THE INTERNATIONAL LAW AND ECONOMICS OF COERCIVE …

Applied Econometrics and International Development Vol. 16-1 (2016)

THE INTERNATIONAL LAW AND ECONOMICS OF COERCIVE DIPLOMACY: MACROECONOMIC EFFECTS AND

EMPIRICAL FINDINGS Christopher E.S. WARBURTON*

Abstract This paper empirically investigates the actual and probable macroeconomic effects of economic sanctions (coercive diplomacy) within the framework of international law. It considers the performance of critical macroeconomic variables before and after the imposition of sanctions. The methodology of this paper incorporates risk tolerance (probabilities) in order to report probabilistic and real outcomes when targets become noncompliant. For a select number of countries with a history of exposure to sanctions, this paper finds that states that are willing to accommodate the economic risks imposed by senders are not likely to increase national income and human welfare. JEL Classification: F13, F17, F51, F53, K33, K42 1. An introduction to the international law of war and peace International law exists because nations have willingly agreed that it is in their best interest to establish rules and regulations in order to improve and safeguard their political and socio-economic relations with one another. Of course, the willingness to cooperate with others for a common good is occasionally misperceived as a renunciation of sovereignty. On the contrary, the manifestation of the willingness of states to freely exercise their sovereign right is a preservation and extension of such a right for the collective benefit of states. In effect, the sovereign willingness to cooperate with others for a common good or in a manner that is not injurious to others does not imply an abdication of the obligation to exercise political and economic authority within a defined geographic territory or region.

The sources of international law and the defined competence of the International Court are stipulated in The Statute of the International Court of Justice:

“1. The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply: a. international conventions, whether general or particular, establishing rules expressly recognized by the contesting states; b. international custom, as evidence of a general practice accepted as law; c. the general principles of law recognized by civilized nations; d. subject to the provisions of Article 59 [willingness of parties to accept the decisions of the Court], judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law. 2. … [T]he power of the Court to decide a case ex aequo et bono, if parties agree thereto.” (Article 38.)

* Christopher E. S. Warburton, Ph.D. Department of Economics, East Stroudsburg University, PA, USA. Email: [email protected]


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States have obligations to one another for at least two essential reasons: (i) fundamental rights and (ii) consent.

The theory of fundamental rights draws inspiration from a state of nature—a prototypical condition—that existed before men formed themselves into political communities or states. Inalienable rights of men were transferred to states as a basis for international interaction. The acquired rights of states include (i) self-preservation, (ii) independence, (iii) equality, (iv) respect, and (v) intercourse (Brierly, p. 49).

The theory of consent belongs to a highly regarded genre of positive law, which argues that states have obligations to adhere to the rules by which they have consented to be governed. There are two subsidiary considerations or principles: (i) binding obligations (pacta sunt servanda) and (ii) a fundamental change of unforeseen circumstances that will incapacitate a nation from adhering to its declared obligation (rebus sic stantibus).1

When offending nations (parties) violate their international obligations, the recourse to resolution is paradoxically dichotomous. For their collective self-defense, the international community must choose between the preferred pacific settlement of dispute, which may be less hostile but coercive, and war. War (belligerent coercion) has hardly been the preferred instrument of foreign policy for the greater part of the nineteenth and twentieth centuries.2

The legal or official renunciation of war as an instrument of foreign policy is nothing new. On the 27 of August 1928, the perennial French Foreign Minister, Aristide Briand, proposed that France and the United States use the renewal of the Franco–American Treaty of 1908 to create a structured environment for the renunciation of war as an instrument of foreign policy. In 1928, Aristide Briand and the US Secretary of State, Frank B. Kellogg, agreed to formulate what became known as the Kellogg–Briand Pact. The Pact, which became a controversial instrument of international diplomacy, was supposed to have outlawed war as an instrument of national policy. It underscores two overriding objectives: (i) the enhancement of human welfare and (ii) the condemnation of war as a mechanism for resolving

1 Modern treaty provisions affirm the obligations of states to adhere to commitments in good faith. For example, Article 26 of the Vienna Convention on the Law of Treaties (1969), entitled “Pacta sunt servanda,” requires every treaty in force to be binding upon the parties, who must also perform their obligations in good faith. In the Fisheries Jurisdiction Case (1973), the International Court of Justice (ICJ) observed that: “In order that a change of circumstances may give rise to a ground for invoking the termination of a treaty it is also necessary that it should have resulted in a radical transformation of the extent of the obligations still to be performed. The change must have increased the burden of the obligations to be executed to the extent of rendering the performance something essentially different from that originally undertaken.” In effect, changes in circumstances must be significant in order to adversely alter the preconceived and shared expectations of treaty provisions. 2 The nineteenth-century European Congress System was an international effort to attain widespread political and economic stability in Europe. The Congress of Vienna (1814–1815), which met after Europe had been convulsed by twenty-five years of war and social ferment, operated on the principles of balance of power and restorative legitimacy to obtain lasting peace. Yet, as the Secretary of the Congress, Freidrich von Gentz, noted: “The real purpose of the Congress was to divide amongst the conquerors the spoils taken from the vanquished” (Ferguson and Brunn, p. 643). There were other congresses, for example, The Congress of Aix-la-Chapelle (1818), The Congress of Troppau (1820), The Congress of Laibach (1821), and The Congress of Verona (1822).

Warburton,C.E.S. The International Law And Economics Of Coercive Diplomacy: Macroeconomic Effects

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international disagreements or disputes. The High Contracting Parties agreed that the settlement or solution of all disputes or conflicts of whatever nature or of whatever origin they may be, which may arise among them, shall never be sought except by pacific means (Article II).3 Notwithstanding the well-intentioned ideals of the Pact, it was never comprehensive enough to preemptively thwart the inclination to international belligerence.

