Economics of Arms Reduction and the Peace Process: Contributions from Peace Economics and Peace Science 0444888489, 9781483297385, 1483297381

Table of contents :
Front Cover
Economics of Arms Reduction and the Peace Process: Contributions from Peace Economics and Peace Science
Copyright Page
Table of Contents
List of Illustrations
List of Tables
Preface
CHAPTER 1. A SURVEY OF THE PEACE ECONOMICS LITERATURE
1.1 Introduction
1.2 The General Conceptual Framework and Some Basic Issues
1.3 Standard Resource Allocation Analysis and Strategic Behavior
1.4 Arms Race Models and Arms Control
1.5 Macroeconomic Stability Analysis
1.6 Disaggregate (Micro- ) Analysis of Defense Spending Impacts. 1.7 Investment, Research and Development, Productivity and Economic Growth1.8 Political Economy, Organizational and Other Non-Economic Factors
1.9 Conflict Management Analyses and Procedures
1.10 Some Final Comments
Footnotes
References
CHAPTER 2. THE BASIC ECONOMICS OF ARMS REDUCTION
2.1 Introduction
2.2 Standard Resource Allocation Theory
2.3 Macroeconomic Stability
2.4 Modern Growth Theory
2.5 Political Economy
2.6 Final Remark
Footnotes
References
CHAPTER 3. IMPACT OF MILITARY CUTS ON THE SOVIET AND EASTERN EUROPEAN ECONOMIES: MODELS AND SIMULATIONS
3.1 Preface. 3.2 Introductory Remarks3.3 The Klein-Kosaka Arms Race Submodel
3.4 A Model of the Centrally Planned Economy (CPE)
3.5 Simulation Exercises
3.6 Evaluative and Summary Remarks
Footnotes
References
CHAPTER 4. CONFLICT AND TRADE: AN ECONOMICS APPROACH TO POLITICAL INTERNATIONAL INTERACTIONS
4.1 Background
4.2 Theoretical Basis
4.3 Proposition One: The Trade Conflict Relationship
4.4 Proposition Two: The Trade Conflict Relationship Augmented 108 By Trade Elasticities
4.5 Conclusions
Footnotes
References
CHAPTER 5. ON MODELING THE IMPACT OF ARMS REDUCTIONS ON WORLD TRADE. 5.1 Introduction5.2 Motivation
5.3 Theoretical Issues
5.4 Methodology
5.5 Data Considerations
5.6 Empirical Results
5.7 Economie Determinants of Arms Trade
5.8 Conclusions and Implications
Footnotes
References
CHAPTER 6. THE NEW STRATEGIC ENVIRONMENT AND ECONOMIC FACTORS IN THE FUTURE OF NUCLEAR DEFENSE
6.1 The New Strategic Environment
6.2 Economic Infeasibility of Strategic Defense in Cold War 146 Environment
6.3 Strategic Defense in the Post Cold War Era
References
CHAPTER 7. COMPETING OPTIMA IN THE GULF WAR
7.1 Introduction
7.2 Competing Goals. 7.3 Competing Valuations of Human Life7.4 The Model
7.5 Competing Choices
7.6 Measurement: The Elasticity of Saving Lives Through Bombing
7.7 Ground Attack Versus Sanctions
7.8 Conclusion
Footnotes
References
CHAPTER 8. DETERMINANTS OF MILITARY EXPENDITURES
8.1 Introduction
8.2 The Supply of Military Capability
8.3 The Demand for National Security
8.4 Estimates of the Military Expenditures Function
8.5 Conclusion
References
CHAPTER 9. DISARMAMENT NEGOTIATIONS AS AN EXERCISE IN MATURE RIVALRY
9.1 Introduction
9.2 Mature Rivalry
9.3 Encouraging the Development of Mature Rivalry.

Citation preview

ECONOMICS OF ARMS REDUCTION AND THE PEACE PROCESS Contributions from Peace Economics and Peace Science

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ECONOMICS OF ARMS REDUCTION AND THE PEACE PROCESS Contributions from Peace Economics and Peace Science

Edited by Walter ISARD Cornell University Ithaca, NY., U.S.A. Charles H. ANDERTON College of the Holy Cross Worcester, M.A., U.S.A.

&9 1992 NORTH-HOLLAND AMSTERDAM · LONDON · NEW YORK · TOKYO

ELSEVIER SCIENCE PUBLISHERS B.V. Sara Burgerhartstraat 25 P.O. Box 211,1000 AE Amsterdam, The Netherlands Distributors/or

the United States and

Canada:

ELSEVIER SCIENCE PUBLISHING COMPANY INC. 655 Avenue of the Americas New York,N.Y. 10010, U.S.A.

Library of Congress Cataloglng-ln-PublIcatlon

Data

E c o n o m i c s of arms r e d u c t i o n a n d t h e p e a c e p r o c e s s : c o n t r i b u t i o n s from p e a c e e c o n o m i c s a n d p e a c e s c i e n c e / e d i t e d by W a l t e r I s a r d , C h a r l e s H. A n d e r t o n . ρ. cm. "Jointly s p o n s o r e d by E C A A R ( E c o n o m i s t s a g a i n s t t h e A r m s R a c e ) a n d P S S ( I ) (the P e a c e S c i e n c e S o c i e t y , I n t e r n a t i o n a l ) " — P r e f . Includes bibliographical references. ISBN 0-444-88848-9 1. A r m s c o n t r o l — E c o n o m i c a s p e c t s . 2 . D i s a r m a m e n t — E c o n o m i c a s p e c t s . 3. P e a c e . 4. A r m e d F o r c e s — A p p r o p r i a t i o n s a n d e x p e n d i t u r e s . 5 . W a r , C o s t o f . 6. D e f e n s e I n d u s t r i e s . I. I s a r d , Walter. II. Anderton, Charles H. J X 1 9 7 4 . E 3 3 1992 338.4 ' 7 6 2 3 4 — d c 2 0 91 - 4 7 6 3 1 CIP

ISBN: 0 4 4 4 88848 9 © 1992 Elsevier Science Publishers B.V. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher, Elsevier Science Publishers B.V., Copyright & Permissions Department, P.O. Box 521, 1000 AM Amsterdam, The Netherlands. Special regulations for readers in the U.S.A. - This publication has been registered with the Copyright Clearance Center Inc. (CCC), Salem, Massachusetts. Information can be obtained from the CCC about conditions under which photocopies of parts of this publication may be made in the U.S.A. All other copyright questions, including photocopying outside of the U.S.A., should be referred to the copyright owner, Elsevier Science Publishers B.V, unless otherwise specified. No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. pp. 69-88: Copyright not transferred Printed in The Netherlands

Contents

page List of Illustrations

xi

List of Tables

xiii

Preface 1

xv

A SURVEY

OF THE

PEACE

by Walter Isard and Charles

H.

ECONOMICS

LITERATURE

1

Anderton

1.1

Introduction

1

1.2

T h e G e n e r a l C o n c e p t u a l F r a m e w o r k a n d S o m e Basic Issues

2

1.3

S t a n d a r d R e s o u r c e Allocation Analysis a n d Strategic B e h a v i o r

1.4

A r m s Race Models a n d A r m s Control

10

1.5

M a c r o e c o n o m i c Stability A n a l y s i s

18

1.6

1.7

1.5.1

Inflation

1.5.2

Employment/Unemployment

1.5.3

Budget

1.5.4

Balance

4

21 Deficits

at the National

and Defense/Welfare

of Payments

Level

Tradeoffs

22 24

and Trade

25

D i s a g g r e g a t e (Micro-) Analysis of D e f e n s e S p e n d i n g Impacts

26

1.6.1

Regional

Effects

27

1.6.2

Industrial

and Occupational

1.6.3

The Conversion

Effects

28

Problem

29

Investment, Research a n d D e v e l o p m e n t , Productivity a n d

30

Economic Growth 1.7.1

Developed

Country

1.7.2

Developed

Countries

1.7.3

Developing

Country

Analysis:

Specific

Analysis:

Studies

Cross-national

31 Studies

Analysis

34 34

1.8

Political E c o n o m y , Organizational a n d Other N o n - E c o n o m i c Factors

36

1.9

Conflict M a n a g e m e n t A n a l y s e s a n d P r o c e d u r e s

38

1.10

S o m e Final C o m m e n t s

40

Footnotes

41

References

43

2

THE

BASIC

by Kenneth

J.

ECONOMICS

OF

ARMS

REDUCTION

57

Arrow

2.1

Introduction

57

2.2

S t a n d a r d R e s o u r c e Allocation T h e o r y

58

2.3

M a c r o e c o n o m i c Stability

59

Contents

vi

2.4

M o d e r n G r o w t h Theory

63

2.5

Political E c o n o m y

64

2.6

Final Remark

66

Footnotes

66

References

66

3

IMPACT OF MILITARY CUTS ON THE SOVIET AND

EASTERN

MODELS

EUROPEAN

AND

by Lawrence

69

ECONOMIES:

SIMULATIONS

R. Klein, Miroslav/

Gronicki

and Hiroyuki

Kosaka

3.1

Preface

69

3.2

Introductory Remarks

70

3.3

T h e K l e i n - K o s a k a A r m s Race S u b m o d e l

72

3.4

A M o d e l of the Centrally Planned E c o n o m y (CPE)

72

3.5

Simulation Exercises

79

3.6

Evaluative a n d S u m m a r y R e m a r k s

83

Footnotes

84

References

86

4

CONFLICT AND TRADE: TO

POLITICAL

by Solomon

AN ECONOMICS APPROACH

INTERNATIONAL

William

89

INTERACTIONS

Polachek

4.1

Background

89

4.2

Theoretical Basis

90

4.3

Proposition O n e : The Trade Conflict Relationship

95

4.4

4.3.1

Data

4.3.2

Cross-Sectional

4.3.3

Time-Series

96 Analysis

99

Analysis

105

Proposition T w o : The Trade Conflict Relationship A u g m e n t e d

108

By T r a d e Elasticities 4.4.1

Import Demand Trade/Conflict

4.4.2

Bilateral

Conclusions

109

Relationship

Import Demand

Trade/Conflict 4.5

From the Rest of the World and the Elasticity

Estimates

and the

111

Relationship 113

Footnotes

114

References

117

Contents

5

5.1

vii

ON MODELING THE IMPACT OF ARMS ON WORLD

TRADE

by Jeffrey

Bergstrand

H.

REDUCTIONS

Introduction

121

121

5.2

Motivation

122

5.3

T h e o r e t i c a l Issues

124

5.4

Methodology

127

5.5

Data Considerations

129

5.6

Empirical Results

130

5.7

E c o n o m i e Determinants of A r m s T r a d e

137

5.8

C o n c l u s i o n s a n d Implications

139

Footnotes

140

References

141

6

THE

NEW

FACTORS

STRATEGIC IN T H E

by Martin C. 6.1 6.2

ENVIRONMENT

FUTURE

AND

OF NUCLEAR

ECONOMIC

143

DEFENSE

McGuire

T h e N e w Strategic E n v i r o n m e n t

143

E c o n o m i c Infeasibility of Strategic Defense in C o l d W a r

146

Environment

6.3

6.2.1

Similarity

of offensive

6.2.2

Relative

6.2.3

The cold war:

vs defensive

costs of assured

technologies

survival

a non-cooperative

vs. assured allocation

destruction

game

6.3.2

Relative

costs of defense

defense

and offense

Shift in the character less

6.3.3

vs. offense

150 153

and separation

of

153

technologies of the arms race:

more collaboration-

154

competition

Strategic

Preferences

155

References

156

COMPETING by Murray

146 150

Strategic Defense in the Post Cold W a r Era 6.3.1

7

and forces

O P T I M A IN T H E G U L F W A R

Wolfson,

and Robert

Sergio

Gutierrez,

John

159

Traynor

Smith

7.1

Introduction

159

7.2

Competing Goals

160

7.3

C o m p e t i n g Valuations of H u m a n Life

161

7.4

The Model

163

Contents

viii

7.4.1

Destruction

function

163

7.4.2

Iraqi Casualties

164

7.4.3

Cost of bombing

166

7.4.4

UN Casualties

168

7.5

Competing Choices

169

7.6

M e a s u r e m e n t : T h e Elasticity of Saving Lives T h r o u g h B o m b i n g

171

7.7

G r o u n d Attack V e r s u s Sanctions

174

7.8

7.7.1

Sanctions

and economic

7.7.2

Why sanctions

war would have worked

might not have worked

175 177

Conclusion

178

Footnotes

179

References

181

8

DETERMINANTS by Carlos

OF

MILITARY

EXPENDITURES

183

Seiglie

8.1

Introduction

183

8.2

T h e Supply of Military Capability

186

8.3

T h e D e m a n d for National Security

188

8.4

Estimates of the Military Expenditures Function

192

8.5

Conclusion

200

References 9

200

DISARMAMENT IN M A T U R E by Robert E.

NEGOTIATIONS

AS

AN

EXERCISE

203

RIVALRY Kuenne

9.1

Introduction

203

9.2

Mature Rivalry

204

9.3

E n c o u r a g i n g the Development of Mature Rivalry

207

9.4

T h e P r o p o s e d S T A R T Treaty

209

9.5

A Simple M o d e l of D i s a r m a m e n t Negotiations

211

9.6

Conclusions

216

Footnotes

217

References

217

10

WARS

AND

by Amyrta

FAMINES:

ON

DIVISIONS

AND

INCENTIVES

219

Sen

10.1

Introduction

219

10.2

Divisions a n d Incentives

220

Contents

10.3

ix

F a m i n e Mortality a n d Health Services

222

10.4

Investment, C o m p l e m e n t a r i t y a n d Conflicts

223

10.5

Political Incentives a n d Authoritarianism

225

10.6

Concluding Remarks

227

Footnotes

228

References

232

1 1

REGIONAL IN T H E by Manas

11.1

CONFLICT

DEVELOPING

AND

MILITARY

SPENDING

235

COUNTRIES

Chatierji

The Changing World Environment:

Implications for D e v e l o p i n g

235

Countries 11.2

Militarization a n d E c o n o m i c G r o w t h

237

11.3

B e n o i f s Analysis a n d Findings

239

11.4

Critiques of Benoit

241

11.5

Some Summary Remarks

244

R e f e r e n c e s a n d S e l e c t e d Bibliography

245

1 2

249

DO A R M S RACES LEAD TO PEACE? by Jean-Christian

Lam be let

12.1

Introduction

249

12.2

Objections and Competing Views

251

12.3

A Research Agenda

253

12.4

Peace For O u r T i m e ?

254

Footnotes

256

References

260

1 3

KEY

DIRECTIONS

FOR

by Waiter isard and Charles

RESEARCH

261

Anderton

13.1

Introduction

261

13.2

T h e Urgent N e e d for Developing C o u n t r y Studies

261

13.3

N e e d for a More Rigorous G e n e r a l C o n c e p t u a l F r a m e w o r k

262

a n d its Further D e v e l o p m e n t 13.4

N e e d for Better Defined a n d More C o m p r e h e n s i v e Political

262

E c o n o m y Studies 13.5

N e e d for D e v e l o p m e n t of C o n t e x t u a l G a m e a n d Coalition A n a l y s i s

265

Contents

χ

13.6

T h e N e e d for Conflict M a n a g e m e n t P r o c e d u r e s W i t h G r e a t e r

13.7

Other N e e d e d Research Directions

266

P o l i t i c o - E c o n o m i c Feasibility a n d Analytical Significance 268

Footnotes

268

References

268

xi

List of

Illustrations

List of Figures

page

Figure 1.1.

Society's Production Possibility Frontier a n d

5

Figure 1.2.

T h e Prisoner's D i l e m m a G a m e

6

Figure 1.3.

Deterrent Threat

8

Figure 1.4

A C a s e of Evolutionary Equilibrium

Figure 1.5.

Inefficiency of A r m s Rivalry

11

Figure 1.6.

T h e Intriligator-Brito M o d e l

14

Figure 1.7.

S p e c t r u m of Intriligator-Brito Models

15

Figure 1.8.

Economic Warfare

17

Figure 1.9.

A S e q u e n c e of Split-the-Difference C o m p r o m i s e s in

40

Parties' Indifference C u r v e s

9

a Veto Incremax Procedure Figure 4 . 1 .

Effect of Conflict on Welfare

92

Figure 4.2.

D e t e r m i n a t i o n of O p t i m a l Conflict/Cooperation

Figure 6 . 1 .

Side 1's Budget Opportunity Set

148

94

Figure 6.2.

C h e a p e r to Attack than to D e f e n d

151

Figure 6.3.

O p t i o n s A l l o w e d by Small a n d Large B u d g e t s

152

Figure 6.4.

D e f e n s e C h e a p e r than Attack

152

Figure 6.5.

Importance of Anticipating A d v e r s a r y ' s P r e f e r e n c e s

156

Figure 7 . 1 .

Destruction Function

163

Figure 7.2.

Iraqi Casualty Function

165

Figure 7.3a. Total Cost

167

Figure 7.3b. Marginal Cost of B o m b i n g

167

Figure 7.4

U.S. Casualties a n d Destruction of Iraqi Military Capital

168

Figure 7.5.

O p t i m a l B o m b i n g Points at the "Statistical V a l u e of

170

Life" to U.S. Figure 9.1

A n E m p t y Feasible Negotiation Region

213

Figure 9.2

S T A R T Negotiation Set

214

xii

List of Illustrations

List of Charts Chart 3 . 1 .

page Soviet Union. Military Expenditures v e r s u s C o n s u m p t i o n ,

80

Investment in Nonmaterial Sectors, Nonmilitary G o v e r n m e n t Expenditures, Investment in Material Sectors, a n d G N P Chart 3.2.

Personal C o n s u m p t i o n v e r s u s Military E x p e n d i t u r e s

81

Chart 3.3.

G o v e r n m e n t Expenditures v e r s u s Military E x p e n d i t u r e s

81

Chart 3.4.

Investment in Non-material sectors ( I N N M A T ) v e r s u s

82

Military Expenditures Chart 3.5.

Investment in Material Sectors (INMAT) v e r s u s

Chart 3.6.

G r o s s National Product (GNP) v e r s u s Military E x p e n d i t u r e s

82

Military Expenditures 83

xiii

List of T a b l e s

page Table 1.1.

Deviation from LINK Baseline Projections with

20

E n d o g e n o u s Defense S p e n d i n g : F e e d b a c k f r o m Shocked Arms-Race Model Table 1.2.

S e l e c t e d Differences B e t w e e n Free-market T h e o r y a n d

37

Table 2 . 1 .

D e f e n s e in the United States E c o n o m y

58

Table 4 . 1 .

T r a d e - Attribute Data Set Variable List

98

D e f e n s e Market Practice

Table 4.2.

Impact of T r a d e on Conflict by Y e a r

100

Table 4.3.

Corroborative E v i d e n c e : Conflict R e g r e s s i o n s

101

Table 4.4.

D e p e n d e n t Variable D e f e n s e E x p e n d i t u r e

103

Table 4.5.

T h e S i m u l t a n e o u s Determination of T r a d e a n d Conflict

104

Table 4.6.

Probability V a l u e s for the G r a n g e r Causality Test,

107

D i s a g g r e g a t e d by T y p e of Interaction

1 8 6 7 - 1 9 7 8 U S / W A R S A W P A C T Data Table 4.7.

T h e Conflict-Trade Relationship E n h a n c e d by Import

Table 4.8.

T h e Conflict-Trade Relationship E n h a n c e d by Dyadic

110

D e m a n d Elasticities 112

T r a d e Elasticities Table 5 . 1 .

Coefficient Estimates of C r o s s - S e c t i o n a l D e t e r m i n a n t s of

131

A g g r e g a t e a n d N o n - A r m s Bilateral T r a d e Flows Table 5.2.

Coefficient Estimates of C r o s s - S e c t i o n a l D e t e r m i n a n t s of

Table 5.3.

Coefficient Estimates of C r o s s - S e c t i o n a l D e t e r m i n a n t s of

134

N o n - A r m s Bilateral T r a d e Flows 136

N o n - A r m s Bilateral Trade Flows with Military E x p e n d i t u r e s as V a r i a b l e s Table 5.4.

Coefficient Estimates of C r o s s - S e c t i o n a l D e t e r m i n a n t s of

137

Bilateral A r m s Trade Flows Table 6 . 1 .

Relative N u m b e r of Reliable, Deliverable W a r h e a d s Potentially

149

P u r c h a s e d a n d O p e r a t e d for $ X Billion in 1965 Table 6.2.

Relative N u m b e r of Reliable, Deliverable W a r h e a d s Potentially

153

P u r c h a s e d a n d O p e r a t e d for $ Y Billion in 1990 Table 7 . 1 .

Incremental Costs a n d Elasticities of B o m b i n g

173

Table 7.2.

I R A Q G r o s s National Product 1980-1981

175

Table 7.3.

Iraq's International T r a d e in A r m s

176

xiv

Table 8 . 1 .

List of Tables

Military Expenditures (ME) as a percent of G N P a n d of

185

Central G o v e r n m e n t Expenditures (CGE) for S e l e c t e d C o u n t r i e s , 1978 Table 8.2.

W e i g h t e d Least S q u a r e s Estimates for A v e r a g e Real

197

Military Expenditures for the Period 1 9 6 8 - 1 9 7 1 , M E 6 8 7 1 a n d 1972-1976, M E 7 2 7 6 , A l o n g with Estimates for Selected Years Table 8.3.

W e i g h t e d T w o - S t a g e Least S q u a r e s Estimates for A v e r a g e

199

Real Military Expenditures for the Period 1 9 6 8 - 1 9 7 1 , M E 6 8 7 1 a n d 1972-1976, M E 7 2 7 6 , A l o n g with Estimates for S e l e c t e d Y e a r s Table 9 . 1 .

Delivery Platforms a n d W a r h e a d s P o s s e s s e d by U.S. a n d

Table 1 1 . 1 .

S h a r e of Third W o r l d in Global Security Expenditure,

210

U.S.S.R. in 1990 a n d in P r o p o s e d S T A R T Reductions 237

A c c o r d i n g to Regions, 1 9 5 0 - 1 9 8 4 (in percentages) Table 11.2.

T h e Third W o r l d External Debt, Selected R e g i o n s , 1982-90

244

Table 11.3.

Military expenditure a n d external public debt-service as

245

s h a r e s of current g o v e r n m e n t revenue, selected T h i r d W o r l d countries, 1987

XV

Preface This book is jointly s p o n s o r e d by E C A A R ( E c o n o m i s t s Against the A r m s Race) a n d P S S ( I ) (The P e a c e S c i e n c e S o c i e t y , I n t e r n a t i o n a l ) . organized group

of e c o n o m i s t s

(including

a number

E C A A R is a recently of

Nobel

Laureates

e c o n o m i c s a n d o t h e r s of w o r l d r e n o w n ) c o n c e r n e d w i t h r e s e a r c h a n d d e v e l o p m e n t a i m e d at c o n t r o l l i n g t h e a r m s race a n d the r e d u c t i o n of

in

policy military

expenditures. The

PSS(I)

is a g r o u p

of q u a n t i t a t i v e

political

scientists,

sociologists,

p s y c h o l o g i s t s , g e o g r a p h e r s , regional scientists, a n d a limited u m b e r of e c o n o m i s t s a n d other social scientists a n d professionals w h o conduct basic research on conflict a n d the p e a c e p r o c e s s .

T h e f i n d i n g s of t h e n o n - e c o n o m i s t s in this g r o u p are

e s s e n t i a l for e c o n o m i s t s to c o n s i d e r in a d a p t i n g t h e i r t h e o r e t i c a l a n d

applied

research to the c o m p l e x world of reality. At a recent meeting of T r u s t e e s a n d Directors of E C A A R it w a s u r g e d that (1) the

various

findings

of

economists

pertaining

to

conflict,

arms

escalation,

d i s a r m a m e n t a n d related t o p i c s p u b l i s h e d in d i v e r s e a n d s c a t t e r e d j o u r n a l s a n d books be s u m m a r i z e d in a literature survey, a n d (2) there be brought t o g e t h e r s o m e of the basic research by leading e c o n o m i s t s on selected topics of critical importance to the field. Accordingly, this book.

It contains a s u m m a r y of the peace e c o n o m i c s

literature by the editors, a n d s e l e c t e d s e m i n a l c o n t r i b u t i o n s to the field of p e a c e e c o n o m i c s largely d r a w n f r o m p a p e r s p r e s e n t e d at recent c o n f e r e n c e s a n d joint meetings of E C A A R a n d PSS(I).

In selecting p a p e r s for this book, along with the

survey, the editors sought to achieve a fairly c o m p r e h e n s i v e c o v e r a g e of the newly e m e r g i n g p e a c e e c o n o m i c s field as well as a presentation of its nature a n d s c o p e . In line with the objectives of E C A A R they have tried to put out a product that w o u l d h a v e c o n s i d e r a b l e v a l u e for e c o n o m i s t s a n d o t h e r s c h o l a r s , in particular t h o s e entering the field a n d c o n c e r n e d with the impacts of arms reduction a n d c o n v e r s i o n by the major p o w e r s a n d the escalation of military expenditures e l s e w h e r e . W e wish to a c k n o w l e d g e the excellent typing a n d graphics of our secretaries, Helena W o o d , P a m e l a Allain and Beverly B y l u n d . W e also are grateful for the many s u g g e s t i o n s f r o m m e m b e r s of E C A A R a n d PSS(I) on topics to be c o v e r e d in this volume,

and

in

particular

to

Robert

Schwartz,

founder

of

ECAAR,

for

encouragement. W A L T E R ISARD Cornell

University

C H A R L E S H. A N D E R T O N College of the Holy Cross

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Economies of Arms Reduction and the Peace Process W. Isard and C H . Anderton (Editors) © 1992 Elsevier Science Publishers B.V. All rights reserved.

Chapter A SURVEY

OF THE

PEACE

1

ECONOMICS

Walter Isard and Charles

H.

LITERATURE

Anderton

Cornell University and College of the Holy C r o s s

1.1

Introduction

In this c h a p t e r w e w i s h to p r e s e n t a short, but c o m p a c t s u r v e y of the main s t r a n d s of t h o u g h t in the literature on p e a c e e c o n o m i c s .

A more detailed and

thorough survey requires a book-length manuscript currently being written. T h e r e are m a n y w a y s in w h i c h this survey c a n be o r g a n i z e d .

One way would

a d d r e s s first the q u e s t i o n of w h y t h e r e is conflict, p r o c e e d to the identification of s p e c i f i c e c o n o m i c f a c t o r s g e n e r a t i n g or lying b e h i n d c o n f l i c t s , h o n e into the c o n s e q u e n t p h e n o m e n a of military e x p e n d i t u r e s a n d a r m s r a c e s , p e r h a p s t h e n investigate the interplay of e c o n o m i c f a c t o r s in specific conflicts (including t h o s e leading to major unrest, w a r s , revolutions a n d terrorism), e x a m i n e the basis for arms control, a n d finally at all s t a g e s probe into the m a n i f o l d direct a n d indirect effects (the impact) of a r m s escalation, control a n d d i s a r m a m e n t . To p r o c e e d in this w a y , h o w e v e r , is not very u s e f u l .

T h e literature on p e a c e

e c o n o m i c s is heiter skelter, a p p e a r i n g in d i v e r s e j o u r n a l s a n d b o o k s

without

adhering to any s e m b l a n c e of organization. Hence w e c h o o s e to present first s o m e general c o n c e p t u a l materials to help identify the myriad of forces a n d p r o b l e m s that have been e n c o u n t e r e d . T h e n w e proceed to survey the literature, for the most part on o p e r a t i o n a l m o d e l s a n d h y p o t h e s i s t e s t i n g , f o l l o w i n g t h e f o u r

approaches

s u g g e s t e d by e c o n o m i c r e a s o n i n g that A r r o w ( c h a p t e r 2) u s e s in t r e a t i n g the e c o n o m i c effects of arms reduction. T h e s e a r e : s t a n d a r d resource allocation theory, m a c r o e c o n o m i c stability a n a l y s i s , m o d e r n g r o w t h t h e o r y , a n d political e c o n o m y thinking. W e find examination of the literature in this m a n n e r at least as g o o d if not better t h a n any other that

has b e e n p r o p o s e d .

H o w e v e r , w e d i s c u s s writings on

a r m s race m o d e l s a n d a r m s c o n t r o l w h i c h a r e t h e o u t g r o w t h of t h e resource allocation p r o b l e m in a s e p a r a t e s e c t i o n .

standard

Also since t h e r e are extensive

W. Isard and CH.

2

Anderton

writings on s e c t o r a l a n d regional i m p a c t s of military e x p e n d i t u r e s w h i c h e m p l o y m o d e l s d e r i v e d from both s t a n d a r d resource allocation theory a n d m a c r o e c o n o m i c stability a n a l y s i s , w e a d d a s e c t i o n o n t h e s e i m p a c t s after t h e d i s c u s s i o n of m a c r o e c o n o m i c stability a n a l y s i s .

Finally, w e e n d up with a s e c t i o n on conflict

m a n a g e m e n t analysis a n d procedures, a topic of c o n c e r n to all social s c i e n c e s a n d many professions, a n d one on w h i c h e c o n o m i s t s have m a d e notable contributions. 2.1 T h e G e n e r a l C o n c e p t u a l

Framework and Some

Basic

Issues

In s e t t i n g forth a g e n e r a l c o n c e p t u a l f r a m e w o r k , w e n e e d to b r o a d e n t h e e c o n o m i s t ' s traditional study of c o o p e r a t i o n , rivalry a n d conflict a m o n g e c o n o m i c behaving units a n d organizations to cover the study of peace (1988) has p r o p o s e d .

and war, as Hirshleifer

Hirshleifer calls for a g e n e r a l e q u i l i b r i u m f r a m e w o r k to

e m b r a c e within e c o n o m i c s the full variety of conflicts. T o u n d e r s t a n d the operation of the w o r l d e c o n o m y a n d most national e c o n o m i e s , " p e a c e f u l " p r o d u c t i o n a n d e x c h a n g e w a y s of g e n e r a t i n g i n c o m e a n d utility n e e d to be c o m p l e m e n t e d by appropriative-type

w a y s a n d efforts.

expenditures, weaponry

accumulation

These efforts, associated with and conflict that can

l e a d to

military physical

v i o l e n c e , are d e s i g n e d to secure r e s o u r c e s of others or to d e f e n d against loss of r e s o u r c e s to o t h e r s .

In a real s e n s e , m o s t n a t i o n a l e c o n o m i e s are

geared

simultaneously to w a r a n d p e a c e -- e a c h being typically located a l o n g a s p e c t r u m w h o s e e x t r e m e s are "absolute p e a c e a n d total war".

"Individuals a n d g r o u p s can

c h o o s e b e t w e e n t w o main w a y s of a c q u i r i n g i n c o m e :

(1) p r o d u c i n g

economic

g o o d s , v e r s u s (2) seizing w h a t o t h e r parties have produced....It is the fact that intrusive efforts (and defending against them) c a n be as renumerative as production or e x c h a n g e that m a k e s conflict a p e r m a n e n t feature of life" (p. 2 0 2 ) .

Accordingly,

Hirshleifer sets up a m o d e l involving a resource partition f u n c t i o n , a c o n t e s t a b l e i n c o m e p r o d u c t i o n f u n c t i o n , a c o m b a t p o w e r function a n d an i n c o m e distribution function.

1

In a v e i n m o r e c o n s i s t e n t with a r m s race m o d e l l i n g , o t h e r s c h o l a r s developed general conceptual frameworks.

have

For e x a m p l e , for nation J ( o p p o s i n g

nation L) the societal resource allocation p r o b l e m at a g i v e n point of t i m e c a n be stated in a highly simplified m a n n e r a s : Max WJ = WJ(CJ, S^)

(1.1)

subject to: TJ(CJ, MJ, KJ, l_J) = 0

(1.2)

Survey of Peace

Economics

3

J

S e= fJ(SJ, SL φ) J

S

= (1-a)S^ + M

(1.3) J

(1.4)

where: J

W

J

C

= social welfare (utility) of J . = J's production of civilian (consumption a n d investment) g o o d s .

Sg = J's perceived level of national security. J

Τ M

J

= J's transformation function (production possibility frontier). = J's production of military g o o d s , to be v i e w e d as additions to J's stock of these goods.

J

J

K , L = J's stock of capital a n d labor, e a c h defined broadly to include all of J's resources. J

S ,S

L

= J's a n d L's stock of military g o o d s , respectively.

φ = parameter reflecting the quality of military g o o d s in J and L, the state of the international environment, a n d other e x o g e n o u s factors affecting J's security, α = rate of depreciation (covering o b s o l e s c e n c e ) of military g o o d s . = J's stock of military g o o d s at the previous point of t i m e .

Nation L faces a similar e c o n o m i c - c h o i c e p r o b l e m , although the specific form of J's and L's functions will differ. T h e link that g i v e s rise to the a r m s race is t h e a s s u m e d negative e x t e r n a l i t y of e a c h nation's s t o c k of military g o o d s o n its a d v e r s a r y ' s security. Explicit t r e a t m e n t of security as a v a r i a b l e a d d r e s s e s H i r s h l e i f e r ' s a g a i n s t i n v a s i o n or a p p r o p r i a t i o n resources.

by a n o t h e r n a t i o n ( b e h a v i n g

defense

unit) of

one's

It less adequately a d d r e s s e s Hirshleifer's appropriative efforts to acquire

r e s o u r c e s , since a c q u i s i t i o n a n d a c c u m u l a t i o n of p o w e r a n d o t h e r n o n e c o n o m i c 2

c o m m o d i t i e s t e n d to loom m u c h larger in g o v e r n i n g s u c h efforts. N o n e t h e l e s s , the recent

Iraq

economically

invasion

of

Kuwait

may

be

interpreted

by

some

as

basically

m o t i v a t e d to p o s s e s s a n d c o n t r o l m o r e oil r e s o u r c e s ; a n d

the

s u b s e q u e n t r e p o s s e s s i o n of t h e s e oil r e s o u r c e s a n d r e a s s i g n m e n t of t h e m to a restored Kuwait government

r e p r e s e n t s an e c o n o m i c a l l y

based

appropriation

(reappropriation) effort to maintain oil resources for trade in a "free w o r l d " . T h e b a s i c f r a m e w o r k of e q s . 1.1-1.4 has b e e n u s e d by D u m a s (1972) a n d A n d e r t o n ( 1 9 9 0 a ) to illustrate the f u n d a m e n t a l e c o n o m i c nature of a r m s rivalry. M a n y of t h e relationships h a v e b e e n d e v e l o p e d in a more i n - d e p t h f a s h i o n by a n u m b e r of s c h o l a r s .

For e x a m p l e ,

McGuire

(1965) embodied

many

of

the

relationships w h e n he c o n s i d e r e d the role of secrecy in the a r m s race. Isard (1988,

W. Isard and CH.

4

Anderton

c h . 13) p r e s e n t e d a very general mathematical statement in an attempt at synthesis of a r m s race models. W o l f s o n ( 1 9 9 1 , c h . 9) has m o v e d f o r w a r d in the construction of a d y n a m i c t w o p e r i o d g e n e r a l d i s e q u i l i b r i u m

model.

An earlier

dynamic

equilibrium model is presented in Brito (1972). 1.3 S t a n d a r d

Resource Allocation Analysis and Strategic

Behavior

G e n e r a l c o n c e p t u a l f r a m e w o r k s n e e d to be simplified a n d m o d i f i e d t h r o u g h the injection of a s s u m p t i o n s , s o m e t i m e s very strong, to yield m a g n i t u d e s a n d directions of c h a n g e of v a r i a b l e s u s e f u l for p r o j e c t i n g b e h a v i o r , a t t a c k i n g p r o b l e m s identifying appropriate policies.

and

In this s e c t i o n , w e look at w a y s s t a n d a r d resource

allocation theory has been e m p l o y e d to do so. In a direct a n d simple m a n n e r , the g e n e r a l p r o b l e m of r e s o u r c e allocation is well p o s e d by the f a m o u s S a m u e l s o n g u n s a n d butter d i a g r a m .

O n Figure

1.1

p r o d u c t i o n of butter (civilian g o o d s ) a n d g u n s (military w e a p o n s ) are m e a s u r e d along the vertical a n d horizontal axes, respectively.

Society's production possibility

frontier is given by the curve PP' indicating that an efficiently operating society c a n only produce g u n s at the e x p e n s e of butter, or vice v e r s a . the other c u r v e s a n d n u m b e r s t h e r e o n p r e s e n t e d ) .

(For the m o m e n t , ignore

T h e basic q u e s t i o n s a r e : (1)

how m u c h of e a c h g o o d s h o u l d be p r o d u c e d , that is w h a t point on the c u r v e P P ' should be c h o s e n ; a n d (2) if society is operating inefficiently, say at a point Q, inside the curve PP' (the set of all efficient points) b e c a u s e of n o n - e c o n o m i c factors or poor e c o n o m i c d e c i s i o n s , how c a n society reach a point on the c u r v e or m o v e t o w a r d s u c h a point while i n c r e a s i n g p r o d u c t i o n of both g o o d s ?

M o r e o v e r , if t h e r e are

several paths from Q to a point on the curve allowing increasing production of both g o o d s , w h i c h should be c h o s e n ? Society's d e c i s i o n s on w h e r e to p r o d u c e a n d h o w to m o v e to t h e frontier if inside

are

dependent

on

the

desires

of

its

behaving

units

-

individuals,

organizations, interest g r o u p s and so forth -- desires w h i c h generally are conflicting because of the different utility or welfare functions of t h e s e units. In his classic 1962 book, Conflict

and

Defense,

B o u l d i n g has e x a m i n e d this

p r o b l e m , as well as many others on w h i c h e c o n o m i s t s have s u b s e q u e n t l y w o r k e d , extending Boulding's analysis in many directions.

In e x a m i n i n g the behavior of two

units, A a n d B, each say a leader of a political party, Boulding might have a d d e d to a d i a g r a m such as Figure 1.1 the t w o sets of indifference c u r v e s t h e r e o n d e p i c t e d , the upper left set for A a n d the lower right for B.

C o m b i n a t i o n s of butter a n d g u n s

r e p r e s e n t e d by points a* a n d b* are t h e most preferred by A a n d B, respectively. For a s y s t e m that will be operating efficiently, the arc a*b* represents the conflict set

Survey of Peace

Economics

5

(the n e g o t i a t i o n or b a r g a i n i n g set), requiring t h e u s e of a c o n f l i c t

management

p r o c e d u r e , rule or other d e v i c e ( d i s c u s s e d in S e c t i o n 1.9 below) in o r d e r to reach an a g r e e m e n t by the two parties on w h i c h c o m b i n a t i o n to p r o d u c e . H o w e v e r , if society is operating at an inefficient point Q, t h e n t h e interior a r e a Q c d represents the trading or i m p r o v e m e n t set.

G i v e n the c o m b i n a t i o n of g u n s a n d

butter that any point in that set represents, t h e r e is at least o n e point within the arc c d w h i c h w o u l d represent an i m p r o v e m e n t for both participants, a n d so s u g g e s t s a trade within their d e m a n d s . M a n y p r o c e d u r e s have b e e n s u g g e s t e d for t h e p a r t i e s to u s e to r e a c h an argreement in c a s e s w h e r e the initial d e m a n d s are d e f i n e d by a* a n d b*, or w h e n a society is operating at a point Q a n d greater efficiency is d e s i r e d .

S e e for e x a m p l e

the early w o r k of Z e u t h e n (1930) a n d B i s h o p ( 1 9 6 0 , 1 9 6 3 , 1964), a n d the more general analysis in Isard (1988, c h . 10). Butter

ρ

B's indifference curves

'

P'

•

Guns

Figure 1 . 1 : Society's Production Possibility F r o n t i e r a n d Parties' Indifference Curves The resource allocation problem, as posed with a continuous possibility

frontier

and

well-behaved

indifference

curves,

may

production

constitute

a

theoretical e c o n o m i s t ' s perception of reality, but not that of a typical political leader. To such a behaving unit, both his a n d his o p p o n e n t ' s set of possible actions is much more limited.

A n e x t r e m e c a s e c o n s i s t s of only t w o p o s s i b l e a c t i o n s by e a c h

participant in a situation w h e r e s y m m e t r y o b t a i n s , a n d w h e r e e a c h s i m u l t a n e o u s l y O n e possible a c t i o n , a cooperative

o n e , is

w h e n a leader, say A, publicly a d m i t s t h e r e is s o m e v a l i d i t y to t h e

resource

c h o o s e s an action o n c e a n d for all.

allocation w h i c h his o p p o n e n t m o s t p r e f e r s .

He k n o w s t h a t if his o p p o n e n t Β

c h o o s e s the other possible a c t i o n , the noncooperative

(highly c o m p e t i t i v e ) o n e ,

W. Isard and CH.

6

Anderton

a n d d e n o u n c e s his (the first leader's) a c t i o n as folly, Β will w i n out,

resource

allocation b* will be realized a n d he (A) will e n d up on a low ranking indifference c u r v e , say with the low, ordinal

rank

of 2.

He also k n o w s that if Β c h o o s e s a

c o o p e r a t i v e action a n d recognizes publicly s o m e validity to t h e resource allocation A most p r e f e r s , t h e n t h e y are likely to e n d up in a 5 0 - 5 0 t y p e of split like that r e p r e s e n t e d by point g (a m e d i a n point a l o n g t h e frontier), at w h i c h t h e o r d i n a l ranking of his indifference curve is say 5.

Finally, he k n o w s that if Β c h o o s e s a

c o o p e r a t i v e a c t i o n a n d he c h o o s e s t h e n o n c o o p e r a t i v e o n e , a n d t h u s resource

allocation

a* will be r e a l i z e d , at w h i c h t h e o r d i n a l

ranking

wins, of

his

indifference curve is say 10. This situation of s y m m e t r y c a n be r e p r e s e n t e d by the matrix in Figure 1.2 w h e r e the first n u m b e r in e a c h cell represents A's ranking of the o u t c o m e of the joint action r e p r e s e n t e d by that cell, a n d t h e s e c o n d n u m b e r , B's ranking. B's actions cooperate

cooperate

noncoop.

5, 5

1, 10

10, 1

2, 2

A's actions noncoop.

Figure 1.2: The Prisoner's D i l e m m a G a m e F i g u r e 1.2 is t h e c l a s s i c P D ( P r i s o n e r ' s D i l e m m a ) g a m e , w h i c h h a s b e e n d i s c u s s e d ad infinitum

for an a r m s race situation involving t w o nations, w h e r e the

noncooperation action involves an increase in military e x p e n d i t u r e s (an escalation), s o m e t i m e s d e s i g n a t e d defection, a n d the c o o p e r a t i o n action, no increase or e v e n a d e c r e a s e in military expenditures. According to some scholars, rational myopic players would choose

their

unconditionally best of the two actions, n a m e l y n o n c o o p e r a t i o n , a n d the P a r e t o inferior Nash equilibrium (2,2) w o u l d result.

It is s t a b l e ; no player is m o t i v a t e d to

d e p a r t f r o m n o n - c o o p e r a t i o n ; a n d clearly if t h e joint c o o p e r a t i o n w e r e in effect leading to the o u t c o m e (5,5), such w o u l d be unstable since e a c h player w o u l d be

Survey of Peace

t e m p t e d to depart f r o m it.

Economics

7

If the rules of the g a m e are c h a n g e d , so that sequential

action is possible, the s e c o n d m o v e r has the a d v a n t a g e . T h e literature on this g a m e , on t h e g a m e of C h i c k e n (where the payoff of rank 1 is replaced by a rank b e t w e e n 2 a n d 5, say 4 ) is e x t e n s i v e .

3

a n d on m a n y other o n e - s h o t g a m e s

(See Shubik, 1 9 8 2 ; B r a m s a n d Kilgour, 1988).

d i s q u a l i f i e s t h e s e g a m e s for m o s t c o n f l i c t s i t u a t i o n s

T h e o n e - s h o t aspect

encountered

in

reality.

H o w e v e r , m a n y of t h e s e g a m e s have b e e n e x t e n d e d to m a n y - p e r i o d c a s e s (see Shubik, 1 9 8 2 ; Fraser a n d Hipel, 1 9 8 4 ; F r i e d m a n , 1990). T h e r e s t r i c t e d - a c t i o n g a m e f r a m e w o r k h a s led to i n n u m e r a b l e s t u d i e s of strategy.

In his p i o n e e r i n g 1960 w o r k , The Strategy

of Conflict,

S c h e l l i n g is not

c o n c e r n e d with conflict as a pathological state or as a c o n s e q u e n c e of irrational or u n c o n s c i o u s behavior.

Rather, he f o c u s s e s on the m o r e rational, c o n s c i o u s a n d

artful kind of behavior.

T o him, most conflict situations are essentially bargaining

s i t u a t i o n s w h i c h usually i n v o l v e b o t h c o n f l i c t a n d c o o p e r a t i o n , a n d w h e r e the b e h a v i o r of e a c h party significantly i n f l u e n c e s the o u t c o m e possibilities a n d t h u s c o u r s e s of a c t i o n of the o t h e r parties.

T h e a c t i o n s of the parties o f t e n involve

c o m m i t m e n t s , t h r e a t s , p r o m i s e s , c o n c e r n s a b o u t r e p u t a t i o n a n d credibility, a n d d e c e p t i o n s of many t y p e s .

Schelling has illustrated v a r i o u s b a r g a i n i n g situations.

For e x a m p l e , w h e r e enforceable the PD g a m e , the

promises

are possible in an appropriate revision of

P a r e t o efficient o u t c o m e

(5,5) b e c o m e s s t a b l e .

Another

b a r g a i n i n g situation that has b e e n of c o n s i d e r a b l e interest has c e n t e r e d a r o u n d deterrent threat. S u p p o s e the ordinal ranks are as in the matrix of Figure 1.3: T h e s t a t u s q u o is the joint c o o p e r a t i o n o u t c o m e (5,10).

Let A plan to defect

(leading to 10,5) with Β t h r e a t e n i n g s u b s e q u e n t l y to defect (leading to 2,1).

The

payoff matrix points up the tradeoff b e t w e e n the effectiveness a n d credibility of B's deterrent threat.

B's threat to defect (to be n o n c o o p e r a t i v e ) is effective b e c a u s e it

t a k e s A d o w n to an o u t c o m e of rank 2 only.

But is t h e threat credible.

W e r e Β to

carry out the threat, he w o u l d impose a cost to himself, a fall in an o u t c o m e ranked 5 to an o u t c o m e ranked 1. W h e t h e r Β carries out the threat d e p e n d s on m a n y factors including w h e t h e r the play of future g a m e s d e p e n d s on this o n e (reputation effects). See B r a m s a n d Kilgour (1988) for extensive analysis of deterrent threat g a m e s . In his studies, Schelling has e x a m i n e d m a n y other topics including a theory of tacit b a r g a i n i n g , p r o b l e m s of c o m m u n i c a t i o n a n d c o o r d i n a t i o n , s t r a t e g i c m o v e s , r a n d o m i z e d t h r e a t s a n d p r o m i s e s , s u r p r i s e a t t a c k , o p t i m a l c h o i c e of w e a p o n s s y s t e m s , the d i p l o m a c y of violence, the art of c o m m i t m e n t , a n d the manipulation of risk (see Schelling, 1960, 1966a, 1 9 6 6 b . F o r a recent in-depth theoretical treatment of tacit bargaining b a s e d on Schelling's f o u n d a t i o n , see D o w n s a n d R o c k e , 1990).

W. Isard and CH.

8

Anderton

B's actions cooperate

cooperate

defect.

5, 10

1.2

10, 5

2, 1

A's actions defect

Figure 1.3: Deterrent Threat T h e r e have been many important a d v a n c e s in g a m e analysis since Schelling's pioneering works.

O n e of the more recent d e v e l o p m e n t s has b e e n Hirshleifer's

c o n c e p t of evolutionary equilibrium.

In a 1987 study he a s s u m e s that p e o p l e are

m e m b e r s of a h o m o g e n e o u s population meeting r a n d o m l y in pairwise interactions. T h e p e o p l e c a n play c o o p e r a t i v e , n o n - c o o p e r a t i v e or m i x e d s t r a t e g i e s in their d y n a m i c e n c o u n t e r s with one another.

T h e idea of evolutionary equilibrium is that

o v e r t i m e , s o m e strategies will be " d e f e a t e d " by others a n d eventually driven out, if they yield lower a v e r a g e returns t h a n other strategies. inefficient, necessarily.

won't

cooperative

strategies

generally

S i n c e conflict is generally emerge

in s o c i e t y ?

T h e a v e r a g e returns of c o o p e r a t i v e , n o n - c o o p e r a t i v e a n d

Not mixed

strategies "will be a function of the proportions of the population c h o o s i n g e a c h of the strategies."

(p. 224).

H u m a n nature a n d social/legal institutions significantly

affect t h e t y p e s of g a m e s a n d t h e a s s o c i a t e d r e t u r n s t h a t e m e r g e in d y a d i c e n c o u n t e r s . There is no guarantee that these variables will give rise to c o o p e r a t i v e strategies driving out non-cooperative o n e s . In particular, in a Prisoner's D i l e m m a with cardinal payoffs in Figure 1.4a, the average returns α a n d β for cooperation and defection a r e : of such casualties, t h e n C A ) must be the n u m b e r of J's missiles that must remain intact.

T h u s , in oversimplified fashion t h e a m o u n t S

J

of

missiles that J must have for deterrence purposes is given by: L

SJ > f S

L

L

+ C /D

J

(1.7)

Survey of Peace

Economics

13

A proper statement of this relationship recognizes that there is a time delay before J c a n retaliate after a missile attack a n d that t h e r e w o u l d be a t i m e period d u r i n g which retaliation w o u l d o c c u r .

4

O n the other h a n d , J m a y c o n t e m p l a t e the use of a r m s for a potential attack. Where f

J

J

is the effectiveness of one of J's missiles in destroying U s missiles, f S

J

is

J

the n u m b e r of L's missiles J can destroy with its stock S . T h e n J must c o n s i d e r the n u m b e r of L's missiles, S

L

J

J

- f S , left intact after its (J's) attack. Nation J must find

acceptable the n u m b e r of civilian casualties in J's country that this left-over n u m b e r can inflict.

If υ

1

is the n u m b e r of J's casualties an L missile c a n inflict, t h e n for J to

attack it must be that (in oversimplied t e r m s ) : L

O (S

l

J

J

- f S ) < Λ J

where C

C

J

(1.8)

is the m a x i m u m n u m b e r of civilian casualties that J c o n s i d e r s a c c e p t a b l e .

By reordering terms in Eq. (1.8), we o b t a i n 1

5

CJ

(1.9)

A s s u m i n g L's reactions are similar in nature to t h o s e of J , w e have t w o similar e q u a t i o n s for L.

W h e n t h e equality sign holds a n d w h e n w e g r a p h t h e s e four

relations, w e obtain the familiar Intriligator-Brito figure p r e s e n t e d here as Figure 1.6. T h o s e c o m b i n a t i o n s of S

J

and S

L

that lie on the line "J d e t e r s " a n d in the areas to its

right ( 1 , 2J a n d 4J) are c o m b i n a t i o n s w h e r e the stock S attacking.

Likewise, c o m b i n a t i o n s of S

J

and S

L

J

is sufficient to deter L from

on a n d a b o v e the line "L d e t e r s " (in

the a r e a s 1, 2L a n d 4L) are c o m b i n a t i o n s w h e r e t h e stock S deter J from attacking.

L

is large e n o u g h to

T h e d a s h e d a r e a (1) in the upper right c a n t h e n be clearly

d e s i g n a t e d the c o n e of mutual d e t e r r e n c e . T h o s e c o m b i n a t i o n s of S

J

and S

L

lying on a n d below the line "J c a n attack" (in

areas 4 J , 5 J , a n d 6) are c o m b i n a t i o n s w h e r e J c a n effectively attack. N o n e of these c o m b i n a t i o n s give L deterrence capability.

T h o s e c o m b i n a t i o n s of S

J

and S

L

lying

on a n d to the left of line "L c a n attack" (in a r e a s 4 L , 5 L a n d 6) are c o m b i n a t i o n s w h e r e L c a n effectively attack. W e have also indicated in Figure 1.6 a d o t t e d area (3) c o m p r i s i n g t h o s e c o m b i n a t i o n s w h e r e neither J nor L attacks or d e t e r s -

where

possible casualties that the surviving missiles of an o p p o n e n t c a n inflict p r e v e n t s a nation f r o m a t t a c k i n g .

Finally in r e g i o n 5 L , nation L c a n n o t a v o i d

preemption

b e c a u s e L has e n o u g h w e a p o n s to attack J with impunity, but, at t h e s a m e t i m e , neither has e n o u g h w e a p o n s to deter the other. L will be forced to attack or J will be forced to p r e e m p t , in either c a s e leading to w a r (Intriligator a n d Brito, 1 9 8 9 : 1 9 ) .

W. Isard and CH.

14

Region 5J is the o b v e r s e case.

Anderton

In region 6 e a c h side c a n attack the other, neither

can avoid p r e e m p t i o n , and neither can deter the other.

Figure 1.6: T h e Intriligator-Brito M o d e l

Intriligator and Brito then argue that (a) a s m a l l a r m s race escalation f r o m the origin (0,0), or other low w e a p o n s level on both sides, to s o m e other c o m b i n a t i o n r e p r e s e n t e d by a point in a r e a 6 leads to a highly u n s t a b l e situation with a high probability of war, (b) a large escalation that e n d s up in a r e a 1 ( w h e t h e r it g o e s through areas 4L, 3, or 4J leads to a stable situation of mutual deterrence with very low probability of war, (c) a d e e s c a l a t i o n f r o m a high level in a r e a 3 to a relatively high level that r e m a i n s in a r e a (3) retains stability, a n d (d) a major d e e s c a l a t i o n ( d i s a r m a m e n t ) from area (1) to a r e a (6) leads to instability a n d high probability of war. T h e r e has b e e n e x t e n s i v e c r i t i c i s m ( a n d s u p p o r t ) of t h i s a n a l y s i s a n d the implied position that large nuclear w e a p o n r y is justifiable. T h e linearity a s s u m p t i o n of the model is c o n s i d e r e d unjustifiable for policy p u r p o s e s ( K u p p e r m a n a n d S m i t h , 1976) a n d is r e c o g n i z e d as simply a d e v i c e to obtain a m a t h e m a t i c a l l y t r a c t a b l e model.

Even allowing for linearity, Boulding (1978) has pointed out that a very low

probability of w a r with high c a t a s t r o p h i c potential (that w o u l d be a s s o c i a t e d with military stocks c o r r e s p o n d i n g to a position in the z o n e of mutual d e t e r r e n c e ) is still not a c c e p t a b l e ; e a r t h q u a k e s a n d v o l c a n i c eruptions with very low probabilities do occur.

If there is s o m e positive probability that nuclear w e a p o n s will g o off, a n d

there must be if they are to have a deterrent effect, then eventually they will go off.

Survey of Peace

Economics

15

Further A n d e r t o n (1991) has noted that it is important to distinguish b e t w e e n the traditional

l-B

(Intriligator-Brito)

model

and the

l-B

methodology.

The

l-B

methodology gives rise to a whole family of l-B m o d e l s (the traditional l-B m o d e l is a special c a s e ) , m a n y of w h i c h lead to analytical findings quite different f r o m those of the traditional l-B m o d e l .

For e x a m p l e , implicit in t h e traditional l-B a n a l y s i s a n d

m o d e l is a s p e c i f i c attitude -

o n e in w h i c h b o t h p a r t i e s a r e w i l l i n g to a c c e p t

casualties in return for the fruits of victory w h a t e v e r t h e y m a y be. may be inclined t o w a r d m o r e risk a v e r s e behavior.

H o w e v e r , they

T h e y m a y c o n t e m p l a t e attack

only if they can destroy entirely the adversary's forces - in w h i c h c a s e the traditional linear l-B m o d e l at the e x t r e m e right of Figure 1.7 b e c o m e s the linear m o d e l at the middle with the region of mutual attack (region 6) e l i m i n a t e d .

O r t h e y may be still

more c a u t i o u s a n d pursue "sure t h i n g " behavior, a n d c o n t e m p l a t e attack only if they c a n eliminate all the adversary's forces a n d still have a m i n i m u m surviving force (a basic premise around which

Radner,

1989 develops

his m o d e l of

"defense-

protected b u i l d - d o w n " ) , in w h i c h c a s e the linear m o d e l at the e x t r e m e left of Figure 1.7 b e c o m e s relevant. An even more f u n d a m e n t a l criticism of the original l-B model is that e v e n if J a n d L are risk-loving, the mutual attack region is p r o b l e m a t i c .

For

e x a m p l e , at point q in Figure 1.7, L has 10 w e a p o n s a n d J has t w o , yet J is depicted as being able to attack.

J

L

If f a n d f a r e less t h a n o n e , however, there is no rational

basis w h e r e b y J w o u l d attack L in the context of t h e original l-B m o d e l .

Anderton

interprets the original l-B m o d e l as p e s s i m i s t i c , a n d c o n s i d e r s t h e o t h e r t w o as neutral a n d optimistic, respectively.

Figure 1.7: S p e c t r u m of Intriligator-Brito M o d e l s T h e f a n d υ t e r m s of the Intriligator-Brito m o d e l be a function of w e a p o n s levels.

m a y not be c o n s t a n t ; they may

T h i s c a n g i v e rise to n o n l i n e a r r e l a t i o n s f r o m

which a great variety of analytical results are possible (Mayer, 1 9 8 6 ; A n d e r t o n and

W. Isard and CH.

16

Fogarty,

1990).

technologies.

In a d d i t i o n , t h e f a n d υ

Anderton

terms

embody

various

weapons

T h e d r a m a t i c c h a n g e s in military t e c h n o l o g i e s t h r o u g h o u t

history

have dramatically affected war, a r m s rivalry a n d a r m s control. In c o n d u c t i n g d e t e r r e n c e a n d d e e s c a l a t i o n a n a l y s i s F i s c h e r ( 1 9 8 4 ) points up the desirability of c o n s i d e r i n g different t y p e s of military t e c h n o l o g y .

He m a i n t a i n s

that a highly n o n t h r e a t e n i n g d e f e n s e s y s t e m (one c o m p r i s i n g purely

relatiatory

s e c o n d - s t r i k e w e a p o n s a n d lines of a n t i t a n k , antiaircraft m i s s i l e s b a c k e d up by reservists that could d e f e n d their o w n territory) by itself d o e s not reduce the security of ( i m p o s e a n e g a t i v e externality on) a rival; it c a n d e e s c a l a t e a n a r m s race. S c h e l l i n g ( 1 9 6 6 a ) also s t r e s s e s the i m p o r t a n c e of military t e c h n o l o g y w h e n he a r g u e s that in a relationship b e t w e e n a r m e d a d v e r s a r i e s t h e r e is " s o m e t h i n g that w e might call t h e 'inherent p r o p e n s i t y t o w a r d p e a c e or war* e m b o d i e d in t h e w e a p o n r y , t h e g e o g r a p h y , a n d t h e military o r g a n i z a t i o n of t h e t i m e " (p. 2 3 4 ) . S c h i l l i n g ' s inherent propensity idea is a recognition that t h e r e are c h a r a c t e r i s t i c s e m b o d i e d in the w e a p o n s t h e m s e l v e s that push a d v e r s a r i e s t o w a r d p e a c e or war, i n d e p e n d e n t of t h e personalities a n d g o a l s of t h e d e c i s i o n - m a k e r s , the extent of political d i s a g r e e m e n t b e t w e e n the a d v e r s a r i e s , a n d m i s p e r c e p t i o n s about mutual resolve a n d hostility. Other studies have e m p l o y e d l-B t y p e models to study various a s p e c t s of military t e c h n o l o g y a n d its relation to p e a c e a n d w a r i s s u e s

(see

Intriligator a n d Brito, 1986; W o l f s o n , 1987; A n d e r t o n , 1990b, 1992) T h e Intriligator-Brito model has b e e n e x t e n d e d in a n o t h e r direction by W o l f s o n (1985) to point up the basis for e c o n o m i c warfare, using a loose c o m p a r a t i v e statics framework.

Let Figure 1.6 be t h e fourth q u a d r a n t of Figure 1.8 with J's military

production (primarily missiles) m e a s u r e d f r o m the origin d o w n the vertical, a n d L's military production along the horizontal, a n d retain only the "L c a n deter" line.

Let

the production possibility frontier of Figure 1.1 be the P Z P ' curve in q u a d r a n t 1, with civilian g o o d s production m e a s u r e d along the vertical.

Let L's current allocation of

resources to civilian production c!j" and military M!J" be given by point Z. T h e s e c o n d q u a d r a n t d e p i c t s a relationship b e t w e e n g r o s s i n v e s t m e n t ( m e a s u r e d a l o n g the horizontal to the left of the origin) a n d civilian production w h e r e , for simplicity's sake only, g r o s s i n v e s t m e n t is t a k e n to e q u a l s a v i n g s a n d s a v i n g s is t a k e n to be a constant fraction s L

L

s C .

L

of civilian production. A s a c o n s e q u e n c e , gross investment l

L

=

C o r r e s p o n d i n g to allocation Z, O U is the resulting level of g r o s s investment.

If O H is the required replacement investment, t h e n U H is net i n v e s t m e n t w h i c h is m e a s u r e d vertically along the l^ axis in the fourth quadrant. A s s u m e L's military c o n c e r n is with d e t e r r e n c e .

A s an o p t i m a l social w e l f a r e

r e s p o n s e , it has c h o s e n allocation Ζ to p r o d u c e military g o o d s M^, a d e q u a t e for increasing its stock of missiles to match for deterrence p u r p o s e s t h e i n c r e a s e in J's

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Economics

stock resulting from J's military production

17

T h u s the net investment U H (and the

a s s o c i a t e d e x p a n s i o n of L's p r o d u c t i o n possibility frontier (the non bold c u r v e in quadrant 1) c o r r e s p o n d s to

as indicated in the 4th quadrant.

If J's military production had been M 2 , L's optimal r e s p o n s e w o u l d have been a resource allocation to realize M 2 military production, resulting in zero net investment a n d no c h a n g e in its p r o d u c t i o n possibility frontier.

If J's military p r o d u c t i o n had

b e e n M3, L's optimal responses w o u l d have had to be (for d e t e r r e n c e p u r p o s e s ) M 3 , resulting in negative

net i n v e s t m e n t ( i n a d e q u a t e r e p l a c e m e n t of u s e d - u p

o b s o l e t e plant a n d e q u i p m e n t ) a n d a c o n t r a c t i o n of t h e p r o d u c t i o n frontier.

and

possibility

J

High e n o u g h levels of M , as might be a s s o c i a t e d with a r m s e s c a l a t i o n ,

implies e c o n o m i c collapse (bankruptcy) of L.

J

L deters

Figure 1.8: E c o n o m i c W a r f a r e R e t u r n to t h e

arms

race d y n a m i c s

of

reality.

This

simple

exercise

in

c o m p a r a t i v e statics s h o w s how the escalation of military e x p e n d i t u r e s by J c a n in

W. Isard and C. H. Anderton

18

time force another country with a significantly smaller resource base into a situation w h e r e it is u n a b l e to maintain its p r o d u c t i v e c a p a c i t y w h e n o p t i n g to c o n t i n u e to deter as J's military production a n d stock mount.

It will c h o o s e to attack, W o l f s o n

s u g g e s t s , before it is e c o n o m i c a l l y f o r c e d into s u b m i s s i o n ( d e f e a t ) .

Lambelet's

c h a p t e r in this v o l u m e s u g g e s t s that a nation d e f e a t e d by e c o n o m i c w a r f a r e in the Wolfson

sense, may instead withdraw from participating

in a n a r m s

rivalry.

W o l f s o n ' s a n a l y s i s p r o v i d e s a link b e t w e e n t h e conflict a n d a r m s rivalry literature a n d t h e literature on the e c o n o m i c effects of a r m s p r o d u c t i o n a n d d i s a r m a m e n t . W e a p o n s production has important m a c r o - a n d m i c r o - e c o n o m i c effects a n d it is to these topics that w e now turn.

1.5

Macroeconomic Consider

the

macroeconomics.

Stability

Keynesian

Analysis literature

and

the

more

modern

versions

of

C o n s i s t e n t with A r r o w ' s o b s e r v a t i o n in t h e next c h a p t e r , w e

e x a m i n e K e y n e s i a n t h e o r y for use for s h o r t - r u n policy a n a l y s i s , r e c o g n i z i n g the controversial nature of K e y n e s i a n theory today. c o n d u c t e d by S u i t s ( 1 9 6 3 ) .

O n e of the earliest a n a l y s e s w a s

His p u r e l y s c h e m a t i c m o d e l w h i c h he u s e d f o r

illustrative p u r p o s e s is: C = 20 + . 7 ( Y - T )

(1.10)

I

(1.11)

= 2 + .1Y-i

T=.2Y

(1.12)

Y = C + I+ G

(1.13)

w h e r e c o n s u m p t i o n C d e p e n d s on current d i s p o s a b l e i n c o m e (Y-T), i n v e s t m e n t I d e p e n d s on i n c o m e Y - i l a g g e d o n e p e r i o d , t a x e s Τ d e p e n d on i n c o m e Y, a n d i n c o m e Y is c o n s u m p t i o n C plus i n v e s t m e n t I plus g o v e r n m e n t e x p e n d i t u r e

G.

