Transcript A Simple Model of Conflict, Appropriation and Production

Butter, Guns and Ice-cream
Economic Theories of Conflict
Raul Caruso
[email protected]
I. The Economic Theory of
conflict
Conflict and Economics
Conflict, as a rational activity, plays as large a role in
economic development as do production and
exchange.
You can buy something, but you can also steal it. You
can appropriate, confiscate, grab, plunder instead of
producing, contracting or exchanging.
A definition which embraces the main characteristics of
conflict could be: a conflict is a destructive
interaction which involves strategic, interdependent
decisions in the presence of coercion and anarchy .
Simple Classical Intuition
This dichotomy was first emphasized by Vilfredo Pareto in
1902 when he stated:
«The efforts of men are utilized in two different ways: they
are directed to the production or transformation of
economic goods, or else to the appropriation of goods
produced by others».
The first - productive activities - are beneficial for society,
whilst the latter- unproductive and even destructive - are
detrimental to welfare and development.
The classical labelling introduced by Samuelson is ‘Butter’
and ‘Guns’.
Cornerstones and Literature
The recent pionereeing contribution is by Hirshleifer(1988)
and following contributions (Grossman, AER, 1991,
Skaperdas, AER, 1992, Grossman and Kim, JPE, 1995,
Neary, EI, 1997, Anderton et al., EI,1999, Noh, PC,
1999, Dixit, 2004, Munster, ET, 2007), (see the survey
by Garfinkel and Skaperdas 2007).
Most contributions analyze a one-sector economy. Agents
are supposed to split their resources endowment in
‘butter’ and ‘guns’. The trade-off is simple: as guns
increase, butter must decrease. There is no alternative
allocation for available resources. Produce or Predate.
Common results of this literature
(i) conflict is a redistributive activity. Thus, the poorer
parties are able to improve their relative position to
the opponents.
(ii) Asymmetry in technology of fighting does matter.
That is, the relative advantage of one conflict
technology over another must be negligible to
produce cooperation between parties.
(iii) Productive technology does lower the incentive
to fighting. Moreover, the higher is the productive
interdependence between parties the lower will be the
incentive to conflict.
Conflict and endogenous institutions
The economic theory of conflict contributes to
studying the endogenous development of
institutions in societies where property rights
are not fully enforced. In this vein, recent
studies by Dixit (2004), Acemoglu and
Robinson (2006), Greif (2006) and North et al.
(2009) contributed in different ways to the
study of institutions through a theoretical
reasoning which took into account the
existence the conflict from the start.
Economic development of societies
I would explain the motivation of this paper quoting Baumol
(1990)
[…]while the total supply of entrepreneurs varies among
societies, the productive contribution of the society's
entrepreneurial activities varies much more because of
their allocation between productive activities such as
innovation and largely unproductive activities such as
rent seeking or organized crime. This allocation is
heavily influenced by the relative payoffs society offers to
such activities. This implies that policy can influence the
allocation of entrepreneurship more effectively than it
can influence its supply […]
II. Enrichment of the theory:
Modeling a dual economy in the
presence of conflict
Modeling a dual economy
The implicit assumption of classical models is that all butter is
contested. There is no alternative allocation for available
resources. Produce or Predate. But, we can consider a
two-sector economy:
Contested Sector
two agents struggle in order to appropriate the maximum possible
fraction of a contestable output.
Uncontested Sector
each agent holds secure property rights over the production of
some goods. Parties involved in a conflict can have some
income and wealth secure from appropriation.
Why uncontested?
Institutional settings: There could be
sectors where enforcement of property
rights can be more effective than others.
Geography, there could be geographical
factors shielding some sectors from
destructive conflicts and violent
appropriation. In general, there could
physical obstacles to appropriation.
Butter, Guns and Ice Cream
With a contested-uncontested distinction, there are three
possible allocations of resources, (i) guns, (ii) butter,
and (iii) ice-cream. Ice-cream denotes all the
productive activities which are not under threat of
appropriation. In other words, all the business
activities which are not directly affected by the
existence of a bloody conflict.
