Economic Tools of Power

TSDM Web-enabled CourseThis slide show is created from a presentation to the War

College Faculty by Professor David Burbach Sept 13, 2011

Agenda

Economic Tools JMP Framework Causes of Wealth and Poverty COCOM role

04/21/23 NWC/TSDM Dr. Coty Keller 2

Context and Range of Economic Tools

DIME methodology (Diplomacy, Information, Military, Economic) TSDM course suggests we think of strategy in terms of DIME

Economic Tools –Foreign aid, –Trade Policy –Trade sanctions, –Regulations on capital flows and investment,

04/21/23 NWC/TSDM Dr. Coty Keller 3

Foreign Aid A wide range of programs designed to provide economic

assistance to other countries. Development Assistance or food aid are what people

typically think of as “foreign aid.” Dozen or more programs with very different goals,

targets, and limitations; which ones are most prominent vary dramatically from region to region

Other monies are targeted at specific counterdrug, counter terror, non-proliferation activities, etc.

Special grant programs for former Soviet and Eastern European states.

President Bush dramatically increased spending on HIV/AIDS programs, especially in Africa. 04/21/23 4NWC/TSDM Dr. Coty Keller

04/21/23 NWC/TSDM Dr. Coty Keller 5

Trade Policy & Sanctions

Trade policy is another tool of foreign policy. We have at times believed it furthered U.S. interests to be more protectionist (e.g., protecting ‘infant industries’ in the 19th century), or More open (the post-WWII period). Today, we argue that freer trade is good because it

1) Best for U.S. economic growth;

2) Best for other nations to grow economically, which helps them avoid becoming ‘failed states’ or otherwise posing problems for the world;

3) More trade between nations makes war among them less likely.

Preferential tariffs and quotas to reward allies or encourage certain behavior, sanctions to punish adversaries or increase the costs of undesired actions

Sanctions range from broad embargoes on all trade with a nation, to narrowly targeted travel bans and financial restrictions on regime leaders (e.g., going after the foreign assets of Milosevic’s cronies during the Kosovo War). Kaempfer and Lowenberg make the case for targeted sanctions over comprehensive ones.  Sanctions are interagency activities. They usually require Congressional authorization.

–Negotiations to create and interpret them are DoS. –Actual enforcement is a mix of Commerce, Justice, Treasury and Homeland Security. –DoD (via the COCOMs) can also be involved in enforcement abroad (intercepting sanctions-busters in Iraq or former Yugoslavia, for example).

04/21/23 NWC/TSDM Dr. Coty Keller 6

Types of Sanctions Import embargo Export embargo Weapons embargo (or other military/strategic

goods, like WMD tech) Aid, Credit, FDI cutoff Travel restrictions Asset seizures Secondary sanctions (sanctions on sanction

violators) “Smart” sanctions – new term for financial

measures aimed narrowly at regime leaders

04/21/23 7NWC/TSDM Dr. Coty Keller

Sanctions work better when…1. They are not easily circumvented by substitution,

smuggling, or diverting trade to other partners

2. The costs fall on those with influence in the target country

3. The demands do not threaten regime survival

4. They are mandated by a multinational institution

5. The target cares about international legitimacy

6. The demands involve trade issues rather than security

7. Sanctioning countries do not face or can suppress pressure to remove sanctions from affected interests

8. The humanitarian costs in the target are tolerable

04/21/23 8NWC/TSDM Dr. Coty Keller

Sanctions Examples

More Successful

South Africa

COCOM (technology exports to Soviet bloc)

Libya (pre-2011)

Iran ?

Less Successful

U.S. Cuban Embargo

Rhodesia

North Korea

Japan 1941

Iran ?04/21/23 9NWC/TSDM Dr. Coty Keller

Regulations on capital flows and investment,

04/21/23 NWC/TSDM Dr. Coty Keller 10

Monetary policy tools: – intervening in currency markets and – changing interest rates

Regulations on international capital flows Our massive debt levels are already constraining

policy options and effectiveness, Disrupting terrorist and criminal financial networks

has become very important in recent years.

Management of Economic Tools is Fragmented among many Domestic Elements of JMP Framework

US economic policy has multiple goals, not just national security Some aid programs are administered by State on explicit political-strategic

grounds. Need-based programs at USAID are supposed to be run without consideration

of US foreign policy goals Food aid is run by the Department of Agriculture. Debt relief/restructuring and our influence in multinational development orgs like

the World Bank runs through Treasury. Sanctions enforcement is a mix of Commerce, Treasury, State, and Homeland

Security. Trade policy involves huge range of agencies. International monetary policy involves Treasury and the (presumed) politically

independent Federal Reserve. Congress has a great deal of influence, which they exercise much more than on

Defense issues. Sanctions require Congressional approval to start or stop, aid programs have tight Congressional oversight, etc.

04/21/23 NWC/TSDM Dr. Coty Keller 11

04/21/23 NWC/TSDM Dr. Coty Keller 12

JMP Framework

Economic Tools – Lots of Players on the Field!

Development Aid USAID, State, MCA, IGOsFood Aid Agriculture, USAID, IGOsPolitical Aid StateMilitary Aid DoD, StateSecurity/Law Enforce State, Justice, DoD, DHSHealth Aid USAID, OGAC, CDC, IGOsSanctions Commerce, Treasury, State,

DHS, DoDTrade Policy USTR, Commerce, StateExport Controls Commerce, DoDMonetary Policy Treasury, Federal Reserve

Most importantly…. CONGRESS must authorize everything!!

04/21/23 13NWC/TSDM Dr. Coty Keller

Causes of wealth and povertyBefore deciding how to help poor nations (and perhaps ourselves), we should ask what causes poverty in the first place? Bad policy (Colin Powell)

– Poverty caused by combination of lack of a free market, trade protectionism, lack of respect for property rights, and /or government that is corrupt and inefficient.)

– solution is to adopt neoliberal economic policies.

Bad Location (economist Jeff Sachs) – poor countries are mostly tropical and/or

landlocked. – The tropics have vastly higher disease

burdens and poor soil fertility. – Landlocked nations find it very hard to join

global trade networks. – Nations trapped by geography can only

escape poverty if wealthy nations help them with disease eradication and infrastructure development.

Bad histories: colonialism is at fault–Wrecked cultures and political institutions , and left little to replace them–Colonialism left states whose borders have no relationship to underlying ethno-linguistic groups or natural boundaries,

Can a nation affected by external threats or internal violence/instability prosper?

–Some Regional commanders (Zinni, Craddock, Stavridis) argue that security is a key pre-condition for economic growth.

04/21/23 NWC/TSDM Dr. Coty Keller 14

Impact in Theater

The Combatant Commands can play an important role in the use of Economic tools with Educational programsTraining foreign militariesTransfers of military equipmentEnforcement of SanctionsCOMCOMs also have an impact through

–reconstruction operations, and –indirectly by reducing insecurity and crime in their regions to set the conditions for economic growth.

Good example of non-Military application of DIME

04/21/23 NWC/TSDM Dr. Coty Keller 15