The interregnum was turbulent but portentous. Just before the Second World War broke out, The Covenant of the League of Nations encouraged members to pursue the peaceful settlement of disputes and to accept the rules of international law as they were published and interpreted by the International Court at The Hague. The most significant clause of the Treaty was the Sanctions Clause (Article XVI), which called for military action or the implementation of economic sanctions against any aggressive member. The members generally agreed to respect and preserve the territorial integrity and independence of other states, and considered war or threat of war to be a matter of concern to the entire League. However, the League suffered from natural and inherent weaknesses, including its inability to resolve international disputes between the major powers.

The United Nations, whose procedural and substantive arrangements replaced those of the demoded League, inherited some fundamental principles of law and structural difficulties for resolving international disputes. The UN Security Council acquired indisputable authority to determine the existence of any threat to the peace, breach of the peace, or act of aggression in order to make recommendations or decide when to use armed forces or when to partially interrupt the economic and diplomatic relations of nations (UN Article 39). But, like the League of Nations, the United Nations is susceptible to paralysis when disputes arise between major powers of the Security Council that have procedural and substantive veto powers.

The manner in which nations can severally or collectively use force as an instrument of foreign policy are enumerated in Chapter VII of the UN Charter. As an order of preference, “[a]ll Members shall settle their international disputes by peaceful means in such a manner that international peace and security, and justice, are not endangered” (UN Article 2.3). Analogously, “[a]ll Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations” (UN Article 2.4).

Although it is not unusual for there to be controversy over the precise meaning of “use of force,” there seems to be general agreement that the expression is indicative of armed force (Brierly, p. 415). This interpretation is inextricably linked to the preamble of the UN Charter, which calls on all Members to refrain from the use of force in their international relations with other Members in a manner that is inconsistent with the purpose of the United Nations.

3 Participants included the President of the German Reich; the President of the United States; the King of Belgium; the President of the French Republic; the King of Great Britain, Ireland, and the British Dominions; the Emperor of India; the King of Italy; the Emperor of Japan; the President of Poland; and the President of Czescholovakia.


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Three fundamental principles characterize the just use of force (bellum justum): (i) breach or threats to peace and security, (ii) self-defense, and (iii) authorization of the use of force (see also Slomanson, p. 477).4 Inherent in these principles are interwoven complexities. For example, could the Security Council prevent the authorization of wars of self-defense by lack of qualified support of any of the permanent members? The Charter does not abridge the right of self-defense. Abridging the right of self-defense or subjecting it to the permission of the Security Council would prevent states from justly defending themselves against aggression (Rostow, pp. 510–516).

In the absence of war, the objectives of diplomacy are fourfold: (i) mapping out a clear and realistic articulation of objectives to prevent total war; (ii) successfully assessing the objectives of other nations and the actual or potential power available for the pursuit of their objectives; (iii) understanding the extent to which the objectives of other nations are compatible with each other; and (iv) developing an appropriate means to attain the objectives of diplomacy (Morgenthau, p. 361). A coercive form of diplomacy is legitimized by UN Article 41. While Article 41 does not specifically mention the word “sanctions,” it lists specific and unambiguous measures to be taken that are nonforcible sanctions (coercive diplomacy). Evidently, the list of actions to be taken under UN Article 41 of Chapter VII is by no means exhaustive:

“The Security Council may decide what measures not involving the use of armed force are to be employed to give effect to its decisions, and it may call upon the Members of the United Nations to apply such measures. These may include complete or partial interruption of economic relations and of rail, sea, air, postal, telegraphic, radio, and other means of communication, and the severance of diplomatic relations.” (UN Article 41.)

This paper has been specifically structured to examine empirically the law and economics of economic coercion. The rest of the paper is structured to reflect (i) a brief overview of the conversation in the sanctions literature; (ii) the theoretical assumptions and redistributive effects of coercive diplomacy; (iii) an empirical evaluation of risk tolerance under assorted multilateral actions; and (iv) a report of the empirical findings at the end of the paper. 2. An overview of the sanctions literature The legal foundations for the implementation of coercive diplomacy can be classified under five broad categories: (i) conflict resolution, (ii) nonproliferation, (iii) counterterrorism, (iv) democratization, and (v) preservation of human rights, including

4 The first Gulf crisis involving the invasion of Kuwait by Iraq espoused the interwoven complexities of the breach of international peace and territorial integrity under UN Article 2.4, collective self-defense under UN Article 51, and authorization of all means necessary to revert to the status quo antebellum guaranteed by Chapter VII. See UN Articles 42 and 51; see also Schacter and UN Security Council (UNSC) Resolution 678. UN Article 41 provides a broad range of options for collective action authorized by the Security Council. For example, apart from economic sanctions, the Article has been used to create international tribunals and Compensation Commission such as The International Criminal Tribunal for the Former Yugoslavia, The International Criminal Tribunal for Rwanda, and The UN Compensation Commission.


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protection of civilians. Yet senders may pursue more general objectives by signaling, constraining, and coercing targets5 (UN Security Council (UNSC), 2013).

Preliminary data gathered from a multiyear project by the Targeted Sanctions Consortium indicate that UN-targeted sanctions over the past two decades have been effective on average 31% and that the degree of their effectiveness are contingent on the purposes of those sanctions.

Coercing is effective 13% of the time and ineffective 62% of the time. Constraining is effective 42% of the time and ineffective 43% of the time. Signaling is effective 43% of the time and ineffective 25% of the time. The omitted percentages for each category indicate mixed results (Biersteker, Eckert and Tourinho, 2012).

