October 8, 2000

Foreign sanctions are a gift to wily dictators

Posted in International Economy ·
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Over the coming days we will hear the very people who ordered the bombing of Serbia last year spin us yarns about why sanctions were instrumental in bringing down Slobodan Milosevic. When an event of this magnitude happens everyone wants to be a part of it and the EU will talk up the impact of sanctions until it’s all blue in the face.

The EU’s finance ministers will tomorrow hail the lifting of these sanctions as the universal panacea for the Yugoslavian economy of the future. Nothing could be further from the truth. Sanctions keep dictators in power, particularly dictators who have eliminated their middle classes. Just ask Saddam Hussein.

One of the greatest myths in European diplomatic circles is that economic sanctions accelerate the removal of odious regimes. This contention can only hold when a luxury-consuming, rich and substantial middle class support the regime.

This was the case in South Africa. There the apartheid regime was the construction of the middle classes. Its entire raison d’etre was to preserve a European middle-class standard of living for the whites where profits culled from the labour of the black man could be spent on cars, videos, French wines, posh kitchens and the like.

As a consequence, sanctions hit hardest precisely because they hurt the lifestyles of the very class that was supporting the regime. Over time it began to dawn on whites that a way of getting all those nice imported goodies back would be to cut a deal with the blacks, ensuring nothing revolutionary occurred and continuing on as always under a new flag. This is precisely what has happened.

On a recent visit to South Africa I was struck by the lack of retribution on the blacks’ part; but when I probed further, one black taxi driver said to me that things only seem normal because “they pretend [apartheid] never happened and we pretend to forgive them”. Sanctions over, most whites continue to live a rarified existence in a place that can only be described as a sunny Kent with voting servants. The central point is that sanctions worked against PW Botha’s South Africa because they were targeted at the middle classes. Unfortunately, South Africa was the exception, not the rule.

Iraq and Yugoslavia are much more typical of dictatorships, and in these countries there can be no doubt that sanctions prolonged the dictatorships, strengthened their grip on power and prolonged the misery. In both these countries the middle classes are the opposition.

Due to a combination of nationalism, censorship and a lack of education, regimes are often propped up by the poor, the rural and the elderly. Yugoslavia’s polls last week evidenced this fact. Milosevic’s support came from the old, the nationalists and the farmers, a smattering of idealogues and the corrupt nomenklatura he created. While most of these people were unaffected by sanctions, some of them actually benefited hugely from the lack of an open market. To see how this could be the case we have to look at how a typical poorish, middle-income economy works.

Without sanctions, any economy naturally produces credit cycles: good times followed by bad times, savings, investment plans, etc. If the economy is not really competitive, as was the case for Yugoslavia, trade deficits periodically lead to financing crises and money needs to be borrowed from the outside.

Marshall Tito understood this, and as well as being the master geopolitical tactician, he was also one of the best borrowers in Europe. Over the years the economic ebb and flow dictated political change, with the educated middle classes typically at the vanguard of reform movements and the old communist idealogues trying consistently to slow things down.

When sanctions were first introduced in 1992, they were limited to financial sanctions. This meant no one from Yugoslavia could borrow from the outside world. The country had to live off its own domestic savings, which were never great in the first place. Thus, we in the West could export anything we liked to them, but they could not borrow from us to buy — a potent cocktail for economic meltdown.

The best way to illustrate the impact this ridiculous anomaly has on a population is to look back at our economy in the mid 1980s. Imagine how many more people would have emigrated had Ireland’s huge trade deficits been financed out of domestic resources.

The reason emigration did not become an open flood, bad and all as it was, was because the state could borrow to cover the trade shortfall. Therefore, we managed to maintain a semblance of social normality despite not being able to pay our bills. Arguably, keeping it together in the 1980s allowed us to take off in the 1990s, even if the inheritance was a debt-GDP ratio of 130 per cent by 1988.

The national debt grew by almost 60 per cent of GDP during this time, but maybe the explosion of the national debt was the price this country paid to keep the show on the road until such a time as we became savvy enough to pay our way.

Now think of the Yugoslavs. They faced the same situation in 1992 but without any recourse to borrowing. Every time they purchased a car or computer, washing machine or CD, money left the country never to come back. Instead of debts building, the economy actually started shrinking. Like the Irish in the 1980s, many young educated people packed their bags and left.

This was precisely what Milosevic wanted to happen. The haemorrhaging of the opposition to London, Amsterdam, Toronto and Sydney was a godsend for him. Those who were left, the old and the very poor, never had access to imported luxury goods in the first place. The very rich would always be able to get whatever they wanted on the black market anyway, and for waverers sanctions could be used by the regime to enhance the persecution complex element of its propaganda, adding to its popularity.

A new class of sanction-busting thugs and mafiosi were created, who owed their immense overnight fortunes from petrol smuggling to the fact that Slobo’s police turned a blind eye.

The people who really suffered were the middle classes, and their best and brightest voted with their feet as the cash-strapped economy collapsed around them. During this period Milosevic (like Saddam in Iraq) strengthened his position. In the face of slaughter in Bosnia (and in Kurdistan) financial and economic sanctions constituted a coward’s diplomacy. Sanctions against a regime based on emasculating the middle classes will always prolong the dictator, not because sanctions don’t work but because they hurt the wrong people.

In South Africa sanctions only worked because kids of the regime’s supporters went to private schools. Bombarding Serbia and Iraq with cash rather than starving them of credit would have seen Milosevic and Saddam gone years ago.