36 SECURITY STUDIES 6,no.3 This article is organized in three main parts.The first section disaggre- gates economic sanctions,and compares those different forms across a number of common dimensions.The second section explores how those sanctions affect groups differentially in the target country,and explains why this is of fundamental importance for the practice of economic statecraft. The third section considers two sanctions episodes and demonstrates how the microfoundations approach enhances our understanding of the sanc- tions process,and is better able to explain the outcomes than approaches that treat sanctions and targets in an aggregate fashion. 5102 ounf DIFFERENTIATING SANCTIONS CONOMIC SANCTIONS take five general forms:actions which distupt the trade,aid,finance,currency,and assets of the target state.Trade sanc- tions are the most common form of economic statecraft,and as a result the 节 terms are occasionally (and erroneously)treated as synonyms.This type of sanction can be further divided into two categories:export sanctions and import sanctions.The former bans exports to the target state,the latter prohibits imports from the target state.Although there are significant dif- 5 ferences between the two categories that will be addressed in the following uojoeif section,both aim to deprive the target of the gains from trade.8 Aid is also a familiar form of economic diplomacy,which has been em- ployed to advance political goals since as far back as the Peloponnesian war, and has traditionally been used as a mechanism for maintaining alliances. An early example of this is Spanish subsidies to Sweden as a member of the triple alliance of 1699.Aid is the form of economic statecraft most readily 名 practiced as a positive sanction.0 It is also a popular instrument because its papeoluMod inherent fungibility allows it to be employed for a variety of missions,such 8.The broader study of the cconomic statecraft of trade also includes the influence effect of trade,which is outside the scope of this more narrow discussion of economic sanctions. On the influence effect,see Albert O.Hirschman,National Power and the Strutcture of Foreign Trade(1945;Berkeley:University of California Press,1980). 9.George Liska,The New Stafeeraff (Chicago:University of Chicago Press,1960),40. Other studies which focus on the politics of aid include Sidney Weintraub,cd.,Economie Coercion and U.S.Foreign Poligy (Boulder.Westview,1982);Desmond McNeil,The Contradictions of Foreign Aid (London:Croom Helm,1981);David Wall,The Charity of Nations (New York: Basic Books,1973);John Montgomery,Foreign Aid in Intermational Politics (Englewood Cliffs: Prentice Hall,1967);John Montgomery,The Politics of Foreign Aid (New York:Pracger,1962); Jacob J.Kaplan,The Challenge of Foreign Aid (New York:Pracger,1967). 10.The focus here will be on the negative sanction of the suspension of aid.On positive sanctions,see David Baldwin,"The Power of Positive Sanctions,"World Politics 24,no.1 October1971:19-38
36 SECURITY STUDIES 6, no. 3 This article is organized in three main parts. The first section disaggregates economic sanctions, and compares those different forms across a number of common dimensions. The second section explores how those sanctions affect groups differentially in the target country, and explains why this is of fundamental importance for the practice of economic statecraft. The third section considers two sanctions episodes and demonstrates how the micro foundations approach enhances our understanding of the sanctions process, and is better able to explain the outcomes than approaches that treat sanctions and targets in an aggregate fashion. DIFFERENTIATING SANCTIONS E CONOMIC SANCTIONS take five general forms: actions which disrupt the trade, aid, finance, currency, and assets of the target state. Trade sanctions are the most common form of economic statecraft, and as a result the terms are occasionally (and erroneously) treated as synonyms. This type of sanction can be further divided into two categories: export sanctions and import sanctions. The former bans exports to the target state, the latter prohibits imports from the target state. Although there are significant differences between the two categories that will be addressed in the following section, both aim to deprive the target of the gains from trade.8 Aid is also a familiar form of economic diplomacy, which has been employed to advance political goals since as far back as the Peloponnesian war, and has traditionally been used as a mechanism for maintaining alliances. An early example of this is Spanish subsidies to Sweden as a member of the triple alliance of 1699.9 Aid is the form of economic statecraft most readily practiced as a positive sanction.10 It is also a popular instrument because its inherent fungibility allows it to be employed for a variety of missions, such 8. The broader study of the economic statecraft of trade also includes the influence effect of trade, which is outside the scope of this more narrow discussion of economic sanctions. On the influence effect, see Albert O. Hirschman, National Power and the Structure of Foreign Trade (1945; Berkeley: University of California Press, 1980). 