By Glenn Agung Hole, Ph.D.
The debate about the changing global order is usually framed as a geopolitical contest. China is becoming more powerful, the United States is under greater pressure, Europe is struggling to preserve its relative weight, and new centres of influence are emerging outside the traditional Western institutional architecture.
That description is not wrong. But it begins too late.
By the time a shift in power becomes visible in geopolitics, the underlying change has usually been taking place for years, sometimes decades. The more important question is therefore not simply which states are becoming stronger, but why some societies remain capable of turning knowledge, capital, technology and human talent into durable economic and strategic capability while others struggle to do so.
That is fundamentally an institutional question.
Power does not follow resources automatically. A country can be rich, educated and technologically sophisticated without being equally capable of mobilising those advantages. What matters is the institutional system through which resources are converted into productive outcomes and then renewed over time.
This is where I believe much of the debate about the emerging global order remains too narrow. Geopolitical power is often treated as if it begins in foreign policy, defence or diplomacy. In reality, much of it is produced elsewhere. It grows out of the ability of societies to invest, innovate, build, govern and translate long-term ambition into actual capability.
Strategic power is accumulated before it is displayed.
This distinction matters particularly for mature economies because inherited strength can easily be mistaken for present capacity.
Europe remains one of the richest, most educated and institutionally sophisticated regions in the world. It has strong universities, functioning legal systems, substantial private wealth, established infrastructure and a deep accumulation of scientific and industrial knowledge. These are formidable advantages.
But accumulated advantages and reproduced capacity are not the same thing.
A society may continue to appear strong because it is drawing on institutional capital created over several generations. Infrastructure remains in place. Universities maintain their reputations. Established firms continue to generate value. Trust and legal predictability continue to support economic activity.
The more difficult question is whether the institutional system is still reproducing these advantages at the rate required by a changing world.
Mario Draghi's report on the future of European competitiveness makes this question much harder to avoid.
Draghi's diagnosis is often presented primarily as an economic programme for restoring European competitiveness. Yet read from an institutional perspective, the report points to something deeper. It describes a Europe that continues to possess enormous resources but faces growing difficulty in converting them into sufficient productivity growth, technological scale, investment and strategic capability.
The European Commission itself summarises the challenge in terms of slowing productivity, demographic pressures, high energy costs, intensifying global competition and an exceptional need for investment and innovation. Draghi's recommendations subsequently became central to the EU's Competitiveness Compass, built around closing the innovation gap, combining decarbonisation with competitiveness and reducing strategic dependencies.
These are usually discussed as separate policy challenges.
Institutionally, they are closely connected.
The central European problem is increasingly not an absence of resources, but friction between resources and results.
Europe generates excellent science, yet too often struggles to scale the companies that emerge from it. It has substantial private savings, yet faces persistent difficulties mobilising enough productive investment across fragmented capital markets. It has ambitious energy and climate objectives, yet energy costs have become an important constraint on industrial competitiveness. It possesses one of the world's largest markets, yet regulatory and national fragmentation continue to make scaling across that market harder than its size would suggest.
These are not simply individual weaknesses.
They are symptoms of a conversion problem.
This is why I use the concept of institutional conversion capacity: the ability of a society to transform the resources it possesses into productive, technological and strategic capability.
The concept matters because institutional sophistication and institutional capacity are not necessarily the same thing.
Europe has developed highly advanced systems of governance, regulation and oversight. Much of that institutional development serves important and legitimate purposes. But a system can become more sophisticated administratively while becoming less effective at producing certain outcomes.
The Draghi diagnosis brings this tension into particularly sharp relief. Europe does not lack policy ambition. Nor does it lack knowledge. The question is whether its institutional arrangements are sufficiently capable of converting both into economic scale and strategic autonomy.
Draghi himself has placed energy at the centre of this challenge, arguing that Europe cannot sustain competitiveness without bringing energy prices down and accelerating investment in grids and generation capacity. His broader argument is equally important: innovation, skills, investment and decarbonisation cannot be treated independently from the institutional capacity needed to connect them.
This is precisely why the problem cannot be solved by looking at individual policy areas in isolation.
If productive investment becomes systematically more difficult, capital gradually finds other destinations. If companies can innovate in Europe but scale more effectively elsewhere, Europe retains part of the knowledge while losing ownership, production and future strategic leverage. If infrastructure takes increasingly long to permit and construct, the consequences eventually reach beyond administration and into competitiveness. If energy costs remain structurally higher than those faced by major competitors, industrial location decisions begin to reflect that reality.
No single decision changes the geopolitical position of a continent.
The accumulated effect may.
Institutional erosion is therefore difficult to recognise while it is happening.
There is rarely a moment at which a society suddenly becomes less capable. The process usually appears as a series of individually understandable decisions. An investment goes elsewhere. A production facility is closed rather than renewed. A company moves part of its operations abroad. A strategic supplier disappears. Dependence on external technology deepens.
None of these events proves institutional decline on its own.
The issue is what happens when they form a pattern.
Productive capacity is not infinitely mobile without consequence. Industrial ecosystems contain accumulated competence, supplier relationships, tacit knowledge, research connections and investment histories that often take decades to develop. Once sufficiently weakened, such ecosystems cannot simply be reconstructed through a policy announcement.
That is why institutional capital should be understood as something societies both accumulate and consume.
