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How Democracy and Prosperity Affect Alliance Formation and International Peace - Theory and Empirics (2025)

Intensifying geopolitical competition in the context of the Ukraine war has led to the emergence of opposing coalitions. On one side, there is Russia and countries like North Korea and Belarus that effectively lend support to Russia’s war effort. One may also want to include Iran in this group due to it reportedly supplying dual-use goods and weapons to Russia. Meanwhile, China, like so-called middle powers, including Brazil, India and Saudi Arabia, officially remains neutral but has expanded its commercial relationship with Russia, thus effectively lending indirect support to Russia. On the other side, there are the United States and the EU as well as selected US allies, all of which provide military support and financial support to Ukraine, while significantly curtailing their economic ties with Russia. The US-European coalition supporting Ukraine exclusively consists of democracies. The Russian coalition consists of non-democracies only.

Varieties of liberal thought have long held that democracy, economic freedom, and prosperity are inter-connected. Modernization theory, for example, argues that as countries become more prosperous, they become more democratic. Classic liberals like John Stuart Mill argued that economic freedom is conducive to economic prosperity. [1] Liberals also view democratic institutions as acting as a check on overbearing governments and hence being conducive to economic growth and prosperity. Moreover, international political economists view economic interdependence as reducing the likelihood of inter-state war, and many international relations theorists believe that liberal democracies do not go to war with one another. The former is sometimes referred to as “capitalist peace,” the latter as “democratic peace theory.” Yet other scholars see the causality running from peace to democracy. In short, liberal thinkers see democracy, prosperity, and peace as related, even if there is a disagreement about how exactly they are related, and which way causality runs.

The paper reviews the scholarly literature on the effects of democracy (and prosperity) on peace and alliance formation and analyses its implications for U.S, foreign policy and international politics more broadly. First, I will provide a critical overview of the literature on democratic peace theory. Second, I will review the literature on alliance formation and evaluate the so-called democratic alliance hypothesis. Third, I will assess to what extent the data collected by the Atlantic Council’s Freedom & Prosperity Index (FPI) lends support to the democratic alliance hypothesis. Fourth, I will discuss the implications of democratic peace and democratic alliance theory for U.S. foreign policy. Finally, I will assess what the democratization of China and Russia might mean for international competition and conflict.

Democratic Peace Theory

Democratic peace theory posits that democratic states do not go to war with one another, or at least that war among them is rare. Democratic peace theory attributes the relative absence of war between democracies to the existence of domestic liberal institutions and democratic norms, which constrain governments and their foreign policies and instill a culture of non-violent conflict and compromise, at least vis-à-vis other democracies. Although democracies often engage in armed conflict, they rarely to go to war with other democracies.[2] Foreign policy decision-making in democratic countries also tends to be more transparent, which may help generate greater trust and credibility, again particularly in interactions with other democracies. Some democratic peace theory research also emphasizes the importance of economic freedom, which makes “marketplace democracies” more likely to share common foreign policy interests with other democracies, including with respect to international law and economic cooperation. This makes them less likely to fight each other. 

Democratic peace theory has its critics. Some scholars challenge the causal logic underpinning the theory, others contest its empirical validity. Conceptually, there is also disagreement over how best to define (and code) “democracy” and “war”. Such disagreements have led researchers to reach different conclusions about the validity of democratic peace theory. At a minimum, democracy is thought to require the holding of (free and fair) elections. But there is disagreement as to how extensive the voter franchise and how extensive the ability of the legislature to hold the executive to account needs be, among other things, for a country to qualify as a democracy. Yet other researchers define democracy even more extensively, namely as a “liberal regime”, including a market-based economy and private property as constitutive elements.[3]

Another complicating factor is that many of the things that a make a democracy come in degrees. Imperial Germany (1871-1918) is today often seen as a non-democracy by virtue of its parliament’s inability to appoint or dismiss the head of government. But national elections were fair and free, parliament controlled the budget and legislation, the press was free, citizens were allowed to freely organize, and the economy was market oriented. Maybe it was a democracy, or maybe it was not. The point is that conceptual differences often lead to different empirical findings. By comparison, there is generally less disagreement about how to define war, which is generally taken to mean inter-state conflict that causes at least 1,000 battle deaths per year. But even here some researchers have defined war as militarized inter-state disputes regardless of the number of casualties.

This is not the place to assess or critique the various statistical studies, but rather to understand on what grounds democratic peace theory is rejected by its critics. Some research suggests that the evidence prior to World War II supports democratic peace theory, but also argues that there were too few democracies for this conclusion to be statistically significant.[4] As John Mearsheimer has put it: "Democracies have been few in number over the past two centuries, and thus there have been few opportunities where democracies were in a position to fight one another.”[5]

International Relations theorists, particularly those of a realist persuasion like Mearsheimer, do not necessarily contest that democracies rarely go to war with one another, but attribute this fact to system-level causes, such as the military alliances that happen bring together democracies in view of a common threat, such as NATO during the Cold War.[6]Along similar lines, the absence of hegemonic war between Britain and the United States and the transition from Pax Britannica to Pax Americana in the late 19th century is explained by the geopolitical constraints Britain faced in the face of an intensifying German threat rather than the fact both Britain and the United States were democracies.

Other scholars also accept that democracies tend not to go to war with one another but argue that causality runs from peace to democracy. So-called “territorial peace theory” posits that peace leads to democracy rather than the other way round. Yet other studies suggest that the relationship between democracy and peace is spurious. One study, for example, concedes that no wars took place between dyadic pairs of democratic states between 1816-1992. But it also argues that once political similarity, geographic distance, and economic interdependence is controlled for, the remaining causal effect of democracy is negligible to non-existent.[7] Other research similarly attributes the absence of war between democracies to other omitted variables, such as prosperity, economic interdependence, security alliances or American geopolitical dominance. 

