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Essay Subject: Examines economic & political theories related to coercive diplomacy, hierarchy of states & war, focusing on freezing of foreign-owned financial assets as legal & political tactic to settle international disputes.... More...

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Paper Abstract: Examines economic & political theories related to coercive diplomacy, hierarchy of states & war, focusing on freezing of foreign-owned financial assets as legal & political tactic to settle international disputes. Paper Introduction: FINANCIAL ASSET FREEZING: POLITICAL RISKS ASSOCIATED WITH EURODOLLAR ACCOUNTS Introduction The freezing of foreign-owned financial assets held in depository institutions is a tactic that is used widely for both legal and political reasons. Host countries where foreign-owned financial assets are held in depository institutions most frequently place a freeze on activity involving such assets for legal reasons—to preserve the assets until judicial determination has been made as to the proper use and disposition of such assets. A case in point is the freezing of the accounts of the Ministry of Economic Relations of the Republic of Russia held in a financial institution in Luxembourg (Gerenstein, 1993, p. 3A). A freeze was placed in these financial assets through a court order Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. In most instances, the mini-states are, in effect, city states. The virtuesof modern civilization can be better preserved with a maximum of consentand a minimum of compulsion. Effective government necessarily combines the principles of consentand coercion, but the proportion of each is not unimportant. There must be an apparent advantage for the coercing party. At the same time, Keohaneargued that norms are less subject to change than are rules. Kern, D. Prestige is the reputation for power, and military powerin particular. P., &Rapen, D. BothAmerican corporations and American banking institutions have made extensiveuse of the Eurocurrency market to avoid some of the more restrictive of thetight money policies of the Federal Reserve Board (Cosset, 1982, pp. In the UnitedStates, commercial banking institutions are required to maintain a reserveof a specified amount, in order to fulfill the requirements for cashredemption; however, due to the fact that commercial banking institutionsare continuously receiving and paying cash and due to the fact that only asmall fractional proportion of the total deposits at an institution areever redeemed in currency, the amount of the reserve required for thispurpose is minimal. Both Gilpin and Keohanerecognized the significance of economic power in the creation andfunctioning of international regimes, Keohane, however, accorded economicpower a much more central role than does Gilpin.Rules of Interaction Between States With respect to the rules that govern interactions between states,Gilpin (1988, p. Middle powers are more difficult even than are great powers to define. Those theorists who subscribe to the systemic hypothesis hold thatcontrol over or governance of the international system is a function ofthree factors. Thus power coversall social relationships which serve that end, from physical violence tothe most subtle psychological ties by which one mind controls another.Political realism holds that universal moral principles cannot be appliedto the actions of states in their abstract universal formulation, but thatthey must be filtered through the concrete circumstances of time and place. Modelski (1982, p. Currency countries, those countries in whose currencies foreign-ownedfinancial assets are denominated (regardless of where such financial assetsare physically on deposit), typically place a freeze (or attempt to place afreeze since these countries do not exercise either physical or legalcontrol over the depository institutions) on activity involving foreign-owned financial assets as an act of political coercion. Outright armed conflict is simply the last step in theprocess, when all other efforts at persuasion and diplomacy have failed.Unfortunately, at times little effort is made to avoid internationalconflict. But then as the demand forguns goes down, we would expect that to reduce pressures of an inflationarykind. Federal Reserve Bank of New York Quarterly Review, 4(4), 11-2 . Conversely, the systemic hypothesis holds broadly that statescreate international arrangements to advance particular sets of interests,but, although interstate behavior is to varying degrees based on consensusand mutual interest, the primary foundation is in the power and interestsof the dominant states in a system.Political and Economic Links Modelski contended that, in the modern world system, political andeconomic processes are linked in a model of alternating innovations(Modelski, 1982, p. 5B). It attempts to cause the party at which it is directed to relinquishvalues that would not otherwise be relinquished. These six preconditions are as follows: 1. Foreign currency transactionscan escape the scope of agreements relative to domestic currencytransactions, and, it should be noted, can often thwart the objectives ofdomestic monetary policy. Eurocurrency deposits, as is true of any other deposit with a bankinginstitution, carry the requirement for redemption in cash. Modelski (1982, p. Cash Flow, 1 . In actuality, after all of this high levelrhetoric is distilled, coercive diplomacy is a limited application ofmilitary power, in an effort to attain goals without the risks typicallyassociated with full-scale military action. Alternating, generation-long periods of resource scarcityand resource abundance, as reflected in prices for food and raw materials,and as reflected in the distribution of income, will occur. In essence, indifference analysis inthe instance of international regime creation holds that individual stateswill attempt to maximize the attainment of national objectives through theacceptance of a bundle of benefits that offer the best potential for theattainment of this goal. Frydl, E. Bigger role for foreign banks in The City. It is, more often than not, relative militaryweakness which is the relevant criterion. Althoughthe role of relative power among states is recognized in the creation ofinternational regimes, the proponents of the second image hypothesiscontend that, through the exercise of rational-choice, affiliation withinternational regimes is a voluntary action on the part of a state. Modelski's (1982, p. Prestige, rather thanpower, is, according to the proponents of the systemic hypothesis, theeveryday currency of international relations. Some of them, such as Hong Kong andSingapore, are densely populated; however, even in the case of Hong Kong,with more than five-million inhabitants, the population is relativelysmall. It is not appropriate to conclude that either Keohane or Gilpin wasmore correct in their perceptions of the creation, functioning, andevolution of international regimes. Cooke, S. (1975). 