Incentives

 

By
M. Shane Smith

April 2004
 

 

"It is better to be feared than loved, more prudent to be cruel than compassionate."--Niccolo Machiavelli

"He who lives by the sword, will die by the sword." --Matthew 26:52

The two quotes above highlight what are often considered to be two opposing views of politics. The first suggests that, ultimately, people are only motivated by punishment. The second, however, warns that punishment leads to resentment and fear, which cause others to retaliate. In truth, successful statecraft often combines the two approaches to include both threats and promises so that undesirable behavior generates punishment, but favorable behavior merits a reward. [1]

What is an incentive?

In an incentive, A promises rewards to B in an attempt to get B to do or not do X. (In our discussion, we will refer to A as a "sender," and B as a "target.") When punishments or sanctions are likely to be ineffective, providing rewards for preferred behavior may produce a more desirable outcome. However, incentives have been frequently associated with weakness or indecisiveness. As a result, scholarship has tended to focus more on sanctions than incentives. This unequal attention has skewed the perceived effectiveness of threats over promises. Incentives can be an effective alternative for managing conflicts. As with all such devices, however, they must be carefully administered with attention to matching the right tool with the right problem.

Types of incentives

There are generally four different types of incentives:

1.) Relaxing Penalties:

One type is the removal of existing penalties, such as sanctions, embargoes, investment bans, or high tariffs, in exchange for specific policy changes. This was an implicit part of the U.S. incentives package, which tried to encourage Libyan cooperation with U.N. antiterrorism conventions and seek Libyan assistance in the hunt for the perpetrators of the September 11th attacks. However, this approach is not always viewed as an actual incentive. If the penalties being relaxed are thought to be disproportionate to the alleged actions, or the penalties are perceived to be wrongly imposed in the first place, or their mere withdrawal is thought to be insufficient compensation, then the target may not view such an offer as an incentive at all. While these incentives may be viewed as bribes or be resented as invasions of sovereignty, the willingness to lift sanctions in exchange for particular policy changes can create an atmosphere more conducive to compromise than can the threat of more sanctions.

2.) Conditionality:

Another type of incentive is one used to improve the recipient's economic standing.[2] This can include financial assistance, access to technology, loans, or investment initiatives, in return for certain concessions. The foreign policy community in the United States has recently pushed this strategy. In early 2002, for instance, the U.S. Senate introduced a resolution encouraging greater use of economic incentives as a diplomatic tool in the fight against terrorism. Joan Nelson and Stephanie Eglinton of the Overseas Development Council have suggested that foreign aid, typically considered a tool of support or tacit persuasion, should also be used as a form of pressure by making it explicitly conditional.[3] Ways of achieving this, they argue, include providing more aid to those who meet certain criteria and making aid contingent on prearranged policy reforms. In 1992, for example, President Bush indicated that financial assistance to Israel would be contingent on its limiting settlement activities in the occupied territories.

Conditionality, however, does not need to be explicit. In the mid-1980s, South Africa was discouraged from approaching the International Monetary Fund for assistance, due to heavy international pressures against its practices of apartheid and the storm of protests that accompanied its 1983 IMF application. Similarly, the Structural Adjustment Lending program at the World Bank can place implicit pressure on a country's military budget by requiring specific economic and social expenditures aimed at squeezing out military spending.[4] While such conditions may result in policy changes, nations are often unable to make the necessary reforms, or they are able to ignore the implicit pressures and continue "business as usual." Therefore, frustrated donors are increasingly attaching explicit conditions to economic packages, which are more difficult for the target to avoid.

Conditionality is often resented as an invasion of sovereignty, and can backfire on the sender. For instance, without sensitivity to internal political dynamics, a donor may inadvertently weaken reform movements and strengthen hard-line factions in the recipient nation. Moreover, imposing changes on a society whose existing institutions or culture are insufficient to handle the proposed policy changes, may result in unintended consequences that may do more damage than good. After the fall of the Soviet Union, rigid reforms were advocated in the West as conditions for providing financial assistance to Russia. However, imposing rapid, top-down changes had destabilizing effects on the economy and society that threatened reform efforts and democratization.