Although its empirical and theoretical validity is contested, democratic peace theory has been called the “closest thing we have to an empirical law in the study of international relations.”[8] There are of course examples of democracies going to war with one another, such as, arguably, the War of 1812 that pitted Britain against America or, even more arguably, the Sicilian Expedition launched by democratic Athens against democratic Syracuse during the Peloponnesian War. But empirical laws in the social science are invariably statistical in nature. A small number of exceptions does not invalidate the seeming fact that instances of prosperous, liberal democracies engaging in armed conflict with one another are very rare.

On balance, the empirical evidence suggests that democracies are less prone to go to war with one another than with non-democracies, even if the underlying causal relationship remains contested. Leaving scholarly arguments aside, it does seem difficult to envision a scenario where a liberal European democracy goes to war with another European democracy, or where a liberal-democratic America and Canada engage in a military conflict with one another. When there is disagreement, even significant disagreement between democratic states, they tend to resort to diplomatic or economic pressure (or at most in covert action) to resolve conflict, but rarely do they resort to military force to settle disputes.

Democratic Alliance Theory

Systemic theories of international relations posit that states form alliances or coalitions to ensure their security or prevail in armed conflict.[9] Defensive alliances generally commit its members to lend each other support in case of an attack by a third party. Less formal and more ad hoc, coalitions emerge in the context of armed conflict and lead its members to coordinate their efforts in an attempt to achieve its agreed objectives. A case in point: the French Revolutionary or Napoleonic Wars (1792-1815) are divided into seven different “wars of coalition”.

International Relations theorist see anarchy as forcing states to resort to external balancing (formation of alliances with other state), especially if internal balancing (relying exclusively on one’s own resources) proves insufficient to provide states with the desired level of security.[10] Domestic regime type plays no role in systemic-realist theories of alliance formation. Alliance theory is closely related to balance of power theory, according to which states form alliances with the goal of establishing an equal distribution of power among (groups of) antagonists. Both less capability- and power-centered, balance of threat theory posits that threat perception, which is affected by geographic proximity, offensive capabilities, and perceived intentions, is the main driver of balancing behavior and alliance formation.[11]

But if democracies are less likely go to war with one another, should they not also be expected to be more likely to join other democracies to form alliances or coalitions? Research suggests that states with similar political regimes are indeed more likely to ally with one other, at least after 1945. [12] It also finds while two democracies are not more likely to form an alliance than two autocracies, democracies appear to be more likely to form alliances with one another than with non-democracies.[13] This is not the place to propose a theoretical synthesis, but it might be hypothesized that liberal democracies perceive other liberal democracies as less threatening or more trustworthy (perhaps due to the generally greater transparency of their domestic political processes) than other autocracies. Or perhaps their foreign policy goals are generally more aligned compared to those of non-democracies. 

Anecdotal evidence, such as World War II (1939-45) and the Cold War (1947-1989/91), if not necessarily World War I (1914-18), appears to be consistent with the democratic alliance (and coalition) hypothesis, namely that democracies are more likely to form alliances and coalitions with other democracies than with non-democratic states. World War II saw the emergence of an alliance and coalition largely, but not exclusively dominated by democracies pitted against an alliance and coalition consisting almost exclusively of non-democracies. The allied coalition that emerged during World War II comprised the leading democracies, such as the United Kingdom, the United States and, initially, France. But it also included several non-democracies, such as the USSR and China. However, none of the major Axis powers, Germany, Italy, and Japan, nor the minor axis powers were democracies. Finland was not formally allied with the Axis, but rather a co-belligerent, but was effectively member of the Axis coalition waging war against the USSR. The same pattern characterized the two coalitions (or blocs) during the Cold War. The U.S.-led “Western” alliance included at various points several non-democracies, such as Spain or South Korea, though its membership was dominated by democracies. By contrast, the USSR-led alliance did not include any democracies. Given that geopolitical expediency is supposed to drive alliance formation, alliance stratification along democracy/ non-democracy lines is surprising. 

World War I is more arguable example. The principal coalition partners or members of the Entente comprised democratic France and (later) democratic America (technically an “associated power” and coalition partner rather than a formal alliance member) as well as the constitutional monarchies of Britain, Italy and Japan and the constitutional monarchy of Russia. Although Britain was a monarchy, the government was answerable to parliament not the monarch. As war dragged on, many countries joined the Entente as associated allies and co-belligerents, some of them democracies, others not so much. By contrast, the Central Powers consisted of the constitutional monarchies of Austria-Hungary, Germany, and Bulgaria as well as the absolute monarchy that was the Ottoman Empire. 

Leaving aside whether Britain should be considered a democracy in 1914-18, once again no democracy was allied with the Central Powers, unless one classifies Imperial Germany as a democracy (see above). If Imperial Germany is not considered to have been a democracy, the Central Powers did not have any democratic members. The Entente did. But while the Entente may not have been all democratic, all major democracies were part of it, while the non-democratic coalition has no democratic members, provided Germany is not seen as democratic.

The present Ukraine conflict does lend unambiguous support to the democratic alliance hypothesis. The U.S.-led coalition in support of Ukraine consists exclusively of democracies, mostly NATO. By contrast, Russia’s coalition comprises North Korea and Belarus, and arguably Iran. Meanwhile, the members of the Collective Security Organisation Treaty (CSOT), a defensive security alliance, of which Russia is a member and includes Armenia, Belarus, Kazakhstan, and the Kyrgyz Republic, have remained neutral, except for Belarus. Russia’s coalition partners are all non-democracies.]

