A Theory of Economic Coercion and Fragmentation | Hoover Institution

Quick Overview

Matteo Majori presents a model showing that the same features generating gains from trade, like returns to scale and specialization, also create dependency that a dominant country, the 'hedgeimon,' exploits through economic coercion, while preemptive anti-coercion policies by smaller nations risk leading to inefficient over-security and fragmentation.

Key Points: The core mechanism highlighted is that increasing returns to scale and specialization, which create efficiency gains from trade, simultaneously generate dependency, making smaller nations vulnerable to coercion. The hedgeimon has an incentive to 'hyper globalize,' inducing integration beyond what a benevolent planner desires, specifically to increase centrality and create addiction to dealing with the hedgeimon, thereby strengthening threats of exclusion. Anti-coercion policies, when pursued independently by nations trying to shape their economies ex-ante to withstand bullying, can lead to an inefficient 'doom loop' where everyone over-secures and ends up quite poor due to excessive fragmentation. The hedgeimon's optimal coercion strategy involves two rationales: tweaking policies to shape the equilibrium in its favor (like an optimal tariff) and, crucially, actions that increase dependency by discouraging alternatives, even if those actions are privately costly to the coerced country. Majori shifts the economic view of international organizations from being incarnations of a global planner to potentially being constraints imposed by the hedgeimon to lure the rest of the world into dealing with them, which requires commitment from the dominant power to limit extraction. In a specialized finance example using SWIFT, the hedgeimon incentivizes usage of the global system (beneficial for global productivity) while simultaneously discouraging the creation of domestic alternatives (which increases vulnerability to threats).

Context: Matteo Majori from Stanford GSB discusses his paper on a theory of economic coercion and fragmentation, building on previous work on the offensive use of geoeconomics by dominant countries. This paper focuses on the defensive side—how countries should react to coercion threats. The model utilizes a global input-output matrix framework where a single dominant country (the hedgeimon) threatens exclusion from controlled inputs, and other countries implement ex-ante anti-coercion policies to mitigate this influence.