The Art of Economic Persuasion: Positive Incentives and German Economic Diplomacy

by Patricia A. Davis

Overview

Much has been written about a state's use of the threat of military force or economic sanctions to change the behavior of another state. Less is known about the use of positive measures such as economic assistance and investment as a means of influence. This study looks at the ways in which government officials use economic instruments for foreign policy gains. More specifically, it examines the means by which a government can enhance its efforts at economic persuasion by inducing domestic business trade and investing in the target nation. The author demonstrates the domestic conditions under which the state can use commercial economic incentives to achieve foreign policy goals, especially where these incentives are meant to induce cooperative behavior from another state. Using the process of German-Polish reconciliation in the 1970s and 1980s as a case study, The Art of Economic Persuasion, argues that complex institutional links between the German government and the German business community enabled the government to encourage commercial relations with Poland, which supported the government's policies.
With singular access to archives of business associations in Germany as well as numerous interviews with German and Polish officials, the author carefully retraces German foreign policy towards Poland in the 1970s and 1980s.
The Art of Economic Persuasion is a theoretical addition to the literature on international political economy and international relations. It will be of interest to specialists in international relations, foreign policy, and international political economy, as well as economists, political scientists, and historians of Germany, Poland, the United States, and Cold War relations.
Patricia Davis is Assistant Professor of Government and International Studies, University of Notre Dame.

Product Details

ISBN-13:	9780472027330
Publisher:	University of Michigan Press
Publication date:	08/04/2010
Sold by:	Barnes & Noble
Format:	eBook
Pages:	216
File size:	794 KB

About the Author

Patricia Davis is Assistant Professor of Government and International Studies, University of Notre Dame.

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The Art of Economic Persuasion: Positive Incentives and German Economic Diplomacy

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By Patricia A. Davis

University of Michigan Press

Copyright © 1999 Patricia A. Davis
All right reserved.
ISBN: 047210988X

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CHAPTER 1 - Introduction

In January 1989 Mieczyslaw Rakowski, who was to be the last Communist prime minister of Poland, made a visit to West Germany to celebrate former chancellor Willy Brandt's seventy-fifth birthday. Using this "private" occasion to disguise his real purpose, the Communist official appealed to both German politicians and business elites for massive financial aid to restructure the Polish economy. Rakowski felt confident German officials, both private and public, would respond favorably to his pleas for economic support. To an outside observer this seemed a truly remarkable event. Only twenty years earlier Bonn and Warsaw had no diplomatic relations and did not even recognize the legitimacy of each other's regime. Indeed, in the eyes of the Polish elite, West Germany was a revisionist nation, while Bonn considered Poland to be a country unlawfully occupying German territory. Moreover, commercial relations between the two nations were minuscule.

A comparable scenario might be Fidel Castro traveling to Washington, D.C., asking, and then expecting, members of the U.S. political and business communities to support him in carrying out reforms under Cuba's communistregime. Yet, what seems highly unthinkable in the U.S.-Cuban case became the reality in the case of German-Polish relations--two former adversaries perceived it to be in their interests to embrace collaboration and were willing to support one another in their national objectives. The Polish government wanted economic support for its reform process; officials in Bonn wanted political support for its goals to improve conditions for ethnic Germans in Poland as well as to nurture the reform process in East Germany.

How did bitter adversaries become cooperative neighbors? What strategy enabled the West German government to effect such a fundamental shift in relations? How was it able to implement this strategy? This study looks at the utility of economic persuasion as a strategy to promote peaceful change. It looks at ways in which government officials use economic instruments for foreign policy gains. In particular, it examines the means by which a government can magnify its efforts at economic persuasion by inducing domestic business to increase and sustain commercial economic exchange with the target nation. The goal of this book is to improve our understanding of the domestic conditions under which the state can use commercial economic incentives to achieve foreign policy goals, especially where these incentives are meant to induce cooperative behavior from another state.