Three strategic conflicts and the Ukraine conflict hardly make for a large enough, let alone an unbiased sample. Nevertheless, the tendency of coalitions to be somewhat stratified along liberal-illiberal lines is interesting to note. At the time of World War I, there existed few republican democracies, but no republican democracy was aligned with the Central Powers. During World War II, no democracy was aligned with the Axis (only Finland excepted). This was also true during the Cold War. In all three cases, the (predominantly) “democratic” alliance did have non-democratic members, but the “un-democratic” alliance had no democratic members with the possible exception of democratic Finland’s membership in the Axis-led coalition. Anecdotal evidence suggests that democracies have a greater tendency to align with other democracies, even if not all democracies align with one another, and even if predominantly democratic alliances do have some non-democratic members. And democracies are not likely to join non-democratic coalitions or coalitions led by a non-democratic great power.

Freedom, Prosperity and Alliances - Empirics

Perusing the Atlantic Council’s Freedom & Prosperity Index (FPI), this section analyses the propensity of democratic countries (or “free” countries in FPI terminology) to form alliances or engage in substantial security cooperation with other democratic countries.[14] This section will also analyze to what extent economic development (or “prosperity” in FPI terminology) affects a country’s propensity to form alliances with other prosperous countries. 

The FPI measures countries’ levels of freedom and prosperity. The concepts of freedom and prosperity underpinning the index are more multifaceted compared to basic definitions of democracy (e.g. free and fair elections) and economic well-being (e.g. per capita income). Or: “A distinctive aspect of the Freedom and Prosperity Indexes is their root in and reflection of an expansive understanding of what constitutes a free and prosperous society. The Freedom Index measures the economic, political, and legal dimensions of freedom. This broader definition of freedom differentiates the index from other measures focused on specific institutional (electoral, corruption, economic openness, and so on). Likewise, the Prosperity Index is more exhaustive than previous measurement projects such as the United Nations Human Development Index or various poverty indexes.” But both freedom and prosperity serves can be seen as acceptable proxies of democracy and economic well-being.

Analyzing FPI data, it is helpful to distinguish between formal alliances and broader security cooperation. The democratic alliance, broadly conceived, comprises NATO, Rio Treaty members, U.S. bilateral treaty allies, and the EU. The non-democratic alliance led by Russia consists of the members of CSOT and Russia’s bilateral treaty ally, North Korea. China, the other major non-democratic great power, has only one formal treaty ally, North Korea. China and Russia are not allied to one another, but they do maintain close security relations.

Admittedly, security cooperation varies in intensity and one can legitimately disagree over which countries should be classified as “close security partners”. In Russia, this groups arguably comprises, Iran, China, Syria, and Vietnam as well as various sub-Saharan countries (though Syria will likely cease being a Russian security partner following the fall of the Assad regime). Whether countries that maintain close diplomatic ties with Russia, such as Cuba, Nicaragua or Venezuela, should be included is debatable. In the case of China, Cambodia and Laos should probably be classified as close security partners. In the case of the United States, one can rely on Washington’s major non-NATO (MNNA) ally designation to decide which countries should qualify as close security partners. But whether Saudi Arabia, Singapore and the UAE, none of whom are MNNA, should also qualify, can be debated. The same is true for whether China and Russia should be seen as security partners. Admittedly, one can always quibble about the classification of individual countries, but the overall picture does not change much. Table 1 and the Annex show what countries were included in the alliance and security partner category with respect to the United States/ EU, Russia and China.

The democratic alliance comprises NATO, U.S. bilateral security partners, Rio Treaty members and due to the mutual defense clause adopted by the EU in 2009 (even though Austria and Ireland are strictly speaking neutral countries). Using this classification, 83% of the countries in the high freedom category (highly developed democracies) are allies. Of the 41 countries in this category, only Switzerland, the Seychelles, Barbados, Cape Verde, Singapore, Taiwan and Israel are not formally part of the democratic alliance. (However, Singapore is a close U.S. security partner and the U.S. is committed to lending support to Taiwan in case of an attack.) 

By comparison, none of the high freedom countries is formally allied with any of the major (or minor) non-democratic powers, China and Russia (or Iran and North Korea). Of the medium freedom countries, 49% are members of the democratic alliance, and only 5% belong to a non-democratic alliance. In the low freedom category, 37% of countries are members of the democratic alliance, while only 5% are allied to the major non-democratic countries. And only in the lowest freedom category do members of non-democratic alliances outweigh members of the democratic alliance (29% vs 10%). 

If one broadens the definition of alliance to include close security partners (as defined above), the picture is not much different. Adding MNNAs to the democratic alliance, a full 90% of high freedom countries and 44% of medium freedomcountries are part of the democratic alliance. If one adds close security partners in the case of China and Russia, their share among high and medium freedom countries remains unchanged at zero and 5%, respectively. But their share of security partners among low and lowest freedom countries increases from 5% to 17% and 12% to 43%, respectively.

The pattern is very similar in terms of prosperity due to the strong correlation between freedom and prosperity in the FPI. Most prosperous countries are members of the democratic alliance. On the more narrow alliance definition, 88% of high prosperity countries are members of the democratic alliance. On the more extensive definition that includes close security partners, the share increases to 98%. The share of countries among high prosperity countries allied to non-democratic alliances is zero. On both the narrow and the broader alliance/ security partner definition, there are also more democratic allies and security partners in the medium and low prosperity categories. It is only in the lowest prosperity category that China and Russia have significantly more allies and security partners than the democratic alliance.

