Economic Statecraft: New Edition

By Ethan B. Kapstein and David A. Baldwin

A new edition of the classic work on the economic tools of foreign policy

Today's complex and dangerous world demands a complete understanding of all the techniques of statecraft, not just military ones. David Baldwin's Economic Statecraft presents an analytic framework for evaluating such techniques and uses it to challenge the notion that economic instruments of foreign policy do not work. Integrating insights from economics, political science, psychology, philosophy, history, law, and sociology, this bold and provocative book explains not only the utility of economic statecraft but also its morality, legality, and role in the history of international thought.

Economic Statecraft is a landmark work that has fundamentally redefined how nations evaluate crucial choices of war and peace. Now with a substantial new preface by the author and an afterword by esteemed foreign-policy expert Ethan Kapstein, this new edition introduces today's generation of readers to the principles and applications of economic statecraft.

• Language: English
• Publisher: Princeton University Press
• Release date: Sep 22, 2020
• ISBN: 9780691204444

Ethan B. Kapstein

Ethan B. Kapstein is the Paul Dubrule Professor of Sustainable Development, INSEAD, Fontainebleau, France; and a visiting fellow at the Center for Global Development, Washington, D.C. He is also a Senior Adviser to the Carnegie Council on Ethics and International Affairs, and, during 2003-2006, a Transatlantic Fellow of the German Marshall Fund of the United States.

Book preview

ECONOMIC STATECRAFT

Economic Statecraft

NEW EDITION

DAVID A. BALDWIN

WITH A NEW PREFACE BY THE AUTHOR AND AN AFTERWORD BY ETHAN B. KAPSTEIN

PRINCETON UNIVERSITY PRESS

PRINCETON & OXFORD

Copyright © 2020 by Princeton University Press

Requests for permission to reproduce material from this work should be sent to [e-mail]

Published by Princeton University Press

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All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Names: Baldwin, David A. (David Allen), 1936– author. | Kapstein, Ethan B., author of afterword.

Title: Economic statecraft / David A. Baldwin ; with a new preface by the author and an afterword by Ethan B. Kapstein.

Description: New edition. | Princeton : Princeton University Press, 2020. | Includes bibliographical references and index.

Identifiers: LCCN 2020028789 (print) | LCCN 2020028790 (ebook) | ISBN 9780691204437 (hardback) | ISBN 9780691204420 (paperback) | ISBN 9780691204444 (ebook)

Subjects: LCSH: International economic relations. | International relations.

Classification: LCC HF1411 .B2327 2020 (print) | LCC HF1411 (ebook) | DDC 337—dc23

LC record available at https://lccn.loc.gov/2020028789

LC ebook record available at https://lccn.loc.gov/2020028790

First edition published 1985

New edition, with a new preface by the author and an afterword by Ethan B. Kapstein, 2020

British Library Cataloging-in-Publication Data is available

Editorial: Bridget Flannery-McCoy & Alena Chekanov

Production Editorial: Ali Parrington

Cover Design: Karl Spurzem

In Memory of Harold Sprout and Jacob Viner

CONTENTS

TABLES AND FIGURES

Tables

Figures

PREFACE TO THE NEW EDITION

ECONOMIC STATECRAFT is not a recent phenomenon. Examples can be found at least as far back as the ancient Greeks. Despite its time-honored usage, a strong scholarly consensus that such measures were useless and/or counterproductive existed when this book was first published in 1985. Although this conventional wisdom is less widespread today, remnants of this view are not hard to find.¹ Economic statecraft was also a neglected topic measured by the lack of attention to it in textbooks on international relations. Today’s textbooks are much more likely to include discussion of economic topics in general including economic statecraft.

There have also been many changes in the world situation with implications for the use of economic tools of foreign policy, some of which are discussed in the afterword. The end of the Cold War made it possible for the United Nations to use economic sanctions more easily. Sanctions targeted on particular individuals, groups, or sectors rather than on whole countries have been used more frequently.² Also, financial sanctions have been increasingly used.³ China has emerged as a major actor in international relations since 1985 and has made increasing use of economic statecraft. Although none of these changes were specifically discussed in the book, the analytical framework can easily accommodate each of them.

The Argument in Retrospect

There were three central purposes in the book. The first was to submit the basic concepts, assumptions, logic, and supporting evidence of the conventional wisdom to critical review. The second was to stimulate interest in, and research on, economic statecraft, a topic that was then—and still is—receiving less attention than it deserves. The third purpose was to create an analytical framework for assessing the utility of economic techniques of statecraft.

Three important limits on the approach should be noted. First, the focus is on how not what to think about economic statecraft. The book does not attempt to determine whether economic sanctions work 35 percent of the time or not. It does not recommend either increased or decreased use of economic statecraft by particular actors. And it does not generate commandments as to how to use economic statecraft. Second, little or no attention is devoted to the domestic politics of the country using economic statecraft. This is solely for the purpose of making the project manageable and not to suggest that this topic lacks importance. A third limit arises from the case selection strategy. The focus here is on the cases most often cited as failures, i.e., the hardest cases. Although this is appropriate for critical review of the conventional wisdom, it is not appropriate for generalizing about typical cases. Generating a set of comparable cases for large-n statistical analysis is likely to be more difficult than is generally recognized (see chapter 8).

Basic Elements of the Approach

Universal Applicability

The most important aspect of the analytical framework is its universal applicability. That is to say, it can be used to assess the utility of any technique of statecraft, including military, diplomatic, symbolic, and so forth. Only thus can comparisons be made among various techniques. Unfortunately, this element of the approach has received little attention and has generated few attempts at comparisons among techniques.

Multiple Goals and Targets

The single most important step in estimating a country’s capabilities is establishing the goals and targets of the influence attempt.⁴ Foreign policy makers rarely, if ever, pursue one goal at a time with respect to one other country (or nonstate actor).⁵ I have yet to encounter a serious scholarly argument to the effect that foreign policy makers think in terms of one goal at a time. To say that goals are multiple, of course, is not to say that they are always compatible. People often want to have their cake and eat it too; in such cases trade-offs are necessary. Taking multiple goals and targets into account, of course, complicates the analysis, but no one has ever suggested that foreign policy analysis is easy. In my opinion, insufficient care in establishing multiple goals and targets is the single greatest weakness in research on economic statecraft.

