaders could no longer count on

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the West to intervene against South Africa should it threaten Swaziland.69 Western policies thus further pushed the states to remain in the SACU. Agent Strategy: South Africa Sweetens the Deal with More Money No longer certain the economic gains of the SACU outweighed the cost of delegating policy making to a state with obviously divergent preferences, Botswana, Lesotho, and Swaziland sought a renegotiation of the original accord. In press reports, they went so far as to threaten to withdraw if South Africa did not significantly improve the terms.70 Their explorations of other options, which sometimes returned analysis stating that they would gain by leaving the SACU, gave credence to these threats of withdrawal. In negotiations, the BLS pushed for greater compensation and better terms of delegation. However, consistent with predictions that states are loathe to give up policy making, South Africa was unwilling to make governance changes and instead offered to keep the Joining states onboard with a much larger and formal compensation package. The 1969 accord that emerged from the BLS demands was the first time the Africans had themselves delegated authority. Although they mostly wanted changes in the governance accords, they did win some concessions. The preamble to the accord noted that issues affecting the small states deserved greater respect than in the past. It stated that the arrangements should “encourage the development of the less advanced members of the customs union and the diversification of their economies.” The accord accomplished this by adjusting the revenue sharing formula to the benefit of BLS, adding infant-industry protection for BLS only, and allowing BLS to set their own quantitative import restrictions. Prior to the new accord, BLS were assumed to be required to enact the same import restrictions as South Africa.71 Most importantly, the final accord included an unusual provision for revenue sharing. Under Article 14, the Consolidated Revenue Fund of South Africa collected not only tariffs for the states, but also excise and sales taxes.72 The new formula gave the smaller states a 42 percent “loading” in their favor. BLS collectively received R17.0 million in revenues in 1969–1970, a significant jump from the R6.4 million they could have expected with the earlier formula. Thus, the new formula more than doubled their revenues.73 Between 1967 and 1975, Botswana’s receipts from the revenue pool jumped from R3 million to R50 million; the new formula raised the contribution of

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tariffs to the government’s overall revenues from 20 to 50 percent. In 1977, the formula was again adjusted to favor the small states.74 The small states’ share of the common revenue pool now amounted to 38 percent of the total, leaving South Africa with the remaining 62 percent, a dramatic increase for BLS, which had a combined revenue of only 2.64 percent before the new accord.75 This revenue was considered a primary benefit of the union, along with access to the South African market.76 Botswana was reporting that customs duties accounted for, on an average, 35 percent of its annual tax revenue. For Lesotho, the figures were even higher, ranging between 61 and 68 percent a year.77 In Swaziland, SACU revenue accounted for 46–47 percent of total state revenue in 1968 and 1972, dropped to 25 percent in 1976, and rose again to 60 percent in 1980 and 67 percent in 1982.78 The extra allocations were viewed as a means of compensating the states for higher costs due to tariffs designed to protect South Africa’s industries, for the tendency for companies to locate in South Africa as opposed to the other states, and for the states’ “loss of fiscal discretion.”79 Several other aspects of the accord increased the gains to the small states. For example, South Africa guaranteed three landlocked states unfettered transportation for their imports, a proviso it had previously denied the states when it refused to sign the United Nations Convention on Landlocked States.80 The most important and visible change, however, was clearly the enhanced revenue for BLS. The regional hegemon thus agreed to pay a higher price for BLS’s lost sovereignty than it had under the 1910 accord but not to alter the governing structure. The small states’ leaders apparently assessed these higher revenues as sufficient to offset the fears of opportunism, with which they had a long history. The BLS leaders took the easily measured higher revenues rather than pressing for the more abstract change in governance structure. As Robert Kirk and Matthew Stern put it, any “calls for reform were muted by the increasing magnitude of the revenue transfers.”81 In other words, BLS agreed to continue delegating policy making in exchange for significant side-payments.

Changed Condition 2: New Regime Redesigns Governance Structures In the fourth and final stage of the SACU, four of the five conditions still held: a single regional plutocrat, Joining states expecting an economic crisis if they withdraw from the accord, easily measured benefits, and

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no superior options. What did change, and thus ended the plutocratic structures, was the winning coalition in South Africa. The pro-apartheid selectorate that had enthusiastically supported plutocratic structures had now been replaced by a larger selectorate that adamantly opposed apartheid. The new coalition adamantly denied permission for plutocracy. The result is the current intergovernmental structures of the SACU today. In 1994, South Africa’s selectorate changed fundamentally, opening the way for new SACU governance structures. While the 2004 accord offers the small states nothing but positives—more money and more control—South Africa lost both. Not only did it lose the authority to set tariffs and taxes to meet its own preferences—surely its most significant sacrifice—it also lost the rapid decision making that comes with plutocratic structures. Under the new veto rules granted to even the smallest member, decisions are now bound to get bogged down in never ending debate, just as the states did under the Zollverein’s General Congress. Unlike Prussia, which over time created more smoothly functioning structures, ending in complete political integration, South Africa has moved to a more cumbersome structure that will not serve its immediate economic needs nearly so well as the original SACU. Only a dramatic shock can account for such apparent martyrdom and that was the death of apartheid. In 1990, Nelson Mandela was released from prison after serving nearly 30 years for his opposition to apartheid. In 1991, he was elected president of the ANC. Two years later, in 1993, he won the Nobel Peace Prize. During this same period, South African President F. W. de Klerk began dismantling the legal system of racial segregation and enacting democratic reforms. The government eventually outlawed apartheid, rewrote the constitution, and enacted general, all-race, elections. On May 10, 1994, Mandela won the presidency. The end of apartheid meant the end of a plutocratic governing structure for the SACU, though it took another ten years to enact. South Africa’s National Institute of Economic Policy, under the sponsorship of the U.S. Agency for International Development, convened a workshop in March 1994 with the goal of “reconstituting and democratizing the SACU.” They asked BLNS state representatives to discuss negotiable points and “modalities” for reaching this goal.82 Stating concern that the new SACU not become overly bureaucratic—by which he apparently meant that the states would delegate too many decisions to bureaucrats—the Namibian representative proposed that an intergovernmental structure replace the plutocratic one. This new Council of Ministers would approve the

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common external tariff.83 The Namibian ambassador further suggested that SACU could evolve into an economic union, a deeper form of integration that would require a regional reserve bank.84 In November 1994, ministers from the five SACU member states appointed a Customs Union Task Team with a mandate to recommend changes to the accord. The major issues were democratic governing structures, the revenue sharing formula, tariff policy, and new common economic policies.85 South Africa’s new ruling coalition and its views on racial matters played a critical role in the new government’s decision to agree to “an equitable and mutually beneficial regional program.”86 A government that removed its state from the pariah list and was governed by black Africans for the first time since colonialism, would presumably extend these ideals to the international arena. However, the new leadership did not immediately create an equitable governance structure. Although the BLNS had asked for revisions immediately after the collapse of the apartheid regime, in 1994, it took another decade for South Africa to deliver. Although the new government no doubt sought to be a fairer regional player, its economic hegemony in the region apparently made it reluctant to give up too much policy-making authority. The drafters spent years considering qualified majority voting, in which South Africa would have three votes and the four other members one vote each. Five out of seven votes would be required for a decision to be adopted. This voting rules would have given South Africa significant control, but not veto authority. Pretoria finally agreed to drop this voting formula in favor of requiring consensus.87 Though governments often distinguish between how they treat their own citizens and how they conduct their foreign affairs, the South African case demonstrates that this coalition, in any case, was not willing to diverge too far from the policies it long espoused when in opposition. South African economic interests had remained unchanged and therefore, one might argue, its trade positions would likely remain the same as well. Such a position, however, ignores the historic significance of moving from a highly discriminatory government based on racial segregation and white-minority rule to one in which the majority black population governs. The new South Africa’s neighbors would no doubt have been astonished had they been left as subservient members of the SACU. Before the 1994 elections, some argued that not much would change under the new government in terms of its view on regional development, the assumption being that the same narrow economic

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interests would still drive policy in South Africa.88 The ANC, however, publicly favored a more equal partnership with the SACU members. Backed by the activist labor union, Congress of South African Trade Unions, and Afrikaner businesses, the party had the authority and support to move forward with a focus on regional integration with a democratic structure. The large South African businesses that had prospered under apartheid argued for pragmatic economic policies that de-emphasized developing the subcontinental region—a goal derided as “castles in the air”—and instead advocated a focus on the broader trading world.89 The ANC rejected this approach, opting for regional development, which included retaining the SACU, but under intergovernmental and supranational structures rather than plutocracy.

Conclusion The SACU case demonstrates again that political leaders in Joining states, where there is an economic crisis, or expected crisis if the state leaves the accord, will prefer immediate, certain economic gains over distant, uncertain gains, even if the gains promise to be far more substantial. This is such a strong incentive it overrides a Joining state’s reluctance to integrate with an agent that has proven itself to be opportunistic and, in this case, particularly repugnant in its views toward the Joining states’ residents. Yet, the logic of political survival makes clear why state leaders make this odd choice. Given that their first priority is to retain power and that they require government revenues to do so, leaders cannot afford to count on distant, uncertain gains. On a policy level, the SACU case suggests that Western states could easily have changed the calculus for the southern African Joiners. Their required government revenues were not substantial. If this was the driving force behind re-delegating to South Africa, could not the West have afforded to foot the bill until global integration brought the long-term benefits, or at least more fully invested in the southern African states? The Cold War worsened matters for the SACU members, as the United States backed the militaristic South African government against what it perceived as the socialist policies of some of the SACU members. This case suggests two research questions. First, as discussed at the beginning of this case, the British originally delegated policy making to South Africa on behalf of the Territories. Did other colonial powers do something similar? What other acts of delegation were there

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between European imperial powers and other regional powers? Or was South Africa unique? Second, a mystery about the current accords remains: why did it take the SACU members ten years to negotiate the new accords? The answer to this question may be difficult to attain at this time. Since negotiations were so recent, officials may be unwilling to release documents or discuss the details. But the answer will shed light on how states negotiate regional accords. I suspect that South Africa under the ANC was reluctant to give up as much as it did in these new accords. Some evidence suggests that. We know that a weighted voting formula was ultimately rejected. Knowing more about these recent negotiations may shed additional light on how states choose governance structures and how Joining states leverage their power.

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Chapter 6

4

The Newest M ember : The Eura sian Customs Union

The Russian Federation’s economic integration accords started with the 1991 intergovernmental Commonwealth of Independence States (CIS), which accompanied the Soviet collapse, to plutocratic structures in the 1995 Eurasian Customs Union, and then to mixed accords—the Eurasian Economic Community (EAEC) (2000) and the Single Economic Space (SES) (2004)—that require plutocratic monetary integration but otherwise use intergovernmental structures. I analyze in detail two of Russia’s Joiners—Belarus and Kazakhstan—who have been enthusiastic integrationists—and one non-Joiner, Turkmenistan. As with Prussia and South Africa in their own regions, Russia was the clear plutocrat throughout this period. The most important difference between the three periods was the Russian winning coalition. From 1991–1993, President Boris Yeltsin, first of the Soviet Socialist Republic of Russia and then the Russian Federation, had campaigned on a promise to take Russia away from the mixed Communist-liberal system of President Mikhail Gorbachev—a system Yeltsin likened to marrying a grass snake to a hedgehog—to a pure liberal system. Russia would join the West in its liberal traditions. To match these pronouncements, Yeltsin needed governance structures that reflected democratic principles. Plutocratic governance would have been inconsistent. This changed around 1993–1994, when Yeltsin increasingly came under pressure from nationalists, who demanded that Russia reassert itself on the world stage in general and particularly in its own neighborhood. Over time, more of the selectorate supported

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this view. With his political survival at stake, Yeltsin reversed course, moving away from his pro-Western stance. As a result of this change in the selectorate’s views, plutocracy became the preferred governance structure, as it formalized Russia’s dominant position over the other member states. Recognizing that many of the CIS Joiners would not accept plutocracy, Russia focused on its most eager integrationists: Belarus and Kazakhstan. The two Joiners, in turn, responded to the integration accords because Russia was able to give them immediate, easily measured economic benefits that no other partner could match. These benefits were delivered through a major relation-specific asset: oil and natural gas pipelines that connect each state with Russia. For Belarus, the benefits came in the form of natural gas priced well below the market rate. No other partner could have matched this benefit. Kazakhstan, a resource rich state, relied on Russian owned pipelines. Russia gave it access to international markets via Russian owned pipelines. Given that Turkmenistan also faced an economic crisis in the aftermath of the Soviet collapse and was also dependent on Russian owned pipelines to export its fuel, why did it not also become a Joiner? There are two primary reasons: first, Russia immediately revealed itself to be an opportunistic agent for Turkmenistan by preventing it from exporting to European markets. Instead, Russia used Turkmenistan’s gas to feed the cash-poor former Soviet states and then sold Russian gas to the cash-rich European states. Turkmenistan’s gas thus subsidized Russia’s. Furthermore, Turkmenistan’s leader, who had named himself Turkmenbashi (“Father of All Turkmen”) believed he would be able to quickly find alternate export routes and high levels of foreign direct investment (FDI) from Iran and Western oil companies. He ended up being wrong about this, but it had emboldened him to try a path independent of the Russian one.

Introduction to the Post- Soviet Period On December 8, 1991, President Boris Yeltsin of the Soviet Socialist Republic of Russia concluded his secret meeting with the presidents of the other two Slavic republics of the Soviet Union, Belarus and Ukraine. Together they shocked the world when they denounced the 1922 Soviet Union’s founding document and proclaimed, “The USSR, as a subject of international law and geopolitical reality, is ceasing its existence.” Given the size of the three Slavic republics, the announcement sounded the death knell for the Soviet Union. The three republics collectively controlled 73 percent of the

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Soviet Union’s population, 80 percent of its territory, most of its advanced economic infrastructure, and the vast majority of its military might.1 Yeltsin and his fellow leaders thus ended the life of a political entity, in turn dramatically reshaping the political and economic lives of all 15 republics that once comprised the Soviet Union. The three leaders simultaneously announced a new entity, the CIS, a type of voluntary Soviet Union. Kazakhstan’s leader, Nursultan Nazarbayev, rushed to Moscow to challenge Yeltsin on why the Central Asian states had been excluded from the agreement, complaining “that an interstate structure based on ethnic affinity is a relic of the Middle Ages.”2 Following a lengthy meeting with Yeltsin and Soviet President Mikhail Gorbachev, Nazarbayev summoned his colleagues in the other Central Asian states. They spent days discussing their options, eventually emerging with a unified position. They declared their desire to join hands with the Slavic states in forming the CIS and demanded that they have equal status with the founding states. They argued that the Commonwealth should “not be based on ethnic or confessional considerations, and that existing borders should be recognized as inviolable.”3 Nazarbayev’s alacrity and skill in convening the Central Asian leaders resulted in the Slavic presidents agreeing to add other former republics as signatories to a subsequent document of dissolution, what came to be called the Alma-Ata accords, after Kazakhstan’s capital at the time. Gorbachev’s demands and then pleas to not dissolve his state went unheeded as the leaders of the other republics rapidly abandoned the now stateless leader. By late December, 11 of the 15 Soviet republics had joined the new CIS.4 Despite decades of their lands and peoples being subordinate and often the victims of open abuse and even death marches and intentional starvation, the vast majority of state leaders had chosen to keep their citizens in Moscow’s orbit.

The Dependent Variable: Russia’s Integration Accords I evaluate four economic integration accords designed by Russia since it left the Soviet Union, and thus causing its collapse, in December 1991: the intergovernmental CIS (1991), the plutocratic Eurasian Customs Union (1995), and the mixed EAEC (2000) and SES (2004). Although Russia has designed eight significant integration accords between December 1991 and 2008, they tend to overlap or supersede previous accords. Collectively they call for free trade areas, currency unions, customs unions, and common markets. However,

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only the Eurasian customs union has made significant progress toward integrating the states. I include the CIS because of its importance as the first post-Soviet integration accord, and the EAEC because it includes the customs union and suggests the future path for these accords, or at least what Russia wants the world to see. The EAEC is the only Russian-designed regional accord registered with the World Trade Organization (WTO). Unlike the Zollverein and the Southern African Customs Union (SACU) (before 2004), the Russian accords are living history, still largely under development. Most aspects of the accords have not been implemented. Official documents that chronicle debates, reveal the political leadership’s thoughts about events as they unfold, have yet to be released and will likely remain classified for some time to come. In addition, during his presidency, Vladimir Putin (2000–2008) created an even more opaque Russia by tightening control over the media and consolidating power by co-opting the opposition parties and removing the governors’ independence. This opacity combined with the loosely structured integration accords makes it difficult to determine exactly what has been implemented and how the governance structures work in practice.5 Commonwealth of Independent States (CIS) (1991): Intergovernmental The CIS’s founding states envisioned the commonwealth as a type of voluntary USSR. The members agreed to form a common market and develop common policies to cover security, the environment, immigration, and organized crime. They would jointly control the nuclear weapons of the former Soviet Union. Furthermore, the commonwealth would assume control of transnational systems—such as power grids, oil and gas pipelines, transportation, and communications—and of jointly owned assets, such as industrial and financial corporations.6 Subsequent accords specified the CIS plan for economic integration, including the governance structures.7 The states would develop a customs union and common market with free movement of commodities, capital, and labor. They would use a common currency. A newly formed intergovernmental Interstate Economic Committee would govern the Union. Each member’s financial contribution to the organization would determine its voting power, a formula that gave Russia 50 percent of the votes; for “strategic decisions,” 75 percent of the votes would be required. Ten states signed the accord.

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As with all the integration accords, the three Baltic states abstained from signing, as did Ukraine and Georgia.8 In 1994, Russia unveiled, and Joining members signed, a treaty calling for CIS economic integration to begin with the “transitional stage” of customs union among all members.9 Following market economy principles, the members would gradually eliminate trade barriers; begin coordinating trade policy toward non-members; and harmonize economic policy in certain areas, including “industry, agriculture, transport, finance, investment, social sphere, development of fair competition, etc.” The articles detailed how barriers would be removed. In addition to informal dispute resolution procedures, the accord called for using the Economic Court of the CIS to resolve differences.10 Two annexes detailed the rules for determining country of origin and rules governing reexporting of goods. The CIS focused on including as many former Soviet states as possible and using intergovernmental structures that gave Russia voting power commensurate with its greater size. Eurasian Customs Union (1995): Plutocratic Starting in 1995, the Russian government shifted its emphasis away from the CIS’ intergovernmental structures, which attempted to integrate all CIS members, to plutocratic structures that focused on a handful of eager Joiners: particularly Belarus and Kazakhstan. The first and most important of the plutocratic structures is the 1995 Eurasian Customs Union. The accord has been more extensively implemented than any of the other Eurasian accords. As Putin designed broader integration accords—the 2000 EAEC and the 2004 SES—the customs union became part of these accords. In 1995, Belarus, Kazakhstan, and Ukraine immediately announced that they would join the new customs union. However, Ukraine ultimately refused to join on the basis that the agreement did not give all states an equal say. In contrast, Belarus and Kazakhstan immediately began implementing the plutocratic aspects of the accord, changing their tariffs to match those set by the Russian parliament, the Duma. In addition, President Alyaksandr Lukashenka signed a decree imposing on Ukrainian imports a value-added tax with the goal of harmonizing his tariffs with Russian tariffs. In 1996, the Belarusian Cabinet of Ministers announced that it was preparing a new list of tariffs to match the changes made in Russia. In 1997, the U.S. Central Intelligence Agency estimated that the “Customs Union agreement with Russia—which required Minsk to adjust its foreign trade practices to mirror Moscow’s—has resulted

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in higher import tariffs for Belarusian consumers; tariffs rose from 5%–20% to 20%–40%.”11 Russian customs guards, who guarded the Belarus border, add to the plutocratic nature of the union. In 2003, after the customs union had been subsumed by the EAEC, the United Nations Secretariat registered the group as an official international organization. The following year, the EAEC announced that 90 percent of Belarusian tariffs corresponded to those in Russia.12 In August 1995, the Kazakh and Russian governments held detailed talks on implementing the customs union; one month later, Nazarbayev, who had recently dismissed his parliament, ratified the agreement.13 He immediately began implementing the accord by shutting down the customs control stations on the Russian border; Russia reciprocated in January 1996, removing its customs controls between the two states. Kazakhstan raised its tariff levels to equal Russia’s. In some cases, the changes were not through published tariff rates, but rather through value added taxes (VATs) and excise taxes. While it is difficult to find specific information on when and what tariffs were harmonized, two examples demonstrate that Kazakhstan was implementing the accord. In April 1996, as part of an overall tariff-reduction package in April 1996, Almaty announced that export tariffs on oil and gas would fall by 50 percent. Kazakhstan’s move came just weeks after a similar reduction in Russian export tariffs.14 More prominently, Kazakhstan raised its automobile tariffs, a surprising move given that it has no automobile industry to protect. The protection was clearly for Russia’s manufacturers, who had never been fully exposed to the international market, including AvtoVAZ, which built the Lada car, and Kamaz, the massive truck manufacturer.15 In 1996, citing the customs union, Kazakhstan increased by six times the import duties on automobiles; tariffs rose as high as 30–45 percent. Although Kazakh officials later announced that they would no longer enforce the high tariffs, they simultaneously imposed increased excise taxes which had the same effect of making trade with non-customs union members more expensive.16 Although his government did not match all of Russia’s tariffs, Nazarbayev’s commitment to the Russian-designed integration efforts was substantial, significant, and steady. The Eurasian Economic Community (2000): Mixed Structures In 2000, at the beginning of his second presidential term, Vladimir Putin released the Agreement on the EAEC. The EAEC expanded

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the 1995 customs union between Belarus, Kazakhstan, and Russia by adding two more Central Asian states—the Kyrgyz Republic and Tajikistan—and called for an SES, a follow-on accord that was signed in 2004.17 The EAEC will maintain the integration structures developed under the CIS economic agreements, including the Interstate Council, the Integration Council, the Inter-Parliamentary Assembly, and the Community Court.18 Members’ voting rights reflect their contributions to the Community’s budget: Russia has 40 percent of the voting rights, while Belarus and Kazakhstan each have 20 percent; the smallest economies (Kyrgyz Republic and Tajikistan) have 10 percent each.19 The EAEC members envision a comprehensive economic union. The Community plans to form a free trade zone, harmonize tariffs and nontariff measures, formulate a common negotiating position for the WTO, introduce common currency regulations, coordinate economic reforms, enact a common payment system, create a common transport market, standardize national education programs, and coordinate border security, including common policies on smuggling and other customs violations.20 In January 2006, Uzbekistan joined the organization, bringing the total number of signatories to five plus Russia.21 Single Economic Space (2004): Mixed Structures The SES agreement is Russia’s most recent formal economic integration accord. The initial documents for the SES were drafted and signed in 2003 by the presidents of Russia, Belarus, Kazakhstan, and Ukraine. The first three states’ presidents supported the idea unconditionally, while the Ukrainian leader attached a note stating the agreement had to be consistent with the state constitution and its ultimate goal of integrating with Europe.22 The agreement was especially notable for Ukraine’s inclusion, as it had not signed a Russian-led integration accord since the original CIS that broke up the Soviet Union. In September 2004, Russia, Belarus, Kazakhstan, and Ukraine signed numerous agreements expected to enact this wide-ranging union.23 However, the presidents’ views about what the SES should entail differed, with particularly divergent views between the Russian and Ukrainian leaders. Russia envisioned a single currency (the Russian ruble) and a customs union. Ukrainian President Leonid Kuchma, in contrast, opposed a monetary union, as this would clearly be incompatible with eventually joining the EU and converting to

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the euro. Similarly, he and most of the Ukrainian leaders rejected a customs union, favoring instead a free trade zone, a shallower form of integration.24 Assuming members are using the plutocratic governance structures of the 1995 customs union, both aspects of the accord that Ukraine opposes—monetary union using the ruble and the customs union—would require delegating policy making to Russia. However, the evidence is unclear on whether the SES structures for the customs union might now be intergovernmental. If the Russians do intend to use intergovernmental accords, they would be following the Prussian example of starting with plutocratic structures to set the status quo and then moving to intergovernmentalism to attract Joiners and to demonstrate to the wider international community the legitimacy of their agreements.

The Five Conditions Throughout the period examined here, Russia has clearly been the regional plutocrat. Even when its economy was crashing, it remained stronger than the immediate neighbors with whom it sought formal (re)integration. Most of the states were in economic crisis, or feared that losing economic ties with Russia would precipitate a crisis. Russia was uniquely positioned to offer short-term economic benefits. In the early post-Soviet period, the second condition of a permissive coalition for plutocracy did not exist. President Boris Yeltsin’s winning coalition adamantly favored Western institutions and wanted to separate itself from the Soviet era. Plutocratic structures would have too closely resembled the Soviet Union’s institutions. After a few years, however, the Russian selectorate became more nationalistic and began demanding that its leaders return Russia to its great power status, including a more overt demonstration of Russia’s right and ability to control the Eurasian region.

Condition 1: Russia as Regional Plutocrat The Russian leaders can easily claim the regional hegemonic position. Russia’s economy dwarfs those of the other Soviet successor states. When the newly independent Russian Federation designed the CIS in 1991, its GDP accounted for 68 percent of the total GDP for all 15 new states, a figure that has remained relatively constant. As of 2007, Russia’s economy accounted for 88 percent of the combined GDPs for the six customs union members; its GDP in current U.S. dollars

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was $1.291 trillion; the next largest economy was Kazakhstan’s with a GDP of $104 million.25 Russia has immense geographic size, rich natural resources, and a comparatively large population. Russia is the largest state in the world, with over 17 million square kilometers in land and water mass. (The United States has 9.8 million square kilometers.) Kazakhstan, the next largest customs union member, has 2.7 million square kilometers. Russian soil is rich with coal, oil, gas, and every metal desired for the modern industrial world.26 Russia has nearly 100 million more people than Ukraine, the next largest Eurasian state. In the early post-Soviet years and during Russia’s 1998 economic collapse, many in the West focused on Russia’s economic weakness. Yet, even through these difficult times, the big bear looked different to those sitting in the post-Soviet space. To leaders there, Russia has always been a mighty giant. No other state could have commanded a leadership role, or demanded equal policy-making authority. Thus, the first condition for plutocracy—a single wealthy state—has existed since 1991 and throughout the post-Soviet era.

