Transcript Economics of Conflict, War, and Peace

Economics of Conflict,
War, and Peace
Prof. Dr. Jurgen Brauer; Summer 2009
Chulalongkorn University; Bangkok, Thailand
Session 2.1
Contemporaneous/short-term effects of conflict
Group project
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Assignment due Th 11 June [1-2 paragraphs]
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Thai/nick names/student # of group members
Research question to be addressed
Likely data to be used
Perhaps already an idea of the theory to be
applied
[link to econ theory due by midterm Th 25 June,
together with thorough outline of the paper]
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
2
Contemporaneous effects
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Costs
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Contemporaneous effects (short/medium term) (session 2.1)
Intergenerational effects (long-term) (session 2.2)
Transboundary effects (session 2.3)
Environmental effects (session 2.4)
Outline
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General idea/data
T. Brück’s article (2005)
Anderton/Carter (2009) a/o Anderton/Anderton (1997)
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
3
Contemporaneous effects
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Contemporaneous, e.g., …
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Lives lost
Permanent injuries
Refugees
Military expenditure
Asset losses [destroyed capital]
GDP/production losses [income losses]
Trade losses [specialization losses]
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
4
Contemporaneous effects
Range of battle-related deaths from armed civil conflicts, 1946-2005
70
64
60
Number of Conflicts
50
46
47
40
30
20
10
10
1
0
25-999
1,000-9,999
10,000-99,999
100,000-999,999
≥1,000,000
Range of Battle-Related Deaths
Source: Anderton/Carter (2009) – Fig. 7.5
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
5
Contemporaneous effects
Estimated fatalities for selected genocides and politicides, 1965-2006
Afghanistan, 1978-92
1,176,000
Angola, 1975-94, 1998-2002
666,000
Bosnia, 1992-95
228,000
Burundi, 1965-73, 1988, 1993
189,750
Cambodia, 1975-79
2,700,000
China, 1966-75
480,000
El Salvador, 1980-89
49,450
Guatemala, 1978-90
71,400
Iraq, 1988-91
336,000
Rwanda, 1994
750,000
Sudan-Darfur, 2003-06
360,000
Uganda, 1971-79, 1980-86
456,000
0
Source: Anderton/Carter (2009) – Fig. 7.7
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
1,000,000
2,000,000
3,000,000
Fatalities
Economics of Conflict, War, and Peace
Session 2.1
6
Contemporaneous effects
Number of refugees and internally displaced persons (IDPs)
for selected countries of origin, provisional data, end of year 2007
Refugees+IDPs
5,000,000
4,665,112
4,500,000
4,000,000
3,500,000
3,070,120
3,000,000
2,500,000
2,063,629
2,000,000
1,773,032
1,688,253
1,455,357
1,500,000
1,000,000
702,499
500,000
375,727
391,922
280,003
Afghanistan Azerbaijan
Burundi
Colombia
Democratic
Republic of
Congo
Georgia
Iraq
Serbia
Somalia
Sudan
Source: Anderton/Carter (2009) – Fig. 7.6
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
7
Contemporaneous effects
Destruction of human and physical assets during World War II (percent of assets)
Losses in Human Assets
Losses in Physical Assets
25
20
Percent
15
10
5
0
UK
USA
USSR
Germany
Italy
Japan
Source: Anderton/Carter (2009) – Fig. 1.4
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
8
Contemporaneous effects
Diversion, destruction, and disruption costs of World War I
140
$122.9
120
$103.9
billions of 1913 U.S. $
100
80
$66.4
60
40
$21.6
20
0
Resource Diversion
Property Destruction
Human Destruction
Trade Disruption Costs
Source: Anderton/Carter (2009) – Fig. 6.6
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
9
Contemporaneous effects
World real military spending, 1988-2007 (in billions of U.S. dollars
at constant 2005 prices and exchange rates)
1,250
1,195
1,214
1,175
1,145
1,136
1,113
1,071
1,013
1,000
960
World Real Military Spending
928
947
899
855
835
844
875
834
892
843
750
500
250
0
1988 1989 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Latter Cold War Years
Post-Cold War Period
Post-9/11 Period
Source: Anderton/Carter (2009) – Fig. 10.1
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
10
Contemporaneous effects
Source: UNDP (2008, p. 111; Table 4.2)
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
11
Contemporaneous effects
Opportunity cost: foregone GDP
TOTAL, STATIC, AND DYNAMIC EFFECTS. For 2007, the total effect of peace might
have been on the order of US$7.2 trillion (in nominal foreign-exchange based 2007
US$). About one-third of the total effect (US$2.4 trillion, or 4.4 percent of 2007
gross world product) is due to static peace dividend effects that accompany the
reallocation of resources from violence to peace. Static means that the overall
economic pie remains constant so that gains to some industries are offset by losses
to other industries. No new economic activity is generated. However, the remaining
two-thirds (U$4.8 trillion) are due to dynamic peace dividend effects that accrue
when, due to peace, previously unharnessed economic resources are released. This
US$4.8 trillion net economic gain amounts to an addition of 9 percent to the world
economy.