6

Using a 32 equation model (derived from disaggregation of e a c h of the four t y p e s of e q u a t i o n s noted a b o v e ) d e v e l o p e d f r o m t h e earlier K l e i n - G o l d b e r g e r m o d e l , Suits projects the effects on G N P , c o n s u m p t i o n , g o v e r n m e n t e x p e n d i t u r e , tax receipts, g o v e r n m e n t deficit, a n d e m p l o y m e n t

of the d i s a r m a m e n t p r o g r a m of J a n u a r y 1962

p r o p o s e d by the U.S. A r m s Control a n d D i s a r m a m e n t A g e n c y , for e a c h of s e v e r a l tax reduction offset programs. A d e c a d e later Klein a n d Mori ( 1 9 7 3 ) u s e d t h e m o r e e x t e n s i v e W h a r t o n E c o n o m e t r i c Forecasting Unit Model to project the effects of different V i e t n a m a n d

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Economics

19

offset p r o g r a m s c e n a r i o s u p o n G N P , u n e m p l o y m e n t rate, price index (inflation rate) a n d b o n d yield (interest rate). R e c e n t l y , K l e i n , f o l l o w i n g u p o n his e a r l i e r s t u d i e s a n d w i t h his a s s o c i a t e K o s a k a , h a s s c o r e d a m a j o r a d v a n c e t h r o u g h e m b o d y i n g an a r m s race m o d e l , albeit highly simplified, into his 79 nation LINK m o d e l . T h e i r p r o c e d u r e , as r e c o r d e d in Isard (1990), involves four s t e p s : (i) Obtain military expenditures at y e a r t for nation J a s a function of current a n d past military e x p e n d i t u r e s by allies a n d a d v e r s a r i e s , that is: J

A

MEJ(t) = f [ME (t),...,MEK(t),...,MEU(t); MEA(t-1),...,MEK(t-1),...,MEU(t-0}]

(1.14)

forK=A,B,...,U;K*J. (ii)

R e l a t e t h e level of military e x p e n d i t u r e s of a n a t i o n to t h e size of its

e c o n o m y (resource base or productive c a p a c i t y as m e a s u r e d by its G D P ) . H e n c e , estimate the fraction of G D P a b s o r b e d by military e x p e n d i t u r e s as f o l l o w s : ME

J =

GDPJ W

T

MEA

ME

K

ME

U

LGDPAW'-"'GDPKW'"-»GDPIJW'

ME

A

M ME E

KK

ME

U 1

GDr^-^-'GD^^ for Κ = A , B , . . . , U ; K A J .

15

( - >

To account for strains or slack in an e c o n o m y a n d a s s o c i a t e d J

nonlinear effects, a price index, P , c a n be i n t r o d u c e d into E q u a t i o n (1.15) w h e n to do so w o u l d be statistically significant. J

J

(iii) With the initial forecasts of G D P a n d P of Project LINK over the 1980s and the s u b s e q u e n t l y d e r i v e d projections of military e x p e n d i t u r e s t h r o u g h o u t the 1980s, c a p t u r e t h e f e e d b a c k from the military to t h e civilian e c o n o m y .

To a c c o m p l i s h this,

J

e s t i m a t e public ( g o v e r n m e n t ) s p e n d i n g G ( t ) as a function (in a m a r g i n a l s e n s e ) of current a n d past military expenditures as f o l l o w s : J

GJ(t) = g [MEJ(t),

J

M E ( t - γ)]

(1.16)

T h i s reflects t h e i m p a c t u p o n p r e s e n t p u b l i c s p e n d i n g of t h e military

system's

o b l i g a t i o n s , p r o c u r e m e n t , e x p e n d i t u r e a n d d e l i v e r y a s it is in fact s p r e a d o v e r several y e a r s . J

(iv) Use v a l u e s of G ( t ) d e r i v e d f r o m E q u a t i o n ( 1 . 1 6 ) to r e - s o l v e t h e J

J

s y s t e m for n e w v a l u e s of G D P ( t ) a n d P ( t ) .

W h e n completed, the

LINK

procedure

requires a return to step (1) a n d s u b s e q u e n t iterations. Klein a n d his a s s o c i a t e s have c a r r i e d out t h e a b o v e o p e r a t i o n s for W e s t e r n countries.

S o m e typical findings are r e c o r d e d in T a b l e 1 . 1 . T h e s e f i n d i n g s result

W. isard and CH.

20

Anderion

from an a s s u m e d s h o c k to the w o r l d s y s t e m that involves an a b s o l u t e i n c r e a s e in d e f e n s e spending equivalent to 10 percent of military e x p e n d i t u r e s in 1986 a n d the s a m e absolute increase in s u b s e q u e n t y e a r s in both the U.S. a n d the Soviet U n i o n . T h e table s h o w s p e r c e n t a g e d e v i a t i o n s for y e a r 1989 f r o m the L I N K p r o j e c t i o n s previously m a d e w h e n the a r m s race w a s not i n c o r p o r a t e d into the m o d e l .

As a

c o n s e q u e n c e , for W e s t G e r m a n y a n d the U.S. for y e a r 1989 the projections of real G D P are, respectively, 1.5 a n d 2.1 percent higher w h e n t h e a r m s race is e m b o d i e d in the model a n d w h e n the s y s t e m is subjected to t h e a b o v e shock.

For t h e s e two

countries, the increase in the level of the c o n s u m e r price index for year 1989 is 0.4 a n d 0.2 percent, respectively; a n d the d e c r e a s e in the u n e m p l o y m e n t rate is 0.3 a n d 0.2 percent, respectively. T A B L E 1.1 Deviation from LINK Baseline Projections with Endogenous Defense Spending: Feedback from Shocked Arms-Race Model (Estimates in Percent Deviation for Year 1989)

Real GDP France W. Germany Japan U.K. U.S.A.

1.6 1.5 1.4 1.3 2.1

Consumer Price Index (level)

Interest Rate

Unemployment Rate

Nominal Government Spending

-0.3 0.4 0.7 1.1 0.2

nil 0.04 0.03 0.21 0.35

-0.6 -0.3 -0.06 -1.7 -0.2

10.3 1.4 7.9 6.2 12.8

Klein a n d K o s a k a (1988) consider t h e s e findings preliminary.

T h e significance

of the d a t a is not in their m a g n i t u d e , but rather in the fact that t h e y o u t c o m e s of a w o r l d m o d e l in w h i c h the a r m s race is e n d o g e n i z e d .

represent

Considerable

i m p r o v e m e n t of the e q u a t i o n s interrelating o n e nation's e x p e n d i t u r e s to t h o s e of others a n d to relevant political variables c a n be effected t h r o u g h linkage with other multi-national developing.

world

models

that

quantitative

political

scientists

have

been

(Bremer, 1987; G i g e n g a c k , d e Haan a n d J e p m a , 1 9 8 7 ; Faber, 1987a,

1987b). For one s u g g e s t e d direction, see Isard (1990). Since then with Gronicki (1990 a n d in chapter 3 b e l o w ) , Klein has e x p l o r e d the implications of military c u t b a c k s on Eastern E u r o p e a n e c o n o m i e s . T h e y e m p l o y for c o n s u m e r s a traditional maximizing utility a s s u m p t i o n subject to a budget constraint, but a d o p t an h y p o t h e s i s of " o v e r a l l - e x c e s s - d e m a n d " for g o o d s t r a d e d on

official

m a r k e t s , that is one w h e r e effective c o n s u m p t i o n d e m a n d s are c o n s t r a i n e d by the available output, w h i c h in turn serves as a constraint on the a m o u n t of labor that is offered.

T h e y , t h e r e f o r e , use t e c h n i q u e s of d i s e q u i l i b r i u m e c o n o m e t r i c s involving

Survey of Peace

Economics

21

the specification of an e x c e s s - d e m a n d a d j u s t m e n t e q u a t i o n . For different scenarios, t h e y carry t h r o u g h d i v e r s e s i m u l a t i o n s .

S e e c h a p t e r 3. W h i l e r e c o g n i z i n g the

s h o r t c o m i n g s of their m o d e l , t h e s i m u l a t i o n s d o s u g g e s t that r e d u c t i o n in military e x p e n d i t u r e s is likely to h a v e a s t r o n g c o n t r a c t i o n a r y effect o n t h e e c o n o m i e s , ceteris

paribus..

Impacts of c h a n g e s in d e f e n s e s p e n d i n g have also b e e n e x a m i n e d by scholars using the relatively new C G E ( c o m p u t a b l e g e n e r a l equilibrium) m o d e l s , w h i c h may have both m a c r o - a n d m i c r o e c o n o m i c r e l a t i o n s h i p s .

L i e w ( 1 9 8 5 ) e m p l o y i n g the

O R A N I C G E m o d e l for A u s t r a l i a s t u d i e d t h e i m p a c t of a n i n c r e a s e in d e f e n c e e x p e n d i t u r e s on Balance of T r a d e , Exports, Imports, C o n s u m e r Price Index, G N P a n d E m p l o y m e n t ( a g g r e g a t e a n d by o c c u p a t i o n ) .

Roland-Hoist, Robinson

and

T y s o n (1988) have c o n d u c t e d the s a m e type of study for a 1986 a r m s reduction for the United States. In contrast, a n d like Klein, H a v e m a n , Deardorff a n d Stern (1991) have

constructed

a

multi-nation

model

(covering

d e v e l o p i n g nations plus a rest-of-the-world a g g r e g a t e ) .

18

industrialized

and

16

H o w e v e r , unlike Klein a n d

his e m p h a s i s on macro m a g n i t u d e s , they f o c u s on m i c r o e c o n o m i c interconnections a m o n g industries a n d c o u n t r i e s a n d in particular 22 t r a d a b l e a n d 7 n o n - t r a d a b l e commodities.

They

n o n e t h e l e s s o b t a i n f i n d i n g s of a m a c r o e c o n o m i c

nature.

Under their "multilateral 2 5 % reduction in military e x p e n d i t u r e s " scenario, they find, for e x a m p l e , t h a t : (1) t h e r e is a larger a p p r e c i a t i o n of the U.S. dollar t h a n in the scenario of a unilateral 2 5 % reduction in military e x p e n d i t u r e s by t h e United States; (2) e x p o r t s d e c l i n e m o r e a n d i m p o r t s i n c r e a s e m o r e ; (3) a g g r e g a t e e m p l o y m e n t dislocations are not m u c h different, while there is a greater shift of labor from t r a d e d to n o n t r a d e d industries. There are, of c o u r s e , other multi-nation (multi-world region) m o d e l s , in particular the input-output t y p e , with m a c r o e c o n o m i c implications, but t h e y typically f o c u s on sectoral effects, a n d will be d i s c u s s e d below. Studies using econometric, C G E , input-output and other operational

models

have t h e virtue of being able to treat at o n e t i m e m a n y of t h e i n t e r d e p e n d e n c e s within e c o n o m i e s a n d sets of e c o n o m i e s . are simpler,

more

Equally significant are a n a l y s e s w h i c h

p a r t i a l or b o t h a n d w h i c h

point up strategic factors

and

relationships. 1.5.1

Inflation

W h i l e e c o n o m e t r i c , C G E a n d o t h e r m o d e l s yield a n a l y s e s a n d p r o j e c t i o n s of inflation (e.g. the c o n s u m e r price index projection in T a b l e 1.1), a n u m b e r of other kinds of inflation studies have b e e n c o n d u c t e d .

W. Isard and CH.

22

Anderton

In the United States, inflation has b e e n positively a s s o c i a t e d with i n c r e a s e s in M (military e x p e n d i t u r e s ) d u r i n g the W a r of 1 8 1 2 , t h e Civil W a r , t h e S p a n i s h A m e r i c a n W a r , W o r l d W a r s I a n d II, t h e K o r e a n W a r a n d t h e V i e t n a m However,

in t h e

1980's there was a negative association

War.

(Adams and

7

Gold

1987:270 W e i d e n b a u m 1990:239). T h e e v i d e n c e s e e m s consistent with Boulding's (1985:618) a r g u m e n t that before 1970 it is probably safe to say that inflation w a s primarily a war-related p h e n o m e n o n , but that after 1970 inflation b e c a m e a " n o r m a l characteristic" of society a n d w a s hardly related at all to the size of the w a r industry. W e i d e n b a u m (1974) argues that the " c a u s e s of inflation are c o m p l e x , a n d it is rarely strictly true that an i n c r e a s e in s p e n d i n g by t h e military or in b u s i n e s s i n v e s t m e n t or any other category is the sole c a u s e of inflation."

In principle, "the

g o v e r n m e n t c a n adjust its m o n e t a r y a n d fiscal policies to e c o n o m i c c o n d i t i o n s to keep the price level reasonably stable." (p.28). In time of war, however, "it b e c o m e s very difficult to adjust tax, credit, a n d e x p e n d i t u r e policies on the scale n e e d e d . . . " (Burns 1 9 6 8 : 6 4 c i t e d in W e i d e n b a u m 1 9 7 4 : 2 8 ) .

T h e s e s t a t e m e n t s s e e m to be

borne out w h e n c o m p a r i n g the strong inflationary p r e s s u r e s a s s o c i a t e d with the V i e t n a m W a r build-up a n d the declining inflation a s s o c i a t e d with the R e a g a n buildup.

W e i d e n b a u m (1990) a r g u e s that one of t h e key d i f f e r e n c e s b e t w e e n the t w o

periods

was

in m o n e t a r y

policy.

The

Federal

Reserve

in

1965

began

to

a c c o m m o d a t e the e x p a n s i o n of federal deficit s p e n d i n g while in 1981 it s l o w e d the growth of the money supply. But there are other factors in any situation s t u d i e d :

the state of the e c o n o m y

( d e p r e s s i o n , r e c e s s i o n , recovery, prosperity), c o m p e t i t i v e g o v e r n m e n t p r o g r a m s , m e t h o d s of g o v e r n m e n t deficit f i n a n c i n g , s u b s i d i z a t i o n policy, a n d so f o r t h ; a n d effects are both direct a n d indirect, a n d in w a y s not visible by traditional testing methods.

For e x a m p l e , D u m a s (1982, 1 9 8 1 , 1979) d e v e l o p s a link b e t w e e n M a n d

inflation b a s e d on supply side c o n s i d e r a t i o n s a n d the institutional n a t u r e of the defense sector.

He argues that during the last few d e c a d e s

a significant proportion

of t h e U.S.'s t e c h n o l o g i c a l r e s o u r c e s has b e e n d i v e r t e d a w a y f r o m the civilian sector by M, leading to lower productivity in the civilian sector than w o u l d otherwise be the c a s e .

L o w e r productivity c a n s t i m u l a t e inflation a n d s t a g f l a t i o n .

Dumas

a r g u e s that the low productivity/inflationary effect of resource diversion is reinforced by the "cost pass a l o n g " or "cost indifferent" b e h a v i o r of the d e f e n s e industry, an institutional characteristic of the g o v e r n m e n t / d e f e n s e sector relationship. 1.5.2 Employment/Unemployment

at the National

Level

At least f o u r m a j o r v i e w s c a n be d i s t i n g u i s h e d r e g a r d i n g t h e

relationship

b e t w e e n M (military expenditures) a n d u n e m p l o y m e n t . A first v i e w is that M leads to

Survey of Peace

net

reductions

in u n e m p l o y m e n t .

Klein

Economics

(1971:510)

23

presents

data on

U.S.

u n e m p l o y m e n t rates prior to a n d after W o r l d W a r s I a n d II, the K o r e a n W a r a n d the V i e t n a m War.

In each c a s e , u n e m p l o y m e n t rates fell during the w a r effort a n d rose

after the e n d of the war.

T h e d r a m a t i c fall in the u n e m p l o y m e n t rate during W o r l d

W a r II serves as the strongest e x a m p l e of a s e e m i n g negative relationship b e t w e e n M and unemployment.

U.S. wartime e x p e r i e n c e has led m a n y analysts to c o n c l u d e

that increases in M lower the u n e m p l o y m e n t rate a n d reductions in M increase it. A s e c o n d v i e w is that while M leads to net increases in e m p l o y m e n t , alternative civilian e x p e n d i t u r e p a t t e r n s w o u l d c r e a t e m o r e e m p l o y m e n t ( A n d e r s o n et. al., 1986).

B e z d e k (1975) uses an 86-industry input-output m o d e l of the e c o n o m y that

s h o w s beneficial effects on e m p l o y m e n t w h e n resources are shifted from military to civilian use (see also Mosley 1 9 8 5 : 9 0 ) . Another

version

of

the

"high

8

M-less

employment"

or

"high

M-greater

u n e m p l o y m e n t " thesis rests on the D u m a s (1979) a r g u m e n t that the military sector, by

lowering

national

productivity

via

resource

diversion

and

bureaucratic

inefficiency, u n d e r m i n e s international c o m p e t i t i v e n e s s a n d e c o n o m i c g r o w t h , a n d t h u s leads to u n e m p l o y m e n t rates higher t h a n w o u l d o t h e r w i s e be the c a s e .

A

similar a r g u m e n t has b e e n put forth a n d empirically s u p p o r t e d by S m i t h (1977) for fifteen a d v a n c e d capitalist n a t i o n s .

9

A third view is that properly d e s i g n e d offsets or long-term automatic a d j u s t m e n t s (or both) imply little or no relationships b e t w e e n M a n d u n e m p l o y m e n t .

S u c h a view

is s u p p o r t e d by t h e s t u d i e s of Leontief a n d D u c h i n ( 1 9 8 3 ) a n d L e o n t i e f H o f f e n b e r g (1963) using the input-output m e t h o d .

and

A recent input-output analysis

p e r f o r m e d by the C o n g r e s s i o n a l Budget Office (1983:43) s u g g e s t s that M c o u l d be r e p l a c e d by n o n - d e f e n s e private a n d public s e c t o r s p e n d i n g of roughly t h e s a m e m a g n i t u d e with little net a g g r e g a t e impact on e m p l o y m e n t levels ( A d a m s a n d Gold 1 9 8 7 : 2 7 9 ) . M o r e recent a n a l y s e s by D a t a R e s o u r c e s Inc. yield similar c o n c l u s i o n s c o n c e r n i n g S e c r e t a r y of D e f e n s e C h e n e y ' s p o t e n t i a l r e d u c t i o n in t h e

defense

budget o v e r the next five y e a r s (Data R e s o u r c e s Inc., 1 9 8 9 : 3 ; cited in W e i d e n b a u m 1990:239).

It is r e c o g n i z e d , h o w e v e r , that offset policies m a y not be properly

i m p l e m e n t e d , or properly e v a l u a t e d by existing m a c r o a n d n o n m a c r o m o d e l s , partly b e c a u s e s t r u c t u r a l c h a n g e m a y be t a k i n g p l a c e a n d in part i n d u c e d by offset policies. A fourth, Marxist t y p e v i e w , s u g g e s t s that M has a n e c e s s a r y , t h o u g h p e r h a p s contradictory role, in the m a i n t e n a n c e of e m p l o y m e n t in capitalist s y s t e m s (Smith 1977:1).

M, unlike m o s t civilian g o v e r n m e n t e x p e n d i t u r e , is t h o u g h t by

many

Marxists to e n s u r e most effectively the viability of t h e capitalist o r d e r b e c a u s e :

(1)

armaments

for

quickly

become

obsolete, ensuring

a never-ceasing

demand

W. Isard and CH.

24

Anderton

w e a p o n s , (2) ideological rationales c e n t e r i n g a r o u n d t h e C o l d W a r of t h e 1 9 4 0 s a n d 1 9 5 0 s exist to reinforce a high level of M, (3) U.S. military p o w e r is u s e d to maintain A m e r i c a n political a n d e c o n o m i c h e g e m o n y in the capitalist w o r l d s y s t e m , a n d (4) m a s s i v e social service e x p e n d i t u r e is not a d e s i r e d a l t e r n a t i v e b e c a u s e s u c h a policy might c o m p e t e with private enterprise, redistribute i n c o m e in favor of labor, or strengthen the working class (Griffin et. al. 1982:4). Boulding ( 1 9 7 3 : 2 3 4 - 3 7 ) calls the idea that M is n e c e s s a r y to give t h e U.S. full e m p l o y m e n t a n d prosperity, the "Great A m e r i c a n Myth". He cites the 1964 tax cut as an effective offset to the military c u t b a c k of 1963 to 1 9 6 5 ; w h e n national d e f e n s e fell from 8.2 to 7.0 percent of G r o s s Capacity Product (what G N P w o u l d be if there w a s no involuntary u n e m p l o y m e n t ) , u n e m p l o y m e n t also fell quite s h a r p l y , f r o m 5.7 to 4.5%.

Similarly, W e i d e n b a u m ( 1 9 6 7 : 1 7 3 ) a r g u e s that the U.S. r e d u c e d M by 80

percent

between

unemployment.

1945

and

1946

and

suffered

p r o g r a m all helped to offset the reductions in M. simple

dynamic

no

significant

in

reduced-form

regression

D u n n e a n d Smith (1990) d e v e l o p

e q u a t i o n s to t e s t w h e t h e r

e x p e n d i t u r e a n d u n e m p l o y m e n t are G r a n g e r i n d e p e n d e n t in 11 countries.

increase

A sizeable tax cut, an increase in v e t e r a n s ' b e n e f i t s a n d a loan military

industrialized

Their results s e e m consistent with t h e B o u l d i n g / W e i d e n b a u m positions:

the " e v i d e n c e s u g g e s t s that military e x p e n d i t u r e s a n d u n e m p l o y m e n t are G r a n g e r i n d e p e n d e n t . . T h u s as a general c o n c l u s i o n w e c a n accept our null h y p o t h e s i s that in a n a l y z i n g u n e m p l o y m e n t

no s p e c i a l a c c o u n t n e e d s to be t a k e n of

military

expenditures" (p. 70).

1.5.3 Budget

Deficits

and Defense/Welfare

Tradeoffs

W e i d e n b a u m (1989) argues that in the U.S. "the rapid run-up in d e f e n s e outlays in the early 1980's w a s a factor in t h e f e d e r a l g o v e r n m e n t ' s incurring triple-digit b u d g e t deficits." (p. 2)

A s d e f e n s e s p e n d i n g has leveled off, h o w e v e r , the U.S.

b u d g e t deficit has r e m a i n e d w e l l in t h e triple-digit r a n g e .

Obviously,

defense

s p e n d i n g c o n t r i b u t e s to b u d g e t deficits, but so d o e s f e d e r a l s p e n d i n g on r o a d s , schools, buildings a n d Savings a n d Loan bailouts. W h e n t h e s h a r e of r e s o u r c e s a l l o c a t e d to d e f e n s e e x p a n d s or c o n t r a c t s , it necessarily follows as indicated by Figure 1.1 that the share of r e s o u r c e s allocated to the n o n d e f e n s e sector (private a n d g o v e r n m e n t - n o n m i l i t a r y ) will be a l t e r e d .

A

n u m b e r of a n a l y s e s question w h e t h e r there is a tradeoff b e t w e e n d e f e n s e s p e n d i n g a n d the c o m p o n e n t of civilian p r o d u c t i o n t h a t is g o v e r n m e n t w e l f a r e s p e n d i n g . D o m k e et. al (1983) argue that in much of the post W o r l d W a r II era, g o v e r n m e n t s have b e e n able to avoid d e c r e a s e s in social s p e n d i n g in t h e face of i n c r e a s e s in d e f e n s e s p e n d i n g b e c a u s e of g o v e r n m e n t ' s ability to raise t a x e s or run larger

Survey of Peace

Economics

25

budget deficits. T h u s , there has been no clear tradeoff b e t w e e n d e f e n s e a n d social spending for the U.S. a n d other a d v a n c e d industrial d e m o c r a c i e s . Higgs (1988) reaches similar c o n c l u s i o n s for t h e U.S. stating that the d e m a n d s of a g r o w i n g d e f e n s e s e c t o r are likely to d r a w u p o n t h e p r i v a t e s e c t o r , not the g o v e r n m e n t non-military s e c t o r -

" d u r i n g t h e c o l d w a r p e r i o d , t h e private s e c t o r

alone has borne the full cost of military b u i l d u p s " (p. 10). Higgs' result leads to the question, what part of the private sector, investment or c o n s u m p t i o n , b e a r s the brunt of military b u i l d u p s ?

In a c o m p a r i s o n of t h e y e a r s 1 9 2 9 a n d 1969 for t h e U.S.,

Boulding (1973) a r g u e s that there is no significant falloff in t h e i n v e s t m e n t share of the e c o n o m y ; rather, private c o n s u m p t i o n bears the brunt of military buildups.

1.5.4 Balance

of Payments

and

Trade

Military e x p e n d i t u r e s a n d d e f e n s e - r e l a t e d t r a n s a c t i o n s have direct impacts on a nation's international balance of p a y m e n t s t h r o u g h (a) imports of military g o o d s or items required in d e f e n s e procurement, (b) exports of s u c h g o o d s a n d items, (c) the diversion of potentially e x p o r t a b l e r e s o u r c e s into d e f e n s e p r o c u r e m e n t of a g i v e n nation, or of other nations w h i c h might restrict i m p o r t s to t h e g i v e n nation, (d) the receipt of funds from (or outflow of funds to) other nations to support military bases, or provide e c o n o m i c or military a s s i s t a n c e , or b o t h . T o the direct i m p a c t s must be a d d e d the many indirect e c o n o m y - w i d e impacts. In 1 9 7 3 , Benoit a r g u e d that efforts to e s t i m a t e t h e b a l a n c e of p a y m e n t s a n d trade i m p a c t s of d e f e n s e s p e n d i n g "is o n e of t h e most difficult a n d u n r e w a r d i n g of e n t e r p r i s e s . . . b e c a u s e of the variety of policy d e c i s i o n s that c a n significantly affect individual balance of p a y m e n t s items, a n d the highly interdependent nature of these links." (p. 211) T o complicate matters further, the U.S. a n d m a n y other industrialized e c o n o m i e s m o v e d f r o m p e g g e d to floating e x c h a n g e rates in t h e early 1970's, thereby

introducing the e x c h a n g e rate as a variable a n d reducing the significance

of the overall b a l a n c e of p a y m e n t s .

S o m e have a r g u e d that the d e f e n s e - r e l a t e d

p a y m e n t s to foreign countries w a s a major c a u s e of the 1971 balance of p a y m e n t s crisis in the U.S. a n d the shift f r o m a p e g g e d e x c h a n g e rate s y s t e m to a m a n a g e d float, a n d that in the past they have b e e n a m a j o r d e v a l u a t i n g f o r c e on t h e dollar ( D u m a s , 1 9 8 2 ; H u i s k e n , 1983). M o r e recently, e c o n o m i s t s have studied t h e impact of military e x p e n d i t u r e s in t h e U.S. on its m e r c h a n d i s e t r a d e a n d i n t e r n a t i o n a l c o m p e t i t i v e n e s s .

Among

others, three hypotheses have been put forth: 1)

Large b u d g e t deficit h y p o t h e s i s

contributed to large budget deficits.

- In t h e 1 9 8 0 s U.S. military

outlays

Large budget deficits raised real interest rates,

w h i c h led to i n t e r n a t i o n a l c a p i t a l i n f l o w s , a s t r o n g dollar, r e d u c e d

international

W. Isard and CH.

26

c o m p e t i t i v e n e s s , a n d a trade deficit.

Anderton

(Reppy, 1985 a n d W o l f s o n , 1985 m e n t i o n this

h y p o t h e s i s ; N i s k a n e n , 1 9 8 8 ; S t e r n , 1 9 8 8 ; W i l l i a m s o n , 1 9 8 8 ; a n d M e i g s , 1 9 8 8 in general consider the chain from budget deficits to trade deficits). 2)

Political risk h y p o t h e s i s - In the 1970s a n d 80s, the Soviet military threat to

the W e s t c r e a t e d a significant p o p u l a t i o n of f o r e i g n i n v e s t o r s for w h o m

United

States security w a s a major determinant of the proportion of their w e a l t h kept in the U.S. A rise in the U.S. d e f e n s e budget share of G N P i n c r e a s e d such capital inflows a n d t h e real v a l u e of the dollar.

T h e s t r o n g dollar led to r e d u c e d i n t e r n a t i o n a l

competitiveness a n d a trade deficit (Ayanian, 1987). 3)

C i v i l i a n i n n o v a t i o n a n d p r o d u c t i v i t y h y p o t h e s i s - Military s p e n d i n g a n d

military R & D c o m p e t e d with a n d d r e w r e s o u r c e s a w a y f r o m t h e civilian sector, including civilian R & D . civilian

sector

than

T h e rate of innovation a n d productivity w a s lower in the would

otherwise

have

competitiveness a n d trade position of the U.S. Reppy, 1988.

been

the

case,

lowering

the

See D u m a s , 1 9 8 2 ; D e G r a s s e , 1 9 8 3 ;

T h e y are c o n c e r n e d with military e x p e n d i t u r e i m p a c t s on e c o n o m i c

g r o w t h , investment a n d technological c h a n g e , to be d i s c u s s e d further below. In his p a p e r in this v o l u m e B e r g s t r a n d u s e s a g r a v i t y m o d e l a n d e m p i r i c a l materials to study the impact of a r m s r e d u c t i o n s on w o r l d t r a d e , d i s t i n g u i s h i n g b e t w e e n that in military a n d non-military products. A s e x p e c t e d , g e n e r a l d e c r e a s e s in a r m s production do reduce trade in military products, but there is an a m b i g u o u s a priori effect on t r a d e in n o n - m i l i t a r y

products.

The

1975 data suggest

that

d e c r e a s e s in a r m s production t e n d e d to reduce non-military t r a d e ; the 1985 d a t a suggest that d e c r e a s e s

in a r m s p r o d u c t i o n

increases

non-military

trade

by

e n h a n c i n g non-military export supply. H u i s k e n (1983) a r g u e s that military c o m p e t i t i o n b e t w e e n n a t i o n s what c o u l d have b e e n a high d e g r e e of mutually beneficial e x c h a n g e .

precludes Underlying

"these lost opportunities for e x c h a n g e lies the huge w a s t e of resources in t e r m s of the duplication of effort a n d the inefficient allocation of r e s o u r c e s f r o m t h e g l o b a l standpoint" (p. 12). 1.6

D i s a g g r e g a t e (Micro-) A n a l y s i s of Defense S p e n d i n g

Impacts

In identifying sectoral impacts of d e f e n s e s p e n d i n g , the familiar Leontief inputoutput f r a m e w o r k , a linear specification of g e n e r a l e q u i l i b r i u m t h e o r y , has b e e n most extensively u s e d .

Survey of Peace

1.6.1 Regional

27

Economics

Effects

Federal s p e n d i n g , including d e f e n s e s p e n d i n g , is not distributed evenly across t h e r e g i o n s of t h e U.S. a n d o t h e r c o u n t r i e s , s u g g e s t i n g d i f f e r e n t i a l

regional

e c o n o m i c impacts of c h a n g e s in d e f e n s e s p e n d i n g .

S u c h is evident in the d a t a on

military prime c o n t r a c t s in total or per c a p i t a t e r m s .

S u b c o n t r a c t i n g leads to even

g r e a t e r overall c o n c e n t r a t i o n of d e f e n s e s p e n d i n g within U.S. r e g i o n s ( A n d e r t o n a n d Isard, 1985).

Moreover, in the U.S. the regional e c o n o m i c impact of d e f e n s e

s p e n d i n g has c h a n g e d o v e r t i m e r e f l e c t i n g t h e d r a m a t i c shift in t h e

regional

distribution of military contracts a w a y f r o m the Mid-Atlantic a n d East North Central regions t o w a r d t h e Pacific a n d W e s t S o u t h C e n t r a l r e g i o n s ( A d a m s a n d G o l d , 1 9 8 7 : 2 8 2 ; C l a y t o n , 1 9 7 0 : 5 1 - 5 2 ; Udis a n d W e i d e n b a u m , 1 9 7 3 : 2 1 ) .

Cumberland

(1973:83) identifies three types of structural c h a n g e in regional e c o n o m i e s resulting from d e f e n s e s p e n d i n g : capital growth in existing firms, the addition of new kinds of industry that had not previously b e e n r e p r e s e n t e d in t h e regional e c o n o m y , a n d technological c h a n g e in the production functions of industries within the region. Benoit (1963) p r o v i d e d an early study of the regional e m p l o y m e n t i m p a c t s of c o m p l e t e a n d g e n e r a l d i s a r m a m e n t in the U . S . is

incomplete,

he

nevertheless

concludes

10

A l t h o u g h m u c h of Benoit's study that

"a

considerable

regional

concentration of d e f e n s e - d e p e n d e n t e c o n o m i c activity is u n m i s t a k a b l e , a n d this fact will u n q u e s t i o n a b l y create a m a j o r set of r e a d j u s t m e n t p r o b l e m s in the e v e n t of d i s a r m a m e n t " (p. 4 9 ) .

Benoit also points out that c o u n t i e s w h i c h have the highest

per c a p i t a c o n c e n t r a t i o n of prime c o n t r a c t s a r e not invariably in s t a t e s with the largest

relative

dependence

on

defense

manufacturing,

suggesting

that

readjustment policies a i m e d at state or regional levels may be too blunt to a d d r e s s properly county or city-wide d e f e n s e s p e n d i n g impact d i s c r e p a n c i e s . Isard a n d S c h o o l e r ( 1 9 6 4 ) use i n p u t - o u t p u t a n a l y s i s to s t u d y t h e

local

11

i m p a c t s of a 10 p e r c e n t a c r o s s - t h e - b o a r d r e d u c t i o n in military s p e n d i n g in the U n i t e d S t a t e s , a r g u i n g that t h e p r o b l e m of o f f s e t t i n g t h e i m p a c t

upon

local

e c o n o m i e s of c h a n g e s in the level a n d c o m p o s i t i o n of military e x p e n d i t u r e s can be effectively a t t a c k e d .

Daicoff ( 1 9 7 3 ) , after r e v i e w i n g a large literature on the

e c o n o m i c impact of military installations c o n c l u d e s that: ...the p r e s e n c e of a d e f e n s e facility in a c o m m u n i t y d o e s not necessarily impart

a permanent

associated.

influence

on t h e

community

with

which

it

is

While the installation is active, it c o n t r i b u t e s p e o p l e , dollars

a n d activity to the c o m m u n i t y , but this in itself d o e s not c h a n g e t h e c o m m u n i t y ' s potential to carry on a high level of activity w i t h o u t t h e defense installation (p. 162).

W. Isard and CH.

28

Anderton

Daicoff cautions, however, that many of the base closure studies that he d r a w s from o c c u r r e d during a full e m p l o y m e n t a n d g r o w i n g national e c o n o m y . W e i d e n b a u m (1990:239) argues that after "an initial a d j u s t m e n t period - with its a t t e n d a n t pain a n d u n c e r t a i n t y - m o s t localities t e n d to w i n d up w i t h a s t r o n g e r e c o n o m y after the d e f e n c e cut." He cites a D e p a r t m e n t of D e f e n s e (1986) study of 100 f o r m e r military b a s e s s h o w i n g e m p l o y m e n t g a i n s a n d a restructuring of b a s e s to industrial a n d office parks, colleges, a n d vocational schools. D y c k m a n ( 1 9 6 5 ) in his s t u d y of r e g i o n a l d e v e l o p m e n t i m p a c t s of d e f e n s e s p e n d i n g a r g u e d that t h e p a t t e r n of U.S. d e f e n s e s p e n d i n g r e i n f o r c e d c e r t a i n industrial a n d urban d e v e l o p m e n t shifts in the n a t i o n ; for e x a m p l e the c o n c e n t r a t i o n of d e f e n s e s p e n d i n g in California c h a n g e d the industry mix in t h e state, p r o d u c e d new

industrial

location

disproportionately

high

patterns number

of

within

the

scientists

state,

and

concentrated

and technicians

in

a

California.

Reminiscent of Benoit (1964), D y c k m a n a r g u e d that sizable reductions in d e f e n s e s p e n d i n g a c c o m p a n i e d by national offset p r o g r a m s w o u l d not a d e q u a t e l y offset state a n d local impacts in California. M a r k u s e n et. al. (1991) point out that over the past half century, military spending has c r e a t e d a new e c o n o m i c m a p of the United States a n d has played an important role in the d e c a y a n d prosperity of regions — the relative decline of the old industrial heartland, the r e s u r g e n c e of N e w E n g l a n d a n d t h e rise of n e w i n d u s t r i a l r e g i o n s o n t h e n a t i o n ' s s o u t h e r n a n d perimeter.

E a c h w e a p o n s s y s t e m has its o w n u n i q u e g e o g r a p h y :

western

s h i p s a n d the

coastal a r e a s ; aircraft a n d missiles, the Pacific, Mountain a n d N e w E n g l a n d regions; tanks a n d other military vehicles, the M i d w e s t ; a n d electronics a n d c o m m u n i c a t i o n s , the Pacific, Mid-Atlantic a n d East North Central regions.

1.6.2 Industrial

and Occupational

Effects

Military d e s i g n a n d p r o d u c t i o n activities a r e c o n c e n t r a t e d in a relatively f e w industries, c o m p a n i e s a n d o c c u p a t i o n s (Udis a n d W e i d e n b a u m , 1 9 7 3 ; D e G r a s s e , 1983:9-10).

C h a n g e s in d e f e n s e s p e n d i n g c a n h a v e i m m e d i a t e

i m p a c t s on t h e s e s e c t o r s as i n p u t - o u t p u t s t u d i e s h a v e s h o w n

and

sizable

(Leontief

and

Hoffenberg, 1963; Oliver, 1970; Rutzick, 1 9 7 0 ; Blond, 1981). T h e A l m o n Interindustry Forecasting M o d e l (see A l m o n , 1 9 6 6 ) , w a s u s e d by C u m b e r l a n d (1973) to study the industrial a n d occupational impacts of d e c r e a s e s in defense

spending.

Cumberland

assumes

defense

expenditure

changes

c o m p e n s a t e d by c h a n g e s in civilian c o n s u m p t i o n to k e e p the u n e m p l o y m e n t rate at 3.7 percent.

He also u n d e r t a k e s u n c o m p e n s a t e d runs w h e r e u n e m p l o y m e n t is

p e r m i t t e d to seek its o w n level.

C u m b e r l a n d ' s projections of the i m p a c t s of lower

d e f e n s e b u d g e t s on the e m p l o y m e n t levels in v a r i o u s industries s h o w the following

Survey of Peace

general patterns:

Economics

29

(1) s h a r p d e c r e a s e s in O r d n a n c e , C o m m u n i c a t i o n

Equipment,

a n d Aircraft a n d Parts, (2) m o d e r a t e d e c r e a s e s in mining of natural resources, basic c h e m i c a l s , metals productions, a n d s o m e t y p e s of m a c h i n e s , e n g i n e s a n d turbines, a n d (3) m o d e r a t e i n c r e a s e s in a g r i c u l t u r a l p r o d u c t s , c o n s t r u c t i o n , c l o t h e s a n d related products, furniture, wholesale a n d retail t r a d e , a n d c o n s u m e r services. Cumberland

also

studies the

impact

of d e f e n s e

spending

cutbacks

e m p l o y m e n t in states a n d S t a n d a r d M e t r o p o l i t a n Statistical A r e a s ( S M S A s ) .

on The

variation in the range of e s t i m a t e d u n e m p l o y m e n t i m p a c t s in S M S A s is w i d e r than a m o n g states.

" E v e n with individual states, t h e rates of u n e m p l o y m e n t w o u l d vary

widely b e t w e e n metropolitan areas of the state." (p. 115). A d a m s a n d G o l d (1987) c a u t i o n , h o w e v e r , that w h e n all o c c u p a t i o n a l s u b s e t s with t h e h i g h e s t p r o p o r t i o n s in d e f e n s e w o r k a r e c o m b i n e d , t h e y still d o

not

constitute a large bulk of the total U.S. j o b market - only 1.6 percent in 1 9 8 1 . "The v a s t bulk of t h e U S l a b o u r m a r k e t is far less d e p e n d e n t on

defence-related

e m p l o y m e n t " (p.284). W e i d e n b a u m ( 1 9 7 3 ) s t u d i e s d i v e r s i f i c a t i o n of d e f e n s e f i r m s into

nonmilitary

markets. He cites five major m e t h o d s of diversification: (1) m e r g e r s with a variety of c o m p a n i e s in d e f e n s e a n d industrial m a r k e t s , (2) licensing of b y - p r o d u c t s of the military p r o d u c t line to e s t a b l i s h e d c o m m e r c i a l c o m p a n i e s , (3) joint v e n t u r e s with f o r e i g n c o m p a n i e s , (4) c r e a t i o n of a b y - p r o d u c t s e x p l o r a t i o n g r o u p b a s e d

on

internal inventions, a n d (5) d e v e l o p m e n t by military divisions of nonmilitary products during slack periods of d e f e n s e b u s i n e s s .

12

W e i d e n b a u m c o n c l u d e s that d e f e n s e

firm diversification within military a n d related high t e c h n o l o g y g o v e r n m e n t m a r k e t s has

been

quite

successful.

The

defense

industry's

failures

at

commercial

diversification, however, are quite n u m e r o u s . 1.6.3 The Conversion

Problem

T h e c o n v e r s i o n p r o b l e m m u s t be v i e w e d at t h r e e levels at least. macroeconomic.

It is g e n e r a l l y a c c e p t e d by e c o n o m i s t s t h a t

O n e is

macroeconomic

a d j u s t m e n t s to c u t s in military s p e n d i n g c a n be d e v e l o p e d to maintain a g g r e g a t e d e m a n d (Mosley, 1 9 8 5 : 1 6 3 ) .

T h e heart of t h e c o n v e r s i o n p r o b l e m , h o w e v e r , lies

not at the macro level but at the micro level, that is the of

workers,

firms,

localities

and

regions

microeconomic adjustments

impacted

by

military

cutbacks.

M a c r o e c o n o m i c policies t e n d , in r o u g h t e r m s , to be a v e r a g e d o v e r the e c o n o m y ; their stimulating effects c a n n o t reach d e e p l y into specific a r e a s , sectors, firms a n d occupations.

Nor d o t h e y

r e a c h d o w n into t h e military

sector

level

where

adjustments to reintegrate military personnel a n d the military b u r e a u c r a c y to civilian uses are n e e d e d ( M e l m a n , 1974; D u m a s , 1989).

W. Isard and CH.

30

Anderton

T h e United States a n d other countries have had significant e x p e r i e n c e with the c o n v e r s i o n p r o b l e m . T h e U.S. successfully u n d e r w e n t a large-scale transition f r o m military to civilian p r o d u c t i o n after W o r l d W a r II ( M o s l e y 1 9 8 5 : 1 6 7 - 1 7 3 ; D u m a s 1989:7-8).

This successful experience c o u l d be cited as e v i d e n c e that large-scale

c o n v e r s i o n in the U.S. is feasible without extraordinary d i s r u p t i o n . D u m a s a r g u e s , however, that the U.S. experience after W o r l d W a r II must be interpreted with great care if it is to guide present day policy:

For the U S in that p e r i o d u n d e r w e n t w h a t is m o s t a c c u r a t e l y

called

'reconversion', a n d this is quite different f r o m the p r o b l e m of ' c o n v e r s i o n ' that faces most highly military-oriented e c o n o m i e s t o d a y . . . W h e n the W a r e n d e d , t h e s e f i r m s went b a c k to d o i n g w h a t t h e y w e r e u s e d to d o i n g . They 'reconverted'.

For t h e m , military p r o d u c t i o n w a s a t e m p o r a r y

aberration from the norm of the civilian c o m m e r c i a l marketplace.... T h e situation is quite different t o d a y . . . M a n y c o n t e m p o r a r y

military

industrial firms have never operated in civilian markets, (pp. 7-8). T h e y have had, in practice, only o n e c u s t o m e r (the g o v e r n m e n t ) ; now t h e y n e e d to c o m p e t e in highly competitive markets, a n u m b e r of w h i c h have b e e n penetrated by J a p a n e s e , G e r m a n a n d other firms from outside the U.S.

Further, during W o r l d W a r

II both the t e c h n o l o g i e s a n d specific p r o d u c t i o n factors i n v o l v e d in d e s i g n i n g a n d producing military g o o d s were still fairly similar to those in the civilian sector.

Now,

with the e m e r g e n c e o v e r t h e last forty y e a r s of c o m p l e t e l y n e w o p e r a t i o n s for military g o o d s production, there is no return to s o m e t h i n g f a m i l i a r .

13

W e i d e n b a u m ( 1 9 9 0 ) a r g u e s that "any c o n s i d e r a t i o n of t h e e c o n o m i c

policy

responses to further reductions in defence s p e n d i n g should take account of the fact that the ability of the e c o n o m y to adjust to shifts in e c o n o m i c forces is greater in the long run t h a n in the short run." T h e short t e r m effects of military c u t b a c k s can be quite s e v e r e , but "the a d j u s t m e n t s required by d e f e n s e c u t b a c k s are not basically different from the r e s p o n s e s that occur regularly from shifts in c o n s u m e r d e m a n d or f r o m t e c h n o l o g i c a l c h a n g e s w h i c h yield new p r o d u c t s that e l i m i n a t e m a r k e t s for older products, or from c h a n g e s in the pattern of t r a d e " (pp. 2 4 0 - 4 1 ) . 1.7

Investment, Research and Development, and Economic Growth

Productivity

T h e i m p a c t of military o u t l a y s on n e w i n v e s t m e n t a n d c a p i t a l

formation,

t e c h n o l o g i c a l p r o g r e s s , a n d e c o n o m i c o r g a n i z a t i o n a n d u l t i m a t e l y on e c o n o m i c g r o w t h has b e e n a hotly d e b a t e d issue.

O n e of the difficulties in sorting out the

Survey of Peace

Economics

31

impacts of military outlays on e c o n o m i c g r o w t h is that e c o n o m i c g r o w t h has many ingredients.

G r o w t h may be s p u r r e d by an increase in the stock of capital g o o d s or

o t h e r r e s o u r c e s , a n i n c r e a s e in t e c h n o l o g y , t h e e m p l o y m e n t of p r e v i o u s l y

idle

resources, a c h a n g e in e c o n o m i c organization, a c h a n g e in social or cultural factors a n d so o n . A n o t h e r difficulty is that results c a n vary d e p e n d i n g on the time period of the study. A result that appears for an entire time period may not hold within various subperiods. T h r e e b r o a d c l a s s e s of s t u d i e s of this issue c a n be d i s t i n g u i s h e d :

country-

specific t i m e series studies c o m p a r i n g t r e n d s in military e x p e n d i t u r e a n d e c o n o m i c g r o w t h in d e v e l o p e d c o u n t r i e s ; c r o s s - n a t i o n a l s t u d i e s of t h e i m p a c t of military s p e n d i n g o n e c o n o m i c g r o w t h of a d e v e l o p e d c o u n t r y

(usually the

U.S.)

in

c o m p a r i s o n with other d e v e l o p e d o n e s , a n d d e v e l o p i n g country studies. 1.7.1 Developed

Country

Analysis:

Specific

Studies

A first q u e s t i o n is w h e t h e r d e f e n s e s p e n d i n g c r o w d s out i n v e s t m e n t in the e c o n o m y of a d e v e l o p e d c o u n t r y , an a s s e r t i o n that has f r e q u e n t l y b e e n m a d e . Such an a s s e r t i o n easily finds a basis in t h e g e n e r a l r e s o u r c e allocation p r o b l e m d i s c u s s e d in c o n n e c t i o n with Figure 1.1, section 1.3, or with the e c o n o m i c warfare analysis put forth by W o l f s o n . Current resources expropriated by the military leaves less for t h e c i v i l i a n , a n d p r e s u m a b l y less for both i n v e s t m e n t a n d c o n s u m p t i o n purposes.

H o w e v e r , t h e r e are d i v e r g e n t v i e w s on w h e r e the b u r d e n of d e f e n s e

mostly falls.

Boulding (1973) studies this q u e s t i o n .

He f o c u s s e s on the long-term

relationship rather t h a n yearly m o v e m e n t s over shorter t i m e p e r i o d s .

To measure

the a g g r e g a t e size of the e c o n o m y , he uses the concept of G r o s s C a p a c i t y Product (GCP)

-

what

unemployment.

GNP

would

have

been

if t h e r e

had

been

no

involuntary

B o u l d i n g t h e n c h o o s e s t w o y e a r s , 1929 a n d 1 9 6 9 , w h i c h have a

g o o d deal of comparability (low u n e m p l o y m e n t , peak of a b u s i n e s s cycle b o o m ) .

In

the U.S. a major difference b e t w e e n 1929 a n d 1969 is the percent of G C P allocated to national d e f e n s e — 0.6 percent in 1929 a n d 8.2 percent in 1 9 6 9 . d o w n w h e n the d e f e n s e share w e n t u p ? " Gross Private Domestic

"What went

Boulding finds no significant falloff in the

I n v e s t m e n t s h a r e of G C P ; rather, it w a s t h e

private

c o n s u m p t i o n share that fell. W e i d e n b a u m (1990) e x t e n d s Boulding's analysis (and the earlier a n a l y s i s by Russett, 1970 w h o s e f i n d i n g s are similar to B o u l d i n g ' s ) to cover the years through 1988.

He c o n c l u d e s that B o u l d i n g ' s results c o n t i n u e to

hold. A s e c o n d d e b a t e d issue is t h e i m p a c t of d e f e n s e e x p e n d i t u r e s on e c o n o m i c productivity as a w h o l e .

Nardinelli a n d A c k e r m a n ( 1 9 7 6 ) , d i s t i n g u i s h i n g b e t w e e n

G N P and net G N P , i.e., G N P m i n u s d e f e n s e e x p e n d i t u r e s , run a simple regression

W. Isard and CH.

32

Anderton

a n a l y s i s of the relationship b e t w e e n military e x p e n d i t u r e s a n d civilian e c o n o m i c g r o w t h for the U.S. for the 1905-1973 period. A w e a k relationship b e t w e e n the t w o v a r i a b l e s is f o u n d , but a strong negative relationship b e t w e e n military e x p e n d i t u r e a n d civilian e c o n o m i c growth is f o u n d for the 1946-73 s u b p e r i o d . D u m a s (1986b) a r g u e s that "The military production s y s t e m , unaffected by the constraints that face market-oriented producers, operates as a c o m m a n d sector that asserts a n d enforces its claim to the productive resources of the society t h r o u g h the special political priority it has been a c c o r d e d . " (p. 3 5 0 ) .

It is a distractive activity in

that it t a k e s large quantities of p h y s i c a l , f i n a n c i a l , a n d h u m a n c a p i t a l a w a y f r o m contributive activity (activity w h i c h increases the stock of c o n s u m e r a n d p r o d u c e r goods).

A distractive activity p r o d u c e s p r o d u c t s that do not e n h a n c e t h e material

s t a n d a r d of l i v i n g .

He s t a t e s t h a t p r o d u c t i v e c o m p e t e n c e

(the result of

an

appropriately skilled a n d motivated w o r k f o r c e , a sufficient quantity a n d quality of capital, a n d up-to-date process a n d product t e c h n o l o g y ) is of central i m p o r t a n c e to the long-term health of a nation.

He a r g u e s that c h a n n e l i n g productive r e s o u r c e s ,

t e c h n o l o g y a n d capital into noncontributive (i.e., neutral a n d distractive) activities can erode society's productive c o m p e t e n c e .

T o D u m a s military-oriented activity is

the preeminent (but not the only) e x a m p l e of noncontributive activity.

Stressing that

classifying military g o o d s as noncontributive d o e s not imply that they have no v a l u e , D u m a s maintains that military activity e r o d e s productive c o m p e t e n c e , p e r h a p s not all at once, but slowly a n d persistently o v e r t i m e , in a m a g n i t u d e that is greater t h a n its size as a fraction of G N P would indicate. S o m e a u t h o r s (e.g., G o l d a n d A d a m s , 1 9 9 0 ; W e i d e n b a u m , 1989) reject the v i e w that d e f e n s e s p e n d i n g in the U.S. can compellingly explain the p e a k s a n d the v a l l e y s of U.S. e c o n o m i c p e r f o r m a n c e or the c h a n g e in U.S. e c o n o m i c position relative to other countries.

Other d e t e r m i n a n t s a n d more significant c a u s e s of the

ups a n d d o w n s of U.S. e c o n o m i c preformance may exist.

Moreover, s o m e analysts

argue that the direction of causality runs the other w a y .

For e x a m p l e , Nincic a n d

C u s a c k (1979) find a positive relationship b e t w e e n real military e x p e n d i t u r e a n d growth in real G N P b e t w e e n 1946 a n d 1978, leading t h e m to c o n c l u d e that military spending has been used to stimulate e c o n o m i c growth in the U.S.

See also C y p h e r

(1981) a n d Griffin et. al. (1982). T h e military s e c t o r c a n also affect e c o n o m i c g r o w t h a n d p r o d u c t i v i t y v i a its impact on technology. This raises another controversial q u e s t i o n : d o e s large-scale R & D ( r e s e a r c h a n d d e v e l o p m e n t ) s p e n d i n g a n d t e c h n o l o g i c a l p r o g r e s s in t h e military sector o c c u r at the e x p e n s e of R & D a n d t e c h n o l o g y d e v e l o p m e n t in t h e civilian sector?

Survey of Peace

Economics

33

W e i d e n b a u m ( 1 9 7 4 : 1 3 4 - 1 4 0 ) cites positive c o n t r i b u t i o n s of military r e s e a r c h a n d d e v e l o p m e n t p r o g r a m s to civilian p r o d u c t s a n d t e c h n o l o g y :

e r a d i c a t i o n of

yellow fever, chlorination of water, blood p l a s m a substitutes, m o d e r n aircraft, new high-temperature system.

alloys, electronics and the modern automobile

transmission

L e s s e r - k n o w n military c o n t r i b u t i o n s to civilian s o c i e t y i n c l u d e

nitrogen

m u s t a r d t r e a t m e n t of leukemia, flameproof fabrics, fire-retarding paints, helicopters, communications Lederman

s a t e l l i t e s a n d t h e like ( s e e a l s o S t r i n e r et. a l .

(1971:3), Rosenberg

1958:16-17).

(1976), Trebilcock (1969) also conclude

that

military s p e n d i n g on R & D h a s h a d a p o s i t i v e c o n t r i b u t i o n to e c o n o m i c g r o w t h , productivity a n d c o n s u m e r living s t a n d a r d s . M o r e recently, W e i d e n b a u m ( 1 9 9 0 ) has p r e s e n t e d a s c a t t e r d i a g r a m plotting the relationship b e t w e e n a n n u a l p e r c e n t a g e c h a n g e s in military a n d civilian R & D e x p e n d i t u r e s for the 1 9 5 5 - 1 9 8 8 p e r i o d . civilian

He c o n c l u d e s that c h a n g e s in military a n d

R & D "are j u s t as likely to be in t h e s a m e d i r e c t i o n

directions."

a s in

opposite

14

O n the other h a n d , Solo (1970), Etzioni ( 1 9 7 1 ) , D e G r a s s e ( 1 9 8 3 ) , a n d others argue that the overall impact of military r e s e a r c h a n d d e v e l o p m e n t in one w a y or a n o t h e r is a decline in the rate of c o m m e r c i a l R & D a n d i n n o v a t i o n , of c o u r s e not denying that there are e x a m p l e s of successful transference of military t e c h n o l o g y to civilian uses. R e p p y (1989) a r g u e s that there are t e c h n o l o g i c a l a n d institutional f e a t u r e s of the d e f e n s e market that p r o m o t e a n d limit opportunities for t r a n s f e r e n c e of military R & D ; a n d w e must turn to empirical e v i d e n c e to evaluate the relative i m p o r t a n c e of these opposing tendencies.

S h e s t a t e s that a g g r e g a t e p r o d u c t i v i t y s t u d i e s a n d

patent studies suggest little or no benefit to the civilian e c o n o m y f r o m military R & D . Preliminary d a t a f r o m international trade c o m p e t i v e n e s s studies, h o w e v e r , s h o w a stronger U.S. p e r f o r m a n c e in military-related high t e c h n o l o g y p r o d u c t g r o u p s t h a n in p r o d u c t g r o u p s b a s e d on civilian t e c h n o l o g y .

R e p p y s u g g e s t s that g e n e r a l

c o n c l u s i o n s a b o u t military R & D a n d i n n o v a t i o n are h a r d to m a k e b e c a u s e e a c h technology

a n d i n d u s t r y is p o t e n t i a l l y a s p e c i a l c a s e .

Nevertheless,

Reppy

suggests that military R & D can benefit the civilian e c o n o m y to the extent that: "it is a i m e d at d e v e l o p i n g g e n e r i c t e c h n o l o g i e s with w i d e a p p l i c a b i l i t y ;

...institutional

barriers s u c h as s e c r e c y a n d s p e c i a l i z e d a c c o u n t i n g r e q u i r e m e n t s are m i n i m i z e d ; a n d . . . t h e military c u s t o m e r v a l u e s low c o s t a n d p r o d u c i b i l i t y performance."

as w e l l as

high

H o w e v e r the "record for reform of military R & D a n d p r o c u r e m e n t is

not g o o d , a n d w e are entitled to be skeptical as to w h e t h e r the current interest in using military R & D as the vehicle for i m p r o v e d c o m m e r c i a l c o m p e t i t i v e n e s s is likely to s u c c e e d " (pp. 7-8).

W. Isard and CH.

34

1.7.2 Developed

Countries

Analysis:

Anderton

Cross-national

Studies

It is o f t e n a r g u e d t h a t J a p a n ' s a n d W e s t G e r m a n y ' s

superior

economic

p e r f o r m a n c e s in recent d e c a d e s c a n be a t t r i b u t e d to their low level of military s p e n d i n g , while c o u n t r i e s with higher military b u r d e n s , s u c h as t h e U S A a n d UK, h a v e b e e n u n a b l e to find the path to s u s t a i n e d e c o n o m i c g r o w t h . A n d

many

statistical s t u d i e s s u g g e s t that c o u n t r i e s that d e v o t e a s m a l l p r o p o r t i o n of t h e i r output to military g o o d s t e n d to have higher i n v e s t m e n t or e c o n o m i c g r o w t h t h a n c o u n t r i e s with high p r o p o r t i o n s of military s p e n d i n g to G N P ( S m i t h , 1 9 7 7 ; S m i t h , 1 9 8 0 ; D e G r a s s e , 1 9 8 3 ; S z y m a n s k i , 1 9 7 3 ; B e z d e k , 1 9 7 5 ; Leontief a n d D u c h i n , 1983; Rothschild, 1973). However, see Gold a n d A d a m s (1990) for criticisms of the analyses

suggesting

a negative

relationship between defense

spending

and

investment. O n t h e s u b j e c t of p a t t e r n s of m i l i t a r y / c i v i l i a n

R&D spending and

relative

p e r f o r m a n c e in international m a r k e t s , R e p p y (1991) has s t u d i e d the c a s e for the U.S. a n d four other O E C D countries.

In c o m p a r i n g the U.S. a n d J a p a n , she finds,

as already noted, that the U.S. d o e s better in products that are identified as having a military-based t e c h n o l o g y a n d relatively w o r s e in the civilian-based product g r o u p s . " F r o m t h e s e observations one c o u l d infer either that the U.S. investment in military R & D . . . h a s paid off, or that its civilian industries have suffered f r o m lower levels of R&D

s p e n d i n g , or b o t h "

(p. 109).

A d d i n g o t h e r c o u n t r i e s ( F r a n c e , UK, W .

G e r m a n y ) to the analysis d o e s not alter Reppy's a r g u m e n t that general c o n c l u s i o n s from the data about how military R&D affects e c o n o m i c p e r f o r m a n c e in international markets cannot now be d r a w n .

1.7.3 Developing

Country

Analysis

In the study of the impact of defense spending there has b e e n a clear distinction b e t w e e n effects in d e v e l o p e d c o u n t r i e s ( c o v e r e d in the p r e v i o u s s e c t i o n s ) a n d developing ones. T h e impacts upon d e v e l o p e d countries have been studied almost exclusively by scholars from these countries a n d trained in the use of m e t h o d s a n d t e c h n i q u e s d e s i g n e d for such study.

T h e impacts u p o n d e v e l o p i n g c o u n t r i e s have

been s t u d i e d by s c h o l a r s from both d e v e l o p e d a n d d e v e l o p i n g c o u n t r i e s , but still using

methods

countries.

a n d t e c h n i q u e s d e s i g n e d for s t u d y of i m p a c t s

in

developed

T h u s the findings for d e v e l o p i n g c o u n t r i e s must be r e g a r d e d with still

more caution a n d skepticism t h a n t h o s e for d e v e l o p e d c o u n t r i e s , especially since, as Chatterji points out in chapter 1 1 , there a r e : (1 ) major p r o b l e m s in any attempt at d e f i n i n g d e v e l o p i n g c o u n t r i e s a n d in setting up a c l a s s i f i c a t i o n ; (2) m a j o r d a t a deficiencies; a n d (3) major difficulties in measuring security e x p e n d i t u r e s .

Survey of Peace

Benoit's research.

1973

path

breaking

study

Economics

stimulated

35

a tremendous

amount

of

His findings are reported in s o m e detail in C h a t t e l ' s c h a p t e r in this book.

In brief, the strong version of the Benoit thesis is that d e f e n s e a n d e c o n o m i c growth are positively c o r r e l a t e d in d e v e l o p i n g c o u n t r i e s ; the w e a k v e r s i o n is that they are not negatively correlated. Chatterji reports u p o n a n u m b e r of s t u d i e s critical of Benoit's f i n d i n g s : Ball (1983), Lim (1983), Deger a n d Smith (1983), N a b e (1983), B i s w a s a n d R a m (1986), a n d A d a m s , B e h r m a n a n d Bolden (1991). T o t h e s e might be a d d e d others such a s : Boulding (1974) w h o c o n c l u d e s that there is no relationship at all b e t w e e n d e f e n s e burden and economic growth

in t h e h i g h g r o w t h c o u n t r i e s , a n d a

negative

r e l a t i o n s h i p in t h e low g r o w t h c o u n t r i e s ; Faini et. a l . ( 1 9 8 4 ) w h o find a s t r o n g positive relationship b e t w e e n the investment s h a r e of G D P a n d the d e f e n s e burden for India, but also find that the increased capital a c c u m u l a t i o n d o e s not lead to faster growth; and Frederiksen and Looney

(1983) w h o find a positive

relationship

b e t w e e n d e f e n s e a n d g r o w t h for s o m e L D C s a n d a negative correlation for others. Chatterji reports on o t h e r s t u d i e s that a r e , in o n e w a y or a n o t h e r , s u p p o r t i v e of Benoit's t h e s i s :

W h y n e s (1979) a n d W e i d e n b a u m (1974) w h o in turn refers to a

R a n d C o r p o r a t i o n study. T o t h e s e might be a d d e d others s u c h a s : M a r i a n a (1990) w h o u n d e r t a k e s a m a c r o s i m u l a t i o n analysis of d e f e n s e e x p e n d i t u r e s a n d e c o n o m i c g r o w t h in the Philippines a n d finds that all "the s i m u l a t i o n s s h o w higher g r o w t h in GDP

as

a consequence

of

increased

military

expenditure",

but

"negative

c o n s e q u e n c e s of d e f e n s e s p e n d i n g are not a d e q u a t e l y c a p t u r e d in the m o d e l as well as their s i m u l a t i o n s " (p. 6 ) ; a n d K u p c h a n (1989) w h o cites the e x p e r i e n c e s of T a i w a n a n d South K o r e a as "prime e x a m p l e s of states that have c o u p l e d relatively high d e f e n s e s p e n d i n g (roughly 6 % of G N P ) w i t h i m p r e s s i v e rates of e c o n o m i c growth (over 1 0 % ) " (p. 44). In d i g e s t i n g t h e s e a n d o t h e r s t u d i e s , o n e is not able to r e a c h a n y conclusions.

A recent r e v i e w of t h e literature by G r o b a r a n d P o r t e r

r e c o g n i z e s this o u t c o m e a n d the a u t h o r s call for m o r e s o p h i s t i c a t e d m o d e l s , d e s i r a b l y o n e s w h i c h i n c o r p o r a t e explicitly m o t i v a t i o n for

firm

(1989)

structural

government

s p e n d i n g on the military, a n d even optimizing behavior with respect to security a n d growth.

T h e A d a m s , B e h r m a n a n d B o l d e n study (1991) a d d s s o p h i s t i c a t i o n with

finer distinctions a m o n g variables m a d e possible by t h e use of F e d e r - t y p e analysis. But o n e w o n d e r s w h e t h e r m o r e s o p h i s t i c a t e d structural m o d e l s , with or w i t h o u t m o t i v a t i o n a n d o p t i m i z i n g b e h a v i o r , will e n a b l e a n a l y s t s to g e t a n y c l o s e r to u n d e r s t a n d i n g the direct a n d indirect relationships b e t w e e n d e f e n s e e x p e n d i t u r e s of L D C s a n d their g r o w t h .