Condition 2: Changing Coalitions The winning coalition in Russia changed over time, beginning with a coalition that supported cooperating with Western states (1991–1994), switching to a strongly nationalist coalition that advocated an assertive regional policy (1994–2000), and finally moving to a coalition that was permissive toward a plutocratic structure (2000–2008). Early Yeltsin Years: The Coalition for Cooperation (1991–1994) In June 1991, during the waning days of the Soviet Union, Boris Yeltsin won the Russian Republic’s first popular election for the presidency. In the year leading up to his election and then as President, he espoused his support for democracy and the market economy and indicated his disdain for Soviet leader Mikhail Gorbachev’s incompatible policies.27 When he became President of the newly independent Russian Federation, in December 1991, Yeltsin ended the economic policies for which he had criticized Gorbachev. He fully embraced the West and its institutions.28 According to this “Atlanticist” or internationalist view, Russian policy should be focused beyond the former Soviet borders and should be marked by “gradualism, negotiations, accommodation, and solidarity with the U.S.-led ‘civilized world’.”29 Foreign Minister

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Andrei Kozyrev declared that Russia’s aim was “to become a full member of the international community” and to be viewed as a state that is a “threat neither to its own citizens nor to other countries.”30 Further demonstrating the coalition’s commitment to being seen as a cooperative rather than confrontational power, the Russian leaders advocated banning nuclear testing, destroying chemical weapons, banning or even destroying space and conventional “smart” weapons, and reducing military forces to levels sufficient for only defensive operations. Yeltsin continued Gorbachev’s commitment to cooperation with the North Atlantic Treaty Organization, the Conference on Security and Cooperation in Europe, and other European security institutions. Jane’s Intelligence Review gushed that “a pro-Western orientation is enjoying a consensus, even among the more conservative part of the military bureaucracy.”31 Western leaders and citizens were demonstrably enthusiastic about the region’s transformation from enemy to ally. They applauded Russia’s progress in moving toward a democratic, capitalist state while sending clear signals that it would not be militarily aggressive. Russia’s foreign and security policy was met by “a rhetoric of unlimited goodwill in the West.”32 From 1991 through most of 1993, Russian leaders and their supporting coalition showed no interest in dominating the newly independent states of Eurasia. Quite the opposite. They bent over backward to demonstrate that the Russian Federation was not a new Soviet Union. Moscow was not to interfere in the political independence of its former Soviet siblings. Change in the Yeltsin Years: Advocates for Assertive Regional Policies (1994–2000) The period of unwavering pro-Western rhetoric ended swiftly, and with it the coalition’s opposition to directly intervening in the affairs of the other successor states. This opened the door for plutocratic structures. The shift occurred for a variety of reasons. First, the West was unable or unwilling to save the collapsing Russian economy. The failure of the West to sufficiently aid Russia has been blamed on the United States, the IMF, the World Bank, and the Russian government itself. When the Soviet Union unexpectedly dissolved in December 1991, the United States was preoccupied with electing a new President—George H. W. Bush—who then inherited a $2.2 trillion

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national debt, hindering any large foreign assistance.33 The World Bank, IMF, and G-7’s combined $24 billion aid package contained serious design flaws, according to some analysts.34 Finally, Russian leaders dramatically underestimated the enormity of the changes required to turn around their economy and overestimated the ability of the West and its institutions to finance the change.35 For these three reasons, the Russian selectorate grew disenchanted with the West and Yeltsin’s pro-Western policies. While the Russian economy collapsed under the dramatic market reforms, the former Soviet region was unraveling at the seams. Civil wars broke out, or deepened, in Azerbaijan, Georgia, Moldova, and Tajikistan. The three Baltic states adopted discriminatory policies against Russian nationals, and Ukraine refused to submit to Russian pressure in several key policy areas. These events brought Russian attention to the former Soviet region as well as providing opportunities for Russia to intervene in these states’ affairs. While these external events unfolded, Yeltsin was under attack at home. The President’s primary opposition was in the Supreme Soviet and its parent organization, the Congress of People’s Deputies—the bodies that comprised the legislative branch.36 Yeltsin’s chief opponent in the Supreme Soviet, Chairman Ruslan Khasbulatov, argued that the Constitution supported a Supreme Soviet superior to the presidency and aggressively challenged Yeltsin on domestic and international issues. He declared the Soviet Union’s disintegration a tragedy.37 In December 1992, the Congress of People’s Deputies tried on three occasions to strip Yeltsin of his powers, prompting the President to declare that he would rule by decree. Yeltsin attempted to dissolve the Supreme Soviet and the Congress and hold parliamentary elections. The Russian Constitutional Court declared Yeltsin’s decree unconstitutional. The legislators fought back, refusing to leave their building. With military troops surrounding the parliamentary building, the administration cut off electricity, gas, and telephone lines. When that failed to bring out the deputies, the military stormed the building. According to official figures, 145 people died in the conflict and 733 were injured.38 Yeltsin had won but at a high cost. With the West off its pedestal, neighboring states in turmoil, Russian nationals under attack, and Yeltsin struggling to survive, the President switched gears and embraced a Eurasianist view, which prevailed through Vladimir Putin’s tenure. This view recognized Russia as a unique nation-state, with its own interests and personality. It emphasized Russia’s position

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as a great power, with a complementary focus on the former Soviet states as Russia’s sphere of influence. According to a Yeltsin advisor, “Our state emerged and grew strong as a unique historical and cultural amalgam of Slavic and Turkic, Orthodox and Muslim components . . . [It has] a thousand-year history and legitimate interests” in the region. Russia “should not be afraid to use her muscle” in defending state interests.39 Yeltsin now proclaimed, “Stopping all armed conflicts on the territory of the former USSR is [in] Russia’s vital interest.”40 In November 1993, he signed “The Basic Provisions of the Military Doctrine of the Russian Federation,” which identified peacekeeping within the former Soviet borders as one of the military’s most important missions and claimed that Russia had the right to “terminate any unlawful violence” within the borders of the CIS.41 In what came to be called a Russian Monroe Doctrine, Russia’s Foreign Affairs Minister declared in a United Nations speech that Russia would preserve the former Soviet states’ stability and that “no international organization or group of states can replace our peacemaking efforts in this specific, post-Soviet space.”42 Once the architect of the Atlanticist program, Andrei Kozyrev now embraced the Eurasianist view. He noted that the CIS was “to become in the future a real military-political soyuz [union] of republics united by a common history and by the common CIS border, for we simply do not have and do not need another border . . . Let the West react as it pleases . . . There are, of course, those who see any strengthening of Russia or the CIS as harmful because they prefer a weak partner to a strong one. Well, let them think that way while we strengthen both Russia and the CIS.”43 The Eurasian rhetoric that saw Russia as a regional power with the right and authority to control its neighboring states continued throughout Yeltsin’s remaining presidential years. By 1999, when Yeltsin stepped down from the presidency, analysts argued, “It is clear that the Russian elite is increasingly more anti-Western. The anti-Western feelings have spread from those who are called the ‘Red to Brown,’ to those who belong to the liberal movement and, until recently, usually held pro-Western views.”44 Putin Years: Permission for Plutocracy (2000–2008) Vladimir Putin, whom Yeltsin appointed interim President on December 25, 1999, won the presidential election in March 2000 with 52.5 percent of the vote.45 During his two four-year terms (2000–2004, 2004–2008),

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President Putin pursued a more centrist approach. Steering clear of the strident nationalism of the later Yeltsin years, he allied with states based on what they could do for the Russian economy. He courted democrats and autocrats alike: the EU, traditional allies from the Soviet-era (e.g., Iran and Serbia), and emerging powers, particularly China.46 The evidence suggests that Putin’s political coalition would give him permission to construct plutocratic accords, though it was not overwhelmingly advocating for regional dominance in the way Prussia and South Africa’s coalitions had. First, in a critical measurement of the selectorate’s opinion about the direction of Russian foreign policy, on March 14, 2004, Putin was returned to the presidency with the support of 71 percent of those voting, demonstrating overwhelming support for the leader, if not necessarily for his centrist foreign policy. Second, an opinion poll reveals a split in support for Russia as a regional power, indicating that the selectorate is not unified on this issue. Conducted by an independent polling agency in Russia—New Russia Barometer—1,600 Russians were asked in 2003 if they would rather see Russia “first and foremost as a great power, respected and feared by other countries, or a country with a high standard of living, even if not one of the strongest in the world.” A sizable minority, 43 percent, chose to have their state respected and feared, while 54 percent chose a high standard of living, suggesting that the selectorate is split on the importance of having a great power image.47 Finally, though it occurred outside the time period I analyze here, an opinion poll by the New Russia Barometer asked 1,597 Russians about their state’s August 2008 intervention in South Ossetia, one of Georgia’s two breakaway republics (the other being Abkhazia). The results suggest that Russians were nearly divided in their views about keeping Russian forces in neighboring states. Asked whether Russia should keep its troops in South Ossetia, 56 percent said yes, 27 percent said no, and 17 percent said they did not know.48 These three polls suggest that the Russian selectorate moved away from the extremes of the pro-Western early-Yeltsin years and the anti-Western late-Yeltsin years. Their divided views thus opened the way for Putin to pursue governance structures of his choosing

Condition 3: Economic Crises There is no doubt that as the Soviet Union collapsed, all of the former Soviet states suffered economic collapse. Table 6.1 shows the change in GDP for the first five postindependence years for the states evaluated in this chapter.

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Table 6.1

Changes in GDP in select post-Soviet states, percentage, 1992–1996

Belarus Kazakhstan Turkmenistan Russia

1992

1993

1994

1995

1996

⫺10 ⫺5 ⫺5 ⫺15

⫺8 ⫺9 ⫺10 ⫺9

⫺12 ⫺13 ⫺17 ⫺13

⫺10 ⫺8 ⫺7 ⫺4

⫹3 0 ⫺7 1

Source: World Development Indicators, World Bank, 2009.

Although economic conditions improved after these initial very painful years, the states that had joined the customs union and were enjoying the benefits, both the side-payments from Russia and the longer-term gains from trade, would have to think hard about whether leaving the accord would ruin their economies. Once a state is part of an accord, and is prospering, why would it risk possible economic crisis by withdrawing?

Condition 4: Immediate, Easily Measured Economic Benefits Despite the economic collapse following the Soviet Union’s demise, Yeltsin and his coalition were willing and able to provide immediate economic benefits to prospective Joiners. Using relation-specific assets (RSAs)—particularly oil and gas pipelines—the Russians were able to provide substantial side-payments to the Joiners. In international relations, RSAs are durable assets that bind together two or more states. They encourage economic integration between the states they connect through two mechanisms: (1) since they cannot easily be replaced, is it less costly to keep the relationship with the other state than to form new relationships, and (2) they provide a convenient way for Designing states to provide easily measured economic gains. In the Eurasian case, Russia gave Belarus much-needed natural gas, delivered through the pipelines, at below-market rates, and offered Kazakhstan an outlet for its own gas and oil. Economic Benefits for Belarus: Low-Cost Fuel For Belarus, Russia provided a massive economic pay-off in the form of much needed natural gas. Although Western states, their financial institutions (the World Bank, the IMF, and the European Bank for Reconstruction and Development), and other donors (such as Soros

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Foundation) promised grants, loans, and technical assistance, no one in the West was willing or even able to offer Belarus the economic payoffs that Russia did. Rather than distributing substantial customs duties to Joining states—as Prussia and South Africa had done for their members— Russian leaders offered a far more lucrative deal, which did not require them to spend money they did not have: to resource poor Belarus, they sold natural gas and crude oil at rates far below market values and then frequently forgave or stretched out the mounting debts. For example, Belarus paid only $50 per 1,000 cubic meters of natural gas at a time when Lithuania and Ukraine paid $80. This was a major concession, for Belarus depended heavily on imported natural gas. The state produced an average of only 6.6 billion cubic feet per year, hardly sufficient for its average annual consumption of 628 billion cubic feet. Russia filled the short-fall.49 Russia’s discount amounted to an indirect subsidy of an estimated $400–450 million a year, a substantial, easily measured, and quickly delivered economic gain. Furthermore, in 1996, Russian leaders converted a $1.3 billion gas debt (the equivalent of 6.5 percent of Belarus’s GDP) into long-term credits.50 Russia even allowed Belarus to repay its debt with food and other goods, a concession Lukashenka could hardly expect from the World Bank or the EU.51 RSAs help tell the story of why Russia was willing and able to make the critical gas deal. Economists define RSAs as “durable transactionspecific sunk investments.”52 Three types of specific assets have significant explanatory power: site, physical, and dedicated.53 Site-specific assets are those that are too heavy or large to easily move to a new location. Physically specific assets contain design characteristics specific to the transaction and have lower values in alternative uses. These assets are physically tailored for a certain project. Unlike site-specific assets, they might be easily transported to other locations, but their next best use is of very low value. Dedicated assets involve substantial general-purpose investments that would not have been made if not for a particular relationship. If the exchange between the two partners were discontinued, the investor would have excess capacity. A particular RSA can be specific in one or more of the three ways. Oil and gas pipelines have all three types of specificity: (1) they are extremely heavy, making them site specific assets; (2) they contain specific design characteristics making alternative uses prohibitively expensive, a feature of physically specific assets; and (3) states build them for a particular customer base and therefore assume that

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customers will continue to demand the product, a feature of dedicated assets. Pipelines are a critical component of the relationship between Belarus and Russia. The northern branch of Russia’s Druzhba (Friendship) pipeline passes through Belarus, delivering crude oil to a Latvian Baltic seaport as well as to Germany and Poland. The Northern Lights pipelines carry natural gas to Europe, the volume of which fluctuated during this time period: 7–9 billion cubic meters in 2004 and 14 billion cubic meters in 2006, for example.54 Germany imported more oil from Russia than from any other foreign producer, accounting for about one-third of Germany’s foreign oil supply. Poland counted on Russian oil even more substantially, comprising about one-half of its imports.55 In addition, Germany is Russia’s number one importer of its natural gas, accounting for about 1.3 trillion cubic feet. Italy follows with 824 billion cubic feet. For many European states, Russian natural gas provided between 40 and 100 percent of domestic consumption.56 Both Russia and Belarus relied heavily on these pipelines: Russia needed to export its fuel, and Belarus needed the transit fees. The pipelines thus economically cemented Belarus to Russia, making Belarus a primary prospective Joiner for Russia. Kazakhstan’s Pipelines: Economic Benefits through Access With vast oil and natural gas reserves, Kazakhstan’s situation appeared to vary significantly with that of energy-deficient Belarus. Low-cost fuel was hardly a concern for Kazakhstan. However, the two states were more kindred spirits than natural resource endowments suggest. Like Belarus, Kazakhstan needed Russia, not for its fuel, but for its export pipelines. Without these critical conduits, the Central Asian state had no avenue for its volumes of oil and natural gas, its key to hard-currency earnings. Oil Fields The Caspian shelf’s rich oil and gas reserves made fossil fuels Kazakhstan’s most exciting economic sector, bringing in billions of dollars in FDI since Kazakhstan’s independence in 1991. These investments went toward developing and exporting fossil fuels from four fields: Tengiz, Uzen, Karachaganak, and Kashagan. The Tengiz and Uzen fields are located off the Caspian Sea; Karachaganak is in the northwest, near the Russian border; and Kashagan is in the shallows of the Caspian Sea.

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Discovered in 1979 and estimated to contain 6–9 billion barrels of oil, the Tengiz field was one of the most significant oil discoveries of the previous 30 years, competing with the biggest fields in the world.57 In 1993, the U.S. oil company Chevron created with Kazakhstan a $20 billion joint venture called TengizChevroil. New partners subsequently joined the project, giving Chevron a 50 percent share; ExxonMobil, 25 percent; KazMunaiGas, 20 percent; and LukArco, a Russian-British consortium, 5 percent.58 The project has played a critical role in Kazakhstan’s economy. In 2004, TengizChevroil extracted 13.6 million tons of crude oil.59 Chevron put an estimated $3.5 billion into the project and committed to invest another $4 billion to enlarge production and increase exports. As part of the expansion, Chevron pledged in 2006 to reconstruct and enhance the state’s railway system, a benefit that would extend well beyond the oil industry.60 Kazakhstan’s second largest field, Uzen, was discovered in 1959 and began producing oil in 1965. Experts estimate its reserves at 8.03 billion barrels. Due to operational problems associated with Uzen’s reservoirs and the unusually high paraffin content in the oil, the field has not attracted private foreign investments. However, the World Bank issued substantial loans with the goal of making the field commercially viable.61 Organizational difficulties and collapsing markets in the 1990s have delayed the project. Kazakhstan’s third large field, Karachaganak, has oil reserves totaling an estimated 1.2 billion tons and is also a major natural gas and gas condensate reservoir.62 In 1997, the Kazakh government signed an agreement allowing several investors to develop the field over a 40-year period. As of 2001, the production sharing accord gave British BG and Italian Eni shares of 32.5 percent each; Texaco, a 20 percent share; and LukOil, the remaining 15 percent.63 The Karachaganak Processing Center opened in 2003, specifically to treat the field’s oil and natural gas. It can process up to 96 million barrels of oil and 14.5 billion cubic meters of natural gas per year.64 The fourth field, Kashagan, dwarfs the other three. Although Soviet geologists in the 1980s discovered Kashagan, which is in the shallows of the Caspian Sea, Moscow did not significantly develop the region, preferring to focus on Russia. After the Soviet Union dissolved, Nazarbayev invited an array of Western companies to explore the area, including Agip/Eni of Italy, British Gas, British Petroleum, Mobil (US), Royal Dutch/Shell, Statoil (Norway), and Total (France). Agip/Eni now operates the consortium on behalf of itself, Kazakhstan, and five other companies.65 Estimates for completing

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production costs range from $31 billion to $50 billion, with expected oil production starting in 2010.66 Kazakhstan’s energy minister predicts that $60 billion would flow to the state during Kashagan’s 40-year production life.67 Despite these significant oil fields and the FDI they have attracted, Kazakhstan (and the companies) will not earn any money if it cannot export the fuel to states that can pay for energy with hard-currency, as opposed to barter as most of the former Soviet states must do. The pipelines owned by Russia are thus critical to Kazakhstan’s economic success. Natural Gas Reserves Once a minor player in the natural gas market, Kazakhstan under Nazarbayev has become a significant exporter. With about 1.35 trillion cubic meters of gas, Karachaganak rivals the world’s largest natural gas fields. As of 2004, Karachaganak accounted for more than 40 percent of the state’s natural gas reserves.68 Located in the northwest, it is an extension of Russia’s Orenburg field. The primary purchaser of the gas was KazRosGaz, jointly owned by Kazakhstan’s gas company and Gazprom, each with 50 percent shares. All of the gas was supplied to Orenberg, a processing plant owned by Gazprom, with most of the refined product then sold to Russians.69 The state plans to increase natural gas production to more than 40 billion cubic meters by 2010. Of that amount, 15 billion cubic meters would be exported, more than double the figures for 2005. Export prices have been $31 per thousand cubic meters, a bargain compared to international market prices at around $220–$250 per thousand cubic meters.70 Oil Refineries Refineries and the pipelines that connect fields to refineries are also RSAs that enable Russia to give Kazakhstan significant economic benefits. Kazakh crude oil destined for export flowed first to Atyrau, located in the northern Caspian region where it was blended with other Kazakh crude oil. It then flowed northward to Samara, where it was combined with Russian crude. This blend, called Ural Export Blend, then streamed either south again to Russia’s Novorossiysk, or west to Latvia for export via the Ventspils port.71 Furthermore, too far from Kazakhstan’s oil fields and population centers to economically refine Kazakh oil, the state’s largest refineries—Pavlodar and Shymkent—processed Russian crude.72 Siberian crude was delivered via a north-south pipeline built during the Soviet period, when these borders made little difference. Other

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Soviet vestiges that further knotted the relationship included Russia’s Samara refinery that processed Kazakh crude, and Kazakhstan’s reliance on Russia to process its natural gas. The vast Karachaganak field’s natural gas is processed at the Russian-owned Orenburg plant. In the 1990s, Orenburg accepted “only a fraction” of the field’s potential output.73 As in the case of Belarus, these RSAs provided critical structural incentives for Kazakhstan to join Russia in its integrationist plans regardless of the plutocratic structure. Without Russian pipeline and refinery access, as well as crude oil to fill its own inconveniently placed refineries, Kazakhstan would have been shut out of the international economic market, its most lucrative asset made a hostage to Russian whims. Acting as a major advocate for continued integration, Nazarbayev was rewarded with access to Russian pipelines and fuel for refining. (See Figure 6.1 on next page).

Condition 5: No Optional Partners Can Match Immediate Benefits The economic benefits that Russia offered Belarus and Kazakhstan were both critical to their economies and irreplaceable by any other integration option, including global integration. Belarus, in particular, would be hard pressed to end its dependence on natural gas and/ or find another state willing to give it fuel at Russian-level discounts. In the long run, with significant international loans and other types of foreign aid, Belarus could conceivably sufficiently reduce its natural gas dependence—perhaps through nuclear energy plants, as the Baltic states have done—so that it can afford to pay world market prices. In the short run, however, the risks were simply too high for the Belarusian leaders to reject the Russian integration accords. Kazakhstan worked to reduce its dependence on Russia’s pipelines by courting a variety of international partners to help it build pipelines, as discussed below. Still, its geographic proximity to Russia made it difficult to avoid Russia altogether. Option 1: European Union as Optional Agent for Belarus The EU is often held up as a superior agent for Belarus. While Belarus is currently not a viable candidate—it is neither economically nor politically liberal—Western states have assumed that Belarus would benefit from moving away from Russia and eventually joining the EU. In a recent document, titled “What the European Union Could

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Figure 6.1 Map of Russian Pipelines.

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Bring to Belarus,” the European Commission argues that Belarusians should join their “zone of prosperity, stability and security.”74 The EU is a superior option in one of the three areas noted by plutocratic delegation theory—reputation—but is inferior in compensation and delegation. Compensation The EU cannot replace the RSAs—pipelines—and the low-cost natural gas that flows through them, on which Belarus is dependent. The EU instead offers long-term, somewhat uncertain gains, acquired through trade in a large market space. The EU also offers development funds, but it is unclear how these could really substitute for the approximately $250 million annual discount Russia has historically offered Belarus through low-priced gas. Delegation Joining the EU would require Belarus to delegate substantially more authority over substantially more policies than the Russian accords do. The EU’s supranational institutions have significant policy-making authority over a wide variety of economic and social policies, and increasingly foreign affairs. The intergovernmental European Council and other EU institutions delegate significant agenda-setting, monitoring, and implementation authority to the EU bureaucracies. While the CIS and EAEC accords purport to cover a wide-range of economic issues, including creating a centralized transportation and energy system, few of these have actually been implemented. The Eurasian monetary union—which follows plutocratic principles by requiring members to delegate monetary policy to the Russian Central Bank—has not been implemented; the euro—which requires delegating monetary policy to the supranational European Central Bank—has. Before his state could even enter the EU, Belarusian President Lukashenka would have to end his authoritarian rule, placing himself at risk of losing his job. Under the logic of political survival, this was not a risk worth taking. Furthermore, the EU’s requirements for market transparency and free trade are inconsistent with Belarusian policies. The high political hurdles in exchange for uncertain gains were simply not worth it. Furthermore, once an EU member, Belarus would have virtually no control over the EU as an agent. Despite the many ways scholars argue that member states can control their agents, an individual state—particularly a late Joiner like Belarus—has virtually no control over the supranational structures of the EU.

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In contrast, despite the unequal relationship, Belarus has some control over Russia due to economic interdependencies. Russia needs access to the pipelines traversing Belarus, moving oil and gas to Europe. Belarus owns these pipelines and charges Russia fees to use them, which are generally kept on the books and reimbursed through the cost of natural gas that Belarus consumes. Interdependence gives both states the option of taking hostages, threatening to harm the partner in one arena should it threaten harm in another. For example, if Russian President Vladimir Putin threatens to cut off cheap energy to Belarus, Lukashenka can threaten to stop fuel from flowing through Belarus’s pipelines or to raise dramatically transit fees. This interdependence has allowed Belarus to push back against Russia when its leaders have demanded that Belarus delegate more than Lukashenka cared to. Recognizing this interdependence, Lukashenka proclaimed, “God has blessed Russia with resource wealth. Russia uses these resources today as leverage in world policy. God has blessed us with other resources: our geographic location as a transit country in Europe. This resource may be less valuable, but we will use it.”75 Russia often exerted its pressure through the giant and powerful hand of the state-owned Gazprom. During the 15-year period following the Soviet collapse, Gazprom has been one of the world’s ten largest companies—controlling about 25 percent of all known gas reserves—and the largest gas producer. Several times between 2002 and 2006, Gazprom used its muscle to try and force Lukashenka to surrender control of the Belarusian company that owns the natural gas pipelines carrying Russian fuel to Europe. These incidents—really one ongoing incident—demonstrate the power of mutual hostage-taking as a means of keeping in check an opportunistic agent. In November 2002, Belarus exceeded the gas imports that Russia allowed under a prior agreement. In retaliation, Gazprom cut supplies by 50 percent, a dramatic reduction for a state that depends wholly on Russian imports. The Belarusian government subsequently paid Gazprom $11 million of the $282 million it owed, resulting in a slight increase in supplies a few days later. Several days passed before the Prime Ministers of Belarus and Russia met to discuss the dire situation. Following the meeting, the leaders announced that once again Beltransgaz and Gazprom would form a joint venture, an action obviously linked to resolving Belarus’s debts. The two sides had signed an agreement to merge the companies in July 2002, vowing to seal the deal within one year. In November, the

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Belarusian Prime Minister promised to put before Belarus’s legislature a bill calling for the joint venture’s creation no later than July 2003, one year past the original deadline. About one week later, both the lower and upper houses, the latter unanimously and without deliberation, removed the legal ban on privatizing Belarus’s natural gas pipelines, paving the way for the joint venture. Selling off his state’s major bargaining asset would seem a poor decision on Lukashenka’s part. The deal was apparently designed to relieve Russian pressure. The compact would grant Gazprom 25–30 percent of Beltransgaz as payment for Belarus’s debts to the gas company.76 The deadline passed without action. As the end of 2003 neared, the Russian Prime Minister threatened Belarus with an ultimatum: push through the joint venture, or Gazprom would start charging Belarus full market prices for natural gas. If carried out, the Russian threat would significantly cripple Belarusian companies and literally leave Belarusians in the cold.77 Rather than buckling to the neighboring giant, Belarusian officials announced on December 30, 2003, that they refused to discuss a joint venture. The following week, as the new year dawned, Beltransgaz reported that its value stood at about $5 billion. The Russians scoffed at this figure. In the Russian assessment, $600 million more accurately reflected the pipeline company’s “book value.”78 The competition between the states heated up; classic mutual hostage taking ensued. Belarus stated it was considering raising transit fees for Russian oil flowing through Belarusian pipelines to Europe. Ukraine had been charging 73 cents per 100 kilometers, while Belarus offered the low fee of only 51 cents. Belarus now threatened to match Ukraine’s higher rates. In response, Russia vowed to reduce its quotas for Belarusian oil products. Hoping for reconciliation, the two states’ Prime Ministers met in Moscow. Binding together two issue areas, the leaders discussed integrating their gas industries and their currencies. They made little progress.79 Unable to seal a deal, Gazprom stopped supplying Belarus on January 20, 2004. Gazprom offered to resume the flow if Belarus agreed to jump its payments from $30 to $80 per thousand cubic meters, a 167 percent increase in fees. Lukashenka refused. With their states’ relationship in tatters over these critical RSAs, the two presidents sat down at the bargaining table. Though media reports do not indicate what transpired at the meeting, the outcome was quickly announced. On January 23, just three days after Gazprom’s audacious act, the gas again began to flow. Putin subsequently decreed that the Russian government would give Belarus a gas credit. Though his decree

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counteracted existing law, the Russian President prevailed.80 These mutual hostage-taking incidents occurred several more times, each time ending in stalemates. Lukashenka may not be able to play this card forever, but during this period his use of the pipeline hostage helped serve as a check against assertive Russian actions.81 This incident demonstrates that Belarus has significantly more leeway under its current delegation relationship than many have assumed. This fact, added to the significantly more extensive delegation required under the EU suggests that the European option is inferior in this aspect. Reputation On the third factor to consider—reputation—the EU is a superior option to Russia. While the above incident shows Belarus has more levers to control its agent than has often been recognized, it also demonstrates the Russia can be a poor agent, acting opportunistically and therefore raising doubts about the long-term wisdom of staying in its economic integration accords. As discussed under plutocratic delegation theory, one of the great risks with entering a plutocratic deep integration structure is that it may evolve into full political integration in the form of an imperial system. As an intergovernmental and supranational organization, the EU has too many principal controls on it for it to behave as opportunistically as Russia can and did. The EU has certainly never been responsible for cutting fuel to poor states in the middle of winter. While the EU agents might “slip and shirk,” they do not act aggressively toward their principals. Option 2: Global Integration Another option open to Belarus was global integration. By reforming its economy, Belarus could attract FDI, along with bilateral and multilateral aid. However, the Belarusian government’s unwillingness to reform the economy—from a centrally planned to a market economy—has made it nearly impossible for international banks to continue their loans to Belarus. In March 1995, the IMF announced that it was postponing a $250 million standby loan because of the state’s failure to pass necessary reforms. Throughout 1995, the IMF and Belarus flirted with each other, moving closer and then pulling apart again.82 By the end of the year, however, it was clear that aid to Belarus would drop off dramatically. Foreign aid and financial flows from international organizations

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slowed to a trickle. Between 1995 and 1998, Belarus received only $42 million in concessional net financial flows.83 Under the EU, Belarus would have to delegate to multiple supranational structures. While delegating to Russia had its disadvantages, the immediate economic benefits of low-cost natural gas combined with minimal policy changes made the Russian accords the best option for Belarus. Finally, the Belarusian government’s unwillingness to reform the economy made it nearly impossible for international banks to make loans to Belarus that might have served as a way to alleviate its economic crisis. Kazakhstan’s Option of Global Integration: Making Progress More than the other Joining states in this book, Kazakhstan had a real opportunity to seek optional partners, which it did. However, as in the case of Belarus, the benefits delivered through RSAs could not be matched by outside investors. While scholars and policy makers have sometimes portrayed postSoviet leaders’ choices as either Russia or the West, Nazarbayev from the beginning saw this as a false choice, a relic of Cold War thinking. Even pre-dating his state’s independence, he consistently balanced his pro-Russian integration policy with an active program to attract significant levels of FDI. His efforts paid handsomely, as billions of dollars from a variety of states and their corporations flowed into Kazakhstan. As shown in table 6.2, the Eurasian states received varying levels of FDI. Of the 15 former Soviet states, Kazakhstan earned more FDI every year than any state except Russia. It averaged $1.652 billion per year between 1992 and 2005; Russia averaged $4.723 billion in the same period. Kazakhstan’s achievement stands out even more when one considers the difference in average GDP over the same period; Russia’s economy was more than ten times larger than Kazakhstan’s ($272.6 billion compared with $20.4 billion). Accounting for population differences, the Central Asian state far outpaced even Russia in 2004, a year in which both states nearly doubled the prior year’s figures: FDI per capita for Russia was $108, compared with $274 for Kazakhstan. As Table 6.2 demonstrates, Belarus and Turkmenistan, in contrast, were unable or unwilling to attract barely any investments. The vast majority of Kazakhstan’s FDI came from oil and gas companies developing fields and producing energy for export. These were mostly from the industrialized states—Japan, several European states, and the U.S.—but also included China, Oman, and various others, further demonstrating Nazarbayev’s multivector strategy. The primary goals

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Table 6.2 FDI, net inflows, 1992–2006 (current US$ million) 1992 1994 1996 1998 2000 2002 2003 Russia Kazakhstan Belarus Turkmenistan

2004 2005

2006

1,161

690 2,579 2,761 2,714 3,461

7,958 15,444 12,886 30,827

100 .. ..

