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The Impact of Economic Dependence on Political Compliance

  1. INTRODUCTION

The period after World War Two witnessed increased economic exchanges between nations of the world, as global trade volumes increased more than six fold in the next 50 years, leading to an approximate three times increase in aggregate output from world economies (Olson, 2011). Through regional integration mechanisms such as the European Union, European member states are fuelling economic activity for greater competition and prosperity today. While it seems that economic interdependence will continue to grow in the short-run, its consequences on the political interaction amongst world nations remains unclear (Barbieri, 1996). Nations are increasingly losing their sovereignty as they increasingly become economically dependent on each other for provision of goods and services, especially developing nations that enjoy less power and privilege in the global system (Armstrong, 1981). As a result, developed nations of the world are progressively capitalizing on global economic interdependence to politically coerce developing nations to embrace ideologies of capitalism and democracy, with economic sanctions remaining a preferable approach to ensure balance of power between developed and developing nations (Drezner, 2003). This paper examines the relationship between economic dependence and political compliance.

 

  1. THEORY

According to Leonard (2015), world nations are living in a world of geo-economics. This term was coined by Edward Luttwack in 1990 where he claimed that though competition between global powers assumed an economic dimension, its purpose remained political. The global world is governed by the notion of politics and not the notion of commerce. Following the fall of Soviet Union, a divided global system embraced an interconnected and interdependent world (Barbieri, 1996), but following the global financial crisis of 2008, it was clear the global economy had both winners and losers.  Precisely, the potential of a major shift in balance of power threatened existing powers and inspired the rising powers, leading to re-emergence of competition and power struggles in completely new forms, including economic coercive measures such as sanctions (Armstrong, 1981). As a result, economic interdependence and interconnectivity went contrary to the wishes of many nations, as it failed to bury long time tensions between global actors.

Leonard (2015) agrees economic coercion from global economic actors puts the global economic system at a risk of disintegration by it essential actors and beneficiaries. This contrasts their common interest of sustaining a system that benefits all constituents, and favors individual interests that seek to use the system for self-interests (Crescenzi, 2005).  Nations realize that economic independence resulting from the emergence and spread of globalization connects even disparate parts of the world through finance, trade, and supply chains, but they also remain aware such links offer various actors with power and influence over other actors. It is not surprising economic coercion is enforced through economic sanctions and financial sanctions common amongst global actors who use economic interdependence and inequality to leverage their position in the global system (Crescenzi, 2005).

According to Economic and Social Council (2016), an extraterritorial coercive measure is a tool employed by a nation or international organization in an attempt to alter the strategic decisions and actions of another nation or international organization. The state or non-state actor threatens to violate its interest or international law by hindering trade, investment, or other business activities (Richardson, 1981). Through this measure, a state tries to change the behaviour of another state without using weapons or military intervention. Extraterritorial coercive measures are normally used by developed nations in an attempt to restrict economic activity of nationals, businesses, their governments though recipients continuously disregard the sanctions as a violation of the sovereignty of states and international law (Economic and Social Council, 2016).

Through economic sanctions, powerful actors in the global system force less powerful actors such as developing nations to change their foreign policies by limiting trade, investment, and other commercial activities (Armstrong, 1981). Sanctions have been used as tool for economic governance since the 5th century when Pericles, a statesman in Athens ordered the banning of all forms of trade between Megra and Athens. Sanctions were later used in the 20th century owing to the persistence of the Cold War, but were rarely enforced in the international system (Economic and Social Council, 2016). However, the end of Cold War in the 1990s led to reemergence of sanctions following establishment of the United Nations. The international organization immediately imposed sanctions on Angola, Haiti, Serbia, Iraq, Sudan, and Somalia amongst others.