8) went on to add that"attempts to separate a sphere of real activity, called 'economics,' fromanother sphere of real activity, called 'politics,' are doomed tofrustration and failure." Gilpin (1988, p. A definition ofa great power is that it is a state which is capable of securing its ownexistence against any other single state, other than one of thesuperpowers. Thus, these bankinginstitutions can establish reserves with respect to Eurocurrencytransactions based only on their interpretations of the requirements forprudent operations. In the contemporary time period, the Eurocurrency market is composed ofassets and liabilities denominated in the currencies of several of themajor western industrialized countries-the United States, the largercountries of the European Economic Community, Switzerland, and Japan(Cooper, 1985, pp. It is notabsolute military weakness which is always the relevant criterion, however,in international relations. 42-46). (1959). Power, within the context of political realism, may comprise anything thatestablishes and maintains the control of man over man. Gilpin recognized a greater power for thehegemonic state. Modelski defined world leadership as "the performance, by a nation-state, of the functions of ordering and maintaining global-levelinteractions" (Modelski, 1982, p. Thus, both force, albeit controlled, andthreats of the use of force may be integral components of a coercivediplomacy strategy. Coercion used in international relations is apart of conflict behavior between nations (Mitchell, 1991, p. 79), bycontrast, would define some of what Gilpin referred to rules as norms ofbehavior that are not as specific as are rules. (1991). Gilpin (1988, p. In internationalrelations, such relationships are defined in the context of superpowers,great powers, and so forth (Brodie, 199 , p. 97). The application of the model of alternating innovations led to theconclusion that world leadership is exercised by lead countries during longcycles. It largely depends upon whose ox is being gored. Keohane, R. These three structures are as follows: (1) hegemony orimperialism, in which a single powerful state dominates the lesser statesin the system; (2) bipolarity, in which two powerful states controlinteractions within and between their respective spheres of influence; (3)or a balance of power in which three or more states control one another'sactions through diplomatic maneuver, shifting alliances, and open conflict. Several different explanations havebeen offered as to why the activities which led to the development of theEurocurrency market were initiated. 11-2 ). Actions taken by the major western nations under the auspices of theUnited Nations to freeze the foreign-held financial assets that were ownedby Kuwait in the wake of the Iraqi invasion of that country in 1991 were aprotective effort to preserve the assets for the government of Kuwait,while simultaneously denying access to those assets to the government ofIraq, which was viewed as the aggressor nation. Francisco de Vitoria, in 1525, established the modern concept ofinternational law with respect to war, which holds that war is licit as alast resort, when all other means of persuasion have failed. TheEurocurrency market is an international financial market, in whichinstitutions both borrow and lend currencies other than those of thecountries in which they are headquartered (Kern, 1981, pp. 157-158). Host countries where foreign-owned financial assets are held indepository institutions most frequently place a freeze on activityinvolving such assets for legal reasons-to preserve the assets untiljudicial determination has been made as to the proper use and dispositionof such assets. (1991). 97) "not size ... (1988). In Prochnow, H. Broadly, the second image hypothesis holds that incentives to forminternational regimes depend most fundamentally on the existence of sharedinterests. (2nd ed.).Cambridge, England: Cambridge University Press. More broadly still, wewould expect periods of high-saliency politics to be periods when attemptsare made to improve the operations of politics through major innovation andthe launching and establishing of new political industries" (Modelski,1982, p. War and change in world politics. Suchactions are financial in character only to the extent that the assetsinvolved are monetary in character, and such actions involve theinternational banking system only to the extent that the internationalbanking system is manipulated by legal and political authorities in thepursuit of objectives associated with dispute resolution. The contention isthat hegemony and cooperation are not alternatives. Such powers have been called them the upper crust of the non-great.Michael Handel (1991, p. Coercive diplomacy is said to focus upon affecting the enemy's willrather than upon negating his capabilities. Rather, it was one major step in an evolutionaryprocess, which, in the 198 s, brought about major banking reform in boththe United Kingdom and the United States. Some havegone further and held that a superpower is one over which the jointmilitary efforts of all non superpowers would be unable to achieve amilitary victory. The basic relationship was perceived in the model as "that of theworld power providing, among its range of political goods/services andthrough its own international