9. George Iiska, The New Statecraft (Chicago: University of Chicago Press, 1960), 40. Other studies which focus on the politics of aid include Sidney Weintraub, ed., Economic Coercion and U.S. Foreign Policy (Boulder Westview, 1982); Desmond McNeil, The Contradictions of Foreign Aid (London: Croom Helm, 1981); David Wall, The Charity of Nations (New York: Basic Books, 1973); John Montgomery, Foreign Aid in International Politics (Englewood Cliffs: Prentice Hall, 1967); John Montgomery, The Politics of Foreign Aid (New York: Praeger, 1962); Jacob J. Kaplan, The Challenge of Foreign Aid (New York: Praeger, 1967). 10. The focus here will be on the negative sanction of the suspension of aid. On positive sanctions, see David Baldwin, "The Power of Positive Sanctions," World Politics 24, no. 1 (October 1971): 19-38. Downloaded by [Shanghai Jiaotong University] at 02:27 24 June 2013
The Microfoundations of Economic Sanctions 37 as purchase,where aid is implicitly exchanged for other considerations such as basing rights. The manipulation of international financial relations is a relatively mod- ern tool of state power.Financial sanctions can involve either lending or investment,but both techniques aim to interrupt the flow of resources to the target.As with aid,financial sanctions emerged from the tradition of punishing defectors from alliances.In earlier eras there was little illusion about the separation of economics and politics:France's minister of finance Caillaux stated in 1913 that"I have admitted to quotation only those for- eign loans which assured France political and economic advantages."In more recent times,the political considerations that have continued to shape aunf the direction of financial flows express themselves more subtly.11 Monetary sanctions aim to destabilize the value and stability of the target state's currency.Such actions have real economic effects,including increas- ing inflation and debt burdens and upsetting public and private economic planning.Money's special nature both as a store of personal wealth and a symbol of national sovereignty,also causes the psychological effects of these sanctions to be considerable.Although less common than trade or aid sanctions,monetary sanctions have been used in a considerable number of cases in the twentieth century,often with dramatic consequences.12 The least commonly used form of economic sanction is the seizure of a Suojoelf target's assets.This can take the form of physical property,securities,and bank accounts.These assets can be frozen,which prevents the target from accessing them,or vested,which transfers ownership of the assets from the target to the sender.Such sanctions can complement a strategy designed to weaken an adversaty(for example,in wartime),or provide additional lever- age to a specific influence attempt.3 B papeojuMo 11.Herbert Fcis,Europe:The World's Banker 1870-1914 (1930;New Haven:Yale Univer- sity Press,1964),123(quote).For more on the politics of international financial relations,see Jacob Viner,International Economics(1928;Illinois:Free Press,1951);Feis,The Diplomagy of the Dollar,1965 [1950];Andrew Spindler,The Politics of International Credit (Washington,D.C.: Brookings,1984);Cheryl Payer,The Debf Trap (New York:Monthly Review Press,1974); John Williamson,ed.,IMF Conditionaliry (Washington D.C:Institute for International Eco- nomics,1983). 12.On monetary sanctions in particular and currency politics in general,see Jonathan Kirshner,Currengy and Coergion:The Political Economy of International Monetary Power (Princeton: Princeton University Press,1995). 13.On this form of economic cocrcion,sce Judd Polk,"Freezing Dollars Against the Axis,"Foreign Afairs 20,no.1 (October 1941):113-30;Karin Lissakers,"Money and Ma- nipulation,"Foreign Poligy,no.44 (fall 1981):107-26;Robert Carswell,"Economic Sanctions and the Iran Experiencc,"Foreign 4fjairs 60,no.2 (winter 1981/82):247-65;F.W.Neate, ed.,"The Carter Freeze,"International Business Lawyer 9,no.3 (1981):93-114
The Microfoundations of Economic Sanctions 3 7 as purchase, where aid is implicitly exchanged for other considerations such as basing rights. The manipulation of international financial relations is a relatively modern tool of state power. Financial sanctions can involve either lending or investment, but both techniques aim to interrupt the flow of resources to the target. As with aid, financial sanctions emerged from the tradition of punishing defectors from alliances. In earlier eras there was little illusion about the separation of economics and politics: France's minister of finance Caillaux stated in 1913 that "I have admitted to quotation only those foreign loans which assured France political and economic advantages." In more recent times, the political considerations that have continued to shape the direction of