660 1,137 1,151 1,282 2,590 11 105 203 119 247 103 108 62 131 100

2,092 172 100

4,014 169 -15

1,975 305 62

6,143 354 731

Source: World Bank, World Development Indicators,2009, http://devdata.worldbank.org/ dataonline/

of this policy were to develop pipelines that bypassed Russia, made Russia a minor player instead of the majority owner, and increased carrying capacity with Russian-owned pipelines so as to reduce Russia’s leverage or interest in imposing export quotas. Many of the foreign companies investing in Kazakhstan became advocates for multiple export routes, which they also viewed as enhancing export reliability and thus the profits on their investments. Easing Dependence on Russia Over the 15-year post-Soviet period, Nazarbayev successfully brokered numerous pipeline deals, easing his dependency on Russia. The first and most important of these was the Caspian Pipeline Consortium (CPC), originally launched in 1992 by Russia, Kazakhstan, and Oman. In 1996, Kazakhstan’s Minister of Oil and Gas listed the pipeline as a top priority.84 Construction began soon after, and the pipeline became operational in 2001. Eleven entities jointly owned the CPC: the Russian Federation (24 percent), Kazakhstan (19 percent), and Oman (7 percent) collectively owned 50 percent; eight oil and gas companies owned the remaining half with the biggest shareholders being Chevron (15 percent) and LukArco (12.5 percent).85 Investors put a combined $2.65 billion into the pipeline.86 Russia contributed some of the old Soviet pipelines and pumping stations on its territory, which it valued at $295 million and for which it receives annual reimbursement payments.87 The nearly 1,000-mile CPC begins at the Tengiz oil field, heads north briefly before turning to the west and south where it runs through southern Russia, terminating at the Black Sea port of Novorossiysk. TengizChevroil has exported all of the field’s annual 12–13 million tons of oil using the CPC. The company expected to significantly increase exports in 2007, taking further advantage of pipeline’s carrying capacity of 35 million tons.88 The consortium running the Karachaganak field

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built a 398-mile pipeline, going south to the northern Caspian city of Atyrau, where it then connects to the CPC.89 While the CPC offered an alternative export route, it also included Russia as a significant partner, raising questions about how much the pipeline reduced Kazakhstan’s dependence on Russia. While Kazakhstan’s geography and massive, high-cost RSAs prevented it from completely shaking the Russian connection, the pipeline’s carrying capacity greatly expanded Kazakhstan’s ability to export as much crude oil as it can produce. With Russia having a financial stake in transit fees, it further had an incentive to ensure that exports continued to grow. The days of 1996 when Russia would block Kazakhstan’s exports in order to make room for its own fuel no longer existed. While the CPC was one of Nazarbayev’s most critical achievements, other export routes have similarly helped relieve dependence on Russia. Once labeled “the deal of the century,” Azerbaijan signed a $7.5 billion deal with the Azerbaijan International Oil Company (AIOC) consortium in 1993. The AIOC comprised 12 oil companies from Britain, Japan, Norway, Russia, Saudi Arabia, Turkey, and the United States.90 In exchange for access to Azerbaijan’s fields, the AIOC members agreed to help the government develop export routes, preferably avoiding Russian soil.91 In 1996, Nazarbayev also began lobbying for pipelines that would link Kazakhstan to the Black Sea and Turkey.92 The proposed pipeline from Baku to Turkey’s Mediterranean port of Ceyhan was expected to cost an estimated $2 billion to construct, with an annual throughput capacity of 45 million tons. The line had the advantage of being the shortest and most economical route to the Mediterranean for Caspian oil. Furthermore, it would increase export options for Kazakhstan as well as Azerbaijan.93 Agreements were signed, feasibility studies done, searches for financing completed. In October 1998, the AIOC announced that it would build a new pipeline connecting the three cities of Baku (Azerbaijan), Tblisi (Georgia), and Ceyhan (Turkey); the triad’s initials gave the pipeline its name: the BTC. U.S. support for this route over options that included Russian territory—coupled with a group endorsement from the presidents of Azerbaijan, Georgia, Kazakhstan, Turkey, and Uzbekistan—clinched the deal.94 In 1999, the presidents of the three connecting states signed accords constituting the legal framework for constructing and operating the pipeline, while Nazarbayev signed a declaration pledging to export oil via the pipeline.95 After a ten-year construction period and numerous cost overruns, the BTC opened in 2006 just as oil prices hit their all time

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high. Running for 1,100 miles, specialists predicted the pipeline would reach a peak capacity of 1 million barrels a day in 2008.96 Nazarbayev also successfully sought alternative export routes for his state’s natural gas. The BTE (Baku-Tbilisi-Erzerum) gas pipeline partially parallels the BTC and was expected to begin operating by the end of 2006.97 Putin’s decisions to repeatedly cut off gas supplies to Ukraine and Belarus during freezing winter temperatures pushed European states to look for non-Russian options to meet their increasing energy requirements. At the end of the 15-year period, Kazakhstan stood well poised to take advantage of these demands. One of the state’s most dramatic successes during this period was the opening of an energy pipeline to China. In 1996, Kazakhstan announced that it was seriously considering a route to China and possibly the Pacific Ocean, an idea at which many scoffed.98 The following year, the two states signed an estimated $9.5 billion deal on oil field development, shipments, and two pipelines. The China National Oil Corporation would develop two fields in western Kazakhstan—Uzen and Aktyubinsk—and build a 3,000 kilometer pipeline to China’s western border and a 250 kilometer pipeline to the border with Turkmenistan, both of which the leaders predicted would open by 2002.99 Many suspected this grandiose plan was “likely to be shelved.”100 Defying the skeptics, in July 2006, China and Kazakhstan began pumping oil through a massive pipeline connecting their states, marking the first time a pipeline has connected China to foreign oil fields.101 China expected to import about 10 million tons through the pipeline over the subsequent year.102 Whose oil will fill the pipeline remained a point of speculation and contention. Officials predicted each of the following scenarios: all Russian oil, 50 percent Russian and 50 percent Kazakh, and all Kazakh. Interestingly, it was Russia’s transport company, Transneft, who stated categorically that no Russian oil would enter the Kazakh-China pipeline.103 As the state leaders anticipated Kazakh oil flowing to China for the first time, they began discussing a parallel pipeline that would feed natural gas to China.104 The successful oil collaboration no doubt buoyed hopes that more energy cooperation would be possible. Nazarbayev’s multivector strategy and pro-integrationist policy with Russia paid off handsomely. The proof is largely in Kazakhstan’s dramatic increase in oil exports nearly every year since independence. In 1992, the state exported 125,000 barrels a day. With steady annual increases—except in the early years when Russia limited quantities— exports climbed to 1.07 million barrels a day by 2005, nearly ten times the earlier levels.

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Despite Kazakhstan’s progress in trying to reduce its dependence by courting alternatives to the Russian pipelines, these RSAs have continued to keep Kazakhstan in the plutocratic accords. However, the pipelines may have bought Kazakhstan some breathing room. While inconclusive based on available information, Russia may have given a green light to Kazakhstan to change only those tariffs that would not negatively affect Nazarbayev’s political coalition. If so, this would further support the plutocratic delegation prediction that states will sweeten the deal if they believe a Joining member may have superior options.

Turkmenistan: No Delegation As of 2009, Turkmenistan had not joined the Russian-designed customs union. Given Turkmenistan’s resemblance to Kazakhstan, this is puzzling. Both states began their independence with the blessing—or curse—of surplus natural resources as well as underdeveloped fossil fuel fields that would presumably attract significant external financing from developed states and their corporations.105 Export pipelines connected both states to Russia. Authoritarian rulers served for the entire 15-year postindependence period that I analyze here. Both governed majority Muslim populations and heralded their states’ unique ethnic identities. Yet, in sharp contrast to Kazakhstan’s Nazarbayev, Turkmenistan’s President Saparmurat Niyazov resisted Russian integration almost as vehemently as the European-oriented Baltic states. Why, despite all their similarities, did Turkmenistan choose a different path from Kazakhstan? Condition 5: Expected Economic Gains from Superior Partners Turkmenistan’s leader believed that his resource endowments combined with a better geographic position than Kazakhstan’s gave him options superior to integration with Russia. Like Kazakhstan at the start of its independence, Turkmenistan relied exclusively on Russian pipelines for exporting its primary resource and hard currency earner; in Turkmenistan’s case, natural gas. As of 2006, the state had about 74 trillion cubic feet in reserves, amounting to 1.2 percent of the world’s total and making it the state with the fourteenth largest natural gas reserves.106 In the 1990’s, excited experts calculated substantially higher levels, claiming the state held beneath its land and seas the world’s third largest gas reserves—behind only Russia and Iran—with estimates ranging as high as 535 trillion cubic feet.107

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Even at the revised lower levels, Turkmenistan’s 5 million citizens and its local industries required only a fraction of the natural gas the state produced. In 2002, for example, the state-owned energy companies Turkmengas and Turkmenneft produced 71 billion cubic meters of gas; of that total, Turkmen citizens and industries used only 15 billion cubic meters, leaving nearly 80 percent for export.108 Turkmenistan’s abundant supply appeared highly enviable and surely gave the President and his citizens great hopes for prosperity as an autonomous state. In 1995, the United States predicted that natural gas would be the fastest growing component of primary energy consumption worldwide. Consumption was expected to increase by about 2 percent annually between 1990 and 2010; the other fossil fuels would grow at slower rates (1.5 percent for oil and 1.3 percent for coal). Natural gas was anticipated to account for 23 percent of total energy consumption by 2010, while coal would decline from 27 to 25 percent. At this rate, worldwide natural gas consumption would increase a total of 47 percent between 1990 and 2010. Fast growing (non-OECD) Asia would account for a great portion of this, with its demand steeply rising by 140 percent over the 20-year period. Turkmenistan appeared to be gaining independence just in time for a boom in demand for its sole export.109 With time, the predictions became even more encouraging. By 2005, the expected annual growth rate for natural gas consumption was 2.3 percent (up from 2 percent) through 2025. The bulk of the demand was expected to come from the former Communist states and the Asian emerging economies. Between 2002 and 2025, these two regions would increase consumption by a projected 63 percent. Cash-rich Western Europe would increase its dependence on imported gas, rising from about one-third of total consumption to a projected 40 percent in 2015 and 50 percent in 2025.110 Outstripping Europe, China would account for the greatest growth, rising by 7.8 percent annually, leading to a demand for 6.5 trillion cubic feet in 2025.111 Given Turkmenistan’s proven and unproven reserves and relative proximity to both the Asian and European markets, Niyazov could reasonably assume that his state was well positioned to capitalize on this growth market. Critical to his success, Niyazov must have understood, was increasing the state’s output and, more importantly, finding export routes that could accommodate the growth. Since Russia was the number one producer and exporter of natural gas, with reserves estimated at an astounding 1,700 trillion cubic feet, it would be directly competing with Turkmenistan for export markets for the foreseeable future.

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However, Turkmenistan was at the mercy of Gazprom. The giant gas company owned the pipelines that transported Turkmenistan’s fuel northward through Kazakhstan, into Russia, and then west to Ukraine, the state through which about 80 percent of Russia’s natural gas exports passed. Russia and Ukraine accounted for virtually all of the Central Asian state’s export product. Because Russia’s own natural gas competed for space in the pipelines, if Gazprom’s capacity could not handle all available exports, the Russian product would be favored over that of Turkmenistan. Furthermore, Russia used Turkmenistan’s cheap gas to subsidize Russia’s own gas exports to Europe. Integrating with Russia might therefore bring significant and immediate economic benefits of lower transit fees, guaranteed export routes, and a more legalized system for negotiating any future prices for natural gas purchases and transit. With this economic connection—not unlike Nazarbayev’s in Kazakhstan—Niyazov had strong incentives to sign Russia’s plutocratic customs union. Yet, he initially refused to join even the CIS’ intergovernmental accords. Russia as Unreliable Agent Opportunistic behavior in the early 1990s may have persuaded Niyazov that Russia would play tough even if he became a loyal integrationist. In May of 1993, Niyazov was the only leader from a CIS member state to refuse to sign the Economic Union accord, a formal structure that Yeltsin had designed and actively pushed.112 Niyazov’s refusal came at a time when the Russian President was locked in a bitter and aggressive battle with the Duma, members of each government branch fighting for their legitimacy. This struggle made the success of the CIS and related accords critical for demonstrating Yeltsin’s ability to retain Russia’s role as a great power among the other former Soviet states. The Russian President could not have appreciated Niyazov’s intransigence. Yeltsin had a strong hand that he proved willing to play. In 1993, Russia exported through its pipelines 11 billion cubic meters of Turkmenistan’s gas to European states, where the customers paid in hard currency. Most CIS states, in contrast, were already defaulting on payments. These defaults had led Niyazov to dramatic actions—which Russia later used itself—almost immediately following independence. In March 1992, Niyazov cut off gas exports to Ukraine after Turkmenistan demanded world market prices of $70–100 per cubic feet, a nearly ten-fold increase over previous prices, and Ukraine had

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halted in-kind payments of food and manufactured goods in protest of the demand.113 Turkmenistan relied on Russia both to deliver its gas to Europe and to collect payments. During this face-off with Ukraine, Russia did not reimburse Turkmenistan for two months of exported gas, worth about $185 million, and then informed Niyazov it would transport Turkmenistan’s gas only to the former Soviet republics and not to Europe. This was a major blow to Turkmenistan, which was already owed about $1.5 billion for natural gas it had exported to Azerbaijan, Armenia, Georgia, Kazakhstan, Ukraine, and Uzbekistan.114 Under economic pressure, Niyazov finally joined Russia’s Economic Union at the December 1993 CIS Summit.115 The sequencing and timing suggest that Niyazov may have been promised increased export opportunities if he signed the agreement. Or he may simply have hoped for such favors. Either way, his decision to join these structures failed to bring improved export markets or additional payments. Russia continued to block Turkmenistan’s exports to Europe, forcing it to send only to the poor CIS states. When Russia presented the CIS Free Trade Area accord the following year, Niyazov did not sign. Adding to Russia’s uncooperative behavior, Niyazov believed that he could court and win other partners and thereby bypass Russia. There is substantial evidence that no matter what he had done, no matter how many integration accords he had signed, Russia was not going to open up the pipelines to Europe as it had done in the first year of independence. The one time that Niyazov did sign a Russiandesigned integration accord (in 1993), Russia did not alter its pipeline policy. Russia had quickly learned that it could use its pipelines and fuel exports to leverage others and was unlikely to make concessions to Turkmenistan. Furthermore, the cheap gas from Turkmenistan was helping fuel Russia’s assertive pipeline diplomacy with other states. Unlike in Kazakhstan’s case, Turkmenistan’s natural gas competed directly with Russia’s exports. Finally, unlike Kazakhstan and Belarus, Turkmenistan did not share a border with Russia. Those states that shared a border with Russia had economies much more closely intertwined than the distant states. Turkmenistan was quite far from Russia, with a long Kazakh border separating the two states. Because of this distance, Russia’s gains from economically integrating with Turkmenistan were lower than with bordering states. When Russia switched to plutocratic governance structures, Turkmenistan did not make its top list of candidates for integration. After Yeltsin pushed Niyazov into signing the 1993 accord, there is no evidence that Russia again attempted to

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bring Turkmenistan into its integration fold. Similarly, Turkmenistan could not expect the same standard economic payoffs from a customs union that Belarus and Kazakhstan might have received. In this light, Niyazov’s decision to stay clear of Russian-led accords was a rational strategy. Belief in Superior Options: Comes up Empty-Handed Despite the economic and political rationality of his strategy, Niyazov’s plan did not succeed. He chose to focus on two optional partners: fellow Muslim states and Western energy companies. Unlike Kazakhstan, Turkmenistan is embedded in a Muslim neighborhood. If Niyazov wanted to disassociate with the recent past—a past that bound his state to a European Slavic state—he could look south toward Iran, Pakistan, and the Arabian Sea beyond them. From this vantage point, even the promising Indian import market was within reach. Furthermore, Niyazov could court Western and other international investors eager to capitalize on his state’s resource wealth. With corporate executives and news reporters flooding his state, many of whom pumped up the estimated value of Turkmenistan’s gas reserves, Niyazov was on solid foundation in making this assumption. The fact that these alternatives did not pan out before his death in 2006 should not conceal the promising landscape Niyazov saw before him at the dawn of independence. Option 1: The Middle East Niyazov’s actions and speeches support the idea that he envisioned his state’s future as enmeshed in the Middle East and among the Asian states, rather than as part of the former Soviet Union. In addition, those states immediately welcomed their new neighbor, much as the Europeans did the former Communist states on that continent. A Chinese delegation was the first to visit, arriving on January 7, 1992. Three days later the two states had signed an accord on trade and other economic issues and Niyazov had accepted an official invitation to visit China. On January 17, Niyazov celebrated the opening of the border with Iran, for the first time in 70 years. Iran became the first state to open an embassy in Turkmenistan. By the last days of February, Niyazov had entertained delegations from China, Iran, Saudi Arabia, Kuwait, and Turkey.116 He had officially applied for membership in the Organization of the Islamic Conference, and the Economic Cooperation Organization, which included regional Muslim members Turkey, Iran, and Pakistan.117 Rather than

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eschewing all alliances, he eagerly aligned himself with other Muslim states and their organizations. The President’s neutrality policy was apparently not directed at Muslims, only at Moscow. Iran was to be a key player in Niyazov’s strategy. During the course of his 15-year presidency, Niyazov pursued six pipeline proposals, three of which involved Iran. By February in Turkmenistan’s first year of independence, Iran had agreed to fund a pipeline to Turkey.118 In 1994, Niyazov announced that Iran would build a TurkmenistanIran-Turkey-Bulgaria gas pipeline. The pipeline was expected to extend 4,000 kilometers with an initial capacity of 15 billion cubic meters annually, later to be expanded to 28 billion cubic meters. The partners estimated the cost at $8 billion, with Iran financing $3.5 billion to start construction. The United States vigorously opposed the concept. In 1995, President Bill Clinton issued an executive order, which President George W. Bush extended in March 2004, prohibiting U.S. companies and their foreign subsidiaries from conducting business with Iran. Furthermore, the U.S. Iran-Libya Sanctions Act of 1996 imposed mandatory sanctions on foreign companies that invested more than $20 million per year in Iranian oil and natural gas sectors.119 The project never materialized.120 Turkmenistan and Iran attempted to resurrect the project in 1998.121 The proposed pipeline would go south into Iran and then west to Turkey where it could reach worldwide markets. The United States again immediately opposed this idea. Again, no progress was made. A rather modest proposal did finally reach fruition. In 1997, Turkmenistan and Iran completed a short connecting export pipeline between their two states. The $190 million Korpeje-Kord Kuy pipeline included a 25-year contract under which Iran would purchase annually between 5 and 6 billion cubic meters. With this deal, Turkmenistan became the first Central Asian state to bypass Russia in exporting natural gas via a pipeline.122 Option 2: Western Energy Companies While the Iranian initiatives floundered under U.S. opposition, another proposal eventually gained momentum after several starts and stops. Until 1997, Unocal (which merged with Chevron in 2005) was a major player in Turkmenistan. The American company led the multinational Central Asia Gas Pipeline consortium, designed to evaluate the feasibility of a pipeline that would connect Turkmenistan with Afghanistan and Pakistan, the so-called TAP pipeline named after the participating states. Expected to have an annual carrying capacity of 33 billion cubic meters of gas, the pipeline would eventually connect

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to the increasingly energy-thirsty Indian market.123 Despite the promising prospects, Unocal suspended operations in 1998.124 When the United States ousted the Taliban from Afghanistan in 2001, the states began again discussing TAP. In July 2003, however, the Asian Development Bank put the 1,000 mile long project on hold, citing concern about its feasibility, both in terms of the southern route and the projected gas reserve levels.125 The Bank then officially invited India to participate in the venture but the Indian government declined, citing continued conflicts with Pakistan.126 In February 2006, India reversed itself, announcing that it would join the $3.5 billion project.127 Still, Asian Development Bank specialists noted that Turkmenistan would require more producing fields to meet the continued and rising demands of South Asia.128 Yet another project—supported by Exxon, Mitsubishi, and the Chinese National Petroleum Company—called for building a 5,000 mile (8,000 kilometer) pipeline originating in Turkmenistan and running north through Uzbekistan and Kazakhstan, stretching into China and eventually Japan. In 1998, the pipeline was projected to carry annually up to 30 billion cubic meters of gas, to cost $8–11 billion, and to begin operating in 2005.129 The project stalled for years. Meanwhile, the United States, working with Azerbaijan, Georgia, Turkey, and Turkmenistan championed a Trans-Caspian Gas Pipeline that would bypass Russia by going under the Caspian Sea. The 1,200 mile (2,000 kilometer) pipeline would plunge 200–300 meters beneath the Caspian and cost an estimated $2.5 to $3.0 billion. The carrying capacity would increase in stages, beginning with 10 billion cubic meters and ramping up to 30 billion cubic meters.130 In 2000, Turkmenistan withdrew from the project after dismissing numerous proposals and demanding billion dollar financing before the project began.131 With the gas pipeline connecting Azerbaijan to Turkey nearly completed, the United States revived its lobbying efforts for the Trans-Caspian pipeline, which would connect to the Europebound pipeline. Turkmenistan remained uncommitted.132 With the West disenchanted and Iran blocked, Niyazov again directed his attentions to the East. In April 2006, eight months before he died of a heart attack, Niyazov visited President Hu Jintao for the first time in eight years. He arrived with a contract that would tie the two states together via a pipeline stretching to Shanghai and strategically sidestepping Russia. Under the agreement, Niyazov committed his state to deliver to China 30 billion cubic meters of natural gas annually for 30 years. Hu agreed that China would assist

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in constructing the pipeline, scheduled to be completed in 2009. Harkening back to ancient connections, Niyazov colorfully called the pipeline the Great Silk Road of the 21st Century.133 Niyazov’s goal of a significant export route that bypassed Russia was not reached before his death. At the conclusion of the 15-year post-independence period, Turkmenistan had made little progress in reducing its reliance on Russian pipelines.134 Although Niyazov had reason to believe at the time of Turkmenistan’s independence that he could garner sufficient foreign investment to escape Russian domination, he miscalculated his state’s reserves, negotiating complexities, and investor interest and patience for his eccentricities. Platts Energy Economist complained in 2006 that “Niyazov can quite literally decide on one course of action in the morning, but then on quite another course in the afternoon.”135 His focus on Iran did not bear fruit, in large part because any venture involving that state could not obtain funding from the West. The Leader of All Turkmen misunderstood how much Western investors were willing and able to pay and thus imprudently played his hand.

An Alternative Explanation: Clarifying the Role of Nationalism Scholars of the post-Soviet states have sometimes argued that nationalism explains which states have economically integrated with Russia.136 This is a tempting argument, given that the strongly nationalist Baltic states immediately fled the region for European integration, while the Slavic Belarus eagerly signed deep integration accords with Slavic Russia. While the phenomenon and study of nationalism is nothing new,137 scholars have found the former Soviet region a particularly lucrative mine for analyzing levels and types of nationalism.138 In these studies, Belarusians are considered distinctively lacking in nationalistic sentiments.139 Indeed, one of the foremost scholars on the state subtitled his book “the denationalized nation.”140 Lukashenka’s first election (1994) has been cited as evidence that the Belarusians were not strongly nationalistic. To the surprise of nearly all observers, the little known Lukashenka won an impressive 45 percent of the vote. In a run-off, he won 80 percent of the vote, trouncing the former Prime Minister. The two major reform and pro-Western candidates—Zyanon Paznyak and Stanislau Shushkevich—earned only a combined 23 percent of the first vote. Many interpreted the reformers’ resounding defeat as a clear Belarusian preference for an assertive pro-Russian foreign policy.141

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I argue, however, that the election should be read differently. Before and during the election, Lukashenka was most closely associated with his anticorruption campaign, not with a pro-Russian or anti-Western stance. Belarusians were fed up with governmental corruption and lies, which they associated with the Communist regime, and supported the candidate who seemed most likely to address that concern, as well as advocating close economic relations with Russia. Lukashenka’s commitment to end corruption was credible and well known during the campaign. At the time of the election, he chaired a government-sponsored anticorruption commission. He argued that “corruption has paralyzed power.” He vowed to improve the economy and then win a “struggle with corruption and defeat of mafia structures ruling the state.” He contended that “corruption is a threat to the economic and political security of our state. It means the complete decay of the state administration and absolute loss of control over the state economic sector.”142 Once elected, Lukashenka advocated economic reform, not a return to the Soviet economy. He pledged to run a sharply disciplined regime, to turn away from a command economy, to protect private property, and to collaborate with the IMF.143 His ministerial choices connoted a similar path. He appointed a foreign minister known for his pro-Western views (Uladzimir Senka)144 and retained the proreform National Bank chairman Stanislau Bahdankevich, who had earlier announced, “While I’m sitting in this seat, there will be no unification of the monetary systems along the lines proposed by Moscow . . . I shall never agree to put the assets of the National Bank at the disposal of another state.”145 Lukashenka’s career path and public proclamations before the election and his immediate post-election appointments were not strongly pro-Russian. One can conclude, then, that Belarusians were not so much rejecting Belarusian independence and embracing Russia, as supporting a candidate they believed would restore the economy and oust corrupt officials. If Belarusians truly wanted to return to Soviet structures, they would have elected one of the candidates that represented that era, either the Communist Party leader, the chairman of the Agrarian Union, or the former Prime Minister, all of whom had stronger connections to the prior regime and who would most likely have advocated even tighter relations with Russia than Lukashenka had. Belarusian opinion in 2003 further supports the image of a pragmatic selectorate, rather than one driven by a pro-Russian obsession. When an independent Minsk-based institute asked Belarusians to

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decide between Russia or the EU, 47 percent of respondents selected Russia while 36 percent went with Europe. Furthermore, 60 percent supported Belarus becoming a member of the EU.146 Though his warnings were not credible—for all the reasons I stated above, he had no intention of joining the EU—even Lukashenka occasionally threatened to turn to Europe after he had a row with Russia.147

Conclusion The states that joined Russia’s plutocratic economic accords were primarily driven by easily measured, short-term economic benefits that they required due to economic crises in their home states. The leaders did not entertain detailed mathematical calculations to determine their policy choices. Furthermore, they desperately needed benefits that Russian leaders, both Yeltsin and Putin, were willing to concede: low-cost fuel for Belarus and access to export pipelines for Kazakhstan. For these benefits, they were willing to forego some policy-making authority. Whatever fears the new leaders had once had of Russians when they governed the Soviet Union, they put these aside in exchange for economic benefits that would help ensure their political survival. When the new Russia, particularly under President Putin, did act opportunistically, against them individually or against other states, the leaders of Belarus and Kazakhstan fought back as best they could. Belarus’s Lukashenka used the gas export routes he owned as leverage against Russia. Kazakhstan’s Nazarbayev courted numerous other allies to gain much needed investments; to explore, extract, and export oil and natural gas; and to build export pipelines to reduce its dependence on the Russian routes. Nazarbayev played his cards well. By the end of the 15-year period, he had several new pipelines either completed or nearly completed, some that included Russia as a minority partner and others that excluded Russia entirely; some that passed through Russian territory and others that avoided it. Despite these efforts, Kazakhstan still relied on the high volume Russian pipelines to export large quantities of fuel to the rest of the world. Both Belarus and Kazakhstan saw no viable options to Russian integration. Seated in Europe, Belarusians could have theoretically turned to the West instead of the East. Although some have argued that their weak sense of nationalism dictated that they would return to Russia, this cannot be logically substantiated. The Belarusians demonstrated that they were pragmatic when it came to choosing allies. They showed themselves to be neither rabidly pro-Russian nor anti-Russian, as demonstrated in their first and only free presidential

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election where they selected neither the candidates that most represented a return to Russia nor those who advocated European integration. They chose instead an anticorruption candidate. Subsequent opinion polls support the image of a Belarusian selectorate willing to align economically with the state or region most able to provide benefits. At the time of independence, given existing interdependencies and Russia’s low-cost fuel that no European state would or could possibly supply, Russia offered the greatest promise. This suggests that even with a democratic Belarus, the state would not join the EU, as it would almost certainly then lose the benefits of low-cost natural gas. Locked as it was right up against Russia, deeply integrated during the Soviet period, and reliant on Russian export lines, Kazakhstan could not reasonably have expected any better partner than Russia, a point that Nazarbayev recognized immediately as the Soviet Union was breaking up and never doubted. The one state of the three examined here that had a real opportunity to court another region was Turkmenistan. Located relatively far from Russia and with the culture and borders to claim itself a Muslim member, Turkmenistan’s Niyazov pursued a southern option. His efforts failed, in part because he stubbornly insisted on focusing on Iran. Strong U.S. opposition to anything dealing with Iran was set down in law and supported by U.S. presidents during most of the post-Soviet period. As a result, Iran could never afford to built the pipelines Turkmenistan sought. Furthermore, Niyazov had a bad habit of overplaying his hand, which led to more lost foreign investment. Finally, Russia may have crossed the delegation-coercion line when it cut fuel to Belarus in the middle of a freezing winter. While Belarus had not paid its gas bills, giving Russia a legitimate reason to withhold its product, the timing suggests coercion rather than capitalism. While Russia’s ambition was to gain control of Belarus’s pipelines, the hardball tactics demonstrate that Russia is willing to be cruel to those who do not give it what it wants. While Belarusian leader Lukashenka was not cowed by these power moves, they do raise questions about whether the customs union henceforth can be considered a relationship of delegation.