economic policies and its initiatives inworld arrangements, the political basis for global economic relations"(Modelski, 1982, p. America in a changing world of political economy. The development of the Eurocurrency market.Finance & Development, 12(9): 14-16. The most typically used classification system categorizes statesaccording to five gradations-superpowers, great powers, middle powers,small states, and mini-states. Banker,136(729), 69-134. References Blunden, M. but those indicators that bear on status as 'activezone': the creation of leading sectors and the relative size of theindustrial economy, and participation in world trade, both quantitatively... The second image hypothesis holds contrarily thatthe international relations policy of a state tends to be a product ofdomestic political structures and pressures. Suchmanipulation is facilitated by the existence on a large scale of Eurodollaraccount holdings. Princeton, New Jersey: Princeton University Press. Eachnational state tends to reserve a monopoly on violence for itself; however,through the mutual diplomatic recognition of one another, national stateshave also recognized the legitimacy of the wars they have waged,particularly so the wars they have won. The Eurocurrency market began to develop in the 195 s, wheninstitutions operating in the international system began to issueliabilities-usually short-term-in the denomination of the currencies inwhich the assets were acquired. Journal of Commerce and Commercial, 398(28116),5B. Irish Banking Review, (12),24-3 . War is also justified on other grounds. Weak states in the international system. 35) held that they applied to (1) the conduct of diplomacyand political intercourse among states, (2) the conduct of war betweenstates, and (3) the conduct of economic activity between states. The proponents of thesecond image hypothesis argue further that, rules, if they are to beeffective at all, must derive from specific interstate agreements thataffect the exercise of national controls. There must be a sense of urgency in the conflict situationfrom the perspective of the coercing party. Michael Handel (1991, p.1 ) stated that the behavior of states in the international system islargely determined by the power relations and differentials among them.Order within the system is continually threatened by the possibility thatsome states will resort to force or war in order to improve their relativepositions. Whenever, in the economy, actors exert power overone another, the economy is political. A second source of theconfusion are the names "Eurocurrency" and "Eurodollar," which areinterchangeable, for no physical currency exists by such names. 69-134). fundamentalshifts in the economy of the world" (Modelski, 1982, p. (1982, Winter). 5 -61). 23) said that, on the whole, they exhibitcharacteristics of weak states, rather than those of the great powers. A case in point is the freezing of the accounts of the Ministry ofEconomic Relations of the Republic of Russia held in a financialinstitution in Luxembourg. Long cycles and strategy. A case in point isthe action by the Office of Foreign Asset Control of the United StatesTreasury Department to force the Arab Banking Corporation located inBahrain to compel the institution's Libyan-born president and chiefexecutive officer to resign those positions at the institution. Thesuperpowers, as a consequence of their control of essential naturalresources, and the strength of their economic development are able toprotect themselves and their interests against any other power. One example of the thwarting of domesticmonetary policy is the ease with which American banks long avoided thesnare of the Federal Reserve Board's Regulation Q in the conduct ofinternational financial transactions-simply by holding United States dollarbalances in foreign banks, as opposed to United States banks. It is also contended,however, that domestic political structures and pressures underlie mostinternational relations policy. A case in point is the freezing of the accounts of theMinistry of Economic Relations of the Republic of Russia held in afinancial institution in Luxembourg (Gerenstein, 1993, p. For those reasons we must anticipate the demand for basic resources,hence also the general price level, to move in the same manner as thedemand for political goods/services of world order. By contrast, the proponentsof the second image hypothesis contend that power is essential for theconstruction and maintenance of regimes, and accorded economic power aprimary role in this context. Further, it is held that the sources of such rules ofinternational conduct are custom and formally negotiated treaties. The differentiation between conflict behavior and competition issignificant, because conflict assumes the necessity or the desirability ofconfrontation. The weak variant is called a "try-and-see" approach. A satisfactory definition of a small state is a statewhich cannot be classified as high as a middle power, and one which cannotcorrectly classified as a mini-state. Gilpin employed the cost-benefit concept inassessing the reasons for change in international regimes. V. The model assumes both politicaland economic dimensions for these functions. 22-25). Theorists generally hold that the liberal international arrangementsfor trade and international finance may be interpreted as responses to theneed for policy coordination created by the fact of interdependence. The dominance of a single great power may contribute toorder in world politics, in particular circumstances, but it is not asufficient condition to create and maintain such order. Actions placing a freeze on foreign-owned financial assets, whethersuch actions are initiated by either host countries or currency countries,therefore, are tools employed in dispute resolution processes that involveeither or both legal and political issues (Cowhig, 1993, p. (1994, April). Cowhig, J. 97). 