The two World Wars and the ensuing public policies were significant in reducing the inequalities that existed in the twentieth century. Nevertheless, inequality began to rise again in the 1970s and 1980s with varying degrees in different countries meaning that institutions and political systems are major contributors to this (Richardson, 1981). In this chapter, the author sets out to explore which is the better route to take towards acquiring wealth – work or inheritance? In nineteenth century France, the wealthiest people lived a life that an ordinary person could not manage through income from labour alone. Work and study alone were not enough to afford one the comfortable lifestyle resulting from inherited wealth. The situation was similar in eighteenth and nineteenth century Britain (Olson, 2011).

It is plausible that underdevelopment is mostly caused by coordination failures, as shown by differences in economic development for countries sharing the same economic factors. Economic development is not easy to achieve without proper coordination by various economic stakeholders. The principal-agent model can be used to explain the success or failure of economic development. Under this model, the government is the principal while the agents are; private sector firms, public agencies, international companies, government-owned enterprises and households. For economic development to occur, an effective principal is required to coordinate all the actions of various agents in a way that everyone benefits (Moon, 2009).

Coordination failure can result from the principal failing in their duties, which leads to an outcome that is not favourable to the agents. The key to successful coordination is to have a public policy that creates incentives for investment. It is the duty of the government to create an economic environment that encourages business investment (Armstrong, 1981). Public policy intervention is often needed to correct market failure. Market participants expect other stakeholders to play their role so that everyone benefits. An economic system comprises of inter-related production processes, which requires smooth coordination of its various activities (Olson, 2011).

Analysis of inequality ratios for countries requires as much information as possible to complete the distribution picture (Richardson, 1981). Nevertheless, most statistics from official organizations, like the OECD, deliberately leave out figures for the top end of the distribution. They give no indication of income ore wealth above the ninetieth percentile in a bid to give a favourable picture of national distribution of wealth. The measurement of capital ownership nevertheless gives very high percentiles sometimes (Moon, 2009). The bottom 50% in the capital distribution curve own very little and measuring this is very hard. Depending on the measurement applied for small fortunes, there are many different evaluations that one can come up with for wealth hierarchy (Hirschman, 1980). The same only applies to labour income to a certain extent. In as much as the value of trade is measured differently in different countries, the larger countries a fairly significant share of the total trade income. This is the reason why the author emphasizes the study of different distributions in a manner that emphasizes how different countries share income and wealth. Particular attention should be paid to the bottom 50% and the top 10% countries in the world, rather than using fixed thresholds for defining different percentiles. This will give a much more accurate picture of the distribution (Drezner, 2003).

Economic Interdependence and Political Coercion

In global politics, manipulating economic relationships for political purposes is not a new phenomenon. International actors often resort to threats and employ economic manipulation in order to shape the foreign policy of other actors (Crescenzi, 2005). Moreover, there are scenarios when a state with the power to employ economic force desists from initiating one. For instance, the European Union and U.S refrained from economic sanctions upon Soviet Union for causing the civil war in Chechnya in 1999. For many years, the West has employed economic incentives to encourage political relationships with other states, especially Africa where democracy is yet to bear fruit (Moon, 2009). For instance, the decision to allow China to join the World Trade Organization was anchored on a belief that increased economic interaction with member countries would encourage cooperation and collaboration in China’s global relations, and further democratization in the country (Crescenzi, 2005). Moreover, America’s attempt to initiative market economic changes in Russia and attempts by the European Union to reform Eastern Europe was based on the ability of economic interactions to foster political cooperation, which later transformed into domination of developing nations by developed nations. However, it is apparent these efforts demonstrate an eagerness by the Western world to further expand into emerging markets across the world regardless of the political consequences of their actions (Armstrong, 1981).

As a result, Economic dependence between more powerful and less powerful actors in the global system offers powerful states the opportunity to link their economic relationships with the political bargaining process. Economic interdependence is tied to political behavior because states are able to use interstate relationships as a political bargaining tool. According to Wagner (2009), economic interdependence influences the choices of states at both the economic and political decision-making levels. The global economic system is characterized by economic inequalities between actors, which remain the sole source of political power (Crescenzi, 2005). Even though economic inequalities do not imply that a less dependent state will exercise political control over a more dependent state, it is apparent developed states continuously exploit economic asymmetries to realize political interests in developing states.  However, Wagner (2009) insist that employing economic interdependence for political influence is important  when the exchange of political concessions for economic resources makes both stakes better off than if they shared the gains realized from the economic relationship only.

