Members of the Reagan Administration including former Lieutenant Colonel Oliver North, and CIA DirectorWilliam Casey are, often in distaste, considered to be the architects and builders of the Iran-Contra affair in which the United States government engaged in the exchange of arms for hostages with nations who had ties with terrorist groups such as Hezbollah and funded Nicaraguan opposition factions(Weiner 2007) who used violent means in order to eliminate the growing political Left in the South American nation(Committee 1987). While the entire affair may be easily skimmed with seemingly perfect hindsight vision as a dirty stain in the United States’ history of international relations, it is important to note the rationality that went behind Iran-Contra and to consider the contemporary Institutions of that time period which facilitated the entire process. It is also significant to note that some of the acting agents of the affair were looking to serve their country’s best interests from an economic standpoint while others found exploitative paths toward serving their own financial interests (Walker 2003). In understanding the ends used to justify the means, this paper aims to portray the incentives that were at stake, the economic consequences of political deterrence, and how rational systems are inherently flawed given their need for perfect and dynamic inflows of information.
At the foundation, the dominant theme is the idea of rationality as dependent upon tangible and intangible Institutions. The prevailing paradigms such as the acceptance of Dependency Theory and the worldwide split in attitude towards Communism (Reagan 2007) were key variables as well as the global shift of wealthy nations towards Neoliberalism (Robinson 2008), and the inefficiencies created by Congress’ passage of the Arms Export Control Act. These factors shall be presented as drivers complementing other money and power incentives such as the speculated value of Nicaragua, which altogether led to the rationalization and coordination of the Iran-Contra scandal.
Setting the Stage: Initial Political and Economic Motives & Unintended Consequences of Arms Export Control Act
January of 1985, CIA Director William Casey was looking at two urgent demands from President Ronald Reagan. One was to free the American hostages taken in Beirut in 1984, including a CNN bureau chief, a CIA station chief, a reverend from a Presbyterian missionary, and a librarian working at American University in Beirut. The entire list totaled 14 missing persons who had vanished during that past year. The other message delivered to Casey requested him to find a way to preserve the contras. The contras were not only in league with the parties responsible for the kidnappings, they were a foothold of power for the United States within Latin America. Through a combination of soft and hard power, the U.S. hoped to arrange the release of U.S. hostages through appeasement of the Contra’s Iranian allies and simultaneously carry out a covert war in order to secure and preserve economic dominance within the Latin American region. The relationship between the CIA and the contras served as a loophole in which America could finance its war against leftist groups seeking independence in Central America all the while bypassing the funding and arms-export limits imposed by Congress in 1976.(Weiner 2007)
Here, it is integral to note the importance of the economic and criminal ramifications caused by Congress’ passage of the Arms Export Control Act (AECA) in 1976. The bill essentially restricted the flow of arms from U.S. traders and manufacturers in the sense that they were barred from dealing with specified parties such as the conservative factions in Nicaragua as well as groups labeled as terrorist organizations such as Hezbollah, who also aided said Nicaraguan militias. Extensive documentation and paperwork was required of every transaction. The issue however was the creation of a surplus of demand in comparison to the legal supply quota. This movement away from market equilibrium created a notable incentive to illegally deal arms “under the table,” within a covert black market as the price of arms rose in response to the Act(Weiner 2007). Given the wake of Vietnam, Congress was also opposed to openly declaring war in Central America, especially with the American perception that the Soviet Union’s finger was on the trigger (Reagan 2007). Force and diplomacy would have to be carried out as covertly as possible with cloak and dagger. The very nature of this triangle relationship between the U.S., Nicaragua, and Iran as war raged on in Central America served as a prime catalyst for military corruption. Officer profiteering quickly became a reality, evidenced by a transaction in November of 1986 in which the American military scalped missile parts to Iran.
“The Iranians had been cheated. They were complaining, with good reason, that they had been overcharged 600 percent for the last shipment of HAWK parts.” (Weiner 2007, 472)
Nevertheless, these short-term profits were only a portion of the entire picture. The entire relationship between the U.S., Nicaraguan contras and Hezbollah became politically economic on a much larger scale. And after a skirmish culminated in a political an exchange in 1985 between Hezbollah leaders and the U.S., “the ordeal taught Casey a lesson: Reagan was willing to make deals with terrorists.” (Weiner 2007, 464)
Neoliberalism, Nicaragua, and the United States’ place in the world stage
The Reagan era was the backbone of the age of Neoliberalism, or the political movement to the Right where government was to be kept small and markets were to be kept free. The debt crisis in Latin America during the 1970s led Nicaragua into a general split in the mindset of its political economy. Nicaragua was commandeered by the Sandinista National Liberation Front (abbreviated as FSLN in Spanish) from 1979 up until 1990 (Walker 2003). Their goal was to break ties with imperialist powers such as the United States and Great Britain and generate development within their nation by becoming economically independent. This entailed socialist nationalization of numerous industries and manufacturing trades and the ousting of American capitalists. Rich in resources, the United States viewed this as one of their many resourceful piñatas being taken from them. In response, the U.S. sided with Nicaragua’s contra militias, labeling them as freedom fighters (Reagan 2007). The relationship would mean that the Right-winged opposition groups in Nicaragua would be militarily aided by U.S. resources as long as they invited American economic policy-makers and implement fiscal austerity and neoliberal measures in exchange. Proper execution would ease the perceived security threat of having Russian-aided Communist governments in the backyard of the U.S. Reagan wrote in his diary in 1981, “There is no question but that all of Central America is targeted for a Communist takeover.”(Reagan 2007, 50)
On top of that, the plan would also generate growth for American business looking to either expand their markets or cut costs of their labor forces (Robinson 2008). For the Reagan administration, that was more than enough political and economic incentive to justify their wars down south.So long as they supported the Nicaraguan contras, the U.S. stood to reap benefits that, in the eyes of the Reagan Administration, would outweigh the both total opportunity costs of warfare and the risks of the secret coming undone.