97)used the term "lead economy," as opposed to "leading economy," as a meansof emphasizing "acting as a leader" or "going in front" (Modelski, 1982, p.97). One source of this confusion is the absence of a universallyaccepted assessment of the role played by the market in internationalfinancial arrangements or of the nature of the impact Eurocurrencytransactions on the international financial system. While investment returns on Eurocurrencyaccounts may often exceed those associated with national currenciesaccounts, the Eurocurrency accounts are susceptible to relative purchasingpower changes associated with base currencies in the international moneymarkets. When the demand for political goods/services ...and particularpolitical innovations rises, the scarcity of resources ... The theory ofpolitical realism holds that international relations is the concept ofinterest defined in terms of power. Luxembourg court puts freeze on someRussian trade accounts. Preponderant political processes becoming evident in periodsof political innovation will lead to the establishment of new world powers.Economic Bases For the Creation of Regimes Both Robert Keohane (1984, p. A huge political risk, thus, is attached to the holdingof substantial financial assets in Eurodollar accounts. Thus, humanity had to either acceptwar or stagnate. Keohane (1984,p. The debate over regulating the Eurocurrencymarkets. In this model, the political process is viewed asthe dependency of the world political system on the rise of world powers.Similarly, the economic process is viewed in the model as the dependencyinternational economic system on the formation of lead economics. A second is the theory of realism. J. Keohane (1984, p. If the coercing party had nocommonality of interest with the target party, it would simply impose thehurt on that target party, rather than attempting to gain its objectivesthrough coercive action. Together, the two variants of the coercive diplomacystrategy provide the two ends of a continuum. Thefreezing of foreign-owned financial assets held in depository institutionsis a tactic that is used widely form both legal and political reasons.Host countries where foreign-owned financial assets are held in depositoryinstitutions most frequently place a freeze on activity involving suchassets for legal reasons-to preserve the assets until judicialdetermination has been made as to the proper use and disposition of suchassets. American Political Science Review, 81, (1987), 1121-1137. Conflict behavior has been defined as overt actionsundertaken by one party ...aimed at an opposing party with the intention ofmaking that party abandon or modify its goals. Currency countries, those countries in whose currencies foreign-ownedfinancial assets are denominated (regardless of where such financial assetsare physically on deposit), typically place a freeze (or attempt to place afreeze since these countries do not exercise either physical or legalcontrol over the depository institutions) on activity involving foreign-owned financial assets as an act of political coercion. In practice,regular commercial banking institutions are required to honor only a smallfractional amount of their total deposits in this manner. In this context, prestige refers primarily to theperceptions of other states with respect to a state's capacities and itsability and willingness to exercise its power. Thus, warbecomes an extension of political participation, diplomacy. Business Week, (2884), 42-46. 97) formulated fourhypotheses. 97). If this latter view is correct,then the Eurocurrency market was not, in fact, the culmination of anevolutionary process. Economic innovations coinciding with periods of resourcescarcity will become embodied in new leading sectors. In Avia, W. The use of coercion also requires that the interests of the twoparties concerned not be absolutely opposed. Keohane, however, tended to discount the dominant capacity and willingnessto exercise such capacity accorded to power states in Gilpin's assessmentof international control. J. In the 196 s, most of the Eurocurrency activity shifted awayfrom New York, as a result of the implementation of Regulation Q by theFederal Reserve Board, which subjected Eurocurrency transactions conductedin the United States to reserve requirements (Frydl, 1979-198 , pp. This conceptgoes on to hold that the cause which justifies war is the violation of aright, and that an essential condition for the licitness of a war is thatthe evils resulting from it will not be greater than the good intended. Both official regulation and private agreements have playedsignificant roles in the development of the Eurocurrency market as a meansof facilitating international capital flows. From the perspective of the party applying coercive diplomacy, thereare six pre-conditions which must be fulfilled, before the strategy isapplied. The participants in this international financial market includecommercial banks, central banks and monetary authorities, and non-financialinstitutions, such as multinational corporations (de Grauwe, 1975. J. Cosset, J-C. 22) stated that control "overor governance of the international system is a function of three factors.These three factors are, according to Gilpin, the distribution of poweramong political coalitions, the hierarchy of prestige among states, and theset of rights and rules that govern or at least influence interactionsamong states. Small states are characterized by their military weakness. The systemic hypothesis holdsgenerally that the international relations policy of a given state tends tobe a product of the international regime of which it is a part (Rogowski,1987, pp. Such actions are financial incharacter only to the extent that the assets involved are monetary incharacter, and such actions involve the international banking system onlyto the extent that the international banking system is manipulated by legaland political authorities in the pursuit of objectives associated withdispute resolution. will increaseand the general price level is likely to rise. At the same time, it is argued thatnorms are less subject to change than are rules. Gilpin (1988, pp. The resort to war, or to the threat of war, is closely associated withthe theory of relative power among national states. 