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:
1. Sanctions may satisfy some, if not all, of a
state’s goals.
2. Sanctions may pave the way for use of military
force.
3. Sanctions may be a relatively attractive option
in the absence of alternatives.
4. An instrument increasingly used in post-Cold
War era (though not necessarily more effective)
5. Globalisation: has important cross-cutting
implications for economic sanctions (increases
both vulnerability and options)
Economic incentives: an underappreciated 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