Wednesday, December 30, 2009

The Value of Economic Sanctions

The administration of economic sanctions by a country or group of countries against another country as a means to induce certain policy changes has been a staple of foreign policy for decades. The use of sanctions is popular because it is viewed as a viable alternative to taking costly and frequently unpopular military action. One powerful preconceived notion involving economic sanctions seems to be that it offers the greatest probability of success for the lowest possible cost. Decades ago there was a significant probability that economic sanctions could be utilized as an effective means to influence policy or strategy change because the global economy was still reliant on a small number of countries. However, due to globalization and the emergence of a significant number of new economic players, it is much more difficult to influence policy change through economic sanctions. The biggest problem with modern economic sanctions is their structure and execution did not evolve as the global economic and political community evolved. This lack of evolution has left economic sanctions that may have worked in the 1950s and 60s flawed and with a much lower chance for success in present day. The continued use of economic sanctions with little alteration in application demonstrates a large disconnect between theory and reality for those responsible for the administration of these sanctions.

Improperly designed economic sanction policies actually have a greater probability of doing more harm than good; creating a greater divide in the relationship between the sanctioning and the sanctioned countries further reducing the probability of success in future diplomatic engagements. This possibility is one of the reasons the application of economic sanctions can be detrimental because they frequently act as an accelerant in conflict between two countries. Typically economic sanctions are levied by one country against another country because the sanctioned country is taking an action, be it economic, political or militarily, that the sanctioning country disapproves of and possibly believes to be dangerous. In large part economic sanctions can be regarded as the last step before a military conflict/intervention, so clearly when a country uses economic sanctions that country normally does not currently have a quality diplomatic relationship with the sanctioned country where rationality and even quid pro quo diplomacy can be utilized.

Unfortunately when friction exists between two countries the governments of those countries use political propaganda to further increase distrust of the opposing country in their citizens. This propaganda can facilitate a nationalist response when faced with economic sanctions from a country viewed as the enemy where instead of capitulating to the threat of or actual economic sanctions, the citizenry of the sanctioned country unites in defiance with their leaders. Such an attitude is characterized by those citizens digging in even harder rather than be characterized as weak, which would establish a precedence that they can be pushed around at the sanctioning country’s whim.

The two most notable historic examples illustrating the failure of economic sanctions are between the United States and Cuba and the United States and Iraq. For over 40 years economic sanctions have been the policy of the United States towards Cuba and yet a Castro still remains in power (Fidel to Raul) and the economic system is still socialist (those who refer to the economic system of Cuba as Communism need to actually research the definition of Communism). Realistically there are only two reasons economic sanctions remain on Cuba. First, for simple vengeance as the initial reason for enacting economic sanctions was due to Fidel Castro illegally seizing U.S. property and assets in Cuba when he seized power. Clearly those in power who owned those assets did not look upon such an action favorably. Second, a fanatical anti-Castro movement by Cuban-Americans in Florida and other places around the U.S. continues to provide heavy political pressure on the federal government to continue the economic sanctions; ironically pressure which the government caves to for no real legitimate reason because the voting power of these individuals as a whole is rather pathetic.

Economic sanctions on Iraq lasted for over a decade and still did nothing to induce revolution to overthrow Saddam Hussein or change Saddam’s policy towards his own citizens or the rest of the world. Instead military force was used to remove Saddam from power. In both situations all economic sanctions really did was hurt the citizens of those sanctioned countries as well as hurt the economy of the United States. Most free-market proponents believe that utilizing capitalism and free trade would have influenced the desired political change much faster and efficiently by providing incentives to maintain a positive relationship through the purchase of goods. Basically if Country A sells Country B a lot of product x and product x is valued Country B will have a more friendly relationship with Country A. So why do policy makers skill believe that economic sanctions under their current design are a viable strategy for inducing foreign policy changes?

Why has the generic blueprint for the general economic sanction remained the same for over six decades with the only improvement being the advent of ‘smart sanction’, which has had mixed results at best? One possible explanation is that in the early post-World War II period economic sanctions, most initiated by the United States, were successful a vast majority of the time. Unfortunately that early success turned out to be a negative influencer for future results, convincing U.S. authorities that economic sanctions would frequently work and that the structure of those post-war sanctions was the proper structure to achieve success. In addition most of these successful economic sanctions were unilateral further fostering confidence in the superiority of the U.S. economic system and its influence aboard. Interestingly enough this mindset has yet to truly change despite significant failures of unilateral U.S. economic sanctions to generate change from the late 1970s to the present.