PERSPECTIVE. To put the US$4.8 trillion number in perspective, it amounts to about
one-third of the current economic heft of the United States (US$13.8 trillion in
2007).
Source: Brauer//Tepper-Marlin (2009) “Defining Peace Industries and Calculating the Potential Size of a Peace Gross World Product by
Country and by Economic Sector”. Report for Institute of Economy & Peace, Sydney, Australia.
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
12
Contemporaneous effects
USA’s real merchandise trade with Germany and Japan
(millions of U.S. dollars at 1913 prices)
Germany
Japan
450.0
Real Merchandise Trade
400.0
War Years,
1941-45
350.0
300.0
250.0
200.0
150.0
100.0
50.0
0.0
1931
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
Year
Source: Anderton/Carter (2009) – Fig. 1.5
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
13
Contemporaneous effects
Annual cost of selected multilateral peace missions, reporting year 2007
1,737
1750
Millions of USA $ per Year
1500
1250
1,105
1000
750
702
678
605
512
500
318
250
85
125
67
80
40
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Source: Anderton/Carter (2009) – Fig. 1.6
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
14
Brück’s model: the security economy
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Let’s look at all this a bit more systematically.
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Main point: view security as risk management
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Risk: possibility of a harmful event (e.g., credit card fraud)
Variation/volatility of economic indicators (exchange rate risk)
Threshold crossing; risk as uninsurable vulnerability; irreversibility
Huge literature on risk: health econ, insurance econ, financial econ
The security economy: “those activities affected by, preventing,
dealing with, and mitigating insecurity in the economy”
The security good
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Individual countries fail to internalize the foreign costs and benefits of
their actions and inactions concerning the underlying global risk.
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
15
Brück’s model: the security economy
P/unit
Divert harm
(conflict)
Extra economic
costs incurred in
the world system
Net economic
costs incurred
in the world
system
Reduce risk
Extra economic
benefits foregone (cooperation)
by the world
system
Net economic
S
S
benefits foregone
by the world system
S
P*
Amount of costs
imposed on others
(external costs that
should be internalized)
P*
D
Amount of benefits
bestowed on others
(external benefits that
should be internalized)
D
Q* < Q*
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Q
Economics of Conflict, War, and Peace
Session 2.1
D
Q* < Q*
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Brück’s model: the security economy
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Summary of consequences:
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National measures to divert harm are underpriced (too
much supply) and oversupplied | (P* < P*) and (Q* > Q*)
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We do too much to defend ourselves
National measures to reduce risk are underpriced (not
enough demand) as well and undersupplied | (P* < P*) and
(Q* < Q*)
We don’t do enough to cooperate
We do exactly the opposite of what is needed!
 Why? The free-rider (or easy-rider) problem
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
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
17
Brück’s model: the security economy
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Insecurity imposes costs
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(1) direct costs (event costs)
(2) indirect costs
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(2a) first-order cost: agents’ reactions to risk
perceptions
(2b) second-order cost: policy responses to the
event and to the agents’ first-order reactions
Economic tradeoffs
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
18
Brück’s model: the security economy
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Indirect costs: agents’ reactions/responses
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(1) voluntary responses: e.g, firms putting up security
fences, etc.; cost curves shift upward; price effects depend
on demand elasticities; akin to payment of insurance
premiums; costs will differ by riskiness of location (oil
pipelines in Colombia vs internet firm in Bangalore)
(2) market-driven responses: employees/customers
demand security features (workplace protection; conflict
diamonds); also rolled into product price, depending on
demand elasticities; but revenue gain reimburses for some
of these costs
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
19
Brück’s model: the security economy
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Indirect costs: agents’ reactions/responses (cont.)