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Chapter 7

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Conclu sion

I began this book with the question, what explains regional plutoc-

racy? In particular, why do states delegate trade policy-making authority to wealthy states? I first argued that we need to make a distinction between shallow and deep integration accords and between monetary and trade accords. This is a critical starting point for analyzing integration agreements. For example, dividing agreements by depth immediately reveals an important difference in how often states form certain types of agreements: of the 380 regional accords registered with the World Trade Organization (WTO), only ten are customs unions, a moderately deep form of integration. Agreements can also be usefully categorized by governance structure. While scholars have recognized two of these—supranational and intergovernmental—they have overlooked the third, plutocracy. To explain plutocracy, I developed a theory based on principalagent delegation models and assumptions about political survival, notably that all leaders must worry about pleasing their supporting political coalition. I argued that integration accords are the result of strategic interactions involving Designers and Joiners. The Designers are wealthy states who create the governance structures with which they hope to attract the prospective Joiners. Plutocratic structures are used when the following five conditions are met: 1. Single Plutocrat: There must be a single plutocrat among the constellation of member states; this state is the Designer of the accords.

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2. Permissive Coalition: The Designer’s domestic political coalition must favor or be indifferent toward plutocratic structures. 3. Economic Crisis: The prospective Joiner must be in, or anticipate being in, an economic crisis. 4. Immediate Benefits: The accord must bring the Joiner immediate and easily measured economic benefits, as opposed to uncertain, hard-to-calculate future gains. 5. No Superior Options: The Joiner must lack superior options for easing its economic crisis. Options must be inferior in terms of compensation, delegation, and reputation. In chapters 4 to 6, I tested my theory using a variety of economic integration accords that center around the regional great powers of Prussia (1828–1866), South Africa (1910–2008), and Russia (1991–2008).

Three Underexplored Cases This book brings to light the details of three important integration cases that have been overlooked or underexplored in the comparative regional integration literature. Chapter 4 covered the first customs union of the three analyzed in the book. At its height in the 1860s, the Zollverein included nearly all of the German states. This case is particularly interesting for its two-step approach to integration. Prussia required Joiners to change their tariff rates and tariff laws to match those of Prussia, thus indicating the accord was an historic case of plutocratic governance. However, after that initial step, Prussian leaders designed, and the Zollverein members accepted, an intergovernmental structure and later even a supranational parliament. Scholars of integration as well as international delegation will find the Prussian case particularly interesting given this early use of supranational structures, a fact that has largely gone unnoticed in the integration and delegation literatures. In Chapter 5, I analyzed the oldest surviving customs union, the Southern African Customs Union (SACU), due to celebrate its 100-year anniversary in 2010. The SACU is very rarely included in comparative studies. One reason it may have been overlooked is that it began with Britain delegating policy-making authority to South Africa, on behalf of Britain’s territories. Scholars might see the SACU as more about empire building than integration. However, Britain’s initial delegation to the Union of South Africa deserves explanation. In addition, on several occasions, the terms of the delegation were renegotiated after the Territories gained their independence.

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Each time the Joining states threatened to leave, South Africa agreed to more favorable terms; thus, these states played an important role in shaping the accord. Finally, in Chapter 6, I evaluated the most recent case, the Russiandesigned Eurasian customs union, as well as the intergovernmental Commonwealth of Independent States (CIS). Most integration studies focus on states whose accords can easily be tracked through the World Trade Organization (WTO), an organization to which Russia does not belong, making it difficult to determine exactly what provisions are in the Russian-designed accords. Some scholars have concluded that the Eurasian agreements are worthless and therefore undeserving of study. However, state leaders have spent significant time and energy negotiating, signing, and implementing them, even if they are less institutionalized than we are used to seeing in the West. Despite these limitations, three states significantly altered their tariff rates to match Russia’s. Several other former Soviet states have not signed agreements at all. If these are costless accords to sign, why would not all states in the region sign them?

Implications of the Theory and Findings In Chapter 1, I argued that plutocratic delegation theory suggested a variety of state behaviors that should be observable if the theory was a good predictor of plutocracy, and that the assumptions behind the theory appropriately describe the political environment. In this section, I return to those nine issues, highlighting the findings from each case. I find that the theory is an accurate predictor of many of the behaviors seen in the case studies and the assumptions match the way political leaders in both Designing and Joining states approach economic integration. Consensual The empirical chapters demonstrate that the Joining members considered the economic benefits they would be offered if they joined the integration accords. They were facing economic crises and needed immediate benefits that would ease the crisis and thus save their political positions. They were not coerced into joining, but rather chose to join for political reasons. In fact, many of the Joiners initiated the integration agreements, rather than waiting for the Designers to approach them. Hesse-Darmstadt was the first state to advance the idea of a customs union with Prussia. Although Prussian leaders agreed to form the customs union, they were careful to avoid any appearance

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of pushing the integration accord on the Joining states. Internally, they discussed the importance of making sure the smaller states chose to come to them first. The Joining states were facing economic crises and voluntarily turned to the state in the region with the largest economy. Other states followed Hesse-Darmstadt’s lead. While Prussia did try to break up integration accords that impeded its trade, it would be a stretch to call this coercion. In 1910, the British delegated policy making to South Africa to ease the financial burdens of colonialism. South Africa would be allowed to set tariff and other trade policy for Britain’s three Territories in exchange for administering the customs system for Britain, including distributing tariffs to the Territories in quantities sufficient for the African leaders to govern their residents. When the Territories gained their independence in the 1960s, the political leaders opted to continue delegating to South Africa in exchange for receiving the guaranteed and familiar short-term economic benefits of customs collections. Similarly, the leaders of Kazakhstan and Belarus repeatedly pushed for integration with Russia, sometimes accelerating the pace beyond what had been agreed to in the accords. The integration package that Russia created included low-cost natural gas and pipeline access, inducements to membership that are not that different from the development funds the EU offers its members. Prospective Joiners understood that these gains would come with economic integration and a departure from the accords would mean higher tariffs and the end of these special benefits. This does not constitute coercion. Thus, in all three integration cases, we mostly see voluntary delegation in exchange for expected economic benefits. In two cases, however, the Designer did cross the line separating delegation from coercion. In the 1980s, under extreme worldwide pressure from economic sanctions, the South African government became increasingly militaristic, at one point imposing severe economic sanctions on one of the customs union members who was harboring members of the opposition party, the African National Congress (ANC), which had become more aggressive. This behavior strongly signaled to the SACU members that South Africa would not hesitate to impose crippling sanctions against states that went against its interests. At this point, then, South Africa was indeed using coercive behavior that then belied the voluntary nature of the SACU. Second, in 2002–2006, Russia stopped natural gas deliveries to Belarus in the dead of winter. While Russia had solid market reasons to halt gas—Belarus routinely does not pay its bills—the fact that it did this

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several times during the winter demonstrates a certain level of cruelty that is inconsistent with voluntary delegation. Single Plutocrat In each of the three integration regions—Germanic Europe, southern Africa, and Eurasia—the great power designed a regional integration accord in which it was indisputably the wealthiest state. South Africa has no contenders on the continent. Russia does have a great power in its region—China—but its integration accords focus on the former Soviet states, of which it is clearly the great power. Prussia’s chief rival for regional plutocrat was Austria. Consistent with the theory, Prussia refused to let Austria join the Zollverein, and Prussia would not integrate with other German states via the German Confederation as it included Austria, which also chaired the confederation institutions. Furthermore, the next two largest states among the Germans—Hanover and Bavaria—formed their own plutocratic accords. They were large enough to believe they could be their own plutocrats in the right constellation. Eventually, their customs unions failed and they joined the Zollverein. But this occurred only after they had attempted to run their own accords. Immediate Benefits As the theory predicts, neither the leaders of the Joining states nor of the Designing states, relied on sophisticated economic analysis to determine how much their economies would grow under the particular integration effort. Some of the shortcuts suggested by economists applied, such as proximity to other members, but detailed calculations based on each state’s economic position were not the primary determinants of whether or not to join. For the German states, a major concern was getting immediate economic benefits in the form of collected customs. The same held true for the southern African states when they gained their independence. While the African leaders commissioned analysts to conduct detailed evaluations of the costs and benefits of leaving the accord, they instead opted for the known benefits of customs collections over the unknown, longterm benefits of global integration outside the customs union. Even with the distortions caused by South Africa’s ISI (import-substitution industrialization), the smaller states believed they would be better off inside the customs union. As political leaders of newly independent states it would have been a highly risky gamble to go it alone.

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In the Eurasian accords, it was the relation-specific assets (RSAs) that provided the immediate benefits. Belarusian leaders did not need to conduct detailed calculations to know that they required natural gas to fuel their industries and warm their citizens. The fact that Russia was willing to subsidize the cost of this fuel made it an unbeatable economic deal. Similarly, Kazakhstan knew that it had to have pipeline access, or it would have no outlet for its vast energy resources. Russia was willing to keep open the pipelines in exchange for Kazakhstan joining the customs union. Whether Russia would cut off Kazakhstan’s access if it left the customs union is unknown. It certainly has incentives to keep the fuel flowing, as it earns pipeline transport fees. Nevertheless, Kazakhstan’s leadership was prudent to not test this feature of the integration accords. Focusing on RSAs also means recognizing that the Western states, including the EU, may be unable to match the benefits that Russia can provide integration partners. If plutocratic delegation and its related assumptions about political survival are correct, then state leaders will not abandon a plutocratic accord, even for a less opportunistic agent, unless it can find an alternative that can match the short-term, easily measured economic benefits. No matter how attractive the EU might be for its long-term gains and supranational structures, it cannot replace the low-cost natural gas that Russia gives Belarus. Only if Russia presses too hard on Belarus, including raising natural gas prices, will the EU have a real chance to attract Belarus. Even then, political logic suggests that President Lukashenka is highly unlikely to change his authoritarian system to a democratic one, a prerequisite for EU membership. The three cases also demonstrate that delegation and reputation are not as important in an integration package as compensation. Prussia was known to have ambitions to unite the German states under its leadership. It acted in opportunistic ways when other customs unions impeded its trade. Until recently, South Africa was a deeply racist regime, hardly a positive attribute in the eyes of the African leaders. It would not be difficult to find an agent with a more positive reputation. Moscow under the Soviet Union was responsible for many atrocities, particularly in Kazakhstan where its policies led to massive starvation. Yet, none of these factors deterred the Joining states. Even when Russia acted opportunistically toward Belarus, the Joining states remained members of the integration accords; in fact, even more states joined the accords after Russia had cut off gas to Belarus. Turkmenistan provides the counterexample in the Eurasian case. Even when it signed the intergovernmental CIS accords (1991) and the Agreement on the Formation of Economic Union (1993), Russia did not grant it pipeline access. Thus, integration was not rewarded

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with short-term benefits. Instead, Russia blocked Turkmenistan from selling its energy resources to Europe, using Turkmenistan’s gas for its local population and then selling Russian higher-quality fuel to Europe for world market prices. Without the easily measure benefits, Turkmenistan opted not to join any more accords. Winning Coalition The theory assumes that leaders in both the Designing and Joining states will listen to their supporting political coalitions to ensure that they will remain in power, their primary goal. The case studies show that this assumption fits reality. The views of the Designer’s winning coalition played a critical role, twice preventing the formation of plutocratic accords. In 2004, ten years after the end of apartheid, the SACU implemented new governance accords. Although the other conditions largely remained unchanged, South Africa’s winning coalition no longer gave permission for plutocratic accords. The ANC had long campaigned not only for equality among all people in South Africa, but equality among the African members of the SACU and other African institutions. This was a major theme and part of their identity. It would have been unthinkable to now use the same accords, which formalized the unequal status of the members, that the racist regime had used. In the second case, the newly elected Boris Yeltsin and his winning coalition in 1991 symbolized the doggedly pro-Western approach, favoring close foreign relations with the United States and Europe and advocating for democracy and a market economy within Russia. In addition, like the ANC, Yeltsin’s coalition wanted to distance itself from the past regime and what it represented. It intentionally created institutions that sounded much more like the European Community than the Soviet Union. Plutocratic accords would have been inconsistent with this new Russian image. This changed, however, when the Russian selectorate became fed up with standing in the shadow of the West, as the economy suffered and the former Soviet region unraveled in civil wars. The newly assertive Russian selectorate now supported retaking control of the region. With his political future on the line, Yeltsin suddenly sounded like a true nationalist and with this new stance came the plutocratic governance structures of the Eurasian customs union. Today, it is unclear whether Russia is using intergovernmental accords for its latest integration efforts: the Eurasian Economic Community and the Single Economic Space. The coalition that supports Vladimir Putin appears to be open to

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either intergovernmental or plutocratic accords. With Russia firmly the dominant power in the region, it no longer needs to prove itself through plutocracy. On the other hand, it may not want to unnecessarily give up this control. Role of Ideas The theory suggests that ideas among the leader’s winning coalition can affect which governance structure is used in the integration accords. In this section, I elaborate on another set of ideas that came into play with Prussia. During the 1800s, when Prussia was creating the Zollverein, two groups were engaged in philosophical and corporal battles throughout Europe: the liberals and the reactionaries, the latter term denoting those who argued in favor of preserving aristocratic privileges and against republicanism, liberalism, and socialism. German leaders feared the liberal ideas and the accompanying revolts that spread throughout Europe. The leader of a prospective Joiner had to consider the ramifications of delegating authority to the Prussians, whose leaders were known reactionaries. If they delegated too much authority, they risked looking weak as well as anti-liberal, positions that could threaten the leaders’ survival or way of governing. As discussed in Chapter 4, kings were swept away in revolutions. Other monarchs created constitutions or enacted other liberal reforms in hopes of quelling the threat from this idea that challenged their political legitimacy. Sensitive to these issues, the Prussian leaders designed intergovernmental accords that gave every member one vote and full veto authority, a strikingly egalitarian position for any state, but particularly for one known to favor the old monarchies and to disdain liberal principles. This structure was designed to soothe the liberal movements within the Joining states and thus make it safer for the leaders to join the Prussian accords without risking their political positions. In addition, several of the states had nationalist coalitions who jealously guarded their autonomy. The intergovernmental structures made delegation a bit easier to swallow. Agent Strategies The theory suggests that Designing states, as the agents, will find ways to attract critical Joining states. We should see the Designers calculating what kind of integration package will attract the Joiners, and, if necessary, improving features related to compensation,

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delegation, or reputation. Prussian Finance Minister von Motz and later Prime Minister Otto von Bismarck creatively designed intergovernmental structures that governed decisions after the plutocratic delegation, thus appeasing liberals and nationalists in Joining states. When the SACU Joiners threatened to leave the integration accord after becoming independent states in the 1960s, South Africa agreed to renegotiate the terms of the accord. The Joiners tried to persuade the South Africans to change the governance structure, but failed to win that concession. However, they did get an increase in the percentage of the collected customs that were critical for meeting the basic costs of government. Efficient Policy Making Plutocracy eases policy making and thus opens the way for deeper integration where intergovernmental structures might fail. The Prussian case demonstrates the frustrations of intergovernmentalism. The structures that were designed to ease the fears of the Joiners proved highly inefficient for policy making. Between 1854 and 1859, despite a concerted effort to lower tariff levels in the intergovernmental Congress, Prussia succeeded in lowering only one tariff. It eventually abandoned the highly egalitarian structure in favor of one that weighted votes based on economic power. The SACU’s ten-year long negotiations after the ANC came to power may have been bogged down over this exact question: how can members create egalitarian governance structures without losing the efficiency of plutocracy? No Superior Options Highlighting the importance of options, the theory predicts that Joiners will contemplate other options for resolving their economic crises and select the best choice, based on the three features of compensation, delegation, and reputation. Of these, compensation will be most important, given the Joiner’s economic crisis. In all three regions, Joining states took every opportunity to consider alternatives to the plutocratic structures the Designer was offering them. While they sometimes found options with better reputations—the EU for Belarus—or that required less delegation—the WTO for the southern African states—the Joiners could not find alternatives that would provide the same or better compensation. In contrast, Turkmenistan’s leader, having received no compensation package from Russia, assumed that it could find a more lucrative option. Indeed, its

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oil and natural gas wealth suggested that it could attract significant FDI. Plus, it hoped to play the ethnic card and economically integrate with Muslim neighbors, particularly Iran. Although these options never played out, Turkmenistan had reason to believe they would and therefore rejected the option of Joining with Russia. Punctuated Equilibrium Finally, the theory suggests that we should see significant institutional changes following a major regional economic crisis. This is a case of what Stephen Krasner calls “punctuated equilibrium,” in which we see significant institutional changes after an exogenous shock, followed by little change for long periods of time.1 In this case, an economic crisis is the shock that risks the political leader’s survival. Are these integration bursts followed by relative stasis? It appears so. The Zollverein became Germany, the SACU will celebrate its 100-year anniversary in 2010, and the Eurasian accords in many respects continue a somewhat shrunken USSR. Entering into these deep integration agreements may tie states into long-lived economic and possibly military and political relationships that leaders often only vaguely conceive of at their inception.

Future Research Here I briefly suggest a few areas for future research, each of which links to the plutocratic delegation theory while suggesting a broader research agenda. First, why did it take the SACU members ten years, from 1994 when apartheid ended to 2004, to negotiate and implement the new intergovernmental governance structures? I suspect the answer to this question will tell us a great deal about how state leaders think about governance structures when creating new ones, under new circumstances. Second, what other agent strategies do Designing states use in negotiating integration accords? Under what conditions do states use each of the three strategies I identify: improving compensation, delegation, or reputation? The examples I use here should be folded into the larger delegation in international relations literature that focuses on agent strategies. In addition, the broader delegation literature may generate new ideas for agent strategies in integration accords. Third, does plutocratic delegation vary by issue area? If so, how and why? How does trade integration under plutocracy relate to monetary union in these same accords? Fourth, is plutocracy used in non-European cultures and is there a connection to authoritarianism?

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If so, might plutocratic structures be China’s option should it choose to integrate formally Southeast Asia or Central Asia? The answers to these questions may well better prepare the United States and Europe for future cases of integration and for developing foreign policy options that relate to Russia’s and perhaps other non-European regional integration projects. Identifying and understanding plutocracy could be key to creating wise Western foreign policies toward Eurasia and Asia.

Policy Implications The conclusions we can draw from the three cases suggest several issues Western states should consider regarding the integration agreements that most concern the EU and the United States: the Eurasian Customs Union and other integration accords. First, the Western states may be able to affect integration accords in regions of concern by offering more attractive alternative agents. Keeping in mind that short-term economic gains are most critical to leaders with struggling economies, Western states must offer not only distant benefits but also immediate benefits, such as grants and loans. This may mean lowering the priority of other important policies. For example, in 2006, Uzbekistan abandoned its economically isolationist policy and joined the Eurasian Customs Union. This action occurred months after the Western states strongly criticized Uzbekistan for an alleged massacre in the mountainous town Andijon.2 Although Russia may have played a role in Uzbekistan’s decision, it also appears highly likely that Western condemnation not only pushed Uzbekistan into the Eurasian customs union, but also cost the United States a key military base. In many cases, the Western states may not be able to offer high enough compensation. As I argue above, the West would be hard pressed to even come close to matching the economic benefits Russia offers Belarus and Kazakhstan. In addition, as I argued in Chapter 1, the United States should reconsider its hard-line position on admitting Russia to the WTO. As a member of the WTO, Russia would have fewer incentives for continuing the plutocratic customs union. Without the authority to set high tariffs to protect its industries, it may be less interested in its own integration efforts. As a WTO member, Russia would be required to provide more transparency about its customs union and other trade policies. Other Eurasian Customs Union members would be more likely to join the WTO. Indeed Russia is already working with members to create a unified negotiating position. WTO membership may also

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undermine the military and political relationships that sometimes accompany economic integration and thereby calming fears that Russia is recreating an empire. Furthermore, trade disputes would be handled by the WTO’s Dispute Settlement Body rather than through coercive means. Second, Russia may be following Prussia’s example of using intergovernmental structures after using the plutocratic option. This may well be Russia’s way of recognizing that most of the customs union members—particularly Kazakhstan—may soon have viable alternatives to the Russian accords. The West has been strongly focused on Russia’s coercive actions against Belarus and Ukraine—where Russia has several times cut off oil and natural gas to the states in the dead of winter—but other states are less vulnerable. As discussed in Chapter 6, Kazakhstan’s President Nursultan Nazarbayev has built up his economy by courting FDI from all over the world. While he still relies on Russian pipelines to export his natural gas and oil, he is slowly reducing Russia’s leverage. Third, the stories of each integration effort end differently. One of the plutocrats succeeded in establishing a consolidated state (the Zollverein became Germany), another never realized its ambitions of absorbing the member states (the southern African states are all independent), and the third’s story is still playing out (we do not know what will become of the Eurasian customs accords). Although I argue that plutocracies taken to their ultimate political unification are empires, there is nothing preordained about that outcome. Scholars should continue studying Russia to better understand how the Eurasian accords work and thus determine whether or not they are a threat. Meanwhile, political leaders in the West should use caution to avoid confusing empire building with a traditional, if now infrequently used, governance structure.

Notes Chapter 1 1. On the logic of political survival, see Bruce Bueno de Mesquita et al., The Logic of Political Survival (Cambridge, MA, and London: The MIT Press, 2003). 2. Terry M. Moe, “The New Economics of Organization,” American Journal of Political Science 28 (1984): 756. 3. For recent developments in delegation theory applied to international relations, particularly international organzations, see Michael J. Tierney, “Delegation Success and Policy Failure: Collective Delegation and the Search for Iraqi Weapons of Mass Destruction,” Law and Contemporary Problems 71, no. 1 (2008): 283–312; Curtis A. Bradley and Judith G. Kelley, “The Concept of International Delegation,” Law and Contemporary Problems 71, no. 1 (2008): 1–36; Darren G. Hawkins et al., eds., Delegation and Agency in International Organizations (Cambridge, UK: Cambridge University Press, 2006); Mark A. Pollack, The Engines of European Integration: Delegation, Agency, and Agenda Setting in the EU (Oxford and New York: Oxford University Press, 2003); and Daniel L. Nielson and Michael J. Tierney, “Delegation to International Organizations: Agency Theory and World Bank Environmental Reform,” International Organization 57, no. 2 (2003): 241–76. 4. See Chapter 4 for details of the Prussian case. 5. The EU literature is vast and has been covered in detail elsewhere. For excellent reviews of the literature, see Andrew Moravcsik, The Choice for Europe: Social Purpose and State Power from Messina to Maastricht (Ithaca, NY: Cornell University Press, 1998); Walter Mattli, The Logic of Regional Integration: Europe and Beyond (Cambridge and New York: Cambridge University Press, 1999); Mark A. Pollack, “International Relations Theory and European Integration,” Journal of Common Market Studies 39, no. 2 (2001); and “Theorizing the European Union: International Organization, Domestic Polity, or Experiment in New Governance?” Annual Review of Political Science 8 (2005). For explanation of why some institutions are intergovernmental and others supranational, see Wayne Sandholtz and Alec Stone Sweet, eds., European Integration and Supranational Governance (Oxford and New York: Oxford University Press, 1998); Alec Stone

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7.

8. 9. 10. 11.

12.

13.

Sweet, Wayne Sandholtz, and Neil Fligstein, eds., The Institutionalization of Europe (Oxford and New York: Oxford University Press, 2001); Pollack, Engines of European Integration. Berthold Rittberger, “Which Institutions for Post-War Europe? Explaining the Institutional Design of Europe’s First Community,” Journal of European Public Policy 8 (2001). David A. Lake, Entangling Relations: American Foreign Policy in Its Century, Princeton Studies in International History and Politics (Princeton, NJ: Princeton University Press, 1999). Alexander J. Motyl, Imperial Ends: The Decay, Collapse, and Revival of Empires (New York: Columbia University Press, 2001). Ibid., 4. These assumptions are consistent with the “logic of political survival.” Bueno de Mesquita et al., Logic of Political Survival. By hierarchy approaches I mean those that draw on Oliver Williamson’s theory of the firm. When used by international relations scholars, these approaches generally focus on explaining the variation between alliances and hierarchies. In Chapter 3, I discuss the hierarchy and delegation approaches in greater detail. Stephen D. Krasner, “Approaches to the State: Alternative Conceptions and Historical Dynamics,” Comparative Politics 16 (1984). Krasner borrowed the term from evolutionary theory; see Niles Eldridge and Stephen Jay Gould, “Punctuated Equilibria: An Alternative to Phyletic Gradualism,” in Models in Paleontology, ed. Tom Schopf (San Francisco: Freeman Cooper, 1972). Alexander L. George and Andrew Bennett, Case Studies and Theory Development in the Social Sciences (Cambridge: MIT, 2005).

Chapter 2 1. Scott Cooper, “Why Doesn’t Regional Monetary Cooperation Follow Trade Cooperation?” Review of International Political Economy 14, no. 4 (2007): 626–52. Cooper is not counting by depth, but rather by the number of members. Under this counting rule, he finds there are 30 trade agreements with three or more members. 2. In addition to the Southern African Customs Union and Eurasian Customs Union that I explore in this volume, the customs unions reported by WTO include Andean Community (1988), Caribbean Community and Common Market (1973), Central American Common Market (1961), European Community, East African Community (2000), Economic and Monetary Community of Central Africa (1999), Gulf Cooperation Council (2003), and Mercosur (1991). World Trade Organization, “Regional Trade Agreements Information System,” 2009, http://rtais.wto.org/UI/PublicMaintainRTAHome.aspx. 3. Many scholars have written about this history. Two prominent examples on trade and money, respectively, are Richard N. Rosecrance,

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5. 6.

7. 8.

9. 10. 11. 12. 13. 14. 15.

16. 17.

18.