financial flows express themselves more subtly.11 Monetary sanctions aim to destabilize the value and stability of the target state's currency. Such actions have real economic effects, including increasing inflation and debt burdens and upsetting public and private economic planning. Money's special nature both as a store of personal wealth and a symbol of national sovereignty, also causes the psychological effects of these sanctions to be considerable. Although less common than trade or aid sanctions, monetary sanctions have been used in a considerable number of cases in the twentieth century, often with dramatic consequences.12 The least commonly used form of economic sanction is the seizure of a target's assets. This can take the form of physical property, securities, and bank accounts. These assets can be frozen, which prevents the target from accessing them, or vested, which transfers ownership of the assets from the target to the sender. Such sanctions can complement a strategy designed to weaken an adversary (for example, in wartime), or provide additional leverage to a specific influence attempt.13 11. Herbert Feis, Europe: The World's Banker 1870-1914 (1930; New Haven: Yale University Press, 1964), 123 (quote). For more on the politics of international financial relations, see Jacob Viner, International Economics (1928; Illinois: Free Press, 1951); Feis, The Diplomacy of the Dollar, 1965 [1950]; Andrew Spindler, The Politics of International Credit (Washington, D.C.: Brookings, 1984); Cheryl Payer, The Debt Trap (New York: Monthly Review Press, 1974); John Williamson, ed., IMF Conditionality (Washington D.C.: Institute for International Economics, 1983). 12. On monetary sanctions in particular and currency politics in general, see Jonathan Kirshner, Currency and Coercion: The Political Economy of International Monetary Power (Princeton: Princeton University Press, 1995). 13. On this form of economic coercion, see Judd Polk, "Freezing Dollars Against the Axis," Foreign Affairs 20, no. 1 (October 1941): 113-30; Karin Lissakers, "Money and Manipulation," Foreign Policy, no. 44 (fall 1981): 107-26; Robert Carswell, "Economic Sanctions and the Iran Experience," Foreign Affairs 60, no. 2 (winter 1981/82): 247-65; F. W. Neate, ed., "The Carter Freeze," International Business Lawyer 9, no. 3 (1981): 93-114. Downloaded by [Shanghai Jiaotong University] at 02:27 24 June 2013
38 SECURITY STUDIES 6,no.3 Differentiating economic sanctions is essential because each type of sanction has distinct characteristics.Circumstances associated with a given influence attempt will dictate which specific characteristics an instrument of coercion must have for the effort to have a chance of working.Similarly, attributes inherent in each sanction type will,in a number of settings,pre- clude the possibility that a given technique could be successfully intro- duced.Thus,a sensitivity to the differences between economic sanctions is necessary to understand why and when they work,or how they can be op- timally introduced.Three important attributes of instruments of coercion that explain their economic impact are speed,publicity,and robustness. Speed refers to the fact that different types of sanctions have different lag times between the time that they are enacted and the time that they are felt by the target.If the goal of the sanction is to resolve a crisis or cripple a 寸 specific military operation of an adversary,only sanctions which are felt relatively quickly will have any chance of success.Sanctions which impose their bite swiftly,however,might lose their teeth over time.Monetary sanc- tions offer an excellent example of this:the most successful monetary sanctions-those that completely demonetize the target economy-can be swift and effective.If demonetization is not successful in the short run, however,it will probably not be effective in the end,as the target will re- construct its payments system.Such a sanction reaches its maximum weight relatively early and then becomes easier to bear.Trade sanctions,on the other hand,take some time before they are felt(as several months'worth of goods may be en route),but when successfully applied,such sanctions should increase their burden slowly over time.Asset,aid,and financial sanctions fall somewhere in between:they represent an immediate contrac- tion of the set of resources available to the target,but are not fully felt until B the target's unaffected assets become depleted. peojuMo Because different sanctions work at different speeds,it cannot be said, for example,that trade sanctions work while financial sanctions do not work.The relative utility of the instruments depends on the needs of each particular case.Stopping loans and freezing assets may prevent a target from financing a military operation:an operation which might otherwise be successfully completed before trade sanctions even took effect.On the other hand,trade sanctions may be the only possible way to dislodge a state from successfully annexed territory. Sanctions also differ with regard to their publicity.Publicity is important because,at different times,it can either be essential for or incompatible with success.Secrecy often has its benefits.One of the classic problems with economic sanctions is the well-known rally-around-the-flag effect
