The economy can be described as the study of the scarcities and the methods through which we can use the resources, the goods that are produced, and the services that are offered. Economics is a multifaceted field that helps us deal with many areas like political science, mathematics, psychology medicine, and business. The main crux of economics is that it helps us with decision making, that we are able to analyze the best possible outcome, the most logical and the most effective method to use the resources available to gain the most benefit out of it.
In the international system, the most prominent theoretical framework on which the system runs is Realism, realism states that the international system is anarchic, meaning that the states have to look out for themselves.
Realism talks about power, it states that in order for a state to become powerful it must gain power. They need to strengthen their militaries; a state needs to have a stronger economy and must be technologically advanced. After the end of World War II, the states came together to develop platforms that would bring peace to the globe. The use of the economy or the use of money as an incentive to promote one’s ideology was done after the end of World War II.
In contemporary times due to the increased globalization, the competition between the states has increased and now it is a race towards global governance. Now the war has become multifaceted as the wars back in time were fought on the battlefield but now they are fought on the economic battlefield. The competition has now transformed into an Economic Warfare. Now economy is used as a tool of war with it holding many different shapes.
In the international system, humans are considered selfish, and they are always in the pursuit of power. People hold different ideologies, values, cultures, different opinions. The people also run states, so we can say that the states are also of a selfish nature, they too work towards the protection and promotion of their ideas. After the end of World War II, Europe was in ruins, it was devastated economically, also the Cold War was starting, the USA who had the ideology of Capitalism feared the rise of communism, and these two ideologies were at each other’s throats.
The US, under the implication that Europe was economically devastated and would fall into the clutches of the USSR, the supporter of the communist ideology, US then-President Harry Truman and Secretary Gorge Marshall authorized the plan in 1948 the Economic Recovery Act of 1948, which over the next four years gave the aid of $13.3 billion for Europe’s recovery. This had Europe in the US’s favor and the USSR lost a potential ally, the economy was used as a weapon to influence the devastated state to become an ally towards them.
This Research article is being written to answer the questions about economic warfare, using the approach of Neo-Realism and how the institutions use their power and influence to control the states, as to how the developed states use the economy as a tool to influence the underdeveloped states. This article will highlight the various tools that the developed states use for their influence over the underdeveloped states. All the data that was collected for this research article has been sourced from various articles, and books.
In the contemporary world, the most prominent phenomenon is that of the globalization. It is the word that is used most frequently. Globalization signals interdependency and interconnectedness. Today the states are dependent on each other, a state cannot survive on its own, and the states need connections to survive. Before the world was, the states used to judge strength on the basis of the military, the only source of state power was considered to be the military.
But now, in contemporary times, the power of a state is not just limited to military strength. Along with the military capabilities, the world has opted for other dynamics of powers as well such as advanced technology, and a strong economy; knowledge is also part of a state’s strength. The idea of globalization is based on liberal values that state that there should be free trade between different nations, the trade barriers should be removed, and the states should adopt democratic values because the notion is that the states with democratic values will not fight each other.
The idea that was related to globalization was that due to interdependency there will be no conflict, but instead, it has given rise to competition. Now, the competition between the states is ever high.
The nation states, the most prominent actors in the international system are in a competition to gain the most market. The race to be the economic giant has given rise to competition among the states. The major powers of the world are the top economies of the world, with the US being at the top and China coming in 2nd. The race for economic power has given rise to “Economic warfare.”
Now the strategies and tools for winning the wars have changed, it is not the war of bullets, but rather it is now the war of money. Currency is the new bullet; the economy has been weaponized. These developed states pursue economic gains. These same developed states have been exploiting the underdeveloped states, gobbling up their resources, and gaining their support for the protection and promotion of their National Interest. For the protection and promotion of their national interest, they have different tools to persuade these states to accept and uphold their interests. These economic tools are of an offensive nature.
Economic Sanctions: Sanction is one of the tools of economic warfare that is used by the policymakers of a nation-state when the state on whom the economic sanction is being imposed does not respond in favor of the state’s strategic decisions or when there is a threat to the national interest of the state. Sanctions remain a very important tool of the foreign policy. The term economic sanction can refer to the discontinuation of financial relations with another state due to the threat to the national security of the state. It is a tool governments and other international institutions use to punish those who do not follow or accept their way.
Economic sanctions are a cheap way to punish the states; sanctions are a step that is taken to put the state on hold so that a much better option can be adopted.
Many powerful nations and actors other than the state have put economic sanctions on many of the states that have violated the international system. The US uses economic sanctions more than any other state. The US has economic sanctions on many states, such as Iran, Syria, Zimbabwe, Ukraine and Russia. There was an increase in the economic sanctions or the overall sanctions after the 9/11 attacks, the US government made these sanctions in an effort to disrupt the financial infrastructure that was supporting the terrorists and all of the international criminals.