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The Rise of the Trading State: Commerce and Conquest in the Modern World (New York: Basic Books, 1986); and Eric Helleiner, The Making of National Money: Territorial Currencies in Historical Perspective (Ithaca: Cornell University Press, 2003). Francesco Duina, The Social Construction of Free Trade: The European Union, NAFTA, and Mercosur (Princeton: Princeton University Press, 2006), 3. World Trade Organization, “Regional Trade Agreements,” http:// www.wto.org/english/tratop_e/region_e/region_e.htm. This includes eight bilateral and two regional accords. The bilateral agreements are with Australia, Canada, Chile, Israel, Jordan, Mexico, Morocco, and Singapore. The regional accords are the North American Free Trade Agreement (NAFTA) with Canada and Mexico and the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. World Trade Organization, “Regional Trade Agreements Information System.” Joakim Reiter, “The EU-Mexico Free Trade Agreement: Assessing the EU Approach to Regulatory Issues,” in Regionalism, Multilateralism and Economic Integration: The Recent Experience, ed. Gary P. Sampson and Stephen Woolcock (Tokyo, New York, and Paris: United Nations University Press, 2003). Agata Antkiewicz and John Whalley, “China’s New Regional Trade Agreements,” World Economy 28, no. 10 (2005). World Trade Organization, “Regional Trade Agreements Information System.” Bela A. Balassa, The Theory of Economic Integration (Homewood, IL: R.D. Irwin, 1961). Dominick Salvatore, International Economics (John Wiley & Sons, Inc., 2004), 321. World Trade Organization, “Regional Trade Agreements.” Balassa divided integration accords into only shallow and deep. I have added this interim level of “moderately deep.” The major German-speaking state omitted from the Zollverein was Austria. As I discuss in Chapter 4, Prussia expressly excluded Austria, which it considered a rival for regional hegemon. Salvatore, International Economics, 330. The customs union has now become part of the broader Eurasian Economic Community. I separate it from the other accords, however, because the members are much further along in implementing it than the other integration provisions, such as a common market. On types of monetary integration, see Benjamin J. Cohen, The Future of Money (Princeton, NJ: Princeton University Press, 2004), The Geography of Money (Ithaca: Cornell University Press, 1998); and “The Political Economy of Currency Regions,” in The Political

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19. 20.

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22.

23.

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25. 26.

27.

28.

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N ot e s Economy of Regionalism, ed. Edward D. Mansfield and Helen V. Milner (New York: Columbia University Press, 1997). Cohen, Future of Money, 43. Benjamin J. Cohen, “Monetary Governance in a World of Regional Currencies,” in Governance in a Global Economy, ed. Miles Kahler and David A. Lake (Princeton, NJ: Princeton University Press, 2003), 139. These percentages include all foreign currencies. Tatna Sahay and Carlos A. Végh, “Dollarization in Transition Economies: Evidence and Policy Implications,” in The Macroeconomics of International Currencies: Theory, Policy and Evidence, ed. Paul Mizen and Eric J. Pentecost (Cheltenham, UK: Edward Elgar, 1999). Andrea Bubula and Inci Otker-Robe, “Are Pegged and Intermediate Exchange Rate Regimes More Crisis Prone?” in IMF Working Paper, WP/03/223 (Washington, D.C.: International Monetary Fund, 2003). Rupa Duttagupta and Inci Okter-Robe, “Exits from Pegged Regimes: An Empirical Analysis,” in IMF Working Paper, WP/03/147 (Washington, D.C.: International Monetary Fund, 2003). Andrea Bubula and Inci Otker-Robe, “The Evolution of Exchange Rate Regimes since 1990: Evidence from De Facto Policies,” in IMF Working Paper, WP/02/155 (Washington, D.C.: International Monetary Fund, 2002). Kurt Schuler, “Some Theory and History of Dollarization,” Cato Journal 25, no. 1 (2005). For a complete list of dollarized cases, see Ibid., 121–23. For other studies focused on dollarization, see Dominick Salvatore, James W. Dean, and Thomas D. Willett, eds., The Dollarization Debate (Oxford: Oxford University Press, 2003); Sahay and Végh, “Dollarization in Transition Economies”; Edward B. Flowers and Francis A. Lees, The Euro, Capital Markets, and Dollarization (Lanham, MD: Rowman & Littlefield Publishers, 2002); S. H. Hanke, “On Dollarization and Currency Boards: Error and Deception,” Journal of Policy Reform 5, no. 4 (2002); Eduardo Levy Yeyati and Federico Sturzenegger, eds., Dollarization (Cambridge, MA, and London: The MIT Press,2003); and J. L. Moreno-Villalaz, “Lessons from the Monetary Experience of Panama: A Dollar Economy with Financial Integration,” Cato Journal 18, no. 3 (1999). Adrian Saville, Maureen Bader, and Zane Spindler, “Alternative Monetary Systems and the Quest for Stability: Can a Free Banking System Deliver in South Africa?,” South African Journal of Economics 73, no. 4 (2005): 683. David A. Matthews et al., “Reassessing the Case of Ecuador’s Dollarization,” Journal of Economics and Economic Education Research (September 2006). The Comoros Islands in the Indian Ocean are an exception. Although members of the Franc zone, the states also have a national currency

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32. 33.

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and bank. Since gaining their independence, the African states renamed the currency, but were careful to keep the CFA acronym. It now represents two names (one for each region of the CFA zone): Communauté Financière d’Afrique, and Coopération Financière en Afrique Centrale. David Stasavage, The Political Economy of a Common Currency: The CFA Franc Zone since 1945 (Ashgate, 2003); and Cohen, Future of Money, 43. Stasavage, The Political Economy of a Common Currency. Bureau of African Affairs U.S. Department of State, “West African Economic and Monetary Union,” http://www.state.gov/p/af/rls/ fs/15202.htm. John S. Chipman, “A Survey of the Theory of International Trade: Part 1, the Classical Theory,” Econometrica 33, no. 3 (1965): 479. For a summary of these economic arguments, see Walter Mattli, The Logic of Regional Integration: Europe and Beyond (Cambridge and New York: Cambridge University Press, 1999). For the original theories of absolute and comparative advantage, see Adam Smith, The Wealth of Nations (New York: The Modern Library, 1937); and David Ricardo, The Principles of Political Economy and Taxation (Homewood, IL: Irwin Publishing, 1963). For expositions of the classical theory of comparative advantage, see Gottfried Haberler, The Theory of International Trade (London: W. Hodge & Co., 1936); Jacob Viner, Studies in the Theory of International Trade (New York: Harper & Brothers, 1937); Jagdish Bhagwati, “The Pure Theory of International Trade: A Survey,” Economic Journal 74, no. 293 (1964); and Chipman, “A Survey of the Theory of International Trade.” For a review of neoclassical and modern theory, see John S. Chipman, “A Survey of the Theory of International Trade: Part 2, the Neo-Classical Theory,” Econometrica 33, no. 4 (1965); Ronald Winthrop Jones and J. Peter Neary, “The Positive Theory of International Trade,” in Handbook of International Economics, ed. Ronald Winthrop Jones and Peter B. Kenen (Amsterdam and New York: North-Holland, 1984); and John S. Chipman, “A Survey of the Theory of International Trade: Part 3, the Modern Theory,” Econometrica 34, no. 1 (1965). Modern economic theory is generally associated with Heckscher-Ohlin’s factor endowments theory and the follow-on Stolper-Samuelson. For the original contributions, see Bertil Gotthard Ohlin, Interregional and International Trade, Rev. ed., Harvard Economic Studies; V. 39 (Cambridge, MA: Harvard University Press, 1968); Eli F. Heckschler, “The Effect of Foreign Trade on the Distribution of Income,” in Readings in the Theory of International Trade, ed. Howard Sylvester Ellis and Lloyd A. Metzler (Homewood, IL,: R.D. Irwin, 1950); and Wolfgang F. Stolper and Paul A. Samuelson, “Protection and Real Wages,” The Review of Economic Studies 9, no. 1 (1941).

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34. Sidney Weintraub, “Lessons from Chile and Singapore Free Trade Agreements,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004). 35. Mattli, Logic of Regional Integration. 36. Antkiewicz and Whalley, “China’s New Regional Trade Agreements,” 1554. 37. Jeffrey J. Schott, “Assessing US FTA Policy,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004), 12. 38. Ibid., 13. 39. Stephan Haggard, “Regionalism in Asia and the Americas,” in The Political Economy of Regionalism, ed. Edward D. Mansfield and Helen V. Milner (New York: Columbia University Press, 1997), 25. 40. J. Clark Leith and John Whalley, “Competitive Liberalization and the US-SACU FTA,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004), 335–36. 41. See the chapter on the Zollverein. 42. Jacob Viner, The Customs Union Issue (New York: The Carnegie Endowment for International Peace, 1950); James E. Meade, The Theory of Customs Union (Amsterdam: North-Holland, 1955); Richard Lipsey and Kelvin Lancaster, “The General Theory of the Second Best,” Review of Economic Studies 24, no. 1 (1956); and Richard Lipsey, “The Theory of Customs Unions: A General Survey,” The Economic Journal 70, no. 279 (1960). 43. Mona M. Lyne, The Voter’s Dilemma and Democratic Accountabilty: Latin America and Beyond (University Park, PA: Penn State University Press, 2008); and Bruce Bueno de Mesquita et al., The Logic of Political Survival (Cambridge, MA, and London: The MIT Press, 2003). 44. Colin McCarthy, “The Southern African Customs Union in Transition,” African Affairs 102 (2003): 608. 45. These factors are summarized in Salvatore, International Economics, 327–28. 46. McCarthy, “Southern African Customs Union in Transition,” 607–08. 47. Viner, Customs Union Issue. 48. As measured by purchasing power parity, as of 2007. U.S. Central Intelligence Agency, “World Factbook,” https://www.cia.gov/ library/publications/the-world-factbook/. 49. Robert A. Mundell, “A Theory of Optimum Currency Areas,” American Economic Review 51, no. 3 (1961); Ronald I. McKinnon, “Optimum Currency Areas,” American Economic Review 53, no. 9 (1963); and Peter B. Kenen, “The Theory of Optimum Currency Areas: An Eclectic View,” in Monetary Problems of the International

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Economy, ed. Robert A. Mundell and Alexander K. Swoboda (Chicago: University of Chicago Press, 1969). Mundell, “Theory of Optimum Currency Areas,” 657. For a thorough discussion of the benefits and costs of dollarization in general as well for specific groups of states, see two edited volumes, Salvatore, Dean, and Willett, eds., Dollarization Debate; and Yeyati and Sturzenegger, eds., Dollarization. James Gwartney, Kurt Schuler, and Robert Stein, “Achieving Monetary Stability at Home and Abroad,” Cato Journal 21, no. 2 (2001): 196. “Ecuador’s Congress Approves U.S. Dollar Plan,” Associated Press, March 1, 2000. Tamim Bayoumi and Barry Eichengreen, “Shocking Aspects of European Monetary Integration,” in Adjustment and Growth in the European Monetary Union, ed. Francisco S. Torres and Francesco Giavazzi (Cambridge, UK, and New York: Cambridge University Press, 1993). José M. Salazar-Xirinachs and Jaime Granados, “The US-Central America Free Trade Agreement: Opportunities and Challenges,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004), 232; and Inbom Choi and Jeffrey J. Schott, “Korea-US Free Trade Revisited,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004), 187–88. Dean A. DeRosa, “US Free Trade Agreements with Asean,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004), 166–67. Salazar-Xirinachs and Granados, “US-Central America Free Trade Agreement,” 232. Andrew L. Stoler, “Australia-US Free Trade: Benefits and Costs of an Agreement,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004), 96; and Howard Rosen, “ Free Trade Agreements as Foreign Policy Tools: The US-Israel and US-Jordan FTAs,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004), 52–53. Edward D. Mansfield, “ Effects of International Politics on Regionalism in International Trade,” in Regional Integration and the Global Trading System, ed. Kym Anderson and Richard Blackhurst (London: Harvester Wheatsheaf, 1993); and Joanne Gowa, Allies, Adversaries, and International Trade (Princeton, NJ: Princeton University Press, 1994). Antkiewicz and Whalley, “China’s New Regional Trade Agreements,” 1554.

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61. Ronald Rogowski, “Political Cleavages and Changing Exposure to Trade,” American Political Science Review 81, no. 4 (1987). 62. Robert Z. Lawrence, Regionalism, Multilateralism, and Deeper Integration, Integration National Economies Series (Washington, D.C.: Brookings Institution, 1996), 10. 63. For an explanation that adheres closely to the principal-agent model, arguing that supranational structures as rationally designed to meet state interests, see Mark A. Pollack, The Engines of European Integration : Delegation, Agency, and Agenda Setting in the EU (Oxford and New York: Oxford University Press, 2003). For an alternative explanation that focuses on the myopia of political leaders, see Paul Pierson, “The Path to European Integration: A Historical Institutionalist Analysis,” Comparative Political Studies 29, no. 2 (1996). 64. Cohen, Geography of Money, 6. 65. Cohen does not argue that these hierarchies are coerced; the terminology, however, suggests it. 66. Finn Laursen, ed. Comparative Regional Integration: Theoretical Perspectives (Hampshire, UK, and Burlington, VT: Ashgate, 2003). 67. Duina argues that the member states’ legal traditions—civil law versus common law—explain the variation. He also compares how societal groups respond to the various accords. Duina, Social Construction of Free Trade. 68. For a brief discussion of their role, see Berthold Rittberger, “Which Institutions for Post-War Europe? Explaining the Institutional Design of Europe’s First Community,” Journal of European Public Policy 8 (2001).

Chapter 3 1. Ronald H. Coase, “The Nature of the Firm,” Economica 16, no. 4 (1937): 386–405; “The Problem of Social Cost,” Journal of Law and Economics 3, no. 1 (1960): 1–44, Friedrich A. von Hayek, “The Use of Knowledge in Society,” American Economic Review 35 (1945): 519–30; and Studies in Philosophy, Politics, and Economics (Chicago: Chicago University Press, 1967). 2. Adding to the confusion, another intellectual approach is called Neo-Institutional Economics. The leaders of neo-institutionalism include John K. Galbraith, Clarence Ayres, and Adolph Lowe. For a discussion on this approach, see Allan G. Gruchy, Contemporary Economic Thought: The Contribution of Neo-Institutional Economics (Clifton, NJ: Augustus M. Kelley, 1972). 3. For example, see Beth V. Yarbrough and Robert M. Yarbrough, Cooperation and Governance in International Trade: The Strategic Organizational Approach (Princeton, NJ: Princeton University Press, 1992); Benjamin J. Cohen, The Geography of Money (Ithaca: Cornell University Press, 1998); David A. Lake, Entangling

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4. 5.

6. 7. 8.

9.

10.

11.

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Relations: American Foreign Policy in Its Century, Princeton Studies in International History and Politics (Princeton, NJ: Princeton University Press, 1999); Katja Weber, Hierarchy Amidst Anarchy: Transaction Costs and Institutional Choice, Suny Series in Global Politics (Albany, NY: State University of New York Press, 2000); and Kathleen J. Hancock, “Surrendering Sovereignty: Hierarchy in the International System and the Former Soviet Union” (Dissertation, Ph.D., University of California, San Diego, 2001). Terry M. Moe, “The New Economics of Organization,” American Journal of Political Science 28 (1984): 756. For recent developments, see Michael J. Tierney, “Delegation Success and Policy Failure: Collective Delegation and the Search for Iraqi Weapons of Mass Destruction,” Law and Contemporary Problems 71, no. 1 (2008): 283–312; Curtis A. Bradley and Judith G. Kelley, “The Concept of International Delegation,” Law and Contemporary Problems 71, no. 1 (2008): 1–36; Darren G. Hawkins et al., eds., Delegation and Agency in International Organizations (Cambridge, UK: Cambridge University Press, 2006); Alexander Thompson, “Screening Power: International Organizations as Informative Agents,” in Delegation and Agency in International Organizations, ed. Darren G. Hawkins, et al. (Cambridge, UK: Cambridge University Press, 2006); Mark A. Pollack, The Engines of European Integration : Delegation, Agency, and Agenda Setting in the EU (Oxford and New York: Oxford University Press, 2003); and Daniel L. Nielson and Michael J. Tierney, “Delegation to International Organizations: Agency Theory and World Bank Environmental Reform,” International Organization 57, no. 2 (2003): 241–76. Bruce Bueno de Mesquita et al., The Logic of Political Survival (Cambridge, MA, and London: The MIT Press, 2003), 38. Moe, “New Economics of Organization,” 756. Darren G. Hawkins et al., “Delegation under Anarchy: States, International Organizations, and Principal-Agent Theory,” in Delegation and Agency in International Organizations, ed. Darren G. Hawkins, et al. (Cambridge: Cambridge University Press, 2006), 7. Alec Stone Sweet and Wayne Sandholtz, “Integration, Supranational Governance, and the Institutionalization of the European Polity,” in European Integration and Supranational Governance, ed. Wayne Sandholtz and Alec Stone Sweet (Oxford and New York: Oxford University Press, 1998), 8. Darren G. Hawkins and Wade Jacoby, “How Agents Matter,” in Delegation and Agency in International Organizations, ed. Darren G. Hawkins, et al. (Cambridge: Cambridge University Press, 2006); Nielson and Tierney, “Delegation to International Organizations”; and Thompson, “Screening Power.” Gulf Cooperation Council, http://www.gcc-sg.org/index_e.html.

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12. APEC, “How APEC Operates,” http://www.apec.org/apec/about_ apec/how_apec_operates.html. 13. Sweet and Sandholtz, “Integration, Supranational Governance, and the Institutionalization of the European Polity,” 8. 14. The others are policy implementation, regulatory, monitoring and enforcement, agenda setting, research and advice, and re-delegation. Bradley and Kelley, “Concept of International Delegation.” 15. Mark A. Pollack, “Delegation and Discretion in the European Union,” in Delegation and Agency in International Organizations, ed. Darren G. Hawkins, et al. (Cambridge, UK: Cambridge University Press, 2006). Robert Shuman, the architect of the EU’s genesis organization, the European Coal and Steel Community, originally wanted the “High Authority,” which later became the Commission, to have much stronger supranational powers. For a discussion of the High Authority’s formation, see Berthold Rittberger, “Which Institutions for Post-War Europe? Explaining the Institutional Design of Europe’s First Community,” Journal of European Public Policy 8 (2001): 673–708. 16. Andrew P. Cortell and Susan Peterson, “Dutiful Agents, Rogue Actors, or Both? Staffing, Voting Rules, and Slack in the WHO and WTO,” in Delegation and Agency in International Organizations, ed. Darren G. Hawkins, et al. (Cambridge, UK: Cambridge University Press, 2006). 17. For a comparison of dispute settlement mechanisms, see James McCall Smith, “The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts,” International Organization 54, no. 1 (2000): 137–80; and Daniel Y. Kono, “Making Anarchy Work: International Legal Institutions and Trade Cooperation,” Journal of Politics 59, no. 3 (2007): 746–59. 18. For a principal-agent analysis of the EU’s supranational organizations, see Pollack, Engines of European Integration. For an overview of all the EU’s institutions, see Desmond Dinan, Ever Closer Union: An Introduction to European Integration (Boulder: Lynn Rienner, 2005), Part II. For a persuasive account of how the European Court of Justice became so powerful, see Karen J. Alter, “Who Are the ‘Masters of the Treaty’? European Governments and the European Court of Justice,” International Organization 52, no. 1 (1998): 121–47; and Establishing the Supremacy of European Law: The Making of an International Rule of Law in Europe (New York: Oxford University Press, 2001). For an argument about how EU leaders inadvertently tied their own hands, see Paul Pierson, “The Path to European Integration: A Historical Institutionalist Analysis,” Comparative Political Studies 29, no. 2 (1996): 123–63. 19. Bradley and Kelley, “Concept of International Delegation,” 9. 20. Hawkins et al., “Delegation under Anarchy: States, International Organizations, and Principal-Agent Theory,” 11n5.

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21. Barbara Koremenos, “When, What, and Why Do States Choose to Delegate?” Law and Contemporary Problems 71 (2008): 155. 22. Lake, Entangling Relations. 23. Alexander J. Motyl, Imperial Ends: The Decay, Collapse, and Revival of Empires (New York: Columbia University Press, 2001). 24. Ibid., 4. 25. For some of the more prominent work on rational choice approaches in political science and the early debates about their utility, see Jon Elster, The Cement of Society : A Study of Social Order (Cambridge, UK, and New York: Cambridge University Press, 1989); Donald P. Green and Ian Shapiro, Pathologies of Rational Choice Theory: A Critique of Applications in Political Science (New Haven: Yale University Press, 1994); James G. March and Herbert Alexander Simon, Organizations (New York: Wiley, 1958); and Kenneth A. Shepsle and Mark S. Bonchek, Analyzing Politics: Rationality, Behavior, and Institutions (New York and London: W.W. Norton and Company, 1997). 26. Herbert Alexander Simon, Administrative Behavior; a Study of Decision-Making Processes in Administrative Organization, 2nd ed. (New York: Macmillan, 1957); Oliver E. Williamson, Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization (New York: Free Press, 1975); and Douglas C. North, “Structure and Performance: The Task of Economic History “ Journal of Economic Literature 16, no. 3 (1978): 963–78. 27. James D. Morrow, Game Theory for Political Scientists (Princeton, NJ: Princeton University Press, 1994), 19. 28. Interview with NTV, Moscow, June 12, 1994, as reported in Taras Kuzio, Russia-Crimea-Ukraine: Triangle of Conflict (London: Research Institute for the Study of Conflict and Terrorism, 1994), 41. 29. Bueno de Mesquita et al., Logic of Political Survival, 38–55. The authors refer to three groups, with the coalition as a subset of selectorate. However, since each group is a subset of the one before it—the selectorate is a subset of all residents, and so on—I refer to these as four rather than three groups. For the original use of “selectorate,” see Philip G. Roeder, Red Sunset: The Failure of Soviet Politics (Princeton, NJ: Princeton University Press, 1993); and Susan Shirk, The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993). 30. Bueno de Mesquita et al., Logic of Political Survival, 38. 31. Ibid. 32. Roeder, Red Sunset. 33. Bueno de Mesquita et al., Logic of Political Survival, 38. 34. Interestingly, empirical research suggests that states of relative equality rarely succeed in forming their own integration accords. For example,

188

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35. 36. 37.

38.

39.

40. 41. 42.

43.

in the 1800s, several southern German states of equal wealth attempted to form their own customs union; it failed. Similarly, the Central Asian states after the collapse of the Soviet Union considered their own accord, which would have included Kazakhstan and Uzbekistan, states of relatively equal wealth. The newly independent southern African states also considered their own accord. None of these agreements materialized. See also Walter Mattli, The Logic of Regional Integration: Europe and Beyond (Cambridge, UK, and New York: Cambridge University Press, 1999). Bueno de Mesquita et al., Logic of Political Survival, 26. Ibid., 101–02, 73–213. J. Clark Leith and John Whalley, “Competitive Liberalization and the US-SACU FTA,” in Free Trade Agreements: U.S. Strategies and Priorities, ed. Jeffrey J. Schott (Washington, D.C.: Institute of International Economics, 2004), 335–36. Lawrence B. Krause, European Economic Integration and the United States (Washington, D.C.: Brookings Institution, 1968); Harry G. Johnson, “The Gains from Free Trade with Europe: An Estimate,” Manchester School of Economic and Social Studies 26 (1958), “The Trade Effects of EFTA and the EEC, 1959–1967” (Geneva: EFTA Secretariat, 1972), and “The Effect of EFTA on the Economies of Member States,” (Geneva: EFTA Secretariat, 1969); and Bela A. Balassa, “Trade Creation and Trade Diversion in the European Common Market,” The Economic Journal 77, no. 305 (1967): 1–21. Oliver E. Williamson, The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (New York and London: Free Press and Collier Macmillan, 1985). Hawkins and Jacoby, “How Agents Matter”; and Bradley and Kelley, “The Concept of International Delegation.” Hawkins and Jacoby, “How Agents Matter,” 199. Italics in original have been removed. For a summary of the arguments that Russia is neo-imperialist or post-imperialist, or something else, see Celeste A. Wallander, “Russian Transimperialism and Its Implications,” The Washington Quarterly 30, no. 2 (2007): 107–22. Rawi Abdelal, National Purpose in the World Economy: Post-Soviet States in Comparative Perspective (Ithaca: Cornell University Press, 2001).

Chapter 4 1. Although Treitschke’s writing is the most powerful, his portrayal of some situations has been questioned, given his strong bias toward Prussia. Heinrich von Treitschke, Deutsche Geschichte Im Neunzehnten Jahrhundert (Leipzig: S. Hirzel, 1896). 2. The first detailed discussion of the Zollverein was written by the Prussian nationalist Treitschke in the late 1800s. Most authors writing about the Zollverein rely heavily on this original treatment, which is

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3. 4. 5. 6. 7.

8. 9.

10. 11. 12. 13. 14. 15. 16.

17.

18. 19. 20.

189

contained in seven lengthy volumes. Ibid. For the English translation, see Heinrich von Treitschke, History of Germany in the Nineteenth Century, trans. Eden Paul and Cedar Paul, 7 vols. (London: George Allen & Unwin Ltd., 1918), especially vols. 3 and 4. For the two principal, and highly detailed, English language accounts of the Zollverein, both of which rely on extensive primary sources, see W. O. Henderson, The Zollverein (Cambridge: Cambridge University Press, 1939); and Arnold H. Price, The Evolution of the Zollverein, a Study of the Ideas and Institutions Leading to German Economic Unification between 1815 and 1833 (Ann Arbor: University of Michigan Press, 1949). For a recent comparative account of the Zollverein, see Walter Mattli, The Logic of Regional Integration: Europe and Beyond (Cambridge, UK and New York: Cambridge University Press, 1999). Price, Evolution of the Zollverein, 199–224; and Henderson, Zollverein, 51–52. For details on the negotiations for Baden, Nassau, and Frankfurt, see Price, Evolution of the Zollverein, 104–21. Henderson, Zollverein, 93, and Price, Evolution of the Zollverein, 246. Henderson, Zollverein, 316. Ibid., 318. There were some exceptions to this rule. For example, negotiations with Austria and Switzerland would be preceded by consultations with bordering states. Ibid., 313–17. Erich Eyck, Bismarck and the German Empire, 3rd ed. (London: Allen & Unwin, 1968), 21; and Dennis Showalter, The Wars of German Unification (London: Arnold Publishers, 2004), 3. Henderson, Zollverein, 10. David Ward, 1848: The Fall of Metternich and the Year of Revolution (New York: Weybright and Talley, 1970), 55. Ibid., 76–77. Price, Evolution of the Zollverein, 18. Frank B. Tipton, A History of Modern Germany since 1815 (Berkeley: University of California Press, 2003), 51–52. Price, Evolution of the Zollverein, 47; and Tipton, A History of Modern Germany, 51. Frederick W. Kagan, The End of the Old Order: Napoleon and Europe, 1801–1805 (Cambridge, MA, and New York: Da Capo Press, 2006), 631. Prussia lost more territory after the 1805–1806 war; its population of 9.5 million fell to 5 million. Ward, 1848: The Fall of Metternich and the Year of Revolution, 72. J. F. Bosher, The Single Duty Project: A Study of the Movement for a French Customs Union in the Eighteenth Century (London: The Athlone Press, 1964), 1. Ibid., 5–7. Henderson, Zollverein, 21. Price, Evolution of the Zollverein, 107.

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21. Martin Kitchen, A History of Modern Germany: 1800–2000 (Victoria, Australia: Blackwell Publishing, 2006), 61. 22. Henderson, Zollverein, 39–40. 23. Treitschke, History of Germany in the Nineteenth Century, vol. 3; Price, Evolution of the Zollverein, 209–24; and Henderson, Zollverein, 54–56, 70–80. 24. Price, Evolution of the Zollverein, 120, 90–91. 25. Treitschke, History of Germany in the Nineteenth Century, vol. 3, 457–63; Scott B. MacDonald and Albert L. Gastmann, A History of Credit and Power in the Western World (Edison, NJ: Transaction Publishers, 2004), 139; and Henderson, Zollverein, 54. 26. Henderson, Zollverein, 319. 27. Price, Evolution of the Zollverein, 201n33. 28. Ibid., 201. 29. Ibid., 200. 30. Ibid., 203–04. 31. Treitschke, History of Germany in the Nineteenth Century; and Price, Evolution of the Zollverein. 32. Quote by Johann Albrecht Eichhorn, as cited in David T. Murphy, “Prussian Aims for the Zollverein, 1828–1833,” The Historian 53, no. 2 (1991). 33. Tipton, History of Modern Germany, 113. 34. Ibid., 117. 35. Murphy, “Prussian Aims for the Zollverein, 1828–1833.” 36. Kagan, The End of the Old Order, 630. 37. David Blackbourn, History of Germany, 1780–1918: The Long Nineteenth Century, 2nd ed. (Malden, MA: Blackwell Publishing, 2003), 47. 38. Kagan, The End of the Old Order, 651. 39. Blackbourn, History of Germany, 48–49. For more on the Confederation, see Hans A. Schmitt, “Germany without Prussia: A Closer Look at the Confederation of the Rhine,” German Studies Review 6, no. 1 (1983). 40. Quoted in Blackbourn, History of Germany, 46–47. 41. Ibid., 54. 42. Showalter, The Wars of German Unification, 2. 43. Tipton, A History of Modern Germany, 31. 44. Ibid. 45. Ibid., 258. 46. Price, Evolution of the Zollverein, 30–31. 47. See below for a discussion on the southern accord. 48. Ibid., 209–11. 49. Price, Evolution of the Zollverein, 203. 50. The distance was reported in German miles. The conversion to kilometers is the author’s and is based on 1 German mile ⫽ 7,532 km. 51. Treitschke, History of Germany in the Nineteenth Century, 474. 52. Ibid.