38 SECURITY STUDIES 6, no. 3 Differentiating economic sanctions is essential because each type of sanction has distinct characteristics. Circumstances associated with a given influence attempt will dictate which specific characteristics an instrument of coercion must have for the effort to have a chance of working. Similarly, attributes inherent in each sanction type will, in a number of settings, preclude the possibility that a given technique could be successfully introduced. Thus, a sensitivity to the differences between economic sanctions is necessary to understand why and when they work, or how they can be optimally introduced. Three important attributes of instruments of coercion that explain their economic impact are speed, publicity, and robustness. Speed refers to the fact that different types of sanctions have different lag times between the time that they are enacted and the time that they are felt by the target. If the goal of the sanction is to resolve a crisis or cripple a specific military operation of an adversary, only sanctions which are felt relatively quickly will have any chance of success. Sanctions which impose their bite swiftly, however, might lose their teeth over time. Monetary sanctions offer an excellent example of this: the most successful monetary sanctions—those that completely demonetize the target economy—can be swift and effective. If demonetization is not successful in the short run, however, it will probably not be effective in the end, as the target will reconstruct its payments system. Such a sanction reaches its maximum weight relatively early and then becomes easier to bear. Trade sanctions, on the other hand, take some time before they are felt (as several months' worth of goods may be en route), but when successfully applied, such sanctions should increase their burden slowly over time. Asset, aid, and financial sanctions fall somewhere in between: they represent an immediate contraction of the set of resources available to the target, but are not fully felt until the target's unaffected assets become depleted. Because different sanctions work at different speeds, it cannot be said, for example, that trade sanctions work while financial sanctions do not work. The relative utility of the instruments depends on the needs of each particular case. Stopping loans and freezing assets may prevent a target from financing a military operation: an operation which might otherwise be successfully completed before trade sanctions even took effect. On the other hand, trade sanctions may be the only possible way to dislodge a state from successfully annexed territory. Sanctions also differ with regard to their publicity. Publicity is important because, at different times, it can either be essential for or incompatible with success. Secrecy often has its benefits. One of the classic problems with economic sanctions is the well-known rally-around-the-flag effect, Downloaded by [Shanghai Jiaotong University] at 02:27 24 June 2013
The Microfoundations of Economic Sanctions 39 where nationalism motivates citizens to support the home government from outside interference.It can also make compliance more difficult due to "loss of face"both nationally and internationally.14 This effect can not only undercut sanctions,but can strengthen the target government by pro- viding an excuse for other failed policies.Private sanctions can also be used against states with which the sender wants to maintain essentially friendly relations over the long run.On the other hand,in some settings publicity will be an important component of the sanctions effort.Publicity makes it easier to facilitate cooperation from other states.It is also essential for sig- 景 naling-either to other states,or to provide support for opposition groups within the target state. In practice,there are several levels of publicity.There are at least four distinct audiences that a sanctioner may wish to address,or,alternately,to keep in the dark:constituencies within its own borders,the general popula- tion of the target state,elites in the target government,and third parties. There may be instances where the optimal sanction is one of which the tar- get is completely unaware.At other times,it may be crucial that central governments are able to communicate with each other without the knowl- edge of their own citizens. Since sending governments always have the option of declaring their ac- tions,the key to differentiating sanctions in this area is evaluating the extent to which each has an essential public component.At one extreme,mone- tary sanctions have the least essentially public quality,5 while trade sanc- reyuey tions tend to have the most.Given the dominance of private actors in trade,such sanctions must be legislated and made public for them to be enacted.Similar legal necessities can be found in the case of asset seizure. 