3.) Political and Security Incentives:

A third type of incentive is political or security cooperation. It involves meetings between political leaders or military/law enforcement exchanges, which can bolster the recipient government's legitimacy. States often seek international legitimacy for their policies in order to secure policy independence and improve international relations. Visits by foreign leaders symbolize this international legitimacy and can promise material gains. In addition, international legitimacy can potentially demonstrate successful leadership and strengthen domestic legitimacy.

Similarly, cooperation on security matters provides added legitimacy to the actions of one's military forces. For instance, the United States has sought international military cooperation in its "war on terror" and missions in Afghanistan and Iraq. This has been more out of symbolic than tactical need, as the superiority of U.S. forces is largely undisputed. However, unilateral military actions are resented in the international community and the political ramifications could have significant consequences. Indeed, several countries, like Turkey, explicitly offered coalition support in exchange for economic and political concessions from the United States. Less dramatic military cooperation can also provide significant benefits. For example, joint exercises or military assistance can help strengthen a nation's forces while simultaneously providing a powerful symbol of friendship, legitimacy, and security that bodes well for both domestic and international politics.

Another security incentive that has had notable success in conflicts requiring third-party mediation and arms-control measures is the issuance of security assurances.[5] After the fall of the Soviet Union, significant nuclear stockpiles remained in Ukraine. In exchange for Ukraine's disarming, the United States and Russia reaffirmed their respect for the territorial and political sovereignty of Ukraine, and stated a willingness to defend the newly independent country. This international agreement helped alleviate Ukraine's fear that Russia might again pursue imperial ambitions, allowed it to disarm, and, in doing so, enhanced the stability of the region during an uncertain time. Similarly, U.S. security assurances through the extension of its "nuclear umbrella" have helped stave off the atomic ambitions of such countries as South Korea, where the development of a nuclear arsenal could spark a regional arms race.[6]

4.) Inclusion Incentives:

The expansion of the European Union and the North Atlantic Treaty Organization has affected how states in the region behave, and has sparked discussion of the last type of incentive: inclusion in international organizations. These institutions can bestow financial, security, and psychological benefits on their members. Joining the European Union, for instance, symbolizes that one is part of, and ostensibly reflective of, a progressive and peaceful community with an increasingly competitive edge in the international marketplace. As Czech Foreign Minister Svoboda suggests, "The E.U. is for us the symbol of stability, prosperity, security and the capability of creating good relations with neighboring countries... It was a symbol for us to join the family of the free, democratic countries." [7] Thus, the European Union provides financial benefits through an open market, security benefits through increased competitiveness in the global economy, and psychological benefits by allowing members to identify with like-minded neighbors who share similar values.

Membership, however, has its costs. Nearly every international organization has certain economic, political, or social criteria and norms that must be respected. While these stipulations may have significant domestic costs, the potential long-term benefits of joining often outweigh short-term losses. For instance, market-oriented changes necessary for membership into free trading zones, such as the European Union and the North American Free Trade Agreement, can threaten many businesses and jobs. Thus, leaders who initiate the integrative measures necessary for membership sometimes face heated domestic opposition. Yet, the long-term benefits associated with economic openness, and the potential for interconnectedness with one's neighbors to bring about peaceful relations,[8] are powerful motives for leaders to make the necessary changes. Indeed, the prospect of stability and prosperity associated with membership in the European Union has encouraged many eastern European countries to undergo the difficult transition from socialist dictatorship to a more capitalist democracy, and has transformed a once divided and conflicted continent into an increasingly integrated group of countries.

A similar and largely effective type of incentive is a process that Paul Schroeder describes as "association-exclusion."[9] Economic cooperation, development, democracy, and peaceful relations characterize the nations of the Pacific Rim and North Atlantic The prosperity of many of these countries is envied around the world, and the potential for improved relations and identification with them, particularly the United States, encourages others to undertake systemic changes that include democratic values. Indeed, David Cortright argues that, "the most powerful inducement for peaceful relations in the world today is access to the emerging system of political cooperation and economic development among major states."[10] For instance, he attributes Brazil's and Argentina's dismantling of their budding nuclear programs to their desire to improve political and economic relations with the United States and their Latin-American neighbors. The fear of being excluded from the group, and foregoing the associated benefits, can provide an incentive like no other.