W o u l d not t h e r e result further i m b a l a n c e b e t w e e n the

t y p e s of f a c t o r s d e v e l o p e d c o u n t r y m o d e l s c a n h a n d l e a n d t h o s e

noneconomic

W. Isard and CH.

36

Anderton

factors (social, political, ecological, etc.) that s h o u l d but c a n n o t be i n c o r p o r a t e d into t h e s e m o d e l s , given existing d a t a a n d m e t h o d s of analysis.

Is not the situation one

w h e r e , as stated by Ball (1983), understanding "will only be r e a c h e d if c a s e studies f o u n d e d on t h e s o c i o e c o n o m i c ,

political a n d e c o l o g i c a l r e a l i t i e s of

c o u n t r i e s are u n d e r t a k e n " (p. 5 2 2 ) .

individual

O r p e r h a p s m o r e a p p r o p r i a t e m e t h o d s of

analysis will evolve. 1.8

Political Economy, Organizational Non-Economic Factors

and

Other

In formulating a n d analyzing scenarios for a r m s reduction a n d studying d e f e n s e e x p e n d i t u r e i m p a c t s , one c a n n o t ignore t h e influence of t h e socio-political s y s t e m a n d the behavior of its institutions.

E c o n o m i s t s have paid attention to s o m e of the

issues in this realm, in particular, defense b u d g e t i n g , w e a p o n s p r o c u r e m e n t a n d the military industrial c o m p l e x . Defense

budgeting

is t h e p r o c e s s of g o v e r n m e n t a l d e c i s i o n m a k i n g that

determines the defense budget.

T h e p r o c e s s typically i n v o l v e s an initial D O D

( D e p a r t m e n t of Defense) budget proposal to the President w h o s u b m i t s a revised one in his January budget proposal to C o n g r e s s . C o n g r e s s t h e n critically e x a m i n e s the p r o p o s a l , requiring of D O D constant justification of items, a n d a p p r o v e s a final v e r s i o n . H o w e v e r , s u p p l e m e n t a r y a p p r o p r i a t i o n s may be s u b s e q u e n t l y r e q u i r e d . Such a process has been modelled by political scientists (e.g. Majeski, 1983) using a disequilibrium

partial a d j u s t m e n t

mechanism

(see B e n a s s y ,

1987) and

an

adaptive expectations model (Parkin, 1987). E c o n o m i s t s a n d other social scientists h a v e h i g h l i g h t e d i n e f f i c i e n c i e s in t h i s p r o c e s s ( N i s k a n e n , 1 9 6 7 ; G r o s s e

and

P r o s c h a n , 1 9 6 7 ; M c K e a n , 1967; Alchian, 1 9 6 7 ; R o g e r s o n , 1 9 9 0 ; Gansler, 1989). Weapons

procurement

is the p r o c e s s of acquiring quantities a n d qualities of

w e a p o n s o n c e b u d g e t allocations have b e e n m a d e .

O n this p r o c e s s a n d related

d e f e n s e e c o n o m i c s m u c h has b e e n written since t h e s e m i n a l w o r k of Hitch a n d M c K e a n (1960).

Major differences exist b e t w e e n the o p e r a t i o n of the free market

a n d that of the defense market. Peck and Scherer (1962) forcefully state: "A market s y s t e m in its entirety can never exist for the acquisition of w e a p o n s " (p. 57) b e c a u s e (1) t h e v e r y large e x p e n d i t u r e s r e q u i r e d by individual w e a p o n s p r o j e c t s a l m o s t i n v a r i a b l y p r e c l u d e p r i v a t e f i n a n c i n g , (2) t h e u n i q u e u n c e r t a i n t i e s of

weapons

a c q u i s i t i o n s t e m m i n g f r o m t e c h n o l o g i c a l c h a n g e a n d c o m p l e x i t y , d e f e n s e policy c h a n g e s , c h a n g e in e n e m y p l a n s a n d n u m e r o u s o t h e r f a c t o r s raise

extreme

difficulties in predicting cost, d e v e l o p m e n t t i m e , a n d p e r f o r m a n c e quality of output, (3) the seller c o n f r o n t s a single buyer (the g o v e r n m e n t ) w h i c h has t h e b a r g a i n i n g

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p o w e r of a m o n o p s o n i s t w h o d o e s not clearly specify d e s i r e d c h a r a c t e r i s t i c s of a w e a p o n s p r o g r a m . A recent publication (Gansler, 1989) reinforces the n o n - m a r k e t characteristics of w e a p o n s p r o c u r e m e n t , as partly s u m m a r i z e d in T a b l e 1.2. T A B L E 1.2 Selected Differences Between Free-market Theory and Defense Market Practice Free-market Theory

Defense-market Practice

Many small buyers

One buyer (DOD)

Many small suppliers

Very few, large suppliers of a given item

All items are small, and bought in large quantities

Each item is extremely expensive, and bought in very small quantities

Market sets prices

Monopoly or oligopoly pricing - or "buy in" to "available" budget dollars

Free movement in and out of market

Extensive barriers to entry and exit

Prices fall with reduced demand to encourage buying more

Prices rise with reduced demand, owing to cost-based pricing

Market shifts rapidly with changes in supply and demand

7-10 years to develop new system, then at least 3-5 years to produce it

Profits are equalized across economy

Wide profit variations between sectors; even wider between firms

No government involvement

Government is regulator, specifier, banker, judge of claims, etc.

Selection is based on price

Selection is based primarily on promised performance

Size of market is established by buyers and sellers

Size of market is established by "third party" (Congress) through annual budget

Buyer has the choice of spending now or saving for a later time

DOD must spend its congressional appropriation or lose it

Source: Gansler (1989, pp. 159-60). B e y o n d t h e a r e a of d e f e n s e e c o n o m i c s , the writings on political e c o n o m y a n d related subjects by e c o n o m i s t s are meager.

A n u m b e r of both g e n e r a l a n d specific

n o n - e c o n o m i c factors w h i c h fall within the s c o p e of political e c o n o m y are d i s c u s s e d in Isard (1988) a n d s u m m a r i z e d in the final c h a p t e r of this b o o k .

O n e of t h e s e ,

h o w e v e r , to w h i c h e c o n o m i s t s h a v e p o i n t e d e x t e n s i v e l y is the o p e r a t i o n of the military industrial c o m p l e x . T h e w a y s it places p r e s s u r e s u p o n C o n g r e s s p e r s o n s to support g e n e r a l increases a n d specific items in the d e f e n s e budget, to o p p o s e cuts, is clearly d i s c u s s e d in A d a m s ( 1 9 6 8 ) , R o s e n ( 1 9 7 3 ) , a n d m o s t recently in the writings of U l l m a n ( 1 9 8 5 ) , M a r k u s e n ( 1 9 8 6 ) , M a r k u s e n et. al. ( 1 9 9 1 ) a n d Higgs (1990).

W. Isard and CH.

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Anderton

In a d d i t i o n to p r e s s u r e s on C o n g r e s s p e r s o n s

from the

military

industrial

c o m p l e x , t h e r e are a l w a y s p r e s s u r e s f r o m a C o n g r e s s p e r s o n ' s local g r o u p s a n d constituents. A s W e i d e n b a u m (1990) puts it: I c a n cite f r o m p e r s o n a l e x p e r i e n c e t h e f r u s t r a t i o n of d e a l i n g w i t h m e m b e r s of C o n g r e s s w h o , in p u b l i c , a d v o c a t e l a r g e r e d u c t i o n s

in

military s p e n d i n g a n d the next d a y c o m e to the W h i t e H o u s e in a frantic but private effort to " s a v e " the w e a p o n s y s t e m being p r o d u c e d in their districts... Part of the p r o b l e m is that what p a s s e s as benefit/cost analysis in the political s p h e r e is usually d o n e f r o m a local r a t h e r t h a n a perspective.

national

Try closing any u n n e e d e d d e f e n c e b a s e - or r e d u c i n g t h e

n u m b e r s of aircraft or missiles b e i n g p u r c h a s e d .

The overwhelmingly

n e g a t i v e p u b l i c r e a c t i o n will q u i c k l y d e m o n s t r a t e t h e point t h a t t h e political p r o c e s s gives the benefits to the locality far g r e a t e r w e i g h t t h a n the costs borne by the rest of the nation, (p. 238). Moreover, as implied by Arrow in the next chapter, future gains from alternative uses of a population's assets (resources) do not get equal weight as i m m e d i a t e losses. 1.9

Conflict

Management

Analyses and

Procedures

It is difficult w h e n to date the start by e c o n o m i s t s of significant w o r k on conflict management.

O n e c o u l d go back to C o u r n o t a n d E d g e w o r t h a n d e v e n to A d a m

S m i t h , or just to Z e u t h e n ( 1 9 3 0 ) w h o s e s e m i n a l c o n t r i b u t i o n c o n c e r n e d conflict between

labor a n d m a n a g e m e n t .

U s i n g a c a r d i n a l utility m e a s u r e ,

Zeuthen

s u g g e s t e d a procedure involving a series of rounds w h e r e b y at any round the party w h o has t h e least to lose s h o u l d m a k e a s m a l l c o n c e s s i o n -- a principle w h i c h H a r s a n y i (1956) later d e m o n s t r a t e d requires only lineal utility a n d formally yields the N a s h principle ( m a x i m i z a t i o n of the product of utilities).

Implicit in S c h e l l i n g

(1960) a n d in Boulding (1962) w h o d i s c u s s s e s a b r o a d range of conflicts in detail a n d r e m a r k s generally on conflict m a n a g e m e n t are v a r i o u s p r o c e d u r e s for coping with conflict.

Of significance, too, is T i n b e r g e n (1990) w h o d e v e l o p s quantitative

w o r l d welfare m o d e l s (scenarios). A specific, veto-incremax procedure w a s d e v e l o p e d by Isard a n d T. Smith (1966, f o r m a l i z e d later in 1969) utilizing C o u r n o t a n d E d g e w o r t h c o n c e p t s .

T h e y h a d in

m i n d : (1) t h e p r o b l e m of m o v i n g participants f r o m the N a s h e q u i l i b r i u m point e d e p i c t e d in Figure 1.5 to a point within the i m p r o v e m e n t set (the d a s h e d - f o o t b a l l

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Economics

s h a p e d a r e a ) , let a l o n e to t h e c o r e C D ; (2) t h e desirability, s h o u l d o n e or both participants be c o n s e r v a t i v e , of having m a n y r o u n d s , w h e r e o n e a c h r o u n d only a limited c o m m i t m e n t to c h a n g e in p r o p o s e d action (policy) is p e r m i t t e d ; (3) the n e e d to g u a r a n t e e i m p r o v e m e n t on each r o u n d for e a c h participant; (4) the n e e d to have a p r o c e d u r e w h i c h requires participants to be able only to rank joint o u t c o m e s in t e r m s of desirability; (5) the need for the o u t c o m e to be preindeterminate in order to avoid conflict over w h i c h p r o c e d u r e to use since e a c h participant w o u l d desire that procedure w h i c h yields a joint action closest (indifference c u r v e - w i s e ) to its optimal point; a n d (6) the n e e d to give e a c h participant t h e v e t o p o w e r for a p r e d e t e r m i n e d n u m b e r of t i m e s to e n c o u r a g e h i m / h e r to e n g a g e in ( o v e r c o m e b a r r i e r s to) s e e k i n g a c o m p r o m i s e joint a c t i o n .

psychological

T h e rules to be f o l l o w e d by

participants using the v e t o - i n c r e m a x p r o c e d u r e require t h a t :

(1) on e a c h r o u n d

each participant specify his m a x i m u m c o m m i t m e n t to c h a n g e of action, the lesser of the t w o being u s e d to define the c o m m i t m e n t set; (2) e a c h participant next p r o p o s e (state his most d e s i r e d ) joint action in the i n t e r s e c t i o n of t h e c o m m i t m e n t improvement

and

s e t s ; a n d (3) if t h e d e s i r e d j o i n t a c t i o n s are not i d e n t i c a l , t h e

p a r t i c i p a n t s s h o u l d p r o p o s e as a c o m p r o m i s e t h a t joint a c t i o n d e f i n e d by t h e m i d p o i n t of t h e line s e g m e n t c o n n e c t i n g t h e t w o p r o p o s e d joint a c t i o n s .

This

midpoint then serves as the reference point for the next m o v e . W e r e the participants to f o l l o w t h e s e r u l e s , o n e p o s s i b l e s e q u e n c e of c o m p r o m i s e j o i n t a c t i o n s

is

indicated in Figure 1.9, which is a rough e n l a r g e m e n t of the e C D part of the football of F i g u r e 1.5 (p. 11).

S e e Isard et. a l . ( 1 9 6 9 ) for a r i g o r o u s s t a t e m e n t of this

p r o c e d u r e , a n d variants of it, w h i c h might be said to provide a theoretical basis for the Single N e g o t i a t i o n s Text p r o c e d u r e u s e d t o d a y in international conflicts.

See

Raiffa (1982, pp. 211-17) for a more realistic statement. In Isard a n d C. S m i t h ( 1 9 8 2 ) , m o r e t h a n o n e h u n d r e d conflict

management

p r o c e d u r e s are d i s c u s s e d . A m o n g those by e c o n o m i s t s a r e : 1.) the c o n c o r d a n c e - discordance

(Electre) m e t h o d of Delft a n d N i j k a m p (1977).

2.) d e m a n d revealing (no bluffing) m e t h o d of Vickrey (1978). 3.) min discrepancy from the ideal (using rank correlation) in N i j k a m p et al. (1979). 4.) permutation m e t h o d (max c o r r e s p o n d e n c e to o u t c o m e s w e i g h t e d by relative importance) of Paelinck (1976). Raiffa ( 1 9 8 2 ) has p r e s e n t e d a n d d e s i g n e d a n u m b e r of p r a c t i c a l

procedures

a p p l i c a b l e to b u s i n e s s c o n f l i c t s , w h i c h h a v e c o n s i d e r a b l e v a l u e for conflicts a m o n g nations.

attacking

K u e n n e ( 1 9 8 8 , a n d c h a p t e r 9 of this v o l u m e ) a d v a n c e s

oligopoly theory for mature rivals a n d e x a m i n e s the potential use of his rigorous

W. Isard and CH.

40

Anderton

analysis involving a mix of competitive a n d c o o p e r a t i v e factors in the g o a l s e e k i n g of key political leaders in the international a r e n a .

a sequence of compromise joint actions

improvement set for the first move commitment set (square) for the first move

Figure 1.9: A S e q u e n c e of Split-the-Difference C o m p r o m i s e s in a Veto Incremax Procedure

Finally, there have been a n u m b e r of studies of special diverse topics w h i c h we c a n n o t review in detail in this c o m p a c t survey.

For e x a m p l e there is the study of

L u n d b o r g (1991) w h o in a careful e c o n o m e t r i c a n a l y s i s of U.N. v o t i n g d u r i n g the C o l d W a r period, finds support for the "gift e x c h a n g e " h y p o t h e s i s , n a m e l y that the relative political support for the US is positively affected by U S aid a n d negatively affected by Soviet a i d .

T h i s "implies that U S aid rises as a result of i n c r e a s e d

political s u p p o r t for the U S a n d that Soviet aid falls." (p. 2 4 ) .

Another careful

e c o n o m e t r i c study is by van Bergeijk (1988) on the s u c c e s s a n d failure of e c o n o m i c s a n c t i o n s ; he finds that the "probability that an e c o n o m i c s a n c t i o n s u c c e e d s is higher t h e larger the p r e - s a n c t i o n t r a d e l i n k a g e , t h e m o r e u n s t a b l e the t a r g e t ' s political situation a n d the shorter the sanction period." (p. 28), with the t e n d e n c y for the efficacy of a sanction to d e c r e a s e as the duration is p r o l o n g e d . T h e r e is also a significant literature on t e r r o r i s m (e.g., C a u l e y a n d S a n d l e r , 1 9 8 8 ; S a n d l e r a n d L a p a n , 1 9 8 8 ; Lee a n d S a n d l e r , 1 9 8 9 ) , i n s u r r e c t i o n ( G r o s s m a n , 1 9 9 1 ) , a n d a general treatment of political violence (Gupta, 1990). 1.10

Some

Final

Comments

At this point w e could attempt a s u m m a r y of the state of the p e a c e e c o n o m i c s literature a n d point out q a o s , areas insufficiently d e v e l o p e d , a n d kev d i r e c t i o n s for

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41

Economics

H o w e v e r , in the c h a p t e r s to follow, t h e r e will be c o v e r a g e of still m o r e of

the literature a n d , more important, s e m i n a l contributions to t h e literature.

Therefore,

w e p o s t p o n e e v a l u a t i o n of t h e literature a n d t h e identification of key d i r e c t i o n s for further research to the final c h a p t e r s of this book. Footnotes 1

1n the order stated t h e s e functions are:

4>(Fj,Gi) = Rj where

i=1,2

(1.1 n)

in a c o n f l i c t e a c h s i d e i d i v i d e s its e n d o w e d

resources

Rj

between

contestable productive effort Fj a n d appropriative effort (weaponry, etc.) G j ; l = T l ( F i , F 2)

(1.2n)

w h e r e t h e social a g g r e g a t e of c o n t e s t a b l e i n c o m e I is a f u n c t i o n of t h e p a r t i e s ' productive c o m m i t m e n t s FJ; Pi = Q i ( G i , G 2 )

(1.3n)

w h i c h d e t e r m i n e s t h e proportion pj of social a g g r e g a t e i n c o m e i r e c e i v e s (through c o e r c i o n or actual battle); a n d li = l{ai + Pi(1-ai - a 2) } where α ϊ

(1.4n)

a n d oc2 r e p r e s e n t " p r o t e c t e d " f r a c t i o n s of s o c i a l a g g r e g a t e

a v a i l a b l e to t h e r e s p e c t i v e p a r t i e s , a n d a i a n d a 2 are p r o d u c t i v i t y

income

coefficients.

W o r k i n g with specific f o r m s of t h e s e four e q u a t i o n s , Hirshleifer o b t a i n s interesting results for Cournot, Stackelberg a n d Threat a n d P r o m i s e type situations. 2

S e e Isard et. al. (1969) for a discussion of s u c h c o m m o d i t i e s .

3

l n C h i c k e n , the payoff table of ranking of actions may t a k e the f o r m : B's actions cooperate

cooperate

noncoop.

5, 5

4, 10

10, 4

2,2

A's actions noncoop.

W. Isard and CH.

42

Anderton

Here, t w o stable equilibrium o u t c o m e s (10,4) a n d (4,10) exist.

If t h e p l a y e r s are

initially at (5,5) b e c a u s e both have c h o s e n the c o o p e r a t i v e a c t i o n , A c o u l d c h a n g e his a c t i o n , c h o o s i n g to be n o n - c o o p e r a t i v e t h e r e b y i n c r e a s i n g the ranking of his indifference curve to 10.

Β could do the s a m e , that is c h a n g e to a non-cooperative

action t h e r e b y increasing her ranking to 10.

H o w e v e r , if both w e r e to m a k e t h e s e

c h a n g e s simultaneously they w o u l d both receive their worst o u t c o m e , namely utility represented

by an i n d i f f e r e n c e c u r v e w i t h r a n k i n g 2.

Whoever

is t h e

more

aggressive, a n d c h a n g e s his/her action first obtains his/her most preferred o u t c o m e . T h e other must t h e n accept the utility r e p r e s e n t e d by an indifference c u r v e with a lower rank.

For once the o u t c o m e set (10,4) or (4,10) is r e a c h e d , neither A nor Β

has any incentive to c h a n g e his/her action.

For if A w e r e the less a g g r e s s i v e , a n d

w e r e to c h a n g e f r o m a cooperative to a n o n c o o p e r a t i v e action w h e n Β had already c h o s e n to be n o n c o o p e r a t i v e , his utility w o u l d fall being g i v e n by his indifference curve with ranking 2 because the new set of o u t c o m e s (2,2) w o u l d result. A in effect is t h e " c h i c k e n . "

A l t h o u g h at t h e start he c o u l d h a v e i n c r e a s e d his payoff by

c h a n g i n g his action from c o o p to n o n c o o p provided he did so before B, he hesitated to do this for fear Β w o u l d simultaneously c h a n g e her action f r o m c o o p to n o n c o o p a n d that as a result they w o u l d end up in a situation with o u t c o m e s (2,2). 4

L

L

L

W h e r e 0 to 0 is the time interval during which L attacks a n d 9 t o 6 + ψ

ϋ

is the time

interval during which J retaliates, Eq. (1.7) is more appropriately stated a s : S

J

L

L

L

L

j

J

> f [1 - exp(-ß0 )]S + C / D [ 1 - exp(-äy )]

(1.5n)

w h e r e β is the rate at which L fires its missiles in the first-strike strategy a n d α is J's rate of retaliation.

T h e r e have b e e n other r e f i n e m e n t s ; for e x a m p l e , in Brito a n d

Intriligator (1973, 1974), account is t a k e n of the response lag a n d uncertainty about w h e t h e r a missile site is empty. 5

T h e equation is more appropriately stated a s : £j

1 S

6

~ fJ[1 - e x p ( - ä e J ) ]

SL

L

" fJ[1 - e x p ( - ä 0 J ) ] O [ 1 - β χ ρ ( - β ψ ΐ - ) ]

1

"

6 n)

S u p p o s i n g next year's g o v e r n m e n t expenditure is 20, a n d the preliminary estimate

of this year's i n c o m e is 100, t h e n Suits s o l v e s t h e a b o v e e q u a t i o n s to y i e l d next year's c o n s u m p t i o n , investment, t a x e s a n d i n c o m e to be 8 6 . 2 , 12, 2 3 . 7 a n d 118.2, respectively.

(

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43

Economics

F o r the W a r of 1812, the S p a n i s h - A m e r i c a n W a r , W o r l d W a r II a n d the K o r e a n W a r

see Klein (1971:511 ). For the Civil W a r see Robertson a n d W a l t o n ( 1 9 7 9 : 2 4 5 - 2 4 6 ) , Lerner (1955), E n g e r m a n (1966), a n d Klein ( 1 9 7 1 : 5 1 1 ) . (1931), Gilbert ( 1 9 7 0 ) , a n d Klein ( 1 9 7 1 : 5 1 1 ) .

For W o r l d W a r I see Clark

For t h e V i e t n a m W a r see M c C a r t h y

(1972), Klein (1971:511) a n d W e i d e n b a u m ( 1 9 9 0 : 2 3 9 ) . 8

Similar

results

h a v e b e e n put f o r t h by G o l d et. a l . ( 1 9 8 1 ) a n d

DeGrasse

(1983:10,28-30). 9

S m i t h ' s v i e w s have b e e n critiqued by Hartley a n d M c L e a n ( 1 9 7 8 ) , C h e s t e r (1978),

a n d Griffin et. al. (1982). 1 0

S e e Z i m m e r m a n a n d K l i n g e m a n n ( 1 9 6 6 : 7 5 - 7 6 ) for d a t a on u n e v e n

defense

contracts by region for West G e r m a n y . 11

Six a r e a s are c o n s i d e r e d :

Los A n g e l e s - L o n g B e a c h ; S a n F r a n c i s c o - O a k l a n d ;

California; St. Louis; K a l a m a z o o C o u n t y ; a n d Philadelphia. 1 2

U d i s (1978) cites ten motives for diversification by d e f e n s e f i r m s :

a v o i d layoffs,

avoid g o v e r n m e n t red tape, assure survival of the firm, d e p e n d less on g o v e r n m e n t support, c h a n g e i m a g e , d e p e n d less o n the military, s m o o t h out o p e r a t i o n s , k e e p a b r e a s t of n e w t e c h n o l o g y , i n c r e a s e profits, k e e p r e s e a r c h a n d d e s i g n together.

teams

He also d i s c u s s e s in detail the obstacles to diversification.

1 3

F o r d i s c u s s i o n s of c o n v e r s i o n in other nations see T h e e ( 1 9 8 9 : 5 9 - 6 2 ) a n d Udis

(1978) for W e s t e r n E u r o p e ; T h o r s s o n (1989) for S w e d e n ; G l e d i t s c h et. al. (1989), Bjerkholt et al. (1980) a n d C a p p e l e n et al. (1982) for N o r w a y ; a n d Filip-Kohn et al. (1980) for W . G e r m a n y . 1 4

W e i d e n b a u m (1990:237) lists three possible reasons for t h e s e results: (1) trends

in both military a n d civilian R & D may be influenced by a c o m m o n set of factors; (2) n o n d e f e n s e a n d d e f e n s e e n g i n e e r s a n d scientists are not perfect s u b s t i t u t e s ; a n d (3) the supply of scientists a n d engineers is not f i x e d ; it r e s p o n d s to variations in job opportunities, migration a n d pay.

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Economies of Arms Reduction and the Peace Process W. Isard and C H . Anderton (Editors) © 1992 Elsevier Science Publishers B.V. All rights reserved.

Chapter THE

BASIC

ECONOMICS Kenneth

2

OF J.

ARMS

REDUCTION

Arrow

Stanford University*

[In this paper, Kenneth Arrow provides a general framework for analysis by economists of the forces lying behind the deescalation and escalation of military expenditures.

On the basis of his long

experience and leadership in the development of economic theory, he addresses the question: what are the ways suggested by such theory for estimating the economic effects of a major reduction of current arms expenditure, particularly with reference to the United States? (eds.)] 2.1

Introduction In this paper, I want to set forth different w a y s s u g g e s t e d by e c o n o m i c theory for

estimating the e c o n o m i c effect of a major reduction of the current a r m s expenditures in the United States.

T h e s e a p p r o a c h e s will help illuminate t h e possible directions

of r e s e a r c h to c o m e to better g r i p s with t h e e c o n o m i c g a i n s p o s s i b l e by a r m s reduction.

S o m e p o p u l a r d i s c u s s i o n has s u g g e s t e d v e r y large g a i n s ,

d r a w n by

simple c o m p a r i s o n s with J a p a n , w h i c h , a m o n g its m a n y other d i f f e r e n c e s with the United States, d o e s use a m u c h lower proportion of its national i n c o m e in military e x p e n d i t u r e s . T h e discussion may also help in the reorientation of e c o n o m i c theory to a c c o m m o d a t e

better many strongly positive feedback features, which

are

beginning to find e m p h a s i s in the theory of e c o n o m i c g r o w t h . I will in fact c o n s i d e r , t h o u g h v e r y

unevenly, four possible

approaches

s u g g e s t e d by e c o n o m i c reasoning. T h e first is neoclassical welfare theory, in which the s t a n d a r d a s s u m p t i o n s of c o m p e t i t i o n , a b s e n c e of externalities, a n d c o n s t a n t or diminishing returns of scale are m a d e . This is the best d e v e l o p e d t h e o r y , a n d I will have the most to say a b o u t its implications. m o d e r n v e r s i o n s of m a c r o e c o n o m i c s .

T h e s e c o n d is K e y n e s i a n a n d more

T h e third is m o d e r n g r o w t h theory, a revival

a n d more rigorous v e r s i o n of d e v e l o p m e n t e c o n o m i c s of the i m m e d i a t e p o s t - w a r p e r i o d s , w h i c h t e n d to e m p h a s i z e e x t e r n a l i t i e s a n d i n c r e a s i n g r e t u r n s , but with s o m e notions of equilibirium a n d m a r k e t - c l e a r i n g to provide structural parallels to competitive equilibrium.

Finally, the fourth e c o n o m i c p a r a d i g m is that of political

K.J. Arrow

58

choice theory, w h e r e w e c o n s i d e r the political s y s t e m as a t t a c h e d to t h e e c o n o m i c a n d feeding back into it. 2.2 S t a n d a r d

Resource

Allocation

Theory

If prices truly reflected scarcity, as t h e y do u n d e r ideal c o n d i t i o n s , t h e n t h e resources u s e d for d e f e n s e can be m e a s u r e d at their market v a l u e s . T h u s , w e m a y easily m e a s u r e the g a i n in o t h e r u s e s of n a t i o n a l i n c o m e c o r r e s p o n d i n g to a reduction in d e f e n s e expenditures.

In this paper, although by no m e a n s a full-blown

e m p i r i c a l a n a l y s i s , I will refer to s o m e q u a n t i t a t i v e s t a t e m e n t s a b o u t the U n i t e d States e c o n o m y , which are collected for easy reference in the following Table. T A B L E 2.1 Defense in the United States Economy Year

Defense/GNP

D e f e n s e / F e d . Budget

Defense/R&D

1960

9.3%

52.2%

48%

1980

4.9%

22.7%

22%

1988

6.0%

27.3%

33%

Estimated Marginal Excess Burden of T a x a t i o n : 3 0 % S t a n d a r d Deviation of Log Defense E x p e n d i t u r e s : .112 Standard Deviation of Log Federal Budget: .060 S o u r c e s : U.S. Department of C o m m e r c e , Bureau of the C e n s u s , Statistical Abstract of the United States, 1989 a n d earlier i s s u e s . W a s h i n g t o n D . C : G o v e r n m e n t Printing Office, Tables 685, 446, 489,.526, 9 7 0 , 9 7 1 . If we refer to the first c o l u m n , we see the fraction of national i n c o m e d e v o t e d to defense.

For the p u r p o s e s of this paper,

5 0 % in military expenditures.

w e will t a k e as c o n o n i c a l a reduction of

It has b e e n responsibly a r g u e d (e.g., K a u f m a n 1989)

that such a reduction is feasible without infringing on national security; i n d e e d , such a r g u m e n t s w e r e a d v a n c e d before the r e m a r k a b l e c h a n g e s in E a s t e r n E u r o p e in 1989 a n d 1990 a n d the corresponding perception that the cold w a r is at an e n d . T h e simplest calculation, t h e n , using the figures for 1988, is that a 5 0 % cut in d e f e n s e e x p e n d i t u r e s increases the availability of r e s o u r c e s for other p u r p o s e s by 3 % of national i n c o m e ( 5 0 % of 6 % ) . T h e resources can be u s e d in m a n y different w a y s , of c o u r s e .

T h e y c a n be u s e d for private c o n s u m p t i o n or i n v e s t m e n t , as

i n d i v i d u a l s c h o o s e , by leaving all o t h e r g o v e r n m e n t e x p e n d i t u r e s

unchanged.

Economies of Arms

Reduction

59

Alternatively, the r e s o u r c e s can be u s e d for other f o r m s of collective c o n s u m p t i o n . O n e possibility is an increase of e x p e n d i t u r e s on health, particularly public health. If one is c o n c e r n e d about the increase in c r i m e , additional e x p e n d i t u r e s on prisons or police or on p r o g r a m s to reduce drug d e p e n d e n c y are possible.

T o t a k e an issue

on w h i c h there is w i d e s p r e a d a g r e e m e n t , h i g h w a y s , bridges, m a s s transit a n d other f o r m s of infrastructure are regarded as deficient, i.e., having a high marginal return. Or finally, to take another form of infrastructure, i m p r o v e m e n t s in education to create better citizens a n d increase productivity w o u l d form a suitable use. W h i c h of these directions, public or private, w o u l d give an optimal use of the r e l e a s e d resources is a m a t t e r of i n d i v i d u a l j u d g m e n t a n d political p r o c e s s .

If i n d e e d r e s o u r c e s are

c u r r e n t l y a l l o c a t e d o p t i m a l l y , t h e n , t o a first a p p r o x i m a t i o n difference in w h i c h direction the expenditure is to g o .

it will m a k e

little

But under this c o n d i t i o n , one

c a n n o t e x p e c t an increase of more t h a n 3 % in national i n c o m e available for nonmilitary uses. But in fact the allocation of resources b e t w e e n the public a n d private sectors is not fully g o v e r n e d by optimality criteria. T h e r e are several a s p e c t s of this departure from optimality. government

O n e , to be d i s c u s s e d briefly later, is that the level a n d direction of

spending

is d e t e r m i n e d

by a p o l i t i c a l

process

which

does

not

necessarily share the Pareto efficiency properties of t h e price s y s t e m . A s e c o n d is that g o o d s u s e d for public p u r p o s e s are f i n a n c e d primarily by t a x a t i o n . k n o w n , all t a x e s create d e a d w e i g h t losses or e x c e s s b u r d e n s .

As is well

All practical taxes

fall on s o m e e c o n o m i c activity, w h e t h e r it be p u r c h a s e a n d sale of g o o d s , w o r k i n g , or s a v i n g . G i v e n such a set of t a x e s , there is an alternative set of l u m p - s u m taxes yielding the s a m e r e v e n u e (and t h e r e f o r e the ability to buy the s a m e g o o d s and supply the s a m e public services) which w o u l d m a k e e v e r y o n e better off.

H e n c e , the

social cost of a dollar of t a x - f i n a n c e d g o v e r n m e n t e x p e n d i t u r e s is g r e a t e r t h a n one dollar by the a m o u n t of the excess b u r d e n . In d i s c u s s i n g e x c e s s b u r d e n s , it is i m p o r t a n t , as e l s e w h e r e in e c o n o m i c s , to d i s t i n g u i s h a m o n g m a r g i n a l , a v e r a g e , a n d total m a g n i t u d e s . burden of taxation is, roughly, proportional to the square

T h e total e x c e s s

of the tax rate. H e n c e , the

marginal e x c e s s b u r d e n is p r o p o r t i o n a l to the tax rate, a n d t h e a v e r a g e e x c e s s burden of t a x e s is about half the marginal tax rate. A reduction of 5 0 % in d e f e n s e e x p e n d i t u r e s is, f r o m t h e s e c o n d c o l u m n of T a b l e 2 . 1 , a r e d u c t i o n of 1 3 % in government expenditures.

If w e a s s u m e all e x p e n d i t u r e s are t a x - f i n a n c e d , this is a

c o n s i d e r a b l e c h a n g e , so that t h e m a r g i n a l e x c e s s b u r d e n c h a n g e s significantly, being reduced in the s a m e proportion. T h e r e are by n o w a n u m b e r of e s t i m a t e s of t h e e x c e s s b u r d e n of F e d e r a l t a x a t i o n in the literature.

T h e y start with a partial e q u i l i b r i u m a p p r o a c h d u e to

K.J. Arrow

60

Browning

(1976). A m o n g the more

recent and more

richly d e t a i l e d

general

equilibrium a p p r o a c h e s , the best s e e m to be t h o s e of Ballard, S h o v e n , a n d W h a l l e y (1985) and Jorgenson and Yun (1990).

T h e e s t i m a t e s of t h e latter t w o

are

c o n s i d e r a b l y higher t h a n earlier e s t i m a t e s .

T h e m a g n i t u d e of t h e e x c e s s b u r d e n

d e p e n d s on the elasticities of supply of basic factors, especially of s a v i n g s a n d of labor supply.

Neither elasticity is k n o w n w e l l .

Ballard, S h o v e n a n d W h a l l e y m a k e

t w o alternative a s s u m p t i o n s about e a c h elasticity, giving four e s t i m a t e s altogether; the e s t i m a t e s of total gain from replacing the t a x e s by l u m p - s u m t a x e s range f r o m 1 3 % to 2 4 % of t h e r e v e n u e s , w h i c h imply that the m a r g i n a l e x c e s s b u r d e n per dollar of taxation f r o m a small reduction in t a x e s is b e t w e e n 2 6 % a n d 4 8 % of the r e d u c t i o n (Table 3, p. 1 3 3 ) .

T h e e s t i m a t e of m a r g i n a l e x c e s s b u r d e n m a d e by

J o r g e n s o n a n d Kun is even higher, 4 6 % (see T a b l e 1, entry for 5 % reduction of, "All Tax Bases").

H o w e v e r , they a s s u m e that s a v e r s m a x i m i z e a s u m of d i s c o u n t e d

utilities, an a s s u m p t i o n w h i c h , in my j u d g m e n t , leads to an u n a c c e p t a b l y

high

e s t i m a t e of the elasticity of s a v i n g with r e s p e c t to after-tax rate of r e t u r n , a n d t h e r e f o r e to high e x c e s s tax b u r d e n s .

I h a v e t h e r e f o r e e s t i m a t e d the

marginal

e x c e s s b u r d e n of t a x e s to be 3 0 % , t h o u g h a slightly h i g h e r f i g u r e c o u l d

be

defended. Under

that

assumption,

a cut

of

50%

in

military

expenditures

and

a

c o r r e s p o n d i n g cut in t a x e s will increase private real p u r c h a s i n g p o w e r , not by 3 % but by 3 X 1 . 3 % , since the excess burden on the a m o u n t cut will also be e l i m i n a t e d . T h u s , we c o u l d have raised total private c o n s u m p t i o n a n d investment by 4 % . w o u l d be about $ 2 0 0

This

billion dollars a year. T o achieve this g a i n , however, it w o u l d

be necessary to cut all taxes more or less proportionately.

Since the major effect is

to increase the incentives to save a n d to work, the efficiency gain is greater for those w h o save more or w h o s e w o r k is more highly v a l u e d in the market.

If t h e " p e a c e

d i v i d e n d " w e r e u s e d to i m p r o v e i n c o m e distribution, by cutting t a x e s or increasing transfer p a y m e n t s disproportionately to the lower income g r o u p s , the efficiency gain w o u l d be r e d u c e d , t h o u g h not e l i m i n a t e d ; there are important efficiency gains to be obtained by increasing w o r k incentives at the lower e n d of the i n c o m e scale.

How

the tax reduction is allocated a m o n g the income classes is a matter for social value j u d g m e n t ; efficiency can be t r a d e d off against equity if d e s i r e d . Alternataively, the resources released by a r m s reduction c o u l d be allocated to other parts of the federal budget or to state or local e x p e n d i t u r e s .

In principle, this

reallocation s h o u l d t a k e place only if a dollar of g o v e r n m e n t e x p e n d i t u r e s in the direction c h o s e n is w o r t h m o r e t h a n the m a r g i n a l cost of t a x e s (one dollar plus marginal e x c e s s b u r d e n ) . Since marginal e x c e s s benefit is a p p r o x i m a t e l y linear in t a x e s , a cut of half the defense budget or 1 4 % of the total budget s h o u l d reduce the

Economies of Arms

Reduction

m a r g i n a l e x c e s s b u r d e n f r o m 3 0 % to a b o u t 2 5 % .

61

T h e r e f o r e t h e cut s o m e w h a t

increases the range of g o v e r n m e n t e x p e n d i t u r e s t h a n c a n be justified o n efficiency grounds. In all t h e a b o v e

analysis,

I have

assumed that

a reduction

e x p e n d i t u r e s w o u l d be a c c o m p a n i e d by an e q u a l reduction in t a x e s .

in

military

It might a n d

probably w o u l d be a c c o m p a n i e d by s o m e reduction in the deficit, that is, in the rate of increase in the g o v e r n m e n t debt. It is not my p u r p o s e here to present an analysis of the effects of deficit reduction; a deficit has s o m e of the s a m e characteristics as a tax in creating an excess b u r d e n . 2.3

Macroeconomic

Stability

T h e analysis of fluctuations in the g e n e r a l e c o n o m i c level of activity is still in a state of great dispute. For a long part of the p o s t w a r period, a d o m i n a t i n g p a r a d i g m w a s the K e y n e s i a n t h e o r y .

Briefly s u m m a r i z e d , prices, especially w a g e s , did not

m o v e to e q u a t e s u p p l y a n d d e m a n d , or at least d i d not m o v e quickly e n o u g h to p r e v e n t p e r i o d i c c o n d i t i o n s in w h i c h t h e r e w a s a n e x c e s s of s u p p l y on markets (unemployment) [Tobin, 1975].

labor

In at least s o m e v e r s i o n s , it w a s also

possible to h a v e an e x c e s s of supply on product m a r k e t s , in t h e s e n s e that firms w o u l d be willing to supply more products at t h e g o i n g w a g e s a n d prices t h a n they can in fact sell. Under these conditions, an increase in d e m a n d for any c a u s e could increase total national i n c o m e by c a u s i n g idle r e s o u r c e s to be u s e d .

In fact, the

usual v i e w w a s that t h e r e w a s a "multiplier" effect in w h i c h t h o s e e m p l o y e d as a result of t h e initial i n c r e a s e in d e m a n d w o u l d t h e m s e l v e s i n c r e a s e d e m a n d still further a n d therefore employ still more resources. In this m o d e l , an i n c r e a s e in g o v e r n m e n t s p e n d i n g for a n y p u r p o s e

would

increase national i n c o m e , except at t h o s e t i m e s w h e n t h e e c o n o m y w a s already fully e m p l o y e d .

In this c o n t e x t , military e x p e n d i t u r e s w e r e not at all costly, a n d

r e d u c i n g t h e m w o u l d per se reduce national i n c o m e , p e r h a p s by m o r e t h a n the reduction in military e x p e n d i t u r e s .

During the 1960's t h e r e w a s a w i d e s p r e a d joke

that the C o l d W a r aided both sides; it s h o r e d up the Soviet political s y s t e m a n d the United States e c o n o m i c s y s t e m . Of c o u r s e , military e x p e n d i t u r e s h a d no special role in stimulating d e m a n d in the K e y n e s i a n f r a m e w o r k .

Any other f o r m of e x p e n d i t u r e w o u l d do as well a n d of

course might be preferred on other g r o u n d s . S o m e Marxist critics, particularly Paul Baran ( 1 9 6 9 : 2 9 0 ) , did a r g u e that it w a s not politically p o s s i b l e to substitute other g o v e r n m e n t e x p e n d i t u r e s in sufficiently large a m o u n t s , b e c a u s e t h e y w o u l d begin to s e r v e f u n c t i o n s w h i c h w e r e c o m p e t i t i v e w i t h p r i v a t e e n t e r p r i s e .

But

most

K.J. Arrow

62

K e y n e s i a n t h e o r i s t s f o u n d it perfectly p o s s i b l e to a r g u e for m o r e

government

s p e n d i n g in g e n e r a l a n d less military s p e n d i n g in particular. S u b s e q u e n t research a n d e x p e r i e n c e has u n d e r m i n e d s o m e of the c o n f i d e n c e in t h e K e y n e s i a n t h e o r y .

S o m e still a r g u e for v a r i a t i o n s of t h e o r i g i n a l t h e o r y ,

others, the so-called real b u s i n e s s c y c l e s theorists s u c h as K y d l a n d a n d Prescott ( 1 9 8 0 ) , h a v e a r r i v e d at a t h e o r e t i c a l s t r u c t u r e in w h i c h m a r k e t s a l w a y s

clear.

Variations in e m p l o y m e n t , for e x a m p l e , are regarded as variations in the willingness to supply labor, so that all u n e m p l o y m e n t is voluntary, that is, unwillingness to w o r k at the current w a g e levels.

Clearly, if m a r k e t s a l w a y s clear, t h e n any c h a n g e in

g o v e r n m e n t expenditures c a n only redirect resources, not create new o n e s . In v i e w of t h e u n c e r t a i n t y in m a c r o e c o n o m i c a n a l y s i s , o n e c a n n o t use any particular model with any confidence. Simple Keynesian stories m a k e little sense to me for long-run a n a l y s i s , o t h e r w i s e o n e c a n get t h e a b s u r d c o n c l u s i o n of J o a n R o b i n s o n that fixed real w a g e s w o u l d be c o m p a t i b l e with indefinitely i n c r e a s i n g unemployment.

Stagnationist v i e w s are i n c o m p a t i b l e with both history a n d any

e c o n o m i c logic w h i c h ascribes s o m e element of rationality to e c o n o m i c agents.

But

that is not to say that disequilibria in the labor a n d product m a r k e t s c a n n o t exist for s o m e periods of time, even of the order of magnitude of o b s e r v e d business cycles. I c o n f i n e t h e a n a l y s i s here to o n e e l e m e n t c o m m o n to m o s t , p e r h a p s versions

of

macroeconomic

analysis.

Variabaility

in g o v e r n m e n t

or

all

other

e x o g e n o u s e x p e n d i u t u r e s will in general increase the variability of b r o a d e c o n o m i c m a g n i t u d e s , s u c h as national i n c o m e a n d e m p l o y m e n t . In g e n e r a l , o n e w o u l d expect this variability to lower the average level of p e r f o r m a n c e along each of d i m e n s i o n s , for two reasons.

these

O n e is that u p w a r d m o v e m e n t s will s o m e t i m e s reach

the full e m p l o y m e n t ceiling, so that they do not offset the d o w n w a r d m o v e m e n t s ; the s e c o n d is that the unpredictability of future m o v e m e n t s will d e c r e a s e the willingness to invest a n d especially the ability to invest efficiently. In this paper, I simply c o m p a r e the variability of military e x p e n d i t u r e s with that of the total F e d e r a l b u d g e t .

T o m e a s u r e variability in relative rather t h a n a b s o l u t e

t e r m s , I have u s e d the standard deviation of the logarithms for e a c h of the t w o kinds of e x p e n d i t u r e s .

As can

be s e e n

in T a b l e

2 . 1 , the variability

of

defense

e x p e n d i t u r e s , so m e a s u r e d , has been almost twice that of the Federal budget as a whole.

It is r e a s o n a b l e to c o n c l u d e that military e x p e n d i t u r e s have a d d e d to the

instability of the A m e r i c a n e c o n o m y .

Economies of Arms

2.4 M o d e r n G r o w t h

Reduction

63

Theory

T h e r e is a n e w t r a d i t i o n , w h i c h is in fact a revival of a n o l d o n e , w h i c h c o n c e n t r a t e s on e x p l a n a t i o n s for g r o w t h rates of a n e c o n o m i c s y s t e m .

Instead of

the static analysis of section 2.2, it gives e m p h a s i s to factors w h i c h influence g r o w t h rates rather t h a n levels of national i n c o m e a n d the like. T h e r e c l a s s i c a l t h e o r y of o p t i m a l g r o w t h .

has b e e n a rich neo-

H o w e v e r , in t h e a b s e n c e of t e c h n o l o g i c a l

progress, g r o w t h of per capita income is attributed to increase of capital per w o r k e r a n d therefore must diminish over t i m e . This effect w o u l d be e v e n stronger if limited natural resources w e r e included as a s e p a r a t e factor.

But, it a p p e a r s ,

rates of per

c a p i t a i n c o m e g r o w t h in a d v a n c e d c o u n t r i e s h a v e not s h o w n d i m i n u t i o n o v e r a century. Tinbergern

(1942), Solow

(1957), and other pioneers

simply

postulated

e x o g e n e o u s f a c t o r s w h i c h g a v e rise to g r o w t h ; t h e s e w e r e u n d e r s t o o d to be increases in k n o w l e d g e , w h i c h in effect multiplies the productivity d u e to capital a n d labor.

However, innovations w h i c h increase productivity arise to a large extent from

d e l i b e r a t e r e s o u r c e a l l o c a t i o n s to a c h i e v e t h e m .

H e n c e , o n e m i g h t a t t e m p t to

construct a m o d e l in w h i c h investment in r e s e a r c h a n d d e v e l o p m e n t i n c r e a s e total factor productivity (the ratio of output to an index n u m b e r which c o m b i n e s labor a n d capital inputs). T h i s w o u l d lead to a m o d e l with i n c r e a s i n g r e t u r n s to s c a l e , at least in a d y n a m i c s e n s e ; a p r o p o r t i o n a l i n c r e a s e in c a p i t a l a n d labor a l o n e will i n c r e a s e output proportionally, but a s i m u l t a n e o u s proportional increase in labor, capital, a n d r e s e a r c h a n d d e v e l o p m e n t d e v o t e d to i n n o v a t i o n s s h o u l d i n c r e a s e o u t p u t more than proportionately.

Naturally, such a m o d e l c a n n o t be o n e of perfect c o m p e t i t i o n ,

a n d s o m e form of monopolistic competition must be introduced. Ideas like this w e r e a l r e a d y p r e s e n t in A l l y n Y o u n g ' s p r e s i d e n t i a l a d d r e s s to t h e R o y a l Society

(1928).

Examples

of s u b s e q u e n t

development

Economic

a r e to be f o u n d

in

R o s e n s t e i n - R o d a n (1943) a n d Nurkse ( 1 9 5 3 ) ; for a survey of this literature a n d its relation to g e n e r a l e c o n o m i c t h e o r y , see A r r o w ( 1 9 8 8 ) .

The current

revival of

interest in this a r e a s t e m s from the w o r k of R o m e r (1986), w h o in particular pointed to the lack of t e n d e n c y to c o n v e r g e n c e a m o n g t h e per c a p i t a i n c o m e s of different countries as evidence for increasing returns m o d e l s . Look t h e n at the last c o l u m n in Table 2 . 1 . R e s e a r c h a n d d e v e l o p m e n t has been a roughly c o n s t a n t s h a r e of g r o s s n a t i o n a l p r o d u c t , a b o u t 2 . 6 % .

H o w e v e r , the

military share of research a n d d e v e l o p m e n t has fallen below its earlier levels in line with the g e n e r a l reduction in t h e s h a r e of military e x p e n d i t u r e s , a l t h o u g h not as m u c h . T h e r e f o r e , the share of R&D in military expenditures has, if a n y t h i n g , risen.

K.J. Arrow

64

W h a t w o u l d be the effect of a cut in military e x p e n d i t u r e s with a c o r r e s p o n d i n g cut in military R & D ?

I c a n offer only s p e c u l a t i o n .

O n e q u e s t i o n is w h e t h e r the

private sector will in fact absorb all the R & D resources released.

If the supply w e r e

elastic, t h e n s i n c e t h e d e c r e a s e in military d e m a n d w o u l d r e d u c e t h e

overall

d e m a n d a n d t h e r e f o r e t h e p r i c e , o n e w o u l d e x p e c t s o m e d i v e r s i o n of resources now u s e d by the military to other p u r p o s e s .

R&D

T h e c o n s t a n c y of the R & D

fraction in the entire e c o n o m y d o e s suggest an inelastic supply of R & D r e s o u r c e s , so that in fact they w o u l d all flow to the private sector. T h i s s u g g e s t s a m o d e l for a n a l y z i n g the effect of a b u d g e t cut.

Preliminary

c a l c u l a t i o n s by Junjie Li a n d myself a l o n g t h e s e lines do not lead to any great d e p a r t u r e f r o m the results predicted in Section 2.2, that is, roughly an increase in private use e q u a l to the d e f e n s e budget cut (apart f r o m the effect of the e x c e s s b u r d e n of t a x a t i o n ) . H o w e v e r , t h e m e t h o d s are so s c h e m a t i c t h a t not

much

confidence should be placed in t h e m . T h e r e is one more point that s h o u l d be m e n t i o n e d .

A n o t h e r strand of the new

g r o w t h e c o n o m i c s a n d of t h e earlier literature w h i c h it e c h o e s is t h e role of externalities.

In s o m e v e r s i o n s of t h e t h e o r y , it is a s s u m e d t h a t t h e r e

are

c o n s i d e r a b l e externalities, particularly with r e g a r d to t h e c r e a t i o n of k n o w l e d g e ; t h u s , k n o w l e d g e c r e a t e d by t h e use of R & D r e s o u r c e s in o n e f i r m or s e c t o r increases productivity in other sectors, e v e n t h o u g h the latter do not pay for t h e s e resources.

It h a s

sometimes

been

argued that

military

externalities ("spillover effects") on the civilian e c o n o m y . true of electrronics.

R&D

has

created

This w o u l d be particularly

U n q u e s t i o n a b l y , the d e m a n d for radar stations with m i n i m a l

m a i n t e n a n c e for d e t e c t i o n of i n c o m i n g ballistic missiles in the 1950's w a s a great stimulus to the d e v e l o p m e n t of transistors.

T h e r e is a g e n e r a l i m p r e s s i o n that the

military d e m a n d s in the last twenty y e a r s are so remote f r o m civilian r e q u i r e m e n t s that very little spillover has o c c u r r r e d .

If this is t r u e , the v i e w that d e f e n s e R & D

e n h a n c e s civilian productivity w o u l d not hold. 2.5

Political

Economy

In a n a l y z i n g the effect of a cut in d e f e n s e e x p e n d i t u r e s on the e c o n o m y , we c a n n o t forget t h e influence of t h e political s y s t e m on t h e c h o i c e , d i r e c t i o n , a n d m a g n i t u d e of the reductions.

I simply lay out the directions in w h i c h t h e analysis

has to g o , a n d m u c h of it is hardly surprising. T h e q u e s t i o n s do raise s o m e issues a b o u t t h e a n a l y s i s of public c h o i c e in a d y n a m i c c o n t e x t a n d a b o u t returns to scale in the political field.

increasing

Economies of Arms

Reduction

65

A reduction in military e x p e n d i t u r e s typically has a negative e c o n o m i c effect on s o m e subset of the population. Clearly, there is a direct e c o n o m i c gain to part of the p o p u l a t i o n , n a m e l y the t a x p a y e r s a n d t h o s e to w h o m public e x p e n d i t u r e s will be redirected.

I n d e e d , apart from the public g o o d s v a l u e of t h e military e x p e n d i t u r e s ,

any r e d u c t i o n in d e f e n s e e x p e n d i t u r e s is trivially a s o c i a l g a i n .

Yet h o l d e r s of

s p e c i a l i z e d a s s e t s , i n c l u d i n g h u m a n skills, m a y w e l l lose by a r e d i r e c t i o n of demand.

A classical e x a m p l e , a g a i n in t h e n e w s p a p e r s as this is being written, is

the possible c l o s i n g of b a s e s .

T h e D e f e n s e D e p a r t m e n t has long m a d e clear its

p r e f e r e n c e for c l o s i n g m a n y of the b a s e s n o w b e i n g u s e d a n d has a l w a y s f o u n d public opposition represented politically by c o n g r e s s m e n f r o m t h e affected districts. S o m e of this p e r c e i v e d loss may be illusory, by individuals w h o do not realize the value of their assets in the alternative u s e s c r e a t e d by the r e l e a s e d d e m a n d .

But

i m m o b i l i t y of r e s o u r c e s b e t w e e n p l a c e s a n d b e t w e e n s e c t o r s is real e n o u g h , particularly o v e r periods of t i m e w h i c h are long e n o u g h to matter to individuals, even t h o u g h they are short on s o m e longer national time scale. Of c o u r s e , shifts in d e m a n d are o c c u r r i n g all the t i m e for r e a s o n s o t h e r t h a n c h a n g e s in t h e level of military e x p e n d i t u r e s : i n n o v a t i o n , f o r e i g n c o m p e t i t i o n , population movements. forces of the market.

M a n y of t h e s e are a l l e v i a t e d , if not totally offset, by the

Labor a n d capital m a d e idle by d e m a n d shifts will be u s e d in

other s e c t o r s , if at a r e d u c e d level of c o m p e n s a t i o n ; land rents will fall; a n d of course in the United States e c o n o m y migration of labor is a l w a y s present. The

logic of political e c o n o m y

does

have some

interesting

problems

of

a s y m m e t r y b e t w e e n gainers a n d losers.

R e d u c t i o n s in d e f e n s e e x p e n d i t u r e s , as I

have r e m a r k e d , are a net private g a i n .

T h e losses to s o m e w o r k e r s a n d asset-

holders are more t h a n offset

by the g a i n s to o t h e r s .

If one t a k e s a naive m o d e l ,

w h e r e r e n t - s e e k i n g effort is p r o p o r t i o n a l to the g a i n s at s t a k e , t h e n t h e political p r e s s u r e f r o m the potential g a i n e r s s h o u l d o u t w e i g h the o p p o s i t i o n of t h e losers. T h e r e are of c o u r s e a n u m b e r of o b j e c t i o n s w h i c h c o u l d be m a d e to this s i m p l e argument.

O n e is a q u e s t i o n of returns to s c a l e .

T h e cost of mobilizing political

s u p p o r t m a y be p r o p o r t i o n a l to the n u m b e r of i n d i v i d u a l s i n v o l v e d ; h e n c e , for a g i v e n total s t a k e , it is e a s i e r to exert p r e s s u r e if the n u m b e r of g a i n e r s is s m a l l . M a n y military e x p e n d i t u r e s are highly c o n c e n t r a t e d by firm a n d by g e o g r a p h i c a l a r e a , w h i l e t h e b e n e f i t s to t a x p a y e r s a n d to t h e s e c t o r s to w h o m the e x p e n d i t u r e s will flow are w i d e l y s p r e a d .

reduced

A s e c o n d p r o b l e m , w h i c h is frequently

a d d u c e d in the determination of tariffs a n d other restrictions on foreign t r a d e , is that the losing industries exist while the g a i n s will accrue only in the future.

In e c o n o m i c

theory, gains a n d losses w o u l d be equally effective; but it is s o m e t i m e s a r g u e d that in a d e m o c r a t i c society the future industries do not get equal weight.

K.J. Arrow

66

Finally, it s h o u l d be noted that t h e r e are policies w h i c h might help to c o n v e r t potential to actual Pareto i m p r o v e m e n t s .

I refer to a d j u s t m e n t aid for retraining

laborers a n d assisting in the redirection of m a n a g e m e n t , especially in s m a l l firms. Such policies exist today for meeting a d j u s t m e n t s to i m p o r t - i n d u c e d shifts a n d have b e e n very s u c c e s s f u l in S w e d e n .

A d j u s t m e n t policies are p r o v i d e d in c o n n e c t i o n

with current d e f e n s e cuts, but I do not k n o w how effective they are.

2.6

Final

Remark

It is probably true that the misallocation d u e to the a r m s race is not m u c h more than the direct e x p e n d i t u r e s .

This is still a fairly large s u m , 3 % or 4 % of national

income. It may be recalled that Robert Fogel (1964) attracted m u c h critical attention for arguing that the net gain d u e to the existence of railroads w a s approximately 5 % of national i n c o m e in 1890. This w a s held to be too low a figure for what a p p e a r e d to be the obviously large role of railraods in 19th c e n t u r y e c o n o m i c d e v e l o p m e n t . Yet a little calculation s h o w e d that it c o n s t i t u t e d p e r h a p s 2 0 % of t h e g a i n in total factor p r o d u c t i v i t y o v e r t h e relevant p e r i o d , by no m e a n s a trivial p r o p o r t i o n . Similarly a cut of 5 0 % in d e f e n s e e x p e n d i t u r e s will constitute a major addition to g r o w t h in disposable national i n c o m e in a five-year period. N e e d l e s s to say, the major e c o n o m i c c a s e for d e f e n s e e x p e n d i t u r e cuts is the reduction in the probability a n d cost of war, the e c o n o m i c c o n s e q u e n c e s of w h i c h are only too easy to predict.

Footnotes *This w o r k w a s a i d e d by the C e n t e r for E c o n o m i c Policy R e s e a r c h at S t a n f o r d University.

I a m greatly indebted to my research assistant, Junjie Lie. T h e P a p e r

w a s originally p r e s e n t e d to the C o n f e r e n c e on t h e E c o n o m i c s of D i s a r m a m e n t at Notre D a m e University, under the s p o n s o r s h i p of E c o n o m i s t s A g a i n s t t h e A r m s Race and the

Institute of I n t e r n a t i o n a l

R e l a t i o n s of N o t r e

Dame

University,

N o v e m b e r , 1990. References A r r o w , K.J. ( 1 9 8 8 ) . G e n e r a l e c o n o m i c t h e o r y a n d the e m e r g e n c e of t h e o r i e s of e c o n o m i c d e v e l o p m e n t . In K.J. A r r o w (ed.), The Balance Agriculture

in Economic

Development,

Between

Industry

and

V o l u m e 1 (Basic Issues). B a s i n g s t o k e

Economies of Arms

and

London:

Macmillan

Reduction

in a s s o c i a t i o n

with

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the

International

Economic

A s s o c i a t i o n , pp. 2 2 - 3 2 . B a l l a r d , C . L , S h o v e n , J . B . a n d W h a l l e y , J . ( 1 9 8 5 ) . T h e total w e l f a r e cost of the U n i t e d S t a t e s t a x s y s t e m : a g e n e r a l e q u i l i b r i u m a p p r o a c h . National Journal,

Tax

3 8 , 125-140.

B a r a n , P. ( 1 9 6 9 ) . E c o n o m i c p r o g r e s s a n d e c o n o m i c s u r p l u s . In P. B a r a n , Longer

View,

New York and London: Monthly Review Press, pp. 271-307.

Reprinted from Science

and Society,

1953.

B r o w n i n g , E.K. ( 1 9 7 6 ) . T h e m a r g i n a l c o s t of p u b l i c f u n d s . Journal Economy,

The

of

Political

84, 2 8 3 - 2 9 8 .

F o g e l , R. ( 1 9 6 4 ) . Railroads

and

American

economic

growth.

Baltimore: Johns

Hopkins University Press. J o r g e n s o n , D., a n d Y u n , K.-Y. ( 1 9 9 0 ) . T h e e x c e s s b u r d e n of t a x a t i o n in the U.S. Unpublished. Kaufman, W.W.

(1990).

Glasnost,

perestroïka,

and

U.S.

defense

spending.

W a s h i n g t o n , D.C.: Brookings. K y d l a n d , F., a n d Prescott, E. (1980). A c o m p e t i t i v e t h e o r y of f l u c t u a t i o n s a n d the feasibility a n d desirability of stabilization policy. In S. F i s c h e r (ed.) Expectations

and Economic

Policy.

Rational

C h i c a g o a n d L o n d o n : University of C h i c a g o

Press. N u r k s e , R. ( 1 9 5 3 ) . Problems

of capital

formation

in underdeveloped

countries.

O x f o r d : O x f o r d University Press. R o m e r , P. ( 1 9 8 6 ) . I n c r e a s i n g returns a n d long run g r o w t h . Journal Economy,

of

Political

94, 1 0 0 2 - 1 0 0 3 7 .

R o s e n s t e i n - R o d a n , P.N. ( 1 9 4 3 ) . P r o b l e m s of i n d u s t r i a l i z a t i o n s o u t h e a s t e r n Europe. Economic

Journal,

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and

53, 202-211.

S o l o w , R.M. ( 1 9 5 7 ) . T e c h n i c a l c h a n g e a n d t h e a g g r e g a t e p r o d u c t i o n f u n c t i o n . Review Tinbergen,

of Economics J.

(1942).

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and Statistics, Zur

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39, 312-320. de

langfristigen

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T o b i n , J . ( 1 9 7 5 ) . K e y n e s i a n m o d e l s of r e c e s s i o n a n d d e p r e s s i o n . Economic

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Y o u n g , A.A. (1928). Increasing returns a n d e c o n o m i c progress. Economic 38, 5 2 7 - 5 4 2 .

American Journal,

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Economies of Arms Reduction and the Peace Process W. Isard and C H . Anderton (Editors) 1992 Elsevier Science Publishers B.V.

Chapter

3

IMPACT OF MILITARY CUTS ON SOVIET

AND

EASTERN

MODELS Lawrence

EUROPEAN

AND

R. Klein, Miroslaw

THE

ECONOMIES:

SIMULATIONS Gronicki

and Hiroyuki

Kosaka

University of P e n n s y l v a n i a edited by Walter

Isard

Cornell University

[The survey of chapter 1 lays out past and current contributions of economists to the peace economics literature, and the Arrow paper provides a broad look at the contributions of four different approaches in economic analysis. We now wish to probe deeply into critical theoretical and actual problems. There are many ways in which we can organize the different contributions of the scholars that follow. However, at the time of writing, an extremely critical problem of world-wide interest was the impact of the revolutionary political changes taking place in Eastern Europe and Soviet Asia upon the nations and regions involved as well as those in Western Europe and elsewhere. We therefore begin with the contributions of Klein, Gronicki and Kosaka. Their focus is on the Impact of Military Cuts on the Soviet and Eastern European Economies, a contribution which falls within Arrow's category: Macroeconomic Stability Analysis. With the information now available the authors are able to dig more deeply than ever before into the past and evolving economic structures in Eastern Europe. They add to our knowledge of the effects of military expenditures upon the development of totalitarian economies with a set of scenarios realistic for the turn of the decade, (eds.)]

3.1

Preface B e c a u s e of v i s a a n d other p r o b l e m s c a u s e d by the recent political u p h e a v a l s in

Eastern Europe, it w a s not possible for L a w r e n c e R. Klein a n d Miroslaw Gronicki to c o m p l e t e the w o r k for the paper to be p r e s e n t e d in this chapter.

However, because

of the importance of their w o r k for the d e v e l o p m e n t of p e a c e e c o n o m i c s a n d for the analysis of p r o b l e m s currently confronting the Eastern E u r o p e a n c o u n t r i e s a n d the republics e m e r g i n g f r o m the partial (or full?) d i s s o l u t i o n of t h e Soviet U n i o n , the senior editor of this book u n d e r t a k e s in w h a t follows a pulling t o g e t h e r , hopefully

L.R. Klein, M. Gronicki and H. Kosaka

70

effective, of several of their past a n d currently u n p u b l i s h e d contributions plus s o m e of his o w n appraisal of the work of Klein, Gronicki a n d K o s a k a . Section 3.2 is an edited version of an introductory s t a t e m e n t written by Miroslaw Gronicki alone in the S p r i n g , 1 9 9 1 .

Section 3.3 is a c o n c i s e r e s t a t e m e n t by the

editor of the K l e i n - K o s a k a a r m s race s u b m o d e l , an ingredient of both the m o d e l of section 3.4 a n d the model used to g e n e r a t e the simulations of section 3.5.