From Economic Coercion to Economic Persuasion between Adversaries

Most scholars tend to rely on theories of military force or coercive diplomacy to explain foreign policy "successes." I suggest, however, that what happened between 1969 and 1991, that is, the normalization of relations between two adversarial nations, was not a matter of prudent use of military force nor coercive diplomacy, but was instead the result of economic persuasion. Also referred to as positive economic statecraft (Baldwin 1985) or economic linkage (Mastanduno 1992), this strategy uses economic incentives (the provision of benefits or the promise to furnish them in the future) as the means for the end of peaceful change (persuading or convincing the opponent to revise his/her views of the adversarial nature of the dispute).

Thus, German officials engaged in a foreign policy aimed at expanding economic exchange as a means of inducing peaceful change in its adversary. In particular, economic tools, both commercial and public, were instrumentally employed by the West German government to facilitate and maintain economic transactions with Poland. That is, German officials made use of such economic inducements, or "positive economic sanctions" (Knorr 1975; Baldwin 1971), as commercial trade promotion and credit extension to achieve political normalization. Key to the success of this strategy was the German government's ability to align the German business sector behind this policy of according economic incentives toward Poland. In other words, Germany succeeded in one of its major foreign policy goals through a long-term process of proffering economic carrots instead of brandishing sticks.

That this topic is of growing importance can be seen by the fact that the U.S. government has recently engaged in its own policy of offering economic "carrots" as a means of inducing changes in political behavior. Indeed, Washington successfully "persuaded" Ukraine to relinquish control and ownership of nuclear weapons by extending the government financial "rewards." In the case of halting nuclear proliferation in North Korea, too, economic incentives played a role in convincing North Korean officials to forgo certain policies. It would seem, then, that economic incentives can be successful in achieving desired political outcomes. However, in both cases the desired outcome was short-term in nature and involved a singular, explicit change in policy. Neither, for example, concerned long-term, evolutionary transformations in behavior. Moreover, in both cases, the economic incentives offered were primarily public in nature, that is, involved official monies. Neither involved the more common types of inducements--increased trade and technology transfer, for example--that generally involve the private commercial sector. Thus, the conclusions that would be reached by looking at this type of economic persuasion could hardly be generalized to include hypotheses regarding how to achieve long-term, evolutionary changes in political behavior with economic instruments.

Indeed, most of the literature investigating the utility of coercive economic statecraft is also limited by this shortcoming. Largely confined to the study of negative economic sanctions, for example, boycotts and embargoes, these scholars primarily consider cases concerning coercive short-term or explicit policy changes, such as the Soviet withdrawal from Afghanistan (Hunter 1991); the release of American hostages by Iranian terrorists (Alerassool 1993); or the Iraqi evacuation from Kuwait (Cordesman 1997). Even the literature that does include cases involving long-term goals such as attempts to "force the Soviets to their knees" by means of strategic and economic embargoes is not sufficient (e.g., Mastanduno 1992). This literature is for our purposes inadequate in that it does not consider cases where a foreign policy "success" for the sender government would still permit the targeted government to remain in power. Typical coercive strategies demand compliance from the target regime, which in many cases means removal from power. The means are threatening and the goal is coercive. In other words, it cannot provide us generalizations for foreign policy goals that pursue such objectives as reconciliation, conflict reduction, or confidence building.

Above all, applying lessons learned from these types of coercive foreign policies cannot be useful for understanding the utility of economic persuasion in that governments in market economies can forbid commerce but they cannot command it. That is, negative economic sanctions are relatively simple to legislate and implement since governments are empowered to do so as part of their authority to govern foreign commerce. Yet these same governments are not empowered to command from business that they engage in trade and lending with other nations or foreign firms. Hence, economic boycotts and negative sanctions are far easier to impose than policies of economic linkage or "positive" sanctions.

Economic Persuasion as an Underdeveloped Concept

Once a foreign policy strategy shifts from threat or use of force (coercion) to peaceful change the most proficient means of achieving this outcome is, I argue, economic persuasion. A more articulate understanding of the concept is therefore called for in order to appreciate its utility. What does economic persuasion embody and how does it contribute to the outcome of peaceful change? What is it, and what purpose does it serve?

Numerous studies abound on the theory and logic of economic per-suasion. Baldwin (1985) defines what he calls the strategy of economic statecraft as attempts made by governments to influence other nations by means that rely primarily on resources that have a reasonable semblance of a market price. His is an instrumental approach in that he argues that in many cases country A can indeed more often successfully induce country B to do X with positive sanctions than it can compel B to the same action with negative sanctions. Baldwin (1971) enumerates fourteen means by which positive sanctions, as opposed to negative sanctions, can make a difference in the behavioral consequences of actor B.