Benefits of Incentives

Some benefits of incentives are:

1.) Spill-over Effects: The decision to employ incentives will not only influence the immediate behavior of the target, but will also have a "spill-over effect" on relations in general. Incentives tend to enhance the willingness of the target to cooperate on other issues, while sanctions are likely to impede such cooperation.

2.) Legitimacy: It is generally much easier and less controversial to increase another's prosperity in return for a desired action, than to forcibly deprive them of something if they do not conform. That is why, for instance, the United States has been willing to provide nations with incentives for cooperation in the "war on terror," but has been reluctant to openly employ sanctions except in the most egregious of cases. In other circumstances, however, the opposite strategy may be required. Few would suggest that deterring nuclear attack by threatening retaliation is less moral or legitimate than offering a bribe to the potential attacker. Indeed, there was a great deal of outrage over President Clinton's decision to offer economic and energy incentives to North Korea in exchange for partial closure of its illegal nuclear weapons program, without further concessions on part of the North Koreans.

3.) Market Forces: Eileen Crumm argues that market forces work against sanctions, while incentives can be tailored to maximize their value to the targeted actor. [11] Sanctions require multilateral coordination; if the target is able to acquire sanctioned goods elsewhere, then the sanction is only symbolic and has little impact on the target. Incentives can be unilateral and structured to fit the needs of the target, in a manner that maximizes their value and benefits particular sectors within society.

4.) Addressing Needs: Conflict largely arises out of political, economic or security-related need. Sanctions increase that need; by subtracting from the target's political, economic, or security baseline, they exacerbate the tensions and can precipitate conflict. Incentives, on the other hand, add to a target's baseline and can be structured to address the need that is creating contentious behavior.

The recent relationship between the United States and Pakistan provides an example of a successful use of sanctions or incentives. In 1998, the United States placed sanctions on Pakistan for testing a nuclear weapon. Offering an incentive, or tacitly accepting Pakistan's actions, could have encouraged nuclear proliferation by other countries and further weapons development within Pakistan. Instead, though the punishment was short-lived, the sanctions sent a signal that such behavior was unacceptable. After the terrorist attacks on the U.S. in 2001, the United States lifted these sanctions and provided Pakistan with financial assistance to secure its cooperation in the fight against terrorism. It is doubtful that continued or increased sanctions would have produced a similar outcome, although that was certainly an implied possibility had Pakistan not cooperated with U.S. policies.

Problems

Problems with incentives include:

1.) Symbolism: David Baldwin argues that "[n]egative sanctions have become psychologically linked with such characteristics as courage, honor, and masculinity," which are especially important in the international arena. Thus, he continues, "the statesman who would use [incentives] risks being perceived by both foreigners and his domestic public as soft, weak, or lacking in toughness." [12] Therefore, the reputation -- and by extension domestic and international clout -- of a political leader may be damaged by offering incentives, unless the leader does so from a position of perceived strength.

2.) Blackmail: The use of incentives may encourage attempts to blackmail the sender. Richard Haass and Meghan O'Sullivan warn that, "the provision of incentives to curtail offensive behavior could encourage others to engage in similar activities in the hopes of extracting benefits." [13] Moreover, the target country can exploit incentives, creating a "moral hazard," whereby an incentive generates further need for the incentive and the target develops strategies for extracting greater benefits. For instance, some argue that providing North Korea with assistance during the 1990s in exchange for halting its illegal nuclear program may have encouraged the Koreans' subsequent belligerence, with the goal of securing additional assistance. To help avoid such scenarios, David Cortright suggests structuring incentive packages in an incremental manner, which allows for evaluation of changes and ongoing relations and incorporates sanctions to combat resistance. [14]

3.) Rewarding Evil: Just as sanctions may inadvertently bolster anti-reform or hostile sectors of society, incentives can have negative effects on internal political dynamics as well as have international consequences. For instance, during the Cold War, the United States and the Soviet Union provided military assistance to despotic leaders of other countries, as an incentive to adopt policies favorable to the U.S. or the U.S.S.R. in the global, geopolitical struggle. This materiel was all too often used against the country's own citizens in efforts to repress opposition and secure the illegitimate government's leadership. Similarly, assistance was provided to insurgent forces combating governments whose policies were unfavorable to the United States or U.S.S.R.. Such incentives had disastrous consequences within these countries, and sometimes produced a "boomerang effect." Indeed, when U.S. forces entered Somalia, they found themselves being fired upon by American-made weapons.

