Wednesday, December 29, 2010

2010 Best of the Blog, VII

. Wednesday, December 29, 2010

Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From March 27, "Sanctions, Sovereign Borrowing and Financial Integration":

Over the last couple of months, Sarah, Will and I have been working on our MA theses, each hoping to make a sufficiently important contribution to the discipline (or at least show sufficient potential to some day contribute something) to warrant the department to continue funding us and let us start studying for comprehensive exams and work on our dissertation proposals. I'm writing my thesis on the intersection between economic sanctions and finance, specifically how financial integration and sovereign borrowing affects a target state's decision to acquiesce to sender demands in high politics cases.


Earlier this afternoon, I stumbled upon an article titled "Don't Sanction Dictators" by Jason McLure that was published in Foreign Policy last summer that has a bit in common with the argument I'm trying to advance. In the piece, McLure argues that sanctioning dictators is a futile policy choice for advanced countries and uses the threatened sanctions against Eritrea as he makes his case. McLure argues:
Sanctions are made to cut countries off from vital international exchange. The trouble is, Eritrea already trades less with the outside world than any country in Africa and places 210th out of all 226 countries and islands for global commerce.
He then discusses the specific case of Eritrea and how sanctions against dictators won't work because they won't respond to the coercive attempts of larger states and concludes:
These lessons apply to sanctions on dictators more broadly. How do you punish North Korea with sanctions when its trading partners are already limited to a handful of countries -- none of which are likely to pay heed to a harsher set of rules? How do you choke Zimbabwe's Robert Mugabe when his strongest rationale for staying in power is to save his country from the hands of countries who would (and do) impose sanctions? Perhaps it's no wonder that such countries' leaders not only survive sanctions, but use them to justify bad behavior.
I'm really happy to see McLure make this argument, and the beginning of his logic is similar to what I am arguing in my thesis. However, McLure stumbles in a couple of ways, specifically when he conflates "international exchange" with trade flows and makes a distinction between autocratic and democratic governments that I argue actually doesn't matter. Analyzing sanctions episodes using a political economy approach, specifically looking at the influences of trade and finance on sanctions success makes a lot of sense and should give our explanations greater traction (at least I hope it does). This is one way in which the extant literature on economic sanctions has been surprisingly weak.

I disagree with McLure and argue that it's not that dictators are better able to withstand the coercive pressure of larger powers simply because of the characteristics of dictatorships, it's the fact that most dictatorships are not intricately linked with the international financial system to the point where larger powers (i.e. the United States) can impose sufficient costs to induce them to cooperate. This characteristic can't be solely attributed to dictators. It's in fact possible for democratic states to have very little integration with global financial markets and thus hold the same financial characteristics that are common in certain autocracies, and you can also have an autocratic government (Singapore) that is heavily integrated with and dependent on financial markets. Furthermore, I object for an array of reasons with immediately relying on trade flows to make an argument for sanctions success without engaging the finance side (if you want to know why, I'll have my thesis up on my website sometime by late April).

Larger powers have very little bargaining leverage over states that are not integrated with and dependent on the international financial system. Why? Because the costs that matter (borrowing costs that are directly imposed on governments, rather than trade costs that are dispersed across the population) can't be unilaterally imposed by these states. They need the cooperation of financial markets, and more specifically institutional investors in order to impose costs on targets. These larger powers need to increase the risk associated with investing in a given country, which increases the borrowing costs of the target state as investors seek higher interest rates and/or decrease exposure to that market in order to compensate for the increased risk. A credible threat to act if a government does not change its policy coupled with the effects (or potential effects) of sanctions themselves are sufficient to induce an increase in a target government's risk profile.

Institutional investors can only impose costs on states that require foreign capital to continue to finance their international debt obligations, roll over their debt and fund their operations. Those that are not sufficiently integrated and not dependent on global markets for access to capital will have dramatically lower costs when engaging in sanctionable (risky) behavior because they don't have to worry about increases in borrowing costs when calculating the costs and benefits of a given policy bundle. It is not that states with one type of political regime or another are better able to withstand coercive pressure from advanced, industrial countries, it's the fact that those states that are dependent on external sources of financing have the most to lose from engaging in that activity and can't withstand the coercive pressure. Non-integrated and non-debt dependent states' individual cost-benefit analyses are not sufficiently altered by sanctions threats or impositions and thus the costs associated with defecting from the status quo are very low. Therefore, sanctions episode success should be based on two indicators: 1) a country's degree of financial integration and 2) it's external debt to GDP ratio. Or at least I hope it is so that my thesis committee will find it in their hearts to pass me!

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2010 Best of the Blog, VII
 
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