Two examples of successful economic persuasion efforts include aftereffects and side effects. A side effect would be what is known as the "spillover effect" on B's relations with A with respect to other issues. "While positive sanctions tend to enhance B's willingness to cooperate with A on other issues, negative sanctions tend to impede such cooperation." An aftereffect may be that "If A uses positive sanctions today, B will tend to be more willing to cooperate with A in the future, but if A uses negative sanctions today, B will tend to be less willing to cooperate with A in the future" (Baldwin 1985, 32-33). Here the logic is relational in that economic incentives are a function of the political situation; they are meant to influence preferences, not exert power.

Positive sanctions are thus defined as "actual or promised rewards to B; negative sanctions are defined as actual or threatened punishments to B" (Baldwin 1971, 23). Baldwin himself relies on the pathbreaking work carried out by Lasswell and Kaplan (1950) for a further refinement of the concept of positive sanctions: A sanction is positive when it enhances the value for the actor to whom it is applied and is negative when it deprives her/him of values. Furthermore, according to Lasswell and Kaplan, control over B's well-being can be a potential power base for A. On this premise, Baldwin reasonably assumes that this would then imply A has the ability to add to B's well-being, and not just subtract from it (as most theories of economic sanctions would have us believe).

While appearing to be economic acts, these policies are, in effect, political acts because the state is attempting to affect the actual or potential behavior of another state. Hanson (1989), too, claims that economic persuasion belongs to the domain of political strategies. The purpose of such a strategy would be to establish closer contact and thereby influence the attitudes and perceptions of an elite in the target nation. "A strategy in this context would be a stance somewhere along the spectrum between commercial detente and economic warfare, adhered to consistently over many years . . . a strategy closer to the detente end of the spectrum would be based on the belief that a long period of expanding commercial relations would be in the political interest of the nation pursuing that strategy" (5). In its most manifest form, economic persuasion could include, for example, governmental subsidization of East-West trade.

Similarly, the contributors to Reinhard Rode and Hanns-Dieter Jacobsen (1985) investigate the utility of what they call economic detente in affecting East-West relations. Their fundamental definition of such a strategy is "frequent attempts to influence the political conduct of a country or group of countries by measures intended to affect their external economic relations. Such attempts to exert influence may be positive as in the form of economic aid, reduction of trade barriers, etc." (93). In its crudest form such a strategy is bribery for political concessions, but in its more ideal form it would create mutual dependencies, thereby lessening the probability of resort to violence to solve what they see as inevitable conflicts.

In his extensive treatment of what he calls "economic doctrines" Van Ham (1992) takes a functionalist approach, which holds that

a certain amount of commerce between East and West may over time result in a situation where both trading partners perceive a certain extent of mutual dependence (or interdependence). It is expected that East-West economic interdependence will decrease the probability of conflicts, since both parties have economic benefits to lose. (23)

It is perhaps Mastanduno (1992) who provides the most precise and nuanced definition of economic persuasion. In his study of CoCom he distinguishes four possible economic strategies that a state may pursue: economic warfare, strategic embargo, tactical economic linkage, and structural economic linkage. Here we are most interested in his definitions of linkage strategies since they are not meant to deny or weaken the target state but instead rely on some magnitude of beneficial economic exchange. This strategy is also meant to influence the behavior or policies of target governments. The critical difference between these two types of positive economic statecraft is the degree of conditionality imposed on the target state. A strategy of tactical linkage can condition or calibrate trade according to changes in target behavior by rewarding, or promising to reward, good behavior. It also punishes, or threatens to punish, bad behavior. Structural linkage, on the other hand, relies exclusively and unconditionally on trade expansion. By developing or intensifying economic relations the sender government hopes to induce or reinforce desirable changes in the policies of the target government.