According to Brown (2010), the relationship between economic interdependence and political coercion, especially in developing nations is witnessed in the impact of aid on sovereignty. Contemporary aid relations are characterized by policies that continue to challenge and deny African sovereignty. Today, aid policies are dominated by economic requirements regarding structural adjustment programmes and political conditions concerning respect for human rights and democratic governance that involve constitutional, electoral, and political reforms (Brown, 2010).Widespread intrusions by external forces into what is considered the affair of sovereign governments thoroughly discredits conventional notions of sovereignty in African governments. Today, there is unending tension exists in the post-World War Two global system between the rights of states to independence and freedom according to the principle of individual determination, and the responsibility of states to grow and develop in the international system (Hirschman, 1980).

Another explanation for the relationship between economic interdependence and political coercion, especially in developing nations is their history of colonialism (Brown, 2010). The contemporary actions of human and liberal interventions in developing nations such as Africa represent the continuation of administration and governance embraced by European empires. Imperialism is characterized by a coercive and controlling architecture that favours progressive aspects of European imperialism at the expense of developing nations (Richardson, 1981). Moreover, peacekeeping missions are becoming processes of international occupation and pacification, which is likely to cause challenges and problems of colonial rule (Brown, 2010). As a result, these colonial tendencies have transformed and reinforced government and state institutions that continue to mirror colonial forms of administration, an action that has eroded sovereignty in unimaginable ways (Hirschman, 1980).

The need to increase wealth through economic exchanges remains a powerful motivator amongst developed and developing economies in the world, as they strive to capitalize on their comparative advantages, promote efficient allocation of production resources, increase global output of goods and services, and their availability for consumption. Economic interdependence between the UK and Africa best explains how developed nations of the world succeed in employing economic measures to politically coerce African countries into compromising their strategic foreign policy decisions and actions in favor of the UK. In 2014, Africa accounted for 4.3 percent of Britain’s trade deficit, which was down from 5.1 percent in 2004 (Office for National Statistics, 2016). However, trade balance between the UK and Africa turned into surplus from 2009 to 2011 following increase in UK exports and a decline in imports, but returned to deficit in 2012 because of imports from Africa (Office for National Statistics, 2016). The UK’s increased dependence on imports from Africa warrants a peak into the political affairs of various African nations, especially South Africa, Egypt, and Nigeria that accounted for more than 50 percent of Africa’s gross domestic product. This is a strategy used in to ensure a steady flow of goods and services between them (Office for National Statistics, 2016). However, many African governments are increasingly concerned about their sovereignty, but the UK is employing various economic coercive measures in order to indirectly influence the foreign policies of developing nations.

Hypothesis

Political compliance by a dependent nation is correlated to economic dependence on a dominant nation, and an increase in economic dependence leads to an increase in political compliance

  1. DATA AND METHODS

The study used three different indicators of compliance: event data; general index of agreement; and index of agreement.

Event data – measures level of compliance when both countries face low compliance costs

General index of agreement – measures level of compliance when issues are of little importance to both nations

Index of agreement – measures level of compliance when issues are of great importance to the dominant nation but not to the dependent nation

Based on the hypothesis, a positive relationship was expected for all three indicators of compliance. Furthermore, the Index of Agreement indicator was expected to show a stronger relationship between dependence and compliance, compared to the other measurements – Event data and General Index of Agreement.

