Economic Statecraft

Economic Statecraft February 11, 2014

Overview • Economic statecraft: instruments and objectives • Economic sanctions: not always successful, but still useful • Economic incentives: an under-appreciated instrument of statecraft? • Economic interdependence: source of political harmony or conflict?

Economic statecraft • Statecraft: the use of instruments by central political authorities to serve foreign policy purposes (diplomatic, military, economic) • Economic statecraft: the use of economic tools and relationships to achieve foreign policy objectives. Part of the wider array of foreign policy instruments, where economic measures are used in conjunction with military and diplomatic tools

Economic Statecraft - overview • Long history of use, at least to ancient Greece • But used much more heavily in modern times • 174 recorded use of sanctions between 1914 -2000 • Strong economies with many economic instruments are more likely to use economic statecraft than weaker economies

Despite widespread use, economic sanctions don’t often appear to be that successful • However, many argue that still have important role, even if they don’t solve major problems • Can be useful to signal intentions, build consensus, or even set stage for military action

Economic statecraft: instruments and objectives Tools of economic statecraft include: • Trade restrictions • Financial sanctions • Investment restrictions • Monetary sanctions

Trade restrictions • Trade restrictions are placed on given exports or imports of a particular country • Countries that rely heavily on imports or exports, or in general, or of particular commodities, are more vulnerable • Examples: • 1973 OPEC crisis, UN sanctions against Iraq, US trade embargo of Cuba

Financial Sanctions • Often used alongside trade restrictions in effort to increase pressure on a government • Includes things like cutting off of economic or military aid or the blocking or freezing of access to lending institutions (e.g. World Bank) • Sometimes target specific assets of government leaders held in other jurisdictions • Examples: • US freezing Iranian assets during hostage crisis, freezing assets of suspected terrorist/supporters

Investment restrictions • Restricting foreign direct investment (FDI), which affects the state’s infrastructure • Particularly powerful for countries that are highly dependent on FDI for economic growth and development • Have been used by Western nations against Iraq, Iran and Libya • Also used against South Africa during the 1980s

Monetary sanctions • Destabilizing a given currency/exchange rate (buying and selling of large quantities of a target state’s currency) • If effective can create serious financial crisis for target state • Examples: US against the UK during the Suez Crisis

Negative uses of sanctions (sticks) Governments use economic sanctions to satisfy a range of foreign policy objectives: • Altering the domestic politics of a target country (e.g. over human rights practices) • Influencing the foreign policy behaviour of a target country (forcing an end to a conflict, or the withdrawal of troops)

Affect the economic or military capabilities of a target country (e.g. slowing military growth) Attempting to bring about regime change (forcing political capitulation)

Positive uses of sanctions (carrots) • Trade promotion (promise or actuality of expanded trade) • Increase aid/transferring of significant resources (Marshall Plan) • Encourage foreign investment • Support a country’s currency • Promise of economic rewards to lock in a series of desirable, long-term changes (EU enlargement)

Economic sanctions: not always successful, but still useful • Economic sanctions offer a possible alternative to war as a means to settle disputes and contain aggression • Both League of Nations and the UN encouraged members to use sanctions before war • Cumulative post-war experience suggest that economic sanctions were for the most part an ineffective form of statecraft.

Implementation difficulty So why is it so hard to for sanctions to work? Difficulty of maximizing economic pain • Target states always have options to work around sanctions, even the majority of states are cooperating with sanctions • States can respond over time to diversify their economy to produce what can’t get

Even the imposition of economic pain does not necessarily translate into desired political changes • Instead of creating political disarray and pressure domestic pressure on the government can have the opposite effect • Can create solidarity, political integration with the target country or rally around the flag effect - unit against external enemy • E.g. Castro in Cuba

Sanctions can be costly to the ‘sanctioner as well as the target, making political support difficult to sustain over time. In increasingly integrated economy hard to impact economy of one country without creating ripple effects on others (allies or own) Examples - Reagan lifting US grain embargo on USSR, China-US today

Can create political and public relations problems for sanctioners when the effects fall disproportionately on vulnerable groups • Can’t guarantee how the sanction will be felt inside the country and by whom • Those with means inside the country can still find access, while the poorest and most vulnerable can be most impacted

Sanctions can be so effective actually create a humanitarian crisis inside the country, which can cause backlash against sanctions themselves • E.g. Iraq, Haiti • Has led to ‘smart sanctions’ that attempt target damage more precisely • E.g. target certain sectors of economy (e.g. weapons imports), or the assets of leaders & supporters

Usefulness In spite of the challenges, governments still find sanctions useful for a number of reasons: • Sanctions may satisfy some, if not all, of a state’s goals. • Sanctions may pave the way for use of military force. • Sanctions may be a relatively attractive option in the absence of alternatives.

An instrument increasingly used in post-Cold War era (though not necessarily more effective) • Globalisation: has important cross-cutting implications for economic sanctions (increases both vulnerability and options)

Economic incentives: an under-appreciated instrument of statecraft? Positive economic statecraft: • Promise or provision of economic benefits to get a state to do something. Two basic types: 1) Tactical linkage: Operates at the immediate level, offer a specific benefit for a specific action • The economic reward is tactically calculated to gain maximum effect. • The reward usually conditional on the action

2) Structural linkage: more of a long-term effort to use a steady stream of economic benefits to reconfigure the balance of political interests within a target state. • It tends to be unconditional

Given the importance of economic relations in foreign policy it’s not surprising that scholars have begun to rediscover the agenda of positive economic statecraft • Some argue that US foreign policy objectives would be better served by employing carrots rather than sticks, even in relations with seemingly intractable states such as Iran and North Korea

Economic interdependence: source of political harmony or conflict? • Liberals argue that economic interdependence decreases incentives for conflict. • Realists argue that economic interdependence is more likely to lead to state conflict. • Each position has its own empirical support. It may be useful to search for intervening variables that help to explain the circumstances under which economic interdependence leads to war or peace.

Conclusion • Economic statecraft is important and widely used aspect of foreign policy • Sanctions, despite not always achieving major objectives, are widely used and can have important impacts on foreign policy • Have seen a growth in use of sanctions since the end of the Cold War

Economic Statecraft