The "Power" of Economic Persuasion

Going beyond these theoretical conceptions of the logic of economic persuasion we need also to examine the actual utility of economic incentives. What is the utility of employing economic instruments for political ends? Much like the case with negative sanctions (i.e., measures meant to punish or harm) economic incentives can serve a broad range of purposes. These purposes can range from the relatively modest (e.g., send a signal) to the more difficult (e.g., extract political concessions).

By stipulating that the instrument used have a tangible market price, economic instruments are distinguished as separate and discrete tools of foreign policy, as distinct from military or diplomatic tools, for example. Such economic means range from threats or actual use of economic punishment (e.g., embargoes, boycotts) to promises or actual awarding of economic rewards (e.g., loans or grants). Hence these tools include negative as well as positive sanctions. Increased bilateral economic exchange, for example, could be used as a basis for political cooperation between states and across issues or it could be used in exchange for anticipated future political gains. Other positive sanctions include favorable taxation policies, granting most-favored-nation status, tariff reductions, investment guarantees, and so on.

Two primary examples of instruments used as a means of economic persuasion include purchase and free trade. Purchase, or direct monetary payment, is "one of the most common ways for some people to get other people to do things they would not otherwise do" (Baldwin 1985, 43). In this sense, purchase could include options ranging from debt forgiveness to concessional grants (which do not require repayment) to financing favored political foundations by means of endowments. The West German government tried all three of these examples in its strategy toward Poland (discussed in the empirical chapters in part 2).

Second, manipulating the legal and political framework can also be carried out in order to influence the pattern of international trade. A commitment to free trade or reducing discrimination is such an instrument in the sense that such a policy can be used to pursue a number of foreign policy goals, such as promoting economic recovery, ensuring access to strategic raw materials, stimulating economic development, creating markets for exports, or even creating an international atmosphere conducive to peace and security.

Baldwin (1985) discusses three significant types of "bargaining behavior" for which such economic incentives are particularly useful, the first of which focuses on images and symbols. Since statesmen usually behave as if others were watching (that is, they usually try to gauge the effects their behavior may have on outside observers), economic signals can be used to clarify the statesman's values and intentions for others. For example, Jervis (1970, 7-8) argues that goodwill, prestige, and saving face are important goals and that these are "aspects of a state's image that can greatly contribute to its pursuit of other goals. . . . For if they succeed they can bring rewards all out of proportion to their costs by influencing the psychological environments and policies of other decision-makers."

Next, economic incentives function as indicators of intention. Positive or supportive orientation can be implied by economic rewards. (Of course, the reverse is also true: Refusal to engage in economic intercourse with another country projects an image of disapproval and hostility.) At the same time, techniques of statecraft per se vary in the degree to which they enable states to make ambiguous and limited commitments. For example, when sender country A grants economic aid to target country B it signals more than mere verbal support. At the same time, A's demonstration of political support by means of economic aid signals less support than military aid would. Likewise, negative economic sanctions are "often designed to deter and reassure simultaneously. Techniques that enable policy makers to demonstrate firmness while reassuring others of their sense of proportion and restraint can be highly useful" (105).

Finally, economic incentives can enhance credibility. "Talk is cheap." While economic diplomacy will usually cost more than propaganda or political diplomacy, its costliness also lends it more credibility. In terms of sanctions' expressive utility, using economic diplomacy can be used to signal approval (e.g., by not revoking MFN status, or by renewing trade treaties, sender A can signal "business as usual" to target B) or disapproval (e.g., by imposing a boycott or embargo against target B or by lowering quotas). These examples aptly correspond to the case study under review since the psychological phenomena of symbols, commitments, and credibility were necessary for Bonn to pursue its objectives of gaining trust and rehabilitating its reputation.

Sanctions also have the advantage of allowing for small, measured steps over a longer period of time, not always an option with military force. In other words, as Baldwin notes, "Quicker is not always better." Using a "salami tactic" of slow, cumulative series of negative economic influence attempts, none of which alone crosses the threshold that makes the commitment operative, can be very successful. This is especially true in mixed-motive games in which applying pressure and avoiding the evocation of an armed response are both important goals, making economic tools even more attractive. Hanson, too, argues that the success or failure of a particular foreign economic policy must be appraised by its cumulative effect over a lengthy period of time. "The usual approach is to judge 'sanction episodes' as self-contained short stories, each with its own sad or happy ending" (1988, 71).