Correlation is not causation. America’s global military power or its greater prosperity may make it a more desirable alliance partner than China or Russia. Non-democratic Russia and China have far fewer alliance and security partners, while Iran has no formal ally and North Korea has only two bilateral security allies, China (1961) and more recently Russia (2024). America is evidently also more willing to form alliances and security partnerships than China or Russia (demand). Or perhaps countries are simply more eager to cooperate closely with the United States (supply). 

Moreover, greater economic interdependence may lead liberal, “market-oriented” democracies to share similar foreign policy goals and hence make them more likely to enter alliances with one another. Or maybe, and this would be consistent with the democratic alliance hypothesis, the U.S. (and the major European powers) offers more liberal leadership than non-democracies whereby domestic institutions translate into strategic restraint[15] and democratic alliance leadership is more predictable and transparent, making it a more attractive alliance partner overall, but particularly among free and prosperous countries. America does have security partnerships, if not treaty relationships, with less than liberal-democratic countries, particularly in the Middle East and the Gulf. But all U.S. allies are fairly to very democratic and prosperous. Among U.S. allies, only the Philippines, Thailand and Turkey do not fall into at least a both medium freedom and medium prosperity category. 

The data shows that the freer and more prosperous a country is, the more likely it is a member of the democratic alliance. The probability of a country being allied with non-democratic China and Russia increases, as a country’s prosperity and freedom decreases. Naturally, the higher percentages of democratic alliance partners in the high and medium freedom and prosperity categories compared to non-democratic alliance partners are also partly a reflection of the higher overall number of countries that are members of the democratic alliance. It is possible that the causality runs from prosperity to alliance membership rather than democracy, or that omitted variables, such as economic interdependence underpin the observed correlation. Yet, the fact remains that prosperous and free countries effectively form a broad democratic alliance and that such countries are not allied with non-democratic, less prosperous states, such as China or Russia.

Conversely, not a single high freedom country nor a single high prosperity country is allied with China or Russia, or is a close security partner of either country. Maybe this because high freedom and high prosperity countries are geographically concentrated in North America, Europe, East Asia and Australasia, and today’s geographically concentrated alliances are simply a legacy of the Cold War. But the Cold War ended more than thirty years ago. Moreover, formerly non-democratic, initially (presumably) low prosperity Warsaw Pact countries have joined the democratic alliance since the end of the Cold and after being transformed into medium to high prosperity and freedomcountries. A more thorough analysis of the FPI data, which goes back three decades, would show that Eastern European countries joined NATO only after they had become more free and prosperous, lending further support to the democratic alliance theory, at least as far Eastern Europe is concerned.

Whatever the underlying causal mechanism, the FPI data lend support to the democratic alliance hypothesis and it also lends support to what may be termed the enhanced democratic-prosperity alliance hypothesis, which posits a close relationship between freedom, prosperity and geopolitical alignment: the more free and prosperous a country is, the more likely it is allied with other prosperous democracies; and prosperous democracies do not form alliances or even security partnerships with major non-democratic powers.

Implications for U.S. Foreign Policy and Strategy

Liberal thought and theories have long posited a connection between democracy and prosperity as well as between democracy and peaceful international relations. Democratic peace theory posits that democracies do not go to war with one another and attributes this empirical fact to the democratic nature of democracies’ domestic political regime. Democratic alliance theory posits that democracies are more likely to form alliances and collations with another than with non-democracies. A corollary is that democracies very rarely join alliance led by non-democracies. If both of these theories are “true”, this has important implication for U.S. foreign policy.

If democratic peace theory and democratic alliance theory are correct, the larger the number of democracies, the less likely military conflict should become, all other things equal. And the larger the number of prosperous democracies, the larger the pool of potential alliance and coalition members for democratic states and the smaller the pool of potential allies for non-democracies. Again, democratic states do not necessarily join security alliances led by a liberal power, though high freedom and high prosperity seem to do so in overwhelming numbers; but they are highly unlikely to join alliances led by or dominated by illiberal states. 

If this is so, the United States and Europe should support economic development and democratization. Such a strategy will be countered by non-democratic powers, and for good reason. Undoubtedly, if the North Korea were to become democratic, it would lead to unification with South Korea. China would be deeply antagonized and would act forcefully to prevent such an outcome. After all, it intervened in the Korean War (1950-53) to prevent the emergence of a U.S.-allied state at its border. 

Similarly, a democratic Belarus would seek closer ties with the West, over time cumulating in NATO and EU membership, just like a democratic Ukraine might have done, had Russia not intervened. A democratic Iran would likely take a far less antagonistic position vis-à-vis the United States, and the United States vis-à-vis Iran, and might (again) become a major U.S. partner. Beijing and Moscow understand this, and the very prospect of non-democratic countries aligned with China or Russia turning democratic represents a threat to their geopolitical interests. This is why so-called color revolution tend to trigger strong reactions from both Russia and China. 

Supporting democratic and economic development and the widening the pool of potential allies is not least an imperative in light of China’s continued economic ascendance, which requires a forward-looking, alliance-based foreign policy strategy or extensive external balancing to maintain the balance of power in the future. It is also an imperative for another reason. According to non-partisan Freedom House, political rights and civil liberties worsened in 52 countries and improved in only 21 in 2023, representing a democratic decline for the 18th consecutive year.[16] If this trend is not halted and reversed, it might negatively affect the propensity of countries with weakening democratic institutions to join democratic alliances. They may even become potential allies of non-democratic alliances.