6 Aid and finance fall somewhere in the middle:although most aid is legis- lated publicly,aid flows can be delayed and covert aid suspended very dis- papeol creetly.Given the close relationship between a government's monetary in- stitutions and large private banks,informal financial boycotts are at least UMOC feasible,which is not the case with trade. Variations across the dimension of robustness is a crucial determinant of when different types of sanctions will be more or less appropriate for a given situation.Robustness refers to how the power of sanctions is affected by actions taken by private actors,as well as the defenses of the target 14.See for example Baldwin,Economic Statecraf,108. 15.Monetary power can be exercised quite privately.It requires no legislation-in fact, many in the home country might not even notice what's going on.If it were so inclined,the home country would not even have to tell the target government that it was the source of their monetary trouble
The Microfoundations of Economic Sanctions 39 where nationalism motivates citizens to support the home government from outside interference. It can also make compliance more difficult due to "loss of face" both nationally and internationally.14 This effect can not only undercut sanctions, but can strengthen the target government by providing an excuse for other failed policies. Private sanctions can also be used against states with which the sender wants to maintain essentially friendly relations over the long run. On the other hand, in some settings publicity will be an important component of the sanctions effort. Publicity makes it easier to facilitate cooperation from other states. It is also essential for signaling—either to other states, or to provide support for opposition groups within the target state. In practice, there are several levels of publicity. There are at least four distinct audiences that a sanctioner may wish to address, or, alternately, to keep in the dark: constituencies within its own borders, the general population of the target state, elites in the target government, and third parties. There may be instances where the optimal sanction is one of which the target is completely unaware. At other times, it may be crucial that central governments are able to communicate with each other without the knowledge of their own citizens. Since sending governments always have the option of declaring their actions, the key to differentiating sanctions in this area is evaluating the extent to which each has an essential public component. At one extreme, monetary sanctions have the least essentially public quality,15 while trade sanctions tend to have the most. Given the dominance of private actors in trade, such sanctions must be legislated and made public for them to be enacted. Similar legal necessities can be found in the case of asset seizure. Aid and finance fall somewhere in the middle: although most aid is legislated publicly, aid flows can be delayed and covert aid suspended very discreedy. Given the close relationship between a government's monetary institutions and large private banks, informal financial boycotts are at least feasible, which is not the case with trade. Variations across the dimension of robustness is a crucial determinant of when different types of sanctions will be more or less appropriate for a given situation. Robustness refers to how the power of sanctions is affected by actions taken by private actors, as well as the defenses of the target 14. See for example Baldwin, Economic Statecraft, 108. 15. Monetary power can be exercised quite privately. It requires no legislation—in fact, many in the home country might not even notice what's going on. If it were so inclined, the home country would not even have to tell the target government that it was the source of their monetary trouble. Downloaded by [Shanghai Jiaotong University] at 02:27 24 June 2013
40 SECURITY STUDIES 6,no.3 state.16 Actions taken by private actors represent the "market"response to sanctions:will the sanctions provide opportunities for profit that under- mine their intended effect?It is also logical to assume that the target will take whatever steps it can to circumvent the sanctions.Once again,the specific constellation of variables in each case will privilege some tech- niques of statecraft while impoverishing others.This can be seen with monetary sanctions.Private market forces can react to pressure on the tar- get currency by(wittingly or unwittingly)bandwagoning with or balancing against that pressure,depending on whether the depreciation is perceived as undervaluing the currency or signaling the start of a new decline.These forces will often determine whether the weight of monetary sanctions will aunf be intensified or mitigated.This will depend on a number of variables:the scale of the pressure relative to the normal trading