This logic is particularly important for those foreign policy goals that aim for a positive modification of attitudes and beliefs. The reverse of the salami tactic--not slicing off resistance bit by bit, but adding credibility step-by-step--would suggest that steady positive inducements would be the best means of gaining trust. This thesis is supported by Goldstein and Freeman (1990) who find that "single-shot initiatives do little to promote long-term cooperation; initiatives which are maintained for long periods of time, even if sporadic, appear to be best suited for eliciting long-term cooperation in this environment" (5). I consider this to be a very important insight in light of Bonn's need to continually reassure its neighbors of its benign foreign policy intentions.

Above all, one important advantage in using economic persuasion to facilitate peaceful change lies in the appreciation of its larger power base. The scope of application is larger than that of purely negative sanctions. According to the concept of the "third face of power," understanding power entails not just looking at policy decisions, but also at the creation of political structures and political cultures. It is the cultural values and norms of a society that determine what its actual interests are. Thus, a study of the utility of a particular foreign policy strategy cannot limit itself only to instances of behavioral compliance. Whereas most scholars take it for granted that determining what actor B would "otherwise do" (in the absence of actor A's influence) can be gauged on the basis of actor B's preferences, Lukes (1974, 34) claims that the proper variable to measure is actor B's interest. "A exercises power over B when A affects B in a manner contrary to B's interest." This suggests that the third face of power does not necessarily involve measurable conflict, since "is it not the supreme exercise of power to avert conflict and grievance by influencing, shaping, and determining the perceptions and preferences of others?" (Lukes 1978, 669). Likewise, Mastanduno (1992) suggests that unconditional expansion of trade will "enhance a sanctioning state's security by restructuring the choices, the incentives, and ultimately, the behavior of a target state" (55).

Effecting changes in attitude or changes in preferences implies long-term change versus short-term or single acts of compliance, which are usually singled out as case studies of economic embargoes. An important key, then, to understanding the usefulness of economic statecraft is recognizing that a long gap in time may occur before success is observable. Moreover, affecting attitudinal change also implies employing different means. The power to do so, the power to affect pride or respect through integrative behavior, is just as significant as the military power of a nation to wage war:

It is integrative power that is the most dominant and significant form of power, in the sense that neither threat power nor economic power can achieve very much in the absence of legitimacy, which is one of the more important aspects of integrative power. Without legitimacy, both threat and riches are 'naked.' The great fallacy, especially of political thinking in regard to power, is to elevate threat power to the position of dominance, which it does not really possess. (Boulding 1989, 10)

Institutional Anatomy of the Trading State

If we accept the liberal premise that increased economic exchange between nations can lead to reductions in tensions and possibly to long-term peaceful change, then how can a government initiate and sustain such exchange? How does a state successfully employ a strategy of economic persuasion? The primary purpose of this study is to evaluate the utility of economic persuasion, or the use of economic incentives, to achieve foreign policy goals that are noncoercive and long-term in nature. Using an institutional analysis, it provides insights into the process of foreign policy making. It assumes that instead of following the path of a traditional "military-territorial state" (Rosecrance 1986), officials can employ a strategy of economic persuasion to achieve foreign policy goals. In other words, state officials can instead adopt the stance of a "trading state," that is, a state that pursues "peace through trade."

However, embracing a strategy of economic linkage does not imply the ability to implement it effectively. Mastanduno (1992) argues that structural economic linkage is quite difficult to implement since "the strategy requires both the mobilization of private economic interests and their long-term subordination to political considerations" (54). So we need private business to support it. A state must also possess the capacity to implement such a foreign policy. Klaus Knorr (1975) in his seminal work on economic power persuasively argues that for nations trying to favorably affect foreign policy outcomes the "power" of positive economic engagement can be quite useful. Yet he then claims that it is nearly impossible for market societies to implement this strategy successfully.

As in the case of trade restrictions, the use of the trade carrot is more easily employed by state-trading than by capitalist states. It is institutionally difficult for the latter to channel trade expansion in a politically desired direction. (Knorr 1975, 164)

A state must, therefore, also be able to "guide" private wealth. How does a state channel private resources in a desirable direction?

