Economic Counterinsurgency: Implications for Political Violence and Foreign Investment

Government efforts to insulate financial systems from criminal and terrorist exploitation are a centerpiece of 21st century counterinsurgency and counterterrorism. The Group of Seven (G-7) created the Financial Action Task Force (FATF) in 1989 after a decade of wide-spread violence by narco-cartels to coordinate efforts to disrupt illicit financing and develop international standards on combating money laundering. After the September 11, 2001, attacks on the World Trade Center these existing structures were integrated into the United States' War on Terror. In a Rose Garden address, on September 24, 2001, President George W. Bush implored of world leaders, ``Money is the lifeblood of terrorist organizations. Today we are asking the world to stop payment’’ (Bush 2001). This dissertation evaluates the tools and policies designed to accomplish this ambitious goal, presents new country-year measures of counter-illicit financing structures and effectiveness, and analyzes how well the world has met this challenge. Under the coordination of FATF, individual governments and intergovernmental organizations have created a massive interconnected system of regulations, surveillance, and enforcement with purview over every part of the global financial system. Despite the growth and expansive scope of these policies, the academic and policy evaluations of these institutions have been limited, far less than the scholarship devoted to the military and law enforcement prongs of counterinsurgency. This dissertation brings these diverse policies under one research agenda. I argue that these institutions have wide-ranging consequences across a broad spectrum of political phenomena including security and international political economy. This dissertation demonstrates the importance of both targeted and systemic economic counterinsurgency in explaining patterns of political violence and foreign investment. I address the following questions: How does targeted economic counterinsurgency impact rebel groups use of violence against opponents and civilians? How do we measure country-level systemic economic counterinsurgency? How does systemic economic counterinsurgency impact the levels of political violence within a country and the desirability of a country's economic market? In Chapter 2, I present a theory of rebel group heterogeneity in response to economic sanctions and show that sanctions reduce violence from economically vulnerable groups, but groups lacking social ties to civilians may respond to resource deficiencies by increasing their violence against civilians. This work demonstrates when policymakers can best expect economic sanctions to succeed and when these policies might produce a backlash of violence against civilians. In Chapter 3, I create country-level estimates of counter-illicit financing structures and the effectiveness of these institutions using FATF reports and a Dynamic Item Response Theory model. The results show that an aversion to regulating private businesses hinders the strength of structural provisions to countering illicit financing. I conclude by showing that effective systems are associated with fewer civil war battle deaths. In Chapter 4, I evaluate how foreign direct investment should respond to counter-illicit financing systems. I expect firms to invest in markets with fewer structures but high effectiveness. However, firm preferences for an effective counter-illicit financing environment decreases as the regulations they are subject to increase. My results support these expectations. This chapter contributes a new theory explaining variation in FDI and highlights a tension between firm preferences and efforts to protect financial systems from illicit exploitation.PHDPublic Policy & Political ScienceUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/169621/1/csimonel_1.pd