Success Is a Matter of Degree

The temptation to dichotomize success and failure in analyzing economic statecraft is widespread. Even scholars who judge success on a ten-point scale often classify cases of six or above as successes and those below six as failures. Foreign policy undertakings rarely completely succeed or completely fail.

Effectiveness and Efficiency

Although these terms are often used interchangeably, they have quite different meanings. Efficiency takes into account both effectiveness and the costs incurred in achieving it. Enron was very effective in generating revenue, which misled investors as to the success of the company. When Enron’s costs (liabilities) were taken into consideration, however, its failure became apparent. Likewise, any judgment about the success or failure of instruments of statecraft based solely on effectiveness can be highly misleading.⁶

Alternatives Matter

A great deal of effort has been devoted to the question of whether economic sanctions succeed 35 percent of the time or, say, 5 percent of the time. It is not clear, however, what the significance of such figures is. Policy makers must choose among alternative policy options—all of which may have dismal prospects of succeeding. Thus, they care only about the prospects of success in comparison with their other policy options.

Images Matter

Neither signals nor indices⁷ are trivial matters. They are intrinsic to strategic interaction. In such situations, the best strategy for one party depends on the strategy that other parties are expected to adopt. Thus, countries are continually managing their own images as well as monitoring the images of other countries. Sending messages, of course, is not an activity peculiar to economic measures. Diplomacy, propaganda, and military actions are also used for this purpose.

Difficulty Matters

Judgments about the success of an undertaking should take into consideration the difficulty of the task. In Olympic diving contests athletes are awarded extra points for executing a difficult dive. A comparable attempt to adjust the score should be made in judging the success of various techniques of statecraft.

Fundamental Problems

Two fundamental analytical problems permeate the literature on economic statecraft: the ambiguity of success and the implications of the logic of choice. Although a great deal of ink has been spilled debating whether or not economic sanctions work, relatively little attention has been devoted to clarifying what work means in that context.

Success is a slippery concept. Unlike power or wealth, success is not just one of many goals that people may choose to pursue. To the extent that human behavior is purposeful, everyone may be said to pursue success. This is because success is defined in terms of favorable or desired outcomes. Both the definition of success and the implicit rules used in applying the term suggest that costs are an important part of the concept. Successful undertakings are those without excessive costs. Winning a nuclear war by destroying life as we know it or imposing economic sanctions that secure compliance of the target state only by bankrupting the country that imposed them is unlikely to be described as an instance of success. The operation was a success, but the patient died does not mean what it seems to say. It is a sarcastic expression implying that the term success is being misused. If success is defined in terms of favorable policy outcomes, it is necessary to consider both costs and benefits in assessing the success of an undertaking.

Although the question of whether economic sanctions work is repeatedly raised, one seldom encounters comparable questions for other techniques of statecraft: e.g., Does military force work? Does diplomacy work? Does propaganda work? Judgments about the success of military undertakings often fail to take costs into consideration. Small and Singer⁸ ignore costs in coding winners and losers of wars, but they at least admit that this is a possible weakness in their approach. Other writers, e.g., Wang and Ray,⁹ include no such admission. Still others blithely assert that they "will classify as successful those states or coalitions that ‘won’ in each dispute and each war, no matter how pyrrhic the victory.¹⁰ The phrase Pyrrhic victory," however, does not refer to a type of victory; it is a sardonic expression suggesting that what seems like a victory is really a failure. Given the potentially catastrophic costs of war, assessments of war outcomes that ignore costs are both misleading and irresponsible.

The question of how well economic sanctions work is often confused with the question of whether they should be used.¹¹ Thus, some writers view a success rate of 35 percent as very low and suggest that policy makers choosing to use them are either foolish or ignorant.¹² Foreign policy makers must choose among various policy alternatives. Thus, knowledge about the likely success of only a single alternative is not likely to be very helpful. From the standpoint of the logic of choice, a successful policy option is one that maximizes the utility of the policy maker in a given situation. From this standpoint, identification of a successful policy alternative requires consideration not only of the costs and benefits of using economic sanctions but also of the costs and benefits of alternative policy options. What policy makers really want to know is: How effective will sanctions be, with respect to which goals and targets, at what cost, and in comparison with which policy alternatives? Scholarly discussions that fail to address all of these questions do not provide a basis for advising policy makers and can be quite misleading if they purport to do so.

One important implication of the logic of choice perspective is that the costs that matter most may not be those associated with economic sanctions. The costs of military alternatives are usually greater than the costs of economic sanctions—often by many orders of magnitude. In the months before the U.S. invasion of Iraq, a number of pundits exaggerated the costs of maintaining the sanctions regime and downplayed or underestimated the costs of military intervention.¹³ In 2008, however, the costs of the war were estimated at three trillion dollars.¹⁴ This figure far exceeds even the wildest prewar estimates of the costs of invading Iraq. In a great many cases, the strongest argument for using economic measures has more to do with the likely costs of military force than with the likelihood that economic measures will work.

Pitfalls in Analyzing Economic Statecraft

As noted above, the focus of Economic Statecraft is on how to think about economic tools of foreign policy. Another way to approach this topic is to focus on how not to think about such matters. Below are a number of pitfalls to be avoided in analyzing economic statecraft.

One Goal/One Target

Focusing on a single goal can—and often does—lead to serious misunderstanding of a sanctions episode. There is no better example than the case of the U.S. oil embargo on Japan in 1941 (discussed in chapter 8). Depictions of the goal solely in terms of deterring war with Japan lead to conclusions that the sanctions not only failed but were counterproductive in that they increased the likelihood of war. This is one of the classic cases underpinning the view that economic sanctions are useless and counterproductive. Proper specification of the policy-contingency framework, however, leads to quite different conclusions. At the time there was widespread awareness of the likelihood of war with Japan. Keeping critical war materiel, e.g., oil, out of the hands of a potential adversary was undoubtedly on the minds of many foreign policy makers. The oil embargo may or may not have increased the probability of war with Japan, but there can be no doubt that it weakened Japan’s military capabilities by depriving them of vital war materiel.