Influence through International Institutions: The major international organizations that work in today’s globalized era that emerged after World War II: The Bretton Woods institutions: International Monetary Fund, The World Bank. The governments of the member states often arguably misuse these institutions to fulfill their interests. The major democratic states use these institutions and manipulate them to help out those states that are important to them.
1- International Monetary Fund: The IMF’s main purpose was to see the workings of exchange rates across the developed states. But soon, it began to work on the underdeveloped states’ balance of payment and debt issues. After the 1970’s IMF started to fund the underdeveloped states, it stated to hand out economic reform programs which had an economic plan but with it were conditions attached. The US has a great say in this, the loans that are handed out to the states. The money that the organization hands out is a pool of money that is created by the 189 member states.
The US shows favor to the states whose officials have degrees from US universities, US exploits the IMF to fund the money to the states they favor.
Already the loan comes with strings called conditions, but along with it, these states have to follow the crude political policies that they might not normally follow but are bound to follow due to the economic pressure they have.
2- The World Bank: like the IMF the World Bank too has strayed from the original idea that it was built for. The World Bank was built to rebuild Europe after World War II. The main purpose of the World Bank was to rebuild Europe, but it now focuses on the underdeveloped states. The World Bank has decided to free the world of poverty, but these were dreams. Along with the other institutions World Bank is misused, if anyone tries to fulfill the dream of ending poverty, they would be out of a job. The loans that the World Bank provides are a way of cashing huge interest rates, rather than focusing on any development: all this just to gain maximum power, power that is shared by the member states.
The World Bank is politically controlled, major economic powers provide more funding to gain more political favors. The US uses the World Bank to favor those underdeveloped states in the good graces of the US. The World Bank gets pressured by the US to help those governments that are friendly to the US, those governments will get loans that will be in favor to the US elections than those who aren’t in the US’s favor.
Capital inflow can be divided into two categories: Foreign aid and Foreign Private Investment, Foreign aid is further categorized into “Grants” and “relatively low-interest rate loans”. Foreign private investment can be categorized into “Foreign Portfolio investment” and “Foreign Direct investment.”
Foreign aid can be an important source of income for developing states; these foreign aid plays a key role in the developing state’s economy. Foreign aid can kick-start the process of growth, it can reduce the burden on a state, it facilitate the inflow of new and advanced technology. But foreign aid sometimes isn’t helpful. If we take the example of Pakistan: the literacy rate in Pakistan is around 50%, the social indicators such as health, education, and employment, along with many more, don’t show any progress, and the economic aids failed to improve the economic condition of Pakistan.
The flow of foreign aid has increased from $1.9 billion dollars in 1970 to $52.6 billion in 2005. Foreign aid is an important source of capital flows, but after the Cold War, the importance of foreign aid declined, but the number of donors increased. Although it provides great help to a state the conditions that the donors impose put constraints on the receiving states as to how they can use it.
Foreign aid gives way to the corruption of the recipient state, this aid most of the time is given by the donor states to further their own interests.
For example, in the 80’s, US aid was mostly based on the ideological stance of the recipient state, it did not matter whether the recipient state was corrupt. We can say that these aids bound the recipient state to act in accordance with the donor state’s interests. The donor states offer economic incentives in exchange for the economic control of the underdeveloped, poor recipient state, which will benefit the donor state, which is usually the developed state. This also leaves the states as a cripple, with the notion that if we are poor we can get economic foreign aid. This will be in the favor of the developed states as they would be able to exploit it.
The Underdeveloped states suffer from a dilemma that is of a financial nature. Let’s say the people of the underdeveloped states need a higher standard of living. This will be possible if the state goes through development, the better and efficient utilization of the available resources. The resources will be available if there is any investment for it, and investment comes from savings, unfortunately, developing countries are living hand to mouth, so savings is not an option. Therefore, if savings can’t be done, there will be no investments, and if there are no investments then there won’t be any economic progress.
To overcome these issues, the states need to focus on their personal development; they need to have better leadership that would be able to make decisions that are in favor of the state’s national interest and lead the state to better economic and productive conditions so that they won’t be in the need for foreign economic help. The underdeveloped states will not be stuck in the complex financial dilemma of having to help their state but under the influence of the powerful developed states. If the states devise better policies, have great leadership, and overall better ideas as to how to run the state, they won’t need the help of these powerful states and will be safe from the arsenal of the economic warfare that they hold.
The author is an International Relations scholar at Minhaj University Lahore, specializing in Foreign Policy Analysis, Strategic Studies, and Maritime Research. With a keen interest in understanding global dynamics, the author brings a unique perspective to these fields, contributing valuable insights to the discourse on international affairs.