Sanctions that are intended to terminate hostile conflicts include those on Somalia and Eritrea 751/1907, Liberia 1521, the Democratic Republic of the Congo (DRC) 1533, Côte d’Ivoire 1572, and Sudan 1591. It is noteworthy that the sanctions generally reflect responses to intrastate conflicts that threaten human welfare and interstate or regional stability. The hostility-induced sanctions have three basic objectives: (i) to weaken the target(s) or enable their military defeat, (ii) to facilitate a negotiated settlement by inducing the target(s) to engage in mediation (for example, DRC and Sudan regimes), and (iii) to reinforce the implementation of a peace agreement (for example, the Liberia regime). Of course, as the nature of a conflict becomes dynamic or amorphous, UN sanctions may also evolve in scope and demands. For example, a sanctions regime may be initially imposed with the objective of facilitating mediation after which it could then shift to enabling the military defeat of one party to the conflict (for example, Côte d’Ivoire and Somalia regimes). Conversely, an initial strategy of coercion that is intended to terminate a war can change to a negotiated settlement (for example, the Taliban regime). Admittedly, these distinctions can be imprecise when a conflict resolution strategy becomes confusing.

States that have been subjected to nonproliferation sanctions include the Democratic People’s Republic of Korea (DPRK) 1718 and Iran 1737 regimes.6

5 The signaling approach, which is the mildest of the available options, presupposes that targets must be engaged in a subtle and effective manner that does not cause significant material damage to their economies or welfare; under it, no significant burden is imposed on targets. Constraining sanctions expressly seek to incapacitate the intended targets by materially limiting their capabilities to act. The virtually uncompromising positions of senders and targets usually make the constraining sanction a much more attractive option. Like the signaling objective, targets are expected to change undesirable policies in favor of much more conciliatory or acceptable ones. The compliance of targets may determine political defeat or sometimes facilitate the free movements of the targets. Coercive sanctions are generally intended to alter the risk (cost-benefit) calculus of targets as a result of the actual and material economic damages that are likely to be inflicted on targets. The intransigence of targets make it more realistic for senders to forcefully demand the change of undesirable policies (see also Giumelli, pp. 18–19). 6 Previous nonproliferation sanctions regimes include the South Africa 418 and Iraq 661 regimes. Mandatory sanctions—sanctions imposed by the UN Security Council—were imposed on the DPRK with resolution 1718 of October 14, 2006, following its October 9, 2006 nuclear weapons test. See UNSC, 2013 for the relevant demands on the DPRK and Iran. It is mandatory for UN members to comply with Security Council actions under Articles 39 and 41 of the UN Charter. Resolutions that do not constitute a decision but call on states to make voluntary decisions are not mandatory under Article 25 of the UN Charter. Since it is incumbent on all UN members to carry out the decisions of the Security Council under Article 25, conflicts between municipal and international law do not release members from their treaty obligations. In reality, though it is difficult to advance the theory that failure to comply constitutes a “threat to peace”


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Resolution 1737, which was an extension of voluntary Resolution 1696, indicates that there was a lack of compliance with the expectations of the Council and the International Atomic Energy Agency (IAEA). Assurances could not be provided that there was no undeclared nuclear material in Iran.

Sanctions against terrorism (counterterrorist sanctions) are pointedly designed to force state sponsors of terrorism to stop providing the infrastructure for terrorist activities. The first two counterterrorism UN sanctions regimes were Libya 748 (1992–2003), in response to the bombing of Pan Am flight 103 in 1988 and UTA flight 772 in 1989, and Sudan 1054 (1996–2001), for alleged complicity in an attempted assassination of President Hosni Mubarak of Egypt in 1995. Other counterterrorism regimes include Al-Qaida 1267, territorially linked to Afghanistan, and Lebanon 1636.

Unlike counterterrorism regimes, democratization regimes are intended to promote representative government and prevent the usurpation or seizure of political power. Although the first two UN sanctions regimes on Southern Rhodesia and South Africa were not characterized in terms of democratization per se at the time, the right to popular representation was integrally subsumed in them. A comparatively recent regime is Resolution 2048, in response to the April 2012 military coup d’état in Guinea-Bissau. Regimes that foster democratization may also constrain the ability of former officials or loyalists to destabilize bourgeoning democratic systems.7 However, McGivillray and Stam (2004) find that democratic states may be more resistant to sanctions than nondemocratic states because of their obligation to a large coalition of domestic supporters.

Several sanctions could now be designated as regimes for the protection of human rights under international humanitarian law. These regimes include Somalia 751 (1992), DRC 1533 (2004), Côte d’Ivoire 1572 (2004), Sudan 1591 (2005), and Libya 1970 (2011). The Libya 1970 (2011) regime is seemingly the first UN sanction regime to have stated at the outset—unequivocally, explicitly, and outright—that the need for human security is a fundamental objective. Adopted on February 26, 2011, the preambular paragraphs of Resolution 1970 specifically allude to “violence and use of force against civilians,” “gross and systematic violation of human rights,” “widespread and systematic attacks” that may constitute crimes against humanity, and the need to “hold to account those responsible for attacks, including by forces under their control, on civilians.”8

O’Connell (2002) succinctly summarizes the evolution and contending perspectives of the sanctions debates. Some of the arguments that are generally critical of the prototypical sanctions of the 1960s question the authority of the Council to impose crippling comprehensive sanctions of mass destruction. The ultra vires question remained the central issue until the end of the Cold War. But the shift to comprehensive regimes can be construed as symptomatic failures of voluntary regimes. The post-1990s witnessed a potpourri of options, including the sensitivity to human

under the provisions and language of Chapter VII, such a failure might have retaliatory consequences; see Lowenfeld, pp. 713–714. 7 See Resolution 1518 concerning the state of affairs in Iraq in 2003. 8 See UNSC, November 2013, p. 5.


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welfare after the imposition of sanctions.9 Yet the issue of proportionality remains an uneasy phenomenon.

