Instruments of Statecraft: Leveraging National Economic Power

Strategies are useless without effective implementation, so strategic leaders need an understanding of the tools of national power and the ways they may be used to implement policies through instruments such as: diplomacy, information, military force or economics.

If one of the objectives of using national power is to change the behavior of other states to accomplish your own goals, then economic power can be particularly influential. National economic power is the allocation of resources and apportioning of goods and services, to foster national goals. It may include economic pressure or sanctions, and economic incentives such as aid and favorable trade relations.

The economic instrument of national power, if well linked to the private (business) sector, can wield significant influence through foreign investment, trade, and other forms of financial leverage. For the UAE, economic power may be its most influential tool of statecraft.

 

Political economy professors Leslie Armijo and Saori Katada have proposed that economic statecraft may be either defensive or offensive, may be targeted either bilaterally or systemically and may employ either financial or monetary means. Financial tools can be used as shields to protect national development (trade barriers and import taxes are examples) or externally as either carrots (to encourage other states) or sticks (to force a change in behavior).

For instance, trade sanctions may be imposed on a foreign country with the aims of pressuring its government to end human rights violations (as was the case in South Africa until the sanctions imposed by the US and other nations forced it to end Apartheid) or cease construction of nuclear weapons (as has been tried against both Iraq and Iran). Conversely, friendly military or diplomatic states may receive subsidized loans or trade preferences, like those recently benefitting both Egypt and Pakistan.

 

Another aspect of economic statecraft is monetary policy, which Armijo and Katada see as “statecraft involving currency values (exchange rate levels), currency regimes (fixed, floating or mixed) or the use of reserve currencies, each in the service of larger foreign policy goals.

” Since the UAE wisely aligned the dirham with the dollar it has benefitted from great stability in the past two decades. Armijo and Katada also pointed out that “the manipulation of currency values has the internal objective of insulating domestic monetary policy, but also the external (international) goal of promoting exports or exacting concessions on other issues.” Currently China is in the process of manipulating its currency and the United States is adapting its domestic lending rates – both have had a tangible effect on world markets.

 

Another key instrument used by the UAE to support its foreign policy goals is the Sovereign Wealth Fund (SWF). IPIC, ADIA, ADIC, EIA, ICD and Mubadala (which just established a UAE-China Joint Investment Fund with China’s State Administration of Foreign Exchange) are all SWFs making significant contributions to the stability of the UAE financial sector and indirectly to the UAE itself.  They also make it possible for the UAE to employ bilateral credits and monetary pressure, even in times of low oil prices, and even to become a significant international creditor for other Arab states.

 

Even though the current price of oil has dampened some of the UAE’s leverage, increasing multi-polarity, the redistribution of global financial capabilities towards emerging economies and the increased activity of emerging market policymakers on the global stage are all global shifts forming opportunities to be seized by the UAE in the next decade using its strong economic capabilities. The well crafted use of national economic power can ensure the UAE remains prosperous and innovative and a nation of great influence as well.