In this book I suggest that institutional capacities determine the utility of economic persuasion. Here capacity is understood as both the actual mechanisms of commercial diplomacy (i.e., instruments and levers) as well as the institutional structures that can help shape the interests and actions of public and commercial actors. In particular this means that the state must be able to enlist the resources of the private sector in order to employ economic instruments. In other words, business interests must be aligned with the interests of the state. Under what conditions, then, can public officials in market economies succeed in utilizing public and private economic incentives for desired political outcomes? What factors enable state policymakers to rely on, indeed secure, the support of the private sector to increase economic exchange with the target state?

I propose that an analysis of institutional structures can provide the answer to these questions. In particular, the degree to which two particular conditions are present can be important in determining whether economic persuasion can be usefully implemented: (1) functional autonomy, coordination, and continuity within the bureaucratic process and its relations with the institutions of capital; (2) state capacity to extract and channel domestic resources to target countries. These key attributes, which I label managed foreign economic policy and reward power, affect policy outcome.

Why are these factors important? Because they determine the institutional capacity of the state to maintain a strategy of providing economic incentives to the target nation. Institutional capacity includes knowing what the business community needs in order to facilitate economic exchange and possessing the actual levers to effect that exchange (e.g., export credit guarantees, technology transfer), as well as the ability to shelter the provision of these levers from excessive politicization by external forces.

By institutions I mean "the formal rules, compliance procedures, and standard operating practices that structure the relationship between individuals in various units of the polity and economy" (Hall 1986, 19). This follows the view that certain institutional features have a particular impact on the successful design and implementation of policy. Hall discusses two particular structural features that he argues play a crucial role in explaining policy outcome: organizational position of important actors in decision making and the actual organization of that decision making. The organizational position of a particular policymaker is important in that it influences the actor's definition of his/her own interests by establishing his/her institutional responsibilities and relationship to other actors. In particular, organizational position can be decisive in determining the likely direction of that actor's pressure. Within this context government-business relations comprise one particularly crucial structural component. How these relations are patterned is critical to understanding the success or failure of economic linkage since they can shape and mediate how foreign interests are defined and how foreign economic policy is designed and implemented.

Second, the actual organization of policy-making is also important because it affects the degree of power that any one set of actors has over the policy outcomes. "In this way, organizational factors affect both the degree of pressure an actor can bring to bear on policy and the likely direction of that pressure" (Hall 1986, 19). Organization is particularly acute in the case of the trading state since policymakers must be able to carefully calibrate policy outcomes.

Most literature discussing the utility of military force claims that the greater the military capability, the more influence it will have on coercing the opponent to behave as desired. This study assumes in a parallel manner that the greater the intensity of economic exchange, the more likely peaceful change will occur. The intent, then, is to increase levels of economic exchange between nations in the hope that this constructive behavior will in turn foster peaceful change in the target's policies and behavior.

I use recent definitions of political cooperation to identify means of economic cooperation. Martin (1992) simply defines cooperation as "any joint activity among states." Putnam and Bayne (1984) take a much more nuanced approach to cooperation, claiming it to be

episodes in which the policies of one or more states are modified to reduce the costs (or increase the benefits) that those policies entail for the welfare of other states, so that national policies differ from those that would have been expected from purely unilateral or autarkic policy-making. International cooperation in this sense is a matter of more-or-less, not yes-or-no. Co-operation may vary in intensity, scope and duration. (2)

Economic cooperation then becomes an issue of episodes, or activities, that are designed to benefit the welfare of the other state. As such not all cooperative efforts are always aimed directly at the target state; inducements can also be seen in gestures such as support for membership in international economic organizations, acting as an advocate in financial (e.g., the Paris Club) or trade (e.g., the European Community) forums.

However, most economic inducements are measurable: volume of trade and investment; amount of foreign aid; number of commercial agreements; amount of credits, public and private; and so forth. From this we see that not all economic inducements are under the control of government officials, that is, some involve commercial transactions. The decision to trade, invest, transfer technology, extend credits, and conduct other economic transactions are matters for the private sector. The instruments, or economic levers, which the state controls are limited. To increase the level of economic cooperation, then, the state must rely on the support of the business sector. How to generate business support then becomes a matter of domestic politics, that is, state-business relations. Thus, the successful use of economic incentives to evoke peaceful change in a target state is to a large degree dependent on private actor support.