However, the evidence supporting democratic peace and democratic alliance theory must not be regarded as a license for a foreign policy of assertive regime change and democratization. How to best to promote democracy and prosperity sustainably is a separate question that cannot be dealt with here, except to say that establishing democracy by force has at best a mixed record.[17] It was successful in Germany Japan following World War II, it has failed in Afghanistan and Iraq. But it proved successful in the case of many formerly Communist countries in Eastern Europe. 

Moreover, policymakers should be aware that democracy promotion will be seen as a double threat to both China and Russia and they will likely ramp up countermeasures, as it threatens both their geopolitical position if its geopolitical partners are targeted for democratization and the legitimacy of their own political system if such efforts are directed at their democratization. [18] A strategically less risky approach would be to deprive China and Russia of potential allies by supporting democratization, particularly countries, which are geographically somewhat more “out of reach” for China and Russia and where their geopolitical interests are less intensive and extensive, like in Latin America and Africa.

But what if it were possible to transform China and Russia into democracies? Democratic peace theory suggests that the risk of armed conflict would decline (and relations might improve). However, a caveat that needs to be borne in mind, however, is that research suggests that countries transitioning toward democracy become more militarily aggressive, at least temporarily. This is attributed the lack of accepted democratic norms or political entrepreneurs seeking to gain votes by playing the nationalist card.[19]

These are not particularly novel ideas novel ideas. The “China as responsible stakeholder” theory[20] was in part premised on the expectation that China’s increasing prosperity would transform it into a liberal polity, while a high level of international economic interdependence would lead China to accept the international status quo. Similarly, liberals hoped that political and economic liberalization in Russia would end geopolitical competition in Europe. Neither was an unreasonable expectation from a liberal point of view. China and Russia may yet become more democratic. For now, however, China has not moved toward a more liberal-democratic form of government, and its challenging the international status quo. Similarly, Russia remains a non-democracy quite willing to pursue its interests by force. Nevertheless, U.S. and European foreign policymakers should consider supporting democratization and prosperity in order to reduce the likelihood of armed conflict and limit the pool of potential alliance members of non-democratic powers. The more the focus of such a policy moves from strategically peripheral countries to the major non-democratic powers themselves, the stronger the geopolitical pushback of the latter will be. 

Policy Recommendations

> Washington should continue to lend support to democratization, from strategically peripheral countries to non-democratic great powers, to help reduce the risk of inter-state armed conflict, all other things equal. If democratic peace theory is correct, then the larger the number of democracies, the less frequent inter-state military conflict becomes, all other things equal. A caveat here is that a larger number of democracies diminishes the overall likelihood of war but may do little to prevent great power war between democracies and non-democracies. It may even make it more likely if non-democracies come to view their geopolitical position deteriorate as a consequence of a lack of allies and coalition partners.

> Washington should continue to support democratization to reduce the number of countries inclined to align with non-democratic powers and to increase the number of potential U.S. allies and security partners. If the democratic alliance hypothesis is correct, then geopolitical competition with Russia (and China) is the America’s (and its democratic allies) to lose – provided the world does not regress in terms of democracy. The more countries become democratic, the fewer potential alliance partners non-democracies, like Russia, North Korea, Iran and China will have. An implication of democratic alliance theory for U.S. foreign policy is that lending support for democratization and economic prosperity would reduce the pool of countries willing to align with non-democratic alliances and coalitions, while increasing the number and propensity of countries to align themselves security-wise with democratic alliances.

> Washington may also want to support democratization in China and Russia, bearing in mind that Beijing and Moscow will consider this a direct threat and cognizant of the concomitant risk of a further deterioration of relations. If democratic peace theory is correct and if China and Russia were to become democracies, the risk of great power war should recede, especially once democratic norms and culture are consolidated the previously non-democratic countries. A caveat here is that countries in the early of democratization may behave more belligerently. Another caveat is that a policy aimed turning low freedom into high freedom countries will make non-democratic powerss foreign policies more antagonistic and potentially bellicose, as they fear losing potential allies and view democratization efforts aimed at them as a direct threat to the regime survival. This should be taking into account when designing foreign policies and strategy. 

Conclusion

The empirical support for democratic peace theory is strong, and the hypothesis that democracies do not go to war with other democracies can be considered a relatively well-confirmed empirical generalization, even if there are disagreement as to its underlying causal logic. The evidence in favor of democratic alliance is theory is also fairly solid. Both theories provide a sound intellectual basis for a U.S. foreign policy and strategy that support democratization (and prosperity). If democratic peace theory is correct, then the larger the number of democracies, the less frequent inter-state military conflict becomes, all other things equal. If democratic alliance theory is correct, then the larger the number of democracies the larger the potential pool of U.S. allies and the smaller the pool of actual and potential allies of non-democratic great powers. If democratic peace theory is correct, successful and sustainable democratization of China and Russia does hold out the prospect of a more peaceful future, perhaps even the sort of perpetual peace Immanuel Kant envisioned. 