A developing country will have trade dependence on a dominant nation only if foreign trade is important to the developing nation’s economy, and it conducts a great portion of its foreign trade with the dominant nation (Armstrong, 1981). Therefore, our index of trade dependence incorporates both factors as follows:

  1. Indicator of foreign trade importance: Xi = ai / GNPi

Where: ai = the value of total exports and total imports of nationi

GNP1 = the gross national product of nation1

Xi = the percentage of exports and imports as a part of economic production of nationi

 Indicator of the amount of total trade conducted with dominant nation: Yij = aij / ai

Where: ai = the value of the total trade exports and imports of nationi

Aij = the value of total exports and imports of nationj from nationi

Yij = the percentage of impact of exports and imports to nationj upon total exports of nationi

Thus, when both indicators are combined through multiplication yields:

Index of Trade Magnitude: TM = XiYij

 The concentration of a nation’s trade depends on the number of trading partners and how its trade is distributed among these partners. The exports of one nation to another can be expressed as a percentage of its total exports (Armstrong, 1981).

The model of economic dependence also includes economic and military aid in addition to foreign trade exchanges. It has been shown that aid is used by the donor to gain leverage over the recipient and control their behaviour. Hence, if the recipient relies greatly on aid, the donor will have more power and influence over the recipient’s behaviour.

Indicators of compliance

The variables for measuring political compliance are based on the voting patterns in the UN General Assembly and dimensions of interaction event data. The general index of agreement (GIA) and the index of agreement (IA) indicators are derived from the UN roll call votes. The following equation is used:

 

IA = f + 1/2g

t

Where: f = number of votes on which the pair agrees  (both yes, both no, both abstain)

g = number of votes on which the pair partially agrees (yes-abstain, no-abstain)

t = total number of votes on which the pair voted

 

Although the UN General Assembly votes on a wide range of issues, for the purposes of this study, were focused on those issues that are most salient to the UK. The general index of agreement (GIA) incorporates all the remaining roll call votes after the UK’s issues have been factored out. Unlike the index of agreement (IA), the GIA represents interactions which are of low policy concern for both the dominant and dependent nation.

Multiple regressions were performed in analysing the set of four variables identified for this study. The methodology of multiple regressions assumes that each predictor variable is statistically independent of others. This makes it necessary to examine the correlations between the independent variables used in the analysis.

 

  1. FINDINGS AND RESULTS

The findings support the hypothesis that economic dependence is positively related to political compliance when the relationship is examined using the Index of agreement (IA). The standard partial regression coefficient provides the relative impact of each predictor variable (TD, TI, MA, EA) on compliance. It was hypothesized that these variables are positively related to compliance on the direction and magnitude of change the predictor variables have on compliance. See Table below:

Table 1 – Relationship Between Economic Dependence Variables and Index of Agreement

Dependence Variables 2005 -2007 2008 – 2010 2011 – 2013 2014 – 2016
Trade Importance TI

 

Military Aid

MA

 

Trade Dependence

TD

 

Economic Aid EA

.45 (.56*)

 

 

.53* (0.15)

 

 

.25 (.08)

 

 

.12 (.45*)

.30 (.60*)

 

 

.65* (.75*)

 

 

.23 (-.06)

 

 

.12 (-.05)

.65 (.71*)

 

 

.30 (.56*)

 

 

.04 (-.12)

 

 

.04 (-.13)

.95* (.65*)

 

 

.08 (.26)

 

 

0.2 (.09)

 

 

.02 (.08)

*Significant at 0.5 level

 

Overall, military aid was the single most important influence on the pattern of political compliance as it produced the greatest changes in the IA distribution between the periods examined. Trade importance had the largest impact on the indicator for compliance, and is a better predictor of compliance than trade dependence variable. Contrary to expectations, economic aid did not have a significant impact on compliance in the periods examined.

The GIA also shows that economic dependence is positively related to political compliance. The coefficient of determination increased significantly through the periods examined. The combined trade and aid variables contributed more to the variance in the compliance variable.