8) analysis was concerned primarily with theperiod stretching from the beginning of the First World War to the mid-198 s. In this context, the superpowersclassification becomes a segment of the great powers classification. Cooperation may be considered as a foundation of humancivilization; however, cooperation in transnational conflict resolution hastraditionally been noticeably absent in the conduct of internationalrelations. In this context, he stated that one "can viewinternational political economy as the intersection of the substantive areastudied by economics ... Martin's Press. Strategy variations areavailable to the coercing party all along the continuum. It was Friedrich Nietzsche in 19 1 who provided the mostpervasive justification for war of any type, and the romanticized conceptof a just war for a just cause. The motivationof the United States was primarily one of spite, as the action would havelittle actual effect on Libya other than embarrassment as Libya is a 25percent owner of the Arab Banking Corporation. It is characterized by a high level of verbal communicationbetween the parties involved. (3rded.) New York: St. Within this research framework, Modelski (1982, p. With respect to the hierarchy of prestige among states, Gilpin statedthat, ultimately, it rests on economic and military power. By contrast, Keohane contended that power isessential for the construction and maintenance of regimes, and he accordedeconomic power a primary role in this context. Handel, M. 24-3 ). 6. In the early 196 s, the Eurocurrency market was split between New Yorkand London. Thesearrangements, which we will call 'international regimes,' contained rules,norms, principles and decision making procedures." Keohane's (1984, p. Journal of InternationalBusiness Studies, 13, 71-83. Coercive diplomacy is a typeof conflict behavior. When coercive diplomacy does not work, however, theinitiating party may weaken its position significantly. In the United States, however, the reserve requirement is also used asa tool by the Federal Reserve Board as a means of providing safety andstability for the domestic banking system in the country, and to influencedevelopment of the economy through the manipulation of the country's moneysupply. The motivation of the United States was primarily one of spite,as the action would have little actual effect on Libya other thanembarrassment as Libya is a 25 percent owner of the Arab BankingCorporation. Abetter definition of a middle power is likely that a middle power is astate which can effectively defend its own interests against any othersingle state, other than a superpower or a great power. Thisaction was pursued by the United States through a coercive threat ofinitiating a freeze order on the Eurodollar assets of the Arab BankingCorporation that were denominated in United States dollars. 72)emphasized the significance of the application of the rational-choice modelfrom economic theory. It is a strategic move which may be implemented withsomething less than a full commitment on the part of the coercer, because,if the strategy does not work, the coercer is not committed, internally, topursue the strategy. In essence, indifference analysis in the instance of regimecreation holds that individual states will attempt to maximize theattainment of its national objectives through the acceptance of a bundle ofbenefits that offer the best potential for the attainment of this goal.The indifference curve in such an instance is tricky to apply, as so manydifferent factors must be included, which means that multiple points ofindifference must be determined and coordinated. Gilpin, however, generally addressesthe question of regimes in broader terms than does Keohane. 97). With respect tothe creation of regimes, however, Gilpin used the concept of indifferenceanalysis from economic theory to explain the actions of both regime leadersand members. FINANCIAL ASSET FREEZING: POLITICAL RISKS ASSOCIATED WITH EURODOLLAR ACCOUNTS Introduction The freezing of foreign-owned financial assets held in depositoryinstitutions is a tactic that is used widely for both legal and politicalreasons. Rather, it is better to conclude thatboth are valid in certain circumstances, and, therefore, should be viewedas complementary to one another.Conflict Resolution International relations are largely associated with conflictresolution. Summary and Conclusion This research examined the freezing of foreign-owned financial assetsas a function of the international dispute settling mechanism. (6th ed.). Waves of political problems and innovations coinciding withresource scarcities will bring the reordering of political structures andthe rise of new regimes, states, and international organizations within theglobal community of nations. 2. 1121-1137). (1987). pp. 8 -123). With respect to the rules that govern interactions between states, theproponents of the systemic hypothesis hold that such rules apply to (1) theconduct of diplomacy and political intercourse among states, (2) theconduct of war between states, and (3) the conduct of economic activitybetween states. Prestige is thereputation for power, and military power in particular. Bycontrast, the proponents of the second image hypothesis tend to define someof the systemic hypothesis considers to be rules as norms of behavior thatare not as specific as are rules. The acceptable terms for a settlement of the conflictsituation must be precise and fully known. With respect to the creation of international regimes, the proponentsof the second image hypothesis emphasize the significance of theapplication of the rational-choice model from economic theory. 97). 97) postulated that the "actual length of thesephases ... (1985). (1985). 3. A huge political risk, thus,is attached to the holding of substantial financial assets in Eurodollaraccounts. (3rd ed.)London: Frank Cass and Company Limited. (1985, April). Keohane added that hegemony and cooperation are notalternatives; on the contrary, they are often found in symbioticrelationships with one another. 97). 