In such a case the opportunity cost of conflicts would
be related not only to the contested production but
also to the production of goods which are not subject
to appropriation.
III. A Basic Model
The Model
There are two agents. They have a positive
resources endowment which can be split
in ‘butter’(x), ‘guns’(G) and ‘ice-creams’(y):
Ri  yi  xi  Gi , i  1,2
The model
Therefore, at a certain point in time, income
accruing to each agent is a function of
contributions of both sectors as:
Wi Yi , Si   Y ( yi )  Si ( gi , g j , xi , x j ), i  1,2, j  i
And the social outcome (as total income) is
given by:
TW  W1  W2 
 UY (Y1 , Y2 )  CY ( S1 , S 2 )
Results
(a) as the productivity in the ice-cream increases,
a party will prefer to allocate more resources to
it; and (b) whenever the warring parties do not
sufficiently value the losses from foregone
production and destruction in the short-term,
they have fewer incentives to allocate
resources to the uncontested sector.
Simple results
(1) The opportunity cost of conflicts is related not
only to the production of butter but also to the
production of ice-cream.
(2) as the productivity in the uncontested sector
increases each agent will prefer to allocate
more resources to the uncontested sector,
namely in the production of ice cream;
(3)when the conflict is perceived to be nondestructive each agent has fewer incentives to
invest in the uncontested sector.
Examples
Fitting examples could be drawn from many developing African
countries experiences the famous ‘resource curse’. Warlords
compete by investments in guns to appropriate a fraction of
the contested resource (butter).
In many cases, bloody conflicts are localized in mineral-abundant
regions, while other territories are not greatly affected by war
and predation. In less developed countries, agriculture and
small manufacturing presumably constitute a large portion of
economic activity of these uncontested territories. Such
sectors can be included within the class of ice-cream.
Table 1 - Contributions to GDP in selected countries - values expressed in % Manufacturing
4.05
3.7
Mining
59.9
58.8
Angola
1995
2006
Agriculture
7.4
8
Nigeria
1995
2006
32.34
33.11
10.2
3.52
40.2
39.5
Chad
1995
2006
36.8
21.3
11.9
6.7
0.6
46.2
Mozambique
1995
2006
33.9
21.5
7.4
13.0
0.6
5.9
Source: Unctad
Hence…..
A society with a higher proportion of
resources devoted to ice-cream could be
considered preferred. Whenever a higher
proportion of resources is allocated to the
uncontested sector, fewer resources will
be allocated to the contested sector.
The likelihood of (re) descending into a
bloody conflict should be decreasing in the
level of ice-cream.
Economic analysis of Civil wars
There is a widespread agreement that the
incidence of civil wars is positively associated
with the abundance of natural resources. See
among others: Collier and Hoeffler
(1998/2000/2004), Le Billon (2001a), De
Soysa (2002), Sambanis (2001/2002), Bannon
and Collier (2003), Fearon and Laitin (2003),
Fearon (2005), Humphreys (2005), Lujala et
al. (2005), De Soysa and Neumayer (2007),
Collier and Rohner (2008).
Enrichment
It is possible to to complement the existing literature on
civil wars by highlighting the relationship between
different sectors of economy and the incidence of
civil wars In particular, the structure of an economy is
captured through the breakdown of GDP by main
sectors: (i) manufacturing sector; (ii) mining sector;
(iii) agriculture.
Such an approach is theoretically underpinned by a
distinction between contested and uncontested
sectors.
Policy Implications
Clearly, the cooperative management of
contested resources - what we have
termed butter - is the most important
issue. To stress other points consider:
(1) reducing arms spending;
(2) providing economic incentives to icecream production;
(3) improving productivity in the long run;
Reduction of Guns
A common but erroneous belief is that government
should increase military spending in order to
ensure the stability of social order and
guarantee security . Two theoretical points
counter this idea:
(1) First, it is clear that military spending has an
adverse effect on economic growth by
crowding out private productive investments.
(2) Second, social systems based upon threats
and deterrence are intrinsically unstable
Swords-Hunt
Reduction of arms cannot be limited only to
government and rival fighting groups. It is
well-known that small arms tend to
proliferate among the citizens and
residents of war-torn countries. This
phenomenon can increase violence,
which, even if it is not committed to
overthrowing the ruling government,
negatively affects economic and social
development.