N ot e s 53. 54. 55. 56.

57. 58. 59. 60. 61. 62. 63.

64.

65. 66. 67. 68.

69. 70. 71.

191

Henderson, Zollverein, 142. Ibid., 81. Ibid., 81–82. Frank B. Tipton, “Book Review: Wirtschaftliche Integration Im 19. Jahrhudert: Die Hessischen Staaten Und Der Deutsche Zollverein,” The Journal of Modern History 56, no. 4 (1984): 753. Henderson, Zollverein, 141. Ibid., 186. Price, Evolution of the Zollverein., 24–25. Richard Tilly, “Popular Disorders in Nineteenth-Century Germany: A Preliminary Survey,” Journal of Social History 4, no. 1 (1970): 15. Geffcken, “ Unity of Germany,” 212. Price, Evolution of the Zollverein, 175–76. It is unclear what role the riots themselves played in Hesse-Kassel’s decision to join the customs union. Many of the rioters were protesting factors that would not be directly addressed by the customs union, such as feudal privileges and grain distribution practices, and limits on their political liberty. Furthermore, since the customs union would lead to increased tariffs, this hardly seemed the right response to address citizens’ concerns. On the other hand, the leaders may well have determined that turning around the economy would have a palliative effect. On the causes of the uprisings, based on a review of contemporary newspapers, see Tilly, “Popular Disorders in Nineteenth-Century Germany.” For a useful summary of the revolutions and edited original sources from the time period, see Frank Eyck, ed. The Revolutions of 1848–49 (Edinburgh: Oliver & Boyd, 1972). For background on the liberal movements in Germany at the time, see James J. Sheehan, “Liberalism and Society in Germany, 1815–48,” The Journal of Modern History 45, no. 4 (1973): 583–604; Michael John, “Liberalism and Society in Germany, 1850–1880: The Case of Hanover,” The English Historical Review 102, no. 404 (1987): 579–98; and Theodore S. Hamerow, Otto Von Bismarck and Imperial Germany : A Historical Assessment, 3rd ed., Problems in European Civilization (Lexington, MA, and Toronto: D.C. Heath, 1994). Eyck, Bismarck and the German Empire, 20; and Henderson, Zollverein, 191–92. Geffcken, “Unity of Germany,” 216. Eyck, Bismarck and the German Empire, 22–27. For a detailed account of events in Paulskirche, see Frank Eyck, The Frankfurt Parliament 1848–1849 (London, Melbourne, Toronto, and New York: MacMillan and St. Martin’s Press, 1968). Eyck, Bismarck and the German Empire, 22–27. Henderson, Zollverein, 38–39. Price, Evolution of the Zollverein, 128.

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72. Quoted in Murphy, “Prussian Aims for the Zollverein, 1828–1833.” 73. Otto Prince Von Bismarck, Bismarck: The Man and the Statesman: Being the Reflections and Reminiscences of Otto Prince Von Bismarck, trans. A. J. Butler, 2 vols., vol. 1 (London: Smith, Elder, & Co., 1898), 309–10. 74. Gordon Alexander Craig, From Bismarck to Adenauer : Aspects of German Statecraft (Westport, CT: Greenwood Press, 1979), 6. 75. Ibid., 9–11. Quote on p. 11. 76. Eyck, Bismarck and the German Empire, 38. 77. Ibid., 49–56. 78. Ibid., 57. 79. Ibid., 114. 80. Ibid., 39. 81. Von Bismarck, Bismarck, 64. 82. Eyck, Bismarck and the German Empire, 115–17. Bismarck’s idea was not unique to him; he had seen Napoleon use this device to successfully end the Second Republic. 83. Schmitt, “From Sovereign States to Prussian Provinces,” 24–32. 84. Ibid.: 35–41. 85. Henderson, Zollverein, 308. 86. Ibid., 42. 87. Ibid., 93, 140–43, 71, 84–85, 249. 88. W. O. Henderson, “Book Review: Die Handelsbeziehungen Zwischen Belgien Und Dem Zollverein,” 261. 89. Treaties with individual members provided some exceptions to this rule. These provisions were rarely used, however, as Prussia negotiated nearly all economic accords with the foreign powers. 90. For the battle between protectionists and free traders, see Henderson, Zollverein, 179–89. 91. Ibid., 249, 61, 99. 92. Ibid., 319–28. 93. Henderson, Zollverein, 67. 94. Ibid., 68–88; and Murphy, “Prussian Aims for the Zollverein, 1828– 833.” 95. Henderson, Zollverein, 81–82. 96. The customs union was so called because it included an unusual provision requiring members to use a standardized consumption tax. 97. Henderson, Zollverein, 122–26, 229. 98. Ibid., 154. 99. William L. Rapp, “The ‘Mittlestand’ and Politics: The Case of Hanover, 1830–1850,” German Studies Review 4, no. 3 (1981): 363–72. 100. Ibid., 373; and Henderson, Zollverein, 191. 101. Henderson, Zollverein, 213–17. 102. James J. Sheehan, “Book Review: Die Deutsche Trias in Idee Und Wirklichkeit: Vom Alten Reich Zum Deutschen Zollverein,”

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American Historical Review (1991): 1220. See also Paul W. Schroeder, “Book Review: Die Deutsche Trias in Idee Und Wirklichkeit: Vom Alten Reich Zum Deutschen Zollverein.” 103. Ibid., 57–58. 104. Price, The Evolution of the Zollverein, 92. 105. Ibid., 67. Price notes that List could not take credit for the idea, as he had proposed a separate union, but not the common administration of such a union. This idea came from state officials in Wurttemberg. 106. Ibid., 91–94. 107. Price, writing in 1949, called Nebenius’ plan a “customs administration.” His insistence that “this was not a customs union” (p. 54), a point he also made about the Southern customs union, appears to be based on his view that such a union cannot have supranational structures. In writing about the southern option, he stated, “The union proposed here was not a customs union, since each member state was to give up its own administration and a common customs administration was to be erected” (67). 108. Price, Evolution of the Zollverein, 97. 109. Treitschke, History of Germany in the Nineteenth Century, 442, 50. Ever the Prussian nationalist, Treitschke notes that “the university of the Bavarian capital could not be compared, even remotely, with the leading university of Prussia.” 110. Henderson, Zollverein, 62; and Treitschke, History of Germany in the Nineteenth Century, 463. 111. Price, Evolution of the Zollverein, 193; and Henderson, Zollverein, 62. 112. Henderson, Zollverein, 62; and Treitschke, History of Germany in the Nineteenth Century, 470–71. 113. Price, Evolution of the Zollverein, 194. 114. The Bavaria-Wurttemberg union is discussed in ibid., 192–99; and Henderson, Zollverein, 57–64. 115. Württemberg had created its own limited customs union in 1824, incorporating its enclave principalities of Hohenzollern-Sigmaringen and Hohenzollern-Hechingen. These principalities automatically became part of the Bavarian-governed union. Price, Evolution of the Zollverein, 150; and Henderson, Zollverein, 62–63. 116. Price, Evolution of the Zollverein, 199–233. 117. Henderson, Zollverein. 118. Showalter, Wars of German Unification, 3. 119. Price, Evolution of the Zollverein, 206. 120. Ibid., 48–49. 121. Henderson, Zollverein, 95–97, 213; and Price, Evolution of the Zollverein, 48–50. 122. Roy A. Austensen, “The Making of Austria’s Prussia Policy, 1848– 852,” The Historical Journal 27, no. 4 (1984): 861.

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123. Ibid., 867. 124. Ibid., 871. 125. Ibid., 874–75. 126. Henderson, Zollverein, 196–202. 127. The Bavarian Army remained autonomous in peacetime. 128. Tipton, A History of Modern Germany, 120–25. 129. The 66 years counts from the first accord between Prussia and the enclaves in 1819 to the last treaty between the German Empire and the free city of Bremen. The official Zollverein lasted 36 years, beginning in 1834. 130. The free cities of Hamburg and Bremen did not share the German Empire’s customs system until 1885. Henderson, Zollverein, 334.

Chapter 5 1.

2. 3. 4. 5.

6. 7. 8.

9.

10. 11. 12. 13.

For a copy of the Schedule, see Union of South Africa, Negotiations Regarding the Transfer to the Union of South Africa of the Government of Basutoland, the Bechuanaland Protectorate and Swaziland, 1910–1939 (Pretoria: Government Printer, 1953). Article 17 addresses the plutocratic structure. Quote in Leonard Monteath Thompson, The Unification of South Africa, 1902–1910 (Oxford: Clarendon Press, 1960), 419. Article 12. Niel Joubert, “The Reform of South Africa’s Anti-Dumping Regime: Managing the Challenges of WTO Participation: Case Study 38” (2006), http://www.wto.org/english/res_e/booksp_e/casestudies_ e/case38_e.htm. Articles 4 and 8. Article 4. Richard Gibb, “The New Southern African Customs Union Agreement: Dependence with Democracy,” Journal of Southern African Studies 32, no. 3 (2006). Namibia had been governed by South Africa as part of a post-World War I agreement. Having annexed the land, South Africa applied the SACU rules to it. When Namibia at last gained its independence, its leaders signed on to the SACU without negotiating the terms or altering the articles. Ronald Hyam, The Failure of South African Expansion: 1908–1948 (New York: Africana Publishing Corporation, 1972), 186–87; Robert Kirk and Matthew Stern, “The New Southern African Customs Union Agreement,” The World Economy 28, no. 2 (2005): 171, fn 4. Article 16. For a copy of the accord, see the Trade Law Centre for Southern Africa, http://www.tralac.org/ Article 31. Articles 8–10. Article 11.

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14. Article 14. 15. Article 13. 16. Gibb, “The New Southern African Customs Union Agreement: Dependence with Democracy,” 600. 17. Gerhard Erasmus, “New SACU Institutions: Prospects for Regional Integration,” (TRALAC: Trade Law Centre for Southern Africa, 2004), 23. 18. Article 34. 19. Sifiso Ngwenya, “The New SACU (Southern African Customs Union) Draft Agreement,” in Sisebenza Sonke (Pretoria: Department of Trade and Industry, 2002), as cited in McCarthy (2003), 627. 20. For an overview on Africa’s economy in the 1800s, see J. Forbes Munro, Africa and the International Economy, 1800–1960: An Introduction to the Modern Economic History of Africa South of the Sahara (London and Totowa, NJ: J. M. Dent; Rowman and Littlefield, 1976). 21. Ibid., 56–57. 22. Ibid., 17–39. 23. Ibid., 14, 56. 24. Ibid., 57. 25. D. Hobart Houghton, “Economic Development, 1865–1965,” in The Oxford History of South Africa, ed. Monica Wilson and Leonard Thompson (Oxford: Oxford University Press, 1971), 11–12. 26. Library of Congress, South Africa: A Country Study, Country Studies/Handbook Series (Washington, D.C.: Library of Congress, 1981); Munro, Africa and the International Economy, 78–79. The amount invested is from the Library of Congress. Munro’s numbers are lower; he estimates that £41 million had been invested in Transvaal gold mining by 1895. 27. J. A. Hobson, The War in South Africa: Its Causes and Effects (New York: Howard Fertig, 1969 [1900]), 297. Quote is from Sir Grey in an address before the Colonial Parliament. 28. Woolsey, “A Comparative Study of the South African Constitution,” 7–8. 29. Hobson, War in South Africa, 300. 30. Ronald Robinson, John Gallagher, and Alice Denny, Africa and the Victorians: The Climax of Imperialism in the Dark Continent (New York: St. Martins Press, 1961), 61–62. 31. Ibid., 64. 32. Ibid., 417–18. 33. Ibid., 410–12. 34. Ibid., 416–17. 35. Ibid., 413. 36. Munro, Africa and the International Economy, 79–81; and Library of Congress, South Africa. 37. Library of Congress, South Africa .

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38. William Beinart, Twentieth-Century South Africa (Oxford: Oxford University Press, 2001), 62–65. 39. Library of Congress, South Africa ; Geoffrey Blainey, “Lost Causes of the Jameson Raid,” Economic History Review 18 (1965); Elaine N. Katz, “Outcrop and Deep-Level Mining in South Africa before the Anglo-Boer War: Examining the Blainey Thesis,” Economic History Review 48, no. 2 (1995); and Richard Mendelsohn, “Blainey and the Jameson Raid: The Debate Renewed,” Journal of Southern African Studies 6, no. 2 (1980). 40. Robinson, Gallagher, and Denny, Africa and the Victorians, 446. 41. Ibid., 442. 42. Thomas Pakenham, The Boer War (New York: Random House, 1979), xix. 43. G. H. L. Le May, British Supremacy in South Africa: 1899–1907 (Oxford: Clarendon Press, 1965), 88–91, 106–10. 44. E. H. H. Green, The Crisis of Conservatism: The Politics, Economics, and Ideology of the Conservative Party, 1880–1914 (London and New York: Routledge, 1995), 73–75. 45. Richard A. Rempel, Unionists Divided: Arthur Balfour, Joseph Chamberlain and the Unionist Free Traders (Great Britain: David & Charles, 1972), 151. 46. Leonard Monteath Thompson, A History of South Africa, 3rd ed., Yale Nota Bene (New Haven: Yale University Press, 2001), 146–47; and Leonard Thompson, “The Compromise of Union,” in The Oxford History of South Africa, ed. Monica Wilson and Leonard Thompson (Oxford: Oxford University Press, 1971), 336–37. 47. Mats Lundahl and Lennart Petersson, The Dependent Economy: Lesotho and the South African Customs Union (Boulder, San Francisco, and Oxford: Westview Press, 1991), 98–99. For detailed accounts of the various customs unions in the region, dating from the 1889 accord between the Cape Colony and the Orange Free State, see Stephen J. Ettinger, “The Economics of the Customs Union between Botswana, Lesotho, Swaziland and South Africa” (unpublished Ph.D., University of Michigan, 1974); Jean Van der Poel, Railway and Customs Policy in South Africa 1885–1910 (London: Longmans, 1933); and Andries J. Bruwer, Protection in South Africa (Stellenbosch: Pro Ecclesia Printing Works, 1923). 48. Thompson, Unification of South Africa, 54–57. 49. Thompson, “ Compromise of Union,” 331, 43–50. 50. “The Constitution of South Africa.”, “The South Africa Act, 1909; Supplement: Official Documents.” For a detailed account of the conference, see Thompson, Unification of South Africa. For a condensed version, see Thompson, History of South Africa, 143–53. Also, see Ronald Hyam and Peter Henshaw, The Lion and the Springbok: Britain and South Africa since the Boer War (Cambridge: Cambridge University Press, 2003), Chapter 4.

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51. Thompson, “Compromise of Union,” 348–49. 52. Hyam and Henshaw, Lion and the Springbok, 108. 53. All quotes from Hyam, Failure of South African Expansion, 80–81. On the African leaders’ preference for British protection over incorporation into South Africa, see also Michael Ward, “Economic Independence for Lesotho?” Journal of Modern African Studies 5, no. 3 (1967): 357; Lord Hailey, The Republic of South Africa and the High Commission Territories, Richard P. Stevens, “The History of the Anglo-South African Conflict over the Proposed Incorporation of the High Commission Territories “ in Southern Africa in Perspective: Essays in Regional Politics, ed. Christian P. Potholm and Richard Dale (New York and London: Free Press, 1972). 54. Hyam, Failure of South African Expansion, 1–2; and Thompson, Unification of South Africa, 269–79. 55. Hyam, Failure of South African Expansion, 19. 56. Union of South Africa, Negotiations Regarding the Transfer to the Union of South Africa of the Government of Basutoland, the Bechuanaland Protectorate and Swaziland, 1910–1939, 7. 57. Hyam, Failure of South African Expansion; and O.M. Lord Hailey, The Republic of South Africa and the High Commission Territories (London and New York: Oxford University Press, 1963), 50–103. 58. Jack Halpern, South Africa’s Hostages: Basutoland, Bechuanaland and Swaziland (Baltimore: Penguin Books, 1965), 232–33; McCarthy, “ Southern African Customs Union in Transition,” 611. 59. “Covenant of the League of Nations,” 1919. 60. Colin McCarthy, “The Southern African Customs Union in Transition,” African Affairs 102 (2003): 612. 61. Ettinger, “The Economics of the Customs Union between Botswana, Lesotho, Swaziland and South Africa,” 67–73. 62. Ibid., 79–80. 63. Paul Mosley, “The South African Customs Union: A Reappraisal,” World Development 6, no. 1 (1978). 64. Peter Robson, “Reappraising the Southern African Customs Union: A Comment,” World Development 6, no. 4 (1978). See also Pierre M. Landell-Mills, “The Southern African Customs Union: A Comment on Mosley’s Reappraisal,” World Development 7, no. 1 (1979); Cobbe, “Integration among Unequals”; and Paul Mosley, “Reply to Robson and Landell-Mills,” World Development 7, no. 1 (1979). 65. Mosley, “South African Customs Union .” 66. J. Barron Boyd, Jr., “A Subsystemic Analysis of the Southern African Development Coordination Conference,” African Studies Review 28, no. 4 (1985): 48–50. 67. Bischoff, Swaziland’s International Relations and Foreign Policy, 214–15. 68. Ibid., 217–20. For information on U.S. policy, see ibid., 220–37.

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69. Ibid., 245, 75–78. 70. Pierre M. Landell-Mills, “The 1969 Southern African Customs Union Agreement,” Journal of Modern African Studies 9, no. 2 (1971): 266–67. 71. On the importance of nontariff trade barriers to SACU, see James H. Cobbe, “Integration among Unequals: The Southern African Customs Union and Development,” World Development 8 (1980). 72. For a copy of the 1969 accord, see the Trade Law Centre for Southern Africa, http://www.tralac.org/ For additional discussion on the formula, see Colin McCarthy, “The Southern African Customs Union in a Changing Economic and Political Environment,” Journal of World Trade 26 (1992). 73. Landell-Mills, “The 1969 Southern African Customs Union Agreement,” 275, Table 3. 74. Stoneham, “An Overview of the SACU,” 3–4; Kirk and Stern, “The New Southern African Customs Union Agreement,” 171. X. P. Guma has argued that the formula change in 1975 actually made BLS worse off and even created the possibility of a perverse outcome in which the small states transferred money to South Africa, rather than the reverse as was intended. See X. P. Guma, “The Revised Southern African Customs Union Agreement: An Appraisal,” South African Journal of Economics 58, no. 1 (1990). 75. Stoneham, “An Overview of the SACU,” 9, Davies, “The Southern African Customs Union,” 33. 76. Davies, “The Southern African Customs Union,” 33. 77. World Bank, “WDI Online: World Development Indicators,” h t t p : / / d d p - e x t . w o r l d b a n k . o r g / e x t / D D P Q Q / m e m b e r. do?method⫽getMembers. The states only reported figures for a handful of years: for Botswana, 1990–1996; Lesotho, 1990–1993, and 2004; Namibia, 1990–1992 and 2001–2003; Swaziland, 2000–2003. 78. Bischoff, Swaziland’s International Relations and Foreign Policy, 210. 79. Davies, “The Southern African Customs Union,” 31–32. Quote is from World Bank, “Botswana: Opportunities for Industrial Development in Botswana,” (Washington, D.C.: World Bank Southern African Department, 1992), 31. See also Landell-Mills, “The 1969 Southern African Customs Union Agreement.” 80. Landell-Mills, “The 1969 Southern African Customs Union Agreement,” 276–77. 81. Kirk and Stern, “The New Southern African Customs Union Agreement,” 169. 82. Festus Mogae, “Preface,” in Reconstituting and Democratising the Southern African Customs Union: Report of the Workshop Held in Gaborone, Botswana, 6–8 March 1994, ed. Max Sisulu, et al. (Braamfontein (South Africa): National Institute of Economic Policy), ii.

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83. Mose Tjitendero, “The Future of the SACU–a Namibian Viewpoint,” in Reconstituting and Democratising the Southern African Customs Union: Report of the Workshop Held in Gaborone, Botswana, 6–8 March 1994, ed. Max Sisulu, et al. (Braamfontein (South Africa): National Institute of Economic Policy, 1994), 22–23. 84. Ibid., 27. 85. G. Hattingh, “The New Southern African Customs Union (SACU) Draft Agreement” (Pretoria: Department of Trade and Industry, 2002). 86. Davies, “Southern African Customs Union,” 36. 87. Gibb, “ New Southern African Customs Union Agreement,” 597– 9. 88. See Arne Tostensen, “What Role for SADCC?,” in Apartheid: Regional Integration and External Resources, ed. B. Odén (Uppsala: Nordiske Afrikainstitutet, 1993). 89. James J. Hentz, “South Africa and the Political Economy of Regional Cooperation in Southern Africa,” Journal of Modern African Studies 43, no. 1 (2005): 29–31. The quote is from the executive director of the Anglo-American Corporation.

Chapter 6 1. David T. Twining, The New Eurasia: A Guide to the Republics of the Former Soviet Union (Westport, CT, and London: Praeger Publishers, 1993), 8. 2. “Nazarbayev’s Press Conference,” RFE/RL Newsline, December 10, 1991. 3. “Central Asian Leaders to Discuss Commonwealth,” RFE/RL Newsline, December 12, 1991; “Central Asian Leaders Meet,” RFE/RL Newsline, December 13, 1991; and “Central Asian Republics Want to Join Commonwealth,” RFE/RL Newsline, December 16, 1991. 4. “Commonwealth of Independent States Proclaimed in Alma-Ata,” RFE/RL Newsline, December 23, 1991. The Baltic states have never signed any of the Russian-designed economic integration treaties, including the original disintegration and new integration accord. Georgia also abstained from signing on to the CIS in 1991; however, two years later it joined the others. 5. My account relies on daily news reports from the region, secondary sources, and personal interviews (1996–1997) and follow-up communications with Western and Russian officials, academics, private and public contractors, and embassy staff working in Russia, Kazakhstan, and Ukraine. 6. Dmitri Ruritov, “How It All Began: An Essay on New Russia’s Foreign Policy,” in Russian Security after the Cold War, ed. Teresa Pelton Johnson and Steven E. Miller (Washington, D.C.: Brasseys,

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7. 8.

9. 10. 11. 12.

13. 14.

15.

16.

17.

1994), 157; and Richard Woff, “High Command of the CIS–Putting the Pieces Together Again,” Jane’s Intelligence Review 4, no. 4 (1992): 174. These features were spelled out in the September 1993 Agreement on the Creation of Economic Union. For news reports on the CIS Economic Union and its governing board, see “Prime Ministers’ Meeting Establishes Supranational Economic Body,” RFE/RL Newsline, September 12, 1994; “CIS Summit: Economic Decisions,” RFE/RL Newsline, October 24, 1994; “CIS Integration Measures,” RFE/RL Newsline, September 9, 1994; “Interstate Economic Committee Holds First Session,” RFE/ RL Newsline, November 21, 1994; “Caution on Customs Union,” RFE/RL Newsline, December 1, 1994; and “Results of the Prime Ministers’ Meeting,” RFE/RL Newsline, September 13, 1994. Article 21. For a copy of the accord, see “Tuck Trade Agreements Database” (Dartmouth University, 2005). Article 19. U.S. Central Intelligence Agency, “World Factbook,” CIA, https:// www.cia.gov/library/publications/the-world-factbook/geos/rs.html. Kathleen J. Hancock, “The Semi-Sovereign State: Belarus and the Russian Neo-Empire,” Foreign Policy Analysis 2, no. 2 (2006); and Constantine Micholopoulos and David Tarr, “Are Customs Unions Economically Sensible in the Commonwealth of Independent States” (paper presented at the Trade Policy and WTO Accession: A Training of Trainers Course for Russia and the CIS, December 2004 [Moscow]). OMRI Daily Digest, August 21, 1995. U.S. Embassy sources in Almaty confirmed that Nazarbayev had this authority. The harmonizing was confirmed by the attorney for USAID–Development, Trade & Investment Project. Brian O’Shea, Author interview in Almaty, Kazakhstan, March 4, 1997; OMRI Daily Digest, January 3, 1996; Pipeline News, April 12, 1996; “Kazakhstan Lifts Customs Control on Russian Border,” OMRI Daily Digest, September 21, 1995; and “Russia Not Ready to Lift Customs Control on Kazakhstani Border,” OMRI Daily Digest, September 27, 1995. Ford and BMW later opened assembly plants in Russia to avoid high tariffs and to take advantage of low-cost labor. “Ford Works on Deal to Start Making Cars in Russia,” Detroit Free Press, March 19, 1999. Almaty U.S. Embassy, Commercial Services Section, e-mail to author, January 24, 1997. The automobile excise taxes were printed in Kazakhstanckaya Pravda, January 9, 1997. In both Russia and Kazakhstan, it was difficult to determine exactly what the import fees were be on any given item and a given time. While tariff rates were published, they changed frequently and were only reported in newspapers. Article 2.

N ot e s 18. 19. 20. 21. 22. 23. 24.

25.

26.

27.

28. 29.

30.

31. 32. 33. 34.

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Articles 3–8. Article 15. RIA Novisti, June 16, 2004. “Russia Approves Uzbekistan’s Admission to Eurasec,” Central Asia & Caucasus Business Weekly, August 1, 2006. Oleksandr Sushko, “From the CIS to the SES: A New Integrationist Game in Post-Soviet Space” (PONARS Policy Memo 303, 2003), 1. Official Kremlin International News Broadcast, September 16, 2004. “Ukrainian Govt Confirms Commitment to Stronger CES,” TASS, August 30, 2006; and “P.M. Rules out Ukraine Joining CES Customs Union,” Ukraine Business Daily, September 21, 2006; “Ukrainian foreign minister says regional economic club has potential,” BBC Monitoring Kiev Unit Supplied by BBC Worldwide Monitoring, October 19, 2007. Author’s calculation based on data from World Bank, “WDI Online: World Development Indicators,” http://devdata.worldbank.org/ dataonline/. For a listing of Russia’s abundant resources, see Kyrre Elvenes Brækhus and Indra Øverland, “A Match Made in Heaven? Strategic Convergence between China and Russia,” China and Eurasia Forum Quarterly 5, no. 2 (2007). Yeltsin said about Gorbachev, “He wanted to combine things that cannot be combined—to marry a hedgehog and a grass snake— communism and a market economy, public-property ownership and private-property ownership, multiparty system and the Communist Party and its monopoly on power. But these things are incompatible.” Quoted in Anders Åslund, Economic Transformation in Russia (New York: St. Martin’s Press, 1994), 28. John B. Dunlop, “Aleksandr Lebed and Russian Foreign Policy,” SAIS Review 17, no. 1 (1997). Leon Aron, “The Foreign Policy Doctrine of Postcommunist Russia and Its Domestic Context,” in The New Russian Foreign Policy (New York: Council on Foreign Relations, 1998), 24. Quoted in Alvin Z. Rubenstein, “The Transformations of Russian Foreign Policy,” in The International Dimension of Post-Communist Transitions in Russia and the New States of Eurasia, ed. Karen Dawisha (Armonk, NY: M.E. Sharpe, 1997), 34. “Toward Reform and Cooperation,” Jane’s Intelligence Review 4, no. 8 (1992). Aron, “The Foreign Policy Doctrine of Postcommunist Russia and Its Domestic Context,” 23. Rubenstein, “The Transformations of Russian Foreign Policy,” 37–38. Anders Åslund, How Russia Became a Market Economy (Washington, D.C.: Brookings Institute, 1995), 218.