Section

3.4 is a m o d e l of a Centrally P l a n n e d e c o n o m y d e v e l o p e d by M i r o s l a w G r o n i c k i a l o n e ; it represents a further d e v e l o p m e n t of t h e Klein-Gronicki m o d e l b e h i n d the s i m u l a t i o n s of section 3.5.

Section 3.5 p r e s e n t s s o m e u n p u b l i s h e d s i m u l a t i o n s

from the 1990 Klein a n d Gronicki m o d e l , important for the insights they yield on the f u n c t i o n i n g of centrally p l a n n e d e c o n o m i e s a n d useful for c o m p a r a t i v e a n a l y s i s . Section 6 contains concluding remarks by the senior editor. 3.2.

Introductory Remarks (By Miroslaw

Gronicki)

It is possible that e c o n o m i c a n d strategic relations b e t w e e n East a n d W e s t are n o w c h a n g i n g t o w a r d a m o d e of c o e x i s t e n c e .

T h e l e a d e r s of W a r s a w

Pact

countries have a c k n o w l e d g e d f o r m e r difficulties a n d the late 8 0 s b e c a m e a period of serious e c o n o m i c a n d political reform. in all countries of the Pact.

Now, military cuts have b e e n a n n o u n c e d

In D e c e m b e r 1988, Soviet leader G o r b a c h e v p r o p o s e d

unilateral c u t s of 1 0 % in military s p e n d i n g a n d a r e d u c t i o n of 5 0 0 , 0 0 0 in a r m y forces.

After the huge budget deficit (which according to s o m e e s t i m a t e s r e a c h e d

9 % of the Soviet G N P ) w a s revealed, further cuts w e r e p r o p o s e d , w h i c h a m o u n t to a total reduction of 1 4 . 2 % in military s p e n d i n g . Similar cuts have b e e n p r o p o s e d by leaders of other W a r s a w Pact c o u n t r i e s :

for e x a m p l e , P o l a n d plans to r e d u c e its

military b u d g e t by a b o u t 4 0 % a n d to d i s s o l v e s e v e r a l a r m y u n i t s , d e c r e a s i n g military personnel by 5 0 % .

Moreover, the G D R a r m y d i s a p p e a r e d after unification.

At the s a m e t i m e , G o r b a c h e v i m p l e m e n t e d withdrawal of s o m e Soviet c o n v e n t i o n a l f o r c e s f r o m E a s t e r n E u r o p e a n d p r o p o s e d f u r t h e r r e d u c t i o n s in s t r a t e g i c

and

conventional forces during d i s a r m a m e n t talks. In 1 9 8 9 , after r e v o l u t i o n a r y c h a n g e in E a s t e r n E u r o p e , t h e W a r s a w practically d i s a p p e a r e d .

Pact

In 1990 c o m m u n i s t regimes w e r e o u s t e d in e a c h country

of the region a n d new g o v e r n m e n t s d e m a n d e d a c o m p l e t e w i t h d r a w a l of the Soviet forces a n d formal dissolution of the W a r s a w Pact.

T h e s e d e m a n d s a n d unification

of G e r m a n y in O c t o b e r 1990 led in April 1991 to t h e d i s s o l u t i o n of all f o r m a l institutions of the W a r s a w Pact. T h i s n e w political situation will not only influence the internal politics in the region.

It may also affect the world's security, b e c a u s e first E a s t e r n E u r o p e will

Military Cuts and the Soviet and East European

Economies

71

create a buffer b e t w e e n the W e s t a n d the Soviet U n i o n , a n d s e c o n d t h e r e will be a need for new political a n d military alliances. Political c h a n g e s a n d b o l d e c o n o m i c r e f o r m s in E a s t e r n E u r o p e will significant impact on the military sector in the e c o n o m y .

have

It is highly probable that the

share of military related expenditure in G N P will be cut significantly but the question is: w h a t will be the influence of military cuts on the e c o n o m y as a w h o l e . Will they i m p r o v e e c o n o m i c p e r f o r m a n c e or will t h e y further e x a c e r b a t e existing e c o n o m i c difficulties? A properly f o r m u l a t e d e c o n o m i c analysis of f o r m e r a n d current r e g i m e s will be useful for an ex post e x a m i n a t i o n of the transition p r o c e s s , as well for g u i d i n g a n d analyzing e c o n o m i c reform a n d its impact on the military in the short t e r m . T h e r e are significant r e l a t i o n s h i p s b e t w e e n military s p e n d i n g a n d e c o n o m i c p e r f o r m a n c e ; their effects on the e c o n o m y d e p e n d on the e c o n o m i c s y s t e m a n d the phase of b u s i n e s s cycle.

In market e c o n o m i e s , increases in military outlays during

t i m e s of e c o n o m i c slack may be beneficial in providing j o b s , but in periods of full c a p a c i t y utilization t h e y may c a u s e i n f l a t i o n .

In C e n t r a l l y P l a n n e d

Economies

( C P E s ) , i n c r e a s e s in military e x p e n d i t u r e s m a y i n c r e a s e t h e hidden inflation a n d r e d u c e the s u p p l y of civilian g o o d s . expenditure

may

have the same

In t h e r e f o r m i n g e c o n o m y c u t s in military

n e g a t i v e effect as in t h e m a r k e t

economy

d e p e n d i n g , however, on the significance of the military sector in the e c o n o m y a n d on the level of i m b a l a n c e s .

It is t h u s interesting to ask w h e t h e r c u t s in military

expenditures might improve the e c o n o m i c p e r f o r m a n c e of t h e s e countries.

In other

w o r d s , how m u c h can military cuts help the reforming East E u r o p e a n c o u n t r i e s ? O v e r the y e a r s , there has b e e n a d e b a t e about the impact of d e f e n s e s p e n d i n g on the Soviet t y p e e c o n o m i e s .

[Earlier results are g i v e n , for e x a m p l e , in Pryor

( 1 9 6 8 ) ; m o r e recent o n e s c a n be f o u n d in B e c k e r (1985) a n d R o s e n f i e l d e 1987)]. A c c o r d i n g to a series of UN reports [United Nations (1972), (1977), (1981), (1982)] military s p e n d i n g resources

may

is m a i n l y improve

the

unproductive overall

a n d an a p p r o p r i a t e

performance

of t h e

reallocation

economy.

of

Other

r e s e a r c h e r s , for e x a m p l e , Benoit ( 1 9 7 3 ) , S m i t h ( 1 9 7 7 ) , a n d A d a m s et al (1988), (1989), c l a i m that military s p e n d i n g , especially in the d e v e l o p i n g e c o n o m i e s , has positive effects on e c o n o m i c g r o w t h . Gronicki a n d Klein (1988, 1989) s u g g e s t that the military sector in a Centrally P l a n n e d E c o n o m y ( C P E ) is s e p a r a t e d to s u c h an e x t e n t that a n y a t t e m p t s to a c c e l e r a t e g r o w t h a n d i n c r e a s e e f f i c i e n c y of t h e e c o n o m y may fail d u e to the inefficient civilian sector.

T h e civilian sector of a C P E

has a l w a y s b e e n t r e a t e d as of l e s s e r i m p o r t a n c e a n d , unlike t h e s i t u a t i o n in W e s t e r n e c o n o m i e s , spin-off of R & D from the military to civilian sector has usually been d e l a y e d a n d w e a k .

LR. Klein, M. Gronicki and H. Kosaka

72

3.3

The Klein-Kosaka A r m s Race S u b m o d e l (by Walter

Isard)

In Klein a n d K o s a k a (1988), as s u m m a r i z e d in Isard (1988), a n d in c h a p t e r 1 of this book, an initial attempt is m a d e to capture the d y n a m i c s of the a r m s race within J

a multi-nation econometric m o d e l . Recognizing that a r m s s p e n d i n g M E of a nation J is potentially affected by the s p e n d i n g of other nations Κ (K = A , . . , U ; Κ Φ J ) ; that lags are involved in this relationship a n d that J's spending is in a major w a y directly J

related to its G D P , Klein a n d Kosaka specify: A

A

MEJ . rME .. ME* M E J x/( t ..1 M E A/ A1x MEU GDpJ· G D P ^ ^"GDPÜ^

Using forecasts of G D P

K

"

1

)

(K = A,...,J,...,U) over a relevant time period from the basic

LINK Model, they then determine M E

K

(K = A , . . . , J , . . . , U ) .

A l s o , since military

expenditures may be j u d g e d to strain the resources of an e c o n o m y a n d thus affect K

its price level P , t h e relationship (3.1) may be m o d i f i e d to i n c o r p o r a t e the variables.

However, M E

J

J

is part of J's g o v e r n m e n t s p e n d i n g G .

P

K

H e n c e , there is

f e e d b a c k captured by the relationship J

G ( t ) = f 2(MEJ(t),... l)

(3.2)

w h i c h leads to new projected v a l u e s of G D P are t h e n r e q u i r e d .

J

J

and P .

Iterations of this procedure

Klein a n d K o s a k a t h u s e x t e n d e d t h e basic L I N K m o d e l to

incorporate these relationships for 19 countries (including U S a n d U S S R ) a n d the N A T O bloc w h o s e variables w e r e t a k e n to be s u m s of m e m b e r country variables. T a b l e 1.1 in C h a p t e r 1 r e c o r d s s o m e of t h e m o d e l ' s o u t c o m e s .

In Klein a n d

Gronicki (1990), the a r m s race s u b m o d e l is e x t e n d e d to c o v e r E a s t e r n E u r o p e a n countries. 3.4 A M o d e l o f t h e C e n t r a l l y P l a n n e d E c o n o m y (by Miroslaw

(CPE)

Gronicki)

T h e e c o n o m e t r i c m o d e l s of the Soviet U n i o n a n d East E u r o p e a n

countries

a s s u m e that the "official e c o n o m y " (socialized sector) in the u n r e f o r m e d e c o n o m y is in a state of p e r m a n e n t d i s e q u i l i b r i u m (that is, in a l m o s t all p e r i o d s d e m a n d is greater than supply).

In m o d e l i n g s u c h an e c o n o m y , m e t h o d s of d i s e q u i l i b r i u m

e c o n o m e t r i c s must be applied (for a review see Q u a n d t , 1987). S u c h m o d e l s have b e e n f o r m u l a t e d according to propositions of recently d e v e l o p e d e c o n o m i c theory,

( 3

Military Cuts and the Soviet and East European

for e x a m p l e Balicki ( 1 9 8 3 ) , a n d B e n a s s y ( 1 9 8 4 ) . c o m p r i s e d of the f o l l o w i n g s e c t o r s :

Economies

73

T y p i c a l m o d e l s of C P E s are

the state s e c t o r ( i n c l u d i n g , inter

alia,

state

o w n e d enterprises, the military sector, a n d state a n d local b u d g e t s ) ; the h o u s e h o l d sector; the private sector; a n d the foreign trade sector. T h e "official e c o n o m y " consists of the state a n d foreign trade sectors, a n d of the h o u s e h o l d supply of labor t o , a n d d e m a n d for c o n s u m e r g o o d s f r o m , t h e official economy. economies.

A s is w e l l k n o w n , C P E s differ in i m p o r t a n t r e s p e c t s f r o m

market

A c c o r d i n g l y , e c o n o m e t r i c m o d e l s of t h e s e e c o n o m i e s differ in their

a p p r o a c h a n d formulation. Probably the most important difference b e t w e e n models of C P E s a n d market e c o n o m i e s (for e x a m p l e , see C h a r e m z a a n d G r o n i c k i , 1 9 8 8 ) is an explicit examination of the state sector a n d the treatment of the supply side of the economy.

B e c a u s e of the a s s u m p t i o n of m a c r o e c o n o m i c d i s e q u i l i b r i u m , financial

flows are of limited use in explaining historical d a t a . that s o m e

economies were somewhat

more

A l t h o u g h it might be a r g u e d

monetized than a typical

CPE,

enterprises still operated according to the dictates of the plan. In C P E s a n d also in the reformed e c o n o m i e s , t h e private sector is substantially smaller t h a n in a typical market e c o n o m y a n d therefore it is not a n a l y z e d in detail. A more precise f o r m u l a t i o n of c o n s u m e r a n d enterprise b e h a v i o r w o u l d explicitly include interactions b e t w e e n the official a n d unofficial sectors, but there is a lack of sufficient d a t a for a p r o p e r a n a l y s i s .

T h e only readily o b s e r v a b l e i n d i c a t o r of

s e c o n d e c o n o m y activity is the b l a c k - m a r k e t e x c h a n g e - r a t e (with t h e e x c e p t i o n of P o l a n d since 1990).

A c c o r d i n g l y , the b l a c k - m a r k e t e x c h a n g e - r a t e is u s e d as an

indicator of the spillovers from the official to unofficial m a r k e t s .

1

T h e p r o p o s e d m o d e l is d e v e l o p e d a l o n g t h e lines of C h a r e m z a a n d G r o n i c k i (1988).

C o n s u m e r s are a s s u m e d to m a x i m i z e a traditional utility f u n c t i o n of the

form: U = U(C, L, M/p)

(3.3)

subject to the budget constraint: M 0 + w L = pC + M

(3.4)

w h e r e C is c o n s u m p t i o n , L is labor s u p p l i e d by t h e c o n s u m e r , Mo is initial w e a l t h (cash p l u s s a v i n g s ) , M is final w e a l t h , ρ a r e p r i c e s , a n d w are w a g e s .

2

In an

e c o n o m y w i t h o u t quantity c o n s t r a i n t s , m a x i m i z a t i o n of the utility f u n c t i o n yields a Walrasian consumption demand: C

d

d

= C ( w , p, M 0)

(3.5)

L.R. Klein, M. Gronicki and H. Kosaka

74

W a l r a s i a n labor s u p p l y : s

(3.6)

L = LS(w, p, Mo) a n d W a l r a s i a n d e m a n d for m o n e y : d

M

= M

d

(3.7)

(w, p, Mo)

However, in the present analysis, the hypothesis of " o v e r a l l - e x c e s s - d e m a n d " for g o o d s t r a d e d on official markets is a s s u m e d . d

3

T h e r e f o r e , the W a l r a s i a n d e m a n d ,

s

C , a n d W a l r a s i a n labor supply, L , are not a p p l i c a b l e .

Instead, agents choose

d

s

effective c o n s u m p t i o n d e m a n d s , C , a n d effective labor s u p p l i e s , L , b a s e d on applicable constraints. s

T h e a m o u n t of the c o n s u m p t i o n g o o d available, C , is a s s u m e d to be less than d

the effective a m o u n t d e m a n d , C .

Hence the a m o u n t t r a n s a c t e d , Cq, is equal to the

s

a m o u n t provided, C . T h u s : Cs = Cq < C

d

(3.8)

In t u r n , this implies that the a m o u n t of labor s u p p l i e d to t h e e c o n o m y will be effected by the quantity of the c o n s u m p t i o n g o o d available. That is, the existence of constraints on the c o n s u m p t i o n market f e e d back into labor supply.

T h e r e f o r e , the

earlier equation for labor supply ( m e a s u r e d in "efficiency units") must be modified to reflect the availability of c o n s u m p t i o n g o o d s : s

L = Ls(w, p, M 0, Cq)

(3.9)

A g a i n , a s s u m i n g e x c e s s d e m a n d for labor, the a m o u n t of labor t r a n s a c t e d e q u a l s the supply. That is: L

d

In

> i_q = i_s determining

(3.10) consumption

demand,

agents

adjust

their

N o n e t h e l e s s , it is a s s u m e d t h a t c o n s u m p t i o n d e m a n d e x c e e d s

labor

supply.

consumption

supply. T h u s : C

d

= C

d

(w, p, M 0 , Lq)

(3.11)

S t a n d a r d e c o n o m e t r i c models of C P E s generally a s s u m e that p l a n n e r s treat the s u p p l y of c o n s u m p t i o n g o o d s as a r e s i d u a l in the p l a n n i n g p r o c e s s .

T h a t is

Military Cuts and the Soviet and East European

Economies

75

i n v e s t m e n t a n d d e f e n s e receive priority in t h e n o n - m o n e t i z e d a l l o c a t i o n s y s t e m , and consumption

m a r k e t s are s u p p l i e d "last."

In C z e c h o s l o v a k i a ,

however,

c o n s u m p t i o n s u p p l y w a s t h e p r o d u c t of d e l i b e r a t e p l a n n i n g w h i c h a t t e m p t e d to maintain the s t a n d a r d of living. T h u s , c o n s u m p t i o n supply c a n be a s s u m e d to be a function of p l a n n e d o u t p u t : C

S

4

S

= C (QP)

(3.12)

w h e r e QP is p l a n n e d output. T h e a s s u m p t i o n that c o n s u m p t i o n d e m a n d e x c e e d s c o n s u m p t i o n supply implies that C

d

is not d i r e c t l y

observable,

e c o n o m e t r i c s s h o u l d be a p p l i e d .

and

hence techniques

of

disequilibrium

O n e possible m e t h o d o l o g y to a n s w e r q u e s t i o n s

regarding the unobservability of d e m a n d is t h e specification of an e x c e s s - d e m a n d adjustment e q u a t i o n . T h e e c o n o m i c "center" is a s s u m e d to adjust plan variables to " s o m e extent" e n d o g e n o u s l y , taking into a c c o u n t current output as well a s current disequilibrium. P l a n n e d c o n s u m p t i o n o u t p u t in t h e next p e r i o d , C P + i , is a s s u m e d to be a fraction of p l a n n e d total output in the next p e r i o d , QP+-|.

Moreover, the c h a n g e in

p l a n n e d c o n s u m p t i o n output o v e r current c o n s u m p t i o n output is a s s u m e d to be a fraction of the c h a n g e in p l a n n e d total output o v e r current total output.

T h u s , the

adjustment of p l a n n e d c o n s u m p t i o n may be represented a s : C P +i - C q = a ( Q P +1 -QQ)

(3.13)

P l a n n e d output is b a s e d , inter alia, on current d i s e q u i l i b r i u m on the c o n s u m p t i o n market: d

QP+1 - Q q = g i ( C - C q )

(3.14)

T h e n , given appropriate restrictions, this equation may be inverted in order to derive an o p e r a t i o n a l e x p r e s s i o n for a d j u s t m e n t to d i s e q u i l i b r i u m on t h e c o n s u m p t i o n market: C d - C q = f i ( Q P +1 -QQ)

(3.15)

Planners are also able to adjust w a g e s a n d prices in order to m o v e the e c o n o m y 5 6

t o w a r d s w h a t t h e p l a n n e r s c o n s i d e r to be e q u i l i b r i u m . '

T h u s , an a l t e r n a t i v e

adjustment equation for excess d e m a n d on s o m e markets for c o n s u m e r g o o d s : C

d

- Cq = f 2( A w , Δρ)

(3.15')

LR. Klein, M. Gronicki and H. Kosaka

76

Ceteris

w h e r e Δ is the first difference operator.

Paribus,

i n c r e a s i n g w a g e s will

increase e x c e s s - d e m a n d a n d increasing prices will d e c r e a s e e x c e s s - d e m a n d .

7

M a x i m i z i n g b e h a v i o r of e n t e r p r i s e s , in t h e n e o c l a s s i c a l s e n s e , is not w e l l d e f i n e d in C P E s b e c a u s e the maximization function of e n t e r p r i s e s is u n k n o w n .

In

s o m e s e n s e , the quantitative output plan can be a s s u m e d set s i m u l t a n e o u s l y with the d e m a n d for inputs, generally as a result of a bargaining p r o c e s s b e t w e e n the enterprises a n d the planning authorities. N o n e t h e l e s s , labor d e m a n d is a s s u m e d to be a f u n c t i o n of t h e future output plans:

Ld = |_d(QP+1)

(3.16)

A g a i n , g i v e n the fact that a typical C P E e c o n o m y e x h i b i t e d s t r o n g i n d i c a t i o n s of "repressed inflation," it is a s s u m e d that d e m a n d for labor e x c e e d s supply. T h u s , by a r g u m e n t s similar to those described a b o v e for the c o n s u m p t i o n market, the excess d e m a n d for labor may be represented a s :

8

Ld - L_q = f 3(QP+i - Cfl)

(3.17)

In a typical C P E , it is officially proclaimed that the state (central planners) seeks to

maximize

the

long-run

fulfillment

of s o c i a l

maximization of investment in the short-run. however,

economists

needs, generally

through

the

Early in the e x p e r i e n c e with planning,

realized and debated the danger

e c o n o m i c g r o w t h , a n d the resulting investment c y c l e s .

9

of t h i s a p p r o a c h

to

T h i s realization, c o u p l e d

with a "social c o m p a c t " to provide a "high" standard of living, creates a contrast with w h a t is c o n s i d e r e d to be typical C P E behavior.

N o n e t h e l e s s , it is a s s u m e d that

investment supply is a function of plans:

INVs = INVS(QP)

(3.18)

Investment d e m a n d is a function of plans, of the capital stock available from the previous period, K.-| , a n d of the backlog of unfinished investment, B l :

INVd = INVd(QP+i, K-i, Bl)

(3.19)

A g a i n , it is a s s u m e d that d e m a n d for investment e x c e e d s supply:

INVd > INVq = INVs

(3.20)

Military

Investment

Cuts and the Soviet and East European

Economies

p l a n s m a y be t h o u g h t of a s t h e r e a c t i o n of p l a n n e r s t o

77

current

disequilibrium in i n v e s t m e n t : INVP+1 - INVq = h i ( I N V d - INVS)

(3.21 )

a n d a d j u s t m e n t of i n v e s t m e n t may be f o u n d f r o m a t r a n s f o r m a t i o n , y i e l d i n g the adjustment e q u a t i o n : INVd - INVS

=

h ^ ^ l N V P ^ - INVQ)

(3.22)

Military e x p e n d i t u r e s , M E , may reflect t r a d e o f f s b e t w e e n c u r r e n t i n v e s t m e n t a n d military e x p e n d i t u r e s . T h u s , an alternative a d j u s t m e n t e q u a t i o n w o u l d b e : INVd - |NVs = h 2( A M E )

(3.22')

T h e stock of fixed a s s e t s e q u a l s the a m o u n t of f i x e d a s s e t s available in the previous p e r i o d , less d e p r e c i a t i o n , d, plus t h e g r o s s i n c r e m e n t of fixed a s s e t s , R, less liquidation, IK:

K = (1 -α)·Κ.ι + R - I K

(3.23)

w h e r e the gross increment of fixed assets is a function of lagged !_(·), i n v e s t m e n t s : R = R[L(U)]

(3.24)

T h e b a c k l o g of u n f i n i s h e d i n v e s t m e n t s is d e f i n e d as the s u m of t h e d i f f e r e n c e s b e t w e e n investment a n d the gross increment of fixed a s s e t s : B l = Σ (INV-i - R.j) i Typically

foreign

(3.25)

trade

has

been

monopolized

by

state

agencies

which

c o n s i d e r e d trade a source of g o o d s a n d t e c h n o l o g i e s w h i c h c o u l d not be p r o d u c e d in the state sector, a n d planners treat foreign trade as a "last refuge" for dealing with d o m e s t i c disequilibrium.

T h u s , imports in t h e current period reflect the real side of

the e c o n o m y (for e x a m p l e , fuel i m p o r t s d e p e n d on d e m a n d by the m a n u f a c t u r i n g s e c t o r ) , but i m p o r t s are a l s o a d j u s t e d a c c o r d i n g t o p r e v i o u s Previous exports act as a financial c o n s t r a i n t .

disequilibrium.

10

Exports are d e t e r m i n e d by the real side of the e c o n o m y , but affected by current d i s e q u i l i b r i u m , w h i c h m a y e n c o u r a g e p l a n n e r s to limit e x p o r t s .

Lagged exports

reflect constraints on the w o r l d market as well as (especially C M E A ) trade n o r m s .

11

L.R. Klein, M. Gronicki and H. Kosaka

78

T h e e q u a t i o n s for t h e f o r e i g n t r a d e b l o c k c a n be s p e c i f i e d a l o n g t h e lines of Gronicki a n d Klein (1989), w h e r e imports (supply) are a function of the appropriate v a r i a b l e s on the real side of the e c o n o m y , R, and/or, of c u r r e n t p l a n s , p r e v i o u s disequilibrium, (QP - CR-i), previous period exports, E X P _ i , a n d w o r l d market prices, pw

12

IMPS= IMPS[R, QP, ( Q P - Q ^ ) , E X P - i , P * ]

(3.26)

Exports (transacted) are a function of the real side of the e c o n o m y , and/or, of plans, of current disequilibrium, a n d of previous period e x p o r t s : W

EXPq = EXPq[R, QP, ( Q P +1 - Qq), E X P - i , P ) Output

13

(3.27)

by sector of origin c a n be obtained from technical production functions.

As stated a b o v e , maximizing behavior of enterprises, in the neoclassical s e n s e , is not w e l l - d e f i n e d in C P E s , b e c a u s e t h e m a x i m i z a t i o n f u n c t i o n of e n t e r p r i s e s is unknown.

T h e r e f o r e , C o b b - D o u g l a s production f u n c t i o n s are u s e d , c o n s t r a i n e d to

be h o m o g e n e o u s of degree o n e : s

Log(Q i/Lqj) = ceo + ociLog(Kj/Lqj) + ε

(3.28)

w h e r e Kj are fixed capital assets, and Lqj is labor utilized in the respective sectors. T h e supply of Q is defined to be the s u m of the c o n s u m p t i o n of material g o o d s a n d s e r v i c e s , C M ; military, M E , a n d non-military, G C , g o v e r n m e n t c o n s u m p t i o n ; investment less total d e p r e c i a t i o n , D E P R ; the c h a n g e in inventory stock, A S T ; the balance of trade, BT; a n d losses, L O S S : Q

s

= Σ QSj = CMS

+

14

(GC + ME) + (INVQ - D E P R ) + A S T + BT + L O S S

(3.29)

In order to capture the implications of subsidy reduction, s o m e budgetary flows are included in the simulation exercises.

T h e state b u d g e t deficit is d e f i n e d to be

the difference b e t w e e n expenditure a n d r e v e n u e :

BuD = EXPtot - REVtot

(3.30)

w h e r e r e v e n u e is the total of excise t a x e s , TAX2; i n c o m e t a x e s , T A X ; a n d other revenue REVoth"

REVtot = T A X 2 + T A X + REV o th

(3.31)

Military Cuts and the Soviet and East European

Economies

79

a n d e x p e n d i t u r e is t h e total of s u b s i d i e s S U B ; military e x p e n d i t u r e ; t h e n o m i n a l interest rate, i, t i m e s t h e p r e v i o u s p e r i o d s a v i n g s d e p o s i t s , S A V - i ; a n d o t h e r expenditure E X P o t h : (3.32)

EXPtot = S U B + M E + i*SAV-i + E X P o h t T h e b u d g e t deficit is f i n a n c e d either by debt or by m o n e y c r e a t i o n .

T h u s , the

c h a n g e in m o n e y , Δ Μ , e q u a l s t h e b u d g e t deficit less c h a n g e s in s a v i n g s a n d c h a n g e s in e x t e r n a l i n d e b t e d n e s s , w h e r e Δ ϋ Ε Β Τ is m e a s u r e d in d o l l a r s a n d E X C H K is the official e x c h a n g e rate.

Thus: (3.33)

Δ Μ = BuD - Δ ϋ Ε Β Τ · Ε Χ Ο Η Κ - A S A V

Equations (3.8) t h r o u g h (3.33) represent the c o m p l e t e e c o n o m i c m o d e l . 3.5

Simulation

E x e r c i s e s ( b y L a w r e n c e R.

and Miroslaw

Gronicki)

Klein

1 5 61

In this paper, w e p r e s e n t results of s i m u l a t i o n e x p e r i m e n t s in w h i c h military s p e n d i n g during the period 1 9 8 9 - 1 9 9 3 w o u l d be cut annually by:

15%, 13%, 1 1 % ,

9 % , 7 % , 5 % , 4 % , 3 % , 2 % , 1 % (in t h e first e x p e r i m e n t , it m e a n s that e x p e n d i t u r e s c o u l d be halved during the next five y e a r s ) .

military

For the c o m p a r i s o n , we

have p r o v i d e d a n o t h e r series of e x p e r i m e n t s , in w h i c h w e a s s u m e d zero g r o w t h in military e x p e n d i t u r e s a n d 1 % , 2 % , 3 % , 4 % , a n d 5 % a n n u a l g r o w t h .

Other

a s s u m p t i o n s for t h e s e e x p e r i m e n t s are t h e s a m e as u s e d for t h e latest

LINK

forecast. W e h a v e a n a l y z e d an i m p a c t of military e x p e n d i t u r e s ( d e n o t e d by M E ) on personal

consumption

(CONS),

non-military

government

spending

(GOV),

i n v e s t m e n t in " m a t e r i a l s e c t o r s " ( I N M A T ) , i n v e s t m e n t in " n o n - m a t e r i a l s e c t o r s " ( I N N M A T ) , a n d on G r o s s N a t i o n a l P r o d u c t ( G N P ) . e x p e r i m e n t s is g i v e n in the a t t a c h e d g r a p h s .

T h e s u m m a r y of s i m u l a t i o n

A s s u m i n g that there will not be any

significant s t r u c t u r a l c h a n g e s in t h e W a r s a w Pact e c o n o m i e s a n d that c u r r e n t e c o n o m i c trends will be p r e s e r v e d the following c o n c l u s i o n s c a n be d r a w n : 1) T h e trade-off b e t w e e n civilian s p e n d i n g (excluding i n v e s t m e n t in t h e militaryo r i e n t e d material s e c t o r s I N M A T ) a n d military s p e n d i n g is e x p e c t e d to be w e a k ; Poland a n d H u n g a r y c o u l d be t h e only e x c e p t i o n s (see the full set of charts). former

has

still

unutilized

capacity

in i n d u s t r y

and

has

recently

The

improved

m a c r o e c o n o m i c efficiency. T h e latter has the e c o n o m i c structure w h i c h is closest to

LR. Klein, M. Gronicki and H. Kosaka

80

that of the market e c o n o m y a n d c o u l d a c c o m m o d a t e t h e military cuts.

In the other

countries g r a p h s s h o w limited trade-offs (the curves are relatively flat, w h i c h m e a n s that response to the military cuts is w e a k ) . 2) T h e highest growth rates of c o n s u m p t i o n (see chart 3.2 a n d the c o n s u m p t i o n curve of chart 3.1) are for Poland a n d H u n g a r y ( 7 . 2 % a n d 4 . 5 % respectively for the e x p e r i m e n t with t h e largest, 1 5 % , c u t s ) .

T h e g r o w t h rates of c o n s u m p t i o n for

R o m a n i a are distinctly l o w e r t h a n in t h e rest of t h e W a r s a w Pact.

It c a n be

e x p l a i n e d by the e c o n o m i c policy of C a u s e s c u a i m e d at r e p a y m e n t of all d e b t s . T h e c o s t s of this policy a r e :

s m a l l i n v e s t m e n t in " n o n - m a t e r i a l " s e c t o r s , a n d

u n d e r c a p i t a l i z e d light industry.

In order to o v e r c o m e this policy a p e r i o d longer

than 5 years w o u l d be required.

Chart 3.1 :

Soviet Union. Military Expenditures versus Consumption, Investment in Nonmaterial Sectors, Nonmilitary Government Expenditures, Investment in Material Sectors, and GNP

-2

h

-15

0 -1 β Ο β A n n u la P e r c e n t ea g C h a neg in M i l i t ay r E x p e n d i t su r e

CONS

INNMAT _ i _t GOV

INUAT

GNP

0

1

Military Cuts and the Soviet and East European Economies

Chart 3.2:

81

Personal Consumption versus Military Expenditure

-15

- 31

-1

9-

7-

3UL

-5

CZY

4-

3-

GDR

2-

^ _

1-

HUN

0

_ , _ POL

1

2

3

4

5

ROM

3) T h e pattern of r e s p o n s e s of non-military g o v e r n m e n t c o n s u m p t i o n a n d " n o n material" investment (see Charts 3.3 a n d 3.4 a n d the c o r r e s p o n d i n g c u r v e s of Chart 3.1) is the s a m e as in the c o n s u m p t i o n c a s e .

In t h e m o s t optimistic e x p e r i m e n t

( 1 5 % cuts in military spending) for all the c o u n t r i e s of the region, the g r o w t h rates for the g o v e r n m e n t spending are lower t h a n for " n o n - m a t e r i a l " investment. Chart 3.3:

Government Expenditures versus Military Expenditures

ME _ S _

3UL

^

CZY

GDR

HUN

POL

ROM

L.R. Klein, M. Gronicki and H. Kosaka

82

Chart 3.4:

Investment in Non-material Sectors (INNMAT) versus Military Expenditures

-15

- 31

-1

9-

7-

5-

4-

3-

2-

1-

C

1

2

3

4

6

ME

_ B_ B U L

CZY

GDR

HUN

PCL

ROM

4) T h e g r o w t h rates for " m a t e r i a l " i n v e s t m e n t (see C h a r t 3.5 a n d t h e I N M A T c u r v e of C h a r t 3.1) b e h a v e in a d i f f e r e n t w a y , a s t h e y a r e , in m o s t c o m p l e m e n t s for military s p e n d i n g . rates.

cases

In three countries w e o b s e r v e negative g r o w t h

For H u n g a r y t h e y start f r o m the e x p e r i m e n t with 3 % a n n u a l i n c r e a s e of

military s p e n d i n g .

A similar pattern is o b s e r v e d for P o l a n d a n d t h e Soviet U n i o n .

T h e negative rates start, h o w e v e r , in m o r e optimistic e x p e r i m e n t s . countries growth rates go d o w n but are still positive. Chart 3.5:

Investment in Material Sectors (INMAT) versus Military Expenditures

- 15

- 31

-1

9-

7-

BUL

5-

-4 -

CZY

3-

ME

GDR

2-

1-

0

HUN

_ ^

1

POL

2

3

ROM

In t h e o t h e r

Military Cuts and the Soviet and East European

Economies

83

5) G r o w t h rates of G N P (see Chart 3.6 a n d G N P curve in Chart 3.1) in Bulgaria, G D R , a n d t h e Soviet Union go d o w n f o l l o w i n g c u t s in military s p e n d i n g .

In the

Soviet c a s e t h e y c o u l d be negative mainly b e c a u s e t h e y have t h e largest ratio of military s p e n d i n g to G N P . For C z e c h o s l o v a k i a a n d R o m a i n i a g r o w t h rates are quite stable.

In the Polish c a s e , g r o w t h rates are stable a n d g r o w starting f r o m (-7%)

e x p e r i m e n t , w h e r e a s for H u n g a r y the r e s p o n s e of G N P may be c h a r a c t e r i z e d by a flat U-shaped c u r v e . Chart 3.6:

Gross National Product (GNP) versus Military Expenditures

0 I

ι - 15

ι - 31

1

1

1

1

1

1

1

1

-1

9-

7-

5-

4-

3-

2-

1-

Annual Percentage C h a n g e

3.6

c

BUL

CZY

GDR

1

in M i l i t a r y HUN

1

0

1

;

.

2

3

4

1

: I— 5

Expenditures

^ _

Evaluative and S u m m a r y Remarks (by W.

POL

ROM

Isard)

Apart from the construction of an a r m s race s u b m o d e l , a major step f o r w a r d by Klein a n d his a s s o c i a t e s is t h e effective i n c l u s i o n of t h e s u b m o d e l c o u p l e d with f e e d b a c k effects within a first-rate e c o n o m e t r i c m o d e l .

U n d o u b t e d l y this s u b m o d e l

will be greatly i m p r o v e d by scholars to follow, a s Klein a n d K o s a k a clearly expect. A s e c o n d contribution lies in the fact that t h e inclusion of this s u b m o d e l within LINK o p e n s up the d o o r for the effective incorporation into LINK (and other multi-nation e c o n o m i c m o d e l s ) of important political v a r i a b l e s that are closely a s s o c i a t e d with a r m s r a c e s , a n d that h a v e b e e n i n c l u d e d in a n u m b e r of a r m s race m o d e l s by others. See c o m m e n t s in Chapter 13. T h e K l e i n / G r o n i c k i w o r k is s i g n i f i c a n t o n s e v e r a l a c c o u n t s .

Although

the

unification of G e r m a n y , the republic i n d e p e n d e n c e m o v e m e n t s in the Soviet Union a n d o t h e r m a j o r e v e n t s m a k e o b s o l e t e t h e s i m u l a t i o n s r e p o r t e d u p o n in this

LR. Klein, M. Gronicki and H. Kosaka

84

chapter, nonetheless they represent important findings.

R e g a r d l e s s of

what

s t r u c t u r e s e m e r g e in the Eastern E u r o p e a n a n d Soviet republic e c o n o m i e s , the p r o b l e m of transition to t h e s e structures are g o i n g to be e x a c e r b a t e d by t h e past heavy d e p e n d e n c e of investment in material sectors ( I N M A T ) on the military sector, as revealed by Chart 3.5 a n d the c o r r e s p o n d i n g c u r v e on Chart 3 . 1 . Clearly, this problem is m u c h more severe than any c o n v e r s i o n p r o b l e m in the United States. A s e c o n d important insight g a i n e d f r o m the s i m u l a t i o n s relates to h y p o t h e s e s a n d t h e o r i e s r e g a r d i n g t h e i m p a c t of military e x p e n d i t u r e s o n d e v e l o p e d developing e c o n o m i e s . of e c o n o m i e s .

and

Many studies of this impact have b e e n m a d e for both t y p e s

A s n o t e d in c h a p t e r 1 , t h e f i n d i n g s o n d e v e l o p i n g c o u n t r i e s are

clearly i n c o n c l u s i v e , a n d t h o s e for d e v e l o p e d c o u n t r i e s quite c o n t r o v e r s i a l .

Now

with the Klein/Gronicki simulations w e have another set of findings, h o w e v e r rough a n d incomplete they may be, useful for analysis on what the impact can be on the f u n c t i o n i n g of totalitarian e c o n o m i e s a n d for c o m p a r a t i v e p u r p o s e s — a set of findings that can help in firming up general h y p o t h e s e s on i m p a c t s . Footnotes 1

A n y increase in disequilibria on official markets affects the actual level of equilibria

e l s e w h e r e , resulting in a depreciation of the d o m e s t i c currency on the black market. This m e a n s that the b l a c k - m a r k e t e x c h a n g e - r a t e may be u s e d as an indicator of spillovers, under the a s s u m p t i o n that this market is a l w a y s in equilibrium. 2

3

T h e labor/leisure trade-off is implicit in this formulation. T h e e x i s t e n c e of an " o v e r a l l - e x c e s s - d e m a n d " r e g i m e has b e e n e s t a b l i s h e d , for

e x a m p l e , by G r o n i c k i a n d Klein ( 1 9 8 9 , 1 9 9 0 ) .

T h e e x i s t e n c e of " s h o r t a g e " is

generally a c c e p t e d in the literature of C P E s although the definition

of shortage may

vary. For a discussion, see Portes (1986), with his c o m m e n t s on Kornai. C o n s u m p t i o n supply is t a k e n to be a fraction of total output, since no d e t a i l e d information exists about c o n s u m p t i o n plans. 5

A more detailed description of this type of formulation c a n be f o u n d in C h a r e m z a

a n d Gronicki (1988). 6

l t c a n be a s s u m e d that the planning process itself c a n increase e x c e s s d e m a n d by

i m p o s i n g "taut" plans w h i c h d e f e r output a w a y f r o m current c o n s u m p t i o n m a r k e t s ;

Military Cuts and the Soviet and East European

Economies

85

on t h e o t h e r h a n d , by i n c r e a s i n g o u t p u t , p l a n s m a y d r i v e t h e m a r k e t t o w a r d s equilibrium. 7

l n the empirical results, both t y p e s of adjustment w e r e o b s e r v e d .

8Ld = l_d(QP + 1) implies that l_d = Ld(Qq, C

d

- C»). T h u s (3.17) follows from (3.9) and

(3.15). 9

S o m e c o n f u s i o n may arise f r o m t h e p r a c t i c e of u s i n g the t e r m s " s u p p l y " a n d

" d e m a n d " w i t h r e s p e c t to state s e c t o r i n v e s t m e n t , s i n c e p r i c e s a n d constraints

are

determined

by

mechanisms

which

are

different

financial

from

their

counterparts in market e c o n o m i e s . 1 0

A n e x a m p l e of exports acting as a financial constraint w o u l d be that an increase

in t h e w o r l d m a r k e t price of oil w o u l d h a v e no i m p a c t o n i m p o r t s in t h e current period.

In s u b s e q u e n t periods, all imports w o u l d contract, not only oil b e c a u s e of

the financial c o n s t r a i n t i m p o s e d by export e a r n i n g s .

This specification assumes

that there is not a strong response to c h a n g e s in world market prices. 1 1

T h i s stylization of behavior prevailed for most C M E A countries (except H u n g a r y ) .

1 2

A s stated a b o v e , it is a s s u m e d that w o r l d market prices have a s m a l l e r effect on

imports a n d exports than in market e c o n o m i e s . 1 3

N e t Material P r o d u c t ( N M P ) is the official m e a s u r e of output in C P E s .

In this

paper Q Ξ N M P ; thus non-material services are excluded from the definition of Q. 1

a c c o r d i n g l y , this definition does not include

non-material services.

1 5

T h e s e s i m u l a t i o n s are g e n e r a t e d by t h e m o d e l r e p o r t e d in Klein a n d G r o n i c k i

(1990), written before t h e unification of G e r m a n y , a n d not by t h e G r o n i c k i m o d e l presented in the previous section w h i c h d r a w s heavily u p o n the former.

(Ed.).

1 6

C h a r t s 3.2, 3.3, 3.4, a n d 3.5 of this section represent u n p u b l i s h e d materials which

t o g e t h e r w i t h C h a r t s 3.1 a n d 3.6 (from Klein a n d G r o n i c k i , 1990) p r o v i d e basic insights for u n d e r s t a n d i n g the p r o b l e m s currently confronting t h e Eastern E u r o p e a n a n d Soviet e c o n o m i e s .

T h e y also p r o v i d e significant insights o n t h e i m p a c t of

military e x p e n d i t u r e s w h i c h will be d i s c u s s e d in t h e next s e c t i o n . T h e c o m m e n t s of this section are e d i t e d v e r s i o n s of s t a t e m e n t s in Klein a n d G r o n i c k i o n a set of c o m p l e m e n t a r y charts in their 1990 article. (Ed.).

LR. Klein, M. Gronicki and H. Kosaka

86

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of the

recommendations

S e c r e t a r y - G e n e r a l . N e w Y o r k : United Nations. United Nations. (1981). and decisions

adopted

development

and

relationship

between

Review

of the implementations

by the General international disarmament

Assembly

economic and

at its tenth special cooperation.

development.

session

Study

on

New York:

on the

United

Nations. United Nations. (1982). Economic and its extremely

harmful

and social

effects

consequences

on world peace

S e c r e t a r y - G e n e r a l . N e w York: United Nations.

of the armament

and security.

race

Report of the

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Economies of Arms Reduction and the Peace Process W. Isard and C H . Anderton (Editors) © 1992 Elsevier Science Publishers B.V. All rights reserved.

Chapter CONFLICT

4

AND TRADE: AN ECONOMICS INTERNATIONAL Solomon

APPROACH TO

POLITICAL

INTERACTIONS

William

Polachek

State University of N e w Y o r k , B i n g h a m t o n * [The Klein/Gronicki/Kosaka contributions dig deeply into the impact of revolutionary political change in Eastern European countries upon their economies and indirectly through trade

upon Western

European economies, focussing particularly on the repercussions of anticipated arms cutbacks. However, when we examine trade, a critical issue to most national and regional economies, and a phenomena that is directly and indirectly tied in a major way to a country's military expenditures (Polachek provides empirical support for this assertion), it then becomes absolutely essential to inquire in general how political conflict affects trade and vice versa. In his contribution Polachek concentrates on political conflict as affected by trade. Can one argue that the greater the trade between an actor country and a target, the smaller the amount of actor to target conflict (or the greater the amount of cooperation)? Since the greater the inelasticity of the demand for imports and the supply of exports, the greater with increased trade the respective consumer surplus and producer surplus (measures of welfare gains), can we state: the greater the inelasticity of import demand and export supply of an actor country to a target, the smaller the amount of actor to target conflict. Polachek also looks at the reverse question, though not as extensively: does political conflict affect the level of trade? The author ingeniously exploits the several sets of data developed by political scientists, each inadequate in certain ways, and several analytical techniques (each also deficient in one way or another), to obtain relatively robust findings on the first of these two critical questions, (eds.)] 4.1

Background C u r r e n t l y o v e r 12 billion d o l l a r s of the U.S. g o v e r n m e n t b u d g e t is d e v o t e d

directly to international relations.

W h e n d e f e n s e e x p e n d i t u r e s a n d foreign aid are

a d d e d , this f i g u r e s o a r s to o v e r 2 7 5 billion d o l l a r s , r o u g h l y 3 0 c e n t s of e v e r y g o v e r n m e n t dollar s p e n t .

1

Despite the i m p o r t a n c e of international relations, m o d e r n

e c o n o m i s t s t e n d to concentrate

only on narrow a s p e c t s s u c h as the c o s t s of w a r or

more m a t h e m a t i c a l l y oriented d e p i c t i o n s of a r m s r a c e s .

International e c o n o m i s t s

deal with e c o n o m i c t r a d e c o n c e n t r a t i n g on tariffs, e m b a r g o e s , q u o t a s , a n d even

S.W.

90

Polachek

trade w a r s , but neglect the more subtle a n d p e r h a p s m o r e i m p o r t a n t a s p e c t s of trade, namely how trade relations a n d political interactions are r e l a t e d .

2

W h y the b e n i g n neglect is not a p p a r e n t , but t h e r e are at least t w o r e a s o n s . First, f r o m t h e t h e o r e t i c a l p e r s p e c t i v e , it is c o n c e p t u a l l y difficult to e m b e d s u c h notions as w a r a n d p e a c e or conflict a n d c o o p e r a t i o n into the c o s t - b e n e f i t t y p e analysis so innately part of the e c o n o m i c m e t h o d o l o g y .

S e c o n d , f r o m the empirical

p e r s p e c t i v e t h e r e are s i m p l y v e r y f e w readily a v a i l a b l e d a t a s e t s international relations.

quantifying

N e v e r t h e l e s s , d e s p i t e this, t h e r e is s o m e p r e c e d e n c e for

e c o n o m i s t s to study international relations. David H u m e b e l i e v e d "that c o m m e r c i a l restrictions d e p r i v e t h e nations of the earth of that free c o m m u n i c a t i o n a n d e x c h a n g e , w h i c h t h e a u t h o r of the w o r l d had i n t e n d e d by g i v i n g t h e m soils, c l i m a t e s , a n d g e n i u s e s , so different f r o m 3

other."

each

In short, "free trade is the vital principle by which the nations of the earth are

to b e c o m e united in o n e h a r m o n i o u s w h o l e . "

4

5

B a r o n de M o n t e s q u i e u w a s more

direct: " P e a c e is the natural effect of trade. T w o nations w h o traffic with each other b e c o m e reciprocally d e p e n d e n t ; for if o n e has an interest in b u y i n g , the other has interest in selling; a n d t h u s their union is f o u n d e d on their mutual necessities."

In

short, trade b e t w e e n t w o countries results in mutual e c o n o m i c benefits, a n d hence peace. 6

This paper entails a n d e x t e n d s my earlier r e s e a r c h to study the principle that e c o n o m i c trade affects political conflict a n d c o o p e r a t i o n .

7

m o d e l c a n be d e r i v e d u s i n g c l a s s i c e c o n o m i c t h e o r y .

Section 4.2 s h o w s how a S e c t i o n 4.3

provides

empirical tests, a n d extensions are provided in Section 4.4. Section 4.5 c o n c l u d e s . 4.2 T h e o r e t i c a l

Basis

T h e motivation of this paper is that one country c a n be both c o o p e r a t i v e a n d hostile at the s a m e time. For example, just as the US a n d Iraq exhibit hostility, these same

countries, for e x a m p l e , the US as it relates to C a n a d a or Iraq as it relates to

Syria, c o o p e r a t e in their political relations.

If there are r e a s o n s to explain why the

U S has g o o d relations with C a n a d a but poor relations with Iraq, t h e n these insights could be applied to understanding how cooperation evolves b e t w e e n countries. This paper takes the perspective of a given country, called an actor.

It a s s u m e s

that e a c h actor has a given factor e n d o w m e n t not easily c h a n g e d at least in the short-run.

Given factor e n d o w m e n t s , trade patterns e m e r g e a n d given t h e s e t r a d e

patterns, a country is a s s u m e d to b e h a v e rationally in its foreign relations d e c i s i o n s . Specifically, if conflict leads to a diminution of trade, t h e n one implicit cost of conflict

91

Conflict and Trade

is the lost welfare g a i n s associated with trade. In short, trade e n h a n c e s cooperation a n d deters conflict. B e g i n with the s t a n d a r d a s s u m p t i o n s u s e d by i n t e r n a t i o n a l t r a d e t h e o r i s t s to describe an actor country. Let the c o n v e x set (q) containing possible output vectors q, such that {q} = Uq, for, i = 1 , ...,n be the actor's production possibility frontier.

In a

i

two c o m m o d i t y world {q} can be represented by the set { q i , q 2} w h e r e output levels of e a c h c o m m o d i t y q i a n d q 2 c a n be d e f i n e d by t h e implicit f u n c t i o n f ( q i , q 2) < K . Graphically this is merely the region on or b e l o w t h e p r o d u c t i o n possibility frontier (AB) defined in Figure 4 . 1 . Next, to o b t a i n rational b e h a v i o r , d e f i n e a w e l f a r e f u n c t i o n W ( C , Z ) for the decision m a k e r in t h e country, a s s u m e d to be d e r i v e d f r o m t h e p r e f e r e n c e sets of the entire p o p u l a t i o n .

8

T h i s function d e p i c t s w e l f a r e levels a s s o c i a t e d with e a c h

possible c o n s u m p t i o n basket C = ( c i , c 2, . . . , c m) , but is also d e p e n d e n t on a n o t h e r variable, Ζ = ( z i , z 2,..., Zk), representing conflict or cooperation t o w a r d any of k target c o u n t r i e s , but w h i c h for n o w is a s s u m e d c o n s t a n t , a n d t h u s not part of the optimization p r o c e s s .

T h e welfare function is a s s u m e d to be quasi c o n c a v e such

that w(c,z) > 0, w c > 0, but that w c c< 0. No a s s u m p t i o n s are necessary of the effect of ζ on welfare levels, since ζ is for now constant. Iso-welfare c u r v e s w' are depicted in Figure 4 . 1 , with optimal c o n s u m p t i o n at c 2 = ( c i 2, c 2 2) . T h e very s i m p l e s t bilateral trade m o d e l a s s u m e s t r a d e to o c c u r at a c o n s t a n t price ratio m = p Ci / p C2 - '

n

the short run this yields an equilibrium 0 4 = ( c ^ , c 24 ) , while

in the long run b e c a u s e of increased specialization in d o m e s t i c production, Cs= ( c i 5, c 25 )

is a c h i e v e d , with t r a d e e q u a l l i n g C s - c 2.

The combined gain from

both

specialization in production a n d trade is W 5 - W 2 . S u p p o s e , for e x a m p l e t h r o u g h q u o t a s , e m b a r g o e s , or e v e n b l o c k a d e s , conflict implies the cessation or at least diminution of trade. T h e n the implicit cost of conflict is the lost gains from trade ( W 5- W 2) a s s o c i a t e d with d e c r e a s e d t r a d e .

9

Obviously,

the greater the welfare loss the greater the c o s t s of conflict, a n d hence t h e smaller the incentive for conflict. Even if conflict d o e s not directly diminish t r a d e , but instead leads to trade restrictions that ultimately affect t h e t e r m s of t r a d e , the s a m e result applies.

In this c a s e less d e s i r a b l e t e r m s of t r a d e result (e.g., m' in Figure 4.1)

i m p l y i n g a new e q u i l i b r i u m (C3) a n d a lower w e l f a r e .

A g a i n t h e implicit price of

conflict is (W5-W3), the lost welfare a s s o c i a t e d with d i m i n i s h e d trade brought about by conflict.

S. W. Polachek

92

C2

S o u r c e : P o l a c h e k (1980) Figure 4.1 : Effect of Conflict o n W e l f a r e

T o see how t h e s e potential welfare losses lead to g r e a t e r c o o p e r a t i o n a n d less conflict, w e introduce more structure. D o m e s t i c c o n s u m p t i o n of c o m m o d i t y i equals d o m e s t i c production of q, plus imports irij minus exports Xj. A s such Ci = q i

+

mi-Xi

(4.1)

k

nrii= Xmy

(4.2)

k Xi =

Xxy

(4.3)

j=1 w h e r e j i n d e x e s import a n d export partners, with k b e i n g t h e n u m b e r of c o u n t r i e s . Next define

ΖΞ[Ζ

1(

Z 2 , . . . , Z S, . . . , ZK] to represent conflict (from the actor) to any target

country j . T h e actor's welfare function as w e have d e f i n e d it is W = w ( C , Z) = wQqi +

5>ij

+ XxyJ,

j

[Zj])

(4.4)

j

w h e r e t h e b r a c k e t e d t e r m s are the c o m m o d i t y a n d conflict v e c t o r s just d e f i n e d . Including Cj within the w e l f a r e f u n c t i o n is o b v i o u s . yield g r e a t e r welfare levels.

H i g h e r levels of c o n s u m p t i o n

Including Ζ within t h e welfare function is u n n e c e s s a r y .

93

Conflict and Trade

However, including Ζ merely allows for t h e possibility of n o n - e c o n o m i c motivations for conflict or c o o p e r a t i o n . O u r p u r p o s e is to d e r i v e a r e l a t i o n s h i p of t h e effect of e c o n o m i c t r a d e on political conflict. A s such w e must identify optimal conflict/cooperation levels current

given

c o n s u m p t i o n a n d trade patterns.

T r a d e c a n be r e p r e s e n t e d as t h e v a l u e of e x p o r t s of e a c h c o m m o d i t y (i) to country (j) m i n u s t h e v a l u e of imports.

If no b a l a n c e of p a y m e n t s p r o b l e m s exist

then m k m Z Z X i j P x i j - l Z m i j P m ij = 0 i J I I

(4.5)

where, P Xij = unit export price c h a r g e d to country j for c o m m o d i t y i. Pmij = unit import c h a r g e d by country j for c o m m o d i t y i. Prices are d e t e r m i n e d in the international market, but as indicated contain at least a c o m p o n e n t a s s u m e d to be d e p e n d e n t on dyadic conflict. T h u s Pxij =f(Zj)

(4.6)

Pmij = g(Zj)

(4.7)

such that hostility raises the price that must be paid for imports a n d lowers the prices at which exports c a n be sold. ,

,

aPmij/3zj = P mii = g > 0

(4.8)

aPxij /θζ] = P'xjj = f < 0

(4.9)

If c o n f l i c t s u c h a s t h r o u g h e m b a r g o e s or b o y c o t t s l e a d s t o t h e c o m p l e t e cessation of trade then f = -ijPxij(Zj) " Σ Σ mijP mj(Zj)] i i i i j i j

(4.10)

S.W.

94

Polachek

First order optimality conditions for optimal conflict requires 3w/3zj + λ [ Χ χ ΐ ] (3Pxij (Zj)/3zj) - I m y (3P mij(Zj)/3zj)] = 0 i x

(4.11)

' p

z

dw/dk = z Z Ü x i J ( j ) - Σ Σ my P mi j ( Z j ) = 0 i

j

(4.12)

i j

E q u a t i o n (4.12) is merely t h e b a l a n c e of p a y m e n t s c o n s t r a i n t .

E q u a t i o n (4.11)

describes

the

the

belligerence.

mechanism

by

which

a country

decides

on

amount

of

Since t h e b r a c k e t e d t e r m is t h e implicit price of receiving less m o n e y

for exports while at the s a m e t i m e having to pay more for imports, it represents t h e net c o s t a s s o c i a t e d with e x t r a hostility ( M C ) .

T h i s t e r m c a n be

graphically (Figure 4.2) as a n u p w a r d s l o p i n g c u r v e

10

represented

w h o s e position d e p e n d s on

m a n d χ levels. In equilibrium, the marginal cost of hostility must just balance the

cooperation

conflict

S o u r c e : P o l a c h e k (1980) Figure 4 . 2 : Determination of O p t i m a l C o n f l i c t / C o o p e r a t i o n

w e l f a r e benefit of a d d e d hostility (dw/dzj) so that t h e i n t e r s e c t i o n of t h e (dw/dzj) c u r v e a n d t h e MC c u r v e d e p i c t s e q u i l i b r i u m c o n f l i c t / c o o p e r a t i o n .

Note that the

e q u i l i b r i u m c o n f l i c t / c o o p e r a t i o n levels still a r i s e e v e n if hostility or c o o p e r a t i o n implies no welfare gain (dw/dzj=0).

In this c a s e , optimal conflict is b a s e d purely on

e c o n o m i c g r o u n d s at the point w h e r e the M C curve intersects the horizontal axis. If imports or exports are i n c r e a s e d , the M C shifts up, t h e r e b y implying lower levels of conflict. T h u s ,

Conflict and Trade

95

P r o p o s i t i o n O n e : T h e g r e a t e r an a c t o r c o u n t r y ' s level of t r a d e with a t a r g e t , t h e smaller the a m o u n t of actor to target conflict.

If increases in foreign debt are not permitted (especially in the long-run), conflict i n d u c e s a c h a n g e in o p t i m a l i m p o r t s a n d e x p o r t s .

T h e m o r e u n f a v o r a b l e the

relative price of t r a d e i n d u c e d by conflict, t h e m o r e greatly e x p o r t s are f o r c e d to increase and imports decrease.

T h e exact c h a n g e in i m p o r t s a n d e x p o r t s c a n be

d e r i v e d f r o m t h e m a x i m i z a t i o n of (4.4) w i t h r e s p e c t to χ a n d m.

Eliminating

subscripts, (d\N/dc)(dc/dx)

+ λΡχ(ζ)) = 0

(4.13)

(3w/3c)(3c/am) + λΡΓη(ζ]) = 0

(4.14)

imply d e m a n d a n d s u p p l y c u r v e s for i m p o r t s a n d e x p o r t s f r o m w h i c h t h e implicit welfare losses a s s o c i a t e d with c h a n g e d foreign t r a d e c a n be c o m p u t e d .

F r o m the

a b o v e one c a n s h o w that welfare losses are largest, t h e m o r e inelastic t h e import a n d exports d e m a n d a n d supply c u r v e s .

Hence,

P r o p o s i t i o n T w o : T h e more inelastic (elastic) an actor c o u n t r y ' s import a n d export d e m a n d a n d supply to a target c o u n t r y , t h e s m a l l e r (larger) the a m o u n t of actor to target conflict.

O t h e r p r o p o s i t i o n s follow as w e l l .

H o w e v e r , at this point, insufficient d a t a exist

for appropriate statistical tests. A s such this p a p e r c o n c e n t r a t e s solely o n t h e s e two propositions. T h e r e m a i n d e r of the p a p e r divides the tests for t h e s e h y p o t h e s e s into t w o parts: Part 4.3 c o n c e n t r a t e s purely o n t h e conflict t r a d e relationship.

Part 4.4 a u g m e n t s

the empirical w o r k to include information on trade elasticities.

4.3 P r o p o s i t i o n O n e : T h e T r a d e C o n f l i c t

Relationship

Multivariate statistical analysis relating conflict a n d t r a d e holding c o n s t a n t other variables are u s e d .

First, cross-sectional d a t a are e m p l o y e d to test the relationship

b e t w e e n conflict a n d t r a d e .

S e c o n d , in o r d e r to c o r r o b o r a t e t h e s e results, v a r i o u s

conflict m e a s u r e s are u s e d .

T h i r d , to test w h e t h e r t h e c o n f l i c t / t r a d e r e l a t i o n s h i p

holds o v e r t i m e , a c a s e s t u d y of U . S . / S o v i e t relations

is e x a m i n e d .

Finally, to

ascertain

U n i o n a n d of U . S . / W a r s a w causality,

both

Pact

cross-sectional

S.W.

96

simultaneous performed.

equations

Polachek

models and time-series

Granger causality tests

are

Before getting into the statistical analysis, a d i s c u s s i o n of the d a t a is in

order. 4.3.1

Data

T h r e e d a t a sets are d e s c r i b e d containing information on (1) d y a d i c conflict, (2) dyadic t r a d e , a n d (3) country attributes.

R e a s o n s for c h o o s i n g t h e s e d a t a sets are

given, but a description of the political d a t a is e m p h a s i z e d since they are more alien to e c o n o m i s t s . (1) P o l i t i c a l I n t e r a c t i o n s D a t a . T h e r e a r e m a n y p h i l o s o p h i c a l p r o b l e m s m e a s u r i n g political interactions.

in

W h a t hostility a n d c o o p e r a t i o n c o n s t i t u t e , as well

as how a n d to w h o m such activities are v e n t e d must be defined in the data. C u r r e n t m e a s u r e s , s u c h as d e f e n s e e x p e n d i t u r e s , w a r d a t a w i t h

resulting

causality estimates, as well as United Nations voting records do not fit the bill.

For

e x a m p l e , d e f e n s e expenditures indicate general levels of hostilities of a country, yet d e f e n s e e x p e n d i t u r e n e e d not reflect hostility at all.

S u c h e x p e n d i t u r e s c o u l d be

v i e w e d as a w a r n i n g , t h e r e f o r e s e r v i n g a s a d e t e r r e n t t o w a r d o t h e r Alternatively, the defense

expenditures can

repression of d o m e s t i c unrest.

nations.

be t a k e n a s a m e a s u r e

of

the

Even if d e f e n s e expenditures constituted a m e a s u r e

of c o n f l i c t , s u c h e x p e n d i t u r e s

n e e d not y i e l d t h e c r u c i a l d y a d i c

information

concerning to w h o m hostilities are v e n t e d . In addition, the extent a n d type of conflict w o u l d be c a m o u f l a g e d . W a r data are better in that they yield information on a particular conflict as well as establish the involved nation states.

T h e p r o b l e m , h o w e v e r , is that w a r s are a

particularly intensive a n d relatively rare form of interaction. T h e n u m b e r of d e a d or w o u n d e d varies with technology as well as country size. Similarly w a r data, as well as the d e f e n s e expenditure d a t a just e l u d e d t o , d e a l only with hostility a n d neglect instances of cooperation as well as acts less hostile t h a n war.

Further, U N general

a s s e m b l y v o t i n g d a t a also are ruled out b e c a u s e s u c h i n f o r m a t i o n

measures

political attitudes, a n d need not reflect actual conflict b e t w e e n t w o countries. B e c a u s e of t h e s e d e f i c i e n c i e s , e v e n t s d a t a , w h i c h o n l y r e c e n t l y a v a i l a b l e , are a d o p t e d . r e p o r t e d in n e w s p a p e r s . concentrate

Events data comprise dyadic (bilateral) 11

became

interactions

A l t h o u g h t h e r e are n o w s e v e r a l s u c h d a t a s e t s , we

on t h e A z a r c o n f l i c t

and

peace

data

bank

(COBDAB),

though

c o m p a r i s o n s are m a d e with another e v e n t s d a t a b a n k c o m p i l e d by M c C l e l a n d (the W E I S S data). C O B D A B is an extensive longitudinal collection of about o n e million daily e v e n t s r e p o r t e d f r o m f o r t y - s e v e n n e w s p a p e r s o u r c e s b e t w e e n 1 9 4 8 1978.

12

and

T h e s e events are c o d e d on a 15 point scale representing different kinds of

97

Conflict and Trade

conflict and cooperation. represents the amount actor/target d y a d .

T h e a n n u a l f r e q u e n c y of e v e n t s in e a c h of e a c h t y p e d y a d i c

interaction

category

contributable

to

an

C u r r e n t l y o v e r 105 c o u n t r i e s a n d h e n c e a b o u t 11 t h o u s a n d

possible d y a d i c interaction m e a s u r e s are included for e a c h year. E v e n t s d a t a are not free of bias.

T h e p r o b l e m w i t h e v e n t s d a t a is that they

c o m p r i s e i n t e r a c t i o n s r e p o r t e d only in n e w s p a p e r s .

Many secret treaties and

negotiations, as well as multi-country interactions not r e p o r t e d in n e w s p a p e r s are obviously omitted.

In a d d i t i o n , n e w s p a p e r s often find certain c o u n t r y pairs m o r e

newsworthy so that extreme selectivity biases c a n exist. T h e benefit of events d a t a is that they m e a s u r e c o o p e r a t i o n as well as hostility. In addition, actor a n d target countries c a n easily be identified. Precise m e a s u r e s of a m o u n t s of different kinds of conflict can be a s c e r t a i n e d , just by using t h e 15 point scale representing different kinds of conflict a n d c o o p e r a t i o n c o n t a i n e d in the data. In addition, selectivity issues c a n be controlled by looking at the relative

frequency

of conflict c o m p a r e d to the total reported f r e q u e n c y of d y a d i c political interactions. T h i s w a y , u n d e r or o v e r reporting c a n be a v o i d e d by c o n c e n t r a t i n g not on the absolute f r e q u e n c y of reported events, but instead on the relative a m o u n t of conflict, the logic being that reporting biases are more related to the specific country than the type of event.