Swords-Hunt
A civilian disarmament plan should be implemented,
followed by the enforcement of strict gun control
laws. The most famous historical example is the
Japanese sword hunt (katana-gari), which occurred in
1588. Before the hunt, civilians were free to carry
weapons for personal defense. There is evidence that
the Japanese peasantry achieved an improvement in
living standards However, it took a long time. It
Begun in 1588, and the final step took place only in
1876.
Swords Hunt: Note
However, violent seizure of weapons could be
also counter-effective. A sword hunt policy
can be sustained if and only if the government
is sufficiently credible. Credibility, trust and
legitimacy take time to root themselves in the
public consciousness. Therefore, in order to
sustain such a plan in the short-term, a policy
of monetary compensation favoring voluntary
disarmament could be adopted.
Economic Incentives for Ice Cream
Production
Incentivizing ice-cream production implies a broad
spectrum of policies favoring and encouraging the
development of businesses not directly affected by
conflict. In the long-run, this policy can shape the
whole structure of the economy. Ross compares
Nigeria and Indonesia.
whilst the Nigerian
government has focused on development of the
petroleum sector, the Indonesian government has
been committed to create incentives for productive
sectors such as manufacturing and agriculture.
Productivity
We said that productivity in the production of
ice-cream can be considered as a force
countervailing the incentives for conflict.
Then,consider:
(1) Investments in education;
(2) Public provision of health services;
(3) Reduction of Military spending (one more
time)( this is also a qualitative concept)
Military Spending
(to close the story)
The Nobel L. Klein demonstrated that military
expenditures
decreased
total
factor
productivity over the period 1971-1991 in five
countries of Southern Cone region.
That is, investments in guns affect negatively the
production of ice cream both quantitatively
(less ice cream) and qualitatively (worst ice
cream)
Education and Health
Schooling and health improve productivity in the long run.
Public policies of education and health cannot be postponed.
The Nobel Gary Becker (1981) said: The policy that I have been
trying to promote for ten years or more, and now has been
implemented, at least in Brazil and Mexico which I follow very
carefully, is to “bribe” the poor parents to keep their children
in school. By that I mean to give them a monthly supplement
conditional on three things: that children attend school
regularly, that they do well, and that children attend regular
health check-ups. Because health is a problem for the very
poor, the program combines attendance and performance at
school with health checks.
Table 2 - Priorities in Public Spending (% GDP)
Angola
Public expenditure
on health (%)
2004
1.5
Public expenditure on
Education (%)
1991
2002-2005*
2.6
Military
Spending (%)
1990
2005
2.7
5.7
Nigeria
1.4
0.9
-
0.9
0.7
Chad
1.5
1.6
2.1
-
1
Mozambique
2.7
-
3.7
5.9
0.9
Source: Undp. Human Development Report 2007. * data refer to the most recent
year available during the period specified.
IV. Globalization and conflict
Aims and potential contributions
1) Following the previous idea, the relative profitability between
sectors has an impact on intensity of conflict and economic
outcomes.
2) The empirical section contributes to the empirical economic
literature on civil wars and resource curse in African countries (see
among others Collier and Hoeffler (1998/2000/2004), Fearon and
Laitin (2003), De Soysa. I., Neumayer E., (2007).
3) This work also contributes to the debate about the impact of
globalization on domestic conflict in LDCs.
38
The Model: Assumptions
(reprise)
The world is made of region 1, region 2 and the rest of the world
(ROW). Regions can produce two tradable goods which are
to be sold to ROW. Economy of both regions is made of:
(1) Contested Sector The two regions struggle in order to
appropriate the maximum possible fraction of a contestable
output. It is assumed to exhibit CRS;
(2) Uncontested Sector each region holds secure property rights
over the production of some goods. It is assumed to exhibit
DRS.
There are three possible allocations of resources, (i) guns, (ii)
butter, and (iii) ice-cream. Butter and guns denote the
classical trade-off between production and appropriation in
contested sectors. Ice-cream denotes all the productive
activities which are not under threat of appropriation.