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(3) reactions to mandated responses - 1:
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Analysis via regulation and taxation theory
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Regulation: legal requirements of firms; raises costs to all firms like any
other regulation, but does not generate offsetting revenue; in a closed
(national) economy, all firms are affected; but different regulations
internationally imply that some firms in some countries obtain relative cost
advantages => raises trade policy issues;
Taxes: taxes raise corresponding revenue from firms, whereas regulations
do not
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some sectors may be doubly affected: by security risk and by security
legislation (regulation or taxation), raising equity issues => policy
recommendation might be to implement a broad-based tax to
distribute the risk burden more widely

example: freight/cargo sector
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
20
Brück’s model: the security economy
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Indirect costs: agents’ reactions (continued)
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(3) reactions to mandated responses - 2:
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Analysis via insurance theory
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Ordinarily risk-pooling spreads risk and improves welfare
But moral hazard: insured agents take higher risks than noninsured agents (usually a good idea!): but, e.g., terror insurance
will encourage more risky behavior, thus raising the risk of terror
more than in the absence of terror-insurance
Adverse selection: more vulnerable targets are disproportionately
likely to seek insurance but because of asymmetric information,
insurance companies can’t tell; insurance companies can
suspect, however, and therefore refuse to write policies so that
the market will be under-supplied;
Moreover: risks from war or terror attacks are correlated across
policies so that insurance companies cannot effectively re-insure
their own risks
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
21
Brück’s model: the security economy
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Economic tradeoffs
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(1) Security spending vs other spending
(2) Security vs efficiency
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On the one hand: diversion
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On the other hand: destruction
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from point A to point B along the PPF
… e.g., more guard labor is not productive
from point A to point C inside the PPF
Overall effect => likely inward movement of PPF
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
22
Brück’s model: the security economy
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Economic tradeoffs
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(3) Security vs globalization and technological
change
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countries that are able to create and abide by
international security standards may be at an advantage
over countries failing to do so
countries falling behind in adopting such standards will
lose out on the benefits of FDI, tourism, and other trade
advantages
conceivably, countries could compete on security
advantages to attract FDI (=> which might then also
make them more attractive as terror targets)
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
23
Brück’s model: the security economy
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Economic tradeoffs
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(4) Security vs equity
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issue regarding distributional costs of security measures
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low-skills (guards) vs high-skills (computing, tracking)
more public sectors vs more private sector jobs
more internal trade vs more external trade jobs
compensation has to be linked to the nature of the security
risk: e.g., countries at high terror risk, bearing high costs,
may need to be rewarded with compensating free-trade
opportunities
another equity issue: who has access to security goods?
The rich, the poor?
ex ante: not clear who bears the adjustment burden
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
24
Brück’s model: the security economy
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Economic tradeoffs
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(5) Security vs freedom and privacy
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Positive link between economic freedom and economic growth
(Freedom House ranking)
Network economy and security economy are linked; low marginal
values of internet data generate large social values; system
protection globally requires tradeoff with protection of the billions of
individual people, firms, and entities using the network
Changing balance of type I and type II errors?
 type I (innocent goes to jail) | type II (guilty goes free)
 at the moment, most societies err on the side of type II; but
network economies can make the consequences of a mistake
immediately global and so a social reversal may occur by which
to err on the side of type I (some authoritarian govt’s have begun
to exploit this thinking)
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
25
Brück vs Anderton/Anderton
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Tilman Brück ’s argument is put mostly in terms
of PPF and public vs private goods production
(we’ll get back to this)
The Anderton’s use a different economic model
to broaden the theoretical terms of
understanding what’s going on => use of the
Edgeworth Box (connected to PPF as well)
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
26
The Anderton/Anderton model
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
27
The Anderton/Anderton model
Optimal production and consumption in autarky
(b) Player B
(a) Player A
Produces/consumes
Y=50; X=100
B's Production and Consumption of Good Y
A's Production and Consumption of Good Y
200
100
50
0
100
200
A's Production and Consumption of Good X
Produces/consumes
Y=100; X=50
100
50
50
0
100
B's Production and Consumption of Good X
Source: Anderton/Carter (2009) – Fig. 12.5
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
28
The Anderton/Anderton model
(b) Player B
(a) Player A
B's Production and Consumption of Good Y
A's Production and Consumption of Good Y
200
100
50
0
100
200
A's Production and Consumption of Good X
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
100
50
50
0
100
B's Production and Consumption of Good X
Economics of Conflict, War, and Peace
Session 2.1
29
The Anderton/Anderton model
B's Production and Consumption of Good X
50
100
50
100
100
50
200
A's Production and Consumption of Good X
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
(b) Player B
100
200
0
B's Production and Consumption of Good Y
A's Production and Consumption of Good Y
0
(a) Player A
30
The Anderton/Anderton model
Gains from exchange in an Edgeworth box
Gains from specialized
production and exchange
A produces/consumes at C: Y=50; X=100
B produces/consumes at C: Y=100; X=50
A produces/consumes at D: Y=75; X=75
B produces/consumes at D: Y=75; X=75
75
50
0B
D
75
150
Good Y
Good Y
150
150
0B
200
A specializes to produce X=200
and then trades X=100 for Y=100
to consume at E: Y=100; X=100
100
E
UA=10,000
75
UA=5,625
50
C
A's Imports
of Y
UB
100
50
C
UA=5,000
UA=5,000
A's Exports
of X
0A
75
150
150
100
0A
Good X
100
200
150
Good X
Source: Anderton/Carter (2009) – Figs. 12.6 and 12.7
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
31
The Anderton/Anderton model
Effects of diversion of
resources to military goods
Effects of destruction
and trade disruption
200
0B
E
UA=10,000
E'
UA=6,400
80
35
0A
0B
105
100
80
160
Good Y
Good Y
160
80
100
160
200
0A
E'
UA=6,400
E''
UA=2,450
70 80
105
160
Good X
Good X
Source: Anderton/Carter – Figs. 12.8 and 12.9
Prof. J. Brauer; Summer 2009
Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace
Session 2.1
32