Sometimes the performance required of business (e.g., trade and investment) is automatic. That is, if the transactions with the target state are potentially profitable, then business will likely perform without encouragement from the state. However, in many cases (especially those that involve commerce with centrally planned economies or, now, countries in economic transition) the economic and/or political risks are too high for business. In some cases the government in the target state may hold a monopoly on economic activities (i.e., communist regimes), putting business at a disadvantage in conducting commercial relations there. Here we observe commercial actors exercising a type of pocket veto over the sender state's efforts. In those cases the private sector limits the volume of economic exchange desired by the target government in that business chooses not to perform. In these instances, then, some type of encouragement or risk-assumption may be necessary on the part of government officials. In other words, should potential profitability be small due to high transaction costs, political risks, etc., then governmental domestic economic policy must be able to induce business performance. As a result we need to look at the ways in which a sender government can magnify its efforts by inducing business to support this policy of increased economic exchange. A primary goal of this book, then, is to improve our understanding of the domestic conditions under which the state can use private sector economic incentives to achieve national goals where these inducements are meant to facilitate cooperation with another state.

Once these conditions are met, what emerges is a vastly more nuanced and complex relationship between business and government. It is not a case of government demanding performance from business to support its interests. The relationship can also progress beyond business supporting the state in its more narrowly defined interest of increased economic exchange, to the point where private officials can, at the behest of government, substitute for or act in the spirit of public officials. Members of the business community can actually compensate for restricted interstate relations. For example, in times of political conflict between two states, where one state reduces its diplomatic exchange with the other, business can still conduct economic exchange with the target state. Under these conditions continuity in economic exchange can keep dialogue open between the two feuding governments, albeit in a much more discreet manner. Such was the case of German business in Poland during the period of martial law in the early 1980s after most Western nations had imposed a diplomatic embargo against Warsaw as punishment. Under these conditions commercial operators can function as a type of third-party mediator in that they provide a means of communication and political exchange between both parties in disagreement.

Normalization of German-Polish Relations as a Case Study

Forty-five years after its "temporary" division at Potsdam, Germany was united as a nation. For years scholarly consensus maintained that the unification of Germany was, at best, a prospect for the distant future. Even after the Berlin Wall was breached on November 9, 1989, predictions were that two sovereign German nations would continue to exist side by side, establishing at the most some type of confederation.

Poland in particular wanted to believe in the permanency of two German states. Meeting with Polish foreign minister Krzysztof Skubiszewski the day after the Wall opened, West German foreign minister Hans-Dietrich Genscher reassured his colleague that Bonn would not exploit the situation in East Germany or East Europe for its own purposes. Bonn would not seize the initiative for a reunification, and there would be no return to the old Germany. Political leaders in Bonn insisted that the issue at stake was the reunification of the German nation, not the reunification of Germany. Indeed, Chancellor Kohl's original pan-German policy, introduced in late November, envisioned a German confederation with possible reunification after a span of ten years. Yet even this relatively benign vision was met with mild alarm in most European states (East and West).

From a historical perspective it deserves noting that the Western alliance was originally designed with a dual purpose in mind: to contain the Soviets and the Germans. As one of its founding fathers nonchalantly declared, NATO was meant to "keep the Americans in, to keep the Russians out, and to keep the Germans down." A French official expressed a similar sentiment when he quipped that he loved Germany so much he was glad there were two of them. Indeed, former German president Richard von Weizsacker himself emphasized that

overcoming partition does not mean unification. . . . For the former we will find understanding almost everywhere and for the latter almost nowhere. Most Europeans dislike the wall about as much as they do the idea of a large German state in the center of Europe. (Pfluger 1990, 180)

Yet despite these disclaimers, German reunification did occur on October 3, 1990, less than a year after the Iron Curtain draped over Berlin was lifted. Why then, despite this almost overwhelming consensus about the nondesirability of a unified Germany (the United States being the one notable exception), did unification occur? If the predominant postwar image of Germany was that of a nation that needed to be contained, then a fundamental transformation of international sentiments must have occurred in order for unification to take place in 1990 with so little resistance.