It is p r e s u m e d that any t a s t e s by n e w s p a p e r s for reporting conflict

more readily t h a n c o o p e r a t i o n w o u l d not be nation-specific so that c o m p a r i s o n s of o n e country pair's relative conflict c o m p a r e d to a n o t h e r w o u l d also not be b i a s e d . Several s u c h m e a s u r e s w e r e c h o s e n .

O n e is t h e net f r e q u e n c y of conflict ( N E T F )

d e f i n e d as the frequency of conflictual e v e n t s (those in c a t e g o r y 9 to 15) m i n u s the frequency of c o o p e r a t i v e events (those in category 1 to 7 ) . H e r e , a negative v a l u e of N E T F implies that more events fall into categories 1 to 7 t h a n 9 to 15, hence that c o o p e r a t i v e interaction exists.

A positive v a l u e implies that the p r e p o n d e r a n c e of

e v e n t s fall into c a t e g o r i e s 9 to 15 so that o n b a l a n c e t h e r e exists a c o n f l i c t u a l relationship.

13

(2) E c o n o m i c T r a d e . needed.

Ideally d y a d i c c o m m o d i t y by c o m m o d i t y t r a d e flows are

U n f o r t u n a t e l y , s u c h d a t a w a s not available o n an a n n u a l b a s i s in e a c h

year for w h i c h conflict d a t a e x i s t .

14

O n the other h a n d , a g g r e g a t e import a n d export

d a t a collected on a country by country directional basis are available.

T h e s e data

c o m p i l e d f r o m the International M o n e t a r y of F u n d series of a n n u a l v o l u m e s under the heading "Directions of T r a d e " w e r e u s e d . T h e trade d a t a are m e a s u r e d in U.S. dollars. (3) Attribute D a t a .

Standardizing v a r i a b l e s holding c o n s t a n t factors relating to

country levels of d e v e l o p m e n t that may e x o g e n o u s l y affect t r a d e a n d conflict are included.

S e v e r a l i n t e r n a t i o n a l d a t a sets w e r e m e r g e d for t h i s p u r p o s e .

The

S.W.

98

Polachek

largest, B a n k s ' (1973) C r o s s - N a t i o n a l T i m e - S e r i e s D a t a A r c h i v e , select country attributes for e a c h year.

15

w a s u s e d to

D e f e n s e expenditure d a t a ( c o m p i l e d mostly

from U N Statistical Y e a r b o o k by Gillespie a n d Z i n n e s )

16

to s t a n d a r d i z e for g e n e r a l

levels of country militancy were included, as w e r e other d a t a listed in T a b l e 4 . 1 . T A B L E 4.1 Trade - Attribute Data Set variable List Variable Name ACTOR YEAR XTOT MTOT XYPCT MYPCT CPI GDP GNP GDPUSA GNPUSA POP* MAR MILEXP ECONS EPROD INDPCr NATINC PRIM SEC UNIV NEWS* PHYS FERT PQLI* I MORT LEXP* PCT15 PCT64 EDEXP PCTURB LIT PCTED CPIPCT

Source COPDAB DOT DOT DOT DOT IFS IFS IFS IFS IFS IFS IFS E/G BANKS/UNS BANKS/UNS BANKS/UNY BANKS/UNY BANKS/UNS BANKS/UNS BANKS/UNS BANKS/UNS BANKS/UNS UNS ODC UND UND UND UND WMSE UND/PRB BANKS/UND UNS IPS

Units 48-77 $US χ 1,000,000 $US χ 1,000,000 % % 1975= 100 Billions of Local Currency Billions of Local Currency Billions of U.S. Dollars Billions of U.S. Dollars χ 1,000,000 $US per Local Currency $USx 1,000,000 Tons Coal χ 1000 Tons Coal χ 1000 %

$us

χ 1000 χ 1000 χ 1000 χ .0001 χ .000,0001 Births per 1000 0 through 100 Deaths per 1000 births Years % % Dollars % % % %

Definition COPDAB Actor Code Total Exports Total Imports % of Yearly World Exports % of Yearly World Imports Consumer Price Index Gross Domestic Product Gross National Product US GDP US GNP Population End of Year Market Exchange Rate Military Expenditures Energy Consumption Energy Production % GDP Originating in Industry National Income Per Capita Primary School Enrollment Secondary School Enrollment University Enrollment Newspaper Circulation Per Capita Physicians Per Capita Fertility Physical Quality of Life Index Infant Mortality Rate Life Expectancy % of Population Under 15 % of Population Over 64 Educational Expenditure Per Capita % of Population in Urban Areas % Literate in the Population % Govt. Expenditures for Education % Change in CPI

Interpolated version of this variable also included Sources: COPDAB: COPDAB actor coding scheme; DOT: Directions of Trade; IFS: International Financial Statistics; Z/G: Zinnes and Gillespie Military Expenditures Data; BANKS/UNS: Banks Data Set and UN Statistical Yearbooks; BANKS/UNY: Banks Data Set and Yearbook of National Account Statistics; UNS: UN Statistical Yearbook; ODC: Index Developed by Overseas Development Council; UND: UN Demographic Yearbook; WMSE: World Military and Social Expenditures.

Conflict and Trade

4.3.2 Cross-Sectional

99

Analysis

(1) ÇrQSS-SeçtiQnal Regressions! Analysis Ωί the. Trade-Conflict Relationship. The g e n e r a l specification is given by e q u a t i o n s (4.15) a n d (4.16) below. (4.15)

(4.16)

where: CONFjj = relative conflict of actor country i t o w a r d target country j . XJJ = exports of actor country i to target country j (the squared X\\ term is introduced to test for nonlinearity). my = imports of actor country i to target country j (the s q u a r e d my t e r m is introduced to test for nonlinearity). Aj Ξ a vector of actor country attributes. Aj = a vector of target country attributes, t ^ a t i m e trend. ejj ΞΞ a r a n d o m error term a s s u m e d to be normally distributed with zero m e a n . Negative coefficients for α ϊ a n d α Ί w o u l d imply t h a t c o u n t r i e s with a g r e a t e r trade d e p e n d e n c e w o u l d e n g a g e in lessrelative conflict. Coefficients 0C3, 04, oc'3 a n d 0C4 reflect t h e i m p a c t of c o u n t r y attributes o n conflict c a n be t h o u g h t of a s other a s p e c t s of the price v e c t o r for conflict. T h e intercept t e r m s reflect levels of conflict that w o u l d result i n d e p e n d e n t l y of attributes or t r a d e .

For t h e p u r p o s e s of this

paper, we present only the coefficients for oco, α'ο, α ϊ , α Ί , cc2, a'2, as, a's a n d treat the attributes as e x o g e n o u s identification variables. A consistent pattern a p p e a r s (Table 4.2) for t h e s e coefficients.

I n d e p e n d e n t of

the functional f o r m , w h e t h e r bivariate or multivariate, linear or hyperbolic, in e a c h y e a r a n e g a t i v e a n d statistically s i g n i f i c a n t r e l a t i o n s h i p e m e r g e s : t h o s e

dyads

e n g a g e d in the most trade have the lease conflict e v e n w h e n adjusting for country attributes.

T h e results hold on an a n n u a l b a s i s , a s w e l l a s for p o o l e d c r o s s -

sectional r e g r e s s i o n s .

17

T h e e m p i r i c a l s i g n i f i c a n c e of this i n v e r s e r e l a t i o n s h i p b e t w e e n conflict a n d trade c a n be a s s e s s e d by c o m p u t i n g the elasticity of conflict with respect to trade. B a s e d on t h e p o o l e d c r o s s - s e c t i o n a l r e g r e s s i o n s (last c o l u m n ) , t h e elasticities indicate that a one percent increase in trade is a s s o c i a t e d with a d e c r e a s e in c o n -

S.W.Polachek

100

T A B L E 4.2 Impact of Trade on Conflict by Year (t-values in parentheses)^

Specifiçation (1)

Adjust for Country Attri- Independ2 butes? ent Variable 1958 1961 no intercept -1.2980 -.3831 (1.1) (4.0)

no

(2)

(3)

yes

(4)

yes

1967 1964 -1.5750 -1.6016 (9.0) (4.7)

1958-67 1948-78 Pooled Pooled -1.3241 (13.7)

Elasticity

-0.0028 (13.3)

.192

X

- .0051 (4.7)

-.0074 (7.7)

-0.0019 (4.8)

intercept

-1.2946 (4.0)

-.4001 (1.2)

-1.5741 -1.6975 -1.3341 (4.7) (9.0) (13.8)

M

-0.0052 (4.8)

-.0072 (7.4)

-0.0019 (4.9)

-0.0019 (3.5)

-0.0027 (12.8)

intercept

10.8405 11.7426 -1.3963 (1.6) (1.6) (0.8)

-4.6669 (1.2)

-0.0984 1.6101 (0.1) (0.3)

X

-0.0022 -.0056 (2.2) (4.3)

-0.0048 -0.0023 -.0359 (5.6) (9.8) (22.3)

-0.0024 (5.2)

-.0020 (3.7)

.185

5

1.511X10" (13.9)

time trend

-3.558 (4.8) 10.8327 11.7499 -1.3997 -4.7328 -0.1119 2.1227 (1.6) (1.2) (1.6) (0.8) (.04) (0.1)

M

-0.0023 -.0056 (2.3) (4.3)

M

-0.0025 -0.0046 -0.0023 -0.0316 (5.4) (5.5) (21.2) (9.9)

2

Number of Country Pairs (Dyads) in sample

6

-.3672 (5.0) 407

409

457

460

4252

48,340

The specifications refer to the following regressions: (1)

NETFjj = Oo + a-ixjj + ε

(2)

NETFy = ß 0 + ß i m i j + e

(3)

NETFy = OCQ + a i Xjj + (X2A1 + (X3AJ + ε

(4)

NETFjj = β 0 + ßimjj + ß 2Aj + ßjAj + ε

5

.152 6 .149

1.18x10" 6 (13.3)

time trend

5

.152 6 .161

χ*

intercept

5

intercepts are the coefficients Oo and β 0 of the regressions. The trade coefficients correspond to the coefficients in equations (4.15) and (4.16). 3 A t-value exceeding 1.96 implies statistical significance at the 0.05 level. «The percentage of impact on conflict given a one percent change in trade. Computed as: Elasticity (3NETF/3x)(x/NETF) and Elasticity^ (3NETF/3m)(m/NETF) 5 Based on Pooled 1958-67 data. 6 Based on Pooled 1948-78 data.

101

Conflict and Trade

flict (increase in cooperation) by b e t w e e n 0.15 to 0.19 percent. T h u s d o u b l i n g trade b e t w e e n t w o c o u n t r i e s imply that on a v e r a g e t h e r e w o u l d be a 15 to 19 percent decline in the relative frequency of conflict. (2) C o r r o b o r a t i v e E v i d e n c e .

O n e c a n easily be skeptical of i n f e r e n c e s d r a w n

from one u n i q u e d a t a set. O n e s h o u l d not rely on the C O P D A B d a t a alone.

Other

m e a s u r e s of conflict are p o s s i b l e t h o u g h o n e m u s t be c a r e f u l d e s p i t e i n h e r e n t definitional p r o b l e m s .

For this reason c o r r o b o r a t i v e e v i d e n c e w a s o b t a i n e d using

other e v e n t s d a t a as well as other type conflict m e a s u r e s .

I do so not b e c a u s e the

o t h e r m e a s u r e s are intrinsically better, but rather a s a l t e r n a t i v e s : If t h e i n v e r s e correlation b e t w e e n trade a n d conflict prevails, t h e n despite potential m e a s u r e m e n t biases, rejecting t h e plausibility of t h e h y p o t h e s i z e d relationship w o u l d be more difficult.

For this reason I turn first to an alternative events d a t a set, a n d s e c o n d to

d e f e n s e e x p e n d i t u r e s , an alternative conflict m e a s u r e .

In addition p u b l i s h e d w o r k

which yield consistent results is e x a m i n e d . T A B L E 4.3 Corroborative Evidence Conflict Regressions Disaggregated by Type of Interaction WEIS DATE (1966-1967) (t-values in parentheses) scale 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

number lyes. of events yield 22 comment 120 consult 528 approve 86 promise 46 grant 79 reward 80 247 agree request 81 propose 97 reject 89 accuse 284 protest 31 deny 31 demand 17 warn 33 threaten 13 demonstrate 40 reduce relations 64 (as negative sanction) expel 17 seize 30 force 22

intercept 3.035 (0.9) 10.251 (1.4) 11.919 (0.8) 10.479 (2.0) 1.006 (0.3) 1.715 (0.4) 1.225 (0.2) 7.261 (0.6) 2.144 (0.4) 1.526 (0.2) -6.674 (-0.9) -2.754 (0.1) -0.429 (-0.1) 0.610 (0.1) -0.332 (-0.1) 1.179 (0.3) 2.648 (1.6) 3.293 (1.0) -9.056 (-2.0)

coefficients -.00006 (-1.5) -.00002 (-0.3) .000028 (1.7) .00012 (2.1) .000017 (0.4) -.00014 (-2.6) .0001 (1.5) -.00006 (-0.4) -.00001 (-0.2) -.0001 (-1.4) -.00015 (-1.7) -.00070 (-2.2) -.000006 (-0.2) -.0001 (-2.2) -.00006 (-2.3) -.0001 (-2.8) -.00003 (-1.4) .000001 (0.0) -.00003 (-0.6)

elasticity -.27 -.017 .005 .139 .037 -.177 .125 -.024 -.012 -.103 -.168 -.246 -.019 -.322 -.352 -.302 -.231 .002 -.046

2.867 (1.3) -0.548 (-0.2) -0.270 (-0.1)

-.00004 (-1.4) -.00005 (-1.3) -.00001 (-.6)

-.234 -.166 -.045

NCONW

-62.897 (-1.5)

-.001

(-2.9)

-.136

NETF (AZAR DATA)

-61.342 (-0.8)

-.002

(-2.7)

-.145

20 21 22

S.W.

102

Polachek

T h e W E I S S d a t a is an event d a t a set c o m p i l e d using only events reported in the New York Times.

A s such it is not as c o m p r e h e n s i v e as C O P D A B , t h o u g h obviously

similarities exist.

O n e test of the validity of C O P D A B w o u l d be to p e r f o r m similar

type regression analysis with W E I S S d a t a to ascertain w h e t h e r the C O P D A B results c a n be replicated.

Since W E I S S d a t a for 1966 a n d 1967 w e r e available to m e , I

c h o s e t h e n to replicate our p r e v i o u s r e g r e s s i o n s for t h o s e d y a d s a n d y e a r s in c o m m o n for both data sets (Table 4.3). T h e results are upheld. A g a i n there is a negative correlation that is surprisingly similar for both d a t a sets. Indeed the elasticity for each is approximately -.15 w h i c h is t h e s a m e result o b t a i n e d for t h e entire p o o l e d C O P D A B d a t a .

Again

elasticities are strongly significant according to the usual statistical l e v e l s .

both

18

In s o m e s t u d i e s d e f e n s e e x p e n d i t u r e s are a s s u m e d i n d i c a t i v e of p o t e n t i a l conflictive behavior.

While skeptics question s u c h a m e a s u r e on v a r i o u s g r o u n d s ,

there is precedence in its u s e .

19

For this reason I adopt the m e a s u r e merely to test

w h e t h e r it is consistent with events data. O n e o b v i o u s p r o b l e m with d e f e n s e e x p e n d i t u r e

m e a s u r e s is t h e

d i r e c t i o n a l i t y r e g a r d i n g identification of t a r g e t n a t i o n s .

lack of

Actors may have

d e f e n s e e x p e n d i t u r e s , but it is impossible to d e t e r m i n e an a p p r o p r i a t e target.

high For

this r e a s o n w e are f o r c e d to p e r f o r m statistical a n a l y s i s d e v o i d of directionality. T h u s a g g r e g a t e d e f e n s e e x p e n d i t u r e s are u s e d on a c o u n t r y basis, a n d c o r r e l a t e d with t r a d e m e a s u r e s . period (Table 4 . 4 ) .

20

T h e results are r e p o r t e d for 30 c o u n t r i e s o v e r a t e n y e a r A g a i n there is a strong negative relationship b e t w e e n trade

a n d d e f e n s e e x p e n d i t u r e s , the p s e u d o conflict m e a s u r e of a b o u t - 1 5 , yielding an elasticity of - . 3 1 , implying that a doubling of trade leads to a 3 1 % decline in d e f e n s e e x p e n d i t u r e s , holding G N P a n d other attributes c o n s t a n t .

Here it is interesting to

note that the most important predictor of d e f e n s e expenditure is G N P but that higher levels of education holding constant G N P d e c r e a s e s d e f e n s e e x p e n d i t u r e s . T h e r e is other corroborative evidence of the trade-conflict relationship, as well. For e x a m p l e , in his classic study, Lewis R i c h a r d s o n cooperation.

21

u s e d trade as a m e a s u r e of

He presents graphical e v i d e n c e that in t h e p o s t - d e p r e s s i o n era of the

1930's t r a d e d r a m a t i c a l l y d i m i n i s h e d p e r h a p s leading to s o m e of the conflictive events preceding W o r l d W a r II. UN v o t i n g d a t a has also b e e n u s e d as a m e a s u r e of c o o p e r a t i o n

between

countries. Voting patterns in a c c o r d with another country is t a k e n to reflect political compatibility a n d c o o p e r a t i o n .

A s already m e n t i o n e d , m u c h criticisms exist on the

capability of v o t i n g d a t a to reflect conflict or c o o p e r a t i o n .

N e v e r t h e l e s s in lieu of

better d a t a s o m e have looked at UN voting patterns. Neil R i c h a r d s o n , for e x a m p l e

22

looks at t h e relationship b e t w e e n voting a n d w h a t he calls " d e p e n d e n c e , " n a m e l y

103

Conflict and Trade

t h e s u m of e x p o r t s f o r e i g n i n v e s t m e n t as well as f o r e i g n a i d . correlation

implying

that

those

country

pairs

with

the

H e , t o o , finds a

greatest

economic

d e p e n d e n c e are the o n e s with the most similar voting records, (see his Figure 8, p. 133). T A B L E 4.4 Dependent Variable Defense Expenditure (N=204) (1)

(2)

INTERCEPT

597.86 (1-5)

504.06 (1.27)

EXPORTS

-15.88 (-4.3)

IMPORTS

-14.51 (-4.4)

SIZE (square miles)

0.21 (1.3)

0.28 (1.8)

SECONDARY SCHOOL ENROLLMENT

-3.73 (-3-3)

-2.98 (2.4)

GNP

1.03 x 10" (30.5)

4

0.947

0.99 χ 1 (36.3) 0.947

(3) C r o s s - S e c t i o n a l C a u s a l i t y : T h e T r a d e - C o n f l i c t R e l a t i o n s h i p W i t h T r a d e Treated Endoaenouslv. direction of c a u s a l i t y .

T h e coefficients p r e s e n t e d t h u s far do not indicate the

T h u s f r o m the t a b l e s o n e c a n n o t a s c e r t a i n w h e t h e r trade

d i m i n i s h e s conflict, or w h e t h e r the reverse is t r u e : conflict r e d u c e s t r a d e .

Although

this paper a r g u e s that both are true, this distinction is important for policy p u r p o s e s . If

t r a d e is only a r e s p o n s e to p r e - e x i s t i n g conflict levels, t h e n no v i a b l e policy

implications for the reduction of conflict w o u l d result f r o m i n c r e a s e d t r a d e .

Thus

tests for causality are important. T o test for c a u s a l i t y o n e s h o u l d v i e w t h e t r a d e - c o n f l i c t

r e l a t i o n s h i p as a

s i m u l t a n e o u s set of e q u a t i o n s .

In o n e e q u a t i o n conflict affects t r a d e , w h i l e in the

other trade

In e f f e c t

affects

conflict.

both trade

and

conflict

are

treated

e n d o g e n o u s l y w h i l e c o u n t r y a t t r i b u t e d a t a are u s e d as e x o g e n o u s f a c t o r s for identification. T o test this e n d o g e n e i t y , t w o - s t a g e a n d t h r e e - s t a g e least-squares are used.

S.W.

104

Polachek

T A B L E 4.5 The Simultaneous Determination of Trade and Conflict Two-Stage Least-Squares (t-values in parentheses)

Specification

Adjustments for Country Attributes

(3)

Yes

X

-1.358 (-5.5)

-.0057 (-6.68)

.363

(4)

Yes

M

-1.310 (-5.4)

-.0049 (-5-8)

.314

Variable

Intercept

Coefficient

Elasticitv

Three-Stage Least-Squares (t values in parentheses) Dependent Variable:

Net Conflict

Exports

Independent Variables Constant

-.77 (-4.3)

-119.02 (-3.4)

Elasticitv

Exports

-.0045 (-5.8)

.29

Conflict

1.83 (0.3)

-.03

Defense Expenditures

Actor Target

-.00018 (-5.6) -.00025 (-8.0)

Population Density

Actor Target

-.0015 (-3.3) -.0016 (-3.5)

GNP

Actor Target

1x10 8 (3.0) 2x10 (7.3)

GDP/GNP

Actor Target

Highway Vehicles per capita

8

Actor Target

Secondary School Actor Enrollments Target

7

3.3x10"7 (3.7) 1.2X10 (1.7) 0.73 (1.5) 0.92 (1.6) 1174.5 (7.4) 1002.2 (7.1) 0.048(1.3) 0.076 (2.1)

Electrical Production per capita

Actor Target

-6.68 (-.7) 0.81 (-.1)

Annual Population Growth

Actor Target

-.066 (-1.2) -.138 (-2.6)

T h e hypothesized causality is as predicted (Table 4.5). A n e v e n stronger, more negative

coefficient

(-.0057 versus

-.0028)

is o b t a i n e d .

Thus, even

when

accounting for simultaneity, the causality from trade to conflict remains. Increases in

105

Conflict and Trade

trade d i m i n i s h conflict s u c h that a d o u b l i n g of t r a d e w o u l d reduce conflict by over 30%.

W h e n t h e entire t w o equation s y s t e m is e s t i m a t e d s i m u l t a n e o u s l y with three

stage least- s q u a r e s , there is no evidence that conflict affects t r a d e .

23

T h u s w e are

confident that trade acts as a barrier to conflict, while at the s a m e time e n h a n c i n g an actor's incentive for c o o p e r a t i o n . Despite t h e s e results, a cross-sectional d e t e r m i n a t i o n of causality is o p e n e d to criticism.

O f t e n , t h e s t r e n g t h of t h e particular r e l a t i o n s h i p s d e p e n d crucially on

exogenous variables.

A s is o f t e n t h e c a s e , little t h e o r y e x i s t s a s to

which

e x o g e n o u s variables are most appropriate. Often parametric e s t i m a t e s prove not to be robust with c h a n g e s in t h e s e v a r i a b l e s .

For this reason m a n y h a v e u n d e r t a k e n

to a n a l y z e causality in a t i m e - s e r i e s rather t h a n a c r o s s - s e c t i o n a l , f r a m e w o r k .

We

adopt such an a p p r o a c h by looking in detail at time-series data. 4.3.3

Time-Series

Analysis

T i m e - S e r i e s d a t a are important for t w o r e a s o n s .

First to establish w h e t h e r or

not the c r o s s - s e c t i o n a l results c a n be g e n e r a l i z e d f r o m an a n a l y s i s a c r o s s m a n y countries at a point in time to the behavior of a single country over t i m e . W h e r e a s in cross-sectional analysis, countries with t h e most trade exhibited the least conflict, it is also essential to k n o w w h e t h e r c h a n g e s of a g i v e n country's trade is at all related to c h a n g e s in political c o o p e r a t i o n a n d hostility.

S e c o n d , issues of causality c a n

p e r h a p s better be d i s e n t a n g l e d with time-series data.

If c h a n g e s in trade levels are

a s s o c i a t e d with c o r r e s p o n d i n g c h a n g e s in political behavior, t h e n causality c a n be established on the basis of leads a n d lags in the time series data. (1) A C a s e S t u d y : U . S . / W a r s a w Pact I n t e r a c t i o n s

B e c a u s e t h e C O P D A B data

have been collected over a long time period, time series tests of the hypothesis can be p e r f o r m e d by linking the panel a s p e c t s of t h e C O P D A B d a t a to c o r r e s p o n d i n g trade v a r i a b l e s .

T o illustrate, t h e U.S. a n d Soviet Union b e t w e e n 1967 a n d 1979

w e r e t a k e n as a c a s e study. T h e s e countries during this t i m e period are important b e c a u s e of the volatility in US-Soviet relations during three y e a r s . Recall the easing of US-Soviet hostilities in the detente period of t h e late sixties a n d early seventies, a n d the abrupt shift that began to t a k e place in the mid-1970s. T i m e series plots of U S - W a r s a w Pact a n d US-Soviet Union T r a d e a n d Conflict from 1967 t h r o u g h 1978 are to be a n a l y z e d in a later manuscript. (These plots are available u p o n request from the author). T h e trade m e a s u r e s / c o n s i s t i n g of the s u m of imports a n d exports, are given in real quarterly dollars. T h e conflict m e a s u r e s are i n t e n s i t y - w e i g h t e d s u m s of c o n f l i c t u a l e v e n t s , a g g r e g a t e d q u a r t e r l y f r o m C O P D A B data.

the

(Relative conflict m e a s u r e s are not n e e d e d in t i m e series analysis

b e c a u s e selectivity issues are reported to o c c u r for differential reporting by nation

S.W. Polachek

106

a n d not by time.)

T h e t r e n d s a p p a r e n t are in a c c o r d with p r e d i c t i o n .

Conflict

d e c l i n e s as trade rises in the 1 9 7 1 - 1 9 7 2 p e r i o d , t h e levels off until late 1 9 7 5 as trade r e m a i n s fairly c o n s t a n t .

Both conflict m e a s u r e s s h o w fairly s t r o n g inverse

correlations with trade before 1976. T h i s is particularly a p p a r e n t for W a r s a w pact conflict directed at the U S , which is substantially higher t h a n U S conflict directed at the Pact before m i d - 1 9 6 8 . T h e r e , inverse relationships support t h e c o n t e n t i o n that greater levels of trade are associated with lower levels of conflict. T h e inverse trade/conflict relationship b e c o m e s m o r e a p p a r e n t w h e n t h e trade a n d conflict d a t a are plotted directly with W a r s a w Pact conflict d i r e c t e d at the U S plotted on one axis a n d U S - W a r s a w Pact t r a d e on t h e other. For the 1 9 6 7 - 1 9 7 5 d a t a the inverse relationship b e t w e e n conflict a n d trade is clear.

In addition, it is

evident that the relationship is probably hyperbolic. (2) T i m e S e r i e s C a u s a l i t y . t y p e causality tests.

25

Time-Series d a t a enable one to c o m p u t e G r a n g e r

T h e logic is straightforward.

W i t h t i m e - s e r i e s d a t a one c a n

ascertain w h e t h e r t r a d e levels in one period affect future conflict levels, a n d vice versa.

Put simply, increases in explanatory p o w e r i n d u c e d by lagged trade values

in a regression of conflict as a function of t r a d e w o u l d be indicative of causality running from trade to conflict. With Τ representing T r a d e a n d Ζ representing conflict, G r a n g e r causality exists if past values of Τ affect present v a l u e s of Z. T h e G r a n g e r method thus involves a test of the joint hypothesis that c.j = 0 for i = 1 to j , w h e r e c.j is the coefficient of Τ lagged i periods in the following e q u a t i o n : Ζ = c 0 + at + bT + (C-1T-1 + ... + c.jT.j) + (d-iZ--| + ... + d.jZ-j)

(4.17)

w h e r e c 0 is the constant t e r m , t is the t i m e t r e n d , T.j and Z.\ are the t w i c e l a g g e d values of Τ and Z, and q , and d, are coefficients. T h e null hypothesis that c.j = 0 for i = 1 to j implies that the past v a l u e s of trade do not predict (and hence "cause") current conflict.

T h i s h y p o t h e s i s c a n be tested

with Fischer's F-Test. Rejection of this hypothesis implies that s o m e past value of Τ significantly affects present Z. T h u s , t h e condition for G r a n g e r causality to hold is rejection of the null h y p o t h e s i s .

26

By the s a m e t o k e n one can also test the reverse,

that is w h e t h e r past conflict " c a u s e s " current trade by re-specifying equation 4.17 as follows: Τ = T 0 + a' + b'Z + (c'-iT.-i + ... + c'-jT.j) + ( d ' ^ Z ^ + ... + d'-jZ-j)

(4.18)

In this c a s e , rejection of the null hypothesis that d'.j = 0 for i = 1 to j implies that past conflict affects current trade.

Conflict and Trade

107

T a b l e 4.6 c o n t a i n s probability v a l u e s for G r a n g e r F-tests of t h e null h y p o t h e s e s that trade d o e s not c a u s e conflict ( C o l u m n 1) a n d that conflict d o e s not c a u s e trade ( C o l u m n 2) in t h e 1 9 6 7 - 1 9 7 8 time p e r i o d .

In T a b l e 4.6 probability v a l u e s of less

t h a n .05 indicate rejection of the null hypothesis, t h e r e b y implying the e x i s t e n c e of Granger causality.

H i g h v a l u e s i n d i c a t e no c a u s a l i t i e s .

The "LAGS" column

indicates the n u m b e r of quarters over w h i c h G r a n g e r causality is t e s t e d . In C o l u m n 1 , the null hypothesis that lagged v a l u e s of trade do not significantly affect p r e s e n t conflict as rejected for t h e first six lag p e r i o d s .

In C o l u m n 2, t h e

hypothesis that lagged conflict d o e s not affect present trade is rejected only in lag p e r i o d s for, 5 a n d 6.

T h e s e results are c o n s i s t e n t with t r a d e affecting political

interactions. T h e s e results can be v i e w e d as strengthening our previous findings b a s e d on a c o n t e m p o r a n e o u s t r a d e conflict relationship.

Specifically o n e c a n i m p r o v e on the

ability of c o n t e m p o r a n e o u s t r a d e to predict conflict by i n c o r p o r a t i n g l a g g e d trade values.

In other w o r d s , the underlying relationship b e t w e e n trade a n d conflict is not

strictly c o n t e m p o r a n e o u s , but c o r r e s p o n d s to distributed lagged f r a m e w o r k .

Further

work on the appropriate lagged structure is obviously necessary. T A B L E 4.6 Probability Values for the Granger Causality Test, 1867-1978 US/WARSAW PACT Data LAGS

TRADE CONFLICT

CONFLICT TRADE

1

.0009

.1046

2

10018

.3165

3

.0004

.1394

4

.0054

.0110

5

.0071

.0201

6

.0126

.0240

7

.0874

.0661

8

.0515

.0604

9

.1917

.1486

10

.2739

. 23 00

NOTE: column 1 gives probability values for tests of the hypothesis that trade does not cause conflict (in Granger's sense). Column 2 tests the converse hypothesis that conflict does not cause trade. Low probability values (e.g., less than .05) indicate that the hypothesis is rejected; high values indicate acceptance. Lag periods indicate the number of quarters over which Granger causality is tested (j in equation 4). Examination of Durbin-Watson statistics indicated that autocorrelation was not significant at the .05 level in any of these equations. Source:

M. Gasiorowski and S. Polachek, "East-West Trade and Linkages in the Era of Detents," J. Conflict Resolution (1982).

S.W.

108

Polachek

4.4 P r o p o s i t i o n T w o : T h e T r a d e C o n f l27i c t Augmented By Trade Elasticities

Relationship

T h u s far the empirical w o r k c o n c e n t r a t e d on h o w t r a d i n g c o u n t r i e s exhibit less conflict a n d more cooperation than d y a d s with little t r a d e . Yet theory indicates that it is not t r a d e a l o n e , but " g a i n s f r o m t r a d e " that are relevant to t h e t r a d e - c o n f l i c t relationship. As w a s stated, if conflict leads directly to a cessation of t r a d e , t h e n one implicit cost of conflict is the lost gains from t r a d e . the

28

T h e higher the gains from trade,

h i g h e r t h e i m p l i c i t c o s t s of c o n f l i c t , a n d t h e g r e a t e r t h e

incentives

for

cooperation. So far t h i s

paper tested the theory

only

in its m o s t

primitive

form

by

c o n c e n t r a t i n g solely on t h e relationship b e t w e e n conflict a n d t r a d e levels, w h i l e ignoring explicit m e a s u r e s of welfare gains. T h o u g h trade levels a n d welfare gains are obviously related, the correlation is by no m e a n s perfect, so that omitting welfare gains c a n bias the trade-conflict estimates.

O n the other h a n d , as shall be shortly

illustrated, including welfare gains estimates e n a b l e s a more substantial test of the model's validity. Incorporating w e l f a r e g a i n s is difficult, as t h e r e are no c u r r e n t d a t a directly measuring gains from trade.

O n e must obtain t h e m implicitly as c o n s u m e r a n d

p r o d u c e r s u r p l u s e s c o m p u t e d as the a r e a under i m p o r t - d e m a n d a n d o v e r exportsupply c u r v e s . T h e more inelastic the i m p o r t - d e m a n d a n d export-supply c u r v e s the greater the levels of c o n s u m e r a n d producer surplus.

T h e greater t h e s e s u r p l u s e s

the smaller the incidence of conflict, holding trade levels constant.

For this reason

inelastic i m p o r t - d e m a n d a n d export-supply curves s h o u l d serve to d e c r e a s e conflict just as d o e s greater trade. This being the c a s e , less conflict a n d more c o o p e r a t i o n s h o u l d be o b s e r v e d for trading partners exhibiting relatively s m a l l import d e m a n d and export supply c u r v e s . W h i l e this result may a p p e a r o b v i o u s , to our k n o w l e d g e there are no empirical test of this proposition. Yet such a test is important b e c a u s e verification of this latter result adds c r e d e n c e to our p r o p o s e d dyadic conflict m o d e l . T o best test the conflict-trade m o d e l , c o m m o d i t y specific s u p p l y a n d d e m a n d elasticities are n e e d e d for e a c h c o u n t r y pair.

D e s p i t e t h e i m p o r t a n c e of t h e s e

e s t i m a t e s , no such d a t a have b e e n c o m p u t e d on a regular s y s t e m a t i c basis.

This

leaves t w o o p t i o n s : (a) to c o m p u t e elasticities or (b) to piece t o g e t h e r w h a t e v e r elasticities

have

already

been

compiled.

Both

options

are taken

in

turn.

Nevertheless, simplification is still necessary b e c a u s e of remaining d a t a limitations. First the e n s u i n g analysis c o n c e n t r a t e s solely on d e m a n d elasticities, a n d i g n o r e s supply c u r v e s .

S e c o n d , only a g g r e g a t e d e m a n d c u r v e s are c o n s i d e r e d , t h e r e b y

Conflict and Trade

omitting consideration

109

of s p e c i f i c c o m m o d i t i e s .

Finally t h e r e a r e

limitations

concerning the n u m b e r of countries a n d country pairs that are c o n s i d e r e d . 4.4.1 Import Demand Trade/Conflict

From the Rest of the World and Relationship

the

D a t a limitations force c e r t a i n s i m p l i f i c a t i o n s : First, a g g r e g a t e i m p o r t d e m a n d c u r v e s are u s e d rather t h a n c o m m o d i t y specific d e m a n d elasticities.

S e c o n d , an

actor's d e m a n d f r o m the rest of the w o r l d is u s e d rather t h a n d e a l i n g with d y a d i c bilateral d e m a n d , t h o u g h this latter s i m p l i f i c a t i o n will be e l i m i n a t e d in t h e next section w h e n w e incorporate elasticities c o m p u t e d by J a i m e M a r q u e s .

29

A country's import d e m a n d from the rest of the w o r l d c a n be specified as log(m/MUV)it = a j 0 + ahlog(MUV/CPI)it + a i 2l o g ( G D P / C P I ) i t + e it

(4.19)

w h e r e m is imports (in millions of U S d o l l a r s ) ; M U V is t h e import unit v a l u e index; a n d i a n d t a r e c o u n t r y a n d t i m e s u b s c r i p t s r a n g i n g f r o m 1 to Ν a n d 1 to Τ respectively; C P I is the c o n s u m e r price i n d e x ; G D P is g r o s s d o m e s t i c product (in local currency units), a n d ε\\ is an error t e r m . The

dependent

variable

(m/MUV)

is i m p o r t

e x p e n d i t u r e s d i v i d e d by an index of import prices.

value

computed

as

import

T h e i n d e p e n d e n t v a r i a b l e s are

real import prices ( M U V / C P I ) , a n d a national i n c o m e deflated by the c o n s u m e r price index ( G D P / C P I ) .

T h e C P I w a s u s e d instead of more a p p r o p r i a t e m e a s u r e s , such

as the G D P deflator b e c a u s e c o m p l e t e series w e r e available for a g r e a t e r n u m b e r of countries w h e n using this m e a s u r e . T h e equation is estimated log-log form so as to directly obtain elasticity estimates.

Price a n d i n c o m e elasticities are a h a n d 1 .

7.5

Competing

Choices

T h e V M P x of b o m b i n g , t h e n , is a d o w n w a r d s l o p i n g f u n c t i o n of X, but w h i c h shifts i n w a r d or o u t w a r d radially as w is lower or higher.

In Figure 7.5 the V M P x is

s u p e r i m p o s e d on t h e m a r g i n a l c o s t s in F i g u r e 7.3b, p e r m i t t i n g us to study the o p t i m a c h o s e n by t h e p a r t i c i p a n t s .

For s i m p l i c i t y w e d i s p l a y o n l y t h e

VMPx

a s s o c i a t e d with t w o c o n t r a s t i n g v a l u e s of w : t h e Statistical V a l u e of Life in the United S t a t e s V M P x ( w * ) ; a n d the v a l u e a s s o c i a t e d with h o p e s of H u s s e i n a n d the fears of N u n n , V M P x ( w * * ) . T h e reader c a n interpolate other v a l u e s .

M. Wolfson, S. Gutierrez, J. Traynor and R. Smith

170

Marginal Costs a n d Value of Marginal Product

MC.

'allies

4

MC,U.S.

VMP(w**)

VMP(w*)

X4 x

X2

X

X3

X5

Xe

Probable Range of X*

Figure 7.5: Optimal Bombing Points at the "Statistical Value of Life" to U.S. V M P x ( w * ) intersects the g r a p h s of all three marginal c o s t s of b o m b i n g .

Given

t h e g o a l s a n d v a l u a t i o n s w e have i m p u t e d to h i m , G e n e r a l S c h w a r z k o p f

would

rationally w i s h to drive to X3 w h e r e the Marginal Factor Cost to the U S equalled the V a l u e of the Marginal Product of c o n t i n u e d b o m b i n g .

T h e allies might well have

a c c e p t e d the U S evaluation of h u m a n life lost in a g r o u n d a c t i o n , w*, t r o o p s w e r e i n v o l v e d as w e l l .

since their

But since they bore a higher M a r g i n a l C o s t w o u l d

have l a u n c h e d the attack sooner, at X4.

T h i s difference w a s e x p r e s s e d in political

t e r m s a n d r e s o l v e d at s o m e point i n t e r m e d i a t e b e t w e e n t h e m , p e r h a p s c l o s e to President Bush's choice X 2 .

T h e intermediate b o m b i n g , X", represents the length of

b o m b i n g that S c h w a r z k o p f w o u l d have c h o s e n if s o m e portion of the support given by allies entered into the marginal cost calculation. V M P x ( w * * ) intersects t w o Marginal Cost c u r v e s , the actual marginal cost of the operation a s s o c i a t e d with the allied contribution a n d the lower m a r g i n a l cost to the US, given the subsidy.

F r o m the N u n n point of v i e w the US might have had to go

on to Xq if the alliance held, or to X 5 if it did not as Hussein h o p e d . G i v e n that length of b o m b i n g , a n d t h e a s s o c i a t e d e c o n o m i c e x p e n s e , t h e y d e b a t e d w h e t h e r the operation w o u l d be worthwhile, or be s e e n to be w o r t h w h i l e by the public in the US and abroad. T h e cost-prohibitive level of b o m b i n g at X 5 or Xq d e p e n d e d on Iraq behavior as well as U S v a l u a t i o n of h u m a n life.

T h e s e points c o u l d be r e a c h e d u n d e r the w*

171

Gulf War

Statistical V a l u e of Life as well as w**.

S u p p o s e t h e Iraqi soldiers w e r e willing to

fight up to s o m e level Y** in Figure 7.2, c o r r e s p o n d i n g to s o m e X* in Figure 7.5 in the

neighborhood

of

X 5 a n d X6-

In t h i s c a s e

both

Marginal Cost

curves

representing the factor cost of b o m b i n g w o u l d e x c e e d the V M P x ( w * ) a n d the g r o u n d c a m p a i g n w o u l d not be u n d e r t a k e n . In t h e s e c a s e s , t h e a p p r o p r i a t e s t r a t e g y w o u l d h a v e b e e n s a n c t i o n s e c o n o m i c warfare rather t h a n military attack.

and

In actuality, w a r b r o k e out d u e on one

side to the preference of President B u s h for military action, his political adroitness, the suitability of high technology U S air-land doctrine to the terrain a n d the brevity of the c a m p a i g n ; a n d , on the other, S a d d a m Hussein's political a n d military ineptitude, the inability of Soviet-style military d o c t r i n e a n d t e c h n o l o g y to c o u n t e r t h e U S on this terrain, a n d the perhaps anticipated unwillingness of Iraq's soldiers to maintain collective behavior in the face of fire. C o n s e q u e n t l y X* t u r n e d out to be s o m e w h e r e b e t w e e n X4 a n d X3 in Figure 7.5. But w h e r e ?

C o u l d it have b e e n s o m e w h e r e to t h e left of X3, so that t h e U S

c o n t i n u e d to attack e v e n after Iraq w a s u n a b l e to offer o r g a n i z e d r e s i s t a n c e ? priori

o n e w o u l d e x p e c t that s i n c e t h e U S w a s t h e e f f e c t i v e d e c i s i o n

A

maker,

c o n s i d e r i n g only its o w n utility it w o u l d b o m b up to the point w h e r e its V M P x e q u a l e d is m a r g i n a l f a c t o r cost at G e n e r a l S c h w a r z k o p f ' s point X3. S i n c e the m a r g i n a l cost w a s extraordinarily low d u e to t h e s p e c i a l c i r c u m s t a n c e s w e have d e s c r i b e d , a n d the U S evaluation of allied lives a n d Iraqi lives w a s as d e s c r i b e d , the US w o u l d rationally have b o m b e d "too m u c h " c o m p a r e d to t h e e v a l u a t i o n s of others.

It w o u l d have inflicted further d e s t r u c t i o n on t h e e n e m y a n d w o u l d have

s a v e d more U S a n d allied lives if it b o m b e d to, say, point Y** in Figure 7.2 with C** the c o r r e s p o n d i n g level of Iraqi casualties along t h e solid-line actual Iraqi Casualty Function.

7.6 M e a s u r e m e n t : T h e E l a s t i c i t y o f S a v i n g L i v e s T h r o u g h

Bombing

In the f a c e of the paucity of d a t a w h i c h m a k e s it i m p o s s i b l e to e s t i m a t e the p a r a m e t e r s of the s y s t e m of equations in the m o d e l , w e attempt a point estimate of the elasticity of US casualties s a v e d with respect to sorties.

A low elasticity implies

that the b o m b i n g w a s carried on to the extent that further air attacks w o u l d yield only a small percent reduction in casualties w h e n the g r o u n d w a r started. From equation (7.7): (dl/dX)(X/l) = -αγ

(7.11)

M. Wolfson, S. Gutierrez, J. Traynor and R. Smith

172

Multiplying by the value of life, w a n d c h a n g i n g the sign a g a i n : (7.12)

V M P X( X / I ) = w a y At equilibrium the V M P x o f another sortie equals its M C .

Substituting a n d dividing

by w w e get the point elasticity of lives s a v e d with respect to b o m b i n g to b e : (7.13)

(MC/w)(X/l) W e m a k e rough high a n d low e s t i m a t e s of t h e elasticity in T a b l e 7 . 1 . e s t i m a t e is m a d e both with a n d w i t h o u t the allied s u b s i d y .

Each

T h e c o m p o n e n t s of

(7.13) are m e a s u r e d as follows: (1) M C is a p p r o x i m a t e d locally by A v e r a g e Cost as the per-sortie Total Variable Cost (TVC) of Desert S t o r m . Since only aggregate point d a t a are available, it is our only m e a s u r e . Nevertheless it is consistent with the theory w h i c h s u g g e s t s that the US w a s operating in a constant returns environment. T V C is reported in different w a y s by v a r i o u s a g e n c i e s .

W e shall rely on d a t a

c o n t a i n e d in the report of Richard D a r m a n , Director of the Office of M a n a g e m e n t a n d Budget to the C o n g r e s s ( D a r m a n , 1991). O M B e s t i m a t e s that w h a t it calls the Total Incremental Cost of Desert Storm to finally be $ 6 0 billion w h e n t h e operation is p h a s e d d o w n a n d t h e t r o o p s are r e t u r n e d h o m e . $ 3 1 . 5 7 4 billion w a s spent.

The Wall Street

Journal

A s of t h e e n d of F e b r u a r y

( W e s s e l , 1991) reports that the

G e n e r a l A c c o u n t i n g Office estimates the cost of Desert S t o r m to have b e e n m u c h lower, $ 4 0 billion on a similar i n c r e m e n t a l basis.

W i t h a f e w a d j u s t m e n t s , w e will

use the O M B figures to derive the elasticities in T a b l e 7 . 1 . For our high e s t i m a t e of T o t a l V a r i a b l e Cost w e only subtract f r o m the $ 6 0 billion the $ 1 . 2 2 0 billion reported by O M B for aircraft a n d v e h i c l e s d e s t r o y e d since t h e y c a m e f r o m s t o c k ( O M B p.8), a n d t h e $2.1 billion e s t i m a t e of t h e g r o u n d c a m p a i g n itself by US News and World Report

(March 1 1 , 1 9 9 1 , p.74).

O u r low estimate includes all of the O M B Total I n c r e m e n t a l C o s t for J a n u a r y F e b r u a r y 1991 e v e n t h o u g h that i n c l u d e s t h e g r o u n d c a m p a i g n t h a t t o o k place b e t w e e n F e b r u a r y 23 a n d February 2 7 .

T o this is a d d e d half of t h e r e m a i n i n g

i n c r e m e n t a l c o s t s , s i n c e t h e a t t a c k force w a s d o u b l e d f r o m t h e

approximately

2 0 0 , 0 0 0 t r o o p s for the d e f e n s i v e Desert Shield O p e r a t i o n , to o v e r 4 0 0 , 0 0 0 for the offensive

Desert

Storm.

This

measure,

which

we consider

still to

be

an

overestimate, turns out to approximate the G A O figure. (2) T h e value of life is t a k e n to be t h e Statistical V a l u e of Life.

In light of the

t r e n d of its e s t i m a t e s o v e r t h e y e a r s , w * = $ 6 million s e e m s r e a s o n a b l e for a volunteer army.

173

Gulf War

(3) T h e total n u m b e r of U S sorties, X, is reported by Time ( M a r c h 4, 1 9 9 1 , p.32) to be 9 4 , 0 0 0 7 (4) U S killed in action c a s u a l t i e s , I, is subject to fine definitional p r o b l e m s .

In

actual fact the n u m b e r of A m e r i c a n s killed in the g r o u n d c a m p a i g n p r o p e r w a s very s m a l l , e x c l u d i n g as it d o e s t h e c a s u a l t i e s i n c u r r e d by t h e S c u d a t t a c k on the barracks in R i y a d h , a n d losses of air p e r s o n n e l . T h e r e may have b e e n as f e w as 4 persons killed on this narrow definition. H o w e v e r , in this analysis w e are c o n c e r n e d with

c h o i c e s that by definition must have b e e n m a d e ex ante

attack w a s l a u n c h e d .

A c c o r d i n g to Newsweek

before the ground

( M a r c h 18, 1 9 9 1 , pp. 3 7 - 3 8 ) , the

plan of attack w a s c a r r i e d out u n d e r a s s u m p t i o n s g i v e n by c o m p u t e r s i m u l a t i o n s c o n d u c t e d by G e n e r a l S c h w a r z k o p f w h i c h s h o w e d a n e x p e c t e d c a s u a l t y rate of 5,000 killed. In T a b l e 7 . 1 , w e c o m p u t e three elasticity e s t i m a t e s for t h e high a n d low v a l u e s of T V C : (1) if the US had received no s u b s i d y ; (2) if the subsidy w a s limited to the a m o u n t that actually has been collected by the date of the O M B report; a n d (3) if all the subsidy w e r e collected, c o r r e s p o n d i n g to the O M B estimate of i n c r e m e n t a l cost w h e n the w h o l e operation is w o u n d up. T A B L E 7.1 Incremental Costs and Elasticities of Bombing (Costs in Billions of Dollars) High Low Gross US Incremental Costs Adjustments

60 -3.32

Net US Incremental Costs

57.68

Elasticity Without Subsidy

1.92

Contributions Received

36.1

US Costs after Receipt

21.58

Elasticity after Contributions Received Contributions Received and Promised

0.7193

39.193 0 39.193 1.31 36.1 3.093 0.1031

54.5J6

54.56

US Cost after Contributions

3.l'2

-15.367

Elasticity after Contributions

0.104

-0.512

Sources: OMB 4-27-91 ; US News and World Report 3-11-91 ; Newsweek, March 4, 1991 p.32 and March 11, 1991 p.74. T h e s e r e s u l t s s u g g e s t that t h e " o v e r - b o m b i n g " h a d b e e n c a r r i e d out to an e x t r e m e m a r g i n , just as o n e w o u l d e x p e c t f r o m t h e t h e o r e t i c a l a n a l y s i s .

For the

lowest of the e s t i m a t e d costs, it s e e m s that e v e n if all the p r o m i s e d contributions do

M. Wolfson, S. Gutierrez, J. Traynor and R. Smith

174

not corne in the US s e e m s to have e a r n e d a positive q u a s i - r e n t a n d p r o b a b l y a profit on the venture. 7.7 G r o u n d A t t a c k V e r s u s However

crude, these

Sanctions estimates

seem

sufficiently

robust

to j u s t i f y

the

c o n c l u s i o n that the U S carried out the b o m b i n g c a m p a i g n until there w a s nothing at all to be g a i n e d by continuing further. It c o u l d do so b e c a u s e of t w o special factors that reduced the marginal cost of the action to virtually z e r o : the w a r w a s fought out of inventory, m u c h of w h i c h w a s either o b s o l e t e or not to be r e p l a c e d ; a n d , the subsidy by allies more than c o v e r e d the variable cost. This a p p r o a c h is in line with the position most closely a s s o c i a t e d with the postViet N a m v i e w s of G e n e r a l Colin Powell that one d o e s not "fool a r o u n d " with w a r by following a p i e c e m e a l p r o g r a m of g r a d u a t e d r e s p o n s e or o n e - d i m e n s i o n a l air or economic war which allows the opponent any opportunity to a d a p t .

8

Powell

r e g a r d e d the decision to w a g e offensive w a r as a political o n e to be m a d e by the President.

But o n c e that decision w a s m a d e , his a p p r o a c h w a s C l a u s e w i t z i a n : the

m a x i m u m multi-dimensional air-land-sea assault p o w e r available is to be brought to bear on the e n e m y to c o m p l e t e l y destroy his capacity to fight. T h i s a p p r o a c h w a s reiterated by G e n e r a l S c h w a r z k o p f on the eve of battle, a n d w h i c h he a n d G e n e r a l 9

M c C a f f r e y carried out until ordered to halt by the President. T h e rush to early military a c t i o n p r e s s e d by P r e s i d e n t B u s h reflected w h a t t u r n e d out to be a correct estimate of the costs. At very little sacrifice to the U S , he hoped for the political a d v a n t a g e s of his New O r d e r in the Middle East, stabilization of the world's oil supply, a n d an object lesson to t h o s e w h o t h r e a t e n the v a l u e s he espouses. Total w a r s of the p a s t - t h e US Civil War, the two W o r l d W a r s , a n d the Cold W a r now w o n - t e s t e d the production possibilities of nations. e c o n o m i c w a r f r o m the A m e r i c a n point of v i e w .

T h e Gulf W a r w a s not an

It w a s largely f o u g h t with slack

e c o n o m i c resources, within the U S production possibility frontier.

Until the c e a s e -

fire w a s o r d e r e d , it w a s s e e m i n g l y a technical military w a r to the U S , safely left to the e x p e r t s to e m p l o y tactics a n d e q u i p m e n t d e s i g n e d to d e s t r o y a S o v i e t - s t y l e army.

T h e d e c i s i o n not to apply s a n c t i o n s a m o u n t e d to a d e c i s i o n not to w a g e

e c o n o m i c w a r during the hostilities, although it has since b e e n c o n d u c t e d after the c e a s e fire. In the e n d the political decision to halt the attack illustrates the limitation of the purely military m a x i m u m a s s a u l t a p p r o a c h w h i c h is s i m p l y t u r n e d o n a n d t h e n a l l o w e d to run its c o u r s e .

Even t h o u g h the e c o n o m i c limitation did not apply to the

175

Gulf War

U S in this c a s e , political constraints c o n t i n u e d to matter a n d to influence the course of war. W a r c a n never be a purely technical military q u e s t i o n left to military leaders any more t h a n t h e operation of a b u s i n e s s enterprise c a n be left to its e n g i n e e r i n g staff. T h e q u e s t i o n w e c o n s i d e r in retrospect is: If the military c a m p a i g n w a s a model of s y s t e m s d e s i g n e d to d e f e a t t h e Soviet U n i o n , c o u l d t h e e c o n o m i c war, w h i c h actually did d e f e a t t h e U S S R , h a v e b e e n d i r e c t e d t o w a r d Iraq ( W o l f s o n , 1 9 9 1 ) ? W o u l d sanctions have w o r k e d ? A s S e n a t o r N u n n r e m a r k e d to G e n e r a l P o w e l l : "We will never know." C o n s i d e r e v i d e n c e on both sides of the p r o p o s i t i o n : 7 7 . 1 Sanctions

and economic

war would have

worked

Iraq w a s in a severely debilitated situation as a result of the v a g a r i e s of world oil prices, the destruction a n d disruption of oil exports as a result of the 1 9 8 0 - 1 9 8 8 w a r with Iran, as well as the e x p e n s e of that struggle. Real G r o s s National Product w a s halved during t h o s e y e a r s , a n d its per c a p i t a G N P r e d u c e d by almost two-thirds as Table 7.2 s h o w s . T A B L E 7.2 Iraq Gross National Product 1980-1981 (Constant 1988 Dollars) Year

GNP (billions)

GNP per Capita (dollars)

1980

124,600

9,441

1981

70,420

5,145

1982

67,880

4,785

1983

65,100

4,427

1984

68,740

4,509

1985

67,430

4,267

1986

56,870

3,472

1987

66,120

3,896

1988

65,790

3,742

Source: US Arms Control and Disarmament Agency (1990, 51). Since oil m a k e s up virtually all of the Iraqi e x p o r t s , t h e s e c o u l d have b e e n cut off, as they still are at this writing, either by the refusal of the rest of the world to buy or the c l o s u r e of t h e pipeline t e r m i n a l s .

Effectively this w o u l d h a v e h a l t e d the

importation of g o o d s by closing off Iraq's supply of foreign e x c h a n g e , without m u c h effort at a naval blockade.

M. Wolfson, S. Gutierrez, J. Traynor and R. Smith

176

T h e d e p e n d e n c y of Iraq on oil exports for its military p r o g r a m is illustrated in T a b l e 7.3. T h e table s h o w s the drastic decline in Iraq's exports d u r i n g t h e Iran-Iraq w a r a n d the e x t r e m e l y large portion of a r m s i m p o r t s c o m p a r e d to t h e e x p o r t of p e t r o l e u m . Exports fell from 30 per cent of G N P at the beginning of the w a r to 2 per cent at the e n d .

At t h e start of the war, a r m s imports w e r e only 9 per cent of the

v a l u e of e x p o r t s .

By 1984 t h e v a l u e of a r m s imports r e a c h e d 9 9 per cent of the

v a l u e of all exports a n d never fell below 3 5 per cent t h r o u g h o u t t h e war. T o be sure s o m e of Iraq's i m p o r t s of a r m s w a s f i n a n c e d by t r a n s f e r p a y m e n t s - f r o m

Kuwait

a m o n g o t h e r s - a s well as its exports of oil. But with both t h e s e s o u r c e s of finance e l i m i n a t e d , Iraq w o u l d have been unable to import military e q u i p m e n t as well as the other g o o d s required to maintain its civilian e c o n o m y . T A B L E 7.3 Iraq's International Trade in Arms (Constant 1988 Dollars) Year

Imports

Exports Arms Imports Arms Imports/GNP

1980

19720

37180

3395

0.16

1981

26760

13590

5421

0.38

1982

26120

12430

8611

0.38

1983

14210

11430

8174

0.22

1984

12470

10380

10300

0.18

1985

11540

11320

5137

0.17

1986

10860

8032

6074

0.19

1987

7660

9311

5681

0.12

1988

12400

1300

4600

0.19

Year

Exports/GNP Arms Imports/GNP Arms Imports/Total Exports

1980

0.30

0.03

0.09

1981

0.19

0.08

0.40

1982

0.18

0.13

0.69

1983

0.18

0.13

0.72

1984

0.15

0.15

0.99

1985

0.17

0.08

0.45

1986

0.14

0.11

0.76

1987

0.14

0.09

0.61

1988

0.02

0.07

0.35

Source: Ibid. p.93.

Gulf War

177

In t h e long t e r m , e c o n o m i c w a r f a r e might h a v e d e s t r o y e d t h e Iraqi military power.

Military e q u i p m e n t is subject to d e p r e c i a t i o n a n d is in c o n s t a n t n e e d of

repair.

T h e m a i n t e n a n c e at the ready of a 4 million m a n army out of a population of

17 million i m p o s e s an intolerable burden on t h e e c o n o m y . 7.7.2 Why sanctions

might not have

worked

S a n c t i o n s might not have i m p o s e d a n u n b e a r a b l e cost on the Iraqi population. A s both G e n e r a l P o w e l l a n d D e f e n s e S e c r e t a r y C h e n e y a r g u e d a g a i n s t S e n a t o r N u n n , S a d d a m a p p e a r e d willing to inflict an e n o r m o u s e c o n o m i c b u r d e n on his people in order to maintain his military strength (Table 7.2).

In retrospect, he has

s h o w n himself able to enforce t h e c o m p l i a n c e of his citizens e v e n in the face of the destruction left by the war.

This a r g u m e n t has its greatest force if s a n c t i o n s w e r e

e x p e c t e d to starve the Iraqis out rather t h a n cut off the supply of imports required to operate their military establishment. In any c a s e , s a n c t i o n s a n d e c o n o m i c w a r f a r e are long t e r m i n s t r u m e n t s of international policy.

It w a s a r g u e d that Kuwait had to be relieved promptly before it

w a s d e s t r o y e d or d e p o p u l a t e d .

Furthermore, there was concern

about

the

w i l l i n g n e s s of t h e i n t e r n a t i o n a l c o m m u n i t y to m a i n t a i n s a n c t i o n s in t h e f a c e of e c o n o m i c incentives to buy Iraqi oil at c o n c e n s s i o n a r y p r i c e s .

10

A n o t h e r r e a s o n is the d a n g e r , i n h e r e n t in e c o n o m i c w a r f a r e , that t h e losing party

may

in d e s p e r a t i o n

launch a pre-emptive

n u c l e a r or c h e m i c a l

strike-

particularly at I s r a e l - w h i l e it still had the capacity to do so ( W o l f s o n , 1985).

While

such an attack w o u l d have e n d e d in the unlimited destruction of Iraq in retaliation, that possibility c o u l d never be d i s c o u n t e d . But the ability of the UN to disable these w e a p o n s by its o w n p r e - e m p t i v e strikes, a n d the failure of Iraq to l a u n c h s u c h w e a p o n s w h e n the conflict w a s actually u n d e r w a y , s u g g e s t that this d a n g e r might have been over estimated if it w a s the basis for the allied d e c i s i o n .

11

So t h e r e w e r e u n c e r t a i n t i e s f a c i n g either c o u r s e of a c t i o n . P r e s i d e n t c h o s e to m o v e quickly to t e c h n i c a l military war. military c a m p a i g n as w e have a n a l y z e d it,

Bush

T h e low cost of c o n d u c t i n g the

evidently c o m p a r e d f a v o r a b l y with the

p e r c e i v e d uncertainties of long t e r m e c o n m i c w a r f a r e .

It w a s costly in Iraqi lives,

s a v e d s o m e Kuwaiti lives, but to the U S it w a s certain in its o u t c o m e a n d virtually costless in its conduct.

M. Wolfson, S. Gutierrez, J. Traynor and R. Smith

178

Conclusion

7.8

T h e issue of s u n k c o s t s is not so m u c h a b o u t history as policy for t h e future. W o u l d the U S have c o n d u c t e d the Gulf action if it had to pay the full freight itself out of current expenditures?

Should it plan to do this sort of operation a g a i n ?

T h e s e are t h e q u e s t i o n s that lie behind the military budget d e b a t e s in C o n g r e s s and elsewhere.

T h e Wall Street

Journal

editorial (May 2 1 , 1991) in criticizing the

a l l o c a t i o n s of w e a p o n r y (although not the size) p r o p o s e d by C o n g r e s s a s s u m e s that the a n s w e r is yes. T h e p r o b l e m is that if the w e a p o n s are p r o d u c e d in o n e p e r i o d , t h e y enter into the stockpile of the next, w h e r e they b e c o m e a s u n k c o s t to t h e extent that they depreciate a n d o b s o l e s c e , or to the extent that they are not to be replaced in a third period. T h e n they do not enter into marginal cost a n d t h e r e b y e n c o u r a g e their use as they did in the Gulf. T h e allocation of resources to research a n d d e v e l o p m e n t functions in the s a m e way.

It influences the nature of the national stock of technical k n o w l e d g e , w h i c h , in

turn d e t e r m i n e s the s h a p e of the future p r o d u c t i o n possiblity frontier. F o s t e r i n g t e c h n i c a l p r o g r e s s in t h e t y p e s a n d level of military c a p a b i l i t y in o n e p e r i o d , c h e a p e n s the relative cost of w a r in the next (Wolfson a n d S h a b a h a n g , 1991). T h e c o n n e c t i o n b e t w e e n the s u n k cost p r o b l e m a n d t h e allied subsidy p r o b l e m is more t e n u o u s .

Nevertheless, there is a parallel since the alliances built up now,

the m u t u a l e n g a g e m e n t s a g r e e d to, entail a quid pro quo that m a k e s s u b s i d i e s m o r e likely, a n d lowers t h e m a r g i n a l cost of future a c t i o n s .

T h a t is to say, t h e

e x p e n d i t u r e s that the U S m a k e s now in its alliance structure r e p r e s e n t s a f o r m of political capital which it can draw upon in the future. T h e r e is a " c o b w e b p r o b l e m " of s o r t s at w o r k h e r e b e c a u s e t h e t i m e

lag

b e t w e e n present actions a n d the ultimate stock of w a r fighting c a p a c i t y is so long. D e c i s i o n s m a d e n o w strongly i n f l u e n c e t h e a t t r a c t i v e n e s s of w a r in the f u t u r e . Consequently, the United States must make a fine distinction now about the kinds of w a r s it is willing to fight in the future.

It s h o u l d p r e p a r e for t h e m .

It s h o u l d not

prepare for w a r s it is not willing to fight. T h e p r e s e n t b u d g e t r e d u c t i o n s in a r m a m e n t s , a n d t h e v i e w of U S

military

planners that there will be at least a t w o year w a r n i n g t i m e before t h e U S S R again might be a military t h r e a t , s u g g e s t that t h e s e c o n s i d e r a t i o n s a r e u n d e r r e v i e w (Tritten, 1 9 9 1 ) . T h e v e x e d question is w h e t h e r e v e n t h e r e d u c e d p r e p a r a t i o n s for s u c h an eventuality will c o n t i n u e to m a k e other a c t i o n s m o r e attractive t h a n they otherwise w o u l d be on the basis of current cost considerations.

179

Gulf War

Footnotes t\Ne

a p p r e c i a t e r e f e r e n c e s p r o v i d e d by Mr. D a v i d W e s s e l of The

Journal

Wall

Street

a n d the advice a n d suggestions of Professors Robert A y a n i a n , Victor Brajer,

A n d r e w Gill, J a n e Hall a n d David W o n g of the D e p a r t m e n t of E c o n o m i c s at C S U F . T h e y are not r e s p o n s i b l e for our v i e w s or e r r o r s .

W e are particularly grateful to

G e n e r a l C o l i n P o w e l l f o r h e l p f u l c r i t i c i s m s of a n e a r l i e r d r a f t .