Table 2 – Relationship Between Economic Dependence Variables and General Index of Agreement

Dependence Variables 2005 -2007 2008 – 2010 2011 – 2013 2014 – 2016
Trade Importance TI

 

Military Aid

MA

 

Trade Dependence

TD

 

Economic Aid EA

.56 (.74*)

 

 

.43* (0.15)

 

 

.65 (.18)

 

 

.16 (.35*)

.34 (.60*)

 

 

.54* (.75*)

 

 

.43 (-.06)

 

 

.23 (-.05)

.71 (.78*)

 

 

.30 (.56*)

 

 

.04 (-.12)

 

 

.04 (-.18)

.85* (.55*)

 

 

.12 (.26)

 

 

0.1 (.09)

 

 

.01 (.16)

*Significant at 0.5 level

 

When analysed separately, trade importance (TI) had the greatest impact on political compliance for the periods examined. The relationship between IT and GIA follows a similar pattern to that seen with IA. It is also worth noting that military aid (MA) has no significant impact here in GIA, whereas it was the most important when measuring IA. There is little evidence to show that economic dependence has a significant impact on compliance.

Figure 1 – Relationship between IAs, GIAs, and DIs

In summary, it is clear from the above analysis that economic dependence contributes to political compliance to a large extent. Furthermore, most of the variables used in this study’s economic dependence model have a positive impact on compliance. In general, military aid also has a significant impact on political compliance, particularly on issues salient to the dominant country. It was surprising that economic aid does not significantly impact on compliance from this study.

  1. CONCLUSIONS

This study has provided good insight into the relationship between economic dependence and political compliance. This was demonstrated well using the indicator of trade dependence, which incorporated trade magnitude, trade partner concentration, and commodity concentration. The study used multiple compliance measures to explain the relationship between dependence and compliance. This led to better understanding of the dynamics of the relationship and this approach is recommended for any studies that intend to use event data to measure the relationship.

Increased economic exchanges between nations of the world, as they strived to capitalize on comparative advantages, promote efficient allocation of production resources, increase global output and consumption of goods and services. However, owing to persistence of economic asymmetries between global economic actors, more powerful states are increasingly using their power to control the political affairs of less powerful states in the global economy. The level of this influence is determined by the level of economic dependence the weak country has on the dominant country.

References

Armstrong, A. (1981). ‘The political consequences of economic dependence’. Journal of Conflict Resolution, 25(3), 401-428.

Barbieri, K. (1996). ‘Economic Interdependence: A Path to Peace or a Source of

Interstate Conflict?’, Journal of Peace Research, Vol. 33, No. 1 (Feb., 1996), pp. 29-49.

Brown, W. (2010). Aid, sovereignty, and history: colonial antecedents and contemporary aid

relations. Prepared for the Africa and the Historical Sociology of the International

workshop. Retrieved on April 3, 2017 from

http://www.open.ac.uk/socialsciences/bisa-africa/files/histsoc-af-workshop_brown_paper.pdf

Crescenzi, M. J. C. (2005). Economic interdependence and conflict in world politics. Lanham:

Lexington Books.

Drezner, D. W. (2003). The hidden hand of economic coercion. International Organization, 57(03), 643-659.

Economic and Social Council.  (2016). Elimination of unilateral extraterritorial coercive

economic measures as a means of political and economic compulsion. MINUM 2016. Retrieved on April 3, 2017 from

http://modelun.ru/reports/ECOSOC-Report.pdf

Hirschman, A. O. (1980). National power and the structure of foreign trade. Berkeley [usw.: Univ. of Calif. Pr.

Moon, B. E. (2009). ‘Consensus or compliance? Foreign-policy change and external dependence’. International Organization, 39(02), 297-329.

Olson, R. S. (2011). ‘Economic coercion in world politics: With a focus on north-south relations’. World Politics, 31(04), 471-494.

O.N.S. (2016). The UK’s trade and investment relationship with Africa: 2016. Office for National Statistics.

  1. Retrieved on April 3, 2017 from

https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/theukstradeandinvestmentrelationshipwithafrica/2016

Richardson, N. R. (1981). ‘Trade Dependence and Foreign Policy Compliance: A Longitudinal

Analysis.’ International Studies Quarterly 24, (2): 191-222.

Wagner, R.H. (2009). Economic interdependence, bargaining power, and political influence.

Cambridge University Press, Vol.42 (3): 461-483.

 


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