Other cases discussed in chapters 8 and 9 also provide vivid examples of the implications of focusing only on a single goal. To judge the success of the U.S. embargo on Cuba solely in terms of the survival of the Castro regime, to judge the success of the sanctions against Iran in 1979 solely in terms of the survival of the hostages, and to judge the success of the Carter grain embargo against the Soviet Union in 1979 solely in terms of the withdrawal of Soviet troops from Afghanistan simplifies each case beyond all recognition. No reasonable judgment can be made about any of these cases on the basis of one goal/one target.

Lump of Success

Even influence attempts with but a single goal rarely, if ever, succeed or fail completely. Positing multiple goals and targets increases the likelihood of some degree of success with respect to some of them. There is no better example of the fallacy of the excluded middle than the tendency to dichotomize the success and failure of economic sanctions. The classic case of the U.S. embargo against Cuba in the 1960s provides an example. This case is often dismissed as unsuccessful due to the failure to remove the Castro regime. It is not clear, however, that this was the primary goal of the sanctions; and it is abundantly clear that it was not the only goal (see discussion in chapter 8). Reducing Castro’s ability to export subversion, signaling American displeasure with a communist outpost in the Western Hemisphere, and imposing costs on the Soviet Union were also goals, all of which were achieved to a significant degree. Classifying this case as abject failure is seriously misleading.

Single Causal Mechanism

Economic sanctions are often treated as purely economic phenomena. As such, they are depicted as economic means, working through economic causal mechanisms toward economic ends. Such measures are by definition economic means and often do work through economic causal mechanisms, but they can also work through noneconomic causal mechanisms. An oil embargo, for example, could simultaneously weaken the economy and military capabilities of a target country, convey a military threat to the target country, and send a message to other countries. Thus, economic measures are capable of working through multiple causal mechanisms; and they usually do.¹⁵

Costs Don’t Matter

The literature on economic sanctions often defines success entirely in terms of the effectiveness of sanctions in attaining goals. The costs to the sender of achieving these goals are sometimes considered, but they play no role in defining success. The following passage provides a typical view of successful sanctions: What does it mean for sanctions to be successful? In general, we are interested in determining the conditions (if any) under which economic sanctions produce an intended (on the part of the sanctioner) change in policy by the target state.¹⁶ Clearly, costs play no part in this conception of success; effectiveness is all that matters.

Let us compare this approach with judging the success of a hypothetical widget-making company. The goal of the company is to sell as many widgets as possible; therefore, the more widgets sold, the more successful the company. However, since the overall goal of the company is to maximize profits, costs must be considered. If the cost of producing the widgets exceeds the revenue generated by sales, what seemed to be a successful business is really a failure. Likewise, the overall goal of imposing economic sanctions is to maximize utility, not policy change. Thus, costs must be taken into account in assessing the degree of success—if any. During the Vietnam War, North Vietnam could have been destroyed with nuclear weapons—effectively changing its behavior—but this was not done. Why not? The costs would have been excessive. Judgments about success that rely solely on effectiveness while ignoring costs are likely to mislead.

Substitutability

The question of whether economic sanctions can serve as an alternative to, or substitute for, military force is often raised—usually with the implication that the answer is negative.¹⁷ It is not clear, however, what this means. Sanctions are an alternative to military force in the sense that they are on the menu of choice available to policy makers. This does not mean that they would have exactly the same effects if used in exactly the same situations as military force. Describing sanctions as alternatives to force, however, implies nothing about the degree to which a policy maker may decide to substitute sanctions for force. Even if the resources (e.g., money, time, personnel) committed to using economic sanctions are small in comparison with those committed to using military force, sanctions are an alternative to force to the extent that the resources devoted to sanctions could have been devoted to the use of force.

Viewing economic sanctions as second-best alternatives or inferior substitutes for military force can be misleading. Herbert Simon points out that it is incorrect to pose a choice between alternative A with low costs and small results and alternative B with high costs and large results. Instead, one should substitute for A a third alternative C, "which would include A plus the alternative activities made possible by the cost difference between A and B."¹⁸ Thus, the choice in 2003 between maintaining the sanctions regime against Iraq (with small costs and small results) and invading Iraq (with large costs and large results) should be characterized as one between invasion on the one hand and maintaining the sanctions regime plus all the activities that could have been supported by three trillion dollars on the other hand.

Better to Do Nothing

The options of doing nothing and choosing to maintain the status quo are sometimes posed as alternatives to using economic sanctions. Such phrases, however, can be misleading. It is not clear what it means for a country to do nothing. The usual interpretation is that a country should do what it would have done if the problem had not arisen. The shorthand phrase often used to refer to this hypothetical state of affairs is the conduct of business as usual. When the Soviet Union invaded Afghanistan in 1979, the United States responded with a partial grain embargo. Some critics of this action argued that the United States should have done nothing, at least with respect to the shipment of grain. (See discussion in chapter 9.) The United States, however, had already agreed to sell 25 million tons of grain to the Soviet Union during 1980. Thus, doing nothing in this situation really would have meant going ahead with the largest Russian grain deal on record. When the British colony of Rhodesia declared independence in 1966, Britain imposed economic sanctions. Doing nothing in that situation would have been interpreted as British approval of the white minority regime governing Rhodesia. When policy makers consider whether to use economic sanctions, the relevant status quo is not that prevailing at the time the decision is being taken but rather the future status quo that would prevail if no action or a different action is taken.

Merely Symbolic

Some writers describe economic sanctions as either instrumental or symbolic.¹⁹ The implication is that instrumental sanctions are intended to further foreign policy goals, while symbolic sanctions (sometimes labeled expressive) are unrelated to foreign policy goals. For the most part,²⁰ this is a false dichotomy. When sanctions are used to signal—or send a message—to other countries, they constitute influence attempts in precisely the same sense that firing a shot across the bow of a ship or some other show of force is an influence attempt. Attempting to change how other countries think is an influence attempt regardless of the means used. Using sanctions for signaling purposes is not an alternative to using them as instruments of statecraft; it is statecraft.

Notoriously Poor Tool of Statecraft

Economic sanctions have been described as a notoriously poor tool of statecraft and as having a low rate of success. From the standpoint of the logic of choice, however, such views have little meaning. One may describe swimming as a poor way to get from the boat to shore, but if the alternative is sinking, it may seem very attractive. One may regard a success rate of 35 percent for economic sanctions as low, but without comparable data about alternative policy options this means little or nothing. In baseball a batting average of .350 might sound low to those who are unfamiliar with the game, but those who understand the game would know otherwise. The important question in evaluating the rate of success of economic sanctions is compared to what alternatives? Does military force have a higher or lower rate of success? Analyzing a single technique of statecraft may have its uses, but it tells us nothing about when, where, or whether it should be used. Only comparative analysis can do that.

