A Political Theory of Economic Statecraft

Abstract

When can economic sanctions and incentives achieve important political objectives? Why do they often fail? We propose a political theory of economic statecraft, arguing that the success of economic statecraft does not depend on the magnitude of its economic effect. Instead, it succeeds when the economic pain or gain it engenders translates into political costs or opportunities. We argue that the political effects of economic signals will depend on a variety of international and domestic political factors, the most important of which is the target state’s level of stateness, comprised of three components: autonomy, capacity, and legitimacy. When economic statecraft motivates key domestic coalitions to push for policy change, high stateness enables target state leaders to resist their calls and defy the sender. Conversely, when economic statecraft convinces target leaders that they ought to comply with the sender’s demands, high stateness enable them to overcome domestic opposition to compromise. To evaluate the usefulness of our theory, we employ a plausibility probe, testing our approach against three leading alternatives (the realist, economic liberal, and domestic conditionalist approaches) with case studies of Western economic incentives to Hungary and Romania after the Cold War and Indian sanctions against Nepal in the late 1980s. The literature on economic statecraft suffers from two important limitations. First, despite Baldwin’s (1985) observation that various forms of economic statecraft follow a similar logic and Hirschman’s (1980) assertion that economic incentives influence states because of the possibility they create for future economic sanctions, the existing literature treats economic sanctions and economic incentives as analytically distinct. Second, much of the literature consists of a rather sterile debate about whether economic sanctions or incentives can achieve important foreign-policy objectives, with less attention to the more policy-relevant issue of when and under what conditions economic statecraft can achieve these goals (Blanchard and Ripsman 1999).