Dependency Theory: A paradigm of incentive & the effects of deterrence
Dependency Theory, first presented by Argentine economist Raul Prebisch German economist Hans Singer in 1949 and then promoted by German-American economist Andre Gunder Frank in the 1970s, purported that resources flow from periphery states such as those rich in natural resources and primary goods (i.e. Nicaragua) to a core of wealthy states (i.e. U.S. & Great Britain). While the relationship appears mutualistic, Dependency Theory asserts that a perpetual cycle is created in which poor states are impoverished and rich ones are enriched.(Ferraro 2008)
Thus, so long as the United States prevented Nicaragua from obtaining independent industrial growth, they stood to keep a steady influx of materials, goods, and wealth. A word of caution, however: Although the U.S. retained a valuable source of goods and resources so long as they maintained political control of Nicaragua, their incentive was less about reaping capital rewards from Nicaragua and more about maintaining a strong geopolitical presence(Walker 2003). The U.S. could substitute the goods and capital obtained from Nicaragua quite easily with goods and capital from another nation. Because of Nicaragua’s position on a thin stretch of land within Central America, the U.S. has a strong economic incentive to control the small country while the possibility of opening a trade canal exists (Walker 2003). A canal passing through Nicaragua would shorten the naval distance from New York to San Francisco by about 500 miles in comparison to the route passing through Panama. Just as Great Britain scored substantial profits by controlling the Suez Canal in Egypt, the U.S. would achieve a significant economic gain if they were to construct and control a Nicaraguan Canal, once gain providing enough incentive for the U.S. government to keep a noose around the government of Nicaragua.
Furthermore, the subjugation of Nicaragua would serve as a deterrent to other nations in Latin America. Although the U.S. could sever ties with Nicaragua on the trading market and still continue to economically thrive, the U.S. government considered the political and subsequent economic implications if Nicaragua were to shake themselves free from being under the thumb of the U.S. The Reagan Administration assumed that if a small nation such as Nicaragua was able to break free amidst Leftist revolution, then it would serve as a model for other Latin American nations in which the U.S. had higher stakes into sever ties from them(Weiner 2007). Reagan’s Administration was doing all it could to maintain their status at the top of the chain in structure outlined in Dependency Theory and the means to justifying this end was encouraging neoliberalism. To do this, the U.S. sided with the contras and thus rationalized that there was enough incentive on multiple levels to circumvent congress and engage in illegal dealings of arms.(Reagan 2007)(Weiner 2007)
Conclusion
While the Reagan Administration received huge backlash in response to the uncovering of the Iran-Contra affair, it is undeniable that the prevailing Institutions, both physical and ideological, were primary drivers in shaping the entire operation as a rational response. Congress’ passage of the Arms Control Export Act as well as their opposition to openly declaring war (Reagan 2007)created market inefficiencies which encouraged military corruption. Neoliberalism also had generated enough of a following both in the United States and in Nicaragua to make the Contras viable (Robinson 2008). The acceptance of Dependency Theory among economists reinstated the idea that nations such as the U.S. would gain create a perpetual cycle of economic benefits by asserting themselves over smaller States such as Nicaragua and its neighbors (Ferraro 2008). Finally, the Western perception that Communism was an explicit danger (Reagan 2007) to the values, security, and liberty of the United States further increased the utility of partaking in the Iran-Contra plot. An alternative the United States had would have been to stand by the FSLN although in the midst of the Cold War with Russia, this would be viewed as a political misstep on the world stage. As it stands, the greatest folly of the Reagan Administration was creating a static function of utility “that grossly overestimated their ability to keep this a secret” (Bonham 2007) and was not fluid enough to adapt to the dynamic nature of warfare and media response. The Reagan Administration’s implementation of Iran-Contra was rational given the information they had, yet because they could not account for the unseen amount of incomplete information, the subsequent result was a firsthand experimentation with Murphy’s Law and an illustration that the rationality model is far from perfect.
Bibliography
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Committee, Americas Watch. Human Rights in Nicaragua: 1986. Human Rights Watch, 1987.
Ferraro, Vincent. “Dependency Theory: An Introduction.” In The Development Economics Reader, edited by Giorgio Secondi, 58-64. London: Routledge, 2008.
Reagan, Ronald. The Reagan Diaries. Edited by Douglas Brinkley. New York City: Harper Perennial, 2007.
Robinson, William I. Latin America and Global Capitalism. The Johns Hopkins University Press, 2008.
Walker, Thomas W. Nicaragua: Living in the Shadow of the Eagle. New York City: Westview Press, 2003.
Weiner, Tim. Legacy of Ashes. New York City: Anchor Books, 2007.