After the UN Security Council imposed voluntary sanctions on the apartheid regimes of South Africa (1963) and Southern Rhodesia (1965), a general and consequential theory of sanctions was introduced by Galtung (1967, p. 379). The initial theory was based on the actions initiated by one or more international actors (senders) against one or more receivers/targets with either of two purposes or both: (i) to punish the receivers/targets by depriving them of some value and (ii) to make the receivers conform with certain norms that the senders deem important in the matter of Rhodesia (Zimbabwe). Baldwin (1985) later characterized the sender-target relationship as coercive diplomacy designed to induce a target country to change a policy it would not otherwise change without some form of coercion.

Sanctions have evolved with multifarious purposes and tactics since the 1960s and by the 1990s the world witnessed a proliferation of targeted sanctions within the context of intrastate conflicts; for example, 751 Somalia (1992–present), 788 Liberia (1992–2001), 820 Yugoslavia (1993–1996), 864 Angola (1993–2002), 918 Rwanda (1994–2008), 1132 Sierra Leone (1997–2010), and 1160 Kosovo (1998–2001) sanctions regimes.

The targeted sanctions represented a significant tactical innovation for the Security Council and were prompted at least in part by the perceived drawbacks of comprehensive sanctions, particularly with respect to their adverse humanitarian impact and a lack of precision in targeting those who had most threatened international peace and security.

Although the Security Council first recognized in Resolution 326 (1973) “the special economic hardships” confronting a member state (Zambia) as a result of the comprehensive sanctions imposed on Southern Rhodesia, it was only in 1995 when all permanent members definitively recognized that “further collective actions in the Security Council within the context of any future sanctions regime should be directed to minimize unintended adverse side-effects of sanctions on the most vulnerable segments of targeted countries” (S/1995/300).10

The diversification of sanctions regimes posed empirical challenges to research, and in the 1990s scholarly work morphed into an assessment of the effectiveness of sanctions (O’Connell). One conceptual innovation in the evaluation of sanctions has been the recognition that the targets, objectives, types of sanctions and context of sanctions regimes often change over time. As a result, Eriksson (2011) argues that rather than the subject of analysis being an entire sanctions regime, it can instead be broken down into distinct episodes or phases, understood as periods where

9 The obvious outcome of sweeping and comprehensive sanctions that result in loss of national income is the inability to import essential goods even when such goods are exempted from international trade restrictions. The Oil for Food Program in Iraq was essentially intended to deal with the humanitarian disaster of comprehensive sanctions. See Jentleson (2000); see also Gordon (2013) for an analysis of the humanitarian crisis in Iraq. 10 Op. cit., p. 3. While resolving intrastate conflict remains a common objective, targeted sanctions have been used for nonproliferation, counter-terrorism, democratization and protection of human rights.


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the targets, objectives, types of sanctions and context of sanctions remain essentially unchanged. Breaking down sanctions regimes into these distinct episodes might allow for a more nuanced analysis of effectiveness as well as a better understanding of how a regime has evolved over time (UNSC, p. 15).

Hufbauer et al. (2007) use the first recorded episode to date sanctions. An episode ends when a sender or receiver changes a policy in a significant way or when the campaign withers away. They use the measurement of success as a component variable of four parts. Sanctions must have contributed at least modestly to an index of success. This leads to a 54% success rate. Complete failure of sanctions = 1; limited failure = 2; limited success = 3; extensive success = 4. Eriksson suggests that the scoring criteria could be problematic (Eriksson, p. 44). The composite dependent variable (a measure of success) does not necessarily isolate the sanctions contribution of explanatory variables, thereby causing some endogeneity problems.

According to Charron (2011), until the late 1990s, UN sanctions had little impact. Between 1945 and 1990, only two mandatory embargoes were imposed globally, on Rhodesia and South Africa. However, since 1990 there have been at least about twenty-eight mandatory cases of sanctions—and two voluntary ones—with a greater proportion on African states (Vines, 2012).

The literature extensively reflects a bifurcated assessment of sanctions, the negative perspective of those who find sanctions to be ineffective for dealing with unwanted behavior and a positivist or revisionist category (Eriksson, pp. 9–10). Whether or not sanctions work has been a recurring question. According to a widely cited study of bilateral, regional, and international sanctions based on 174 cases from 1914 to 2000, there seems to be partial evidence that sanctions are “at least partially successful” 34% of the time (Hufbauer et al. 2007, p. 158). Knorr (1977) finds that sanctions clearly failed in thirteen of the seventeen cases he studied. But very apparent reasons could cloud the real effects of sanctions (Pape, 1997). Of course, the measurements of the efficacy of sanctions are also dependent on the assumptions, criteria, benchmarks, and data that are used (see Smith, 1996). Basic typology regarding the multiple (and often coexisting) purposes of UN sanctions are noteworthy paradigms of coercing, constraining, and signaling target behavior.

In reality, international law has not provided any comprehensive threshold for what should be considered an unduly long imposition of sanctions (see UN Charter, Article 41), except of course, that the Security Council is granted the authority to determine whether economic sanctions are inadequate (Article 42). Though the literature provides interesting empirical and comparative analysis of the duration and efficacy of sanctions, a legally deterministic metric of a generally acceptable duration is subjective and elusive. However, without complete compliance, the willingness of senders or targets to flinch has become an expedient metric for empirical and policy-oriented reasons. The metric provides an opportunity for recalibration and reconsideration of marginal progress to attain a desired political outcome.

The argument that economic sanctions do not work implicitly suggests that they do not have “immediate” political effect on targets. This argument does not necessarily incorporate the long-term destabilizing effects of economic sanctions, including poor economic investment and growth. At a very fundamental level, the imposition and maintenance of economic sanctions regimes cause mutually beneficial


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trade to give way to the welfare-degrading effects of sanctions. The literature invites some probative issues.