Success through Modest Goals

Some writers have advised policy makers that the key to success when using economic sanctions is to pursue modest goals.²¹ Such advice has more to do with creating the illusion of success than with achieving it. Logically, the specification of a standard of achievement precedes specification of the conditions for the success of an undertaking. Any statement about the means to success presupposes a concept of success. Take, for example, the following recipe for success: If you want to get to the other side of this river, you will have to swim or find a bridge. In this example, getting to the other side of the river is the operational definition of success; swimming and finding a bridge are alternative means for accomplishing this goal. The advice to change your goal from crossing the river to the more modest one of staying on this side of the river is not a recipe for success; it is a redefinition of success. This bit of semantic sleight of hand should not be misconstrued as advice on how to succeed. It makes little sense to describe someone as pursuing success without specifying success in doing what. If a prospective student asks for advice on how to succeed in college, one must first ascertain whether the goal is to get good grades or to get a sound education. Take easy courses may be good advice with respect to the first goal, but take challenging courses may be more appropriate advice with respect to the second. Likewise, when advising foreign policy makers on how to make economic sanctions successful, one must first ascertain the goals in terms of which success is to be defined. Advising them to pursue modest goals or not to bite off more than they can chew violates this basic precept of prior goal specification. Those who never bite off more than they can chew may seldom choke, but they are unlikely to make maximum use of their chewing ability either. Take small bites is hardly a recipe for great accomplishments. It also begs the question of how much smaller than the chewable maximum the bite should be.

Hurts Us More than It Hurts Them

It is often suggested that the proper measure of success in a sanctions episode is whether the costs incurred by the target country are greater than those incurred by the sender country. For those who view international politics as a zero-sum game, this makes perfect sense. In such games one party’s gain is another party’s loss. From the standpoint of those who view international politics as a mixed-motive game, however, such comparisons are irrelevant. In mixed-motive games, success is measured in terms of the value system of the sender. The costs that matter for the rational policy maker are those associated with the policy alternatives available. In some situations, all of the available alternatives may hurt us more than them; but this does not relieve the policy maker of the responsibility for choosing the alternative with the most utility.²²

Future Research

There has been more research on economic statecraft since 1985 than occurred in previous millennia. Five foci for future research may improve both our understanding of economic techniques of statecraft and the policy relevance of our findings.

First, the question of whether economic sanctions will work must be separated from that of whether they should be used. Were it not for an interest in the wisdom of using such measures, the question of whether they work would probably never be asked; and the question of whether they should be used cannot be answered without consideration of the likelihood that they will work. Thus, the two questions are related even though they are separable. One must reject the idea that only a foolish policy maker would choose to employ economic measures when the prospects of success are low. The wisdom of a decision to use such measures is determined not by whether their expected utility is high or low but by whether it is higher or lower than that of alternative courses of action.

Second, both the abstract concept of success and the operationalization thereof require careful attention. Changing the ways target countries behave includes not only overt policy change but also changes in beliefs, perceptions, capabilities, and propensities to act. Operational definitions limited to overt policy change are certainly legitimate, but they should be accompanied by explanations that clarify the difference between the abstract concept and the operational measure being used. Also, costs should be taken into account in judging success. Enron was not a successful business, and Pyrrhic victories are not victories.

Third, comparative evaluation of policy instruments is needed.²³ The wisdom of using economic sanctions cannot be determined by studying the costs and benefits of sanctions in isolation from the costs and benefits of alternative techniques of statecraft. One cannot answer the question of whether sanctions should be used without reference to the likely utility of alternative policy instruments, such as military statecraft and diplomacy. Likewise, one cannot know whether military force should be used without knowledge of alternative policy tools. Thus, research is needed on all types of statecraft, asking the same questions and using the same concept of success. The analytical framework set forth in Economic Statecraft provides a vehicle for just such an undertaking.²⁴

Fourth, the costs of military statecraft deserve extraordinary attention. Scholars have often neglected costs, underestimated costs, and/or failed to take them into account in assessing victory and defeat. This is especially important with respect to military force, since the potential costs of such measures include threats to life as we know it on this planet. The need is magnified by the propensity of policy makers to downplay or obscure the costs of military undertakings.

Fifth, although this book eschewed discussion of domestic politics, it remains an important topic. Some instances of economic statecraft cannot be understood without reference to domestic politics—the current U.S. embargo on Cuba being a case in point. Better understanding of the domestic political processes in sender countries and the domestic political processes in target countries are fruitful areas for research.²⁵

Research on economic statecraft has come a long way since 1985, but there is still much work to be done.

David A. Baldwin

Princeton, NJ

February 2020²⁶

1. Jonathan Kirshner, Review Essay: Economic Sanctions: The State of the Art, Security Studies 11, no. 4 (2002): 160–179.

2. For an overview of the emergence of targeted sanctions, see Daniel W. Drezner, Sanctions Sometimes Smart: Targeted Sanctions in Theory and Practice, International Studies Review 13 (2011): 96–108.

3. See Benjamin J. Cohen, Currency Statecraft (Chicago: University of Chicago Press, 2019).

4. On capability analysis, see David A. Baldwin, Power and International Relations (Princeton: Princeton University Press, 2016).

5. Even individuals rarely pursue one goal at a time.

6. On the propensity to use effectiveness as the measure of success, see Dursun Peksen, When Do Imposed Economic Sanctions Work: A Critical Review of the Sanctions Effectiveness Literature, Defence and Peace Economics 30, no. 6 (2019): 635–647.

7. Robert Jervis, The Logic of Images in International Relations (Princeton: Princeton University Press, 1970).

8. Melvin Small and J. David Singer, Resort to Arms: International and Civil Wars (London: Sage, 1982), p. 182.

9. K. Wang and James Lee Ray, Beginners and Winners: The Fate of Initiators of Interstate Wars Involving Great Powers Since 1495, International Studies Quarterly 38, no. 1 (1994): 139–45.