As Jack Levy wrote shortly after the end of the Cold War: “It [democratic peace theory] also provides additional hope to those who believe that world politics is undergoing a fundamental transformation in which war will play a more limited role, and that activist state policies to encourage the spread of democratic institutions and attitudes on a world scale can contribute to this transformation.[21]

Bibliography

[1] Markus Jaeger, Pathways to Prosperity, Atlantic Council, 2023: https://www.atlanticcouncil.org/in-depth-research-reports/books/pathways-to-economic-prosperity-theoretical-methodological-and-evidential-considerations/


[2] Jack Levy, The Democratic Peace Hypothesis: From Description to Explanations, Mershon International Studies Review 38, 1994


[3] Michael Doyle, Kant, Liberal Legacies, and Foreign Affairs, Philosophy and Public Affairs 12(3), 1983


[4] Joanne Gowa, Ballots and Bullets: The Elusive Democratic Peace. Princeton: Princeton University Press, 1999


[5] Quoted in David Spiro, The Insignificance of the Liberal Peace. In Michael Brown et al., Debating the Democratic Peace, Cambridge: MIT Press, 2001


[6] Henry Farber and Joanne Gowa, Polities and Peace, International Security 20(2), 1995


[7] For example, Is Democracy a Cause of Peace? Oxford Encyclopedia of Politics, 2017


[8] Jack Levy, Domestic Politics and War, The Journal of Interdisciplinary History 18(4), 1988


[9] Kenneth Waltz, Theory of International Politics, 1979


[10] Glenn H. Snyder, Alliance Politics, Ithaca: Cornell University Press, 1997


[11] Stephen M. Walt, Alliance Formation and the Balance of World Power, International Security 9(4), 1985


[12] Brian Lai and Dan Reiter, Democracy, Political Similarity, and International Alliances, 1816-1992, The Journal of Conflict Resolution 44(2), 2000


[13] See previous footnote


[14] For methodology and underlying data, see Atlantic Council, Freedom and Prosperity Index, 2024: https://freedom-and-prosperity-indexes.atlanticcouncil.org/#map and https://freedom-and-prosperity-indexes.atlanticcouncil.org/about


[15] G. John Ikenberry, After victory, Princeton: Princeton University Press, 2001


[16] Freedom House, Freedom in the World, 2024


[17] Patrick Quirk, Advancing Freedom, Defeating Authoritarianism, Atlantic Council 2024: https://www.atlanticcouncil.org/in-depth-research-reports/report/advancing-freedom-defeating-authoritarianism-a-democracy-agenda-for-2025-2029/


[18] Herfried Münkler, Welt in Aufruhr, Hamburg: Rowohlt, 2023


[19] Edward D. Mansfield and Jack Snyder, Democratization and the Danger of War, International Security 20(1), 1995


[20] Department of State, Whither China: From Membership to Responsibility, 2005: https://2001-2009.state.gov/s/d/former/zoellick/rem/53682.htm


[21] Jack Levy, The Democratic Peace Hypothesis: From Description to Explanations, Mershon International Studies Review 38, 1994

Economic and Political Power in International Affairs - A Partial Framework (2024)

Economic size, economic power and international influence are correlated. The United States and China do not only have the largest economies, they are also the largest military spenders. Typically a function of its economic size, the level of military spending a country can afford is only one aspect of its international power. The ability to impose costs or confer benefits on other country by intervening in cross-border trade and financial transaction is another important aspect of a country’s international power.

Economic size, resource mobilization and international economic power

Economic size confers a country the ability to mobilize resources in support of its foreign policy objectives. The size of an economy is a good proxy of its resource availability. An important caveat is that high per capita countries have, all other things equal, a greater ability to extract resource before domestic consumption falls below sustainable or even subsistence levels. A country with a low level of per capita income cannot extract more resources than a country with a high level of per capita income, all other equal.

Economic mobilize-ability refers to the share of economic output that can be dedicated to the pursuit of foreign policy objectives on a sustainable basis over a given time horizon without jeopardising economic stability. Political mobilize-ability refers to a government’s ability to mobilize resources over potential domestic opposition. It stands to reason that less democratic regimes may face fewer political constraints in this respect than democratic ones. The Russia-Ukraine war and the uncertainty about the willingness of Western countries to support Ukraine is a case in point. On the other hand, history also suggests that in the face of major, as opposed to minor geopolitical threats, and particularly in the context of an armed conflict, democracies are quite capable to mobilizing huge amounts of resources in pursuit of their foreign policy objectives. The ramp-up of defense production and the reduction of private consumption following the U.S. entry into World War suggests as much. The US fiscal deficit reached 30% of GDP in 1943.

Broad geopolitical influence is in part a function of a country’s ability to spend more than its antagonists. Over the long run, differences in real GDP growth will impact economic size and relative resource availability. However, an economy that is characterized by a low level of per capita income and small population size would need to grow significantly faster over an extended period of time to narrow the difference vis-à-vis a much larger and richer country. Even if Luxembourg grows twice as fast as Germany, the relative resource availability will not be significantly changed twenty years from now.

Governments can mobilize additional resources domestically or internationally. Domestically, they can do so by relying on rapid economic growth, raising taxes and cutting expenditure unrelated to its foreign policy objectives, or by running a larger fiscal deficit. Governments can also raise resources externally through issuing debt or receiving financial support from other countries. In the long term, however, countries will generally run into constraints if they rely on domestic or external borrowing rather than their own resources over an extended timeframe. 

In practical terms, the United States will always spend more resources on defense and foreign policy than an economically much smaller economy like Mexico. However, this is less likely to be true when comparing Chinese and US defense expenditure, for example. China is growing more rapidly than the United States and it has room to increase defense expenditure, which is far lower as a share of GDP than in the United States. The point is that in the case of economically similar-sized geopolitical competitors, differential growth rates do matter, at least over the longer term. 

In addition to economic resources and the ability of governments to extract resources in support of a country’s foreign policy objectives, its ability to intervene in the cross-border exchange of goods, services, capital, technology and data is also an important source of geopolitically relevant economic power.

Economic interdependence and international economic power

A high level of economic interdependence provides countries with opportunities to take advantage of interdependence and exploit economic-financial vulnerabilities by imposing or threatening to impose economic costs or conferring or promising to confer benefits on another country. This works best when interdependence is asymmetric and the target country finds it difficult side-step the costs of adversarial measures. 