An analysis of Polish-German normalization serves as a crucial case study (Eckstein 1992). Characterizing it as a least likely case, I can use German policy toward Poland as a test of validity. In the case of analyzing the utility of economic persuasion, no other set of bilateral relations represents a better example of what Kriesberg (1987) calls "mutual accommodation from a high level of antagonism" (405). In other words, this is not a case study of "war-ending" but deescalating agreements that resolved "contentious issues on terms that do not constitute surrender by one side, but rather reflect mutual acceptance." How was this manifest change in image produced? I submit that it involved the task of convincing the larger international community that Germany had shed its historical legacy of being a wanderer between East and West (based largely on Bismarck's Schaukelpolitik and later confirmed by the secretive Hitler-Stalin pact), that it was indeed a reliable nation, worthy of trust and credibility (Berechenbarkeit).

To achieve this broader, complex goal, I argue, West Germany chose the instrumentality of reconciling with one of its historical adversaries-- Poland--in order to demonstrate its benign intentions to the larger international community. German officials pursued the objective of reconciliation in order to resolve contentious issues peacefully. The means used for this political reconciliation process were overwhelmingly economic. More specifically, how did the West German government change the behavior and policies of their most distrustful neighbors--the Poles? I argue that Bonn recognized the utility of economic and political cooperation in winning the trust of the Polish elite in order to evoke long-term transformations in political attitudes and images.

This was crucial since the objective of reconciliation was to become the linchpin for Bonn's larger Ostpolitik, just as earlier Franco-German reconciliation had been the linchpin for Bonn's larger "Westpolitik" (i.e., integration in the West). In their move to regain autonomy in the 1950s and 1960s West German officials envisioned West European integration in the form of the European Community (EC) as a stepping-stone. Key to the European integration process was French support. Thus, in the early postwar period Bonn granted economic concessions during the creation of the European Community's Common Agricultural Policy in exchange for France's political blessing for further integration (Bulmer and Patterson 1987, 72 and 225 ff.)

To this extent, in the 1950s and 1960s German membership in the European Community served a dual purpose in Bonn's foreign policy. The first objective was symbolic: it signaled a break with Germany's destabilizing nationalist past. Thus, membership in the European Community helped Bonn gain international legitimacy. Second, it provided predictability: it provided a stable political and contextual framework for Bonn's foreign policy. By making the parameters of Bonn's foreign policy transparent, it made Germany a more predictable factor in its partners' calculations.

I suggest that similar goals motivated German officials in the 1970s and 1980s. They envisioned rapprochement with Eastern Europe as a means to avert isolation in the West and lessen the hardships of Germany's division while still holding open the option of unification. Within this larger strategic context, Germany's policy toward Poland fulfilled multiple objectives. For example, one important component of the rapprochement process concerned legitimizing the territorial status quo. Here Poland played a key role, for confirmation of Poland's western border had been a stumbling block to closer relations between Bonn and all of Eastern Europe. I suggest that Bonn exchanged economic concessions for political concessions from Warsaw. More specifically, I argue that it was critical for Germany that Poland be willing to accept an important legal conditionality attached to the 1970 border treaty as well as the 1975 Helsinki agreements. While agreeing to the nonviolability of Europe's borders, this conditionality specifically allowed for the peaceful revision of such borders.



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Excerpted from The Art of Economic Persuasion: Positive Incentives and German Economic Diplomacy by Patricia A. Davis Copyright © 1999 by Patricia A. Davis. Excerpted by permission.
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Table of Contents

Contents List of Figures List of Tables Acknowledgments List of Abbreviations I. The Theory and Tenets of Economic Persuasion 1. Introduction 2. Institutional Structures and Linkages: Managed Foreign Economic Policy 3. Extracting Domestic Resources: Reward Power II. German-Polish Reconciliation: A Case Study of Applied Economic Persuasion 4. Change through Rapprochement: From Isolation to Resolution 5. From Stabilization to Damage Limitation 6. From Ambivalent Adaptation to Normalization III. Conclusion 7. The Utility of Economic Persuasion: A Reappraisal Notes Bibliography Index