It c a n n o t

be

e m p h a s i z e d too strongly that he is not necessarily in a g r e e m e n t with any part of our analysis of the conflict or our statement of his position. 1

C a r l v o n Clausewitz, On War (1832-1837) trans. M. H o w a r d a n d P. Paret, Rev. e d .

(Princeton University Press, N e w J e r s e y , 1 9 8 4 ) .

G e n e r a l C o l i n P o w e l l explicitly

cited C l a u s e w i t z in this c o n n e c t i o n in his t e s t i m o n y to the S e n a t e A r m e d Services c o m m i t t e e ( D e c e m b e r 3, 1990, p. 6 6 0 ) . 2

l n private c o r r e s p o n d e n c e G e n e r a l C o l i n P o w e l l d e n i e s t h e R o b e r t W o o d w a r d

c o n t e n t i o n in The Commanders

Washington

Post (May

The

2, 1 9 9 1 , p. 1 ff) a n d in his b o o k

that he privately a d h e r e d to the N u n n position.

His s t a t e m e n t before

the Senate A r m e d Services C o m m i t t e e (Powell, 1990) f a v o r e d a q u i c k a n d decisive military victory, w h i c h he regarded as certain to w o r k , rather t h a n w h a t he s a w as a problematic o u t c o m e of sanctions. 3

l t is a hotly d e b a t e d point in the literature w h e t h e r t h e v a l u e of life is higher for

y o u n g e r p e o p l e s u c h as t h o s e in t h e a r m e d s e r v i c e s t h a n t h e t h o s e of a v e r a g e working a g e . C o n s e q u e n t l y w e will not attempt an a d j u s t m e n t for the a g e factor. 4

S o r t i e s are really not h o m o g e n e o u s b e c a u s e their mission c h a n g e d a s the conflict

developed.

In t h e early stages of the air war, more of t h e sorties w e r e d i r e c t e d at

d e f e n d i n g a g a i n s t Iraqi air capability.

A s t h e air attack d e v e l o p e d , m o r e sorties

w e r e d i r e c t e d against Iraqi g r o u n d w a r f a r e capital a s s e t s .

S i n c e at this point the

b o m b i n g resulted in greater destruction of capital o n e might be t e m p t e d to say that there w e r e i n c r e a s i n g returns to b o m b i n g until t h o s e t a r g e t s b e c a m e increasingly scarce or required r e p e a t e d attacks to d e s t r o y .

At the present level of abstraction

w e will treat sorties a s h o m o g e n e o u s a n d exhibiting diminishing returns. S o m e w h a t surprisingly, it will turn out that this is not a crucial issue for the analysis. 5

P r o f e s s o r A y a n i a n has s u g g e s t e d t h a t t h e a l l i e d M C c u r v e m i g h t not

show

diminishing returns in this interval a n d therefore s h o u l d be d r a w n as horizontal, but still a b o v e the U S M C . T h i s w o u l d be in a c c o r d with our later t r e a t m e n t of variable costs as linear in the estimation of elasticities.

M. Wolfson, S. Gutierrez, J. Traynor and R. Smith

180

6

W e are grateful to Professor Robert A y a n i a n for bringing this fact to our attention.

7

A l l i e d sorties a d d e d to this figure.

It turns out that for our linear a p p r o x i m a t i o n to

cost this n u m b e r c a n c e l s out, so that a precise segregation of U S a n d allied sorties is not required. 8

R e d u c t i o n of t h e c h o i c e set of a n o p p o n e n t to m e a s u r e z e r o is a v e r y s t r o n g

requirement more appropriate to c h e s s t h a n war. Certainly it is a sufficient condition for winning w a r s , but it is hard to imagine that it is necessary, since there m a y be a w i d e r a n g e of o u t c o m e s t h a t will force an o p p o n e n t to s u r r e n d e r ( W o l f s o n a n d Shabahang, 1991, 53-55). 9

Los

Angeles

Times, May 10, 1 9 9 1 , 9. A 1 7 .

1 0

T h e influence of this political consideration on the military option c a n be seen in

the e x c h a n g e b e t w e e n Senator N u n n a n d G e n e r a l P o w e l (Powell, 1990): N U N N : G e n e r a l Powell, y o u said waiting is not without cost.

No o n e k n o w s w h e n

sanctions will w o r k . . T h e w h o l e question of t i m e a n d w h e t h e r t i m e is on our side is to me e n o r m o u s l y important. G e n e r a l S c h w a r z k o p f , our c o m m a n d e r in t h e f i e l d , w a s q u o t e d in t h e

Los

A n g e l e s T i m e s on N o v e m b e r 29...as f o l l o w s : "At the present, I think t i m e is on the side of the w o r l d coalition.

I really don't think there is ever g o i n g to c o m e a t i m e

w h e n time is on the side of Iraq, as long as the sanctions are in effect, as long as the United Nations coalition is in effect..." POWELL:

...I think w h a t G e n e r a l S c h w a r z k o p f is s a y i n g is use as m u c h time as

you think is available...before the cost of using additional t i m e is too high to bear. There w e r e a lot of "as long as's" in his statement with respect to the coalition, with respect to other factors...We don't know if the sanctions will work.

I hope, more than

a n y o n e , that they w o r k quickly...We just don't know. N U N N : If w e have a w a r w e are never g o i n g to know...the w a y y o u find out...is to give t h e m e n o u g h time to work. (Hearings, D e c e m b e r 3, 1990, p. 6 8 1 ) . 11

T h e w a r itself might be u n d e r s t o o d as a greatly e n l a r g e d surgical strike to be

followed by sanctions to enforce c o m p l i a n c e .

181

Gulf War

References v o n Clausewitz, C. (1984). On war. T r a n s l a t e d by M. H o w a r d a n d P. Paret (rev. ed.). P r i n c e t o n : Princeton University Press. D a r m a n , R. ( 1 9 9 1 ) . United contributions

States

costs

in the persian

guld

conflict

and

foreign

to offset such costs. Report # 2 to C o n g r e s s , Office of M a n a g e m e n t

a n d Budget, April 2 7 , 1 9 9 1 . Fisher, Α., C h e s t n u t , L G . , a n d Violette, D.M. (1989). T h e v a l u e of reducing risks of d e a t h : a note on new evidence. Journal

of Policy Analysis

and Management,

8,

88-100. Hall, J.V., et. a l . ( 1 9 8 9 ) . Economic improvements

in air quality

Maintenance

District

assessment

of

the

in the south coast air basin.

Report

health

benefits

from

South Coast Air Quality

(Contract 5685), California State

University-

Fullerton F o u n d a t i o n , J u n e 1989, (pp 5-1 —5-17). Los Angeles Newsweek,

Times,

May 10, 1 9 9 1 , p. A 1 7 .

March 18, 1 9 9 1 .

P o w e l l , C . L ( 1 9 9 0 ) . T e s t i m o n y , S e n a t e A r m e d S e r v i c e s C o m m i t t e e , D e c e m b e r 3, 1990. Time, M a r c h 4, 1 9 9 1 . Tritten, J . (1991). America #NPS-NS-91-003A,

promises

to come back: a new national

strategy.

Report

U.S. N a v a l P o s t g r a d u a t e S c h o o l , M o n t e r e y , C a l i f o r n i a ,

May 13, 1 9 9 1 . U.S. A r m s C o n t r o l a n d D i s a r m a m e n t A g e n c y . (1990). World and arms transfers

Washington

Post,

expenditures

1989. W a s h i n g t o n , D.C.

U.S. News and World Report, Wall Street Journal,

military

March 1 1 , 1 9 9 1 .

Editorial, May 2 1 , 1 9 9 1 , p. A 2 . May 2, 1 9 9 1 , p. Iff.

W e s s e l , D. (1991). T h e US spent $ 3 1 . 5 billion on gulf war. The Wall Street

Journal,

April 30, 1 9 9 1 , p. A 1 8 . W o l f s o n , M. ( 1 9 8 5 ) . Notes on e c o n o m i c w a r f a r e . Conflict Science,

Management

and

Peace

8, 1-20.

W o l f s o n , M. a n d S h a b a h a n g , H. ( 1 9 9 1 ) . E c o n o m i c c a u s a t i o n in t h e b r e a k d o w n of military equilibrium. Journal

of Conflict

W o l f s o n , M. et. al. (1991). Essays

Resolution,

on the cold war.

35, 43-67.

London: Macmillan.

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Economies of Arms Reduction and the Peace Process W. Isard and C H . Anderton (Editors) © 1992 Elsevier Science Publishers B.V. All rights reserved.

Chapter DETERMINANTS

OF

8

MILITARY

Carlos

EXPENDITURES

Seiglie

Rutgers University

[Returning to a main theme of this book, Seiglie conducts research on the determinants of the level of military expenditures in a way which represents a major step forward. He tests a military expenditure function that explicitly treats both the supply and demand factors.

Recall the statement made

previously that the literature on peace economics comprises a helter-skelter of contributions. Thus we find Seiglie employing variables, for example to reflect political factors and level of trade, often different from those used by the previous contributors to this book. His contribution, however, lies in the comprehensive analysis involving a better balance of factors impinging on arms expenditure policy, (eds.)] 8.1

Introduction T h e r e are t w o areas of research into the d e t e r m i n a t i o n of military e x p e n d i t u r e s

w h e r e e c o n o m i s t s have m a d e significant contributions.

T h e first is in the study of

military alliances using the f r a m e w o r k d e v e l o p e d by O l s o n a n d Z e c k h a u s e r (1966) w h i c h e m p h a s i z e s the public g o o d s nature of d e f e n s e .

E x a m p l e s of w o r k s in this

area are Murdoch and Sandler (1982, 1984), Sandler and Forbes (1980) Dudley a n d M o n t m a r q u e t t e (1981).

and

For t h e most part they have b e e n interested in

s t u d y i n g t h e N A T O alliance a n d t h e d e g r e e of p u b l i c n e s s of m e m b e r c o u n t r i e s ' defense expenditures.

For e x a m p l e , M u r d o c h a n d Sandler explore t h e implications

of c o m p l e m e n t a r i t y b e t w e e n own a n d t h e alliance's w e a p o n s a n d strategy a n d the implication

of t h i s

expenditures.

for

NATO's

ability

to

achieve

Pareto

optimal

levels

of

G e n e r a l l y , t h e s e s t u d i e s are c o n c e r n e d w i t h h o w the d e m a n d for

national security (and c o r r e s p o n d i n g military e x p e n d i t u r e f u n c t i o n ) is a f f e c t e d by m e m b e r countries' e x p e n d i t u r e s . T h e other a r e a has b e e n in t h e study of the d y n a m i c s of military interaction b e t w e e n a d v e r s a r i a l c o u n t r i e s or a r m s races.

N o t a b l e e x a m p l e s in this literature

are Brito (1972, 1975), M c G u i r e (1965, 1977) a n d Isard (1988). G i v e n the d y n a m i c nature of m a n y of t h e s e m o d e l s , a major c o n c e r n of t h e r e s e a r c h is a n a l y z i n g the

184

C. Seiglie

e x i s t e n c e a n d u n i q u e n e s s of the equilibrium level of e x p e n d i t u r e s .

Other studies

e m p h a s i z e the effects that r e s o u r c e , t e c h n o l o g i c a l a n d i n f o r m a t i o n a l c o n s t r a i n t s have on the d y n a m i c s of the a r m a m e n t process. T h i s p a p e r c o m b i n e s a s p e c t s of both a r e a s in d e r i v i n g a military e x p e n d i t u r e function by considering the actions of adversaries, as well as allies a n d by exploring how

domestic

expenditures.

and

international

factors

impact

on the

character

of

these

That e c o n o m i s t s s h o u l d be as interested in the d e m a n d for national

security as they are for housing, electricity a n d other c o m m o d i t i e s s h o u l d be evident by t h e d a t a s h o w n in T a b l e 8 . 1 .

For t h e s a m p l e c o u n t r i e s s h o w n the s h a r e of

national output a c c o u n t e d for by d e f e n s e expenditures range from 3 2 % to 0 . 5 % a n d as a p e r c e n t a g e of C e n t r a l G o v e r n m e n t e x p e n d i t u r e s f r o m 5 4 . 3 % to 2 . 2 % . e c o n o m i s t s c a n d e l e g a t e to p o l i t i c a l s c i e n c e t h e

problem

That

of e x p l a i n i n g

the

allocation of up to 3 2 % of G N P while c o n c e n t r a t i n g on the r e m a i n i n g 6 8 % s e e m s unwise.

It is inconsistent with the recent interest of e c o n o m i s t s in e x p l a i n i n g the

redistributive role of the State ( P e l t z m a n , 1980) w h i c h a l t h o u g h large is still a smaller share of national output for most of the w o r l d . T h e r e is a s e c o n d a r y interest for u n d e r s t a n d i n g the allocation of r e s o u r c e s to d e f e n s e w h i c h h i n g e s on a d e b a t e in t h e e c o n o m i c d e v e l o p m e n t literature on whether

military

expenditure

increases

or

retards

the

rate

of

economic

d e v e l o p m e n t , e.g., see Benoit (1972, 1978), Deger (1986), D e g e r a n d S e n (1983), a n d Chatterhi (chapter 11 b e l o w ) . for military e x p e n d i t u r e s

These econometric studies model the demand

in a n a d hoc f a s h i o n a n d p r o c e e d t o e x p l o r e

relationship b e t w e e n e c o n o m i c g r o w t h a n d t h e s e e x p e n d i t u r e s .

the

T h e r e f o r e , this

p a p e r may have s o m e value to this p r o b l e m by deriving t h e e x p e n d i t u r e function from utility maxmizing behavior. Finally, there is another a r e a of research c o n c e r n e d with d e f e n s e e x p e n d i t u r e s a n d that is the literature on large scale w o r l d e c o n o m e t r i c m o d e l s for e x a m p l e , in the Leontief W o r l d l-O M o d e l , the c o m p u t a b l e g e n e r a l equilibrium m o d e l s a n d the LINK m o d e l (Leontief a n d D u c h i n ( 1 9 8 3 ) , Klein ( 1 9 8 7 ) a n d Klein a n d G r o n i c k i (1989)). All t h e s e employ military expenditure equations in investigating the impact that this c o m p o n e n t of a g g r e g a t e has on the d o m e s t i c a n d w o r l d e c o n o m y .

Given

the prospects for major d i s a r m a m e n t resulting f r o m the i m p r o v e m e n t s in E a s t - W e s t relations, a more c o m p r e h e n s i v e u n d e r s t a n d i n g of the factors affecting t h e military expenditure functions of nations may lead to a better u n d e r s t a n d i n g of t h e impact of d i s a r m a m e n t on t h e p e r f o r m a n c e of t h e e c o n o m y in t h e s e large models.

econometric

Determinants

of Military

185

Expenditures

T A B L E 8.1 Miliatry Expenditures (ME) as a percent of GNP and of Central Government Expenditures (CGE) for selected countries, 1978. Country

Share of ME in GNP

Argentina Canada Chile China Congo Dominican Republic Egypt Finland France Greece Inda Indonesia Iran Israel Ivory Coast Japan Kenya Luxembourg Malaysia Mexico Nigeria Pakistan Peru Quatar Senegal Singapore South Africa South Korea Soviet Union Spain Sweden Syria United States West Germany Zimbabwe

Share of ME in CGE 14.9 9.1 12.6 54.3 14.4 12.5 30.5 5.7 18.3 26.1 15.1 13.4 27.4 35.7 6.3 5.5 13.7 2.2 14.3 3.2 11.6 24.5 26.5 14.6 10.5 26.3 15.7 32.6 53.7 12.0 8.2 35.6 24.1 21.8 20.2

2.8 2.0 2.8 8.8 4.2 1.9 12.2 1.4 3.9 6.4 2.9 3.1 14.6 23.4 2.1 0.9 4.0 0.9 4.5 0.5 3.5 5.3 5.2 32.0 2.4 6.2 4.2 6.3 14.1 1.7 3.4 14.3 5.1 3.3 6.7

T h e following two sections generalize a c l o s e d - e c o n o m y , t w o - c o m m o d i t y model d e v e l o p e d in Seiglie ( 1 9 8 8 a ) by permitting c o u n t r i e s to t r a d e with t h e rest of the w o r l d , h a v e allies as well a s e n e m i e s , a n d p r o d u c e c a p i t a l g o o d s ( a l o n g with consumption

a n d military c o m m o d i t i e s ) .

The following section develops

the

production side of an e c o n o m y p r o d u c i n g t h e s e t h r e e c o m m o d i t i e s , t w o of w h i c h are a s s u m e d to be t r a d e d freely in w o r l d markets. Section 8.3 derives the d e m a n d , as well as military e x p e n d i t u r e , f u n c t i o n s of a c o u n t r y .

T o m o t i v a t e s o m e of the

e m p i r i c a l a s p e c t s of t h e p r o b l e m , a s p e c i f i c f u n c t i o n a l f o r m for p r e f e r e n c e s is a s s u m e d a n d d e m a n d e q u a t i o n s a n d military e x p e n d i t u r e f u n c t i o n s are d e r i v e d for this form a n d later estimated.

C. Seiglie

186

Finally, section 8.4 p r e s e n t s the empirical e s t i m a t e s for the m o d e l , as well as s o m e other important f e a t u r e s of a r m s races.

In particular, this section p r e s e n t s

e s t i m a t e s for the military e x p e n d i t u r e function d e r i v e d in section 8.3 u s i n g c r o s s country data from 1968 to 1976. 8.2 T h e S u p p l y

of Military

Capability

W e begin by d e r i v i n g the p r o d u c t i o n possibility s u r f a c e ( P P S ) for t h e t h r e e commodity economy.

T h e p u r p o s e for its d e r i v a t i o n is that since c o u n t r i e s are

a s s u m e d to be o p e n to international trade a n d face world prices the level of i n c o m e is d e t e r m i n e d i n d e p e n d e n t of d e m a n d . It is being m e a s u r e d by t h e intercept of the plane t a n g e n t to the P P S with a slope g i v e n by relative w o r l d prices.

G i v e n this

i n c o m e , t h e d e m a n d for e a c h c o m m o d i t y will be d e r i v e d in s e c t i o n 8.3, a n d in particular we derive the d e m a n d for d e f e n s e .

W e note that in order to d e t e r m i n e

world trade patterns w e will just take the difference b e t w e e n the a m o u n t s p r o d u c e d a n d c o n s u m e d d o m e s t i c a l l y of each c o m m o d i t y .

T h e r e f o r e , it s e e m s a p p r o p r i a t e

that we present the supply side of the e c o n o m y . We

assume

CES

production

f u n c t i o n s f o r M, m i l i t a r y c a p a b i l i t y ,

Y,

the

c o n s u m p t i o n g o o d a n d Z, the capital g o o d , w h i c h d e p e n d u p o n the stocks of labor a n d capital e m p l o y e d in e a c h of t h e s e s e c t o r s .

T h e e c o n o m y ' s e n d o w m e n t of

capital at any m o m e n t in time is equal to the total a m o u n t of Ζ p r o d u c e d in the past minus any depreciation w h i c h has o c c u r r e d . W e a s s u m e that M a n d Y are t r a d e d freely at w o r l d market prices but that the capital g o o d is not t r a d e d on the w o r l d market.

F u r t h e r m o r e , if w e a s s u m e that o n e c o m m o d i t y is a l w a y s m o r e capital

i n t e n s i v e t h a n t h e o t h e r at any factor p r i c e s (i.e., w e rule out f a c t o r

intensity

reversals) a n d w e a s s u m e competition both within a n d a c r o s s s e c t o r s , t h e n factorprices will be uniquely d e t e r m i n e d .

T h e r e f o r e , the capital-labor ratios will also be

uniquely d e t e r m i n e d for the two t r a d e d c o m m o d i t i e s , M a n d Y, as well as the n o n t r a d e d capital g o o d , Z.

In other w o r d s , t h e i n t e r n a t i o n a l prices for t h e t r a d e d

c o m m o d i t i e s uniquely d e t e r m i n e the capital-labor ratios d o m e s t i c a l l y for all three c o m m o d i t i e s . T h e s e capital-labor ratios d e t e r m i n e fixed input coefficients for all the c o m m o d i t i e s (see Komiya (1967) for a proof). Given the initial e n d o w m e n t s of Κ a n d L, w e have that the d e m a n d s for e a c h of these inputs by the several sectors must equal their e n d o w m e n t .

If w e d e n o t e 3 K M

as the proportion of capital e m p l o y e d in the M sector a n d define likewise, the other input coefficients, w e have: a KM M + a Ky Y + a Kz Z = Κ

(8.1)

Determinants

of Military

187

Expenditures

a LM M + a L YY + a L ZZ = L

(8.2)

S i n c e w e h a v e t w o e q u a t i o n s in t h r e e u n k n o w n s w e n e e d a t h i r d e q u a t i o n w h i c h is p r o v i d e d by a s s u m i n g that t h e p r o p o r t i o n of national i n c o m e s a v e d a n d i n v e s t e d is c o n s t a n t .

Since i n v e s t m e n t is just the production of Ζ w e have that the

savings rate, s, is: s = ( P z Z ) / ( P M M + P Y Y + PzZ)

(8.3)

or letting Ζ serve as the numeraire g o o d w e have, - s P M M - s P Y Y + (1-s)Z = 0

(8.4)

T h i s s y s t e m c a n be s o l v e d for M, Y a n d Z, g i v e n t h e initial e n d o w m e n t s o f capital a n d labor a n d world prices for M a n d Y. T o get the a b o v e e q u a t i o n s in t e r m s of the rate of capital a c c u m u l a t i o n w e divide e q u a t i o n s (8.1), (8.2) a n d (8.4) by Κ t o get a K M( M / K ) + a K Y( Y / K ) + a K Z i = 1

(8.5)

a L M( M / K ) + a L Y( Y / K ) + a,_z i = (1/k)

(8.6)

- s P M( M / K ) - S P Y( Y / K ) + (1-s) i = 0

(8.7)

w h e r e i = (Z/K) is the investment rate a n d k is the e c o n o m y - w i d e capital-labor ratio. Solving

equations

(8.5)-(8.7)

for the

military

supply

function,

s

M , and

rearranging w e get: M

s

=

W

1

s a

' ) LY

+

s P Y a L Z] k - [(1 - s ) a K Y + s P Y a K Z] } L Δ

where: Δ = ( 1 - s ) ( a K M a L Y - aK Yai_M) + s[(aKMai_z - a K Za i _ M ) P Y + (aKZ - «*ΚΥ)ΡΜ3Ι_Ζ]·

T o d e t e r m i n e t h e long run e q u i l i b r i u m f o r t h e e c o n o m y

we assume

that

population (labor supply) g r o w t h i s e q u a l to n, that Κ d e p r e c i a t e s a t t h e rate δ a n d that t h e e c o n o m y ' s i n v e s t m e n t rate, i, c o n v e r g e s to the rate of p o p u l a t i o n g r o w t h plus depreciation of the capital stock, i.e., ΐ=η+δ. In other w o r d s , w e a s s u m e that the e c o n o m y is i n a steady state equilibrium. (For c o n d i t i o n s required of s u c h a s y s t e m to c o n v e r g e to a steady state s e e , Findlay (1970) a n d Deardorff (1974)). A g a i n solving e q u a t i o n s (8.5)-(8.7) for i a n d setting this e q u a l to η+δ w e can solve for the steady state capital/labor ratio, k*,

C. Seiglie

188

k* = ( P Ma KY - P Y a KM ) / ( P M a LY - P Y 3 LM - (η+δ)Δ)

(8.8')

w h i c h w h e n s u b s t i t u t e d into e q u a t i o n (8.8) y i e l d s t h e long run military

supply

function for the e c o n o m y . If s a v i n g s are equal to zero a n d w o r l d prices h a p p e n to c o i n c i d e with d o m e s t i c prices prior to o p e n i n g t h e e c o n o m y t h e n w e w o u l d have t h e p r o d u c t i o n equilibrium d e s c r i b e d in Seiglie ( 1 9 8 8 a ) .

Yet, when domestic and world prices diverge the

c l o s e d a n d o p e n e c o n o m y e q u i l i b r i u m s w o u l d not c o i n c i d e s i n c e c o u n t r i e s c a n specialize in t h e p r o d u c t i o n of t h e c o m m o d i t i e s in w h i c h t h e y h a v e a c o m p a r a t i v e a d v a n t a g e t h e r e b y s e r v i n g to m a x i m i z e t h e i r i n c o m e .

O n c e t h i s p r o d u c t i o n is

d e t e r m i n e d , t h e r e p r e s e n t a t i v e individual m a x i m i z e s utility s u b j e c t to his s h a r e of national income.

T h e next s e c t i o n c o n s i d e r s t h i s p r o b l e m w h i c h l e a d s to t h e

d e t e r m i n a t i o n of t h e d e m a n d for military capability u n d e r t h e a s s u m p t i o n s o u t l i n e d above.

8.3 T h e D e m a n d f o r N a t i o n a l

Security

T h i s s e c t i o n g e n e r a l i z e s t h e d e m a n d for n a t i o n a l s e c u r i t y in D u d l e y M o n t m a r q u e t t e (1981) a n d Seiglie (1988a) in several directions.

and

First, it introduces

the possibility that expenditures by e n e m i e s d e c r e a s e welfare just as t h o s e by allies increase welfare.

S e c o n d , s i n c e t h e e c o n o m y is o p e n a n d in a s t e a d y

state

equilibrium, the budget constraint f a c e d by individuals is a l t e r e d . T h e s e e x t e n s i o n s will be d e v e l o p e d under the a s s u m p t i o n that preferences take a particular functional form w h i c h g e n e r a t e s military expenditure functions w h i c h are linear. T h e a m o u n t of military c a p a b i l i t y p r o d u c e d or i m p o r t e d by a n a t i o n is not necessarily equal to the a m o u n t available for its c o n s u m p t i o n . Part of the difference is d u e in part to t h e p u b l i c g o o d s a s p e c t of military a l l i a n c e s w h i c h h a s b e e n d i s c u s s e d in t h e e c o n o m i c literature, t h e other part results f r o m the fact that s o m e p r o p o r t i o n of an a d v e r s a r y ' s military c a p a b i l i t y spills o v e r a n d decreases effectiveness of the country's military d e f e n s e , i.e., it

the

r e d u c e s its national security.

In the d i s c u s s i o n that follows if w e d e n o t e t h e a d v e r s a r y of C o u n t r y 1 as C o u n t r y 2 ( a n d likewise its potential ally a s C o u n t r y 3) t h e n t h e p r o p o r t i o n of C o u n t r y 2's w e a p o n s t o c k that r e d u c e s C o u n t r y 1's national security will be d e n o t e d by a^2· L i k e w i s e , s o m e p r o p o r t i o n of C o u n t r y 1's military c a p a b i l i t y r e d u c e s C o u n t r y 2's national security.

In t h e s a m e

manner denote this proportion

a2i.

These

p r o p o r t i o n s differ for e a c h c o u n t r y d e p e n d i n g , for e x a m p l e , o n t h e p e r c e n t a g e of military s p e n d i n g d i r e c t e d t o w a r d s o f f e n s i v e v e r s u s d e f e n s i v e p u r p o s e s .

If w e

r e p r e s e n t t h e total a m o u n t of spillover from the a d v e r s a r i a l C o u n t r y 2 to C o u n t r y 1

Determinants

of Military

189

Expenditures

by M 1 2, a n d the positive spillover f r o m t h e ally C o u n t r y 3 by M 1 3, t h e n t h e total c o n s u m p t i o n of national security by Country 1 is MI = M I - M12

where

+ M13

(8.9)

represents the total a m o u n t c o n s u m e d a n d

t h e total a m o u n t p r o d u c e d

by Country 1. By our previous a s s u m p t i o n , (8.10)

M « I 2 = a ^ M 2 + V2

M13 = bi3M3 where

(8.10·)

M 2 is the total a m o u n t of military c a p a b i l i t y p r o d u c e d by C o u n t r y 2 a n d

therefore, s o m e fraction of that total reduces the effectiveness of C o u n t r y 1's military capability

a n d v 2 is a m e a s u r e of hostile a c t i o n s by C o u n t r y 2 w h i c h

intentions a n d is a s s u m e d i n d e p e n d e n t of M.

signal

A similar interpretation holds for the

positive spillover, M ^ , resulting from a military alliance. Therefore, the total effective c o n s u m p t i o n of M for Country 1 , m 1 f is equal t o : m i = M i - A I 2 M 2 - V2 + bi3M3

(8.11)

Likewise, for Country 2 which is a s s u m e d to be allied to Country 4, m 2 = M 2 - A 2 I Mi - v 0, so that the negotiation set enlarges stage by stage as τ c h a n g e s . Treating the results of the S T A R T r o u n d in T a b l e 9.1 as t h e e n d of stage 1 , I h a v e a s s u m e d s p e c i f i c a t i o n s for e q u a t i o n s (9.1) a n d (9.2) to fix i d e a s .

One

interesting insight is that if both rivals are willing to settle for the status q u o a n d the

R.E. Kuenne

212

m a x i m u m force functions in equations (9.1) a n d (9.2) are insufficiently c o n c a v e they will have to do so b e c a u s e that solution will be t h e only point in the feasible region for a r m a m e n t reduction. For stage 2, I a s s u m e that both rivals w o u l d accept the new status quo at [ l a, l r]=[9,498, 6,888]. Moreover, if either rival f a c e d a hypothetical offer by t h e other to r e d u c e force size to 0, I a s s u m e t h e o t h e r s i d e w o u l d insist on m a i n t a i n i n g s o m e force size to c o n f r o n t potential t h r e a t s f r o m o t h e r a d v e r s a r i e s (e.g., an Iraqi challenge or a Chinese threat.) I have a s s u m e d arbitrarily that for R*=0, A a w o u l d e q u a l 3 0 0 , a n d for A* = 0, R r = 200.

H e n c e , t h e p o i n t s [ 3 0 0 , 0] a n d [ 0 , 2 0 0 ] lie on e q u a t i o n s (9.1) a n d (9.2)

respectively.

Let [ A a, A r ] be the U.S. p r o p o s a l s for U.S. a n d U.S.S.R. force levels

r e s p e c t i v e l y , a n d [ R r , R a] the U.S.S.R. p r o p o s a l s for o w n - a n d U.S. force levels. Fitting these points yields the following specifications for equations (9.1) a n d (9.2): R * = - 2 2 1 . 1 + . 7 4 A a+ . 0 0 0 0 0 1 2 A *

(9.3)

A * = - 2 8 7 . 0 + 1 . 4 4 R r - .0000021 R?

(9.4)

T h e s e near-linear f u n c t i o n s are roughly g r a p h e d in Figure 9.1 with the d a s h line depicting the m a x i m u m n u m b e r of U.S.S.R. w a r h e a d s the U.S. w o u l d permit for any n u m b e r of its o w n w a r h e a d s a n d the solid line the m a x i m u m force size the U.S.S.R. would find acceptable for U.S. strength as a function of U.S.S.R. force size. T h e t w o m a x i m u m force functions as I have h y p o t h e s i z e d t h e m , intersect a p p r o x i m a t e l y at the values set by the current S T A R T agreement. T h e negotiation set under t h e s e conditions will be e m p t y a n d no m o v e m e n t will be made from the status q u o . Graphically this occurs b e c a u s e A* lies e v e r y w h e r e to the left of R* except w h e r e the curves join at the status q u o . In t e r m s of the process the difficulty is that neither nation is sufficiently yielding to the d e m a n d s of the other. For every U.S. force level the m a x i m u m U.S.S.R. level it is p r e p a r e d to accept is too small to induce the U.S.S.R. to a c q u i e s c e in the initiating U.S. force level p r o p o s a l . O n Figure 9 . 1 , w h e n A a= 4 , 0 0 0 , R*=2,758.

But w h e n R r= 2 , 7 5 8 , A* is only 3,669.

H e n c e , an initial U.S. force level of 4 , 0 0 0 is m a p p e d by e q u a t i o n s (9.3) a n d (9.4) into a m a x i m u m allowable level of 3,669, a n d the p r o p o s e d A a i s infeasible.

Except

for the status q u o , e v e n w h e n the U.S. p r o p o s e s for any d e s i r e d force level the m a x i m u m U.S.S.R. level it is willing to accept, the U.S.S.R. declines to accept it as a r e s p o n s e to t h e initiating U.S. offer.

A s i m i l a r s t a t e m e n t h o l d s for

U.S.S.R.

initiations. For e x a m p l e , as s h o w n on Figure 9 . 1 , a p r o p o s e d R r o f 2,000 is m a p p e d into an A* of 2 , 5 8 5 ; but for the U.S. to find 2,585 a c c e p t a b l e , R* w o u l d n e e d to be 1,700. T h u s the p r o p o s e d offer of 2,000 is unacceptable to the U.S.

Disarmament

and Mature

213

Rivalry

7000

6000

A* line

y/y''

U.S.S .R. Foi'ce Level

5000

R* line

4000

3000

2000

R.

A* = 2,585

" R * = 2,758

/

1000 200

/

0 0

A*=3,669 1000 2000

3000

4000

5000

6000

7000

8000

9000 10000

U.S. Force Level

Figure 9 . 1 : A n Empty, Feasible Negotiation Region

H e n c e , t h e mere readiness of o n e rival to d e m a n d superior force levels a n d t h e willingness of t h e other to c o n c e d e to t h o s e d e m a n d s , a s is a p p a r e n t in Figure 9 . 1 , is not a sufficient condition for feasible d i s a r m a m e n t negotiations. F r o m Figure 9.1 it is clear that linear m a x i m u m force functions that originate with small positive levels a n d t e r m i n a t e at existing levels c a n n o t lead to further reductions in a r m a m e n t .

In

s o m e d o m a i n b e l o w t h e status q u o force levels, f o r a n y g i v e n n u m b e r of missiles d e s i r e d by rival 1 t h e m a x i m u m it will allow rival 2 must be a c c e p t a b l e t o rival 2 for the initial level of rival 1 force or m o r e . Correspondingly, in s o m e d o m a i n below t h e s t a t u s q u o force levels, f o r a n y g i v e n n u m b e r of m i s s i l e s d e s i r e d by rival 2 t h e m a x i m u m it will allow rival 1 must be acceptable to rival 1 for t h e initial level of rival 2 force or m o r e . Figure 9.2 illustrates t h e principle. If the U.S. p r o p o s e s a level A ' a 1

for itself t h e m a x i m u m U.S.S.R. force it will permit is R* . But t h e U.S.S.R. w o u l d 2

p e r m i t A ' a if it w e r e a l l o w e d only R * .

1

2

Hence, the range R * - R * i s a feasible

214

R.E. Kuenne

bargaining range for a U.S. initial offer of A ' a. T h e feasible region is d e f i n e d as that area captured b e t w e e n the functions in the d o m a i n A'-A" (R'-R").

7000

^

6000

R*

I

line

/

Κ·* _

5000

CD > CD _J

o ο

4000

LL

co 3 0 0 0 CO

^ A *

ZD

2000 1000

line

2/

R7

W a

?

0 0

1000

2000

3000

4000

^

5000

6000

7000

8000

9000

10000

U.S. Force Level

Figure 9.2: S T A R T Negotiation Set

This puts significant restrictions on the s h a p e of the m a x i m u m force functions for a f e a s i b l e region to exist.

Both f u n c t i o n s c a n n o t be linear or n e a r - l i n e a r , for

e x a m p l e , as s h o w n a b o v e . Because near-linearity may be a quite plausible form for the functions in the next phase of S T A R T , such negotiations may be fruitless without a c h a n g e in f u n c t i o n a l f o r m s .

Further, both f u n c t i o n s c a n n o t be c o n v e x .

c o n f i g u r a t i o n of the f u n c t i o n s i m p l i e s that as o w n - f o r c e

levels rise by

This equal

increments a rival is willing to permit the other to have larger a n d larger responsive increments.

Paradoxically,

although such willingness

indicates

more

liberal

attitudes to rivals' p o s t u r e s , if both sides p o s s e s s s u c h w i l l i n g n e s s no feasible region will exist. Within the feasible region, w h e n it exists, w h a t g o a l s w o u l d the rivals s e e k in bargaining for a c h a n g e in the status q u o ?

I suggest that their objective f u n c t i o n s

Disarmament

and Mature

w o u l d include t h r e e t y p e s of relative m e a s u r e s .

Rivalry

215

First, t h e y w o u l d be c o n c e r n e d in

making their offers with the relative distances of s u c h offers f r o m t h e status q u o force levels ( l a , lr) to yield the first c o m p o n e n t s , W a a n d W r , for their respective objective functions: W a= ( l a - A a ) / ( l r - A r )

(9.5)

W r = ( l r - A r ) / ( l a- R a)

(9.6)

Each side has a goal of minimizing this c o m p o n e n t of its objective function, making the numerator as small as possible (that is for t h e p r o p o s e d force level for itself to be as close to t h e status q u o level) a n d t h e d e n o m i n a t o r a s large as possible t h r o u g h bargaining. A s e c o n d goal is to c o m p a r e the distance b e t w e e n their offers for rival force size and their m a x i m u m allowable force size to t h e distance of t h e o p p o n e n t ' s status quo level from his p r o p o s e d own-force size as indicated by t h e ratios:

Xa=(A r -R*)/(lr-Rr)

(9.7)

X r = ( R a - A * ) / ( l a- A a)

(9.8)

C o m p a r e d with the offered reduction in strength by t h e o p p o s i n g rival, h o w m u c h of the m a x i m u m allowable force for that rival is the other giving u p ? C o n s i d e r i n g t h e s e c o m p o n e n t g o a l s only, e a c h rival s h o u l d s e e k to minimize t h e functions (9.7) a n d (9.8), making offers of other-rival levels as close to zero as possible. Given only t h e goal c o m p o n e n t s of equations (9.5)-(9.8) both rivals are driven to irreconcilable offers.

T h e drive to a c h i e v e a g r e e m e n t , h o w e v e r , in t h e interest of

both sides, leads t h e m to t e m p e r t h e s e c o m p e t i t i v e goals with a c o o p e r a t i v e o n e . T h e last c o m p o n e n t goal, therefore, is to seek a g r e e m e n t : 2

Ya = { [ ( A a - R a ^ i A r - R ^ / i l r - l a ) } ' * -1 2

5

Yr= { [ ( A a - R a A i A r - R ^ / i l r - l a ) } " - !

(9.9) (9.10)

T h e parties have an interest in minimizing this function by moving their offers t o w a r d equality, w h e n c o m p a r e d with t h e distance that initially s e p a r a t e d t h e m . A s an initial m o d e l , therefore, I suggest that their respective objective functions ( Z a, Z r ) might be written as a c o n v e x c o m b i n a t i o n of t h e s e t h r e e c o m p o n e n t s in (9.5)-(9.10), a n d that t h e y s e e k to m i n i m i z e t h e s e f u n c t i o n s s e q u e n t i a l l y in t h e bargaining p r o c e s s : Min Z a = oc aW a + ß a X a + e a Y a

(9.11 )

R.E. Kuenne

216

(9.12)

M i n Z r = a r W r + ß r X r + 0 rY r Ota +

ßa + 0 a =

Ct r

(9.13)

+ ßr + 0 r = 1

(9.14)

Aa. A r, R r, R a > 0

Note that each rival is a s s u m e d to know only his o w n m a x i m u m force level function. If t h e m a x i m u m force level functions (9.1) a n d (9.2) are e v e r y w h e r e c o n v e x or c o n v e x in the feasible region, Z a a n d Z r will be sequentially c o n v e x in that e a c h rival will a s s u m e the other's offers are fixed a n d minimize with respect to its o w n decision variables.

At e a c h step of the negotiation, t h e r e f o r e , e a c h rival will attain a global

minimum.

A " s o l u t i o n " is a t t a i n e d w h e n A a = R a a n d A r = R r , a l t h o u g h it m a y be a

preliminary a g r e e m e n t en route to a more satisfactory point to both parties. Of c o u r s e , the negotiation process will be m u c h richer t h a n this simple s c h e m e c a n a d e q u a t e l y portray, but this m o d e l permits one to f o c u s u p o n the contributions to that p r o c e s s that a maturing rivalry c a n m a k e .

O n e w o u l d expect that 0 a a n d 0 r

will g r o w as that o c c u r s : the desire to achieve a g r e e m e n t should rise in i m p o r t a n c e relative to the a c h i e v e m e n t of the self-seeking goals. T h e s e c o n d impact s h o u l d be a g r e a t e r w i l l i n g n e s s to grant rivals larger m a x i m u m f o r c e s for g i v e n o w n forces. That is, R* a n d A* should b e c o m e more c o n c a v e o v e r t i m e , enlarging t h e feasible region. A l t h o u g h this formally permits more u n e v e n solutions to arise, the important practical result is the enlarging of the a r e a in w h i c h s m a l l e r force levels for both rivals can be a c c e p t e d . 9.6

Conclusions

T h e notion of mature rivalry is central to the process of d i s a r m a m e n t .

T h e very

existence of ongoing d i s a r m a m e n t p r o c e s s e s is e v i d e n c e that a posture of extreme political rivalry has t e m p e r e d to the point that cautious c o o p e r a t i o n is possible.

As

the

an

process

proceeds

by

stages,

continued

progress

depends

upon

intensification of t h o s e desires for c o o p e r a t i o n if feasible regions for negotiations are to c o n t i n u e to exist.

For that intensification to occur, w h i c h is to s a y , for a

continuing maturation of the rivalry, certain preconditions d i s c u s s e d in Section 9.2 m u s t intensify.

T h e e n c o u r a g e m e n t a n d a c c e l e r a t i o n of this d e v e l o p m e n t

important goals of the policy maker.

are

Disarmament

and Mature

217

Rivalry

Footnotes 1

S e e K u e n n e ( 1 9 8 8 , 1 9 8 9 ) . For a full d i s c u s s i o n of r i v a l r o u s c o n s o n a n c e

see

K u e n n e (1986). References K u e n n e , R.E. ( 1 9 8 6 ) . Rivalrous equilibrium.

consonance:

A theory

of general

oligopolistic

Amsterdam: North-Holland.

K u e n n e , R.E. ( 1 9 8 8 ) . Conflict m a n a g e m e n t a n d t h e t h e o r y of m a t u r e o l i g o p o l y . Conflict

Management

and Peace

Science,

10, 3 7 - 5 9 .

K u e n n e , R.E. ( 1 9 8 9 ) . Conflict m a n a g e m e n t in m a t u r e rivalry. Journal Resolution,

33, 5 5 4 - 5 6 6 .

of

Conflict

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Economies of Arms Reduction and the Peace Process W. Isard and C H . Anderton (Editors) © 1992 Elsevier Science Publishers B.V. All rights reserved.

Chapter WARS ON

AND

DIVISIONS

10 FAMINES:

AND

Amartya

INCENTIVES

Sen

L a m o n t University Professor at Harvard University*

[Up to now, our analysis has pertained largely, if not entirely, to the problems faced by both developed and Eastern European countries.

But most of the world's population resides in developing countries

elsewhere, where the role and impact of military expenditures is significantly different. In the first of two papers relating to developing countries, Amyrta Sen asks the basic question:

how does the

preparation for and the execution of wars influence the ability of famine-prone countries to escape mass starvation — a question of perhaps not much significance to highly developed industrialized market economies, but clearly of tremendous significance to developing economies, (eds.)] 10.1

Introduction F a m i n e s have often b e e n a s s o c i a t e d with w a r s .

e m e r g e d with r e m a r k a b l e force in the m o d e r n w o r l d . war-torn

countries

in s u b - S a h a r a n

Africa, such

T h i s historical link has reF a m i n e s have d e v a s t a t e d

as Angola, C h a d ,

Ethiopia,

M o z a m b i q u e , S o m a l i a , S u d a n , a n d many others. T h e association is not c o n f i n e d to s u b - S a h a r a n A f r i c a , a n d t h e r e are terrible e x a m p l e s e l s e w h e r e as w e l l , e.g., in Kampuchea.

S o m e t i m e s , f a m i n e s have also o c c u r r e d in w a r t i m e w i t h o u t being

directly related to military actions, e.g., the B e n g a l f a m i n e of 1943 w h i c h o c c u r r e d soon after the J a p a n e s e army m o v e d into t h e neighbouring province of A s s a m a n d just after Calcutta w a s - rather slightly - b o m b e d . T h e relationship b e t w e e n w a r s a n d f a m i n e s is a m e s s y subject, a n d it w o u l d be h o p e l e s s to try to get a s i m p l e f o r m u l a i c c o n n e c t i o n b e t w e e n t h e t w o t y p e s of phenomena.

N e v e r t h e l e s s , there is c o n s i d e r a b l e e v i d e n c e that the preparation for

a n d the e x e c u t i o n of w a r s do often a d v e r s e l y influence the ability of f a m i n e - p r o n e countries to e s c a p e mass starvation. G i v e n the importance of the subject, it may be useful to a t t e m p t a preliminary sorting out of i s s u e s , d e a l i n g particularly with the different w a y s in w h i c h w a r s a n d war-like activities c a n w e a k e n a poor c o u n t r y ' s d e f e n s e s against f a m i n e s .

A. Sen

220

I s h o u l d b e g i n w i t h a c o u p l e of d i s c l a i m e r s .

First, in t h i s p a p e r ,

I shall

concentrate on the role of w a r s in the causation of f a m i n e s , rather t h a n the c o n v e r s e (i.e., the role of f a m i n e s in the d e v e l o p m e n t of w a r s ) .

It is i n d e e d possible to a r g u e

that f a m i n e s , in their t u r n , c a n contribute to t h e d e v e l o p m e n t of w a r s , but in this essay I shall not be directly c o n c e r n e d with that part of the possible linkage.

This

paper is about the different w a y s in w h i c h w a r s a n d military activities c a n - directly or indirectly - serve as causal antecedents of f a m i n e s . S e c o n d , the c h o i c e of f o c u s in this paper is deliberately b i a s e d t o w a r d s more indirect rather t h a n direct links b e t w e e n w a r s a n d f a m i n e s .

The

relationship

b e t w e e n wars a n d f a m i n e s has s o m e simple a n d easily identifiable a s p e c t s . destroy c r o p s . capital.

Wars

T h e y d e v a s t a t e the e c o n o m y a n d r a v a g e t h e s t o c k of productive

T h e y d a m a g e transport facilities a n d disrupt m o v e m e n t s of f o o d a n d other

commodities.

T h e r e do indeed exist clear a n d easily identifiable links b e t w e e n the

two p h e n o m e n a . While these

a s p e c t s of t h e r e l a t i o n s h i p b e t w e e n w a r s a n d f a m i n e s

are

undoubtedly important, they s h o u l d not deflect us from investigating m o r e c o m p l e x a n d less o b v i o u s i n t e r - c o n n e c t i o n s b e t w e e n t h e t w o .

T h i s p a p e r is c o n c e r n e d

primarily with identifying s o m e crucial but less direct c o n n e c t i o n s b e t w e e n w a r s a n d famines. enough.

1

2

T h e i m m e d i a t e l y d e s t r u c t i v e roles of w a r s h a v e b e e n n o t e d It m a y be u s e f u l in the p r e s e n t c o n t e x t to c o n c e n t r a t e o n the

often less

straightforward interactions b e t w e e n w a r s a n d f a m i n e s . I shall argue that a central feature of the role of military activities in the causation of f a m i n e s is the accentuation of e c o n o m i c a n d political divisions as a c o n s e q u e n c e - direct or indirect - of these activities. That accentuation c a n be a n a l y s e d in t e r m s of t h e e c o n o m i c a n d political i n c e n t i v e s t h a t i n f l u e n c e a c t i o n s a n d

policies.

I n t e r m e d i a t i o n t h r o u g h social d i v i s i v e n e s s is the p r i m a r y f o c u s of the a p p r o a c h explored in this paper. It is not being c l a i m e d that this perspective c a p t u r e s most of t h e f a c t o r s that causally link f a m i n e s to w a r s .

It is, however, inter alia a fruitful g e n e r a l c o n n e c t i o n

to pursue - an associative linkage that is often m i s s e d in presentations that f o c u s on the more i m m e d i a t e features of material destruction c a u s e d by w a r s .

It is useful in

this context to m a k e use of w h a t w e d o k n o w a b o u t t h e c a u s a t i o n of f a m i n e s in general a n d see the contribution of w a r s in that over-all b a c k g r o u n d . 10.2

Divisions and

Incentives

F a m i n e s are c a u s e d by t h e inability of s o m e s e c t i o n s of t h e p o p u l a t i o n to c o m m a n d a d e q u a t e food for survival.

T h e v u l n e r a b l e g r o u p s face starvation as a

Wars and

Famines

221

result of d e c l i n e s in their " e n t i t l e m e n t s " (i.e., t h e set of c o m m o d i t y b u n d l e s over w h i c h a family c a n establish o p e r a t i v e c o n t r o l ) . h a p p e n in m a n y different w a y s .

S u c h an e n t i t l e m e n t d e c l i n e c a n

T h e a n t i c i p a t i o n a s w e l l as t h e p r e v e n t i o n of

f a m i n e s must t a k e a d e q u a t e note of the diverse w a y s in w h i c h entitlement failures may o c c u r .

3

A decline in f o o d output c a n , of c o u r s e , contribute to entitlement failures, even t h o u g h it is not a necessary condition for such failures. A c r o p loss directly affects the food entitlements of peasants a n d share croppers, a n d indirectly m a k e s it harder for o t h e r s to c o m m a n d f o o d in the m a r k e t , e s p e c i a l l y t h r o u g h i n c r e a s e d relative price of f o o d . output.

F a m i n e s have o c c u r r e d , h o w e v e r , e v e n w i t h o u t a d e c l i n e in f o o d

I n d e e d , s o m e t i m e s they have t a k e n place in situations of " p e a k " availability

of f o o d in the e c o n o m y .

4

No less importantly, e v e n w h e n f a m i n e s t a k e place in

situations of r e d u c e d f o o d availability, that availability d e c l i n e c a n be o n e of many factors responsible for the inability of the f a m i n e victims to establish c o m m a n d over food. Entitlement antecedents.

failures

l e a d i n g to f a m i n e s c a n

have

many

different

causal

T h e y c a n result, for e x a m p l e , f r o m u n e m p l o y m e n t , leaving people

without the e c o n o m i c m e a n s of c o m m a n d i n g f o o d . That c o n n e c t i o n , m u c h explored in the recent literature on f a m i n e s , w a s identified by A d a m Smith h i m s e l f .

5

Large-

scale starvation c a n also result from severe d e c l i n e s of m o n e y w a g e s in relation to f o o d prices, m a k i n g it hard for m a n y to buy f o o d , e v e n w h e n t h e r e is no j o b loss. Similarly, d e c l i n e s of e x c h a n g e rates v i s - a - v i s f o o d m a y e r o d e t h e f o o d - b u y i n g power of sellers of c o m m o d i t i e s such as services a n d craft products. T h e r e c a n also be o t h e r e c o n o m i c c h a n g e s l e a d i n g to s h a r p d e c l i n e s of t h e e n t i t l e m e n t s

of

particular g r o u p s of people in the society. F a m i n e s are divisive p h e n o m e n a .

Typically t h e y affect only a s m a l l section of

the p o p u l a t i o n - rarely more t h a n five or t e n p e r c e n t of t h e p e o p l e .

6

They

m u c h m o r e to d o w i t h t h e p o w e r to c o m m a n d f o o d on t h e part of o c c u p a t i o n g r o u p s t h a n with t h e overall availability of f o o d .

have

particular

W a r s a n d military

activities can disrupt t h e entitlements of v u l n e r a b l e g r o u p s e v e n without destroying crops or disrupting production or transport. Divisiveness has t w o a s p e c t s - e c o n o m i c a n d political. T h e i m m e d i a t e links of famines are with economic divisions.

With changes

of r e l a t i v e

prices

and

opportunities of transaction, the entitlements of different g r o u p s can m o v e in sharply different w a y s .

S o m e t i m e s the s u c c e s s of o n e g r o u p in c o m m a n d i n g f o o d c a n

contribute to the failure of others to get e n o u g h for survival, with Lucifer t a k i n g the hindmost.

A. Sen

222

E c o n o m i c d i v i s i v e n e s s c a n , h o w e v e r , be m o d e r a t e d by political a n d processes.

legal

For e x a m p l e , if a country has u n e m p l o y m e n t i n s u r a n c e a n d m i n i m a l

g u a r a n t e e s of i n c o m e a n d f o o d (for e x a m p l e , t h r o u g h p o v e r t y - r e l a t e d rights to assistance), then the "hindmost" g r o u p s will t e n d to be c u s h i o n e d f r o m falling below certain thresholds. preventing f a m i n e s .

These

m i n i m a l g u a r a n t e e s a r e of c r u c i a l i m p o r t a n c e

T h i s applies, incidentally, e v e n to v e r y rich c o u n t r i e s .

in

In the

a b s e n c e of t h e s e s t a t e - g u a r a n t e e d rights, t h e m e a n s of c o m m a n d i n g f o o d e n j o y e d by the u n e m p l o y e d w o u l d be very m e a g e r i n d e e d e v e n in, say, W e s t e r n E u r o p e or North A m e r i c a .

W i t h an u n e m p l o y m e n t rate of a r o u n d 12 per c e n t , t h e r e c o u l d

easily have been w i d e s p r e a d starvation in Britain or B e l g i u m in the early 1980s, but for the protection of minimal entitlements p r o v i d e d by u n e m p l o y m e n t benefits a n d other poverty-relief p r o g r a m s . In effect, t h e s e s t a t e - g u a r a n t e e d s u p p o r t s s e r v e as i n s t r u m e n t s of political correction of e c o n o m i c divisiveness.

It is the a b s e n c e of t h e s e protections in many

war-torn e c o n o m i e s in the Third W o r l d that m a k e s the e c o n o m i c divisions take their full toll.

Indeed, these political instruments of entitlement protection may, in fact, be

further w e a k e n e d by w a r s a n d by militarism (this issue will be t a k e n up in section 10.5). In u n d e r s t a n d i n g the relationship b e t w e e n w a r s a n d f a m i n e s , w e have to see how the political as well as the e c o n o m i c a s p e c t s of social divisions relate to w a r activities.

C r u c i a l to all this is t h e q u e s t i o n of i n c e n t i v e s .

P e o p l e ' s ability to

c o m m a n d f o o d in the market d e p e n d s on what is s u p p l i e d , what is p r o d u c e d , what is t r a n s p o r t e d , a n d so o n , a n d t h e s e e c o n o m i c activities are d e e p l y i n f l u e n c e d by the p a t t e r n s of i n c e n t i v e s o p e r a t i n g in t h e e c o n o m y .

But i n c e n t i v e s also have

political aspects, in addition to e c o n o m i c ones. T h e willingness of the g o v e r n m e n t s in p o w e r to m o d e r a t e e c o n o m i c d e s t i t u t i o n

by e n s u r i n g

minimal

guarantees

d e p e n d s on the political incentives the g o v e r n m e n t s e n c o u n t e r to act that w a y .

The

effectiveness of s u c h protective p r o c e s s e s are d e e p l y c o n d i t i o n a l on the nature of the operative political incentives. 10.3

Famine Mortality and Health

Services

W a r s not only destroy f o o d output a n d productive capital, they also u n d e r m i n e 7

social services. This is partly a result of the c h a o s a n d disruption of w a r s , but also the c o n s e q u e n c e of g o v e r n m e n t a l resources being t a k e n a w a y f r o m social services to finance military build-ups. O n e field in which such deflection is particularly important a n d immediate is that of health services. T h e role of public health m e a s u r e s in preventing famine d e a t h s

223

Wars and Famines

have often b e e n u n d e r e m p h a s i z e d .

I n d e e d , most p e o p l e w h o die in a f a m i n e die

f r o m clearly identifiable d i s e a s e s rather t h a n f r o m starvation as s u c h .

8

Famines

help t h e rapid s p r e a d of d i s e a s e t h r o u g h t h e w e a k e n i n g of i m m u n i t y s y s t e m s , t h r o u g h p o p u l a t i o n m o v e m e n t s , t h r o u g h t h e b r e a k d o w n of s a n i t a r y s e r v i c e s , a n d t h r o u g h the a t t e m p t s of the f a m i n e victims to eat w h a t e v e r t h e y c a n get (including discarded r e m n a n t s of food picked from the g a r b a g e ) . T h e delivery of health care is an important part of famine prevention a n d relief.

9

T h e u n d e r d e v e l o p m e n t a n d b r e a k d o w n of health s e r v i c e s c a n be a m o n g the important c a u s a l a n t e c e d e n t s of large-scale f a m i n e d e a t h s . T h e r e is, of c o u r s e , no necessity to neglect health s e r v i c e s in p r e p a r i n g for w a r , a n d i n d e e d , as will be a r g u e d later on (in s e c t i o n 10.5), in a d e m o c r a t i c c o u n t r y t h e r e are r e a s o n s to expect a c o n s i d e r a b l e intensification war time.

of efforts t o w a r d s w i d e s p r e a d health care in

But health c a r e , especially to d e a l with f a m i n e mortality, rarely receives

the attention it d e s e r v e s in highly stratified societies, with militaristic ruling classes. 10.4

Investment, Complementarity and

The

likelihood

investments.

of w a r s

also

reduce

Conflicts

private

incentive

to

make

long-run

It m a y not be frightfully s m a r t to set up f a c t o r i e s in a w o u l d - b e

battlefield, nor to invest m u c h to i m p r o v e the quality of cultivable land.

O n e of the

r e m a r k a b l e f e a t u r e s of f a m i n e s in s u b - S a h a r a n A f r i c a is t h e i r a s s o c i a t i o n with stagnation a n d decline of productive abilities - not just in f o o d production but also in other i n c o m e - p r o d u c i n g a c t i v i t i e s .

10

B e c a u s e of the prevention of capital formation

(going well b e y o n d the d e s t r u c t i o n of the existing capital g o o d s ) , t h e d e v a s t a t i n g effects of w a r s a n d war-like situations on p r o d u c t i v e abilities c a n be m u c h m o r e extensive a n d pernicious that is apparent f r o m the statistics of capital l o s s .

11

In this

area of e c o n o m i c s as in others, "counterfactuals" are a central part of t h e analysis, a n d w e have to contrast the actual condition with what could have b e e n e x p e c t e d in a situation less r a v a g e d by war-related uncertainties. T h e a d v e r s e effects on p r o d u c t i v e abilities a n d e c o n o m i c o p p o r t u n i t i e s c a n affect different g r o u p s in different w a y s . T h e occupation g r o u p s directly involved in activities that are s h u n n e d or curtailed d o , of c o u r s e , typically suffer most.

But the

p r o c e s s of e c o n o m i c linkages c a n a d v e r s e l y influence also t h e interests of other g r o u p s w h o s e intitlements d e p e n d indirectly on t h e s e activities (e.g., on t h e use of transport facilities). Further, the reduction in the i n c o m e of one g r o u p c a n adversely affect the i n c o m e s of others w h o p r o d u c e c o m m o d i t i e s d e m a n d e d by the former, a n d in this w a y destitution c a n "spread".

A. Sen

224

T h i s f e a t u r e of " c o m p l e m e n t a r i t y " in t h e d e v e l o p m e n t of d e s t i t u t i o n c a n be c o n t r a s t e d with other interconnections that may have more " c o m p e t i t i v e " f e a t u r e s . Different g r o u p s c o m p e t e for the s a m e supply of f o o d a n d other vital c o m m o d i t i e s , a n d the prosperity of one g r o u p can adversely affect the ability of others to establish entitlement over those c o m m o d i t i e s . T h e incentives of the market c a n operate in the direction of deflecting food from o n e g r o u p to another. A w a r e c o n o m y often brings about a rapid increase in the purchasing p o w e r of o n e g r o u p vis-a-vis another, a n d t h e relative

d e c l i n e of e c o n o m i c p o w e r of t h e latter g r o u p c a n result, as a

c o n s e q u e n c e , in its absolute

downfall in t e r m s of the ability to c o m m a n d f o o d a n d

other vital c o m m o d i t i e s . For e x a m p l e , the B e n g a l f a m i n e of 1 9 4 3 , in w h i c h it is e s t i m a t e d that a b o u t t h r e e million p e o p l e d i e d , w a s directly fed by the " w a r b o o m " in B e n g a l .

That

province in British India w a s close to the front line in the w a r with J a p a n , a n d served as a place in w h i c h a m a s s i v e e x p a n s i o n of military a n d w a r - r e l a t e d e x p e n d i t u r e s o c c u r r e d at that t i m e .

civilian

T h e i n c r e a s e d p u r c h a s i n g p o w e r of t h o s e

favorably affected by the w a r b o o m (primarily located in C a l c u t t a a n d s o m e other urban areas) allowed t h e m to take a considerably bigger share of the available food supply, leaving the rural m a s s e s (especially landless laborers) without the ability to c o m p e t e in the "food battle". Interestingly, that a s p e c t of e c o n o m i c d i v i s i v e n e s s w a s not m o d e r a t e d by political i n t e r v e n t i o n in t h e B e n g a l of 1 9 4 3 .

It w a s , in f a c t , e x a c e r b a t e d

by

g o v e r n m e n t a l provision of subsidized rice for normal residents of C a l c u t t a (through ration s h o p s a n d "fair price" distribution centers), a n d t h o s e w h o had been favorably affected by the w a r b o o m in earning higher money i n c o m e s w e r e further the opportunity to buy food at lower p r i c e s .

helped by

12

T h e political i n c e n t i v e s t h e g o v e r n m e n t

h a d f o r g i v i n g priority to

feeding

C a l c u t t a related to t h e fear of t h e British Raj that u r b a n unrest c o u l d be very disruptive for the w a r efforts, w h e r e a s rural disquiet w o u l d be less articulate a n d less p r o b l e m a t i c .

D e a t h s in t h e B e n g a l f a m i n e of 1 9 4 3 w e r e c o n f i n e d a l m o s t

entirely to the rural population even t h o u g h m a n y d i e d in the city of C a l c u t t a after moving there in search of r e l i e f .

13

T h e e c o n o m i c a l l y divisive c o n s e q u e n c e s of the

w a r w e r e , t h u s , magnified a n d s t r e n g t h e n e d by the political incentives operating on the g o v e r n m e n t .

14

In addition to d a m a g i n g f o o d c r o p s , capital g o o d s , transport services, etc., wars and war-like

situations can

prevent capital formation

and disrupt

economic

o p p o r t u n i t i e s , affecting the interests of s o m e g r o u p s m u c h m o r e a d v e r s e l y t h a n t h o s e of o t h e r s .

Massive w a r efforts c a n also c a u s e e c o n o m i c shifts that sharply

alter the balance of purchasing power against s o m e g r o u p s , a n d if t h e s e g r o u p s are

225

Wars and Famines

not crucial for w a r efforts, their p r e d i c a m e n t s m a y receive no g o v e r n m e n t a l attention or r e m e d y (indeed g o v e r n m e n t action c o u l d w o r s e n their p r e d i c a m e n t s ) .

T h e last

issue, viz., w h a t t h e g o v e r n m e n t has incentive to d o or not d o , is a more g e n e r a l question to w h i c h w e now turn.

10.5

Political

Incentives and

Do w a r s m a k e a country more

Authoritarianism politically divisive, or less s o ?

C o n t r a r y to what

w a s d i s c u s s e d in t h e last s e c t i o n , it may be t h o u g h t that t h e a n s w e r m a y well be "less", since w a r efforts can contribute to g e n e r a t i n g a spirit of political solidarity in the nation.

A n d national solidarity c a n be an i m p o r t a n t factor that c o n t r i b u t e s to

attention being paid to the interests of the poor - t h u s working against and deprivation expectation.

of v u l n e r a b l e g r o u p s .

T h e r e is s o m e t r u t h

the starvation

in t h i s

general

I n d e e d , in an i n d e p e n d e n t a n d d e m o c r a t i c c o u n t r y t h e solidarity

g e n e r a t e d by w a r efforts c a n be effectively u s e d to provide s u p p o r t for t h e more vulnerable sections of the c o m m u n i t y . A n e x a m p l e of this c a n be s e e n in the history of Great Britain d u r i n g t h e W o r l d Wars.

Both in t h e First a n d in the S e c o n d W o r l d W a r , t h e British g o v e r n m e n t

m a n a g e d to provide more equal sharing of f o o d a n d health c a r e .

Extensive public

efforts w e r e e x p e n d e d in looking after the interests of the worst off. In fact, w h i l e the a v e r a g e availability of f o o d d e c l i n e d in Britain d u r i n g the S e c o n d W o r l d W a r , the incidence of clinical u n d e r n o u r i s h m e n t also w e n t d o w n with a general i m p r o v e m e n t of the health conditions of the British p o p u l a t i o n .

15

It is also

interesting to note in this c o n t e x t , that t h e i n c r e a s e in life e x p e c t a n c y at birth in E n g l a n d a n d W a l e s w a s m u c h f a s t e r in t h e t w o w a r d e c a d e s (viz. n e a r l y 7 additional y e a r s both in 1911-21 a n d 1 9 4 1 - 5 1 ) t h a n in t h e o t h e r d e c a d e s of this century (life expectancy increased b e t w e e n 1 to 4 y e a r s in every other d e c a d e ) .