Overall there appears to be no good explanation for why the basic structure and methodology behind economic sanctions has not changed significantly. The sad reality is that even when economic sanctions are successful they rarely induce long-term significant change; instead the successes derived from economic sanctions are short-term, typically single event victories. So realistically economic sanctions can only achieve moderate goals in the first place and even those goals have become less attainable in modern society. Perhaps the reality of the situation is that world leaders have concluded that any variation in the economic sanction design will not significantly change the low probability of success, so they have elected to not waste time and resources by modifying the old strategy. Instead economic sanctions are viewed as a policy designed to make the public believe that something is being done about country A that is perceived to be threat for given reason B when in reality nothing of significance is being done. Of course if this is true, economic sanctions are a rather harmful ‘do nothing’ policy for they are detrimental to U.S. based exporters and in some respects U.S. based importers.

If economic sanctions are ever going become a viable alternative to military action its failings must be identified and corrected. The chief problem with economics sanctions is that originally there was motivation to facilitate such sanctions through the United Nations; in fact that facilitation was part of the motivation for establishing the United Nations where the sanctions would have multi-national support, but such a strategy was never really established; therefore most economic sanction strategies became unilateral or at best a small network of countries seeking a common goal. Through most of the 20th century, especially after World War II, the U.S. and the Soviet Union had the economic clout to influence policy through the use of economic sanctions, but globalization has increased the number of effective economies in the global trading game reducing the overall influence of each single economy. Now unilateral sanctions regardless of who imposes them have a much smaller probability of success.

Unilateral sanctions are difficult to successfully administer on two different counts. First, the country being sanctioned needs to have a strong economic relationship with the country that initiates the sanction or the sanction will have little to no effect. Second, the sanctioned country must not be able to acquire a significant amount of resources to neutralize the effect of the sanction. Failure in this second criterion is why most unilateral sanctions fail as even though a powerful economy may elect to cut trade ties with a country only in the rare situation of a global product monopoly will the sanctioned country not be able to receive necessary resources from another country. Countries, like individuals, tend to look out for their own interests first and there is no reason for these other trading partners to agree explicitly with the policies suggested by the sanctioning country without analyzing how such a policy change would influence them. It is irrational for the countries pushing for the sanctions to expect other trading partners to abide by the proposed sanctions because their desired policy is righteous and correct.

Additionally if the first parameter is met, the sudden depression in supply to certain resource sectors of the sanctioned economy can create new opportunities for existing and possible future trade partners to capitalize on the product shortfall. Instead of adhering to the sanction these countries could look to make-up the lost supply carving out a new piece of a foreign market that might not have been otherwise available. Understanding these realities lead to the reasonable conclusion that the goal of the sanction will rarely succeed if it is politically unilateral. The best way to circumvent the economic advantages that non-sanctioning countries receives by not adhering to the sanction is to convince the non-sanctioning countries that the policy the sanction seeks to change is critical for their own national interest. Basically the sanctioning countries should try to convince other possible trading partners that without a policy change in the sanctioned country the future detriment will exceed any short-term economic gain.

If the policy that the sanctioned country wants changed is not critical for the additional trading partners or it is, but they cannot be convinced of such, then the best way to establish policy change is for the sanctioning country to remove a sufficient number of the other potential trading partners from the equation by offering them a better deal. To eliminate the possibility that other countries trade with the sanctioned country, the sanctioning country should negotiate short-term trade agreements with those other partners under the condition that they will not trade with the sanctioned country. These trade agreements should have similar structures and product movement that would be seen between the partner in question and the sanctioned country. Note that only enough trading partners need to be neutralized so that the sanctions will negatively affect the economy of the sanctioned country. Of course such trade agreements will probably increase the total cost of the sanctions for the sanctioning country as well, so the policy change that is being targeted must continue to exceed these costs in overall benefit. Fortunately these trade agreements also may mitigate some of the job loss and capital loss from ceasing trade with the sanctioned country.

In the end even if the proper allies are created, the overall policy change goal when considering the ramifications of the economic sanctions must be rational. A good example of an irrational goal is a portion of the goal involving the economic sanctions placed on Iraq by the United States. Part of the reasoning behind the economic sanctions was to induce rebellion in the Iraqi populous in order to overthrow Saddam; however, such a revolution is improbable when your rebels are sick and dying because they are not getting enough food and medicine because of the economic sanctions placed on their country. Remember that product distribution regarding economic sanctions will typically go from top to bottom. The have-nots will be hurt more often and more severely than the haves. Hence planners need to keep these realities in mind when determining goals for economic sanctions.

Overall before embarking on a proposal to engage economic sanctions against another country it would be wise to consider the following factors:

1. Make sure the eventual policy change goal of the economic sanction is rational and attainable;
2. Ensure enough economic clout to negatively affect the economy of the target country;
3. Neutralize other possible trading partners by convincing them that it is in their best interest to join the sanction or by entering into short-term trade agreements to neutralize the economic gain from trading with the sanctioned country;
4. Immediately cease trade with the sanctioned country as the faster and more forceful the disconnect the greater the probability that the sanction will work at a reasonable cost to the sanctioning country;
5. Do not be afraid to negotiate with the sanctioned country after a fixed period of time under the sanction, the policy change goal does not need to be all or nothing;

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