10. Frank W. Wayman, J. David Singer, and Gary Goertz, Capabilities, Allocations, and Success in Militarized Disputes and Wars, 1816–1976, International Studies Quarterly 27, no. 4 (1983): 500. Italics mine.

11. See Kirshner, Review Essay: Economic Sanctions: The State of the Art.

12. E.g., George Tsebelis, Are Sanctions Effective? A Game-Theoretic Analysis, Journal of Conflict Resolution 34, no. 1 (1990): 3–28; and T. Clifton Morgan and Valerie L. Schwebach, Fools Suffer Gladly: The Use of Economic Sanctions in International Crises, International Studies Quarterly 41, no. 1 (1997): 27–50.

13. E.g., Kenneth M. Pollack, The Threatening Storm: The Case for Invading Iraq (New York: Random House, 2002).

14. Joseph E. Stiglitz and Linda J. Bilmes, The Three Trillion Dollar War: The True Cost of the Iraq Conflict (New York: Norton, 2008).

15. On this point, see Drezner, Sanctions Sometimes Smart, p. 105.

16. Morgan and Schwebach, Fools Suffer Gladly, p. 28.

17. E.g., Robert A. Pape, Why Economic Sanctions Do Not Work, International Security 22, no. 2 (1997): 90–136; and Stephanie Ann Lenway, Between War and Commerce: Economic Sanctions as a Tool of Statecraft, International Organization 42, no. 2 (1988): 397–426.

18. Herbert A. Simon, Administrative Behavior (New York: Free Press, 1976), p. 179. Italics in original.

19. E.g., Morgan and Schwebach, Fools Suffer Gladly, p. 28.

20. The phrase for the most part is used advisedly. While I am willing to concede the possibility of sanctions imposed solely for expressive purposes, a convincing example has yet to come to my attention. Foreign policy makers usually have goals in mind.

21. E.g., David Leyton-Brown, The Utility of International Economic Sanctions (New York: St. Martin’s, 1987), p. 309; and Gary Clyde Hufbauer, Jeffrey J. Schott, Kimberly Ann Elliott, and Barbara Oegg, Economic Sanctions Reconsidered, 3d ed. (Washington, D.C.: Peterson Institute for International Economics, 2009), pp. 162–163.

22. See the discussion in chapter 7. On mixed-motive games, see Baldwin, Power and International Relations and Thomas C. Schelling, The Strategy of Conflict (Cambridge, Mass.: Harvard University Press, 1960).

23. See recent calls for such research by Peksen, When Do Imposed Economic Sanctions Work; and Yoshiharu Kobayashi, Economic Sanctions as Foreign Policy, Oxford Research Encyclopedia, Politics (Oxford: Oxford University Press, 2019), p. 14.

24. The analytical framework includes both positive and negative sanctions—carrots and sticks. The term positive sanctions has caused some confusion and has not been widely adopted. Were I writing the book today, I would use the term positive incentives instead.

25. E.g., Helen V. Milner and Dustin Tingley, Sailing the Water’s Edge: The Domestic Politics of American Foreign Policy (Princeton: Princeton University Press, 2015).

26. Since this book was first published in 1985, scholars have become more sensitive to gender-infused language. Were I writing this book today, I would use terms like policy maker and foreign-policy maker rather than statesman and would use more gender-neutral pronouns.

PREFACE TO THE FIRST EDITION

PINPOINTING THE ORIGINS of this book is difficult. I have been trying to integrate the disciplines of economics and political science in studying foreign policy and international relations for more than twenty-five years. I first publicly advocated the concept of economic statecraft when I organized and chaired a panel on that topic for the International Studies Association in 1969. During 1969–70 I worked full-time on this project but encountered formidable theoretical and methodological problems in making power analysis compatible with the concept of economic statecraft. Foreign aid obviously had to be included; yet standard political science treatments of power tended to focus on negative sanctions and ignore or deny the possibility that power could be based on positive sanctions. Foreign trade also fell within the rubric of economic statecraft; yet standard treatments tended to deny that mutually beneficial exchange relationships could or should be viewed in terms of power. The costs of economic statecraft were obviously an important consideration; yet the role of costs in power analysis was frequently ignored. Thus, for a decade I concentrated on the development and elaboration of the concepts of positive sanctions, power costs, and exchange. Much of this work was a matter of transplanting the ideas and insights of the social power literature into the field of international relations, which, despite its long-standing emphasis on power, had become relatively isolated from the post-1950 revolution in power analysis.

Friends and colleagues familiar with my work in international political economy during the 1960s would often ask why I seemed to have abandoned that field just when it was on the verge of becoming a popular intellectual fad in the 1970s. The answer was always the same—I had not lost interest in either international political economy or the study of economic statecraft. Every article on power that I wrote during the 1970s was intended to lay the foundations for this book. If political economy is about wealth and power, it behooves those who would call themselves political economists to take power analysis more seriously than has heretofore been the case.

In many ways this is a rather old-fashioned piece of work. The research is not a team effort; interviews, surveys, and statistical analysis play little or no role; and many of the references are to works written many years ago. Three reasons for emphasis on the older literature should be mentioned: (1) The quality of such works is often very high. The scholarship of Jacob Viner, Quincy Wright, Harold Sprout, Albert O. Hirschman, or Eli Heckscher, for example, endures and has not yet been superseded by superior treatments. (2) The generation of newly minted or recently converted international political economists that grew up in the 1970s was largely oblivious to the older tradition of international political economy and seemed to believe that the field was either nonexistent prior to 1970 or populated entirely by Marxists.¹ Academic specialists pay their dues by acquainting themselves with the scholarly literature in their field. In the case of international political economy, the dues are higher than the generation of the 1970s has been led to believe. (3) The growth of cumulative knowledge requires that some effort be made to relate current scholarship to past scholarship. Among contemporary social scientists, oddly enough, it is often the most vociferous advocates of cumulative knowledge who ignore anything more than ten years old.

Another sense in which this study is old-fashioned is in its blindness to disciplinary boundaries. I have drawn on economics, political science, philosophy, psychology, history, law, and sociology, as well as on traditional works in international relations. Although specialists in each field will no doubt find fault with my analysis, I hope that the synthesis will be valuable enough to offset such objections. Both international political economy and international relations have traditionally been synthetic disciplines.