First, a country’s ability to restrict cross-border trade has the ability to impose costs on another country. Imposing tariffs on imports leads to lower exports and lower economic growth. While it also translates into economic costs in the country imposing tariffs, the costs to the target country are far greater if the relationship is asymmetric. If U.S. tariffs make it more difficult for China to exports goods to the United States, its economic growth will suffer. 

Second, countries can also impose export controls, often prohibiting the sale of specific goods to specific countries. This can to significant economic disruption in the target country. The United can restrict the export of advanced semi-conductors to China, while China can restrict the export of rare earths. Countries ability to impose costs, and thereby potentially exercise influence, is significantly enhanced if restricted goods cannot be easily, or at all, replaced, increasing the opportunity costs of supply. Arab oil producer embargo massively increased prices and imposed significant costs on advanced economies in the context of the Yom-Kippur War of 1973.

Third, a country, or rather a government, can offer or withhold financing to another country. To the extent that nobody else may be willing to extend financing, for example during a financial crisis, at sufficiently attractive terms, the sender country may be able to exercise power, not least by withholding financing. Moreover, some countries, like the United States, have significant institutional leverage due to their prominent position in international financial institutions, like the International Monetary Fund or the World Bank. In Europe, the larger euro area members can exercise power by vetoing the extension of credit to crisis-ridden members in the context of the euro area architecture created in the wake of the euro area financial crisis 15 years ago.

Fourth, with the help of inward investment restrictions, governments can exclude companies from specific countries to buy certain types of companies. This often serves as a way of restricting other countries’ access to technology and intellectual property rights and can help weaken the longer-term development prospect of countries. Similarly, outbound investment restrictions, most recently introduced by the United States, have a similar objective of limiting technology leakage to companies in other countries, in this case China.

Economic interdependence, sanctions and risk mitigation

Influence and susceptibility to influence is a function of the relative of the target country’s dependence on the sender country with respect to a specific type of cross-border flows. How vulnerable a country is depends on the opportunity costs of neutralizing adversarial measures. In the case of sanctions, for example, third-party spoilers and black knights, whose intervention is motivated by economic gain and geopolitical interests, respectively, can help limit the opportunity costs. This is why enforcement vis-à-vis third parties is often key, as Western policymakers have begun to find out when it comes to imposing economic costs on Russia.

What can countries vulnerable to, for example, trade restrictions do to mitigate risks? Answer: Reshoring, friend-shoring and diversifying. Reshoring is typically costly, as production and supply chains are moved from low-cost countries to higher-cost places. Reshoring as such may reduce international vulnerability, provided no critical part of the supply chain is left vulnerable, but a higher geographic concentration of production may increase risks if domestic production is negatively impacted by shocks. Friend-shoring tends to be less costly than reshoring. Finally, diversification is also costly, as companies need to put in place more diversified supply chains but redundancy helps with risks. But it typically offers the best trade-off between risk reduction and costs.

Are sanction efficacious then? Leaving aside third-party spoilers and black knights, the academic research suggests that economic and financial sanctions in the sense of changing another country’s behaviour are rarely successful in the case of targeting a geopolitical adversary. Sanctions are more successful in case of geopolitical allies. This can be rationalized by the closer economic relations between allies and the higher costs sanctions cause, and also by the likely lower geopolitical stakes given the target and sender countries geopolitical proximity. Similarly, in case of geopolitically adversarial countries, a less extensive economic relationship typically means that sanctions lead to lower costs in the target country, while the political stakes are necessarily higher. This does not mean that sanctions never work in terms of changing an adversary’s behaviour (e.g. US-Iran), but it is relatively rarer. Again, Western sanctions targeting Russia are a case in point. This does not mean that sanction cannot be or are no t effective in terms of imposing economic costs, signalling (domestic and international), deterrence or degrading a target country’s economic base. But they rarely lead to a change in desired behaviour.

The varieties of international economic power

Broad international power and influence is to a large extent a function of a country’s ability to mobilize resources. It is also a function of a country’s ability to exploit asymmetric interdependence by restricting or supporting the cross-border flow of goods, services, capital and technology. Economic size matter, but it is not the only thing that matters in terms of exercising power in international politics. A stable economy, limit vulnerability and solid long-term growth prospect combined with a significant overt or latent ability to mobilize economic resources and convert them into diplomatic or military power. Asymmetric economic and financial relationships and another country’s limited ability to offset cost-imposing measures by forging close economic and financial relations with a third country are another important source of power international politics.

Why Europe Has Made Little Progress on Banking Union (2024)

Europe’s banking union remains incomplete and the prospect of significant progress toward closer integration, particularly with respect to a common deposit insurance scheme, remains unlikely, as creditor countries are unwilling to indirectly backstop debtor countries’ sovereigns. The euro area sovereign and financial crisis which started almost exactly fifteen years ago led European policymakers to the realization that Europe’s fragmented banking supervision regime, largely under the purview of national authorities, required significant strengthening. Economic and Monetary Union (EMU) had been intentionally designed in such a way as to force members to take responsibility for their own financial stability by prohibiting individual members from assuming the financial liabilities of others. In the face of the financial crisis late noughties, however, the absence of an overarching financial architecture capable of pre-empting a systemic financial crisis due to the so-called sovereign-bank nexus. In some instances, sovereign distress and default caused banking sector instability (Greece, Italy, Portugal). In others banking sector weakness led to sovereign financial distress (Cyprus, Ireland, Spain). Without the ability to intervene and backstop sovereigns and national banking sectors, this nexus risked turning into a self-reinforcing financial doom loop. In response to the Greek financial crisis, the euro area created financial instruments and a financial architecture to deal with financial instability by providing distressed countries with financial support in the form of loans issued to government. In the face of the Spanish banking crisis, Europeans then proceeded to consider the public, joint and direct recapitalisation of banks through the European Stability Mechanism, which originally was meant to provide loans to governments only. With a fiscal union not on the agenda due to creditor country opposition and a desire to sever the sovereign-bank nexus, banking sector union represented a second-best solution. The reform of the euro financial architecture, including the move towards banking union, allowed ECB President Mario Draghi to give his “whatever it takes pledge” in the summer of 2012, which effectively saved the euro area from a financial meltdown and potential breakup. 