This paper empirically investigates the actual and probable macroeconomic effects of economic sanctions (coercive diplomacy) within the framework of international law. It considers the performance of critical macroeconomic variables before and after the imposition of sanctions. The methodology of the paper incorporates risk tolerance (probabilities) in order to report probabilistic and real outcomes when targets become noncompliant. For a select number of countries with a history of exposure to sanctions, the paper finds that states that are willing to accommodate the economic risks imposed by senders are not likely to increase national income and human welfare. The next section discusses the macroeconomic theory of coercive diplomacy.

3. The macroeconomics of coercive diplomacy Extended periods of broad-based multilateral economic sanctions have some very apparent macroeconomic consequences: (i) the reduction of the volume of international trade (exports and imports), (ii) the adverse affect upon a targeted country’s terms of trade (the ratio of the exported price index to imported price index), (iii) the depreciation of the targeted country’s currency which then becomes susceptible to destabilizing speculation, and (iv) the likely deterioration of the targeted country’s general welfare and investment therein. Consider the top segment of Figure 1, which depicts the offer curves of a targeted (sanctioned) domestic nation (D) and its multilateral trading partners (F).` Figure 1: The Comprehensive Sanctions Regime and Local Currency Valuation

The offer curve (reciprocal demand curve) of a country shows the quantity of

imports and exports that a country is willing to purchase and sell on the world market at all possible relative prices under normal conditions. The curve is convex in the


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direction of a country’s comparative advantage (domestic exports) and domestic imports and exports are indicative of the willingness of foreign countries to supply aggregated exports and collectively demand (imports) goods and services respectively.

It can be shown that the unwillingness of foreign countries to trade will have detrimental effects on a target country. The rotation of a country’s offer curve away from its export potential shows reduction in exports. Under normal circumstances, movement in the opposite direction shows willingness to trade because an individual country is willing to export more of its goods for its imports at each of a variety of possible terms of trade.

However, when a sanctions regime is imposed on a target country, apart from the export of essential goods, the international community may or may not be uniformly willing to trade with a target country. Target states incorporate such thinking into their reaction functions. The political and economic demands of senders are generally purposeful and evident: (a) the reversal of an unacceptable political or economic policy, (b) the reduction of international trade (the volume of exports and imports) with the offending parties in order to reduce the national income of offending states, (c) a reduction in the terms of trade or relative prices of currencies, (d) the discouragement of foreign investment, and (e) the fomenting of political turmoil and/or the realization of economic changes.

The salient economic arguments are depicted in Figure 1. The foreign offer curve rotates from F1 to F2, indicating a reluctance or unwillingness to trade. The domestic offer curve rotates from D1 to D2 not because a domestic country is naturally unwilling to trade, but because the domestic country has been coerced to export less. Implicitly, though an offending (target) country might be willing to export more goods, services, and assets, it cannot do so because of multilateral restrictions placed upon it.

Realistically, the desired effects of sanctions are contingent on the voluntary or comprehensive responses of senders. The cumulative effects of sanctions could effectively reduce the terms of trade on a target nation from PXD/PID1 to PXD/PID2 only if the decline in foreign exports (and therefore the decline in domestic imports) is disproportionately greater than the reduction in domestic exports; where PXD/PID is the relative price of domestic exports to domestic imports. In effect, a sanctions regime must have punishing effect through the foreign export channel more so than the domestic export channel if the terms of trade should be adversely altered. International exports fall from 0-ID1 to 0-ID2, while domestic exports from the targeted country are reduced from 0-XD1 to 0-XD2. The targeted country accumulates tradable inventory of the magnitude XD2 to XD1, although it could have actually increased exports from 0XD2 to 0XDλ at the new relative price line PXD/PID2 under mutually beneficial normal conditions (without the sanctions regime).11

As a result of the new multilateral conditions, the shortfall in international trade affects the value of the local currency unit of the targeted country through the income transmission mechanism and availability of convertible foreign currency. Consider the lower panel of Figure 1. The reduction in the demand for the exports of the targeted country reduces the demand for its local currency and causes the supply of

11 See Appleyard et al., pp. 104–114, for further analysis of offer curves and terms of trade.


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foreign currency (SF) to shift inwards from SF1 to SF2. If the values or attributes of other macroeconomic variables do not change significantly, including the inability to sterilize, the imposition of a sanction regime is likely to cause a depreciation of local currency.

As the quantity of convertible foreign currency supplied falls from 0-SF1 to 0-SF2, the value of the domestic currency depreciates from ε1 to ε2; where the exchange rate, ε, is defined as the ratio of the local currency unit to foreign currency. Of course, the magnitude of depreciation will depend on the elasticity of the supply of and demand for foreign currency. The more inelastic the demand and supply, the greater the size of the depreciation. The depreciation causes imports to be much more expensive, thereby setting the preconditions for inflationary pressures ex post. Although exports are hypothetically supposed to be relatively cheaper, the coercive export restraint (CER) imposes much more stringent (contractionary) conditions on the ability to earn convertible foreign currency, and targeted countries become susceptible to stagflation, unrest, and rebellion. The effects of CER are much more effective when plutocrats, oligarchs, and autocrats are targeted because of their ability to redistribute income to their advantage. This situation poses additional problems because there is a trade-off between the effects of proportionality and the effects of comprehensive sanctions. An analysis of the redistributive conundrum follows. 3.1 The redistributive conundrum: when are economic sanctions effective? From the preceding discussions, it is plain to see why comprehensive sanctions have far more detrimental macroeconomic effects on targets than do targeted sanctions. In this regard, the sanctions literature is generally consistent with economic theory and rational expectations. Yet, from a humanitarian (normative) point of view, comprehensive sanctions are generally impractical and inhumane, especially in countries that do not have democratic institutions, though there is a tendency for democratic systems to be equally noncompliant. Consequently, it is impractical for economic sanctions to bring about expeditious changes in policies under mitigating conditions. In reality, the trade-off between normative and punitive positions does not immediately make the use of force a viable alternative to diplomatic coercion. Additionally, the choice of options confronting the UN Security Council is equally contingent on the preconditions for economic sanctions in the first place.