volume of the currency, the reputation of the currency,and macroeconomic status of the target economy.Thus,some senders will find monetary sanctions highly robust while others would expect their initial effect to dissipate rapidly.7 What is 前 important is that this is not a random occurrence:particularly vulnerable(or 白 insulated)targets should be identifiable beforehand. The problem of robustness is often the weak link in trade sanctions;in fact it is often held out as the principal reason why economic sanctions do not work.This problem exists because there is profit in circumventing trade sanctions,and private networks which will divert and direct trade through third parties will spring up spontaneously owing to natural market forces.Geography and the composition of trade will be important determi- rey3ueqs] nants here:for example,it is particularly challenging to senders when highly uniform goods such as commodities are involved.18 Financial sanctions are also vulnerable to circumvention from this 合 source,because the profit motive exists in this case as well:when one agent pulls out,another will be tempted to replace him.Circumvention is not as easy as in the trade case,however,because it is harder to divide up a large loan amongst hundreds of faceless agents.Hence the private violators of sanctions are more likely to have to stand up and be counted,and therefore the potential for surveillance and control is greater. With sanctions aimed at aid and assets,there is no logical private re- sponse.Robustness here centers on the ability of the target to replace the 16.It does not include the response of other states.It was assumed above that the level of cooperation and the probability of success is positively correlated,ceteris paribus. 17.Sec Kirshner,Curengy and Coercion,chap.2,"The Viability of Monetary Power." 18.Sce,for example,Thomas D.Willet and Mehrdad Jalaighajar,"U.S.Trade Strategy and National Security,"Cato Journal3,no.3 (winter 1983/84):723-24
40 SECURITY STUDIES 6, no. 3 state.16 Actions taken by private actors represent the "market" response to sanctions: will the sanctions provide opportunities for profit that undermine their intended effect? It is also logical to assume that the target will take whatever steps it can to circumvent the sanctions. Once again, the specific constellation of variables in each case will privilege some techniques of statecraft while impoverishing others. This can be seen with monetary sanctions. Private market forces can react to pressure on the target currency by (wittingly or unwittingly) bandwagoning with or balancing against that pressure, depending on whether the depreciation is perceived as undervaluing the currency or signaling the start of a new decline. These forces will often determine whether the weight of monetary sanctions will be intensified or mitigated. This will depend on a number of variables: the scale of the pressure relative to the normal trading volume of the currency, the reputation of the currency, and macroeconomic status of the target economy. Thus, some senders will find monetary sanctions highly robust while others would expect their initial effect to dissipate rapidly.17 What is important is that this is not a random occurrence: particularly vulnerable (or insulated) targets should be identifiable beforehand. The problem of robustness is often the weak link in trade sanctions; in fact it is often held out as the principal reason why economic sanctions do not work. This problem exists because there is profit in circumventing trade sanctions, and private networks which will divert and direct trade through third parties will spring up spontaneously owing to natural market forces. Geography and the composition of trade will be important determinants here: for example, it is particularly challenging to senders when highly uniform goods such as commodities are involved.18 Financial sanctions are also vulnerable to circumvention from this source, because the profit motive exists in this case as well: when one agent pulls out, another will be tempted to replace him. Circumvention is not as easy as in the trade case, however, because it is harder to divide up a large loan amongst hundreds of faceless agents. Hence the private violators of sanctions are more likely to have to stand up and be counted, and therefore the potential for surveillance and control is greater. With sanctions aimed at aid and assets, there is no logical private response. Robustness here centers on the ability of the target to replace the 16. It does not include the response of other states. It was assumed above that the level of cooperation and the probability of success is positively correlated, ceteris paribus. 17. See Kirshner, Currency and Coercion, chap. 2, "The Viability of Monetary Power." 18. See, for example, Thomas D. Willet and Mehrdad Jalaighajar, "U.S. Trade Strategy and National Security," Cato Journals, no. 3 (winter 1983/84): 723-24. Downloaded by [Shanghai Jiaotong University] at 02:27 24 June 2013