21-49). (1986). A freezewas placed in these financial assets through a court order obtained by theCompagnie Noga d'Importation et d'Exportation SA of Switzerland until adispute over Russian payments on a credit account were settled. B. Such a situation would be 'purepolitics'" (Keohane, 1984, p. in which noneconomic resources wereused solely in pursuit of values that could not be exchanged on a market,such as status, or power itself. Rogowski, R. A failure to do so will likely weaken the position ofthe coercing party to a greater degree than would the failure of a try-and-see strategy. 97). Cooper, W. (199 ). The coercing party must have realistic military options. 3A). Dutch oil group might not avoid UNsanctions against Libya. Proponents of the systemic hypothesistend to posit that the actions of both regime leaders and members arefunctions of indifference analysis. Coercive diplomacy is, thus, distinguished from pure coercion; itincludes bargaining, negotiations, and compromise as well as coercivethreats. While systemic and secondimage hypotheses espouse conflicting approaches to the adoption by statesof international relations policy, economic imperatives underlie suchpolicy-making. NewYork: Longman Publishers, 97-116. Political cleavages and changing exposure totrade. Although he recognized the broad character of internationalrelations during this period, he attributes the motivations of the centralinternational actors during this period primarily to their competingeconomic interests. Thus, while a small state maynever be in a position to, alone, effectively defend its interests againsta middle power, and certainly not against a great power or a superpower, itmay, on occasion, be able to effectively defend its interests againstanother small state. The structure of international conflict. Brodie, B. Keohane's assessmentis based on the comparison by a state of the costs and benefits associatedwith regime affiliation. Mitchell, C. and qualitatively" (Modelski, 1982, p. London: MacmillanPublishers. Keohane (1984, p. (1981). N. 97). (9th ed.). with the process by which power is exercised thatis central to politics. Scanlon, C. This action was pursued by the United States through acoercive threat of initiating a freeze order on the Eurodollar assets ofthe Arab Banking Corporation that were denominated in United Statesdollars. Euromoney,(3 , 22-25. The funds involved in this borrowing and lending are depositsdenominated in some currency other than that of the home countries of theentities in whose names the deposits are held, or deposits denominated inthe home currencies of the depositors which are held by banks outside ofthe depositors' home countries. The action taken by the western governments in freezing the foreignheld financial assets of Libya was taken in the name of the United Nations,however, the underlying motivation for this asset freezing action is topunish the Libyan political leader who refuses to accede to westernpolitical demands, and who while suspected of being the instigator ofterrorist actions has never been proven to have so acted. Georg Wilhelm FriedrichHegel, in 182 , thought that war was the catalyst through which the purposeof mankind was brought to fruition. The threats employed in coercive diplomacymay be purely verbal; at other times, they may take the form of actionsintended to convey the prospect of more forceful actions to follow ifcompliance is not forthcoming; while at still other times, coercivepressures may take the form of actions intended to impose serious costs onan opponent, thus tacitly threatening a high level of continuing costsuntil the opponent complies. After hegemony: Cooperation and discord in the worldpolitical economy. Attempts are often made to settle disputes between national statesthrough an action short of all out war, but, nevertheless, an action inwhich the threat of the use of massive force is present. Sucharrangements contain the rules, norms, principles and decision-makingprocedures required for international intercourse. Modelski, G. Modelski (1982, p.97) further postulated that "the requirements of rebalancing, of solvingproblems left unsolved in the previous phase, might in fact conduce togiving these structures a rough equality and the two phases comparablelength" (Modelski, 1982, p. Coercion, in the form of coercive diplomacy, is one of the theories ofinternational relations through which the actions of nations may beassessed. Withthis strategy, the coercing path must be prepared from the beginning topursue the action. (1993, 6 December). (5th ed.) Chicago:Rand McNally & Company, 21-49. Actions placing a freeze on foreign-owned financial assets, whethersuch actions are initiated by either host countries or currency countries,therefore, are tools employed in dispute resolution processes that involveeither or both legal and political issues. Although Keohane recognized the role of relativepower among states in the creation of regimes, he still contended that,through the exercise of rational-choice, affiliation with internationalregimes is a voluntary action on the part of a state. In addition to the circumvention of regulations (and the thwarting ofobjectives), Eurocurrency market banking institution participants can oftenserve accounts denominated in currencies other than their own moreefficiently than can banks located in the countries of the currencies,because they are specialists in the types of international transactionsinvolved in the Eurocurrency market (Gaza, 1985, p. The actions initiated by the United States in freezing the foreignheld financial assets of the Marcos family of the Philippines is in onesense a simple legal action protecting the assets until proper ownership isdetermined in a court of law. 8). Prestige refersprimarily to the perceptions of other states with respect to a state'scapacities and its ability and willingness to exercise its power ininternational relations. (Ed.). must have some relationship to the time needed to complete apolitical project of world proportions or to conceive, or to launch andconsolidate, a leading sector" (Modelski, 1982, p. Keohaneargued further that, rules, if they are to be effective at all, must derivefrom specific interstate agreements that affect the exercise of nationalcontrols. Asset Freezing As A Tool in Dispute Resolution Two central hypotheses in international relations theory- the systemicand what Kenneth Waltz designated as "the second image"-tend to conflictwith one another (Waltz, 1959, pp. 128)acknowledged the significance of economic interests in the creation andfunctioning of international regimes, as well as employ aspects of economictheory in the analysis of regimes. This alternativeperception holds further that the conduct of international relations must,therefore, be realistic, must accept human nature as it actually is, andmust deal with political processes as they actually occur. A freeze was placed in these financial assetsthrough a court order obtained by the Compagnie Noga d'Importation etd'Exportation SA of Switzerland until a dispute over Russian payments on acredit account were settled. 