Not surprisingly, it has become practical for sanctions regimes to take under advisement the welfare of babies, children, and the very poor or infirm in targeted countries. The contradistinction of the welfare of the have-nots to the haves who indulge in lives of comfort, opulence, and splendor is usually very apparent. Not surprisingly, in the case of Rhodesia, restrictions on exports and imports were initially limited to specific products.12

The limiting economic effects of sanctions are not peculiar to Rhodesia. The Security Council sanctions on Iraq were hamstrung by the external effects of mandatory sanctions. UNSC Resolution 666 had to consider humanitarian circumstances. In close juxtaposition with UNSC Resolution 666 is UNSC Resolution

12 See UNSC Resolutions 232 (Dec. 16, 1966) and 253 (Nov. 29, 1968) on Southern Rhodesia, and UNSC Resolution 1737 (2006), which calls on member states, inter alia, to freeze the assets of particular individuals and companies with ties to Iran’s nuclear programs; see also Lowenfeld, p. 709.


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669, which took into consideration special economic problems arising from preventive or enforcement measures taken by the Security Council in connection with transportation restrictions. Such mitigating measures are consistent with the provisions of Article 50 of the UN Charter (Schacter, p. 455).

The fungibility of concessions under a sanctions regime is likely to be beneficial to oligarchic plutocrats and not beneficial to the indigent and vulnerable. The Oil for Food Program in Iraq is an obvious manifestation of that reality. Nevertheless, restrictive trade policies have societal costs (welfare loss) that are detrimental to consumers because price distortion introduces imperfection and costs into international market transactions that weigh heavily on the poor. More so, the adverse repercussions of coercive diplomacy are generally magnified by the opportunity and prevalence of corruption that is usually well ensconced in target states. Consider Figure 2 with some loss of generality appertaining to the sizes of economic loss rather than the welfare loss itself. Figure 2: Oligarchic Plutocracy and Income Redistribution: The Theory of Financial Sanctions

The hypothetical autarkic position is defined by point A, where the quantity of

any essential good produced is also consumed. When a nation opens up to competitive trade, there is a lower price level such as P1. Locally produced quantity is QD and the quantity of domestic and foreign goods supplied increases to QD+F1. The imposition of a sanction reduces the supply of the good from SD+SF to SD+SF+λ; where lambda is the sanction or tax effect. The quantity of available goods falls from QD+F1 to QD+F2, causing an increase in the per-unit price from P1 to P2.

Trade sanctions are hardly comprehensive enough to cause significant reversals to the hypothetical pre-trade or autarkic situation (A) of production and consumption. Although total supply decreases from QD+F1 (free trade quantity) to QD+F2 (the sanctioned quantity), the sanctions regime increases domestic production and price from B to C and P1 to P2, respectively.

The increase in domestic production is intended to compensate for the shortfall in foreign imports. In effect, sanctions have internal redistributive effects that are suboptimal. Surplus is transferred from consumers to domestic plutocrats who are also business owners or members of the elitist mercantile class. A reversion to the autarkic (A) situation is not realistic because multilateral coercion cannot effectively eliminate all forms of international trade with noncompliant target countries. Restricted trade of the magnitude SF+ λ should be expected because some states will outright oppose


47

voluntary and mandatory sanctions, or surreptitiously engage in shadow transactions that are beneficial to oligarchs. Policy-makers of target states intuitively incorporate the international fissures into their risk calculus ex ante.

The indiscriminate consequences of sanctions have now been recognized and the measured considerations that have informed the construction of targeted resolutions are responses to that reality. Examples of these resolutions include Resolution 1533 (2012), dealing with the Democratic Republic of Congo, UNSC Resolution 1970 (2011) for Libya, UNSC Resolution 1483 (2003) for Iraq, and non-UNSC US Executive Action and EU Resolutions (2014) for Russia. The targeted category of sanctions includes travel bans (UNSC Resolution 1970), arms embargo, commodity interdiction, and asset freezes (financial sanctions).13

For asset freezes involving Iraq, all States were prohibited from making available to the government of Iraq or to any commercial, industrial, or public utility undertaking in Iraq or Kuwait, any funds or any other financial or economic resources. They were also required to prevent their nationals and any persons within their territories from removing from their territories or otherwise making available to that government or to any such undertaking any such funds or resources. Additionally, they were not required to remit any other funds to persons or bodies within Iraq or Kuwait, except for payments exclusively designated strictly for medical or humanitarian purposes and, in humanitarian circumstances, foodstuffs.14

Following Russian involvement in Ukraine, President Obama issued an executive order (EO) to block the property of any person determined to be owned or controlled by—or to have acted or purported to act for or on behalf of—a senior official of the Government of the Russian Federation or a person whose property and interests in property are blocked pursuant to the EO. In addition, the EO blocks the property of any person determined to have materially assisted, sponsored, or provided financial, material, or technological support for—or goods or services to or in support of—a senior official of the government of the Russian Federation or a person whose property and interests in property are blocked pursuant to the EO.