Three questions have been raised often enough at various stages of this project to justify the expectation that they will occur to others: First, why is so much attention devoted to stage-setting in the early chapters? When comments were solicited on early drafts of the manuscript, the most frequent reactions concerned the need to clarify the concept of economic statecraft and to justify aggregation of so many foreign policy tools into a single category. Thus, the first few chapters are in response to such concerns. Second, why go out of the way to identify differences between this approach and those of other scholars? I believe that the spirit of scientific inquiry—indeed, the spirit of scholarly inquiry in general—creates an obligation to set one’s ideas in the context of work by others. This obligation means not only giving credit where it is due but also giving criticism where it is due. Scholars seem to be much better at fulfilling the first than the second of these obligations. Thus, works with which one disagrees are often ignored or referred to only vaguely as opposing schools of thought or common beliefs, leaving the reader wondering precisely what one has in mind. This escape from scholarly duties is eschewed in the pages that follow. Whenever I present a line of argument that conflicts with the views of other scholars, I try to inform the reader precisely how and why my views differ from those of others. I realize that this approach may give the impression of a polemical or adversarial style, but this is neither my intention nor my desire. I attribute this impression to the relative dearth of professional scholarly criticism in international relations and in social science in general. To take another’s work seriously enough to submit it to critical review is not a sign of disrespect but rather the highest compliment one scholar can pay another. This approach should not be trivialized as the mere scoring of debating points; it is the heart of the scientific process. Morton Kaplan trenchantly summarizes this approach as follows:

Although individual great minds may be responsible for spectacular advances in science, the progress of science requires community.… If those working in a field fail to address similar problems, or fail to do so in a manner that permits genuine comparison, then it is possible neither to build on previous efforts nor to discover the inadequacies of current efforts. Rejection of, as well as development from, the past is an integral part of the scientific process. Formulation and criticism are opposite sides of the same scientific coin.²

Third, why is so much material in footnotes? Although I am well aware of the contention that footnotes interfere with the reader and should therefore be minimized, I do not believe that this contention has had a healthy effect on scholarship. In scholarship truth takes precedence over readability. If a footnote is needed to support a point or to expand on a related point, I have not hesitated to interfere with the reader’s thought processes.³ This book is addressed to scholars, not to speed-readers. The effort to suppress footnotes has even reinforced the desire of publishers to save money by placing footnotes at the end of a book. This practice is not only a nuisance but also antithetical to the spirit of science insofar as it hinders verification of the sources on which an argument is based. On the assumption that scholars are supposed to facilitate rather than impede verification of their sources, the footnotes in this book appear on the same page as the text to which they refer.

I am indebted to a number of people who have commented on various stages of this project and have thereby forced me to rethink, clarify, abandon, or bolster certain positions. They include Charles W. Baldwin, David Deese, Margaret Doxey, Henry Ehrmann, Frank W. Fetter, Alexander George, Robert Gilpin, Albert O. Hirschman, Peter Katzenstein, Robert O. Keohane, Gene Lyons, James Mayall, John Odell, Richard Stuart Olson, Robert Paarlberg, Robert Packenham, Laurence Radway, Bernard Segal, Susan Strange, and Oran Young. Sole responsibility for the final product, however, rests, as always, with the author. I should also record my appreciation for the stimulating atmosphere of the Department of International Relations at the London School of Economics and Political Science, where much of the early research was carried out. Jan Barry and Gail Patten provided able typing assistance, while Emily Baldwin and Rebecca Baldwin helped with proofreading, translating, duplication, and humoring the author.

I am grateful to Dartmouth College for faculty fellowships and research support and to the German Marshall Fund of the United States for a fellowship that enabled me to complete the manuscript. It somehow seems appropriate that a fund to memorialize an act of economic statecraft—the Marshall Plan—should be the vehicle for financing the final stages of this study.

This book is dedicated to two former teachers who greatly influenced the way I think about international political economy—and about other things for that matter. The two shared many characteristics, including a view of scholarship as a craft to be practiced meticulously, a belief that familiarity with the history of one’s discipline is important, a healthy disrespect for disciplinary boundaries, and, above all, the view that a scholar’s most important obligation is to speak the truth as he or she believes it to be.

1. When I first discussed this project with Susan Strange in 1969, she asked me to name other American scholars primarily interested in international political economy. Other than myself, I could only come up with Klaus Knorr; and I had to admit that his work during the 1960s seemed to be more military than economic. Although there must have been others, my answer even today would be the same with respect to 1969. This situation, of course, was to change rapidly during the 1970s.

2. Morton Kaplan, Toward Professionalism in International Theory (New York: Free Press, 1979), p. 1. Italics added.

3. For a brilliant and witty defense of scholarly footnotes, see Jacob Viner, The Long View and the Short (Glencoe, Ill.: Free Press, 1958), pp. 376–377.

ECONOMIC STATECRAFT

1

Introduction

The best service peace research could offer to the world today probably consists, not so much in understanding conflicts better, as in providing politicians with an enormous repertoire of actions short of violence that can be applied in conflict situations.¹

One of the main purposes for which social scientists use the concept of A’s power over B is for the description of the policy possibilities open to A.²

IN QUINCY WRIGHT’S LANDMARK WORK, The Study of International Relations, he observes that the fields of economics and politics overlap—on the one hand, a shortage of resources may generate political rivalry, while on the other hand, one group may influence another by offering economic rewards or withholding economic advantages. Politics may therefore be an instrument of economics and economics may be an instrument of politics.³ This is a study of economics as an instrument of politics. Although economic techniques of statecraft have been used throughout history, in recent years they have received renewed attention because of the Arab oil embargo in 1973, the American grain embargo protesting the Soviet invasion of Afghanistan, the freezing of Iranian assets during the hostage crisis in 1980, and other well-publicized cases. Most of these events have been accompanied by journalistic background stories pointing out that such measures rarely work and citing the widespread scholarly consensus on this point. Thus, although few scholars would deny Wright’s contention that economics may be an instrument of politics, most would add the caveat that it is not a very useful instrument.

