Benn Steil and Robert E. Litan (2006), Financial Statecraft, The Role of Financial Markets in American Foreign Policy, Yale University Press.
Recent efforts by the U.S. to tighten financial sanctions on Iran have, once again, brought economic sanctions to the forefront of U.S. foreign policy. The recent book by Benn Steil and Robert E. Litan, Financial Statecraft, The Role of Financial Markets in American Foreign Policy (Yale University Press, 2006), therefore appears at a fortuitous time. Steil is the Director of International Economics for the Council on Foreign Relations, and Litan is Vice President of Research and Policy at the Kaufman Foundation. The title of the book promises a lively discussion of the advisability, and efficacy, of financial statecraft.
Steil and Litan begin their discussion by splitting foreign policy, or statecraft, into four categories, namely economic statecraft (trade policy, economic sanctions), information (propaganda), diplomacy (negotiations and deals), and force (military and covert violence). They define financial statecraft as "those aspects of economic statecraft that are directed at influencing capital flows." Steil and Litan claim that financial statecraft has not "received any systematic scholarly treatment," and they promise to fill the gap:
We aim to illuminate the relationship between financial flows and traditional foreign policy concerns, and the way in which the American government has attempted to harness financial markets and institutions in the service of foreign policy goals. We also aim to offer suggestions for change... (p. 5)
Steil and Litan only partially achieve their aims, however.
Steil and Litan indeed detail a great variety of cases where the U.S. government has sought to shape, control, and restrict international capital flows in support of its broader foreign policy objectives. They also describe the widespread lobbying by think tanks and interest groups for sanctions and other restrictions on international capital flows. Steil and Litan's persistent theme across all the cases is that attempts to control capital flows have failed.
On the normative side, the authors argue for a major redesign of the international financial order. Unhesitatingly supportive of globalization, they do argue against the unilateral U.S. demands that emerging economies open their economies to foreign capital flows. They also call for "depoliticizing" the IMF and the World Bank. These proposal are not controversial, since many others have made similar proposals recently. More controversial is their call "to rid the world of unwanted currencies." (p. 165) A major part of the book is spent arguing for the U.S. to take the lead in moving the world to a single currency under an expanded dollarization plan:
Having a national money is not only becoming less and less useful as the world becomes more and more interconnected economically and financially, but it is becoming more and more destabilizing. Collapsed currencies leave poverty, fear, anger, and insecurity in their wake. (p. 165)
To support their proposal, Steil and Litan argue that the recent currency collapses in Asia, Russia, Brazil, and elsewhere were due to currency mismatches. With debt denominated in foreign currency and assets denominated in domestic currency, a sudden change in exchange rates is often catastrophic. Given today's massive trade and capital flows, only a single currency can provide stability, according to Steil and Litan.
There are serious weaknesses in Steil and Litan's arguments and discussion. First and foremost, Steil and Litan are simply wrong in claiming that financial statecraft has not "received any systematic scholarly treatment." The fact is that governments have always been involved in shaping, influencing, and manipulating the international financial system, and scholars have thoroughly studied centuries of financial statecraft. …