16

Even t h e British National Health Service, w h i c h w a s born just after the e n d of the S e c o n d W o r l d W a r , w a s to a g r e a t extent h e l p e d by t h e w a r e x p e r i e n c e of sharing a n d c a r i n g .

T h e p i o n e e r i n g d e v e l o p m e n t of a National Health Service to

provide health care for all w a s greatly helped by the solidarity g e n e r a t e d by Britain's war efforts.

17

T h e r e is a pattern here that is relevant to m a n y countries in the w o r l d .

But t h e situation is quite different in societies that lack a d e m o c r a t i c s y s t e m a n d in w h i c h the u n e q u a l sharing may be further c o n s o l i d a t e d by w a r s . W h e n a small g r o u p of military or civilian rulers, with direct links only with a relatively small section of the people, run a country, w a r s c a n strengthen the grip of these regimes a n d make t h e m e v e n less sensitive to t h e n e e d s of others. w a r s p r o v i d e c l a s s i c e x c u s e s for s u p p r e s s i n g o p p o s i t i o n p a r t i e s ,

Indeed,

persecuting

A. Sen

226

political o p p o n e n t s , a n d eliminating free a n d i n d e p e n d e n t n e w s p a p e r s .

T h e recent

history of s u b - S a h a r a n A f r i c a provides m a n y illustrations of this tragic p r o c e s s .

18

W i t h t h e s e c h a n g e s , g o v e r n m e n t s are less v u l n e r a b l e to public criticism a n d c a n m a n a g e to survive extensive starvation c a u s e d by t h e entitlement failures of large occupation groups.

F a m i n e s c u a s e d by differential m o v e m e n t s of e c o n o m i c p o w e r

of different g r o u p s may, t h e n , be left largely u n t o u c h e d , without an a d e q u a t e attempt at recreating the lost entitlements t h r o u g h public s u p p o r t .

19

Detailed studies of f a m i n e prevention in different parts of t h e w o r l d (including India a n d also such African countries as B o t s w a n a a n d Z i m b a b w e ) bring out the fact that even in situations of severe decline of total f o o d output a n d s h a r p reduction of m a r k e t - b a s e d e c o n o m i c e n t i t l e m e n t s of p a r t i c u l a r s e c t i o n s of t h e

population,

f a m i n e s c a n be a l t o g e t h e r p r e v e n t e d by public policies a i m e d at p r o t e c t i n g the vulnerable.

This c a n be d o n e in different w a y s .

O n e effective m e a n s is t h r o u g h

public e m p l o y m e n t for a n y o n e w h o s e e k s t h e m (and is ready to do a g o o d day's w o r k ) , thus providing a g o o d c h a n n e l of recreating the lost purchasing p o w e r of the potential f a m i n e v i c t i m s .

20

Such a s y s t e m has incentive a d v a n t a g e s since the self-

selection involved in the willingness to w o r k c a n serve as an effective m e t h o d of s c r e e n i n g (separating out t h e really n e e d y f r o m t h o s e w h o w o u l d like to obtain g o v e r n m e n t a l m o n e y without being in terribly dire s i t u a t i o n s ) .

21

T h e ability to prevent f a m i n e s exists widely a c r o s s t h e w o r l d . r e m a r k a b l e how often this p o w e r is left u n u s e d .

H o w e v e r , it is

T h e g o v e r n m e n t s m a y lack the

political i n c e n t i v e t o p r o v i d e t h i s p r o t e c t i o n if t h e y f e e l u n t h r e a t e n e d

by t h e

prospects of a famine. This invulnerability is itself fostered a n d s t r e n g t h e n e d by the authoritarianism (including the s u p p r e s s i o n of o p p o s i t i o n parties a n d n e w s p a p e r s ) that tends to go with w a r situations. T h e political incentives are s o m e t i m e s o v e r l o o k e d in trying to a n a l y s e f a m i n e s in t e r m s of purely e c o n o m i c p a r a m e t e r s , but the nature of t h e s e incentives c a n be extremely important for understanding the prevalence or a b s e n c e of f a m i n e s .

22

It is

a remarkable fact that while f a m i n e s have o c c u r r e d not only in m a r k e t - b a s e d freeenterprise e c o n o m i e s but also in interventionist socialist c o u n t r i e s ,

23

they s e e m to

have never occurred in a democratic country w h i c h permits opposition parties a n d adversarial

politics

and does

not s u p p r e s s

an

independent

press.

24

If the

g o v e r n m e n t has to go to the polls to secure reelection a n d has to w i t h s t a n d criticism in the m e d i a a n d in the legislatures, it w o u l d have g o o d r e a s o n s to act quickly a n d effectively in p r e v e n t i n g t h r e a t e n i n g f a m i n e s .

I n d e e d , efforts to avert i m p e n d i n g

crises a n d calamities c a n even lead to long-run i m p r o v e m e n t s brought a b o u t by a w a r situation (e.g., as h a p p e n e d in Great Britain during the First a n d S e c o n d W o r l d W a r s , d i s c u s s e d earlier).

227

Wars and Famines

T h e a b s e n c e of f a m i n e s in d e m o c r a t i c politics a p p l i e s not only to t h e richer c o u n t r i e s , but a l s o to t h o s e p o o r , d e v e l o p i n g c o u n t r i e s w h i c h h a v e a s y s t e m p e r m i t t i n g a d v e r s a r i a l politics a n d critical j o u r n a l i s m .

Despite precarious food

situations, f a m i n e s c a n be effectively a v e r t e d t h r o u g h public action in protecting the entitlement of potential famine v i c t i m s .

25

E x a m p l e s of successful protective action in

situations of s e v e r e l y t h r e a t e n i n g f a m i n e s c a n be f o u n d in India (in 1 9 6 7 , 1 9 7 3 , 1979 a n d 1985), B o t s w a n a (in 1982-87), Z i m b a b w e (in 1 9 8 2 - 8 4 ) , a n d e l s e w h e r e .

26

T h e central issue here is the political incentive that o p e r a t e s on t h e g o v e r n m e n t to p r e v e n t f a m i n e s , a n d that incentive is particularly i m p o r t a n t s i n c e f a m i n e s are almost a l w a y s preventable t h r o u g h timely public action. O n e of t h e most pernicious e f f e c t s of w a r s a n d w a r - l i k e s i t u a t i o n s is a w e a k e n i n g of t h e o p p o r t u n i t y a d v e r s a r i a l politics a n d social c r i t i c i s m . parties and independent

newspapers

T h e e x c u s e for s u p p r e s s i n g has o f t e n b e e n

of

opposition

based on the

d e m a n d s of w a r efforts, e.g., in m a n y c o u n t r i e s in s u b - S a h a r a n A f r i c a .

alleged 27

The

w e a k n e s s of the d e m o c r a t i c s t r u c t u r e of m a n y v u l n e r a b l e e c o n o m i e s a n d the accentuation of that w e a k n e s s by w a r s a n d militarism are a m o n g the most important causal a n t e c e d e n t s of f a m i n e s in the m o d e r n w o r l d . 10.6

Concluding

Remarks

T h e c o n n e c t i o n b e t w e e n w a r s a n d f a m i n e s involve t h e o p e r a t i o n of political as well as e c o n o m i c incentives, a n d the p r o c e s s c a n w o r k t h r o u g h c o n s o l i d a t i n g a n d aggravating divisions in the society with disastrous effects on the most vulnerable. It w o u l d be a mistake to c o n c e n t r a t e only on the destruction of outputs a n d capital in causally relating f a m i n e s to w a r s .

T h e e c o n o m i c incentives g o v e r n i n g production

a n d d i s t r i b u t i o n a n d t h e political i n c e n t i v e s a f f e c t i n g p u b l i c p r o t e c t i o n of t h e v u l n e r a b l e can be the crucial features to look at in u n d e r s t a n d i n g how w a r s c a u s e famines. A n ideal b r e e d i n g g r o u n d for f a m i n e s is p r o v i d e d by t h e " c o u p l i n g " of (1) e c o n o m i c p r o c e s s e s that m a k e s o m e sections of the population more v u l n e r a b l e to starvation, and

(2) p o l i t i c a l

processes

that

insensitive to t h e p r e d i c a m e n t s of t h e v i c t i m s .

make

many

governments

more

I h a v e tried to d i s c u s s h o w that

" c o u p l i n g " is f o s t e r e d in m a n y c i r c u m s t a n c e s by t h e p r e v a l e n c e of w a r

and

militarism in the d e v e l o p i n g countries. Wars

can

have diverse

effects

on political divisions

depending

on

the

circumstances.

In s o m e c o n t e x t s , t h e y c a n c o n t r i b u t e to m o r e national solidarity,

which

turn

can

in

lead

to

public

policies

that

result

in

a

reduction

u n d e r n o u r i s h m e n t a n d morbidity (as in Britain during the t w o W o r l d W a r s ) .

of

O n the

A. Sen

228

o t h e r h a n d , with a n o n - d e m o c r a t i c political s t r u c t u r e , led by a u t h o r i t a r i a n rulers, w a r s a n d military alerts c a n serve as g r o u n d s for further s u p p r e s s i o n of the n e w s m e d i a a n d of t h e s c o p e for a d v e r s a r i a l politics in g e n e r a l .

A n d w i t h that the

vulnerability to f a m i n e s i n c r e a s e s t h r o u g h t h e reduction of political i n c e n t i v e s for undertaking preventive public action in a timely a n d a d e q u a t e w a y . The problem economies.

of f a m i n e s is not, of c o u r s e , c o n f i n e d t o t h e

war-affected

But t h e f o r c e s that foster the e c o n o m i c a n d political p r e c o n d i t i o n s of

f a m i n e s c a n be particularly e n c o u r a g e d in s o m e c i r c u m s t a n c e s by militarism a n d war. A better understanding of the contribution of w a r s to f a m i n e s calls for a closer e x a m i n a t i o n of t h e s e political a n d e c o n o m i c l i n k a g e s , a n d requires us to g o well b e y o n d the more o b v i o u s features of the destruction of outputs a n d capital stocks. T h e less apparent need not be any less potent.

Footnotes *A

paper

prepared

for a E C A A R / I I P S

conference

on " E c o n o m i c

Issues

of

D i s a r m a m e n t " at the University of Notre D a m e , N o v e m b e r 30 - D e c e m b e r 1, 1990. An

earlier

version

of t h e

paper

was

presented

in t h e

seminar

series

on

"Reconciliation, W a r a n d the State" at King's College, C a m b r i d g e . 1

T h e a n a l y s i s p r e s e n t e d in this p a p e r d r a w s e x t e n s i v e l y on my m o n o g r a p h on

f a m i n e s , Poverty Hunger

and Famines

and Public

Action

(Sen 1981) a n d on my joint b o o k with J e a n Dreze,

(Dreze a n d S e n 1989).

S o m e of t h e e m p i r i c a l findings

briefly referred to here have b e e n d i s c u s s e d in g r e a t e r detail in t h o s e w o r k s , a n d also in t h e c o l l e c t i o n of p a p e r s i n c l u d e d in a t h r e e - v o l u m e s e r i e s , The Economy 2

of Hunger

Political

(Dreze a n d Sen 1990).

l t is also worth noting that w a r s a n d f a m i n e s have often been temporally congruent

even w h e n the w a r s in question have led to relatively little destruction of c r o p s or of productive capital. 3

4

5

O n this see Sen (1981). O n this see Sen (1981) a n d Dreze a n d Sen (1989, 1990), a m o n g others. " M a n y w o u l d not be able to find e m p l o y m e n t e v e n u p o n t h e s e h a r d t i m e s , but

w o u l d either starve, or be driven to s e e k s u b s i s t e n c e either by b e g g i n g , or by the perpetration p e r h a p s of the greatest enormities. W a n t , f a m i n e , a n d mortality w o u l d

229

Wars and Famines

i m m e d i a t e l y p r e v a i l in t h a t c l a s s , a n d f r o m t h e n e x t e n d t h e m s e l v e s to all the superior c l a s s e s " (Smith 1776, pp. 90-1). 6

7

O n this see S e n (1981), chapters 6-9, a n d Dreze a n d Sen (1989), c h a p t e r s 5-8. O n e of the worst e x a m p l e s in this respect is the disruption of health c a r e a n d other

social services in M o z a m b i q u e d u e to t h e activities of rebels b a c k e d by - a n d partly b a s e d in - neighbouring South Africa. 8

9

O n this see S e n (1981 : A p p e n d i x D), de W a a l (1989), Dreze a n d S e n (1990). O n the health-care aspect of f a m i n e mortality, see particularly de W a a l (1989).

1 0

S e e D r e z e a n d Sen (1989), c h a p t e r s 5-9.

11

T h e a c t u a l a n d c o u n t e r f a c t u a l d e s t r u c t i o n of capital a p p l i e s not m e r e l y to the

production of material g o o d s (industrial a n d agricultural), but also to t h e e c o n o m i c basis of services, trade a n d finance. 1 2

O n this see S e n (1981), chapter 6.

1 3

T h e relief offered in Calcutta w a s totally i n a d e q u a t e .

T h e g o v e r n m e n t refused to

a c c e p t responsibility for f e e d i n g t h e d e s t i t u t e s , a n d i n d e e d G o v e r n o r

Rutherford

w r o t e to t h e V i c e r o y e x p l a i n i n g w h y a f a m i n e h a d not b e e n d e c l a r e d a n d the F a m i n e s C o d e s not invoked (see S e n 1 9 8 1 , pp. 7 8 - 8 3 ) . 1 4

Some

of t h e

specific

policies

undertaken

by t h e g o v e r n m e n t

remarkably insensitive to the n e e d s of particular o c c u p a t i o n g r o u p s .

were

also

For e x a m p l e ,

t w o of t h e hardest hit g r o u p s in the Bengal f a m i n e of 1943 w e r e t h e f i s h e r m e n a n d river t r a n s p o r t w o r k e r s , w h i c h h a d a m o n g t h e h i g h e s t rates of d e s t i t u t i o n (see c h a p t e r 6 in S e n 1 9 8 1 ) .

A l o n g with other rural laborers, t h e y t o o s u f f e r e d f r o m a

g e n e r a l d e c l i n e of c o m p e t i t i v e p o w e r via-a-vis u r b a n d w e l l e r s , but in addition their e c o n o m i c o p p o r t u n i t i e s w e r e s e v e r e l y r e d u c e d b e c a u s e of t h e

governmental

requisitioning - a n d sinking - of all boats c a p a b l e of carrying ten p e o p l e or m o r e , in the river-centered districts of B e n g a l .

T h i s "boat d e n i a l policy" w a s a fairly v a g u e

attempt to prevent the boats from falling in the h a n d s of the J a p a n e s e army in case it reached there.

In t h e event, the "boat d e n i a l policy" m a d e no c o n t r i b u t i o n to the

war, but t h o r o u g h l y d e c i m a t e d t h o s e w h o s e livelihood d e p e n d e d o n t h e use of t h o s e b o a t s - f i s h e r m e n a n d river t r a n s p o r t e r s w h o had little political influence on the White Hall.

A. Sen

230

1 5

0 η this see H a m m o n d (1951). See also Titmuss (1950).

1 6

0 n this q u e s t i o n , see Dreze a n d S e n (1989), c h a p t e r 10. T h e m e a s u r e m e n t for

the d e c a d e of the Forties relates to the period 1 9 4 0 - 5 1 , but the rates are not m u c h modified by that variation. 1 7

R i c h a r d Titmuss (1950) notes:

"By t h e e n d of t h e S e c o n d W o r l d W a r t h e

g o v e r n m e n t h a d , t h r o u g h t h e a g e n c y of newly e s t a b l i s h e d or e x i s t i n g s e r v i c e s , a s s u m e d a n d d e v e l o p e d a m e a s u r e of direct c o n c e r n for the health a n d well-being of the population w h i c h , by contrast with the role of G o v e r n m e n t in the thirties, w a s little short of r e m a r k a b l e " ( p . 5 0 6 ) .

S e e also W i n t e r ( 1 9 8 6 ) d e a l i n g w i t h public

attitudes a n d state policies during the First W o r l d War. 1 8

T h e consolidation of authoritarianism s e e m s to have b e e n a c o m m o n f e a t u r e , in

these c i r c u m s t a n c e s , of g o v e r n m e n t s both of the right a n d of the left.

In addition to

the influence of local wars on national politics, s u b - S a h a r a n Africa has also suffered from the c o n s e q u e n c e s of the international "cold war", which m a d e the W e s t as well as t h e E a s t e r n b l o c k c u l t i v a t e

authoritarian

r e g i m e s so long a s t h e y

were,

respectively, "allies". T h e w e a k e n i n g of the cold w a r in the recent y e a r s provides an opportunity

of

breaking

that

pattern.

The

indirect

encouragement

to

authoritarianism f r o m a b r o a d has b e e n an important factor in the d e v e l o p m e n t of anti-democratic local politics - a n d thus of f a m i n e s - in s u b - S a h a r a n Africa. 1 9

E v e n in the Bengal f a m i n e of 1943, the w a r situation w a s cited as justification for

the c e n s o r s h i p of the local m e d i a , a n d criticisms v o i c e d in that m e d i a had little i m p a c t a n y w a y on d e c i s i o n s t a k e n in L o n d o n or by t h e V i c e r o y in N e w D e l h i . Interestingly e n o u g h , the British Indian g o v e r n m e n t w a s ultimately m o v e d in m i d O c t o b e r (many m o n t h s after the f a m i n e h a d started), only after Ian S t e p h e n s , the c o u r a g e o u s editor of the B r i t i s h - o w n e d C a l c u t t a daily The Statesman,

broke rank

a n d p u b l i s h e d stinging attacks on g o v e r n m e n t a l policy, w h i c h i m m e d i a t e l y led to q u e s t i o n i n g s in Parliament in London (on this see Sen 1981). 2 0

T h e e c o n o m i c p r o b l e m s involved in recreating the lost i n c o m e s of the potential

f a m i n e victims is often e x a g e r a t e d . A typical f a m i n e affects no more t h a n , say, 10 per cent of t h e p o p u l a t i o n (usually t h e f a m i n e v i c t i m s constitute a m u c h s m a l l e r fraction of t h e total population) a n d t h e s h a r e of the national i n c o m e t h e f a m i n e v i c t i m s w o u l d normally earn may be no m o r e t h a n 3 per c e n t or so (often m u c h less).

T h e total a m o u n t of r e s o u r c e s n e e d e d for r e c r e a t i n g their entire n o r m a l

i n c o m e w o u l d , therefore, be typically rather small (especially in c o m p a r i s o n with the

231

Wars and Famines

p r o p o r t i o n of t h e n a t i o n a l i n c o m e t h a t is d e v o t e d to military a n d expenditures).

war-related

T h e a d d i t i o n a l f o o d n e e d e d to r e c r e a t e their entire n o r m a l f o o d

c o n s u m p t i o n w o u l d also be a relatively small fraction of t h e total f o o d c o n s u m p t i o n in the e c o n o m y .

O n t h e s e issues, see S e n ( 1 9 8 1 ) , c h a p t e r s 6-9, a n d D r e z e a n d

S e n (1989), c h a p t e r 8. 21

This t e n d s to deal effectively with the newly d e p r i v e d in a situation of a potential

f a m i n e , e v e n t h o u g h it d o e s not c o v e r a d e q u a t e l y t h o s e w h o are p r e v e n t e d f r o m working as a result of chronic disability, age or other handicaps. But they too c a n be c o v e r e d t h r o u g h a public distribution s y s t e m that t a k e s note of t h e s e identifiable characteristics.

O n t h e s e issues a n d related matters, see D r e z e a n d S e n (1989),

chapters 7 a n d 8. 2 2

0 n this see Sen (1983) a n d Dreze a n d S e n (1989).

2 3

T h r e e e x a m p l e s are the Soviet f a m i n e s in t h e U k r a i n e in t h e early 1 9 3 0 s , the

C h i n e s e f a m i n e of 1 9 5 8 - 6 1 , a n d t h e K a m p u c h e a n f a m i n e of t h e late 1 9 7 0 s .

The

C h i n e s e f a m i n e led to an extra d e a t h of b e t w e e n 2 3 a n d 30 million p e o p l e (on this s e e A s h t o n et. a l . 1 9 8 4 a n d P e n g 1987) a n d is t h e m o s t likely c l a i m a n t to the distinction of being the largest f a m i n e of this c e n t u r y ; on this see S e n (1983).

See

also Riskin (1987) a n d the paper by a n a n o n y m o u s C h i n e s e s c h o l a r in Article 19 (1990). 2 4

l n the p r e v e n t i o n of f a m i n e s , an i n d e p e n d e n t p r e s s has an a d v e r s a r i a l role (in

criticizing a n d pressuring) as well as a c o o p e r a t i v e o n e (in providing early n e w s of starvation a n d d e p r i v a t i o n ) v i s - a - v i s t h e g o v e r n m e n t in p o w e r .

O n this s e e S e n

( 1 9 8 3 , 1 9 8 4 ) , R e d d y ( 1 9 8 8 ) , D r e z e a n d S e n ( 1 9 8 9 ) , Article 19 ( 1 9 9 0 ) , a n d R a m (1990). 2 5

lt

s h o u l d , h o w e v e r , be a d d e d that a d v e r s a r i a l politics a n d free

newspapers

provide less protection against e n d e m i c u n d e r n o u r i s h m e n t a n d d e p r i v a t i o n , w h i c h are less p h o t o g e n i c a n d harder to politicize, a n d the responsibility for w h i c h is more difficult to a s s i g n .

T h e s e issues have been d i s c u s s e d in S e n ( 1 9 8 3 , 1984), Dreze

a n d S e n (1989), a n d R a m (1990). 2 6

S e e D r e z e a n d S e n (1989), a n d also t h e t w o p a p e r s by J e a n D r e z e on f a m i n e

prevention respectively in India a n d in Africa, in D r e z e a n d S e n ( 1 9 9 0 ) .

I should

explain, to prevent any possible m i s u n d e r s t a n d i n g , that it is not being c l a i m e d here that d e m o c r a c y is a necessary

c o n d i t i o n for s u c h a c t i o n , but only that there is

considerable evidence in favor of its

sufficiency.

A. Sen

232

2 7

0 η this issue a n d related matters, see S e n ( 1 9 8 3 , 1 9 8 4 ) , H a r r i s o n a n d P a l m e r

(1986), Kilongson (1986), Cohen (1987), de Waal (1989, 1990), Dreze and Sen ( 1 9 8 9 ) , A f r i c a W a t c h ( 1 9 9 0 ) , Article 19 ( 1 9 9 0 ) , D ' S o u z a ( 1 9 9 0 ) , a m o n g

other

writings.

References Africa W a t c h . (1990). disaster.

Denying

Sudan

"the

honour

of living":

a human

rights

L o n d o n : Africa W a t c h .

Article 19. (1990). Starving

in silence:

a report on famine

and censorship,

edited by

Frances D'Souza, L o n d o n : Article 19. A s h t o n , B., et al (1984). Review,

Famine in C h i n a , 1 9 5 8 - 6 1 .

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and

Development

10.

C o h e n , R., et al (1987). Censorship costs lives. Index on Censorship. de W a a l , A. (1989). Famine de W a a l , A. (1990).

that kills.

16.5.

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T h e Politics of Information: F a m i n e in Ethiopia a n d S u d a n in

the 1980s, in Article 19 (1990). Dreze, J . , and S e n , A. (1989). Hunger D r e z e , J . , a n d S e n , Α., eds. (1990).

and public

action.

The political

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economy

of hunger.

3 vols.

O x f o r d : C l a r e n d o n Press. D'Souza, F. (1990). "Preface," in Article 19 (1990). H a m m o n d , R.J. (1951). History

of the second

world war: food.

Harrison, P., a n d Palmer, R. (1986). News out of africa:

London: HMSO.

Biafra to band aid.

London:

Hilary S h i p m a n . K i l o n g s o n , M. ( 1 9 8 6 ) . R e p o r t s of f a m i n e s are p r o h i b i t e d . Index

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15.10. P e n g , X. (1987). provinces.

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Population

and Development

Review,

13, 6 3 9 - 7 0 .

R a m , N. ( 1 9 9 0 ) . A n i n d e p e n d e n t p r e s s a n d a n t i - h u n g e r s t r a t e g i e s : t h e

Indian

experience, in Dreze a n d S e n (1990). R e d d y , S. ( 1 9 8 8 ) .

A n i n d e p e n d e n t p r e s s w o r k i n g a g a i n s t f a m i n e : t h e nigérian

experience. Journal

of Modern

African

Riskin, C. (1987). China's

political

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S e n , A.K. (1981). Poverty

and famines.

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26, 337-45.

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O x f o r d : Clarendon Press.

S e n , A . K . (1983). D e v e l o p m e n t : w h i c h w a y n o w ?

Economic

Journal,

93, 745-62;

reprinted in Sen (1984). S e n , A.K. ( 1 9 8 4 ) .

Resources,

values

and

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Oxford: Blackwell, and

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S m i t h , A. (1776).

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into the nature

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r e p u b l i s h e d , e d s . R.H. C a m p b e l l a n d A . S . S k i n n e r ( O x f o r d : C l a r e n d o n Press, 1976). T i t m u s s , R.M. (1950).

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London: Macmillan.

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Economies of Arms Reduction and the Peace Process W. Isard and C.H. Anderton (Editors) © 1992 Elsevier Science Publishers B.V. All rights reserved.

Chapter

11

REGIONAL CONFLICT AND MILITARY SPENDING DEVELOPING COUNTRIES Manas

IN

THE

Chatterji

State University of N e w Y o r k at B i n g h a m t o n

[In the paper that follows, we have desired to have a look at the problem of militarization and its growth in relation to economic development of poor countries from the perspective of a scholar who has grown up in such a country and is extremely sensitive to its needs. We have not asked for a critical evaluation of studies that have been done. Almost invariably these studies have used theories, methods and tools designed by scholars in advanced countries — theories, methods and tools inappropriate for attacking problems of development or non-development in a great number of cultures so different from those of developed countries. The fact that so many contradictory and inconclusive findings are recorded in these studies already suggests the need for a completely fresh approach. Perhaps this paper by Chatterji may assist in meeting this need, (eds.)] 11.1

The Changing World Environment: Implications for Developing Countries Drastic c h a n g e s in the i n t e r n a t i o n a l s c e n e h a v e o c c u r r e d o v e r t h e last five

years.

The

bipolar world with the

United States and Soviet

U n i o n as

two

s u p e r p o w e r s c o n f r o n t i n g each other in carving out their o w n a r e a of influence no longer exists, the n e e d of the so-called non-aligned countries to maintain a delicate balance, a n d w h e n necessary to s e e k help f r o m o n e s u p e r p o w e r , has d i m i n i s h e d . S o m e of the effects u p o n E u r o p e a n nations of the b r e a k u p of the s u p e r p o w e r structure are well k n o w n .

O t h e r s are b e i n g intensively s t u d i e d .

W h a t are less

k n o w n a n d being investigated on a m u c h smaller scale are effects u p o n d e v e l o p i n g countries. T h e b r e a k u p of the s u p e r p o w e r structure a n d the increasing attention given by major industrialized p o w e r s to transition p r o b l e m s a n d regional conflicts in Europe have introduced n e w factors into the global situation. O n e of t h e m is t h e diversion of e c o n o m i c aid to reconstruct the Soviet Union a n d Eastern E u r o p e .

S u c h will be

at the e x p e n s e of aid to the poor d e v e l o p i n g countries. This is likely to intensify the conflict s i t u a t i o n s within t h e m .

Less aid i m p l i e s less c o n t r o l by a s u p e r p o w e r .

M. Chatterji

236

Moreover, t e n s i o n b e t w e e n countries in several regions of the w o r l d may increase significantly d u e to the a b s e n c e of political pressure to c o o p e r a t e .

In A s i a , Africa,

a n d Latin A m e r i c a , U.S. - U.S.S.R. influence has d e c l i n e d a n d different t y p e s of geopolitical restructuring are a n d will be t a k i n g place. S h o u l d t h e U.S. a b a n d o n its b a s e s in the Philippines, Korea, a n d J a p a n t h e n C h i n a , J a p a n , a n d possibly K o r e a will e m e r g e as regional p o w e r s with India d o m i n a t i n g S o u t h A s i a .

O n e c a n only

speculate w h a t will h a p p e n in this a n d other major regions of t h e w o r l d since the political situation has b e e n c o m p l i c a t e d by e c o n o m i c c h a n g e s in E u r o p e , as well as c h a n g e s in international t e c h n o l o g i c a l a n d p r o d u c t i o n p r o c e s s of m a n u f a c t u r i n g industries. Disarmament

between

superpowers

will

not

necessarily

decrease

arms

spending in the developing countries. If anything, it may remain at the s a m e level or may e v e n i n c r e a s e d u e to the g r o w t h of regional a n d internal c o n f l i c t s a n d the g r e e d of the d e v e l o p e d countries to find new markets to support their e c o n o m i e s . Currently, there are no s i g n s of r e d u c e d military s p e n d i n g in t h e d e v e l o p i n g countries.

M o s t of t h e s p e n d i n g by t h e d e v e l o p i n g c o u n t r i e s is o n

conventional weapons.

modern

C o u n t r i e s like India have m o r e battle t a n k s t h a n m a n y

western countries. India also has the third largest army a n d navy in the world a n d a significant n u m b e r of c o m b a t aircraft.

V i e t n a m , a l t h o u g h suffering f r o m e c o n o m i c

p r o b l e m s , has more t h a n one million m e n in its a r m y with m a n y aircraft a n d tanks. Indonesia, M a l a y s i a a n d S i n g a p o r e are jointly building up their d e f e n s e s .

Some

countries in the Middle East a n d V i e t n a m have c h e m i c a l w e a p o n s , in spite of their signing the 1972 treaty b a n n i n g t h e m .

S e v e r a l c o u n t r i e s like Algeria, Egypt, a n d

India have surface to surface missiles although they are o b s o l e t e . has b e e n s u c c e s s f u l in m o d e r n i z i n g its missile p r o g r a m .

India, however,

The most dangerous

matter is the prospect of nuclear proliferation. Many countries, s u c h as Israel, have r e f u s e d to sign t h e 1972 n u c l e a r non-proliferation treaty.

India has not s i g n e d

b e c a u s e it is a p p r e h e n s i v e of the C h i n e s e b o m b ; it has p r e s s e d for a w o r l d - w i d e ban. Out of pure e c o n o m i c self-interest, countries such as North Korea, S o u t h Korea, Brazil, C h i n a , (and recently) A r g e n t i n a , Brazil a n d S i n g a p o r e have b e e n a n d are quite active in a r m s supply.

Israel has b e e n busy selling a r m s for m a n y y e a r s .

Further, w h i l e the m a j o r p o w e r s have b e e n active in c o n t r o l l i n g t h e s p r e a d of nuclear, c h e m i c a l a n d biological w e a p o n s , in g e n e r a l t h e y h a v e not a b a t e d their high t e c h n o l o g y conventional a r m s sales to d e v e l o p i n g countries. Even w h e n a s u p e r p o w e r or major industrialized nation intervenes to c o n t a i n a r e g i o n a l conflict, it is not p o s s i b l e to g e n e r a l i z e o n t h e o u t c o m e , a n d o n militarization that e n s u e s .

new

R e g i o n a l p l a y e r s a r e c r u c i a l , as h a s b e e n s e e n in

Military Spending in Developing

Afghanistan, Cambodia and Angola.

237

Countries

Cutting off of military a s s i s t a n c e a n d sales of

a r m s to the d e v e l o p i n g c o u n t r i e s may not be a s o l u t i o n , e v e n w h e n a c c o m p a n i e d by moral support from the United Nations a n d other international organizations. 11.2

Militarization and Economic

Growth

Internal r e l a t i o n s , s u p e r p o w e r r e c o n c i l i a t i o n , r e g i o n a l c o n f l i c t s a m o n g

and

internal p r o b l e m s within the d e v e l o p i n g c o u n t r i e s , a n d c o n c e r n of t h e s e c o u n t r i e s for e c o n o m i c d e v e l o p m e n t are all c o m p l e x l y interrelated.

N o n e t h e l e s s , w e w i s h to

f o c u s on the effects of militarization u p o n e c o n o m i c d e v e l o p m e n t a n d t h e reverse relationship in poor countries. limited

number

of

studies.

This p a p e r a i m s to c o v e r s o m e of t h e f i n d i n g s of a A

subsequent

paper

will

offer

methodological

i m p r o v e m e n t s a n d suggest alternative p r o c e d u r e s for analysis. A c o n s i d e r a b l e a m o u n t of the world's resource are spent on t h e d e v e l o p m e n t , production, a n d use of military e q u i p m e n t .

T h e latest available figure for 1985 w a s

$ 6 6 3 billion. In 1 9 9 1 , it c a n be e s t i m a t e d to be $1 trillion. A l t h o u g h eighty percent of the e x p e n d i t u r e is incurred by the d e v e l o p e d countries, the d e v e l o p i n g countries' share has consistently i n c r e a s e d , from ten percent in 1950 to over twenty percent in 1984, as c a n be s e e n from T a b l e 1 1 . 1 . Their total s p e n d i n g w a s m o r e t h a n sixty billion dollars in recent y e a r s . T A B L E 11.1 Share of Third World in Global Security Expenditure, According to Regions, 1950-1984 (in percentages) Region/Country

1950

1955

1960

1965

1975

1970

1980

1984

3

Middle East 0.5 1.2 0.5 0.9 7.1 2.5 6.9 7.3 China 0.5 5.7 2.9 8.8 10.3 7.3 7.6 5.6 b Far East 2.0 2.1 0.8 1.3 1.6 1.8 3.0 3.1 South 0Asia 1.2 0.7 0.7 1.2 1.2 1.0 1.0 1.3 Africa 0.1 0.2 0.7 0.1 1.7 0.9 2.3 2.5 South America 1.3 1.1 1.1 1.1 1.7 1.0 1.8 1.0 Central America 0.5 0.2 0.4 0.3 0.3 0.3 0.3 0.5 All Developing 6.2 10.6 21.3 14,9 21,6 23,8 17,9 Source: Stockholm International Peace Research Institute, World Armaments and Disarmament SIPRI Yearbook, 1972, 1976, 1979, 1982, 1985 (Stockholm: Almqvist & Wiksell, 1972, 1976) and (London: Taylor & Francis, 1979,1982, 1985).

m

includes Egypt.

^Excludes China.

c

Excludes Egypt.

A first p r o b l e m that arises in c o n d u c t i n g e m p i r i c a l r e s e a r c h on militarization is the classification of countries as d e v e l o p i n g or not.

Usually, d e v e l o p i n g countries

are t h o u g h t to include most of t h o s e in t h e Far East, S o u t h A s i a , A f r i c a , South

M. Chatterji

238

A m e r i c a , C e n t r a l A m e r i c a a n d Middle East. different in t h e s e countries.

But t h e s e c u r i t y s i t u a t i o n is quite

T h e Middle East is, of c o u r s e , u n i q u e b e c a u s e of the

i n o r d i n a t e a m o u n t of f o r e i g n i n t e r v e n t i o n .

In A f r i c a , a large n u m b e r of n e w l y

i n d e p e n d e n t nations have e m e r g e d w h e r e previously t h e r e w a s no a r m y .

Although

the g r o w t h rate of the military may a p p e a r to be high in t h e s e c o u n t r i e s , t h e préexistence of a zero base raises p r o b l e m s for analysis.

In S o u t h A s i a a c c o u n t must

be t a k e n of t h e I n d i a - P a k i s t a n c o n f r o n t a t i o n a n d w a r in A f g h a n i s t a n .

In Latin

A m e r i c a , the interest of U.S. in the civil w a r of s o m e countries c a n n o t be i g n o r e d . In effect, if w e g r o u p all t h e s e c o u n t r i e s u n d e r the rubric of t h e " d e v e l o p i n g w o r l d , " t h e s e c o n s i d e r a t i o n s a n d others s h o u l d be i n c l u d e d a p p r o p r i - a t e l y in t h e m o d e l specifications.

A l t h o u g h c r o s s section a n a l y s i s has m a n y m e r i t s , in this a r e a of

investigation, cross section analysis s h o u l d be s u p p l e m e n t e d by a p p r o p r i a t e time series analysis for s o m e countries, particularly large o n e s . A s e c o n d problem c o n c e r n s s o u r c e s of data, their m e a s u r e m e n t a n d reliability. A n u m b e r of o r g a n i z a t i o n s p u b l i s h d a t a o n military s p e n d i n g .

Some

reliable

sources are (1) International Institute of Strategic Studies; (2) U.S. A r m s Control a n d Disarmament Agency: International Yearbook;

Peace

World Military Research

(4) International

United Nations:

Institute:

Monetary

U.N. Statistical

Expenditure Fund

Yearbook.

World

and Arms

Transfer;

(3) S t o c k h o l m

and

Disarmament

Armament

Government

Finance

Statistics;

a n d (5)

With respect to d a t a on s o c i o - e c o n o m i c

v a r i a b l e s , W o r l d B a n k d a t a a n d o t h e r s c o m p i l e d by individual s c h o l a r s like A z a r (1980) a n d Ruth S i v a r d (1983) are of i m p o r t a n c e . S u m m e r s and Heston (1988).

A n o t h e r i m p o r t a n t s o u r c e is

T h e y p r e s e n t a set of i n t e r n a t i o n a l c o m p a r i s o n s

covering the period 1950-85 for 121 market a n d nine centrally p l a n n e d e c o n o m i e s . For e a c h t h e y e s t i m a t e real per c a p i t a p r o d u c t a n d price level, g r o s s d o m e s t i c product, c o n s u m p t i o n , g r o s s d o m e s t i c i n v e s t m e n t , g o v e r n m e n t e x p e n d i t u r e s , a n d population a n d e x c h a n g e rates. T h e a c c u r a c y a n d c o v e r a g e of the available d a t a leaves m u c h to be d e s i r e d . Many countries do not record all e x p e n s e s , a n d d a t a e x p r e s s e d in local currency is only of d o m e s t i c interest.

For comparability the d a t a should be in constant prices or

expenditures as a percentage of gross d o m e s t i c product. H o w e v e r , e x c h a n g e rates vary widely, a n d for s o m e c o u n t r i e s they are fixed unrealistically at a g i v e n point. The

r e s u l t i n g d a t a in U.S. d o l l a r s a r e t h u s q u e s t i o n a b l e .

Moreover,

some

e c o n o m i e s are p l a n n e d a n d o t h e r s are o p e n ; m o n e y p r i c e s t h e n d o not reflect values in the s a m e way in the two systems. For countries w h i c h have s o m e kind of mixed e c o n o m y this problem is less serious. A third difficulty arises in measuring security expenditures.

Ball (1984) presents

five of t h e m o s t c o m m o n m e c h a n i s m s u s e d by g o v e r n m e n t s to c o v e r u p this

Military Spending in Developing

information:

239

Countries

(1) d o u b l e b o o k k e e p i n g ; (2) u s e of e x t r a - b u d g e t a r y a c c o u n t s ; (3)

highly a g g r e g a t e d b u d g e t c a t e g o r i e s ; (4) military a s s i s t a n c e ; a n d (5) f o r e i g n exchange manipulation. N o t w i t h s t a n d i n g t h e s e difficulties, m a n y s c h o l a r s h a v e a d d r e s s e d t h i s topic. Since most studies start f r o m the p r e m i s s e s of Benoit, w h o p i o n e e r e d this a r e a of study, it is useful to discuss his findings in s o m e detail. 11.3

Benoit's Analysis and

Findings

Benoit first p r e s e n t e d his o b s e r v a t i o n s in his b o o k , D e f e n s e a n d E c o n o m i c G r o w t h in D e v e l o p i n g C o u n t r i e s ( 1 9 7 3 ) a n d r e s t a t e d t h e m in a n article (Benoit 1978). In his w o r d s , It has usually b e e n s u p p o s e d by e c o n o m i s t s that d e f e n s e

expenditures

reduce the r e s o u r c e s available for i n v e s t m e n t a n d so s l o w s d o w n g r o w t h . . H o w e v e r , in a large study of less d e v e l o p e d c o u n t r i e s , an o p p o s i t e pattern s e e m e d to appear, a n d this finding w a s so u n e x p e c t e d a n d c h a l l e n g i n g that it s e e m e d w o r t h w h i l e e x p l o r i n g in d e t a i l . . . C o n t r a r y to my e x p e c t a t i o n s , countries with a heavy d e f e n s e b u r d e n generally had t h e most rapid rate of g r o w t h , a n d t h o s e with t h e lowest d e f e n s e b u r d e n s t e n d e d to s h o w t h e lowest g r o w t h rates." (Benoit, 1978, p. 2 7 1 ) . That military s p e n d i n g is able to stimulate g r o w t h c a n be e x p l a i n e d as f o l l o w s : " D e f e n s e p r o g r a m s of m o s t c o u n t r i e s m a k e t a n g i b l e c o n t r i b u t i o n s to t h e civilian e c o n o m i e s by (1) f e e d i n g , c l o t h i n g , a n d h o u s i n g a n u m b e r of p e o p l e w h o w o u l d o t h e r w i s e h a v e to be f e d , h o u s e d , a n d c l o t h e d by t h e civilian e c o n o m y - a n d s o m e t i m e s d o i n g so, especially in L D C s , in w a y s that involve sharply raising their nutritional and other consumption

s t a n d a r d s a n d e x p e c t a t i o n s ; (2)

providing

education a n d medical care as well as v o c a t i o n a l a n d technical training (e.g., in the o p e r a t i o n a n d repair of c a r s , p l a n e s a n d r a d i o s ; in h y g i e n e a n d m e d i c a l c a r e ; in construction m e t h o d s ) that may have high civilian utility; (3) e n g a g i n g in a variety of public w o r k s - roads, d a m s , river i m p r o v e m e n t s , airports, c o m m u n i c a t i o n networks, etc. - that may in part serve civilian u s e s ; a n d (4) e n g a g i n g in scientific a n d technical specialties such as hydrographie studies, mapping, aerial surveys, dredging, meteorology, soil c o n s e r v a t i o n , a n d forestry projects as well as certain quasi-civilian activities s u c h as coast g u a r d , lighthouse o p e r a t i o n , c u s t o m s w o r k , b o r d e r g u a r d , and disaster personnel.

relief w h i c h w o u l d o t h e r w i s e

h a v e to be p e r f o r m e d

by

civilian

Military f o r c e s also e n g a g e in c e r t a i n R & D a n d p r o d u c t i o n activities

w h i c h d i f f u s e skills to t h e civilian e c o n o m y a n d e n g a g e in or f i n a n c e self-help

M. Chatterji

240

projects p r o d u c i n g certain m a n u f a c t u r e d items for c o m b i n e d civilian a n d military use (e.g., batteries a n d tires) w h i c h might not be e c o n o m i c a l l y p r o d u c e d solely for civilian d e m a n d " (Benoit, 1978, pp. 2 7 6 - 2 7 7 ) . C o n s i d e r Benoit's m e t h o d o l o g y .

T h e study e x a m i n e d g r o w t h rates, i n v e s t m e n t

rates, foreign aid, d e f e n s e s p e n d i n g , etc. from forty-four d e v e l o p i n g countries for the period 1950-65.

It c o v e r e d about s e v e n t y - f i v e p e r c e n t of t h e w o r l d ' s p o p u l a t i o n ,

excluding mainland China.

T h e a g g r e g a t e study w a s f o l l o w e d u p by c a s e studies

of India, South Korea, Mexico, Israel, the United A r a b Republic a n d A r g e n t i n a . Benoit d e f i n e d d e f e n s e b u r d e n as t h e ratio of d e f e n s e e x p e n d i t u r e to the n o n d e f e n s e g r o s s d o m e s t i c product.

He t h e n c o r r e l a t e d this with t h e g r o w t h rate of

n o n - d e f e n s e G D P , using S p e a r m a n ' s rank o r d e r c o r r e l a t i o n a n a l y s i s , w h e r e the a v e r a g e of all v a l u e s (at current prices) of the variables for available y e a r s b e t w e e n 1960 a n d 1965 w a s t a k e n for e a c h c o u n t r y .

For a s a m p l e of n = 4 4 , the rank

correlation coefficient of r=0.55 w a s f o u n d to be statistically significant with t = 4 . 2 with a 1 in 1000 c h a n c e of it being a c c i d e n t a l .

T h e rank c o r r e l a t i o n coefficient

analysis w a s c o n f i r m e d by regression analysis with bilateral foreign a i d , investment rate, a n d d e f e n s e b u r d e n a s i n d e p e n d e n t v a r i a b l e s a n d g r o w t h dependent variable. International

rate as t h e

S o u r c e s for his d a t a w e r e t h e W o r l d B a n k , A g e n c y

Development, and United Nations.

B e n o i t ' s s a m p l e of

for

nations

i n c l u d e d military d i c t a t o r s h i p s a n d as s u c h m a y be c o n s i d e r e d o v e r s t a t i n g the association b e t w e e n d e f e n s e b u r d e n a n d g r o w t h rate; h e n c e he e l i m i n a t e d s o m e countries from his s a m p l e , ran the regression a n d f o u n d the s a m e result.

Also, the

correlation c a n be c o n s i d e r e d s p u r i o u s s h o u l d a third v a r i a b l e like foreign aid be responsible for the a p p a r e n t correlation.

H o w e v e r , b a s e d on a m o r e refined a n d

d e s e g r e g a t e d analysis with the bilateral foreign aid a s an additional v a r i a b l e , he still f o u n d the d e f e n s e burden to be a significant d e t e r m i n a n t of g r o w t h Benoit next c o n s i d e r e d the direction of the relationship, namely, w h e t h e r growth itself i n d u c e s m o r e d e f e n s e s p e n d i n g .

"No significant correlation w a s

b e t w e e n per c a p i t a i n c o m e a n d d e f e n s e b u r d e n s .

found

Nor w e r e tax r e v e n u e s , total

g o v e r n m e n t e x p e n d i t u r e s , or the ratio of d e f e n s e to total g o v e r n m e n t e x p e n d i t u r e s closely linked to the rate of e c o n o m i c g r o w t h .

A n d in multiple regression analysis

e c o n o m i c g r o w t h d i d not e m e r g e a s a s i g n i f i c a n t d e t e r m i n a n t of t h e d e f e n s e b u r d e n " ( B e n o i t , 1 9 7 8 , p. 2 7 5 ) .

A c t u a l t h r e a t s of w a r , i n c i d e n c e of w a r ,

e x p e c t a t i o n of w a r w e r e m o r e i m p o r t a n t f a c t o r s for t h e i n c r e a s e in

and

defense

expenditure. Benoit's

cross-sectional

econometric

study

of

forty-four

countries

was

c o m p l e m e n t e d by individual c a s e studies of such countries as India, Mexico, South K o r e a , Israel, the U n i t e d A r a b R e p u b l i c a n d A r g e n t i n a .

A n a l y s i s of t h e Indian

Military Spending in Developing

s i t u a t i o n is t h e m o s t i m p o r t a n t s i n c e

241

Countries

India is a big c o u n t r y w i t h

i n s t i t u t i o n s , a large p o p u l a t i o n , a n e c o n o m i c d e v e l o p m e n t

democratic

program,

potential

s o u r c e s of conflict with s o m e neighbors, a strong m a n u f a c t u r i n g b a s e with a large potential for w e a p o n s p r o d u c t i o n , a large a r m y , a n d a n o n - a l i g n e d f o r e i g n policy. After a n a l y z i n g the Indian e c o n o m y , e c o n o m i c policy, d e f e n s e p r o g r a m , a n d the e c o n o m i c c o n t e n t s of the budget, he f o u n d , f r o m a t i m e series a n a l y s i s , a positive correlation b e t w e e n g r o w t h a n d d e f e n s e e x p e n d i t u r e s . Benoit c o n s i d e r e d three types of unfavorable effects of d e f e n s e e x p e n d i t u r e on economic growth:

(1) I n v e s t m e n t

Effect:

the defense industry may

absorb

r e s o u r c e s that might otherwise have g o n e into i n v e s t m e n t ; (2) Productivity Effect: the d e f e n s e a n d related g o v e r n m e n t sectors are in g e n e r a l less productive a n d thus lower overall productivity; a n d (3) Income Shift Effect: m e a n s lower civil G N P . on

India.

higher d e f e n s e e x p e n d i t u r e

Benoit c o m p u t e d t h e i m p a c t s of t h e s e u n f a v o r a b l e effects

He t h e n c o n s i d e r e d t h e s t i m u l a t i n g

effects

of i n c r e a s e d

military

e x p e n d i t u r e s a n d f o r e i g n aid (largely f r o m t h e Soviet bloc as a result of India's border

conflict

with

China).

These

effects

were

increased

demand

and

e m p l o y m e n t , i n f l a t i o n , liberal m o n e t a r y a n d fiscal policy, a n d t h e civilian t y p e activities of the military, n a m e l y road b u i l d i n g , m o d e r n i z a t i o n a n d nation building. He f o u n d a n i n c o n s i s t e n c y b e t w e e n e c o n o m e t r i c a n d statistical a n a l y s i s . f o r m e r s h o w e d a s t r u c t u r a l shift p o i n t i n g t o a s l o w d o w n a s s o c i a t e d with i n c r e a s e d military e x p e n d i t u r e s .

in a v e r a g e

The

growth

T h e latter r e v e a l e d a significant

positive c o r r e l a t i o n ; t h e u n f a v o r a b l e effects of t h e i n c r e a s e d military e x p e n d i t u r e s w e r e c o u n t e r b a l a n c e d by the favorable effects from the heavy inflow of foreign aid.

11.4

C r i t i q u e s of

Benoit

S u b s e q u e n t to the publication of Benoit's b o o k a n d paper, a n u m b e r of articles w e r e p u b l i s h e d criticizing his f i n d i n g s a n d offering alternative f o r m u l a t i o n s .

Ball

( 1 9 8 3 ) o b j e c t e d to B e n o i t ' s definition of f o r e i g n aid a n d his i n t e r p r e t a t i o n of its relationship to e c o n o m i c g r o w t h a n d military e x p e n d i t u r e . flow into f o u r m a i n c a t e g o r i e s , n a m e l y :

Benoit d i v i d e d foreign

(1) e c o n o m i c a i d ; (2) l o n g - t e r m private

i n v e s t m e n t ; (3) military a i d ; a n d (4) military t r a n s f e r p a y m e n t s

(expenditure).

H o w e v e r , he i g n o r e d f o r e i g n p r i v a t e i n v e s t m e n t , m u l t i l a t e r a l a i d , a n d

military

a s s i s t a n c e in his multiple r e g r e s s i o n a n a l y s i s w h e n he e x a m i n e d w h e t h e r the defense burden

or inflow of foreign r e s o u r c e s w a s m o r e closely a s s o c i a t e d with

economic growth. services

(military

His s t a t e m e n t that a c o n s i d e r a b l e a m o u n t of e q u i p m e n t a n d aid) w o u l d

not

have

been

obtainable

without the

Military

Assistance P r o g r a m is not realistic in v i e w of the t r e n d s in a r m s t r a d e . After pointing

M. Chatterji

242

out m a n y o t h e r s h o r t c o m i n g s in Benoit's s t u d y , e s p e c i a l l y his t r e a t m e n t of n o n quantifiable effects, Ball c o n c l u d e d that Benoit's a n a l y s e s fail to treat the existing diversity of f o r c e s a n d t h u s of q u e s t i o n a b l e use for u n d e r s t a n d i n g t h e relation of d e f e n s e to d e v e l o p m e n t . Lim (1983) r e e x a m i n e d Benoit's result for t h e m o r e recent p e r i o d 1 9 6 5 - 7 3 for t w e n t y - o n e A f r i c a n , t h i r t e e n W e s t e r n H e m i s p h e r e , e l e v e n A s i a n a n d nine Middle Eastern and Southern European LDCs.

His framework begins with a Harrod-

D o m a r model Y g = f (IOCR, l/Y)

(11.1)

w h e r e Y g is the g r o w t h rate of real G D P , IOCR the i n c r e m e n t a l output-capital ratio, a n d l/Y the ratio of g r o s s d o m e s t i c i n v e s t m e n t to G D P .

A l l o w i n g f o r e i g n capital

inflow to affect the investment-defense expenditures tradeoff, he sets. l/Y = f(D/Y, F/Y)

(11.2)

w h e r e D d e n o t e s d e f e n s e expenditure a n d F foreign capital inflow.

R e p l a c i n g F/Y

by the ratio F/S (S = g r o s s national savings) w h i c h he c o n s i d e r s m o r e relevant in affecting the investment-defense expenditures tradeoff, he obtains by substitution of equation (11.2) into equation (11.1) the estimating equations Y g = f(IOCR, D/Y, F/S)

(11.3)

Y g = f(IOCR, D/GE, F/S)

(11.4)

w h e r e equation (11.4) (an alternative to equation (11.3)) replaces D/Y with the ratio D/GE w h e r e G E is g o v e r n m e n t current a n d capital e x p e n d i t u r e s .

Using ordinary

least s q u a r e regression analysis, Lim finds that d e f e n s e s p e n d i n g is d e t r i m e n t a l to e c o n o m i c growth in L D C s , " a conclusion opposite to Benoit's. H o w e v e r , there w e r e important regional differences. T h e a d v e r s e effects that w e r e m a r k e d in Africa a n d t h e W e s t e r n H e m i s p h e r e w e r e a b s e n t in A s i a , t h e M i d d l e East, a n d

southern

Europe." (p. 384). D e g e r a n d S e n in a careful study for India (1983) did not find a positive impact of military e x p e n d i t u r e s on e c o n o m i c g r o w t h .

For a set of i n d u s t r i e s w h i c h are

e s p e c i a l l y s u s c e p t i b l e t o d e f e n s e l i n k a g e s , t h e y d i d not f i n d a n i m p o r t a n t

or

significant effect, w h i c h "clearly d e m o n s t r a t e s that the beneficial spin-offs generally d i s c u s s e d in the literature are m u c h less than what is c l a i m e d . " (p. 8 0 ) . E c o n o m i c g r o w t h , a c c o r d i n g to L o o n e y ( 1 9 9 0 ) , d e p e n d s o n s o c i o - e c o n o m i c development.

C o n d u c t i n g a factor analysis study of 110 d e v e l o p i n g c o u n t r i e s over

Military Spending in Developing

Countries

243

four year intervals - 1974, 1978, 1982, a n d 1986 - to detect the relationship b e t w e e n s o c i o - e c o n o m i c d e v e l o p m e n t a n d military e x p e n d i t u r e , he a r r i v e d at t h e following conclusions: (1) O v e r t i m e military e x p e n d i t u r e per soldier b e c a m e increasingly a s s o c i a t e d with n o n - d e f e n s e per c a p i t a e x p e n d i t u r e . (2) O v e r t i m e military participation b e c a m e increasingly positively c o r r e l a t e d with s o c i o - e c o n o m i c c o n d i t i o n s in M i d d l e E a s t c o u n t r i e s , w h i l e f o r

developing

countries as a w h o l e such positive correlation w a s fairly constant. (3) Public n o n - d e f e n s e e x p e n d i t u r e b e c a m e less a s s o c i a t e d o v e r t i m e with military participation rates for Middle East/South Asian countries but not for others. (4) In countries with a high (low) level of militarization, the effect on s o c i o - e c o n o m i c p e r f o r m a n c e of the military participation rate d e c l i n e d (increased) o v e r t i m e . In a study of e i g h t e e n Latin A m e r i c a n c o u n t r i e s o v e r the p e r i o d 1 9 4 8 - 1 9 7 9 , V e r n e r ( 1 9 8 3 ) f o u n d no e v i d e n c e t h a t d e f e n s e s p e n d i n g a d v e r s e l y

affects

educational expenditures. For twenty-six African countries over the period 1 9 6 7 - 1 9 7 6 , N a b e (1983) u s e d factor a n d path a n a l y s e s to observe signs of t h e path coefficients pairwise b e t w e e n the following v a r i a b l e s :

Military E x p e n d i t u r e s ; an E c o n o m i c D e v e l o p m e n t Factor (a

c o m p o s i t e of installed K W capacity, g o v e r n m e n t e x p e n d i t u r e s except for health a n d e d u c a t i o n , a n d private e x p e n d i t u r e s ) , a social D e v e l o p m e n t Factor (a c o m p o s i t e of number

of

physicians,

government

expenditures

on

health,

e x p e n d i t u r e s on e d u c a t i o n a n d n u m b e r of t e a c h e r s ) a n d

government

GDP-manufacturing.

Consistent with his h y p o t h e s e s , he f o u n d that (a) the e c o n o m i c d e v e l o p m e n t factor has a positive relation with both G D P - m a n u f a c t u r i n g a n d t h e social d e v e l o p m e n t factor; (b) t h e social d e v e l o p m e n t factor has a positive relation with G D P - m a n u f a c t u r i n g ; a n d (c) military e x p e n d i t u r e

has a n e g a t i v e

relation with both

the

e c o n o m i c a n d social d e v e l o p m e n t factors, rejecting t h e r e b y Benoit's hypothesis. B i s w a s a n d R a m (1986) u s e d a F e d e r - t y p e ( 1 9 6 2 ) to s e c t o r m o d e l , t h e t w o sectors being the military a n d civilian.

T h e y c o n c l u d e d that there is no significant

externality effect of t h e military s e c t o r on t h e civilian sector, a n d that a relative factors productivity differential across the t w o sectors is not statistically significant. Most

recently, Adams,

Behrman

and

Bolden

(1991) addressed

Benoit's

hypothesis for d e v e l o p i n g countries for the period 1974-86, dividing t h e s e countries into "low i n c o m e " a n d " m i d d l e i n c o m e . "

Distinguishing b e t w e e n military a n d n o n -

military g o v e r n m e n t s p e n d i n g in a Feder-type analysis, they c o n c l u d e that neither of these c o m p o n e n t s of g o v e r n m e n t s p e n d i n g has a significant impact on private G D P ,

M. Chatterji

244

a n d that the bulk of the g o v e r n m e n t impact on private G D P results f r o m the inclusion of g o v e r n m e n t sector production in the G D P a c c o u n t s . 11.5

Some

Summary

Remarks

In s u m m i n g up the literature, it is to be noted that t h e majority of t h e studies d o in fact criticize a n d find fault with Benoit's a n a l y s i s . H o w e v e r , s o m e s t u d i e s are supportive of Benoit s u c h a s : W h y n e s (1979) w h o using 1977 d a t a finds for L D C s a correlation coefficient of + 0 . 2 2 4 b e t w e e n d e f e n s e b u r d e n a n d per c a p i t a i n c o m e , the coefficient being - 0 . 3 5 5 for the d e v e l o p e d c o u n t r y s a m p l e ; a n d W e i d e n b a u m (1974) w h o cites a R a n d C o r p o r a t i o n S t u d y of Latin A m e r i c a that s u g g e s t s that nations with larger d e f e n s e expenditures have greater e c o n o m i c g r o w t h . H o w e v e r , t h e most recent s t u d i e s , a s t h e y dig f u r t h e r a n d f u r t h e r into the subject, find that t h e f a c t o r s i n v o l v e d are so n u m e r o u s a n d difficult to e x p r e s s quantitatively

a n d so

much

of a p o l i t i c a l a n d c u l t u r a l

relationships are not identifiable.

nature that

clear-cut

Further, with t h e e m e r g e n c e in t h e 1980's of the

d e v e l o p i n g c o u n t r i e s ' debt p r o b l e m , new conflicting political a n d e c o n o m i c factors have c o m e to play u p o n the relationship b e t w e e n d e f e n s e s p e n d i n g a n d e c o n o m i c g r o w t h in t h e s e c o u n t r i e s .

S e e T a b l e s 11.2 a n d 11.3 for relevant m a g n i t u d e s .

T h e s e f a c t o r s raise n e w c h a l l e n g e s for t h e c o n s t r u c t i o n of m o r e analytical m o d e l s .

T A B L E 11.2 The Third World External Debt, Selected Regions, 1982-90 Figures are in US $billion. (current prices). Region

1982

1984

1986

1988

1990

Africa Latin America and the Caribbean

121.4

133.0

171.3

199.8

206.0

331.2

358.2

383.6

402.7

417.5

826.6

918.3

1086.7

1197.2

1246.3

135.8

136.1

144.8

170.0

175.8

Total debt Total debt-service payments

Source: International Monetary Fund, World Economic Outlook, Oct. 1989.

appropriate

Military Spending in Developing

Countries

245

T A B L E 11.3 Military expenditure and external public debt-service as shares of current government revenue, selected Third World countries, 1987 (Figures are percentages) Military Expenditure

Country Argentina Colombia Chile Egypt Indonesia Israel Jordan Morocco Pakistan Philippines Sri Lanka Zimbabwe

Military Expenditure Plus Debt-Service

External Debt-Service

39.4 65.2 47.6 31.4 49.4 44.0 85.1 50.4 60.5 63.6 54.9 46.0

23.6 50.7 25.6 11.8 35.5 13.1 36.2 30.9 20.4 48.1 24.2 23.5

15.8 14.5 22.0 19.6 13.9 30.9 48.9 19.5 40.1 15.5 30.7 22.5

Sources: World Development Report (World Bank: Washington, D.C. 1989);SIPRI data base; authors' calculations. References

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L a n d a u , D. ( 1 9 8 6 ) . G o v e r n m e n t a n d e c o n o m i c g r o w t h in t h e less c o u n t r i e s : an e m p i r i c a l study for 1 9 6 0 - 1 9 8 0 . Economic Cultural

Change,

35, 35-75.

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facts and figures,

worldwide

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Economic

Development

and Cultural

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3 1 , 377-384.

Looney, R.E. (1990). Recent patterns of d e f e n s e d x p e n d i t u r e s a n d s o c i o - e c o n o m i c d e v e l o p m e n t in the Middle East a n d South A s i a , m i m e o . Lötz, J.R.

(1970).

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The

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Luttwak E. (1968). Coup d'etat.

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Moll, K.D. a n d Luebbert, G. M. (1980). A r m s race a n d military e x p e n d i t u r e models. Journal

of Conflict

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24, 153-85.

M a h a l a n o b i s , P.C. ( 1 9 6 3 ) . The approach

of operations

research

to planning

in

India. B o m b a y : A s i a Publishing H o u s e . Maizels, A. a n d N i s s a n k e , M.K. (1986). T h e d e t e r m i n a n t s of military e x p e n d i t u r e s in d e v e l o p i n g countries. World Development, Mariano,

R.S.

(1990).

Defense

14, 1 1 2 5 - 1 1 4 0 .

expenditures

and

economic

growth

in

the

Philippines: a m a c r o s i m u l a t i o n analysis, m i m e o . N a b e , Ο. ( 1 9 8 3 ) . Military E x p e n d i t u r e s a n d Industrialization in Africa, Economic Neuman,

Issues,

S.G.

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of

17, 5 7 5 - 5 8 7 .

(1978).

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military

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socio-economic

d e v e l o p m e n t : reflections on Iran. Orbis, 2 3 , 5 6 9 - 5 9 4 . P a l m a , G.

(1978).

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or a World

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(1986). Causality b e t w e e n i n c o m e a n d g o v e r n m e n t e x p e n d i t u r e :

international

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Arms and insecurity.

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( 1 9 7 6 ) . T h e w o r l d - e c o n o m y a n d t h e d i s r i b u t i o n of i n c o m e within

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S m i t h , R.P. ( 1 9 8 0 b ) . T h e d e m a n d for military e x p e n d i t u r e . Economic

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London:

Chapter

12

DO A R M S R A C E S L E A D T O Jean-Christian

PEACE?

Lambelet

University of L a u s a n n e D é p a r t e m e n t d ' é c o n o m é t r i e et d ' é c o n o m i e politique ( D E E P / H E C ) , a n d G r a d u a t e Institute*

[The last contribution to this book brings to bear on the subject the perspective of a European, a resident of a "neutral" country, who over the years has conducted some of the most rigorous analysis of arms races. The significance of the question he asks needs no comment, (eds.)]

12.1

Introduction From the standpoint of a r m s race analysis the end of the cold war w o u l d a p p e a r

to be readily e x p l a i n a b l e in t e r m s of t h e e x t e n d e d R i c h a r d s o n i a n m o d e l w h i c h d o m i n a t e s the field, the explanation being roughly as f o l l o w s .

1

G i v e n s o m e u n d e r l y i n g initial c o n f l i c t , t w o or m o r e c o u n t r i e s e m b a r k on a competitive military build-up involving w e a p o n s a s well as m a n p o w e r . T h i s p r o c e s s is not o p e n - e n d e d : b e c a u s e of e c o n o m i c c o n s t r a i n t s , it will e v e n t u a l l y c o n v e r g e t o w a r d s s o m e d y n a m i c e q u i l i b r i u m in w h i c h e a c h p a r t i c i p a n t s p e n d s a h i g h e r 2

fraction of its r e s o u r c e s on d e f e n s e t h a n if there w e r e no r a c e . This will be at the e x p e n s e of c o n s u m p t i o n a n d / o r i n v e s t m e n t .