4.) Entanglement: Another problem for incentives is that they inevitably create invested interests not only within the target state but also in the sender country. For instance, the agricultural or defense industries benefit when the United States provides a country with grain or military assistance. These sectors may then try to hinder future policy changes, because they have significant interests in seeing aid continue to flow to the target country. In the 1970s, the United States opened trade with China to gain its cooperation toward containing the Soviet Union. By 1995, 200,000 American jobs and $12 billion in trade depended on China. At the same time, relations began to deteriorate over human rights and proliferation concerns. Yet, the United States had lost much of its leveraging power due to the increased interconnectedness of the two economies and its growing dependency on a healthy Chinese economy and stable political system.

Conclusion

Incentives do not guarantee peaceful diplomacy. However, they are a promising but underdeveloped tool for encouraging political change, and may help avoid conflict. They are most effective when there is at least an implicit, if not explicit, penalty for objectionable behavior. Moreover, incentives are most effective when provided incrementally, giving the sender an opportunity to evaluate incremental effectiveness. This reciprocal interaction helps sustain greater trust and enhances the potential for longer-term cordiality. Incentives can have unpredictable effects on both domestic and international political dynamics that can harm the interests of the sender. Thus, careful attention must be given to the political context of a particular situation, the economy and/or government relations of the target actor, and the sender's own structures and domestic circumstances.


[1] For a brief discussion of the pitfalls associated with conceptually distinguishing positive from negative sanctions, see David A. Baldwin, "The Power of Positive Sanctions," World Politics Vol. 24, No. 1 (October 1971), pp. 24-27.

[2] David A. Baldwin, "Foreign Aid, Intervention and Influence," World Politics Vol. 21, No. 3 (April 1969), pp. 425-447.

[3] Joan M. Nelson and Stephanie J. Eglinton. Global Goals, Contentious Means: Issues of Multiple Aid Conditionality (Washington, D.C.: Overseas Development Council, 1993).

[4] David Cortright, "Incentive Strategies for Preventing Conflict," in David Cortright (ed.), p. 249.

[5] Thomas Bernauer and Dieter Ruloff (eds.), The Politics of Positive Incentives and Arms Control (Columbia, SC: University of South Carolina Press, 1999).

[6] Mark B.M. Suh, "The 'Korea Question' and Problems of Nuclear Proliferation in East Asia," Korean Peninsula: Enhancing Stability and International Dialogue (June 1-2, 2000), pp. 225-232; available online at http://www.mi.infn.it/~landnet/corea/proc/041.pdf.

[7] "Czechs Cherish Dream of EU Prosperity and Stability," The Irish Times (October 11, 2002), p. 10.

[8] However, the idea that economic interdependence facilitates peaceful relations is not universally accepted. For an overview of the debate, see Susan M. McMillan, "Interdependence and Conflict," Mershon International Studies Review 41 (1997), pp. 33-58.

[9] Paul W. Schroeder, "The New World Order: A Historical Perspective," The Washington Quarterly Vol. 17, No. 2 (Spring 1994), p. 35.

[10] David Cortright, "Incentive Strategies for Preventing Conflict," in Cortright (ed.), p. 269.

[11] Eileen M. Crumm, "The Value of Economic Incentives in International Politics," Journal of Peace Research Vol. 32, No. 3 (1995), pp. 313-330.

[12] Ibid., p. 34.

[13] Richard N. Haass and Meghan L. O'Sullivan, "Introduction," in Richard N. Haass and Meghan L. O'Sullivan (eds.), Honey and Vinegar: Incentives, Sanctions and Foreign Policy (Washington, DC: Brookings Institution Press, 2000), p. 4.

[14] David Cortright, "Incentive Strategies for Preventing Conflict," in David Cortright (ed.), The Price of Peace: Incentives and International Conflict Prevention (Lanham, MD: Rowman & Littlefield Publishers, Inc., 1997), p. 275- 80.


Use the following to cite this article:
Smith, M. Shane. "Incentives." Beyond Intractability. Eds. Guy Burgess and Heidi Burgess. Conflict Information Consortium, University of Colorado, Boulder. Posted: April 2004 <http://www.beyondintractability.org/essay/incentives>.


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