Economic Statecraft

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Economic Statecraft

• February 11, 2014

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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?

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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

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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

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• Despite widespread use, economic sanctions dont
  often appear to be that successful
• However, many argue that still have important
  role, even if they dont solve major problems
• Can be useful to signal intentions, build
  consensus, or even set stage for military action

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Economic statecraft instruments and objectives

• Tools of economic statecraft include
• Trade restrictions
• Financial sanctions
• Investment restrictions
• Monetary sanctions

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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

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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

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Investment restrictions

• Restricting foreign direct investment (FDI),
  which affects the states 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

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Monetary sanctions

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

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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)

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

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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 countrys currency
• Promise of economic rewards to lock in a series
  of desirable, long-term changes (EU enlargement)

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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.

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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 cant get

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• 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

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• 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

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• Can create political and public relations
  problems for sanctioners when the effects fall
  disproportionately on vulnerable groups
• Cant 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

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• 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

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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
  states goals.
• Sanctions may pave the way for use of military
  force.
• Sanctions may be a relatively attractive option
  in the absence of alternatives.

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

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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

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• 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

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• Given the importance of economic relations in
  foreign policy its 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

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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.

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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