The opportunity cost of conflict would be related not only to
the contested production but also to the production of
goods which are not subject to appropriation. In this
work the opportunity cost of conflict is related to the
relative profitability of the two sectors.
39
The Model: Timing
(1) in the first stage, agents observe an exogenous
price for both butter and ice-cream. They are SOE.
(2) agents move simultaneously and choose an optimal
level of guns and ice cream. The supply of both
butter and guns is determined through conflict;
(3) Market clears and prices of butter and ice-cream
take shape.
(4) Payoffs are assigned, final incomes are attained
and the final outcome of the regions is realised
40
Payoffs
Ri  yi  xi  Gi , i  1,2
Y1  y1   y ;Y  y   y
s
1
s
2 The2 resources
2
endowment
Initial
is to be divided between
Relative
butter
and
ice-cream
Wi Yi , Si  Guns,
Yi  pS
,
i

1
,
2
Price of butter
i
in terms
of ice-cream
the final income of
Si  qi G1 , G2 CY
each agent is
a function of
contributions
sectors
qi Gof1 , Gboth
2   Gi / G1  G2 , i  1,2
CSF as axiomatized by
Skaperdas (ET, 1996)
CY  R1  R2  G1  y1  G2  y 2
41
Butter and Guns
1 /  s 1
G1*  G2*  G * 
TR
 p
 2 s / 1 s   
4
s
the quantity of butter and guns is increasing in the initial
relative price of butter in terms of ice-cream.
42
Ice Cream
yi* / s  0  p  2se1/(s1)
yi* / p  0
the higher is the initial relative price of butter in terms of icecream, the smaller will be the production of ice-cream. In
particular, it is also interesting that the supply of ice-cream
increases in the degree of productivity only in the presence of
a combination of p and s . That is, when p is high enough, it
can dominate the beneficial impact on production
emerging in the presence of an adequate degree of
productivity.
43
=
The Rest of the World
1. The rest of the world (ROW) has CobbDouglas preferences.
2. The ROW purchases the total supply of butter
and ice cream and maximizes its utility under
the constraint
44
Market Clearing equations
The supply of the different commodities is nothing but the
equilibrium quantities of butter and ice-cream chosen by regions:
45
Prices after conflict
The price of butter is decreasing in the initial relative price
only in the presence of specific combinations of p, s and
TR. the price of ice-cream is unambiguously increasing in
p.
46
Results
(1) the supply of butter and guns are increasing in the
initial relative price of butter in terms of ice-cream.
(2) The supply of ice-cream is increasing in the degree
of productivity if and only if the initial relative
price of butter in terms of ice-cream is low
enough.
(3) Final prices of Ice-cream are increasing in the initial
relative price of butter in terms of ice-cream.
(4) Final income of both regions is decreasing in the
initial relative price of butter in terms of ice-cream
47
A novel Empirical Application
to explain Civil Wars in SubSaharan Africa (1995-2006)
48
Novelty of this work
Following the theoretical predictions
the analysis focuses not only on the
commodity prices (aka price of
butter) but rather on the relative
price of commodities in terms of
manufactures (aka price of Icecream).
49
Civil Wars in Sub-Saharan Africa
1995-2006
Few studies address directly the
impact of commodities prices.
Besley and persson (2008, wp),
Bruckner and Ciccone (2010, EJ),
Angrist and Kluger (2008, RES),
Dube and Vargas (2008, wp).
50
51
Prices of commodities
I used alternatively commodities indexes (source IMF):
(1) an aggregate commodity price index; (2) an Oil
price index; (3) the Commodity Nonfuel Price Index;
(4) a metals price index.
195
130
65
0
Dec 1994
Jun 1997
Dec 1999
Jun 2002
Boom in the
latest years
Dec 2004
Jun 2007
52
Prices of Manufactures
Under the assumption of an international
convergence of prices [recent studies show
that a convergenge of prices occurred
especially for low-tech manufactures ], I
apply the Manufactures Unit Value Index
(MUV). It is a trade-weighted index of the five
major developed countries’ exports of
manufactured goods. That is, I assume that
the MUV index can be used as world price
of manufactures index. It is in US$.
