Economic Statecraft in the Digital Age

Economic Statecraft in the Digital Age

Diplomats worldwide can benefit from better understanding the ways in which the global economy works – in their everyday work, but also during emergencies like the Coronavirus epidemic

 

Illustration: Pete Linforth (Pixabay license)

 

Economic statecraft is a crucial part of effective diplomacy. In most places of the world, however, diplomatic training fails to give future diplomats the required tools for understanding economic statecraft and how it can be used to achieve foreign policy goals. Until not long ago, it was often difficult for non-experts to see how this deficiency makes a difference in real life. But the recent Coronavirus pandemic has demonstrated how those who understand economic statecraft in the digital age can better and faster help their governments cope with the crisis.   

 

The Westphalian international order, originally founded on sovereign states, has been reorganized in the last few decades with the emergence of powerful non-state actors. NGOs, banks, and giant multinational corporations are now playing on the same playground as states, challenging their sovereign power in many different ways. Facebook, for example, has more users than China has people, users whose digital existence and identity are shaped by the rules and governing principles decided in Sillicon valley. These non-state actors are able to impose their interests and change global economic practices, and that fact has made economic statecraft take a sharp turn.

 

In this essay, I will argue that diplomats must be better trained with the basic principles of modern economic statecraft; that is – economic statecraft in the digital age.  

 

The Rise of Non-State Actors

 

The structure of international relations has changed dramatically in the past few decades. The so-called Westphalian system, which has characterized the international order for the past three hundred years, has been fundamentally transformed. Under the Westphalian system, international relations took place primarily among and between sovereign states, and all other actors only played a secondary role, if at all.

 

Since the late twentieth century, however, powerful private actors to include NGOs, corporations, banks, as well as terrorist organizations have assumed a prominent role in international relations. These actors have accumulated massive power (in many different forms) that was able to bring (some of) them on par with nation states.   

While diplomats will be called upon in the near future to negotiate with new actors in the international realm, little has been done to prepare them

As a byproduct of globalization, corporations and banks became globally diverse in both ownership and management, and in many cases have changed their places of incorporation to countries other than those in which they were originally formed, mostly for tax reasons. Giant corporations like Visa, Apple and Wallmart have yearly revenues exceeding the GDP of many countries. For instance, Business Insider shows that in 2017, Wallmart’s total revenue exceeded the GDP of State of Belgium, if it were a country it would have ranked 24 in the world by its GDP.[1] With so much market power, these corporations have begun to develop policy interests independent of the interests of their countries of origin.

 

NGOs have been showing the same tendencies in the public sector, as their aspirations, usually in the field of human rights, transcend borders and require a change in state policies. While it is obvious that in the near future diplomats will be called-upon to negotiate with these new actors, little has been done to prepare them.

 

Statecraft

 

Along with fundamental changes in international relations, the various categories of statecraft, defined as the measures taken to implement foreign policy objectives, have also changed in relative importance.

 

Public diplomacy is the form of statecraft most affected by evolving technology, such as social media. Measures available to states and non-state actors in promoting their interests have greatly increased, eclipsing the traditional tools of print media, television, and radio. This development, coupled with the proliferation of disinformation as a tool in inter-state relations, has increased the importance of public diplomacy in the mix of strategies available to participants. Yet diplomatic training has largely failed to keep up with the technological transformation of public diplomacy.[2]

 

Technological advancements have further greatly expanded the scope of the strategy of subversion. Instead of being limited to such measures as assassination and support of subversive organizations in the target country, states and NSAs make use of new accessible communications technology to directly and indirectly attempt to influence the internal matters of other states (consider, for example, the Russian meddling in the 2016 U.S. presidential elections). The use of all sorts of cyber tools is not only easy and cheap to acquire, but also exponentially scalable and effective in reaching the masses. For example, these measures can increase the public dissatisfaction with the governments of the target countries or the governing bodies of the target NSAs.

 

The Coronavirus epidemic has also found its way into the ongoing US-China trade war | Illustration: Mohamed_Hassan (Pixabay license)

 

Economic measures of economic statecraft, such as trade and financial sanctions, sabotage, counterfeiting, financial aid and trade agreements have also taken advantage of modern technologies. As such, they continue to be significant elements of statecraft. Nevertheless, since economic strategies are the most ubiquitous of all the non-war elements of statecraft, it behooves diplomatic training to devote more attention to economics in general and to economic statecraft in particular.

 

The element of statecraft which adapted the least to the transformation of international relations in recent decades is the practice of diplomacy. Diplomacy, which is the art and practice of negotiation with other states (and, increasingly, NSAs), has not kept up with the times. That fact represents a danger to the international system, since essentially all the other elements of statecraft will eventually reach the process of negotiation among the entities involved, unless they are totally destroyed.