In the wake of the US reaction to Russian activities in Ukraine, the European Union (EU) has acted multilaterally to issue a list of twenty-one individuals it has identified as responsible for actions that undermine or threaten the territorial integrity, sovereignty, and independence of Ukraine, as well as undermine or threaten persons and entities associated with Ukraine. These individuals have been targeted with a travel ban and a freeze with respect to their EU assets. At the same time, the EU makes every effort to minimize adverse consequences for the civilian population or for legitimate activities (Guimelli). Apart from an evaluation of the economic data that are readily available, this paper takes a look at the probable effects of coercive diplomacy

13 Commodity interdictions prohibit lucrative trade in precious minerals and assets that are sources of robust income and wealth. For example, see UNSC Resolution 1643 (2005), prohibiting the export of diamonds from Côte d’Ivoire, UNSC Resolution 1718 (2006), prohibiting the export of luxury goods to the DPRK, and UNSC Resolution 2036 (2012), prohibiting the export of charcoal from Somalia. 14 See UNSC Resolution 661 (1990), see also UNSC 2048 (2012) in the matter of Guinea-Bissau and UNSC Resolution 1532 (2004) on Liberia.


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for a selected number of countries with different preconditions for the imposition of sanctions. The empirical framework of this paper is presented in the next section. 4. Evaluating coercive diplomacy and macroeconomic risk tolerance: a

methodology The extended empirical work of this paper confronts two empirical challenges: (i) the paucity of available data prior to the imposition of sanctions in the 1960s and (ii) the different conditions for the imposition of sanction regimes as time progresses. These considerations have determined the case studies (subjects of inquiry) included in this paper and scope of inquiry of this paper. The fundamental objective has been to ensure that that there is no missing value or data point. Sanctions that were imposed in the twenty-first century provide the required data for ex ante and ex post econometric analysis. Two econometric techniques have been utilized: (i) an estimation of the probability that national income per capita will rise or fall as a result of risk tolerance and effects of sanctions and (ii) a descriptive assessment of available data from 1960 to 2013. While the first objective is totally successful, not every data point was available for the second objective, partly because some of the states received independence after 1960 and partly because of unknown reasons.

The preferred methodology for the first objective avoids the numerous problems that are associated with pooling countries that have heterogeneous characteristics and different reasons for the imposition of sanctions over different time periods. The effects of the risk calculus of each country are estimated uniquely by time series data that have been obtained from the World Bank’s World Development Indicators. Four countries are of interest: (i) Iran, for the friction over its nuclear program; (ii) Liberia, for military coup and political instability (threat to peace); (iii) Rwanda, for internal turmoil, threat to international stability, and genocide; and (iv) Sierra Leone, for military coup and human rights violations. The Iranian situation is somewhat unique because Iran had a number of sanctions imposed on it before the sanctions that were imposed by the UN Security Council.15 With the exception of Iran, the sampled countries are generally unique for the paucity of sanctions imposed against them, which provides excellent opportunities for ex ante and ex post analyses.

The time series data for this research are balanced to reflect an equal number of observations both before and after the imposition of sanctions. Accordingly, a reasonable amount of information (less than superfluous) on the performance of national income has been collected before the imposition of sanctions. The data on Iran span nineteen years—almost two decades before the 1995 sanction—and the sample runs from 1976 to 2013 to generate thirty-eight balance observations.

Sanctions were variously imposed on the other sampled countries: Liberia (2003–2014), Rwanda (1995–2008), and Sierra Leone (1997–2010). The samples presuppose that there are long outside (response) lags to macroeconomic performance

15 Numerous governments and multilateral entities imposed sanctions on Iran. After the Iranian Revolution of 1979, the United States imposed sanctions against Iran and expanded them in 1995 to include firms dealing with the Iranian government. It was not until 2006, after the Iranian government refused to suspend its uranium enrichment program, that the UN Security Council passed Resolution 1696. US sanctions initially targeted investments in oil, gas, petrochemicals, exports of refined petroleum products, and business dealings with the Iranian Revolutionary Guard. Broad financial sanctions impinge on the banking sector (central and commercial) shipping, and commercial web-hosting services.


49

after the imposition of mandatory sanctions. Thus, the sample for Liberia is from 1992 to 2013, Rwanda from 1976 to 2013, and Sierra Leone from 1980 to 2013.

Since the targets typically tolerate a level of macroeconomic risk that is probabilistic and partly contingent on a perception of domestic politics and fissures among senders,16 the preferred method of the effects of macroeconomic risk is the Binary Logit of the quadratic hill climbing variety (maximum likelihood); where 1 is for the probable effects of a sanctions regime on national income and welfare and 0 otherwise. National income is measured in per capita terms at 2005 US dollars for comparative reasons and to track the effects of inflation. The consideration of risks, unlike uncertainties, subsumes random outcomes with known or estimated probabilities. Equation 1 defines the Binary Logit or linear probability model:

Xe

XeL1

; (1)

Xe

tPtP

Xe

XeLt 11

1 ; (2)

where L is the log of odds, e is the usual natural logarithmic expression, α is a parameter (say an average value of income), the Xs are the odds of events occurring, and is a binomial error expression that reflects the sample sizes and non-normal assumptions. The corresponding probability (Pt) of an event occurring can be extrapolated from Equation 1:

XetP

tP

Xe

XePt 11

11

11 . (3)

Eviews 7 (2009) by Quantitative Micro Software has been used to estimate the probabilities of increasing national income in the aftermath of coercive diplomacy. The results of the empirical estimates are reported in Table 1.