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35. James Richter, “Russian Foreign Policy and the Politics of National Identity,” in The Sources of Russian Foreign Policy after the Cold War, ed. Celeste A. Wallander (Boulder: Westview Press, Inc., 1996), 85. 36. Dunlop, “Aleksandr Lebed and Russian Foreign Policy,” 52. 37. Leszek Buszynski, Russian Foreign Policy after the Cold War (Westport, CT: Praeger Publishers, 1996), 26. 38. Dunlop, “Aleksandr Lebed and Russian Foreign Policy,” 51–53. 39. Quotations are found in Ibid., 51. 40. “Yeltsin’s Speech to Civic Union, as Reported on Moscow Television, Feb. 28, 1993,” FBIS–Central Eurasia 93-038 (1993). 41. “Basic Provisions of the Military Doctrine of the Russian Federation, as Reported on Moscow Television, Feb. 28, 1993,” FBIS–SOV 93222S (1993). 42. The speech was on September 28, 1993. “Russia and the ‘near Abroad’,” Air Force Magazine 1993, 79. 43. RFE/RL Newsline, November 22, 1994. 44. Dmitry Shlapentokh, “The Illusions and Realities of Russian Nationalism,” The Washington Quarterly 23, no. 1 (2000): 173–74. 45. BBC News, “Putin Clinches Russian Presidency,” March 27, 2000. 46. Celeste A. Wallander, “Russian Transimperialism and Its Implications,” The Washington Quarterly 30, no. 2 (2007): 107–22; Kathleen J. Hancock, “Russia: Great Power Image Versus Economic Reality,” Asian Perspective 31, no. 4 (2007): 71–98; Dmitry Polikanov and Graham Timmins, “Russian Foreign Policy under Putin,” in Russian Politics under Putin, ed. Cameron Ross (Manchester and New York: Manchester University Press, 2004); and Mark N. Katz, “Exploiting Rivalries: Putin’s Foreign Policy,” Current History 103, no. 10 (2004): 337–41. 47. RussiaVotes.org, http://www.russiavotes.org/. 48. Ibid. 49. Energy Information Administration U.S. Department of Energy, “International Energy Annual 2004, World Dry Natural Gas Production,” http://www.eia.doe.gov/pub/international/iealf/table24. xls; and “International Energy Annual 2004, World Dry Natural Gas Consumption,” http://www.eia.doe.gov/pub/international/iealf/ table13.xls. 50. Lavon Zlotnikau, “Economic Growth in Belarus: Fact or Fiction?,” RFE/RL Newsline, March 25, 1998. The author was an adviser to the Supreme Soviet of Belarus and to the World Bank. 51. “Russia Accepts Belarus’s Food-for-Gas Offer,” Belarusian TV, October 31, 1998. 52. Paul L. Joskow, “Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electric Generating Plants,” Journal of Law, Economics, & Organization 1, no. 1 (1985): 37.

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53. Oliver E. Williamson and Sidney G. Winter, eds., The Nature of the Firm : Origins, Evolution, and Development (New York: Oxford University Press, 1993), 17. For further elaboration on RSAs, see Benjamin Klein, Robert G. Crawford, and Armen A. Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” Journal of Law and Economics 21 (1978): 297– 326; Howard A. Shelanski and Benjamin Klein, “Empirical Research in Transaction Cost Economics: A Review and Assessment,” Journal of Law, Economics, and Organization 11, no. 2 (1988): 335–61; Scott E. Masten, “About Oliver E. Williamson,” in Firms, Markets, and Hierarchies, ed. Glenn R. Carroll and David J. Teece (New York and Oxford: Oxford University Press, 1999); Joskow, “Vertical Integration and Long-Term Contracts”; and Scott E. Masten, Jr., James W. Meehan, and Edward A. Snyder, “The Costs of Organization,” Journal of Law, Economics, & Organization 7, no. 1 (1991): 1–25. 54. Katja Yafimava and Jonathan Stern, “The 2007 Russia-Belarus Energy Gas Agreement,” in Oxford Energy Comment (Oxford Institute for Energy Studies, 2007). 55. Energy Information Administration U.S. Department of Energy, “Country Analysis Briefs, Baltic Sea Region,” http://www.eia.doe. gov/emeu/cabs/latvia.html; “Country Analysis Briefs, Germany,” http://www.eia.doe.gov/emeu/cabs/Germany/Oil.html; “Country Analysis Briefs, Poland,” http://www.eia.doe.gov/emeu/cabs/poland. html; and “Country Analysis Briefs, Belarus,” http://www.eia.doe. gov/emeu/cabs/belarus.html. 56. Energy Information Administration U.S. Department of Energy, “Country Analysis Briefs, Russia: Natural Gas,” http://www.eia.doe. gov/emeu/cabs/Russia/NaturalGas.html. 57. “Chevron JV to Start BTC Exports in 2007,” Financial Times Information, Turkish News Daily, July 1, 2006. 58. “Chevron Revises Tengiz Costs, Output Targets,” Platt’s Oilgram News, March 2, 2006. 59. “Kazakhstan to Boost Oil Output 30% by 2010,” Russia & CIS Oil and Gas Weekly, March 1, 2006. 60. “Tengizchevroil Awards Southern Oil Route Contracts,” Neft Trader Weekly, March 1, 2006, “Tengizchevroil to Boost Investment 46%,” Petroleum Report, September 1, 2004. 61. World Bank, “Staff Appraisal Report: Republic of Kazakhstan: Uzen Oil Field Rehabilitation Project. Report No. 15114-Kz,” (1996), “Kazmunaigaz Unit Intensifies Uzen Rehabilitation,” Central Asia and Caucasus Business Report, May 7, 2004. 62. “Karachaganak Consortium to Supply Gas to Europe,” Petroleum Report, December 8, 2004. 63. “Investments in Kazakhstan’s Karachaganak Oil Field Exceed $1 Billion in 2001,” Interfax News Agency, September 6, 2001.

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64. Eni, “Eni Worldwide, Kazakhstan, Activities, Exploration and Production,” http://www.eni.it/home/home_en.html. 65. Agip KCO, “About KCO,” http://www.agipkco.com. The five companies are ConocoPhillips, ExxonMobil, Inpex (Japan), Shell, and Total. 66. “First Oil from Kashagan Facing Delays of up to Two Years,” Neft Trader Weekly, October 14, 2005. 67. Oral Karpishev, “Estimates for Final Completion Costs Range from $31 Billion to $50 Billion,” ITAR-TASS, May 4, 2005. 68. “Karachaganak Consortium to Supply Gas to Europe”; Isabel Gorst, “Tightening Rules of the Game, Caspian Oil,” Financial Times, December 14, 2004. 69. “Karachaganak Consortium to Supply Gas to Europe.” 70. “Stalemate in Russia-Turkmenistan Gas Price Talks,” News Central Asia, December 12, 2005. 71. Information on the Ural Export Blend is from the World Bank’s feasibility study on the Uzen project. World Bank, “Staff Appraisal Report: Republic of Kazakhstan: Uzen Oil Field Rehabilitation Project. Report No. 15114-Kz,” 67. 72. Atyrau, Kazakhstan’s third largest refinery, processed Kazakh oil from the Caspian Sea region. 73. Energy Information Administration U.S. Department of Energy, “Country Analysis Briefs, Kazakhstan,” http://www.eia.doe.gov/ emeu/cabs/kazakhstan.html. 74. European Commission, “What the European Community Could Bring to Belarus,” http://ec.europa.eu/external_relations/belarus/ index_en.htm. 75. “Belarus President Urges Closer Ties with Europe,” Die Welt, BBC Monitoring, January 30, 2007. 76.“Russia Cuts Gas Exports to Belarus,” RosBusiness Consulting Database, November 4, 2002; “Parliament Approves Gas Privatization Bill to Meet Russian Demands,” Belapan News Agency, November 20, 2002; “Belarusian Gas Transportation Company to Be Privatized,” RosBusiness Consulting Database, November 11, 2002; “Russian Gas Giant Threatens to Reduce Supplies to Belarus,” Interfax News Agency, November 22, 2002; “Belarus and Gazprom Agree on Debt Settlement,” RosBusiness Consulting Database, November 22, 2002; and “Belarusian PM to Discuss Gas Deliveries in Moscow,” ITAR-TASS, November 11, 2002. 77. “Beltransgaz Says Holders Did Not Discuss Russia-Belarus JV Mon.,” Prime-Tass Business News Agency, December 30, 2003; “Russian PM Vows to Increase Gas Prices for Belarus If Joint Venture Not Set Up,” Prime-TASS, December 17, 2003; and “Russia Is Unwilling to Compromise with Belarus,” The Russian Oil and Gas Report, December 31, 2003. 78. “Beltransgaz Says Holders Did Not Discuss Russia-Belarus JV Mon”; and “Gazprom Insists on Privatizing Beltransgaz by Book Cost,” Interfax News Agency, January 8, 2004.

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79. “Belarus Considering Higher Oil Transit Rates for Russia,” BBC Monitoring International Reports, January 9, 2004; and “Russia, Belarus Discuss Integration Prospects,” ITAR-TASS, January 16, 2004. 80. “Gazprom Stops Deliveries to Belarus Due to Lack of Deal on Tariffs,” AFX European Focus, January 20, 2004; “Russia Continues Gas Exports to Belarus,” ITAR-TASS, January 29, 2004; “Vladimir Putin to Sell Gas to Belarus on Credit,” Russian Oil and Gas Report, January 28, 2004; and “Russia, Belarus Discuss Relations in Gas Sector,” RIA-Novosti, January 23, 2004. 81. For more on the hostage-taking incident, see Hancock, “SemiSovereign State.” 82. RFE/RL Newsline, “Belarus Still Hasn’t Signed IMF Letter,” July 21, 1995; “Belarus To Meet IMF Target By Mid-August,” Aug. 11, 1995; “IMF May Release Credit To Belarus,” Aug. 25, 1995; “IMF Approves Credit To Belarus,” Sept. 14, 1995; “IMF Asks Belarus To Stop Intervening In Currency Market,” Nov. 2, 1995; “IMF Critical Of Belarusian Reforms,” Dec. 19, 1995. 83. World Bank, “WDI Online: World Development Indicators.” 84. “Report on Kazakh Oil and Gas Pipeline Construction,” BISNIS, New Europe, October 6–12, 1996. 85. “Kazakhstan Continues CPC Expansion Talks with Russia,” Russia and CIS Energy Newswire, December 13, 2005. In 2007, Russian transferred its share to state-owned Transneft. Anna Shiryaevskaya, “Russia Transfers 24% CPC Stake to Transneft; Move Set to Increase Role of Pipeline Operator over Regional Infrastructure,” Platts Oilgram News, May 3 2007. 86. American Association of Petroleum Geologists, “Kazakhstan Tops Finds for the Year,” http://www.aapg.org/explorer/2002/01jan/ topdiscoveries.cfm. The article says “$265 billion,” in an apparent typo. For more on the beginnings of the pipeline, see Irina Zviagelskaia, The Russian Policy Debate on Central Asia (London: Royal Institute of International Affairs, 1995), “Russia, Kazakhstan, and Oman Sign Final Pipeline Deal,” RFE/RL Newsline, March 12, 1996, “Talks Resume on Caspian Pipeline Consortium,” RFE/RL Newsline, March 29, 1996, “Regional Oil and Gas Update,” RFE/RL Newsline, March 13, 1997. 87. “Caspian Pipeline Consortium to Lower Payments to Russia,” December 10, 2003. 88. “Kazakhstan to Boost Oil Output 30% by 2010.” 89. Eni, “Eni Worldwide, Kazakhstan, Activities, Exploration and Production”; “KPO Talking Gas Exports with Russia, Equivocal on Exports to China,” Russia & CIS Oil and Gas Weekly, April 19, 2006. 90. Audrey L. Altstadt, “Azerbaijan’s Struggle toward Democracy,” in Conflict, Cleavage, and Change in Central Asia and the Caucasus, ed. Karen Dawisha and Bruce Parrott (Cambridge: Cambridge University Press, 1997), 140. Like the CPC, the membership varied over time. 91. Pipeline News, October 12, 1996.

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92. Ibid. 93. “Turkish Clarifications on the Ceyhan Oil Pipeline Project,” Jamestown Monitor 2, no. 92 (1996). 94. “Five Presidents Sign ‘Ankara Declaration’ While Russia Expresses Displeasure,” RFE/RL Newsline, October 30, 1998’ “Turkey Drums up Support for Baku-Ceyhan on Eve of Pipeline Decision,” Agence France Presse, October 29 1998. 95. “Framework Documents Signed on Azerbaijan Oil Export Pipeline to Russia’s Clear Displeasure,” RFE/RL Newsline, November 19, 1999. 96. “Baku-Ceyhan Oil Pipeline Officially Opened,” EuroNews, July 13, 2006; Thomas Goltz, “Pipeline from Nowhere to Somewhere; BakuTbilisi-Ceyhan Pipeline,” The International Herald Tribune, July 26, 2006. 97. Kirill Zharov, “Baku-Tbilisi-Erzerum Pipeline to Be Launched in 2006,” ITAR-TASS, February 4, 2006. 98. “Kazakhstan and China Sign Oil Deal and Border Agreement,” RFE/ RL Newsline, September 25, 1997; “A China Pipeline for Kazakhstan?,” RFE/RL Newsline, May 2, 1996. 99. “Chinese Corporation Wins Another Kazakh Oil Tender,” RFE/RL Newsline, August 5 1997; “Kazakhstan and China Sign Oil Deal and Border Agreement.” 100. “Kazakhstan Export Pipeline Likely to Be Shelved,” RFE/RL Newsline, August 18 1999. 101. “Kazakh Crude Oil Flows into China,” Chinadaily.com.cn, Financial Times Information Limited—Asia Intelligence Wire, July 31, 2006. 102. Ibid. 103. “Transneft Capacity to Expand 16% in 8% Production Increase,” Petroleum Report, April 13, 2005; “Atasu-Alashankou Oil Pipeline Officially Opened,” Russia & CIS General Newswire, May 25, 2006. 104. “Kazakhstan, China Studying New Gas Pipeline Project—Minister,” BBC Monitoring International Reports, May 20, 2006. 105. For the “curse” perspective, see Terry Lynn Karl. She argues that these oil and gas rich countries may well gain only in the short run. Eventually their “petrodollars” may produce “a highly skewed, inequitable, and mono-export-dependent model of economic growth,” and exacerbate “existing tendencies toward kleptocracy and authoritarian rule.” Terry Lynn Karl, “Crude Calculations: OPEC Lessons for the Caspian Region,” in Energy and Conflict in Central Asia and the Caucasus, ed. Robert Ebel and Rajan Menon (Lanham; Boulder; New York; Oxford: Rowman & Littlefield, 2000), 30. See also Terry Lynn Karl, The Paradox of Plenty : Oil Booms and Petro-States, Studies in International Political Economy (Berkeley: University of California Press, 1997), 26.

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Index

Afghanistan 158 African National Congress (ANC) electoral victory of (1994) 98, 104, 120, 171 Mandela as president of 120 plutocratic structures unsupported by 50, 60, 98 SACU intergovernmentalism and 104 SACU renegotiation and 121–23 South African repression of 168, 173 agents. See Designers/agents Agip/Eni 141 Aktyubinsk oil field (Kazakhstan) 152 Alma-Ata accords 127 Andean Community 178n2 Angola 116, 117 apartheid 98–99 end of 104, 120 institutionalization of 112 racist policies preceding 111–12 Western support of 118 Armenia 23, 156, 207n113 Asian Development Bank 159 Asia-Pacific Economic Cooperation (APEC) 31, 38–39 Association of Southeast Asian Nations (ASEAN) 20, 38–39 Free Trade Area 21 Atyrau (Kazakhstan) 142 Australia 20, 30, 179n6

Austria contradictory Prussian policy of 93–94 customs union unorganized by 92–94 German Confederation failure and 64–65 industrialists in 93–94 Napoleonic War defeats of 72 Prussian military alliance against 82 as Prussian rival 63, 69–70, 71, 75, 169 refused admission to Zollverein 5, 62, 71, 169 in Seven Weeks’ War 64, 82–83 Austria-Hungary 84 authoritarianism 174, 206n105 automobile industry 130 AvtoVAZ 130 Ayres, Clarence 184n2 Azerbaijan 135, 151, 156, 159, 207n113 Azerbaijan International Oil Company (AIOC) 151–52 Baden (German state) 68, 72, 73, 89, 90, 92 Baden Palatinate 91 Bahdankevich, Stanislau 161 Balassa, Bela 20 Baltic states anti-Russian discrimination in 135 economic difficulties of 57

232

Index

Baltic states—continued nationalism in 58 nuclear energy in 143 as Russia alternative option 57 as Russian non-Joiners 129, 199n4 Bangladesh 20 Basutoland. See Lesotho Bavaria (German state) alliance with Napoleon 72, 73 customs unions led by 2, 5, 85, 89–92 immediate economic benefits from Zollverein 77 internal tariffs removed by 68 as plutocrat 90, 169 plutocratic structures created by 59 voting power of, on Customs Council 82 as Zollverein Joiner 64, 92, 169 Bavaria-Württemberg customs union 89 Bechuanaland. See Botswana Beit, Alfred 107, 108 Belarus anti-corruption campaign in 161 coercion used against 15, 58, 163, 168–69, 176 economic crisis in 138t. 6.1 economic reform not undertaken by 148 elections (1994) 160–61 FDI attracted by 149, 150t. 6.2 immediate economic benefits experienced by 53, 55, 60, 126, 138–40, 168, 170 mutual hostage taking by 146–48, 161 nationalism lacking in 160–61, 162 no superior options available to 55, 57, 143–48, 162–63 oil/natural gas pipelines in 139–41, 144fig. 6.1, 145, 162

pragmatic selectorate of 162 pro-Russian policy of 58, 160–61 as Russian Joiner 58, 125, 126–27, 129–30, 140, 162–63, 168 Belgium 79 Beltransgaz 146–47 Bernstorff, Christian von 73, 80 bi-monetary relationships 6, 17, 22–23 Bismarck, Otto von intergovernmentalism espoused by 81–83, 173 universal male suffrage promoted by 82, 192n82 as Zollverein designer 61, 65, 69, 96 BLNS 99, 102–3, 116, 120 blockades 11 BLS 100–101 economic crisis and 112, 113 economic development impeded in 114–115 immediate economic benefits from SACU 113, 114, 118–119, 167, 169 independence granted to 113, 115, 166, 173 no superior options available to 114, 115–118 as principals 115 SACU renegotiated by (1969) 118, 166–167, 173 South Africa delegation by 101 See also BLNS BMW 200n15 Board on Trade and Industry (South Africa) 101 Boers 100 Great Trek of 105 integration resisted by 106–7 nationalism of 105, 107 relations with British 105–8, 110–111 Boer War (1899–1902), 100, 108–9

Index Bolivia 23 Botha, Louis 110, 111, 113 Botswana 98, 115 See also BLNS; BLS Bradley, Curtis A. 39, 44, 60 Braunschweig (German state) 63, 79, 86, 87 Brazil 23 Bremen (German free city) 86, 194n129 British Commonwealth Preference Scheme (1932) 21 British Gas 141 British Petroleum 141 British Territories 98 BTC (Baku-Tblisi-Ceyhan) pipeline 151–152 BTE (Baku-Tblisi-Erzerum) pipeline 152 Bueno de Mesquita, Bruce 52, 187n29 Bundesrat 62, 95 Bundestag 80, 92, 95 Bush, George H. W. 134–135 Bush, George W. 158 CAFTA-DR. See Central AmericaDominican Republic Free Trade Agreement Canada 179n6 Cape Colony (British South African territory) 99–100, 104, 105, 106, 107, 108, 110 Caribbean Basin Initiative 30 Caribbean Community and Common Market 178n2 Caspian Pipeline Consortium (CPC) 150–151 Caspian Sea 140, 141 Central African Economic and Monetary Union (CEMAC) 25 Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) 30, 179n6

233

Central American Common Market 178n2 Central Asia Gas Pipeline consortium 158–159 Chamberlain, Joseph 98, 109 Charles X (King of France) 79 chemical weapons 134 Chevron 141, 150 Chile 20, 22, 26, 179n6 China 5, 20, 149, 152, 157, 159–160 China National Oil Corporation 152 Chinese National Petroleum Company 159 Clausewitz, Carl von 72–73 Clinton, Bill 47, 158 Coase, Ronald H. 36 coercion 37 as plutocracy explanation 14, 57–58 in plutocratic delegation theory 10–11, 54 in plutocratic structures 55–56 Prussian avoidance of 96 Russian use of 15, 58, 162, 168–169, 176 South African use of 15, 58, 168 Cohen, Benjamin J. 22, 31 Colbert, Jean-Baptiste 67 Cold War 17, 19–20, 122 Colombia 19 Common Assembly 5 common markets 22 Common Monetary Area 24 Commonwealth of Independent States (CIS) Belarus as Joiner of 57, 58 Economic Court 129 Economic Union 156, 170 establishment of 126–127 Eurasian Customs Union as replacement of 41, 125 Free Trade Area 156 Georgia and 199n4

234

Index

Commonwealth of Independent States (CIS)—continued implementation of 145 import markets 207n113 intergovernmental features of 126 intergovernmental structures of 50–51, 58, 127, 128–129 Interstate Economic Committee 128–129 Kazakhstan as Joiner of 58 Comoros Islands 180–181n29 comparative regional integration literature 31–32 compensation 54–55, 170, 173–174 competitive economies 28 complementary economies 28 Conference on Security and Cooperation in Europe 134 Congo, Democratic Republic of 116 Congress of People’s Deputies 135 Congress of South African Trade Unions 122 Congress of Vienna (1814) 92, 99, 104 Conservative Party (Britain) 109 Consolidated Gold Mines 107 Consolidated Revenue Fund of South Africa 118 constitutionalism 78–78, 81–82, 88, 96 Cook Islands 24 Cooper, Scott 18 Cortell, Andrew P. 39 Costa Rica 179n6 Council of Ministers 5, 41 Crewe, Lord (British Secretary of State) 100, 113 Croatia 23 currencies anchor 23 bi-monetary relationships 22–23

informal substitution of 22 pegged 6, 17, 23, 41–43 currency areas 29 currency boards 6, 17, 23 curse perspective 206n105 Customs Board 89–90 Customs Council 64, 65 Customs Parliament 65 Customs Tariff Act (South Africa 1925) 114 customs unions 6 characteristics of 21–22 defined 21 examples of 2, 5, 20, 21, 178n2 plutocracy explained through 5 plutocratic structures of 59 rarity of 17, 22 tariffs in 1, 10, 21, 27 trade benefit conditions for 27–28 See also Eurasian Customs Union; Southern African Customs Union; Zollverein (1834); specific customs union Cyprus, Northern 24 Darmstadt Conferences (1820) 90 De Beers Consolidated Mine 105 de Klerk, F. W. 120 Delagoa Bay (East Africa) 107 delegation 54, 55, 170, 173 delegation models 36–37, 44 See also principal-agent delegation models depth 6, 17, 165 DeRosa, Dean 30 Designers/agents 32–33 defined 8, 35, 46 in EU formation 5 plutocracies preferred by 48–49 in plutocratic delegation theory 2, 8–13, 35, 46, 165–166 regional superpower status of 48–49 reputation of 45, 54, 55–56

Index single plutocrat as 165 strategies of 12, 35, 45, 56–57, 172–173, 174 See also opportunism/ opportunistic agent; Prussia; Russia; South Africa entries; specific Designer/agent diamond mining 105 dollar, U.S. 23–24 dollarization 6, 17, 23–24, 29 Dominican Republic 179n6 Duina, Francesco 32 Dutch East India Company 104 Du Thil (Hesse-Darmstadt negotiator) 75, 93 dynamite industry 108 East African Community 178n2 Eastern Caribbean union 24 Economic and Monetary Community of Central Africa 178n2 economic benefits. See immediate economic benefits Economic Community 32 Economic Cooperation Organization 157 Economic Court (CIS) 129 economic crisis economic integration during 26 in Eurasian countries 52, 126, 138t. 6.1 as plutocracy precondition 12, 35, 51–52, 59–60, 166 as political crisis 11, 60 punctuated equilibrium caused by 13 in Russia 132, 133, 134–135, 137–138, 138t. 6.1 SACU and 52, 97, 111, 113, 119 among Zollverein Joiners 1, 74–77 economic integration accord proliferation 17, 18–20, 32, 56

235

“arms race” mentality in 20, 27, 179n6 categorization of 5–8, 6t. 1.1, 17–18, 165 comparative literature on 31–32 equality vs. 187–188n34 global 17, 148–150 governance approaches for 2–3, 18, 31–33 issue area 6, 17–18, 174 monetary benefits 29 multiple governance structures used in 41–43 political benefits 29–31 reasons for 14, 18, 25–31, 170 regional 26–27 RSAs and 138, 170 as strategic interaction 35 trade benefits 27–28 withdrawal from 52 economic sanctions 11 economic union 6t. 1.1, 7, 17, 22, 25 Ecuador 24, 29 elections 40–41 El Salvador 24, 179n6 empires defined 44–45 federal states vs. 7, 44–45 implications for 7–8, 37, 148 plutocracies confused with 3, 44–45, 60 Eni 141 environmental organizations 31 Ernst Augustus (King of Hanover) 88 Eurasian Customs Union coercion used in 15 economic crisis and 52 economic integration through 127–128 establishment of 21, 129 immediate economic benefits from 53–54, 60 implementation of 129, 130,179n17

236

Index

Eurasian Customs Union—continued as living history 128 plutocratic structures of 59, 125, 127, 129–130, 171–172 policy implications of 175–176 political union in 60 punctuated equilibrium in 174 Russian policy control in 48 scholarly neglect of 14, 32, 167 selection of, as case study 14 subsumed by EAEC 130, 179n17 tariffs in 48, 129–130 Eurasian Economic Community (EAEC) 125, 127, 130–131, 145, 171–172, 179n17 euro, EU 23, 24, 25, 30, 131–132 European Bank for Reconstruction and Development 138–139 European Central Bank 4, 24, 39 European Coal and Steel Community 5, 50, 186n15 European Commission 4–5, 39, 145, 186n15 European Common Market 21 European Community 5, 53, 178n2 European Council 41 European Court 5 European Court of Justice 4, 39 European Economic and Monetary Union (EMU) 24 European Economic Community (EEC) 115, 117–118 European Free Trade Area 53 European Free Trade Association 21 European Parliament 5, 39 European Union (EU) 57 Belarus public support for membership in 161 complementary economies in 28 democracy as prerequisite for membership in 170

development funds of 145 foundations of 5 integration “arms race” mentality of 27 integration level deepened in 44 intergovernmental features of 41 political issues in 30 predicted unraveling of 56 Putin and 137 reputation of 145, 148, 173 as Russian Joiner option 131–132, 143–148, 173 scholarship on 4–5, 14, 31–32 supranational accords and 31, 41, 145, 186n15 trade agreements of 20 exchange rates, fixed 23 ExxonMobil 141 Farmers Protection Association 107 federal states, vs. empires 7, 44–45 Fischer, Abraham 110 Ford 200n15 foreign direct investment (FDI) in Kazakhstan 143, 149–150 as plutocracy alternative 49, 54, 56 Russia/Joiner comparison 150t. 6.2 in Turkmenistan 126 France 50 July Revolution (1830) 73, 76, 79 liberal movements in 79 as Prussian threat 69–70, 71–74, 75, 189n16 tariffs as used in 68 universal male suffrage in 192n82 Francis II (King of Bavaria) 72 Franco-Prussian War (1871) 1, 94–95 Franc zone 24–25, 180–181n29 Frankfurt-am-Main (German state) 80, 86

Index free trade agreements 14, 17, 20, 21, 26, 30, 85–86 Friedrich Wilhelm III (King of Prussia) 68, 69, 80 Friedrich Wilhelm IV (King of Prussia) 69, 79, 81 Galbraith, John K. 184n2 Gazprom 142, 146–147, 155 General Agreement on Tariffs and Trade (GATT) 19, 26, 115–116 General Congress 61, 91, 120 Georgia 135, 137, 151, 156, 159, 199n4, 207n113 German Confederation domestic political reform promises unfulfilled by 78–79 end of 95 establishment of 78, 104 failed economic integration attempt of 63, 65–67 liberal/reactionary conflict and 80, 88 universal male suffrage proposed at Diet of 82 as Zollverein alternative 92 German Empire 1, 61, 62, 95, 194n129 German states admission to Zollverein 63–64 immediate economic benefits from Zollverein 169 liberalism as threat in 52 nationalism in 90, 172 no superior options available to 85–95 Prussian negotiations with 71–72, 80–81 reactionary leadership of 52 revolutions in 79 unification of 70–71, 75, 94–95, 170 See also specific state Germany 50, 140