3

If c o n s u m p t i o n is c u r t a i l e d , current

e c o n o m i c w e l f a r e is r e d u c e d w h e r e a s f u t u r e w e l f a r e is u n d e r m i n e d if d e f e n s e 4

outlays c r o w d out i n v e s t m e n t . But all participants suffer from the a r m s race which is seen as a globally s u b o p t i m a l process. T h e r e is no s u c h d y n a m i c e c o n o m i c f e e d b a c k in R i c h a r d s o n ' s original m o d e l .

5

Most m o d e l s of the s e c o n d a n d later g e n e r a t i o n s h o w e v e r include a m o r e or less detailed supply side along the preceding l i n e s .

6

All participants in an a r m s race d o not n e c e s s a r i l y h a v e t h e s a m e e c o n o m i c r e s o u r c e s at t h e i r c o m m a n d . A c o m p e t i t o r with a s m a l l e r e c o n o m i c b a s e will generally have to allocate a higher fraction of its output to d e f e n s e , a n d h e n c e will suffer more. T o the extent that i n v e s t m e n t is c r o w d e d out, g r o w t h will be i m p e d e d a n d the d e f e n s e b u r d e n will b e c o m e c o r r e s p o n d i n g l y heavier o v e r t i m e - until that

J-C.

250

Lambelet

burden a n d the a s s o c i a t e d welfare loss b e c o m e too heavy to bear, a n d the country gives up. S e e n in that light, the a r m s race b e t w e e n the Soviet Union a n d the U.S. - or, more broadly, b e t w e e n East a n d W e s t - has apparently c o m e to an e n d , a n d global peace has seemingly been established after more t h a n forty years of c o n f r o n t a t i o n , essentially b e c a u s e of the superior staying power of the United States a n d its Allies. S u p p o s e d l y , the E a s t - W e s t race has t h u s e n d e d with t h e U.S. et al. b e i n g the economic

victors.

Granting for a m o m e n t that this is what really h a p p e n e d , it c a n be interpreted as m e a n i n g that a r m s r a c e s m a y - a n d s o m e t i m e s a c t u a l l y d o - lead to p e a c e . Richardson, w h o w a s writing with the pre-1914 a n d pre-1939 c o m p e t i t i o n s in m i n d , thought it practically axiomatic that unstable (ie. real) a r m s races had to e n d in w a r .

7 8

Most analysts w h o w o r k e d immediately after Richardson probably s h a r e d this basic view although the issue of the link b e t w e e n a r m s races and the outbreak of w a r w a s practically never a d d r e s s e d explicitly. In 1975 h o w e v e r this writer p u b l i s h e d a short essay on that q u e s t i o n in which he a r g u e d that "(...) the historical failure

to keep

breaking stakes

out.

record

up with the other Similarly,

so much

that

there

side

are also

an open

conflict

suggests

that unilateral

may at times cases became

increase

of arms less

races likely."

9

disarmament the odds

which

of a

increased

or a war the

T e n y e a r s later the

a r g u m e n t w a s p u s h e d one step further in a paper w h i c h a r g u e d that peace science in g e n e r a l a n d a r m s race analysis in particular n e e d e d to be c o m p l e m e n t e d by a normative t h e o r y , just as welfare e c o n o m i c s c o m p l e m e n t s positive e c o n o m i c s . It w a s p r o p o s e d that s o m e a r m s races could be v i e w e d as " g o o d things", for e x a m p l e w h e n a f u n d a m e n t a l l y p e a c e f u l c o u n t r y acts in s e l f - d e f e n s e a g a i n s t a basically aggressive power. A s a result, it is no longer sure that an a r m s race a l w a y s m a k e s up a globally suboptimal process, e v e n w h e n it leads to w a r a n d , possibly, d e f e a t .

10

Put differently, an a r m s race entails lower e c o n o m i c w e l f a r e , but not necessarily lower overall enhance

w e l f a r e b e c a u s e it m a y , u n d e r s o m e c i r c u m s t a n c e s ,

external

security.

11

By t h e s a m e t o k e n , m o t i v a t i o n s a n d

genuinely attitudes

( p e a c e f u l n e s s v s . a g g r e s s i v e n e s s ) have to be explicitly i n t e g r a t e d in the a n a l y s i s a n d the nature of the underlying conflict has to be e x a m i n e d , a c o m p l i c a t i n g factor b e i n g that t h e r e m a y be a f e e d b a c k p r o c e s s f r o m t h e a r m s race itself to the underlying conflict a n d to the runners' m o t i v a t i o n s .

12

T h e a p p a r e n t e n d of the c o l d w a r now s u g g e s t s that the a n a l y s i s s h o u l d be p u s h e d still one step further. T h e E a s t - W e s t a r m s race may have b e e n - i n d e e d , probably w a s - a s y m m e t r i c , in that o n e side w a s m o r e a g g r e s s i v e t h a n t h e other, particularly in the later stages of the c o n f r o n t a t i o n .

13

It may also have i n c r e a s e d the

251

Arms Races and Peace

stakes so m u c h that o p e n nuclear warfare has b e e n effectively d e t e r r e d .

14

But, on

t o p of all that, it is n o w a r g u a b l e that, b e c a u s e of u n e q u a l e c o n o m i c s t r e n g t h , this most i m p o r t a n t of all races has finally b r o u g h t a b o u t g e n u i n e g l o b a l p e a c e , ie. s o m e t h i n g f u n d a m e n t a l l y different f r o m the more or less precarious state of neitherw a r - n o r - p e a c e w h i c h existed since the aftermath of W o r l d W a r II till about 1 9 8 9 .

15

T h i s writer is h o w e v e r not at all certain that this e x p l a n a t i o n of t h e e n d of c o l d war, w h i c h e m p h a s i z e s e c o n o m i c factors, is wholly or e v e n partially correct for it is open to a n u m b e r of more or less obvious c o u n t e r - a r g u m e n t s , to w h i c h w e now turn. 12.2 O b j e c t i o n s a n d C o m p e t i n g

Views

The first thing to be noted is that even if it is true that the United States has w o n the cold w a r b e c a u s e of its superior e c o n o m i c staying power, it still has had to pay a heavy price for it.

Insufficient private a n d public investment, the e n s u i n g a g e i n g of

the stock of private a n d public e q u i p m e n t s , insufficient a n d possibly deteriorating h u m a n capital, lasting public deficits w h i c h are f i n a n c e d by b o r r o w i n g a b r o a d - all this a n d more of the s a m e may be d u e at least partly to the heavy d e f e n s e burden w h i c h the U.S. has had to bear for several d e c a d e s .

16

T h e a r m s race with the Soviet

Union may have finally led to p e a c e , but its c o n s e q u e n c e s are probably going to be felt in t h e U.S. for a long time to c o m e , a n d it w o u l d of c o u r s e have b e e n m u c h better if t h e r e h a d b e e n no race at all, o b v i o u s t h o u g h this m a y s o u n d . T h e real winner of the a r m s race may thus have b e e n s o m e third party, s o m e tertius such as J a p a n a n d , to a lesser extent, W e s t e r n E u r o p e .

17

gaudens

It is not impossible that in

the y e a r s to c o m e this state of affairs will lead to serious a n d lasting international t e n s i o n s of a different sort. T h e c o l d w a r m a y h a v e d i e d , but it has left a heavy legacy, or so it c a n be a r g u e d . O n a m o r e f u n d a m e n t a l l e v e l , it is d e b a t a b l e w h e t h e r t h e S o v i e t

Union's

"surrender" in the c o l d w a r has b e e n d u e wholly or e v e n mainly to an increasingly crushing d e f e n s e b u r d e n . A s a first c o m p e t i n g view, one might a r g u e that t h e Soviet Union has actually given up b e c a u s e of general

e c o n o m i c bankruptcy, w h i c h in turn

followed from the nature of its e c o n o m i c s y s t e m . In that c o n t e x t it may be w o r t h recalling the s o - c a l l e d " s o c i a l i s m c o n t r o v e r s y " w h i c h w a s v e r y m u c h in the n e w s in t h e 1 9 3 0 ' s , at least inside t h e e c o n o m i c s profession. A economists

18

n u m b e r of s o m e t i m e s v e r y

prominent

and

mostly

left-leaning

w e r e t h e n a r g u i n g that in t e r m s of e c o n o m i c e f f i c i e n c y a highly

c e n t r a l i z e d e c o n o m i c s y s t e m c o u l d a n d w o u l d lead to t h e s a m e r e s u l t s as a perfectly f u n c t i o n i n g m a r k e t e c o n o m y w h i l e b e i n g d e c i d e d l y s u p e r i o r on o t h e r c o u n t s such as i n c o m e distribution a n d social equity. O n the o p p o s i t e side of the

252

J-C.

Lambelet

political s p e c t r u m , other equally prominent e c o n o m i s t s w o u l d likely run into i n s u r m o u n t a b l e

19

replied that s u c h a s y s t e m

p r o b l e m s of i n c e n t i v e s a n d

information

t r a n s m i s s i o n . At the t h e o r e t i c a l level t h e c o n t r o v e r s y t h e n s u b s i d e d , till it w a s revived in the seventies in the context of the "principal-agent" p r o b l e m , t h e g e n e r a l c o n c l u s i o n t h e n b e i n g that any highly c e n t r a l i z e d e c o n o m i c s y s t e m w a s i n d e e d likely to be i n c o m p a t i b l e with a p e r f o r m i n g s y s t e m of individual

i n c e n t i v e s . T o be

sure, e n t h u s i a s m , devotion to the c o m m o n g o o d , the will to create a " n e w m a n " a n d the like c a n for a while substitute for individual incentives, as t h e y probably did for s o m e t i m e in the early s t a g e s of t h e " S o v i e t e x p e r i m e n t " . devotion a n d the like c a n last only that l o n g .

21

20

But e n t h u s i a s m ,

T r u e , Soviet planners did try to set up

an alternative incentive s y s t e m stressing a c c e s s to higher e d u c a t i o n a n d to the perks of the "nomenklatura", not to mention negative incentives (penalties of various kinds), but such a s y s t e m w a s b o u n d to be a very inferior s e c o n d - b e s t . A s a result, t h e g e n e r a l p e r f o r m a n c e of t h e Soviet e c o n o m i c s y s t e m s t a r t e d d e c l i n i n g at an accelerating rate in the s e v e n t i e s a n d eighties, the resulting b a n k r u p t c y m a k i n g it i m p o s s i b l e for t h e Soviet l e a d e r s h i p to s u s t a i n the a r m s race w i t h the W e s t in general a n d t h e United States in particular. A s e c o n d c o m p e t i n g v i e w s t r e s s e s the role of c h a n g i n g political a n d social attitudes inside the Soviet Union a n d its satellites. A s a n y o n e travelling in the East during the sixties a n d the s e v e n t i e s c o u l d not fail to notice, t h e r e w a s a s t e a d y erosion of the Communist/Socialist c r e e d . People w e n t on paying lip service to it but "true believers" w e r e b e c o m i n g ever scarcer. T h i s may have b e e n d u e to i m p r o v e d information

22

or to natural doctrinal e r o s i o n . T r u e , t h e resulting v a c u u m w a s not

necessarily filled with other values. A n d to the extent that it w a s filled, it w a s not only filled w i t h " W e s t e r n v a l u e s " ( d e m o c r a c y , resurgence

of

old

attitudes

("Great

h u m a n rights) a s t h e r e a l s o w a s a

Russian"

nationalism,

"Slavophilism").

Nevertheless t h e s e c h a n g e s generally meant that the W e s t w a s less a n d less seen as a threat, as a natural e n e m y , as s o m e t h i n g to be kept at bay, g u a r d e d against a n d justifying a strong military e s t a b l i s h m e n t . T h e s e c h a n g e s in p e r c e p t i o n s a n d attitudes

may

have

been

reinforced

by

the

inferior,

indeed

deteriorating

performance of the e c o n o m y ; a n d they may have in turn contributed to the e c o n o m i c deterioration, a c c o r d i n g to the preceding e x p l a n a t i o n . But, f r o m the p e r s p e c t i v e of this paper, the important thing is that to a large extent t h e s e c h a n g e s may have b e e n a n d probably w e r e a u t o n o m o u s , i.e., u n c o n n e c t e d with the a r m s race. This third c o m p e t i n g e x p l a n a t i o n is particularly relevant if it is true that t h e E a s t - W e s t a r m s race, while it lasted, w a s mainly driven by Soviet "self-stimulation", w h i c h is i n d e e d w h a t w a s f o u n d e m p i r i c a l l y by L a m b e l e t - L u t e r b a c h e r - A l l a n study.

23

in a

1979

253

Arms Races and Peace

12.3 A R e s e a r c h

Agenda

W e t h u s have (at least) three c o m p e t i n g explanations for the e n d of the cold war a n d the E a s t - W e s t a r m s race. T h e Soviet U n i o n g a v e up (1) b e c a u s e , having the w e a k e r e c o n o m i c b a s e , it c o u l d no longer b e a r t h e e c o n o m i c b u r d e n of t h e a r m s race; (2) b e c a u s e of g e n e r a l e c o n o m i c b a n k r u p t c y ; (3) b e c a u s e c h a n g i n g attitudes a n d v a l u e s , particularly vis-à-vis the W e s t , m a d e it e v e r m o r e difficult to justify a large d e f e n s e e s t a b l i s h m e n t by r e f e r e n c e to a s e r i o u s e x t e r n a l t h r e a t f r o m a different a n d hostile social s y s t e m . T h e s e t h r e e e x p l a n a t i o n s are not mutually e x c l u s i v e a n d all t h r e e m a y have b e e n at w o r k , t h e q u e s t i o n t h e n b e i n g that of their r e s p e c t i v e i m p o r t a n c e . O u r g u e s s , for w h a t it's w o r t h , w o u l d be that the specific e c o n o m i c b u r d e n of the a r m s race w a s a contributing factor, but that the principal e x p l a n a t i o n is the s e c o n d one (general e c o n o m i c collapse d u e to the nature of the s y s t e m ) . But t h e q u e s t i o n c e r t a i n l y d e s e r v e s b e i n g l o o k e d into m o r e c a r e f u l l y

and

systematically. O n e w a y to that e n d w o u l d be to t a k e as a starting point t h e latest (1987) Lambelet-Luterbacher m o d e l

24

a n d to use it for s i m u l a t i o n p u r p o s e s . This

model is m a d e up of three s u b m o d e l s : a resource allocation (or a r m s race) sector; a " d i p l o m a t i c " conflict s u b m o d e l a c c o u n t i n g for c h a n g i n g m o t i v a t i o n s a n d a t t i t u d e s ; a n d a w a r - p e a c e s u b m o d e l . C o n s e q u e n t l y t h e w h o l e a p p a r a t u s w o u l d a p p e a r to lend itself to s u c h an i n v e s t i g a t i o n . H o w e v e r it w o u l d h a v e to be m o d i f i e d or c o m p l e t e d on a n u m b e r of counts, of which w e now discuss the t w o main o n e s . First, the purely e c o n o m i c s e c t o r is t o o r u d i m e n t a r y . O n both s i d e s G N P or rather its t r e n d v a l u e s a r e t a k e n as e x o g e n o u s . T h e

consumption-investment-

d e f e n s e allocation p r o b l e m w o u l d thus have to be m o d e l l e d explicitly a n d , on t o p of that, G N P g r o w t h s h o u l d be e n d o g e n i z e d ( w h i c h is q u i c k e r s a i d t h a n d o n e ) . S e c o n d , t h e w a r - p e a c e s u b m o d e l w o u l d p r o b a b l y h a v e to be m o d i f i e d . B e c a u s e this s u b m o d e l consists of a differential g a m e w h e r e the actors only have the choice b e t w e e n c o n t i n u i n g to deter or e n g a g i n g in war, t h e security level v a r i a b l e s which are at the heart of the s u b m o d e l are subject to s u d d e n c h a n g e s - f r o m 0 to 1 or vicev e r s a , for instance, which c o r r e s p o n d s to full-scale w a r breaking out or p e a c e being concluded.

25

T h e nice thing a b o u t this a p p r o a c h is that it c o u l d a c c o u n t for the

relative s u d d e n n e s s with w h i c h the cold w a r e n d e d . H o w e v e r it is not clear that two states only (war or peace) are a d e q u a t e in this context as it might be more realistic to distinguish a third state (no o p e n w a r f a r e but no real p e a c e either, i.e. the c o l d war). Clearly, estimating s u c h a model a n d using it for simulation p u r p o s e s w o u l d be no small task. For one thing, d a t a p r o b l e m s m e a n that m a n y p a r a m e t e r s w o u l d have

J-C.

254

Lambelet

to be c h o s e n on apriori, plausibility g r o u n d s . For another t h i n g , it is not immediately clear h o w s o m e possibly i m p o r t a n t f a c t o r s s h o u l d be m o d e l l e d a n d t e s t e d (e.g. a u t o n o m o u s c h a n g e s in a t t i t u d e s ) . Y e t , w e f e e l t h a t t h e e n t e r p r i s e is p r o b a b l y feasible a n d that it w o u l d yield interesting a n d possibly novel insights g i v e n t h e necessary time a n d resources. 12.4 P e a c e F o r O u r

Time?

26

In the p r e c e d i n g d i s c u s s i o n the e n d of the c o l d war, t h e d e - e s c a l a t i o n of the East-West

arms

race

and

the

Soviet

Union's

"surrender"

were

taken

as

incontrovertible facts, the indications to that effect being sufficiently clear, n u m e r o u s and consistent.

27

H o w e v e r this d o e s not m e a n that t h e m i l l e n n i u m has finally

arrived a n d it s h o u l d be no g r o u n d for e u p h o r i a . No o n e k n o w s w h a t s h a p e a n d c o u r s e the f o r m e r Soviet e m p i r e will t a k e in t h e f u t u r e , t h e huge Soviet nuclear a r s e n a l still e x i s t s , a n d it is surely not i m p o s s i b l e that s o m e c o n f i g u r a t i o n will ultimately e m e r g e in the East w h i c h w o u l d constitute a threat to p e a c e in the region a n d quite possibly to w o r l d p e a c e .

28

Besides there are a n d will be other threats to

t h e stability of the international s y s t e m , the Gulf Crisis a n d W a r b e i n g a timely reminder to that effect. T h e d e m i s e of the cold w a r has certainly m a d e the world a s a f e r place, but that d o e s not mean that it is as yet a perfectly safe place. T h e possibility of a positive f e e d b a c k loop f r o m t h e a r m s race p r o c e s s to the underlying initial conflict a n d back to the a r m s race is o n e of the t h e m e s of postrichardsonian p e a c e science. Motivations a n d attitudes are t h e n s e e n as partly e n d o g e n o u s : as the a r m s race escalates, the competitors may more or less lose sight of the original conflict a n d the piling up of a r m s by the other side b e c o m e s the main m o t i v e of a n x i e t y . T h e r e is g o o d historical e v i d e n c e to t h e effect t h a t s u c h a f e e d b a c k loop is more than just a theoretical p o s s i b i l i t y .

29

In principle t h e r e is nothing w h i c h s h o u l d prevent this effect f r o m w o r k i n g in reverse, that is in a de-escalating context too. A s the a r m s race w i n d s d o w n , mutual c o n f i d e n c e g a i n s g r o u n d , old conflicts are r e - a s s e s s e d a n d possibly s o l v e d , etc. T h e effect w o u l d be to accelerate the de-escalation of the a r m s race a n d to hasten the transition to g e n u i n e p e a c e . O n the face of it this w o u l d s e e m to be all for the good.

The

amplification

question

we

however

would

like to

effect c o u l d not p o s s i b l y g o too

far

raise

here

is w h e t h e r

and whether,

under

this some

c i r c u m s t a n c e s , it might not ultimately a n d paradoxically lead again to a d a n g e r o u s w o r l d . A historical precedent may help make clear w h a t w e have in m i n d .

30

It can be a r g u e d that it w a s America's 1917 intervention w h i c h decisively tipped the scales in favor of the Allies at the e n d of W o r l d W a r I. History c a n n o t be rewritten,

255

Arms Races and Peace

but it is a fair g u e s s that if t h e U n i t e d S t a t e s h a d r e m a i n e d n e u t r a l F r a n c e a n d E n g l a n d w o u l d not h a v e b e e n able to c o n t a i n G e r m a n y ' s offensive in the s p r i n g s u m m e r of 1918 after Russia's collapse had a l l o w e d it to transfer large n u m b e r s of troops from the Eastern to the W e s t e r n f r o n t .

31

Germany would then have achieved

the d e c i s i v e b r e a k t h r o u g h in the W e s t w h i c h it h a d b e e n s e e k i n g since t h e fall of 1914. If that w a s s o , it m e a n t t h a t t h e U n i t e d S t a t e s c o u l d not but h a v e a great influence a n d responsibility in s h a p i n g t h e n e w p o s t - w a r international o r d e r e v e n t h o u g h F r a n c e a n d E n g l a n d h a d c o n t r i b u t e d m u c h m o r e , in t e r m s of b l o o d a n d m o n e y , to the w a r effort against the C e n t r a l P o w e r s . Of c o u r s e , P r e s i d e n t W i l s o n w a s very a w a r e of this a n d it w a s b e c a u s e t h e U n i t e d S t a t e s h a d s u c h a strong h a n d t h a t t h e V e r s a i l l e s T r e a t y e n d e d u p by e m b o d y i n g reconciliation nor a truly c a r t h a g e n i a n p e a c e ,

32

n e i t h e r a p e a c e of

but s o m e t h i n g in b e t w e e n the t w o .

A s the allied country w h i c h had suffered most, France a n d particularly C l e m e n c e a u a n d Foch w a n t e d a harsher p e a c e , but they g a v e in substantially to the A m e r i c a n v i e w s , partly on the u n d e r s t a n d i n g that afterwards t h e United States w o u l d actively g u a r a n t e e the new international order in the s h a p i n g of w h i c h it h a d h a d s u c h an important part. A s e v e r y o n e k n o w s , history t o o k a rather different c o u r s e . In 1917 a n d while the w a r l a s t e d , t h e b u l k of t h e A m e r i c a n

people

had wholeheartedly

and

even

e n t h u s i a s t i c a l l y s u p p o r t e d A m e r i c a ' s i n t e r v e n t i o n in E u r o p e . But s o o n after the actual fighting had s t o p p e d the m o o d in the United States started to c h a n g e t o w a r d s isolationism, an evolution w h i c h can be interpreted in t e r m s of t h e reverse f e e d b a c k effect m e n t i o n e d a b o v e . In N o v e m b e r 1 9 1 9 , t h e S e n a t e r e f u s e d to ratify t h e Versailles treaty, t h e United States r e m a i n e d o u t s i d e the L e a g u e of N a t i o n s a n d more generally w i t h d r e w almost c o m p l e t e l y f r o m t h e international s c e n e or at least from Europe. This w a s not the only factor w h i c h , after a "twenty-year a r m i s t i c e " ,

33

led

to W o r l d W a r II, but it w a s an essential o n e . A n d e v e n t h e n , it w a s only after an o p e n , direct a n d major a g g r e s s i o n on t h e U.S. h a d o c c u r r e d that t h e bulk of the A m e r i c a n p e o p l e finally s a w that their country simply c o u l d not stay aloof from the rest of the w o r l d . "Comparaison

34

n'est

pas

raison",

a s t h e F r e n c h say. I.e., it is s u r e l y

not

foreordained that, like what h a p p e n e d after W o r l d W a r I, the e n d of the c o l d w a r will lead to e x c e s s i v e psychological d e m o b i l i z a t i o n in t h e W e s t .

But, as w e see it, the

d a n g e r d o e s exist, t h e Gulf Crisis b e i n g an indication to that effect, p a r a d o x i c a l t h o u g h this may s e e m at first. T o be sure, the Gulf Crisis c a m e to a happy ending, at least as s e e n by t h o s e w h o t h o u g h t that t h e Anschluss

of Kuwait w a s s o m e t h i n g

a b s o l u t e l y i n t o l e r a b l e f r o m t h e point of v i e w of i n t e r n a t i o n a l

law a n d

rights.

J-C.

256

Lambelet

H o w e v e r , the really significant thing m a y not be so m u c h that a c t i o n w a s finally t a k e n to redress that intolerable w r o n g a n d that it w a s d o n e so efficiently, but rather the

hesitations,

the

"without-me"

attitudes, the

mental

self-torturing

b e f o r e h a n d afflicted a large fraction of W e s t e r n p u b l i c o p i n i o n

35

which

- w h e r e a s the

s i m p l e , plain a n d a s c e r t a i n a b l e truth w a s that S a d d a m H u s s a i n was (is) a sort of Hitler, a l t h o u g h with a different ideology a n d also, fortunately, w i t h o u t t h e s a m e e c o n o m i c a n d military resources at his c o m m a n d . O n a more general a n d theoretical level, it w o u l d certainly be interesting to have a closer and more

r i g o r o u s look at t h e q u e s t i o n of w h e t h e r or u n d e r

what

c i r c u m s t a n c e s the reverse f e e d b a c k effect u n d e r d i s c u s s i o n c o u l d e n d up, if it is s t r o n g e n o u g h , i n c r e a s i n g t h e o d d s t h a t w a r will b r e a k out. A g a i n , t h i s c o u l d presumably be d o n e - given the necessary time a n d resources - with the help of the latest L a m b e l e t - L u t e r b a c h e r m o d e l , a n d it c o u l d p r o b a b l y be d o n e on a purely theoretical level (ie. without having to quantify the model's various p a r a m e t e r s ) . Footnotes 'Heartfelt t h a n k s are d u e W a l t e r Isard w h o supplied t h e moral stimuli w h i c h led to this short essay. 1

B y the " e x t e n d e d " R i c h a r d s o n i a n m o d e l w e m e a n all a r m s race m o d e l s w h e r e

there is not only mutual stimulation but also a supply side. 2

3

0 f course this fraction need not be constant o v e r t i m e .

T h i s ignores foreign help w h i c h c a n be quite important for smaller countries (e.g.

Israel). For the big p o w e r s (United States, Soviet Union) a n d even for m e d i u m - s i z e d p o w e r s ( F r a n c e , U n i t e d K i n g d o m , G e r m a n y ) direct f o r e i g n f i n a n c i n g is largely negligible. 4

W e k n o w of no scientific study specifically a d d r e s s i n g the q u e s t i o n as to w h e t h e r

d e f e n s e e x p e n d i t u r e s c r o w d out investment more t h a n c o n s u m p t i o n or v i c e v e r s a (but this may just indicate how limited our k n o w l e d g e is). In t h o s e a r m s race models which include an e c o n o m i c sector, c o n s u m p t i o n is usually s o m e function of i n c o m e ; this m e a n s that defense expenditures t e n d to c r o w d out investment. 5

l n Richardson's specification the c h a n g e o v e r t i m e in country X's d e f e n s e effort is a

positive function of the level of country Y's effort a n d a negative function of its o w n level: d X / d t = aY - bX + c, w h e r e a, b a n d c are positive p a r a m e t e r s . T h e t e r m -bX

257

Arms Races and Peace

can be interpreted as a supply constraint (or as a "fatigue" effect) in a static context only (no e c o n o m i c g r o w t h ) . S e e R i c h a r d s o n ( 1 9 6 0 ) a n d for a d i s c u s s i o n

see

Lambelet a n d Luterbacher with Allan (1979), particularly pp. 5 0 - 5 1 . 6

F o r an early e x a m p l e , see Lambelet (1971), particularly the simulations on pp. 160

et seq. 7

T h i s d o e s not m e a n that the events preceding W o r l d W a r I are perfectly clear-cut.

For e x a m p l e , t h e A n g l o - G e r m a n n a v a l c o m p e t i t i o n lost m o s t of its m o m e n t u m following the 1912 H a l d a n e mission to Berlin - see this writer's t h r e e pieces on the A n g l o - G e r m a n naval rivalry p u b l i s h e d in 1 9 7 4 , 1975 a n d 1976 in the Papers Peace

Science

Society

(International),

of the

particularly t h e first o n e : "The A n g l o - G e r m a n

D r e a d n o u g h t Race 1 9 0 5 - 1 9 1 4 " . 8

T h i s is clearly so in Richardson's main w o r k (op.cit,

especially c h a p t e r s l-lll) which

c a m e out in book form in 1960 a l t h o u g h it w a s written before 1947 at the latest. In 1 9 5 1 , however, Richardson published a short note on the link b e t w e e n a r m s races a n d the outbreak of w a r - s e e : "Could an A r m s - R a c e E n d Without Fighting?",

Nature,

Sep. 2 9 , 1 9 5 1 , p p . 5 6 7 - 5 6 8 . In that note R i c h a r d s o n a c k n o w l e d g e d t h e theoretical possibility that an a r m s race could e n d without a war, only to d i s m i s s it as unrealistic - to wit: "But could events really h a p p e n t h u s ? A s far as I know, they never yet have d o n e so". This is c o n f i r m e d in a later c o m m e n t by M.R. H o m e in Nature,

Nov. 24,

1 9 5 1 , p. 9 2 0 . 9

S e e Lambelet (1975b).

For various a t t e m p t s to formalize the a p p r o a c h p r o p o s e d

in this article, or s o m e t h i n g akin to it, see a series of papers by Brito-lntriligator a n d Intriligator-Brito, for e x a m p l e : Intriligator a n d Brito (1984). At t h e t i m e , i.e., a r o u n d 1975, the v i e w s e x p r e s s e d in our paper w e r e not well received - not to say violently attacked - by t h o s e w h o m a k e no distinction b e t w e e n the scientific analysis of a r m s races a n d related issues, on the o n e h a n d , a n d short-sighted naive p e a c e activism, on the other. 1 0

S e e L a m b e l e t ( 1 9 8 5 ) . T h e v o l u m e that this p a p e r is in is full of errors, s o m e of

w h i c h m a k e it impossible to u n d e r s t a n d what the v a r i o u s a u t h o r s m e a n t (they w e r e g i v e n no opportunity for p r o o f r e a d i n g ) . A n y o n e interested in a r e a d a b l e v e r s i o n of our contribution to this v o l u m e will receive a clean version on request ( D E E P / H E C , B F S H 1 , CH-1015 Lausanne-Dorigny, Switzerland).

J-C.

258

11

Lambelet

A s to the possibility of defeat a n d utter destruction, "better die fighting t h a n live as

s l a v e s " is certainly a justifiable c h o i c e for w h i c h t h e r e is no lack of historical e v i dence. 1 2

F o r a formal general m o d e l of conflicts, a r m s races a n d w a r w h i c h includes such

a f e e d b a c k loop, see Lambelet a n d Luterbacher (1987). 1 3

I n t h e p a p e r c i t e d in note 10 it w a s a r g u e d t h a t t h e p a r t i a l o c c u p a t i o n of

A f g h a n i s t a n a n d , e v e n more so, the building of a b l u e - w a t e r navy, c o m p l e t e with aircraft carriers, meant that the Soviet Union h a d e v o l v e d o v e r time f r o m a basically d e f e n s i v e p o s t u r e , a l o n g the lines of K e n n a n ' s c l a s s i c a l c h a r a c t e r i z a t i o n , to a clearly e x p a n s i o n a r y attitude, as has often b e e n t h e c a s e historically with a g e i n g empires. 1 4

O f course, sheer luck may also have had something to do with it.

1 5

S e e n in that light, the title of the present paper is a natural c h o i c e .

1 6

T o the extent that the A m e r i c a n " t w i n " (public a n d foreign) deficits are at least

partly the result of heavy military s p e n d i n g , it c o u l d be a r g u e d that J a p a n , W e s t e r n E u r o p e a n d o t h e r f o r e i g n l e n d e r s willy-nilly d i d b e a r part of t h e U.S.

defense

b u r d e n . T h e r e is h o w e v e r a f u n d a m e n t a l difference b e t w e e n acquiring interest- or dividend-bearing U.S. assets, on the one h a n d , a n d financing d e f e n s e e x p e n d i t u r e s " à fonds perdus",

on the other.

1 7

l t is striking that the W o r l d W a r II victors (the U.S., the Soviet U n i o n , Britain), w h o

w e r e in c h a r g e of global security after 1945, all face s e r i o u s e c o n o m i c p r o b l e m s t o d a y w h e r e a s the losers ( J a p a n a n d G e r m a n y , also Italy a n d F r a n c e to s o m e extent) all enjoy e c o n o m i c health a n d s t r e n g t h . T h i s is probably more t h a n just a coincidence. 1 8

S u c h as O. Lange, Α. Lerner, E.M.F. Durbin, F.M. Taylor, a n d others.

1 9

F o r e m o s t a m o n g which w e r e F.v.Hayek a n d L.v.Mises.

2 0

F o r t w o i m p r e s s i v e e y e - w i t n e s s a c c o u n t s of the role p l a y e d by e n t h u s i a s m a n d

d e v o t i o n in the early s t a g e s of the c e n t r a l i z e d stalinistic e c o n o m i c s y s t e m , s e e : Robert Byron, First Russia,

Then Tibet, originally published in 1933 a n d reissued by

Penguin Books in 1985, especially the prescient discussion a r o u n d p a g e 3 8 ; a n d E.

259

Arms Races and Peace

Maillart, Parmi

la jeunesse

russe,

originally p u b l i s h e d in 1 9 3 0 a n d r e i s s u e d by

Editions 2 4 - H e u r e s , L a u s a n n e , 1989. 2 1

A s has b e e n s h o w n t i m e s a n d t i m e s again - for e x a m p l e , t h i n k of R. O w e n a n d

N e w Lanarck. 2 2

l t w a s striking to s e e that, at least in the cities, Eastern people generally t e n d e d to

be q u i t e w e l l i n f o r m e d a b o u t w o r l d a f f a i r s , t h a t t h e y w e r e f a m i l i a r w i t h

the

information a n d a n a l y s e s a b o u t their o w n c o u n t r i e s w h i c h c i r c u l a t e d in t h e W e s t , a n d that very many regularly listened to the B B C , the Voice of A m e r i c a , etc. 2 3

S e e note 5. For a criticism or rather self-criticism of this s t u d y , s e e L a m b e l e t

(1986), especially note 9. 2 4

S e e note 12.

2 5

S e e the d i s c u s s i o n on page 97.

2 6

l t a p p e a r s that the exact w o r d s u s e d by C h a m b e r l a i n in 1938 w e r e : " P e a c e for our

time", and not "Peace in our time". 2 7

Some

important

indications

being: the

Soviet

Union's

wellnigh

complete

w i t h d r a w a l f r o m the Middle East, Ethiopia a n d other p l a c e s ; its attitude during the Gulf W a r ; its letting go of Eastern Europe in 1 9 8 9 ; its g e n e r a l courting of t h e W e s t ; the course t a k e n by various a r m s reduction negotiations; a n d so on a n d so forth. 2 8

F o r e x a m p l e , o n e c o u l d i m a g e that R u s s i a p r o p e r a n d possibly s o m e outlying

a r e a s s u c h as K a z a k h s t a n a n d S i b e r i a will e v e n t u a l l y c o m e to f o r m a new, n o n c o m m u n i s t i c but strongly nationalistic n u c l e a r - a r m e d state p e r m a n e n t l y at o d d s with most of its i m m e d i a t e neighbors, ie. the other new states w h i c h w o u l d have arisen on the ruins of the late empire. 2 9

S e e our 1986 survey m e n t i o n e d in note 2 4 , especially pp. 8-10.

3 0

W h a t follows is largely b a s e d on the w o r k a n d a n a l y s e s of Pierre R e n o u v i n .

31

It w a s not only or even primarily a question of additional m a n p o w e r a n d material

resources, but a question of m o r a l e : France a n d E n g l a n d k n e w that help - a n d what help! - w a s on its w a y . 3 2

A s K e y n e s pretended at the time.

J-C.

260

Lambelet

3 3

A s Marshall Foch had put it in 1919 or 1920.

3 4

E v e n s o , s o m e historians w o n d e r w h a t w o u l d h a v e h a p p e n e d if Nazi G e r m a n y

had not d e c l a r e d w a r on the U.S. a few d a y s after Pearl Harbor. In fairness, it must be a d d e d that the Roosevelt Administration or a g o o d part of it had a clearer vision of w h e r e t h e interests of t h e U n i t e d S t a t e s lay, but t h e p r o b l e m w a s precisely A m e r i c a n public o p i n i o n . 3 5

W i t h - to be sure - large variations b e t w e e n individual countries.

References Intriligator, M.D. a n d Brito, D.L. (1984). C a n a r m s races lead to the outbreak of w a r ? Journal

of Conflict

Resolution

, 28, 63-84.

Lambelet, J.C. (1971). A d y n a m i c model of the a r m s race in the Middle East, 19531965. General

Systems,

16, 145-67. r a c e . Papers,

Lambelet, J.C. (1974). The Anglo-German dreadnought Research

Society

(International),

Peace

22, 1-45.

Lambelet, J.C. (1975a). A numerical model of the A n g l o - G e r m a n d r e a d n o u g h t race. Papers,

Peace

Research

Society

(International),

24, 29-48.

Lambelet, J.C. (1975b). Do a r m s races lead to w a r ? " Journal

of Peace

Research,

4,

44-66. Lambelet,

J.C.

(1976).

A

complementary

d r e a d n o u g h t race, 1905-1916. Papers,

analysis

Peace

of

Research

the Society

Anglo-German (International),

26, 2 1 9 - 6 6 . L a m b e l e t , J.C. ( 1 9 8 5 ) .

A r m s races as g o o d t h i n g s ? in U. L u t e r b a c h e r a n d M.D.

W a r d (eds.) Dynamic

Models

of International

Conflict.

Boulder, C O : Lynne

Rienner Publishers, Boulder (Colorado), 1985, pp. 161-174. L a m b e l e t , J.C. ( 1 9 8 6 ) . T h e f o r m a l ('economic') a n a l y s i s of a r m s r a c e s : w h a t - if a n y t h i n g - have w e l e a r n e d since R i c h a r d s o n ? Conflict Peace

Science,

Management

and

9, 1-18.

Lambelet, J.C. a n d Luterbacher, U. with Allan, P. (1979). D y n a m i c s of a r m s races: mutual stimulation vs. self-stimulation. Journal

of Peace

Science,

4, 49-66.

L a m b e l e t , J . C . a n d L u t e r b a c h e r , U. ( 1 9 8 7 ) . C o n f l i c t s , a r m s r a c e s a n d w a r : a synthetic a p p r o a c h , in C. Schmidt a n d F. Blackaby (eds.) Peace, Economic

Analysis.

New York: St. Martin's, pp. 8 5 - 1 0 3 .

Richardson, L.F. (1960). Arms and insecurity.

Pittsburgh: H o m e w o o d .

Defence

and

Economies of Arms Reduction and the Peace Process W. Isard and C.H. Anderton (Editors) © 1992 Elsevier Science Publishers B.V. All rights reserved.

Chapter KEY

DIRECTIONS

13

FOR

Walter Isard and Charles

RESEARCH H.

Anderton

Cornell University and College of the Holy C r o s s

13.1

Introduction

W e now w i s h to provide s o m e evaluation of the p e a c e e c o n o m i c s literature -- in particular, to identify g a p s in it a n d topics that are given insufficient attention, as we point up key directions for research.

It c a n n o t be said that the survey p r e s e n t e d in

C h a p t e r 1 a n d t h e c h o i c e of t o p i c s in t h e s u b s e q u e n t c h a p t e r s are u n b i a s e d . Certainly, the authors' perspectives

have been involved, even though

these

p e r s p e c t i v e s reflecting o u t l o o k s s e v e r a l g e n e r a t i o n s a p a r t a n d d i f f e r e n t

social

b a c k g r o u n d s , are not similar.

W e trust that critical c o m m e n t s by c o l l e a g u e s a n d

reviewers of this book will help suggest a more r o u n d e d v i e w of p e a c e e c o n o m i c s .

13.2

The Urgent Need for Developing Country

Recall A r r o w ' s c o n t r i b u t i o n .

Studies

He limited his d i s c u s s i o n of t h e different w a y s

s u g g e s t e d by e c o n o m i c t h e o r y for e s t i m a t i n g the e c o n o m i c effect of m a j o r U . S . a r m s reduction (ways also relevant for any major increase). W h a t he had to say by way of analytical m e t h o d s could be c l a i m e d to relate to such reduction in most, if not all, d e v e l o p e d a n d industrialized c o u n t r i e s . to t h e p r o b l e m in d e v e l o p i n g c o u n t r i e s .

He w a s careful to a v o i d any reference Y e t , i m p a c t of c h a n g e s in

military

expenditure in d e v e l o p i n g countries is an extremely important topic for study, a n d is recognized to be so by many scholars a n d policy analysts. Recall t h e little a n d i n c o n c l u s i v e results of s t u d i e s on this t o p i c f r o m Benoit (1973) o n . Chatterji identified several reasons for this state of affairs: (1) p r o b l e m s in d e f i n i n g a n d c l a s s i f y i n g

a d e v e l o p i n g c o u n t r y ; (2) s e v e r e d a t a g a p s

i n a d e q u a c i e s ; a n d (3) p r o b l e m s in the m e a s u r e m e n t of security e x p e n d i t u r e s .

and More

W. Isard and CH.

262

Anderton

urgent is the n e e d to replace the set of theories, m e t h o d s a n d tools c o n s t r u c t e d for analyzing d e v e l o p e d country e c o n o m i e s with a f r e s h , m o r e a p p r o p r i a t e set.

In all

probability this c a n a n d s h o u l d c o m e a b o u t f r o m m a n y m o r e historical a n d c a s e studies w h i c h identify key qualitative attributes a n d proxy m e a s u r e s of t h e m (such as the qualitative concept of e c o n o m i c welfare for d e v e l o p e d countries a n d G N P as its m e a s u r e ) . Clearly such attributes w o u l d be sensitive to unique characteristics of internal politics a n d e t h n i c conflicts, to l a n g u a g e a n d o t h e r c u l t u r a l d i f f e r e n c e s within a country a n d to specific factors s u c h as a p o p u l a c e ' s v i e w of militarization purely a n d simply as a job-creating process or as a w a y to d e v e l o p a market for the product of d o m e s t i c firms — a way to spark industrialization — without any thought given to the negative (or positive) externalities i m p o s e d on other countries. 13.3

Need for a More Rigorous General Conceptual and its Further

Framework

Development

A s i n d i c a t e d in C h a p t e r 1 several g e n e r a l c o n c e p t u a l f r a m e w o r k s have b e e n d e v e l o p e d for a multi-nation system with explicit military sectors a n d functions — in line w i t h

Hirshleifer's

contention

s i m u l t a n e o u s l y to w a r a n d p e a c e . improvement. interconnection economies.

One

direction

that

most

national

economies

are

geared

These frameworks, however, need serious

would

involve

further

development

of t h e m i c r o a n d m a c r o a s p e c t s of a n e c o n o m y

of

the

a n d set of

O t h e r s w o u l d involve the incorporation of d i s e q u i l i b r i u m a s p e c t s into

s o m e , if not many, of the diverse e c o n o m i c p r o c e s s e s c o v e r e d , s o m e recognition of f o r m s of irrational/rational behavior a n d strategy, a more satisfactory consideration of the play of expectations (rational or not) a n d uncertainty, a n d the e n c o m p a s s i n g of political e c o n o m y factors to be d i s c u s s e d in the next section.

These frameworks

s h o u l d be e x t e n d e d to permit more effective study of h o w different t e c h n o l o g i e s (military a n d other) a n d institutions c a n p r o m o t e c o o p e r a t i o n a n d restrict conflict, a n d how models of potential high level v i o l e n c e (wars) c a n be e x t e n d e d to cover s i t u a t i o n s of low level conflict ( c r i m e , street w a r f a r e a n d p e r h a p s e v e n

rent-

seeking).

13.4

Need for Better Defined and More C o m p r e h e n s i v e Economy

Political

Studies

A r r o w pointed out in his c h a p t e r the n e e d to e x a m i n e the effect on e c o n o m i c impact analysis of "public choice in a d y n a m i c context a n d about increasing returns to scale in the political field" (p. ), also having in mind f e e d b a c k effects.

Key Research

263

Directions

It is fair to say that the p e a c e e c o n o m i c s literature has, by a n d large, failed to deal a d e q u a t e l y with n o n - e c o n o m i c factors, especially those of a political nature.

In

v a r i o u s a n a l y s e s (as noted in Isard 1 9 9 0 ) , there is scant a t t e n t i o n , if any, paid to current a n d t i m e c h a n g e s of:

(1) the underlying motivation of nations, w h e t h e r to

reduce insecurity a n d maintain a b a l a n c e of p o w e r , to retaliate for t h e insecurity c a u s e d by actions of one's o p p o n e n t s to a c h i e v e a b a l a n c e of terror, to c o u n t e r a c t the ambition of one's o p p o n e n t s (or one's p o w e r - d r i v e n elite), to a s s u m e a position of strength (greater s t r e n g t h ) w h e n n e g o t i a t i o n s o n a r m s c o n t r o l is e x p e c t e d , or s o m e like f a c t o r ; (2) t h e u n d e r l y i n g c o m m u n i c a t i o n s a n d p e r c e p t u a l

situation

(structure), whether the protagonists mutually perceive threat from the

mere

e x i s t e n c e of military capabilities, or have m i s p e r c e p t i o n s r e g a r d i n g t h e intentions a n d m y o p i c - n o n m y o p i c b e h a v i o r of their rival, or p o s s e s s e x t r e m e attitudes (such as religious f a n a t i c i s m , or u n b o u n d e d - u n f o u n d e d o p t i m i s m ) , a n d so f o r t h ; (3) the underlying policy of the nations involved, w h e t h e r to prepare for w a r (or s o m e form of a g g r e s s i o n ) , to p r e v e n t w a r ( s u c h as in d e t e r r e n c e efforts), or to c o n d u c t a surrogate w a r (for e x a m p l e , an e c o n o m i c w a r d e s i g n e d to e x h a u s t the resources of an o p p o n e n t ) -

or w h e t h e r it is s o m e c o m b i n a t i o n of t h e s e a n d o t h e r p o s s i b l e

policies (including competitive a n d c o m p l e m e n t a r y civilian policies). At m o r e specific levels, s o m e of the political e c o n o m y a n d related f a c t o r s to which e c o n o m i s t s have paid scant attention are (as indicated in Isard 1 9 9 0 ) : (1) the effectiveness of military a n d other foreign aid in achieving one's security goals; (2) the positive effects that e x p e n d i t u r e s on military p r o g r a m s have

on public

opinion t h r o u g h creating new j o b s w h e n a state of u n e m p l o y m e n t exists; (3) the c u r r e n t public c o n c e r n , s u p p o r t , a p p r o v a l , or d i s a p p r o v a l of military expenditures per s e : (4) t h e p o s s i b i l i t y of (a) i n t e r n a l u n r e s t w h e n t o o little g o o d s r e m a i n

for

distribution to t h e nation's p o p u l a c e , or t h e less-fortunate fraction of that p o p u l a c e a n d (b) shifting a t t e n t i o n a w a y f r o m internal p r o b l e m s by f o c u s i n g o n e x t e r n a l threats g e n e r a t e d (exacerbated) by military e x p e n d i t u r e s ; (5) the particular point of a current y e a r in an electoral c y c l e , or an e c o n o m i c planning c y c l e ; (6) the o u t s t a n d i n g g r i e v a n c e s both recent a n d a c c u m u l a t e d that a nation has with its rival; (7) the a m b i t i o n that a nation has for d o m i n a t i n g its rival, or its propensity for submissiveness; (8) the hostility (friendliness) a n d distrust (trust) that a nation has with regard to its rival;

W. Isard and CH.

264

Anderion

(9) the n e e d for t h e nation to s e r v e in a " b a l a n c e - o f - p o w e r " c a p a c i t y with regard to other nations; (10) the existence or nonexistence of a state of w a r mobilization in o n e or more nations. Still other factors a n d relationships pertain to (1) the c o m p o s i t i o n of t h r e a t e n i n g a n d nonthreatening weaponry

p o s s e s s e d by its rival, (2) a n a t i o n ' s

expectations

r e g a r d i n g future t e c h n o l o g y a n d rate of o b s o l e s c e n c e of existing w e a p o n r y a n d w e a p o n r y under production, (3) the stocks of diverse w e a p o n r y of its allies a n d the allies of its rival, (4) the uncertainty associated with the effectiveness of one's efforts at maintaining secrecy regarding military structure a n d capability a n d the a d e q u a c y of one's intelligence efforts, (5) the d e c i s i o n - m a k i n g structure of a n d organizational politics within a nation, (6) the nation's specific v i e w of w h a t is optimal b e h a v i o r on its part a n d that of its rival, a n d (7) time lags in diplomatic a n d other reactions a n d in build-up a n d build-down of w e a p o n stocks. Admittedly study of many of these variables is m u c h closer to the core of political a n d other social sciences t h a n e c o n o m i c s . Yet, if e c o n o m i s t s are to e x a m i n e a r m s races a n d the broad range of conflict situations a n d try to u n d e r s t a n d t h e m , as they s h o u l d since e c o n o m i c v a r i a b l e s are key to m a n y of t h e m , t h e y must t a k e into account t h e s e political e c o n o m y - t y p e variables. W e have already noted that a f e w e c o n o m i s t s are starting to e x a m i n e s o m e of the a b o v e factors - such as P o l a c h e k a n d Seiglie in the use of C O P D A B d a t a in their r e s e a r c h reported on in this book.

T h e r e s h o u l d be m o r e e x t e n s i v e use of

s u c h d a t a , i m p r o v e m e n t in their g a t h e r i n g a n d p r o c e s s i n g , a n d e x p l o i t a t i o n of voting a n d other d a t a in use by n o n - e c o n o m i s t s .

M o r e o v e r t h e s e d a t a s h o u l d be

d i s a g g r e g a t e d , r e o r g a n i z e d a n d s u p p l e m e n t e d by collection of n e w d a t a to allow an analyst to identify better s o m e of the general a n d key factors already n o t e d .

For

e x a m p l e , in a military expenditure function, c o u l d w e have a variable relating to the a m b i t i o n (anti-status quo) of a nation a n d t h u s its propensity to a r m for attack, a s e c o n d variable to indicate the desire of a nation to see a n d t h u s c o n t r i b u t e to a b a l a n c e - o f - p o w e r ( m u t u a l d e t e r r e n c e ) s i t u a t i o n , a t h i r d v a r i a b l e to m e a s u r e the extent of hostility (friendliness) of a nation t o w a r d a rival (or other n a t i o n s ) , a n d a f o u r t h v a r i a b l e m e a s u r i n g internal u n r e s t w i t h i n a n a t i o n ( a n d its a g g r e s s i v e n e s s t o w a r d other nations).

consequent

T h e C O P D A B d a t a (even w h e n u p d a t e d )

w o u l d then need to be d i s a g g r e g a t e d a n d e n o r m o u s l y s u p p l e m e n t e d , often by d a t a to be collected on a continuing basis, to be able to treat s e v e r a l v a r i a b l e s of this nature.

Key Research

13.5

265

Directions

N e e d f o r D e v e l o p m e n t of C o n t e x t u a l G a m e a n d C o a l i t i o n Analysis

In p r o v i d i n g an e v a l u a t i o n of the g a m e t h e o r y literature, S h u b i k ( 1 9 8 7 ) , as already n o t e d , stresses the n e e d for analyzing both c a p a c i t y - c o n s t r a i n e d rationality a n d context-rational behavior, the latter t e r m being "a r e m i n d e r that b e h a v i o r must be a s s e s s e d in t h e context of the situation at h a n d a n d it w a r n s against s p u r i o u s g e n e r a l i t y " (p. 5 7 ) .

It is with r e f e r e n c e to coalition a n a l y s i s , t h e part w h i c h falls

within the realm of g a m e theory a n d the part that d o e s not, that his s t a t e m e n t that " e x p e r i m e n t s a r e n e e d e d to study t h e d i f f e r e n c e s a n d c a u s e s of d i f f e r e n c e s in situations w h e r e the g a m e or other theoretic situation is the s a m e , but the briefing or setting of c o n t e x t , t h e players (their training a n d b a c k g r o u n d ) , a n d o r g a n i z a t i o n a l structure a n d time pressures are v a r i e d " (p. 8 0 , w o r d s in italics are our o w n ) . A s o n e o b s e r v e s t h e w a y c o a l i t i o n s f o r m a n d d i s r u p t , t h e b a c k a n d forth negotiations in forming g o v e r n m e n t s (in a multi-party s y s t e m or the equivalent) a n d policies (in a multi-interest g r o u p situation or t h e e q u i v a l e n t ) , o n e c a n n o t help but be i m p r e s s e d on the one hand with the critical i m p o r t a n c e of the coalitions that are f o r m e d a n d policies realized a n d on the other with the e x t r e m e d e a r t h of analytic k n o w l e d g e of t h e p r o c e s s i n v o l v e d .

W e k n o w g a m e t h e o r y has v e r y little to say

about the solution to an active coalition process. Here a base of e x p e r i m e n t s of the sort u r g e d by Shubik, let alone historical c a s e studies, is required. O n e of t h e key questions u p o n w h i c h these e x p e r i m e n t s a n d studies c a n cast light is: how identify the effect u p o n the coalition process of the hierarchical structure of parties involved. This q u e s t i o n g o e s b e y o n d the q u e s t i o n raised by S h u b i k : " W h o are the players?" (p. 6 2 ) .

It involves not only n u m b e r s of parties directly a n d indirectly i n v o l v e d , but

also their relationship to each other, including t h e relationship a m o n g the behaving units w h i c h e a c h party may represent.

T h i s last c o n s i d e r a t i o n raises of c o u r s e the

question of how a g g r e g a t e the preferences of the units r e p r e s e n t e d by each party, even if only a ranking of a limited n u m b e r of joint actions (coalition a r r a n g e m e n t s ) is sought, let alone d e t e r m i n e the importance ranking of e a c h of the subparties. A s e c o n d key q u e s t i o n upon w h i c h e x p e r i m e n t s a n d historical s t u d i e s can cast light is:

w h a t are t h e effects of different i n f o r m a t i o n f l o w a n d c o m m u n i c a t i o n -

network

structures

o n : (a) t h e c o a l i t i o n

p r o c e s s ; (b) m o r e

specifically,

the

probabilities for the formation of different coalitions a n d their d i s r u p t i o n ; (c) parties' p e r c e p t i o n s a n d m i s p e r c e p t i o n s in g e n e r a l a n d of s u c h specific i t e m s as t h r e a t s a n d motives of others. Closely related is the analysis of c h a n g e s in the informationc o m m u n i c a t i o n structure a s the p r o c e s s p r o c e e d s , e x p e r i e n c e is g a i n e d , parties invest in t h e a c c u m u l a t i o n a n d p r o c e s s i n g of information a n d in t h e e s t a b l i s h m e n t

W. Isard and CH.

266

Anderton

of new c o m m u n i c a t i o n links (all p e r h a p s with costs a n d anticipated g a i n s in m i n d ) ; a n d so forth. Still another key question c o n c e r n s how the a s y m m e t r i e s of the e n g a g e d parties affects

the

coalition

process—asymmetries

in t h e i r

stocks

of

knowledge,

personalities (such as a g g r e s s i v e n e s s ) , v a l u e s y s t e m s , attitudes, p e r c e p t i o n s a n d m i s p e r c e p t i o n s , resource b a s e s , a n d in the p r e s s u r e s e x e r t e d u p o n t h e m by their constituencies and in what they consider to be relevant a n d fair practices. 13.6

The Need for Conflict Management Procedures With Politico-Economic

Feasibility

and Analytical

Greater

Significance

Closely related to coalition f o r m a t i o n is the a r e a of conflict m a n a g e m e n t .

The

f o r m a t i o n of an effective coalition typically i n v o l v e s a c o m p r o m i s e that r e s o l v e s (successfully c o p e s with) the conflict a m o n g the objectives, behavioral propensities, p r o p o s a l s , etc. of the parties i n v o l v e d .

A n d , c o n v e r s e l y , t h e a t t a i n m e n t of say a

p e a c e treaty w h e r e there have existed conflicts a m o n g the o b j e c t i v e s , b e h a v i o r a l propensities a n d p r o p o s a l s on issue t r e a t m e n t r e p r e s e n t s , broadly c o n c e i v e d , the f o r m a t i o n of an effective coalition — d i s r u p t e d of c o u r s e w h e n a party b r e a k s the treaty. A s has already been reported, there have been abstract contributions by g a m e theorists on p r o c e s s e s by w h i c h to reach a solution to certain kinds of conflict.

At

the other e x t r e m e , there have b e e n seminal contributions by international lawyers, social p s y c h o l o g i s t s a n d o t h e r s e m p l o y i n g n o n m a t h e m a t i c a l a n d n o n q u a n t i t a t i v e a n a l y s e s w h o a d v a n c e p r o c e d u r e s to m a n a g e conflicts.

In b e t w e e n h a v e b e e n

s o m e e c o n o m i s t s s u c h as B o u l d i n g a n d S c h e l l i n g , w h o h a v e d r a w n u p o n more t h a n o n e d i s c i p l i n e a n d p r o f e s s i o n a l field in a n a l y z i n g a p p r o a c h e s a n d

have

s u g g e s t e d , implicitly or explicitly, w a y s to c o p e w i t h conflict.

such

However,

a n a l y s e s a n d s u g g e s t i o n s h a v e not c o m e a n y w h e r e n e a r w h a t is r e q u i r e d for today's major conflicts. Isard (1988) has n o t e d that qualitative ( n o n q u a n t i t a t i v e ) conflict

management

p r o c e d u r e s set forth by i n t e r n a t i o n a l l a w y e r s , s o c i a l p s y c h o l o g i s t s a n d political scientists often fail to resolve a conflict, a n d in m a n y c a s e s c o u l d be fruitfully c o m p l e m e n t e d with p r o b i n g q u a n t i t a t i v e a n a l y s i s — particularly w i t h r e g a r d to e c o n o m i c variables a n d the p r o b l e m of estimating significant f e e d b a c k effects. be specific, c o n s i d e r the situation w h e r e side p a y m e n t s are relevant.

To

W h a t levels

a n d c o m p o s i t i o n of side p a y m e n t s are possible a n d what are their tradeoffs with the extent a n d n u m b e r of a g r e e m e n t s on s e v e r a l i s s u e s of conflict?

O r c o n s i d e r the

q u e s t i o n of d i f f e r e n t levels a n d w e a p o n s c o m p o s i t i o n of d i s a r m a m e n t .

In a

Key Research

267

Directions

noteworthy U.N. study, Leontief a n d D u c h i n (1983) c o n s i d e r e d t h r e e d i s a r m a m e n t s c e n a r i o s , e a c h o n e being optimal for o n e of t h e three g r o u p s of nations i n v o l v e d a n d thus being an e x t r e m e , politically infeasible s c e n a r i o f r o m the s t a n d p o i n t of all three g r o u p s .

T h e middle g r o u n d , w h e r e i n might lie a set of politically f e a s i b l e

s c e n a r i o s w a s not e x p l o r e d since Leontief w a s not interested in this p r o b l e m .

Yet,

from t h e standpoint of w o r l d welfare, the "middle g r o u n d " of conflict situations must be e x p l o r e d for a c c e p t a b i l i t y a n d i m p l e m e n t a b i l i t y .

In t h e w o r l d

input-output

f r a m e w o r k of Leontief this c a n n o t be d o n e without a n e c o n o m i c analyst c a p a b l e of estimating direct a n d indirect i m p a c t s of t h e different middle g r o u n d s c e n a r i o s for each of the s e v e r a l parties involved a n d jointly d e t e r m i n i n g with others t h e middle g r o u n d scenarios to be e x a m i n e d . In c e r t a i n conflict s i t u a t i o n s , w h e t h e r w i t h r e g a r d to a r m s c o n t r o l , t r a d e , or environmental issues, the Klein LINK m o d e l or an e x t e n d e d C G E m o d e l to e m b r a c e many or relevant g r o u p s of c o u n t r i e s m a y be the core tool for e c o n o m i c analysis. A n e c o n o m i c a n a l y s t , c a p a b l e of o p e r a t i n g s u c h a m o d e l a n d fully a w a r e of its v i r t u e s a n d limitations, w o u l d n e e d to be actively i n v o l v e d in identifying

middle

g r o u n d scenarios to be inputted. P e r h a p s , as the w o r l d m o v e s into an explicit a n d full c o n s i d e r a t i o n of i m p e n d i n g m a n - m a d e e n v i r o n m e n t a l c a t a s t r o p h e s — w h i c h will a d d to the set of already major conflictual a r e a s — an e v e n m o r e e x t e n s i v e a n d c o m p r e h e n s i v e issue c o m p l e x p r o b l e m will be c o n f r o n t e d requiring an e c o n o m i s t ' s active a n d c e n t r a l role. e x a m p l e , c o n s i d e r an i s s u e c o m p l e x

involving:

(a) c o n t r o l of e m i s s i o n s

For of

g r e e n h o u s e s g a s e s or other e n v i r o n m e n t a l pollutants (a c o n c e r n of s u c h nations as G e r m a n y , J a p a n a n d S w e d e n ) ; (b) control of a r m s exports to Middle East countries, or ethnic cultural entities, or other political a n d cultural units c a p a b l e of a g g r e s s i v e behavior, or to all (a c o n c e r n of such nations as the United States a n d Britain); a n d (c) financial aid to developing countries.

In using existing a n d d e s i g n i n g (inventing)

new conflict m a n a g e m e n t p r o c e d u r e s to identify s c e n a r i o s w h o s e direct, indirect a n d f e e d b a c k i m p l i c a t i o n s are to be i n v e s t i g a t e d n e c e s s a r i l y with w o r l d m o d e l s ( w h e t h e r c r u d e or s o p h i s t i c a t e d ) , h o w c a n a n e c o n o m i c a n a l y s t not be actively involved?

In t u r n , it b e c o m e s essential for e c o n o m i c s to c o n d u c t r e s e a r c h at least

on t h e d e s i g n of e x i s t i n g a n d n e w c o n f l i c t m a n a g e m e n t p r o c e d u r e s , or their properties, that are suitable for e x a m i n i n g with (inputting into) w o r l d m o d e l s or other c o m p r e h e n s i v e f r a m e w o r k s for e c o n o m i c a n a l y s i s .

1

W. Isard and CH.

268

13.7

Other

Needed Research

Anderton

Directions

Clearly t h e r e are other important directions for research that t h e a u t h o r s have failed to perceive or appreciate.

S o m e scholars will u n d o u b t e d l y c o n s i d e r key:

(1)

w o r k with several t y p e s of i m p r o v e d m o d e l s on the impact of a r m s e x p e n d i t u r e s on m a c r o m a g n i t u d e s , especially investment a n d G N P g r o w t h in d e v e l o p e d c o u n t r i e s , m i x e d e c o n o m i e s , a n d totalitarian regimes, (2) further e x a m i n a t i o n of t h e effect of military e x p e n d i t u r e s on trade directly a n d o n levels of hostility a m o n g nations a n d thus indirectly u p o n trade, a n d on how trade affects the level of political conflict a n d t h u s indirectly a r m s e x p e n d i t u r e s , (3) investigations of the possibility of d e v e l o p i n g a d e f e n s i v e c a p a b i l i t y w i t h o u t attack p o t e n t i a l , of d e v e l o p i n g a n o n - t h r e a t e n i n g w e a p o n r y s y s t e m (4) work on different perceptions of the costs a n d gains of war, (5) a n a l y s i s of m a t u r e political l e a d e r s h i p d r a w i n g u p o n c u m u l a t e d d u o p o l y

and

oligopoly doctrine, (6) empirical a n d case studies on the impacts of military R & D , (7) theoretical a n d empirical work on the e c o n o m i c s of terrorism a n d guerrilla w a r f a r e , (8) i n v e s t i g a t i o n (such a s that of H a n s e n , M u r d o c h , a n d S a n d l e r , 1 9 9 0 ) of the possibilities for a n d practice in burden sharing especially if one anticipates that the operations of a U.N, police force will mount significantly in the future, a n d so forth. In brief, o n e c a n easily c o n c l u d e that there is almost unlimited r e s e a r c h to be d o n e in the newly developing field of peace e c o n o m i c s . Footnotes 1

S e e Isard (1990) for a conceptual f r a m e w o r k that involves f e e d b a c k s of the climate

a n d écologie s y s t e m s on a multi-national world e c o n o m y . References Benoit , Ε.

(1973).

Defense

and

economic

growth

in developing

countries,

Lexington, MA.: Lexington Books. H a n s e n , L., Murdock, J . C , a n d Sandler, T. (1990). O n distinguishing the behavior of nuclear a n d non-nuclear allies in N A T O . Defense Isard, W .

Economics,

1, 3 7 - 5 6 .

(1990). Progress in global modeling for w o r l d policy on a r m s control and

e n v i r o n m e n t a l m a n a g e m e n t . Conflict

Management

and Peace

Science,

1 1 , 57-

94. Leontief, W . a n d Duchin, F. (1983). Military O x f o r d University Press.

spending:

facts and figures.

N e w York:

Key Research

Shubik, M. ( 1 9 8 7 ) .

Directions

T h e u s e s , v a l u e a n d limitations of g a m e t h e o r e t i c m e t h o d s in

d e f e n s e analysis, in C. S c h m i d t a n d F. B l a c k a b y (eds.) Defense Analysis.

269

N e w Y o r k : St. Martin's Press.

and

Economic