8) stated that "the liberal international arrangements for trade andinternational finance" could be interpreted "as responses to the need forpolicy coordination created by the fact of interdependence. Eurocurrency transactions, for the most part, escape the reserverequirements imposed by the Federal Reserve Board. Thisassessment is based on the comparison by a state of the costs and benefitsassociated with regime affiliation. 8) and Robert Gilpin (1988, p. Dufey, G., & Giddy, I. Journal of commerce and Commercial, 396(28 1), 3A. 128) offered an interpretation of the terminternational regime, which while broader, does not necessarily conflictwith the views of Keohane. The second variant of the coercive diplomacystrategy, the strong variant, is called a "tacit-ultimatum" approach. 11). Political realism does not require,nor does it condone indifference to political ideals and moral principles,but it requires a sharp distinction between the desirable and the possible. 97) model of alternating innovations assumed that"both global politics and global economics 'listen to the same drummer,"and, thus, "are coordinated by the same value-price priority system, bothby being affected by, and both responding to, the same movements in socialvaluations. These proponents contend thatclaims for the general validity of the theory of hegemonic stability areoften exaggerated. Eurocurrency is not money in the generally accepted definition of theword (Scanlon, 199 , pp. Where competition is"aimed at achieving particular goals, conflict implies behavior aimed ataffecting an opponent. Gilpin (1988, pp. The use of coercion as a form of political participation is a negativeaction, as opposed to the pursuit of a positive policy. The Eurodollar. Thealternating innovations model posits that "generation-long periods offundamental political innovation alternate with those of ... On the contrary, it iscontended, they are often found in symbiotic relationships with oneanother.Hierarchy Among States With respect to the hierarchy of prestige among states, the systemichypothesis holds that, ultimately, such a hierarchy rests on economic andmilitary power. One reason suggested was that themarket was more efficient than domestic banking markets for internationaltransactions (Dufey & Giddy, 1978, pp. Conflict and disagreement are endemic in the internationalenvironment. The success ofcoercive action depends more on the threat of what is yet to come than ondamage already done. Another reason suggested asa cause was the 1957 sterling crisis, during which the United Kingdomimposed stringent controls on non-resident sterling borrowing and lendingby British financial institutions. (1978). (199 ). Within such an international environment, placing financialassets in foreign depositories is a highly risky enterprise. Warfare, thus, is a form of participation in the process of politicaldevelopment. Gaza, T. InstitutionalInvestor, 19(2), 157-158. The use of coercion as a form of politicalparticipation, however, is always a high-risk action, because it is quitelikely to inspire an unpleasant response from the target party. A mini-state is one with limitedterritory and a relatively small population. A case in point isthe action by the Office of Foreign Asset Control of the United StatesTreasury Department to force the Arab Banking Corporation located inBahrain to compel the institution's Libyan-born president and chiefexecutive officer to resign those positions at the institution (Cooke,1994, pp. 25-35) said that states create internationalarrangements to advance particular sets of interests, but, althoughinterstate behavior is to varying degrees based on consensus and mutualinterest, the primary foundation is in the power and interests of thedominant states in a system. The rapid growth of the market has distortedwhat statistical data are available relative to transactions in theEurocurrency market, and has, to some extent, made it more difficult toassess the actual impact of the market on domestic banking structures(Templeman & Wilson, 1985, pp. War and politics. 29).Conflict behavior is contrasted with competition. (199 ). War or the threat of the use of force is the traditional approach toconflict resolution in the conduct of international relations. With respect to the creation of regimes, Keohane (1984, p. This area of intersection can becontrasted with 'pure economics,' in which no actor has any control overthe others," or with "a situation ... The party being coerced must fear an unacceptable escalationof the conflict. American historians often cite Nietzsche asthe philosophical guru for the Nazis in the Germany of the 193 s and 194 s;however, Americans have justified their own wars right down through VietNam and the Gulf War, along with the actions of seemingly countlessAmerican surrogates, such as the Contras and the Israelis, in Nietzchiestterms. The use of coercion requires that the using party possess thepower to hurt the party to which the coercion is applied. Politics among nations: The struggle forpower and peace. Gerenstein, G. Thus, although the broad character ofinternational relations is recognized, the motivations of the centralinternational actors are attributed primarily to their competing economicinterests. de Grauwe, P. H. Morgenthau, H. 28-37) stated that control through the distributionof power has, throughout history, been characterized by: (1) hegemony orimperialism, in which a single powerful state dominates the lesser statesin the system; (2) bipolarity, in which two powerful states controlinteractions within and between their respective spheres of influence; anda balance of power in which three or more states control one another'sactions through diplomatic maneuver, shifting alliances, and open conflict. Eurodollar CDs hedge corporate borrowingexpenses. By either definition, the number of superpowers in theworld at any particular time necessarily will be limited. 