237

gold mining 105–6, 107, 195n26 Gorbachev, Mikhail 125, 127, 133, 134, 201n27 governance structures defined 37–45 determination of 31–32, 165 monetary integration by 43t. 3.2 multiple, in integration accords 41–43 trade integration by 42t. 3.1 See also intergovernmental accords/structures; plutocracies/plutocratic structures; supranational accords/structures Gowa, Joanne 30 Great Britain 24 Boers and 105, 106, 107, 108, 110–111 in Boer War 108–9 as EEC member 117 elections (1900) 109 elections (1906) 109 Hanover trade with 74 Kazakhstan FDI from 142, 151 SACU alternatives unexplored by 113, 114 SACU created by 21 Slavery Abolition Act (1833) 105 South Africa delegation by 41, 57–58, 99, 100–101, 110–113, 166, 168 South African territories of 99–100 trade dependence of 18–19 Great Trek (South Africa; 1836–1846) 105 Greece 79 Grey, George 106 G-7 Group 135 Guatemala 179n6 Gulf Cooperation Council (GCC) 20, 38, 178n2 Guma, X. P. 198n74

238

Index

Hanover (German state) alternative options available to 96 customs unions led by 2, 5, 85, 86–87 economic crisis lacking in 96 free trade accords of 85–86 immediate economic benefits from Zollverein 88–89 in North German Confederation 82 as plutocrat 74, 85, 169 plutocratic structures created by 59 popular uprisings in 88 as Zollverein Joiner 64, 74, 86, 87–89, 169 Hawkins, Darren G. 44, 56–57 Hayek, Friedrich A. von 36 health organizations 31 Heidelberg Protocol (1824) 90–91 Hesse-Darmstadt (German state) economic crisis of 74–75 immediate economic benefits from Zollverein 75, 76, 77 nationalism in 90 Prussia delegation by 63 Prussian negotiations with 1, 70–71, 75, 80–81, 93 Southern German Customs Union and 90–91 as Zollverein Joiner 62, 63, 68, 74, 167–168 Hesse-Kassel (German state) economic crisis of 76–77 immediate economic benefits from Zollverein 77 in Middle German Commercial Union 86 popular uprisings in 88, 191n63 Prussian strategies regarding 1, 70–71 in Southern German Customs Union 92 as Zollverein Joiner 63, 74, 76, 86, 88, 191n63 hierarchy models 36, 37, 178n11

High Authority 5 Hobsbawm, E. J. 209n137 Hofmann, August Konrad 75 Holy Roman Empire 72, 73 Honduras 22, 179n6 Hong Kong 20 hostage-taking. See interdependence and hostagetaking Hu Jintao 159–160 ideas, role of 12, 172 immediate economic benefits from Eurasian Customs Union 53–54, 60 as plutocracy precondition 9, 36, 52–54, 166 from RSAs 9 from Russian economic integration 53–54, 60, 138–143, 144fig. 6.1, 162–163, 168, 170, 206n105 from SACU 53, 97, 100, 111, 113, 114, 117–119, 122, 169, 198n74 import-substitution industrialization (ISI) 114, 169 India 20, 24, 159 Indonesia 30 industrialists 93–94 inflation 23, 24, 29 intellectual property rights 26 interdependence and hostagetaking 146–148, 163 intergovernmental accords/ structures coercion avoided in 56 defined 3, 37–39 Designer strategies and 45 disadvantages of 22, 173 frequency of 40 implications for political union 7 monetary integration under 43t. 3.2 plutocratic choice of 15

Index in Russian economic integration accords 15, 50–51, 171–172, 176 in SACU 41, 97, 102–4, 113, 119–122 trade integration under 42t. 3.1 winning coalitions and 50–51 in Zollverein 61, 62–67, 80–85, 95–96, 120, 166 intergovernmentalism 32 International Monetary Fund (IMF) 23, 134–135, 138–139, 148–149, 161 international organizations 37, 39 Interstate Economic Committee (CIS) 128–129 Iran 137, 153, 157–158, 163 Ireland 28 Islam. See Muslim states Israel 22, 30, 179n6 Italy 79, 82, 141 Jacoby, Wade 56–57 Jameson, Leander S. 108, 111 Jameson Raid (1895) 109 Jane’s Intelligence Review 134 Japan 149, 151, 159 Johannesburg (South Africa) 106 Joiners/principals 32–33 defined 8, 46 Designer strategies with 172–173 economic crisis in 51–52, 59–60 in EU formation 5 immediate economic benefits experienced by 52–54, 58, 60 motivations of 8 no better options available to 54–55 plutocracy as risky for 56 in plutocratic delegation theory 2, 8–13, 35, 46, 166 strategies of 35 See also specific Joiner/principal

Jordan 30, 179n6 July Revolution (1830)

239

73, 76, 79

Kamaz 130 Karachaganak oil field (Kazakhstan) 141, 142, 150 Karl, Terry Lynn 206n105 Kashagan oil field (Kazakhstan) 140, 141–142 Kazakhstan dependence on Russia lessened 150–153 economic crisis in 138t. 6.1 FDI attracted by 142, 149, 150t. 6.2, 162, 176 GDP of (2007) 133 immediate economic benefits experienced by 126, 144fig. 6.1, 140–143, 162–163, 168, 170 import fees in 200n16 independence granted to 140 natural gas reserves in 142 no superior options available to 52, 149–153, 162–163 oil/natural gas exports from 152, 206n105 oil refineries in 142–143 oil reserves in 140–142 pipeline deals in 150–153, 159 as Russian Joiner 58, 125, 127, 129–130, 143, 162–163, 168 tariffs in 130 Turkmenistan compared to 153 as Turkmenistan export market 156, 207n113 KazMunaiGas 141 KazRosGaz 142 Kelley, Judith G. 39, 44, 60 Khasbulatov, Ruslan 135 Kimberly (South Africa) 105, 108 Kirk, Robert, 119 Klewitz, Anton Wilhelm von 69 Korea, Republic of 19, 20 Koremenos, Barbara 44

240

Index

Korpeje-Kord Kuy pipeline 158 Kosovo 24 Kozyrev, Andrei 134, 136 Krasner, Stephen 13, 174 Kruger, Paul 98, 106–8 Kuchma, Leonid 46, 131–132 Kyrgyzstan 131, 207n113 labor organizations 31 Labour Party (Britain) 109 Lada (Russian-made car) 130 Lake, David 7, 44 Laos 20 Latvia 140 leadership 47 League of Nations, Covenant of 114 Lesotho 50, 98, 115 See also BLNS; BLS liberalism Bismarck’s espousal of 61, 81–83 Prussian intergovernmentalism as appeasement of 48, 96, 172, 173 as Prussian threat 52, 69, 73–74, 78–80 revolutions based in 52, 79, 88 Liberal Unionist Party (Britain) 97, 109, 114 lira, Turkish 24 List, Friedrich 93, 193n105 Lithuania 139 logic of political survival 2–3 Designer opportunism and 122 economic crisis and 9, 11, 51–52, 54, 59–60 in Russian economic integration 126, 145, 162 in SACU 52, 122 winning coalitions and 11–12 in Zollverein 59, 61–62, 76, 95–96 Lomé Conventions (1975; 1980) 117 Louis-Philippe (King of France) 79

Louis XIV (King of France) 67 Lowe, Adolph 184n2 Lübeck (German state) 63 Ludwig I (King of Bavaria) 91, 92 LukArco 141, 150 Lukashenka, Alyaksandr 139 as authoritarian 145, 170 election of (1994) 160–161 mutual hostage-taking by 146–148 as pro-Russian 160–162 Russian coercion and 163 Russian plutocratic structures implemented by 129 LukOil 141 Luxembourg (German state) 63 Malaysia 20 Mandela, Nelson 120 Mansfield, Edward D. 30 Mattli, Walter, 26, 32 Mecklenburg-Schwerin (German state) 63 Mecklenburg-Strelitz (German state) 63 Mercosur 20, 21, 32, 38, 41, 178n2 Merriman, John X. 111 Metternich, Klemens von 66, 79, 92–94 Mexico 20, 23, 179n6 Middle East 24, 157–158, 174 See also Muslim states Middle German Commercial Union 85–86, 87 military force 10–11, 54, 56 Milner, Alfred 108 Mines and Works Act (South Africa; 1911) 112 mining industry 106, 107, 108, 195n26 Mitsubishi 159 Mobil Oil 141 Moe, Terry 3, 40–41 Moldova 135 monetary delegation 6

Index monetary hierarchies 31 monetary integration 18, 22–25, 31, 43t. 3.2 monetary union 17, 23, 24–25, 131–132 Mongolia 23 Monnet, Jean 5, 53 Montenegro 24 Morocco 179n6 Mosley, Paul 116 Motyl, Alexander 7 Motz, Friedrich von campaign to destroy competing unions 86 French threat as motivation of 72 governance structures created by 95, 173 negotiations with German states 70–71, 75, 80–81 one-state/one-vote plan of 84 as Zollverein designer 61, 68, 96 Mozambique 116, 117 multilateralism 5 Mundell, Robert 29 Munro, J. Forbes 195n20, 195n26, 195n36 Muslim states 58, 136, 153, 157–158, 163, 174 mutual hostage-taking. See interdependence and hostagetaking NAFTA. See North American Free Trade Agreement Namibia 98, 101, 120, 194n9 See also BLNS Napoleon 192n82 Napoleonic Wars 65, 71–72, 73, 189n16 Nassau (German state) 92 Nassua (German state) 63 Natal (British South African territory) 100, 106, 110 National Assembly 80

241

National Institute of Economic Policy (South Africa) 120 nationalism in Belarus 160–163 of Boers 105, 107 emergence of, during Napoleonic Wars 72–73 in German states 90, 172 origins of 209n137 as plutocracy explanation 14 plutocratic delegation theory and 58–59 in Prussia 72–73, 172, 173 in Russia 47–48, 51, 58, 125–126, 171 Nationalist Party (Britain) 109 Native Lands Act (South Africa; 1913) 112 Native Urban Areas Act (South Africa; 1923) 112 natural gas pipelines 126, 141 fig. 6.1, 139–140, 158–159, 168, 170–171 natural gas reserves 143, 153–154 Nazarbayev, Nursultan Central Asian membership in CIS promoted by 127 Eurasian Customs Union ratified by 130 FDI attracted by 149, 162, 176 natural gas exports under 142, 143 pipeline deals brokered by 150–153 political coalition of 153 as Russian Joiner 145 strategies with Russia 149, 152–153 Western oil exploration encouraged by 141 Nebenius, Karl Friedrich 90, 193n107 Neo-Institutional Economics 184n2 Netherlands 79, 83–84

242

Index

new institutional economics (NIE) literature 36–37, 45 New Russia Barometer 137 New Zealand 20 Nicaragua 179n6 Niyazov, Saparmurat death of 159–160 economic benefits from alternative options expected by 154–155, 157–160 failed/stalled pipeline deals promoted by 158–160, 163 Russian integration resisted by 153, 155–157, 163 Russian pressure to sign integration accords 156 North American Free Trade Agreement (NAFTA) 18, 21, 30, 31, 32, 44 North Atlantic Treaty Organization (NATO) 134 North German Confederation 64, 82 Norway 151 no superior options compensation and 9, 54–55 delegation and 10, 55 as plutocracy precondition 9, 36, 54–56, 166, 173–174 reputation and 10, 55–56 Turkmenistan’s attempts to bypass 153–155, 157–160, 173–174 Novorossiysk (Russia) 142, 150 nuclear energy 143 nuclear test ban 134 nuclear weapons 128 oil pipelines 126, 144fig. 6.1, 139–140, 168, 170–171 oil refineries 142–143 oil reserves 141–142, 206n105 Oldenberg (German state) 63, 86, 87 Oman 19, 150 opportunism/opportunistic agent

Designer reputation and 45, 48, 54, 55, 122 Prussian intergovernmentalism and 78 Russia as 15, 126, 146–148, 155–157, 162, 170–171, 173–174 South Africa as 114–115, 119, 122 optimum currency area theory 29 Orange Free State 105, 106, 110 Orenburg oil field (Russia) 143 Organization of the Islamic Conference 157 Ottoman Empire 79 Pakistan 20, 158 Panama 19, 24 Pavlodar oil refinery 142 Paznyak, Zyanon 160 permissive coalition Peru 19, 23 Peterson, Susan 39 Philippines 30 pipelines BTC 151–152 BTE 152 Central Asia Gas Pipeline consortium 158 CPC consortium 150–151 Korpeje-Kord Kuy 158 natural gas 126, 144fig. 6.1, 139–141, 158–159, 168, 170–171 oil 126, 144fig. 6.1, 139–141, 168, 170–171 as RSAs 9, 53, 139–140 TAP (proposed) 159 Trans-Caspian Gas 159 Turkmenistan-Iran-TurkeyBulgaria (proposed) 158 Platts Energy Economist, 160 plutocracies/plutocratic structures 2, 7–8 advantages of 2, 4, 12, 22, 48–49, 173

Index characteristics of 1 coercion as option in 55–56 conditions for 9, 14–15, 35–36, 48–56, 165–166 (see also economic crisis; immediate economic benefits; no superior options; permissive coalition; single plutocrat) as consensual 8, 10–11, 40–41, 167–169 in customs unions 59 defined 1, 3, 40–41 delegation models and 44 derailing of 9–10 empires confused with 3, 44–45, 60 in Eurasian Customs Union 59–60, 125, 127, 129–130, 171–172 future research on 174 implications for political union 7 importance of 2–5 intergovernmentalism as disguise for 61, 62–67 monetary integration under 43t. 3.2 in non-European cultures 174 as pathways to empire 7–8 policy-making authority in 48 as principal-agent relationship 40–41 rarity of 10 scholarly neglect of 1, 4–5, 35, 57, 59, 165 tariffs in 2 trade integration under 42t. 3.1 plutocratic delegation theory 2, 5, 8–10, 14 assumptions behind 45–46 coercion and 57–58 dependence variable operationalized in 33 Designers/Joiners in 46 Designer strategies in 56–57 future research in 174–175

243

governance structures defined using 37–45 implications of 10–13, 59–60, 167–174 independent variables in 48–56 nationalism and 58–59 political incentives in 46–48 theoretical underpinnings of 36–37 Poland 23, 57, 79, 140 policy-making authority delegation of 54, 55 efficiency in 173 in intergovernmental structures 37–38, 173 in plutocracies 48, 173 in plutocratic delegation theory 173 in supranational structures 31, 39–40 use of term 37 political survival. See logic of political survival political union 6t. 1.1, 7, 17 Portuguese East Africa 107 pound sterling, British 24 preferential trade agreements 6, 17, 20–21 Price, Arnold H. 93, 193nn105 price stability 29 principal-agent delegation models 3, 8, 10–11, 36–37, 40–41, 165 principals. See Joiners/principals Prussia agricultural crisis in 68 anti-liberal sentiments in 73–74 borders of 70 campaign to destroy competing unions 86, 93 coercion not used by 96 contradictory Austrian policy toward 93–94 customs frontier expansion of 75–76

244

Index

Prussia—continued France as threat to 69–70, 71–74, 189n16 German unification as goal of 61–62, 70–71, 170 intergovernmental accords chosen by 15, 48, 80–85, 172, 173 liberal selectorate of 61 Napoleonic War defeats of 72 nationalism in 72–73, 172 plutocratic delegation theory tested in 36 reactionary leadership of 73–74 reliance on trade 19 reputation of 78, 80–81 selection of, as case study 13–14 in Seven Weeks’ War 64, 82–83 as single plutocrat 67–68, 83–85, 169 strategic goals of 75, 95, 170 strategies of 77–85, 95–96, 167–168, 173 tariff reform in 68 winning coalitions in 48, 69–74 See also Zollverein (1834) Prussian Army 95 punctuated equilibrium 13, 174 Putin, Vladimir appointed interim president 136 as authoritarian 57, 128 centrist approach of 136–137 Eurasianist view of 135 integration accords designed by 129, 130 mutual hostage-taking by 146–148 political coalition of 137, 171–172 Russian WTO membership as priority of 15–16 racism 51, 58–59 rationality 45–46 reactionaries 73–74, 78 Reagan, Ronald 117

Realpolitik 81–82 recession 1, 56 Reichstag 62 relation-specific assets (RSAs) defined 9, 37, 53 immediate economic benefits from 9 Russian economic benefits from 53–54, 126, 138–143, 144fig. 6.1, 149, 170 specific assets 107, 139 specificity types 139–140 reputation 45, 54, 55–56, 170, 173 See also under Prussia; Russia; South Africa; South Africa, Union of revolution 79, 88 Rhine Confederation 72 Rhodes, Cecil 98, 105, 107, 108 Rhodesia 110 Rogowski, Ronald 30 Romania 28 Rome 84 Roon, Albrecht von 81–82 Rothschild, Nathan 68 Royal Dutch/Shell 141 ruble, Russian 131 rupee, Indian 24 Russia as best available option 131–132, 143–153, 162–163 civil wars within 135, 137 coercion used by 15, 58, 163, 168–169, 176 customs unions led by 2 economic crisis in 132, 133, 134–135, 137–138, 138t. 6.1 economic integration accords of 125–126, 127–132 (see also Commonwealth of Independent States; Eurasian Customs Union; Eurasian Economic Community; Single Economic Space)

Index elections in 133, 136, 137 FDI attracted by 149–150, 150t. 6.2, 200n15 GDP of (2007) 132–133 immediate economic benefits provided by 138–143, 144fig. 6.1, 162–163, 168, 170, 206n105 import fees in 200n16 intergovernmental accords chosen by 15, 50–51, 171–172, 176 Kazakhstan dependence on lessened 150–153 mutual hostage-taking by 146–148 nationalism and plutocracy in 47–48, 51, 58, 125–126, 171 natural gas reserves in 154–155 as opportunistic agent 15, 126, 146–148, 155–157, 162, 170–171, 173–174 plutocratic delegation theory tested in 36 policy-making authority ceded to 41 reputation of 148, 161–162 selection of, as case study 13–14 as single plutocrat 5, 125, 132–133, 169 as Turkmenistan export market 155 U.S. policy toward 15–16, 175–176 Western empire-building fears regarding 8, 57–58, 175–176 winning coalitions in 47–48, 50–51, 125–126, 132, 133–137, 171–172 See also Soviet Union Russia, Soviet Socialist Republic of 126–127 Russian Central Bank 145 Russian Constitutional Court 135

245

Samara 143 Saudi Arabia 5, 151, 157 Saxony (German state) 64, 83, 86 Schaumburg-Lippe (German state) 63, 87 Schuman, Robert 5, 53, 186n15 Schwarzenberg, Felix zu 94 selectorate changes in 47–48, 51, 98, 108, 109, 120, 125–126, 132, 135 defined 8, 47 in Prussia 61, 78 in Russia 125–126, 132, 135, 137, 161–162, 163 in South Africa 98, 104, 109, 111, 112, 119–120 winning coalition and 9, 47–48, 50–51, 187n29 Senka, Uladzimir 161 Serbia 137 Seven Weeks’ War (1866) 64, 82–83 Shushkevich, Stanislau 160 Shymkent oil refinery 142 side-payments 59, 77, 88, 107, 119, 138 Simon, Herbert A. 45 Singapore 20, 22, 26, 179n6 Single Economic Space (SES) 125, 131–132, 171–172 single plutocrat 36 absence of, in German Confederation 63, 65–67 as plutocracy precondition 9, 35, 49–50, 165 Prussia as 59, 62, 67–68, 83–85, 169 Russia as 5, 125, 132–133, 169 South Africa as 5, 105, 111, 114, 169 site-specific assets 139 Slavery Abolition Act (Great Britain; 1833) 105 socialism 117, 122

246

Index

South Africa apartheid ended in 120 Board on Trade and Industry 101 Boer War (1899-1902) 108–9 Chinese trade negotiations with 20 coercion used by 15, 58, 168 Consolidated Revenue Fund of 118 customs unions led by 2 elections (1994) 120 intergovernmental accords chosen by 15 map 102fig. 5.1 plutocratic delegation theory tested in 36 racism and plutocracy in 51, 58–59, 98–99 reputation of 98, 101, 170 selection of, as case study 13–14 as single plutocrat 5, 97, 169 strategies of 173 trade sanctions against 58 unique geography of 105 Western support of 122 winning coalition absent in 50, 98, 171 winning coalitions in 121 South Africa, Union of apartheid institutionalized in 112 BLS development impeded by 114–115 British/Boer relations preceding establishment of 105–8 British delegation of policymaking authority to 41, 57–58, 99, 100–101, 111–113, 166, 168 Customs Tariff Act (1925) 114 establishment of 19, 104, 111 ISI policies in 114, 169 Lands Acts 112 Mines and Works Act (1911) 112

mining industries in 106 Namibia annexed by 194n9 Native Lands Act (1913) 112 Native Urban Areas Act (1923) 112 political integration preceding establishment of 110–111 racism and plutocracy in 111–113 reputation of 114–115 SACU created by 21 as single plutocrat 105, 111, 114, 169 strategies of 118–119 trade dependence of 19 winning coalitions in 112, 120 South Africa National Institute of Economic Policy 120 South African Republic. See Transvaal Southern Africa elections (1907-1908) 110 map 102fig. 5.1 Southern African Customs Union (SACU) agent strategies in 118–119 as best available option 97–99, 104, 111, 114, 119 coercion used in 15, 168 Council of Ministers 102–3 Customs Union Commission 102 development funds of 103, 121–122 economic crisis and 52, 97, 111, 113, 119 establishment of 21, 100, 111 future research on 174 history of 100–104 immediate economic benefits from 53, 97, 100, 111, 113, 114, 117–119, 122, 169, 198n74 intergovernmental features of 41, 97, 102–4, 113, 119–122

Index membership of 98, 194n9 nationalism lacking in 58–59 as oldest surviving customs union 166 plutocracy abandoned by 60 plutocratic structures of 59, 97, 100–101 precursor period (1815–1910) 99–100 punctuated equilibrium in 174 renegotiations of 118, 120–123, 166–167, 173, 198n74 research questions suggested by 122–123 scholarly neglect of 14, 97, 166 selection of, as case study 14 single plutocrat in 97, 103–4, 111, 119 Tariff Board 102 tariff revenue collected by 27, 97, 100–103, 114, 115, 118–119 Tribunal 103 voluntary delegation under 57–58, 100–101 winning coalitions in 98, 101, 111, 112, 120, 171 Southern African Development Coordination Conference (SADCC) 116–117 Southern German Customs Union 74–75, 85, 89–92, 193nn105, 107, 115 sovereignty. See policy-making authority Soviet Union allies of, courted by Putin 137 Baltic demonization of 12 CIS intergovernmentalism and 50–51, 128 dissolution of 126–127 economic collapse of 137–138 economic relationships among former states of 57–59 reputation of 170 Russian nostalgia for 135

247

winning coalitions in 47 Spain 84 Sri Lanka 20 Statoil 141 Stern, Matthew 119 suffrage, universal male 82, 192n82 superpower status 48–49 supranational accords/structures advantages of 22 characteristics of 3–4 coercion avoided in 55–56 defined 3, 39–40 EU and 31, 41, 145, 186n15 frequency of 40 implications for political union 7 monetary integration under 43t. 3.2 policy-making authority in 31 trade integration under 42t. 3.1 supranationalism 32 Supreme Soviet 135 Swaziland 98, 108, 115, 117 See also BLNS; BLS Tajikistan 131, 135 TAP (Turkmenistan-AfghanistanPakistan) pipeline (proposed) 159 tariffs changing structures setting 41 in customs unions 1, 10, 21, 27, 91–92 medieval European uses of 67 Napoleonic system of 74 in plutocracies 2 post-WWII decline in levels of 19 in preferential trade agreements 20–21 protests against 79 Prussian reform of 69 state uses of 67 See also under specific agreement; country

248

Index

Tax Union 85, 86–87, 93, 192n96 TengizChevroil 141, 150 Tengiz oil field (Kazakhstan) 140–141, 150 Texaco 141 Thailand 20, 22, 23 Total (French oil company) 141 trade barriers 28 trade delegation 6 trade disputes 103 trade integration 18, 19–22, 27–28, 42t. 3.1 Trans-Caspian Gas Pipeline 159 Transneft 152 Transvaal 99, 105, 106–8, 110, 195n26 Treitschke, Heinrich von 62, 188–189n1–2 Trekkers 105 Turkey 151, 157, 158, 159 Turkmenbashi. See Niyazov, Saparmurat Turkmengas 154 Turkmenistan CIS export markets of 207n113 economic benefits from alternative options expected by 153–155, 157–160, 173–174 economic crisis in 126, 138t. 6.1 failed/stalled pipeline deals of 158–160, 163 FDI attracted by 150, 159, 174, 150t. 6.2 Kazakhstan compared to 153 natural gas reserves in 153–154 Russia as opportunistic agent with 155–157, 170–171 as Russian non-Joiner 125, 153, 163, 170–171, 174 Turkmenistan-Iran-Turkey-Bulgaria pipeline (proposed) 158 Turkmenneft 154

Ukraine coercion used against 176 contested identity of 58 economic difficulties of 57 monetary union in 23, 131–132 oil transit fees in 147 as Russia alternative option 57 as Russian Joiner 126–127 Russian natural gas rates in 139 as Russian non-Joiner 129 as Turkmenistan export market 155, 156 United Arab Emirates (UAE) 20 United Nations Convention on Landlocked States 119 United Nations Security Council 46 United States FDI from 143, 150, 151, 159 Russian economic assistance insufficient 134–135 Russian WTO membership blocked by 15–16, 175–176 as single plutocrat 5 South Africa supported by 117, 122 trade agreements of 19–20, 22, 26, 179n6 trade sanctions initiated by 58 Turkmenistan gas pipeline project opposed by 158, 163 winning coalitions in 47 United States Agency for International Development 120 United States Central Intelligence Agency 129–130 United States Congress 47 United States Iran-Libya Sanctions Act (1996) 158 Unocal 158–159 Uruguay 23 Uzbekistan 131, 151, 156, 159, 207n113 Uzen oil field (Kazakhstan) 141, 152

Index veto authority in German Confederation 66 in intergovernmental structures 38 in plutocracies 2, 48 in SACU 98, 99, 102, 120, 121 in Southern German Customs Union 91 in Zollverein 61, 62, 64, 80, 84–85, 95, 102, 120, 172 Vienna, Congress of (1814) 65, 104 Vienna Final Conferences (1819) 89 West African Economic and Monetary Union (UEMOA) 25 “What the European Union Could Bring to Belarus,” 143–144 Wilhelm I (King of Prussia) 81–82, 83 Wilhelm I (King of Württemberg) 91 Wilhelm IV (King of Prussia) 88 Williamson, Oliver 178n11 winning coalition absence of 50–51, 98, 171 changes in 171–172 defined 9 implications of 11–12, 47–48 permissive, as plutocracy precondition 9, 35, 50–51, 166, 171–172 in Prussia 48, 69–74 role of ideas in 172 in Russia 47–48, 50–51, 125–126, 132, 133–137, 171–172 as selectorate subset 187n29 in South Africa 98, 100, 111, 112, 119–120, 171 Witwatersrand (South Africa) 106 World Bank 134–135, 138–139, 141 World Trade Organization (WTO)

249

as BLS option 173 customs unions registered with 165, 178n2 economic benefits from membership in 26 global integration under 17 integration studies and 167 membership of 17, 19 Russian membership in 15–16, 175–176 stalled negotiations under auspices of 56 World War II 19 Württemberg (German state) 64, 68, 72, 89–92, 193n115 Yeltsin, Boris changing governance structures 48, 125–126, 133–136, 171 CIS established by 126–127 domestic political opposition 135, 155 Eurasianist view of 135–136 on Gorbachev 201n27 Niyazov intransigence and 155 steps down from presidency 136 winning coalition of 50–51, 132 yen, Japanese 23 Zimbabwe 116 Zollverein (1834) Austria refused admission to 5, 62, 71, 169 as best available option 85–95, 96 changing tariff structures in 41, 83–85 as customs union 1, 21 duration of 194n129 economic crises of Joiners 74–77, 96 end of 94–95 failed precursor to 61–62, 63, 65–67 General Congress 120

250

Index

Zollverein (1834)—continued German states admitted to 63–64, 167–168, 191n63 historical significance of 95–96 history of 63–67 immediate economic benefits from 53, 75, 76, 77, 88–89, 169 intergovernmentalism as disguise in 61, 62–67, 80–85, 95–96, 120, 166 map (pre-1834) 69fig. 4.1 nationalism and 59 negotiations in 1, 93 new treaties signed for (1867) 65 plutocratic structures of 59, 61, 62, 166

Prussian strategies regarding 77–85 punctuated equilibrium in 174 scholarship on 14, 32, 166, 188–189nn1–2 selection of, as case study 14 single plutocrat in 59, 62, 67–68 supranational structures of 166 tariff revenue collected by 27, 65, 75–76, 77 voluntary delegation under 57–58, 167–168 winning coalition assembled for 69–74