Affluence without Influence: The Inducement Dilemma in Economic Statecraft

Abstract

When can economic inducements, including aid and investment, purchase influence abroad? I argue that the effectiveness of inducements hinges on the sender's ability to credibly withhold an inducement when the target does not concede. If the sender stands to profit from providing an inducement, it lacks the incentive to rescind it, rendering the inducement both credible, because it is interest-compatible for the sender to fulfill its promised inducement, and ineffective, as the target has no incentives to concede. To overcome this inducement dilemma and achieve a quid pro quo, the credibility of the promised inducement must come from the punishment for reneging, rather than the profit from delivering. I test these dynamics in China's Belt and Road Initiative (BRI) using over 300 elite interviews, official documents, and original datasets on Chinese infrastructure project contracts and international responses to China’s human rights practices in Hong Kong and Xinjiang. I find that Beijing's dual goals behind the BRI of addressing domestic economic issues and gaining international acceptance for its governance models undercut each other. Infrastructure projects garner support for China's human rights practices only when these projects do not align with China's domestic goal of exporting excess industrial capacity. This paper challenges the conventional wisdom in international relations by demonstrating that a signal’s credibility can sometimes undermine its effectiveness. It also contributes novel data on the intentions, implementation, and impact of the BRI.

Keywords: Economic inducement, foreign aid, foreign direct investment, China, Belt and Road Initiative