3). 1 ). 97). 5. (1979-198 ). R. Broadly, Keohane (1984, p. (1993, 18 June). (Eds.). In Thus Spake Zarathustra, he said that agood war hallows every cause. 14-16). In this latter context, onenight just as well accord the United States the prerogatives of the UnitedStates as they are continually assumed by the United States government atany rate. This process isreferred to as coercive diplomacy, which calls for using just enough forceof an appropriate kind to demonstrate resolution to protect well-definedinterests and to demonstrate the credibility of one's determination to usemore force if necessary. 3. These three factors are the distribution of power amongpolitical coalitions, the hierarchy of prestige among states, and the setof rights and rules that govern or at least influence interactions amongstates. Definitions and mechanics of Eurodollartransactions. An alternative perceptionholds that the world, imperfect as it is from the rational point of view,is the result of forces inherent in human nature. J. The coercing party must have a strong and unifiedmotivation. The dominance of a single great power may contribute to orderin world politics, in particular circumstances, but it is not a sufficientcondition. Forward rates as predictors of futureinterest rates in the Eurocurrency Market. Amajor problem with this premise is the perception from which the evaluationis made. The action, however, also is one in whichthe United States attempted to extend the reach of United States nationallaw to both Switzerland and the Philippines. One perception ofinternational relations is based upon a premise "that a rational and moralpolitical order, derived from universally valid abstract principles, can beachieved here and now" (Morgenthau, 1993, p. The cost-benefit approachemployed by Keohane is applied in a somewhat different manner fromindifference analysis; however, the decision outcomes of the two approachesare generally quite similar. The market was originally referred to asthe Eurodollar market, because most of these early transactions weredenominated in United States dollars. New York: Knopf Publishers. Others viewed the development of theEurocurrency market as the culmination of a long-term evolutionary process,which included the attempts to organize cooperation between monetaryauthorities during the 1931-1933 time period, the development of bartertrade during the Great Depression of the 193 s, and the establishment ofthe International Monetary Fund in 1944. Waltz, K. Templeman, J., & Wilson, A. The model also assumes that"(1) World powers have had lead economies; (2) world powers haveconstructed the framework of the global economy ...," (and) "Principalchallengers have had large economies" (Modelski, 1982, p. The Eurocurrency, or Eurodollar, market is an enigma to most casualobservers, to many corporate financial officers, and to some professionaleconomists. Proponents of the second image hypothesis, however, tend to discountthe dominant capacity and willingness to exercise such capacity accorded topower states in the systemic hypothesis. 79) held that incentives to forminternational regimes depend most fundamentally on the existence of sharedinterests. The indifference curve in such an instance istricky to apply, as so many different factors must be included, which meansthat multiple points of indifference must be determined and coordinated. (1982). Coercive diplomacy focuses upon affecting the enemy's will rather thanupon negating his capabilities. The Eurocurrency markets. Gilpin, R. 4. O. There are two general variants of the coercive diplomacy strategy-theweak variant and the strong variant. When force is used in coercive diplomacy, it is used in an exemplary,demonstrative manner, in discrete and controlled increments, to induce anopponent to revise calculations and agree to a mutually acceptabletermination of the conflict. The force employed in theconduct of coercive diplomacy is, thus, said to be used in an exemplary,demonstrative manner, in discrete and controlled increments, to induce theopponent to revise his calculations and agree to a mutually acceptabletermination of the conflict. Coercive diplomacy holds manypotential advantages to the party capable of applying the concepteffectively. To operationalize the lead economy concept, Modelski emphasized (1982,p. These hypotheses were as follows: 1. 2. The Eurodollar Market The development of the Eurocurrency market, with the center of so muchof its activity in the City (London's self-governing financial district,which is officially the City of London, a one-square mile jurisdiction), isrecognized as a major factor contributing to banking reform in the UnitedKingdom (Blunden, 1986, pp. According to the proponents of the systemic hypothesis, thedistribution of power has, throughout history, been characterized by one ofthree structures. There is a distinctionbetween the power to hurt and the power to seize or hold forcibly isimportant. An assault on the market forEurobonds. Certainly, Eurocurrency marketactivity served as a major competitive stimulus. Such manipulation is facilitated by the existence on alarge scale of Eurodollar account holdings. The long-ism arm of Uncle Sam. In this context, Keohane stated that claims forthe general validity of the theory of hegemonic stability are oftenexaggerated. In turn,Gilpin held that the sources of such rules of international conduct werecustom and formally negotiated treaties. 71-83). Man the state and war: A theoretical analysis.New York: Columbia University Press. The use ofcoercion is one means of attempting to upset some sort of existing balance. 4. Second thoughts about Eurobonds. The unique risks of Eurodollars.Journal of Commercial Bank Lending, 6 (6), 5 -61. 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