> Pre-crisis, there existed only limited harmonisation of banking regulation, but only in the form of directives rather than regulations, such as the Banking Directive (2000) and the Capital Requirements Directive (2006). National authorities remained in charge of supervision. The EU also created a Committee of European Banking Supervisors (CEBS) in 2004.

> The Maastricht Treaty contains an enabling clause that allowed the ECB to take on prudential supervision of credit institutions and other financial institution, subject to Council approval and EU Parliament assent. This article formed the legal for the euro area members to establish a banking union and delegate supervision to the ECB.

> In 2012, the Van Rompuy proposed the establishment of a banking union, a fiscal union, an economic union and a political union to strengthen EMU and the EU. Banking union presented the path of least political resistance.

Banking union, as originally envisioned, was to consist of three pillars – supervision, resolution and common bank deposit insurance – but euro area governments only succeeded in establishing the first two. Rather than a politically impossible to achieve fiscal union to sever the bank-sovereign nexus, euro area governments agreed to move towards a banking union by establishing euro area level banking supervision and a resolution authority (including a resolution fund) to reduce the risk of destabilizing financial spill-overs by preventing bank failures from triggering sovereign distress and preventing sovereign distress from destabilizing the national and European banking sectors. The Single Supervisory Mechanism (SSM) entered into force in 2014 and transferred the supervision of larger euro area banks from the national supervisory authorities to the European Central Bank. Smaller and mid-sized remained under the supervision of the national authorities, but the ECB was given authority to intervene in them in case of a risk to systemic financial stability. The Single Resolution Mechanism (SRM), consisting of a Single Resolution Board (SRB) and Single Resolution Fund (SRF), transferred the authority to intervene in and, if necessary, resolve in an orderly fashion euro area banks to the body. But euro area governments failed to create a common European deposit insurance regime and a common backstop supporting the SRF. Instead, they issued a political declaration that a common backstop would be created to strengthen SRF within the next ten years. Meanwhile, member states would ensure that national deposit insurance schemes would accumulate sufficient funds to cover 1% of their deposits by end-2023, which would then be fully mutualized to support the SRF. 

> All twenty euro area members are members of the SSM. Non-euro area members have the option to participate in the regime.

> The SRF is financed by contributions from banks. A reform was meant to create a common public, if limited financial backstop to the SRF in the guise of a ESM revolving credit line of nearly EUR 70 billion in case SRF resources are insufficient to finance a resolution. This reform has been stalled due to Rome’s unwillingness to ratify ESM treaty change.

> The SRF is not meant to be used to absorb financial losses incurred by a distressed bank or to recapitalize it. Under certain circumstances, the SRF can provide substantial support to a bank under resolution, but only if at least 8% of the bank’s total liabilities have been bailed in and contribution must not exceed 5% of the bank’s total liabilities.

Efforts to establish a common European Deposit Insurance Scheme (EDIS) to guarantee euro banking sector deposits has not made any substantial progress, largely due to opposition from creditor countries like Germany, while the creation of common ESM-backed backstop to SRF has been blocked by the Italian government. As it stands, the SFR has only limited funds to deal with a systemic banking crisis. But creditor countries not willing to make a pledge to guarantee banking sector deposits in the guise of EDIS for fear of indirectly underwriting debtor countries banking sectors and sovereigns. Instead, Germany has pushed for higher capital charges on bank holdings of sovereign debt to reflect their inherent risk. Such concentration charges would reduce the risks to (debtor) countries’ banking sectors. This however is unacceptable to debtor countries, as they rely on their banking sector to provide financing, particularly during a crisis, and if necessary through moral suasion. The so-called regulatory treatment of sovereign exposures (RTSE) is a non-starter for debtor countries, while it is the starting point for creditor countries if they are ever to agree EDIS. Without progress on RTSE, creditor countries are not going to back a European deposit insurance regime, as they are concerned about indirectly risk insuring other countries’ sovereign risk. Meanwhile, the establishment of a (limited) common backstop to the SRF failed due to Italy’s failure to ratify the necessary ESM treaty change. Making further strides toward a more complete banking union will require euro area governments to find a compromise on how to deal with sovereign exposures and how to share the financial risks related to EDIS. The present relative stability of euro area banking sectors, which have managed to make it through the global monetary tightening relatively unscathed compared to some of its American peers, sharply limits the incentives to reach an agreement. It will require another major crisis for substantial progress to occur. 

> The SRF common backstop was meant to replace the so-called (unwieldly) Direct Bank Recapitalization Instrument. Italy continues to block changes to the ESM and has prevented the common backstop from entering into force. We need to send somebody to Rome to find out why the government opposes ratification. The we did not like the way we were treated a decade ago explanation does not strike one as a plausible explanation.

> The von der Leyen EU Commission failed to establish, or make progress toward a European deposit insurance scheme and create a common backstop to the SRF, despite its pledge to do so when it came to office in 2019. This shows just far apart creditors and debtors are on the issue of completing banking union.