 

Economics and Economic Statecraft

 

The strategies that fall under the category of “economic” are aimed at either weakening (negative strategies) or strengthening (positive strategies) one or more of the basic components of the economic system of the target actor(s). Diplomats should learn these elements and understand how new international actors utilize advanced technologies to steer foreign policy in order to forward their interests. Below I briefly discuss some of these components.

 

The first is the productive process, the purpose of all economic activity. In order to achieve its final goal, an increase in the material well-being of the entity’s members, there must be greater per capita consumption, which can take place only as a result of greater production, which in turn depends on greater investment on the factors of production (land, labor, capital and management). These which must come from greater savings, all of which are dependent on a sufficient degree of political and social stability and economic freedom. The global economic upheaval we are experiencing today, and will continue to experience in the foreseeable future, is a result of devastating damage done to almost every part of this chain.

 

The second pillar of the economic system is exchange. Those entities that can produce a particular good or service most efficiently gain from exchanging with those who can produce other goods or services most efficiently. This is the doctrine of comparative advantage, the basis of all free exchange.

 

Thirdly, money and finance render the productive and exchange processes possible. They are the economic equivalent of blood in the physical system, and just as disorders of the blood will negatively affect the physical body, disorders of the financial system negatively affect the functioning of the economic system.

Contemporary economic measures of statecraft are utilized by both states and non-state actors nowadays, with the latter becoming increasingly important

Finally, supply and demand functions regulate the relationship between goods and services and their financial representation by determining the so-called “equilibrium price”, the price at which markets are cleared. These functions perform their role most effectively when not interfered with externally, as in the case of price controls or production subsidies, which inevitably result in shortages or surpluses, both of which are costly.

 

Economic statecraft is designed to either interfere with or facilitate the functioning of economy in each of its above mentioned components. Negative strategies include trade and financial sanctions, which – even during the current Coronavirus crisis – are ubiquitous in the international arena. Embargoes, such as the 1977 Security Council resolution to ban weapons sales to the Apartheid regime in South Africa; asset freezes, such as those imposed in recent years by the US on Iranian officials; and counterfeiting, widely practiced by Iran and North Korea today. Positive strategies include financial transfers (“foreign aid”), and trade agreements.

 

It should be strongly emphasized that in the contemporary world economic measures of statecraft are utilized by both states and non-state actors, with the latter becoming increasingly important. Criminal syndicates and terrorist organizations, for example, represent an increasing portion of total international economic activity, and are the more dangerous for being impossible to analyze statistically due to the fact that they do not register their activities with public or private statistical agencies.

 

Hezbollah, for example, has set up a vast smuggling and money-laundering network in Latin America that generates hundreds of millions of dollars annually.[3] Combating it cannot be restricted to local law-enforcement operations, but requires a global effort which combines, alongside intelligence-sharing and security cooperation, economic tools of statecraft – such as asset freezes – by all parties involved.

 

But public diplomacy campaigns on social media should also assist in this effort, for example by showcasing how Hezbollah’s criminal activities in Latin America bring massive amounts of drugs to Europe. Likewise, banks who control the inter-continental transfer of funds should also take part in these efforts. Diplomats who understand the economic world can help connect their traditional and novel tools of trade to advance goals from a diplomatic aspect.

 

It is essential that diplomatic training include the basic elements of economics as applied in the overall strategic mix of the actors in international relations.[4] At present, from my experience, such training is inadequate.

 

Notes:

 

[1] https://www.businessinsider.com/25-giant-companies-that-earn-more-than-entire-countries-2018-7

 

[2] Ron Prosor, “Switching from Fax to Facebook Does Not Qualify as Innovative Diplomacy,” The Arena, Issue 3, January 2019,  at: https://www.eng.arenajournal.org.il/single-post/2019/01/07/Prosor-InnoDip-ENG

 

[3] See: Emanuele Ottolenghi, “Stop Iran funding? Hezbollah’s Financial Activities Should be Israel’s Top Priority,” The Arena, Issue 6, February 2020, at: https://www.eng.arenajournal.org.il/single-post/2020/02/06/ottolenghi-hezbollah-latin-america-ENG

 

[4] See: Louise I. Shelley, Dark Commerce: How a New Illicit Economy Is Threatening Our Future, Princeton, NJ: Princeton UP, 2018.

Dr. Norman A. Bailey is Professor of Economic Statecraft in the National Security Studies Center, University of Haifa and also teaches at the Galilee International Management Institute. He was Special Assistant to US President Ronald Reagan for National Security Affairs and Senior Director of International Economic Affairs, and later held a senior position in the Office of the Director of National Intelligence (ODNI) in the G.W. Bush administration.

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