Institutional capital is more than the formal existence of institutions. It lies in the capacity embedded in the relationships between government, law, markets, education, infrastructure, finance and productive enterprise. When these relationships reinforce one another, societies become better at translating potential into capability. When they cease to do so, formal institutional strength can remain visible long after underlying capacity has begun to weaken.
This creates one of the central dangers facing mature societies: the illusion that inherited strength will reproduce itself automatically.
It will not.
The same perspective also changes how we should understand the rise of Asia.
It is too simple to explain the shift in global economic weight primarily through lower labour costs, population size or Western decline. Across very different institutional models, several Asian economies have spent decades deliberately accumulating capability. They have expanded infrastructure, strengthened industrial ecosystems, developed technological competence and created mechanisms through which capital, education and production can reinforce one another.
There is no single Asian model, and there is little analytical value in romanticising these systems. Some have profound weaknesses of their own.
But the underlying fact remains important: capacity has been built.
Once accumulated, that capacity changes strategic possibilities.
A state that can finance large-scale infrastructure, maintain industrial depth, develop critical technologies and support complex production networks has greater freedom of action than one that depends heavily on external actors for those same capabilities.
Economic capacity gradually becomes strategic leverage.
Seen in this way, the boundary between economics and geopolitics becomes increasingly difficult to maintain. Strategic autonomy ultimately has a material foundation. It depends on whether societies retain sufficient control over the productive and technological capabilities required to exercise meaningful choice.
Formal sovereignty and practical strategic autonomy are therefore not identical.
A country can remain entirely sovereign in constitutional terms while becoming increasingly constrained by external dependencies.
The institutional implications extend beyond Europe.
The international architecture created after the Second World War reflected a distribution of economic and political power very different from the one that exists today. The United States and Europe played a dominant role in shaping institutions that subsequently became central to global finance, trade and security.
Many of these institutions remain indispensable.
But institutions do not stand outside history.
Their legitimacy ultimately depends not only on their origins or formal rules, but on whether they remain capable of accommodating changes in the distribution of power.
As economic and strategic weight becomes more dispersed, the distance between material capability and institutional representation becomes increasingly important. States that believe existing institutions no longer reflect their relative importance will eventually seek greater influence or develop alternative channels through which to exercise it.
This is why the development of BRICS, the Asian Infrastructure Investment Bank and other regional structures should not be dismissed either as symbolism or interpreted simplistically as the construction of a unified anti-Western bloc.
Their significance lies partly in the fact that alternatives now exist.
This is how institutional orders often change.
Not through sudden replacement, but through gradual layering.
New institutions emerge alongside established ones. States acquire additional sources of finance, coordination and diplomatic leverage. Relationships become more diversified. Countries that once faced a relatively narrow set of strategic choices gain greater room to manoeuvre.
The original architecture may remain intact while its relative importance changes.
Institutions do not necessarily become irrelevant because they collapse. They may become less central because actors no longer depend upon them to the same degree.
This is where the current global rebalancing becomes more interesting than a simple narrative of Western decline and Asian ascent.
What we may be witnessing is a broader redistribution of institutional capability.
Different societies are accumulating, reproducing and consuming institutional capital at different rates.
Initially, those differences appear in economic statistics, investment patterns and technological capabilities. Eventually they begin to shape strategic choices and geopolitical influence.
By the time they are clearly visible as geopolitics, the institutional transformation may already be far advanced.
This perspective also changes the question Europe should be asking.
The central challenge is not how Europe can prevent other regions from becoming stronger. A world in which other societies become wealthier and more capable is not in itself a European failure.
The challenge is whether Europe remains capable of renewing its own foundations of prosperity and strategic relevance.
This is where Draghi's report should be read as more than a competitiveness strategy.
It is also a warning about institutional reproduction.
Europe possesses many of the assets traditionally associated with power: capital, education, technology, scientific institutions, infrastructure, political stability and a large internal market.
The strategic issue is whether those assets can still be converted rapidly enough into the new capabilities upon which future power will depend.
The Commission's response to Draghi implicitly recognises this. Its subsequent competitiveness agenda focuses on reducing barriers to growth, improving access to capital, lowering structural energy costs, enabling firms to scale more effectively and reducing strategic dependencies. These are not marginal adjustments. They address the institutional mechanisms through which European resources are translated into economic outcomes.
This is why the distinction between strategic ambition and strategic capacity matters.
Europe has no shortage of ambition.
The difficulty lies in conversion.
A policy objective has strategic meaning only when institutions are capable of turning it into an outcome.
That, ultimately, is where the concept of institutional capital becomes useful.
It asks us to look beyond what societies formally possess and examine what their institutions enable them to do.
It also reminds us that institutional strength cannot simply be inherited.
It has to be reproduced.
No society has a permanent claim to economic leadership or strategic relevance. Wealth can persist for a considerable period after the mechanisms that created it begin to weaken. Historical influence can survive beyond the material conditions on which it was originally built.
But neither can do so indefinitely.
The global order changes when the institutional foundations beneath power change.
That shift begins long before new powers demand recognition and long before old powers acknowledge relative decline.
It begins when some societies become progressively better at converting resources into capability while others become progressively less effective at doing so.
That is where the real rebalancing takes place.
And it is why the future of the global order will ultimately depend less on who claims power than on who retains the institutional capacity to reproduce it.
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