53
Basic Specification
I created a panel dataset for the occurrence of civil wars
in Sub-Saharan Africa which spans from 1995 to
2006. Eventually I estimate the following random
effects panel probit model:
Civilwar  0  1commodityikt 1   2 MUVit  uit
The incidence of a civil war is captured through a dummy
variable which takes the value of unity in the presence of a
civil war and zero otherwise. The expected signs for the
coefficients of commodity prices (+) and MUV (-) are
positive and negative respectively.
54
Incidence of Civil wars and Price of Commodities.
Commodity
Price Index
.41
1.94***
(t-1)
OIL price
.32
index (t-1)
.54*
.45*
nonfuel
price index
1.58
.76
(t-1)
metals
price index
.92
1.32
(t-1)
MUV (t-1)
-5.09*** -3.84**
-4.54
-7.04*** -3.55** -4.91*** -6.99*** -6.37** -4.08*
HDI1995
-10.99***
-20.52***
-10.14*** -15.01**
-.24
Literacy
-1.23***
Polity
-0.09**
-.11*** -.16*** -0.08*** -.11***
-.10
-0.07***
-.07
-0.05*
Density of
.20
-.08
-.24
-0.07
-.20
Population
.61
.57***
.25**
.84***
-1.20
-1.50
2.21
Ethpol
-6.02***
-1.84*
.99
1.62
-.90
-.56
Ethfrac
-2.71*
.002
.02
0.08
Forest area
.57***
-.21*
.33**
.52*** .26***
.05
.25
-.19
.33
Landlocked
-.73
.89**
17.05
Const
25.21**
14.25* 19.09*** 35.46*** 12.14*
27.55
19.90** 13.74
360
408
408
360
480
480
408
360
432
Obs.
30
34
34
30
41
41
35
30
36
Groups
Log
-89.92
-119.73 -118.93
-86.47
-148.25 -145.33
-99.38
-88.34 -134.76
Likelihood
42.12
49.61
26.25
49.79
41.79
19.56
41.00
48.03
22.36
Wald
94.83
187.54
186.20
100.57
244.00 224.64
135.13
100.67 205.95
LR
55
Implications for GDP Growth
Eventually I estimate the following fixed effects
panel OLS model to study the impact of MUV on
GDP growth
The expected signs for the coefficients of
commodity prices (-) and MUV (+) are negative
and positive respectively.
56
57
Consider the classical point about Prices
of Commodities and LDCS
(few years ago)
1) Many LDCs are dependent upon the exports of a
small number of commodities. According to
FAO(2003), as many as 43 LDCs depend upon only
one commodity
2) Oversupply of commodities was assumed to drive the
prices down. Oversupply is based upon enhancements
of productivity and emergence of new producers
3) The decline of prices for some selected commodities
has been so significant that the increase in volume did
not compensate for the decline of prices.
58
To summarise the results
1) the evidence on the impact of commodity prices on
actual civil conflict is not fully conclusive;
2) The Oil price index appears to be significantly
associated with the incidence of a civil war.
However, such association appears to be only
weakly significant in only two specifications;
3) There is a robust negative association between
the world prices of manufactures and the
likelihood of a civil war;
4) There is a robust positive association between the
world prices of manufactures and the GDP
59
growth
To summarize this presentation
(1) The opportunity cost of conflict depends on
relative profitability of contested and
uncontested production.
(2) Productivity in the uncontested sector and
relative profitability are countervailing forces
which shape the resources allocation between
butter, guns and ice-cream
(3) Civil wars in Africa depend also on relative
profitability of primary commodities and
manufacturing sectors.
(4) An increase in world prices of manufactures
would make civil wars less likely so sustaining
60
GDP growth
Discussion and Policy Implications
This appears to be crucial nowadays when the
new geography of trade is likely to induce in
the next future a downward pressure on
prices of several categories of manufactures
(ex. China). In many developing countries, in
the presence of low prices for low-tech
manufactures, the relative profitability of
contested productions would increase so
fuelling the emergence of actual conflicts.
61
Thanks!!!