A puzzlement arises: Why do statesmen continue to practice economic statecraft when everybody knows that it does not work? Is this but another example of failure to take accumulated academic wisdom into account leading to bad policy decisions? Are policy makers adopting measures they know are futile in order to appease the public’s demand for action? Although either of these explanations is plausible, a third explanation also deserves consideration: Is it possible that the conventional wisdom is wrong? That economic tools of foreign policy work better than is generally supposed? That statesmen are making more or less rational attempts to adapt foreign policy means to foreign policy ends? What everybody knows easily becomes what everybody takes for granted; and what everybody takes for granted easily becomes what nobody submits to critical review.

Purposes of the Study

This study has three main purposes: The first is to submit the conventional wisdom regarding economic statecraft to critical review. The basic concepts, underlying assumptions, logic, and supporting evidence are all examined. My thesis is that the utility of economic techniques of statecraft has been systematically underestimated by most analysts since 1945. The second purpose is to stimulate increased awareness of and thinking about the many forms of economic statecraft. My thesis is that the study of economic instruments of foreign policy has been neglected relative to the study of other policy tools. And the third purpose is to develop an analytical framework with which to reassess the utility of economic techniques of statecraft. My thesis is that the social power literature developed since 1950 provides a useful framework within which to study economic statecraft.

Structure of the Study

The approach proposed here assumes that economic instruments of foreign policy should be analyzed and evaluated in the same way as other means for making influence attempts. Even a sympathetic reader, however, is unlikely to regard such a statement as self-explanatory. Precisely how should these other means be studied? What are the various forms of statecraft, and how does one distinguish economic from noneconomic statecraft? How has economic statecraft been viewed in the past, and why has it not been analyzed and evaluated in the same way as other foreign policy tools? Chapters 2 through 7 deal with such questions. Chapter 8 reviews several of the classic cases of alleged failure of economic statecraft. Indeed, most of the cases discussed in chapters 8, 9, and 10 were chosen precisely because they are widely regarded as examples of failure. This case selection strategy thus focuses on the crucial cases supporting the conventional wisdom. Since utility is not the only basis for evaluating economic statecraft, chapter 11 surveys the legal and moral norms relevant to such measures.

Limits of the Study

It is important to be clear as to what this book is not about. First, it has little to say about the wisdom with which foreign policy makers choose their goals. A judgment that economic statecraft was successful in a particular case refers to the statesman’s adaptation of means to ends and implies little or nothing about whether the ends were good or bad, wise or foolish. Second, specific policy proposals for particular countries are beyond the scope of this study. The emphasis here is on how rather than what to think about such matters. And third, domestic politics in the country using economic statecraft has been largely ignored. This omission is not intended to imply that domestic politics is unimportant in understanding economic statecraft. Its inclusion, however, would add to the length and complexity of the argument without affecting the basic thrust of that argument in any fundamental way. Domestic political costs and benefits can be incorporated into the cost/benefit calculus of decision makers without altering the basic structure of the argument presented here. An additional reason for omitting domestic politics is that even those who most vigorously deny the utility of economic instruments for foreign policy purposes often admit the domestic political utility of such measures. Thus, the important thing to be demonstrated is that economic techniques can be useful even when domestic politics is ignored. A fourth limitation on this study arises from the case selection strategy. A focus on those cases most often cited as examples of failure, i.e., the hardest cases, is useful for critical assessment of the conventional wisdom; but it is not appropriate for generalizing about typical cases. Such generalizations should be based on study of the whole universe of comparable cases or on a random sample of such cases. For reasons that will be discussed later (especially in chapter 8), identifying a set of comparable cases suitable for statistical analysis is likely to be more difficult than is generally recognized.

Implications

What difference does it make whether the full range of economic techniques available to statesmen is recognized or whether the utility of such measures has been underestimated? There is no guarantee, of course, that better understanding of policy alternatives will lead to better policy. However, in a world where some policy options can have devastating global consequences, extraordinary efforts to elucidate less dangerous alternatives seem worthwhile. If we are to have war, let it not be because of a lack of imagination in identifying policy alternatives or because of miscalculation regarding the probable utility of such options.

Is social science needed to estimate the utility of economic statecraft? Not everyone thinks so. The American Committee on East–West Accord, composed of distinguished academics, business people, journalists, and former public officials, suggests that common sense should determine American policy with respect to trade with the Soviet Union.⁴ This committee tends to favor détente, accommodation, and coexistence in East-West relations and advocates expanded trade with the Soviet Union as a step in that direction. Although sympathetic with this approach, I am wary of relying on common sense. Consider, for example, the following common-sense truths put forward by the committee:

Economic boycotts never work.—Economic warfare is an ineffective weapon. In modern times it has never worked.⁵

Grain embargoes are a grievous mistake.… They are self-defeating and counterproductive abroad. They are not even any good for sending the Soviets a message.⁶

About American economic sanctions against the Soviet Union, two things are of significance above all others: One, they haven’t worked. Two, they can’t work.⁷

Events of the past decade have proven that embargoes or other economic sticks do not increase leverage and control over another nation. Both common sense and historical data suggest just the opposite.⁸

Common-sense knowledge usually has the admirable quality of avoiding extreme statements, but these examples are hardly moderate. To say that economic sanctions against the Soviet Union never work or can’t work is to take an extreme position on a policy issue of immense importance. Even if such propositions seem commonsensical, one must ask whether this is enough. When stakes are high and issues are complex, rigorous analysis is in order. Neither good intentions nor common sense suffices. In medicine, as Karl Deutsch points out, a well-meaning ignoramus is not a doctor but a quack. In international politics, well-meaning, but ill-informed, policy recommendations can be even more disastrous than in medicine. We must study international relations, therefore, as deeply, as carefully, and as responsibly as our limited time and resources permit.⁹ The Committee on East–West Accord may indeed be right in advocating increased trade with the Soviet Union, but it is wrong in suggesting that common sense is sufficient justification for such a policy recommendation.

1. Johan Galtung, On the Meaning of Nonviolence, Journal of Peace Research, no. 3 (1965): 251.

2. John C. Harsanyi, Measurement of Social Power, Opportunity Costs, and the Theory of Two-Person Bargaining Games, Behavioral Science 7 (January 1962): 69.

3. Quincy Wright, The Study of International Relations (New York: Appleton-Century Crofts, 1955), p. 239.

4. Margaret Chapman and Carl Marcy, eds., Common Sense in U.S.–Soviet Trade (Washington, D.C.: American Committee on East–West Accord, 1983).