5. Empirical findings The probability that sanctions regimes will increase national income after the imposition of sanctions is not generally promising for targets that want to prolong the punitive decisions of senders. This finding is generally consistent with Figure 1. The results generally show that for every year that a sanction is imposed, there is zero probability that sanctioned national income will significantly increase as economic activity is undertaken. This finding is generally consistent with trade theory and the welfare-enhancing effects of international trade. The result for Rwanda is not as robust and significant as one might expect, but the estimated standard error is extremely low. he Rwandan finding is instructive for a variety of reasons. It suggests that the effects of sanctions could rapidly dissipate in a post-sanction period if and when economic growth is robust (see Table 2). Of the countries considered in the sample, Rwanda has conducted macroeconomic activity in the longest post-sanction period. It has also recorded the lowest inflation rate (as measured by the GDP deflator) for the periods

16 Also consider the hypothesis that a democratically elected leader who resists pressure from foreign sanctions does so with the support of a large coalition of domestic supporters. For these actors, the benefits of the leader’s policy choices will seem to outweigh the costs imposed by foreign sanctions; see also McGivillray and Stam (2004).


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2001 to 2010 and 2011 to 2013. Its exports as a percentage of GDP increased from approximately 10.4% (for the period 2001–2010) to 14.7% (for the period 2011–2013). Liberia and Sierra Leone are below their pre-crisis levels although incomplete data suggest remarkable levels of economic growth. Iran’s exports as a percentage of GDP (for 2001–2010) fell below the 1971–1980 level of approximately 31.7%.

Table 1: Probability of Increasing National Income and Welfare After Coercion Country Observation Probability Standard Error Signif.(p-value)

Iran 38 0 0.001 0.0086* Liberia 22 0 0.012 0.0169* Rwanda 38 0 0.007 0.1269 Sierra Leone 34 0.01 0.006 0.0960**

* Evaluated at the 95% level of significance. ** Evaluated at the 90% level of significance. For every year of coercive diplomacy national income decreased by 1%.

Table 2: Performance of Key Macroeconomic Indicators (1960–2013 averages) Iran (Coercing, US, 1979 , UNSC2006 -)

1960–70 1971–80 1981–90 1991–00 2001–10 2011–13 GDP Growth 11.2597* 3.85368 2.384979 3.787488 5.213613 0.066667 Exports/GDP 17.66393 31.65364 11.33328 20.49656 28.71562* NA Inflation 0.603278 1.813683 8.589284 82.45854 471.7642 NA

Liberia (Coercing, 2003–2014) GDP Growth 4.917378 1.895536 -9.18386 8.838617 8.623051 10.22568 Exports/GDP 61.37347 74.31303 59.42344* 15.06744* 33.80513* 29.93194* Inflation 0.694787 1.129014 1.902104 33.25893 138.713 245.5409

Rwanda (Coercing, 1995–2008) GDP Growth 2.970787* 5.567484 2.090047 3.15795 7.948014 6.448691 Exports/GDP 10.26745 13.05427 9.47816 6.146928 10.39653 14.65974 Inflation 1.74981 5.591277 10.79825 30.70793 63.58729 105.9444

Sierra Leone (Coercing, 1997–2010) GDP Growth 4.281727 2.315042 0.980939 -2.28983 6.697461 13.78452 Exports/GDP 27.8762* 23.67363 20.65019 21.18921 14.13818 16.32368* Inflation 0.009044 0.017851 0.486348 20.28399 95.32264 192.7546

Notes: *Iran’s GDP growth does not include missing values for 1960–64 and its exports data do not include missing values for 1960–64 and 2001–2010. Its deflator also excludes information for 1960–64. The GDP deflator is used to comprehensively measure inflation; where the deflator is a ratio of nominal to real GDP. Liberia’s exports to GDP ratio has been computed without information for 1987–90, 1991–96, and 2013. Rwanda’s GDP growth does not include the missing value for 1960. Sierra Leone’s exports-to-GDP ratio does not include values for 1960–63 and the exports-to-GDP ratio does not include data for 1960–64 and 2012–2013. It must be noted that Liberia, Rwanda, and Sierra Leone became independent in 1847, 1962, and 1961 respectively. Data Source: Worlbank.org: The World Bank’s World Development Indicators (2014) has been used by the author to compute all averages and the author is responsible for all computation.

The Security Council decided to terminate the remaining measures contained in paragraphs 9 and 10 of Resolution 1011 (1995) in 2008 (see UNSC Resolution 1823) and dissolve the Committee established pursuant to Resolution 918 (1994) concerning Rwanda. By its Resolution 1940 (2010), the Security Council decided to terminate the measures set forth in paragraphs 2, 4 and 5 of Resolution 1171 (1998) on 29 September 2010, thereby dissolving the Committee established pursuant to Resolution 1132 (1997) concerning Sierra Leone (UNSC).


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6. Concluding remarks and policy implications This paper empirically finds that coercive diplomacy detrimentally affects macroeconomic performance. From a theoretical point of view, the offer curves indicate that restrictive trade is mutually destructive. Invariably, the international law of coercive diplomacy has reasonably evolved over the years to consider carefully the normative or humanitarian effects of comprehensive sanctions. By so doing, senders have uneasily conceded that there is an inevitable tradeoff between the normative effects of proportionality and the punitive effects of comprehensive sanctions. This tradeoff has not made (force/war) for an attractive alternative to coercive diplomacy. Within the framework of international law—and for several generations—states have realistically considered the prosecution of wars to be a destructive and costly proposition.

Given the evident tradeoffs that are involved in the implementation of international policies, the duration of sanctions does not seem to be a very attractive and significant metric of consequential international policy within the framework of international law. Rather, the quality of sanctions and their implications for plutocrats and macroeconomic performance have garnered more support among senders.

The viability of international law and its economic implications is ultimately contingent on the ability of all states to adhere to the general principles of law, customary practices of law, and treaty obligations (rules by which states have consented to be governed). While data limitations have prevented a further investigation of the lesser categories of coercion—both signaling and constraining—as a logical extension of this paper, the empirical evidence of this research indicates that though political and economic considerations might result in expedient policies of targets, the adverse long-term macroeconomic consequences are destructive and indisputable.

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