5. Harold B. Scott, U.S.–Soviet Trade 1970–1982: Twelve Years a Hostage to Politics and Unrelated Foreign Policy, in ibid., p. 24.

6. Walter B. Saunders, Soviet Agriculture and World Grain Trade, in ibid., p. 124.

7. Fred Warner Neal, Economic Sanctions: How to Damage Ourselves Without Hurting the Soviet Union, in ibid., pp. 140–141.

8. Carol Brookins, Misconceptions in U.S.–Soviet Trade, in ibid., p. 163.

9. Karl W. Deutsch, The Analysis of International Relations, 2d ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1978), p. 5.

2

Techniques of Statecraft

Students of politics are expected to have something pertinent to offer about the probable effects of adopting one form of government or another, or one policy or another relating to power.¹

INTERNATIONAL ECONOMIC POLICIES may be studied from the perspective of law, economics, international organization, or the international system. To treat such measures as techniques of statecraft, however, is to adopt a perspective different from any of these. Before economic statecraft can be understood, the general nature and implications of the statecraft perspective must be clarified. This chapter will therefore focus on the nature of statecraft, the scholarly neglect of this topic, ways to classify techniques of statecraft, and the relationship between the statecraft perspective and the perspectives of foreign policy, international politics, and policy science. In addition, some objections to the statecraft orientation will be considered.

The Nature of Statecraft

Statecraft has traditionally been defined as the art of conducting state affairs. Such a definition, of course, could include both the foreign and domestic dimensions of public policy; but in contemporary usage the term has been virtually abandoned by students of domestic affairs.² Among students of foreign policy and international politics the term is sometimes used to encompass the whole foreign-policy-making process, but more often it refers to the selection of means for the pursuit of foreign policy goals. Thus, for Harold and Margaret Sprout statecraft embraces all the activities by which statesmen strive to protect cherished values and to attain desired objectives vis-à-vis other nations and/or international organizations.³ Similarly, K. J. Holsti defines statecraft as the organized actions governments take to change the external environment in general or the policies and actions of other states in particular to achieve the objectives that have been set by policy makers.⁴ Insofar as such definitions depict statecraft as governmental influence attempts directed at other actors in the international system, they correspond to the conception of statecraft employed here. The only qualifications are that, in contrast to the Sprouts, nonstate actors in addition to international organizations are included as possible targets of influence attempts; and, in contrast to Holsti, changes in beliefs, attitudes, opinions, expectations, emotions, and/or propensities to act are included in addition to changes in behavior.⁵

The Neglected Study of Statecraft

To study statecraft, as conceived here, is to consider the instruments used by policy makers in their attempts to exercise power, i.e., to get others to do what they would not otherwise do. Two traditional foci of political science research—policy and power—are thus linked by this undertaking. Paradoxically, neither policy analysts nor power analysts have given much attention to the instruments or techniques of influence.⁶ Analysts of both foreign and domestic policy have focused their attention on policy-making processes and have tended to ignore the content or output of those processes. How are policies made? is the question that has preoccupied policy analysts, not By what means are they carried out? Writing in 1968, Austin Ranney noted that "at least since 1945 most American political scientists have focused their professional attention mainly on the processes by which public policies are made and have shown little concern for their contents.⁷ Ranney purported to see signs of increasing discontent among political scientists … with the discipline’s post-1945 focus on process and to hear a growing number of voices … urging more attention to policy contents."⁸ Ranney’s optimism regarding the desire for more emphasis on policy content was partially justified by the appearance in 1975 of Policies and Policymaking as one of the eight volumes in the Handbook of Political Science.⁹ Unfortunately, the instruments of policy receive very little attention in the essays in that volume.

Foreign policy analysts have displayed a similar tendency to emphasize policy-making processes and to ignore policy content. An article titled Foreign Policy in the International Encyclopedia of the Social Sciences, published in 1968, focuses mostly on how policy is made while virtually ignoring policy instruments.¹⁰ A similar article in the Handbook of Political Science identifies the concentration on policy process and the neglect of policy output as one of the major deficiencies in the study of foreign policy.¹¹

The neglect of scholarly attention to techniques of statecraft is usually noted with some regret—if it is noted at all. An important exception is James N. Rosenau’s International Politics and Foreign Policy: A Reader in Research and Theory.¹² Rosenau defends the exclusion of selections on the tools or techniques of statecraft from his collection of readings on the grounds that such matters have been thoroughly treated and pose no major theoretical or methodological problems (p. 174).

Unlike the goals of state action, its forms have proved easy to clarify and analyze. The nature, implications, and consequences of diplomatic action, for example, are the subject of a vast literature not marked by controversy or confusion. The purposes, types, and limits of diplomacy are readily classified, and one is hard put to think of any major methodological problems which might inhibit the investigation of diplomatic practices and processes. Much the same can be said of the other tools and techniques of statecraft. Propaganda, subversion, economic action, military action (or the threat of it), and other techniques have all been thoroughly explored, and none has presented insoluble substantive or procedural problems. (p. 169)

Although economic techniques of statecraft are the main concern of this book, it should be noted in passing that even Rosenau’s remarks about diplomacy are questionable. The works of Robert Jervis¹³ and Thomas Schelling¹⁴ have demonstrated numerous theoretical and methodological problems and have generated many new insights about this technique of statecraft. The lack of fungibility of power resources, the possibilities and incentives for secrecy and deception, and the subtleties of strategic bargaining are only a few of the important theoretical and methodological problems associated with the study of diplomatic statecraft.¹⁵ Rosenau’s reader provided several generations of graduate students with a useful overview of the field of international politics and foreign policy, but it seriously misled them by implying that there were no worthy intellectual challenges in the study of the nature, implications, and consequences of statecraft.¹⁶

Policy analysts might try to justify ignoring influence techniques by arguing that such matters should be addressed by students of power relations. Unfortunately, power analysts have been just as oblivious to policy instruments as the policy analysts. In Robert Dahl’s classic article, The Concept of Power, he notes that the main problem … is not to determine the existence of power but to make comparisons.¹⁷ For Dahl, however, and for most political scientists, this implies a comparison of actors rather than a comparison of techniques. Who governs? rather than By what means? has been the dominant concern of most power analysts. What kinds