Economics of Arms Reduction and the Peace Process. Contributions from Peace Economics and Peace Science

269 Pages·1992·13.49 MB·English

by  Walter Isard

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
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Library of Congress Cataloglng-ln-PublIcatlon Data
Economics of arms reduction and the peace process : contributions from
peace economics and peace science / edited by Walter Isard, Charles
H. Anderton.
ρ. cm.
"Jointly sponsored by ECAAR (Economists against the Arms Race) and
PSS(I) (the Peace Science Society, International)"—Pref.
Includes bibliographical references.
ISBN 0-444-88848-9
1. Arms control—Economic aspects. 2. Disarmament—Economic
aspects. 3. Peace. 4. Armed Forces—Appropriations and
expenditures. 5. War, Cost of. 6. Defense Industries. I. Isard,
Walter. II. Anderton, Charles H.
JX1974.E33 1992
338.4 ' 76234—dc20 91 -47631
CIP
ISBN: 0444 88848 9
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xi
List of Illustrations
List of Figures page
Figure 1.1. Society's Production Possibility Frontier and 5
Parties' Indifference Curves
Figure 1.2. The Prisoner's Dilemma Game 6
Figure 1.3. Deterrent Threat 8
Figure 1.4 A Case of Evolutionary Equilibrium 9
Figure 1.5. Inefficiency of Arms Rivalry 11
Figure 1.6. The Intriligator-Brito Model 14
Figure 1.7. Spectrum of Intriligator-Brito Models 15
Figure 1.8. Economic Warfare 17
Figure 1.9. A Sequence of Split-the-Difference Compromises in 40
a Veto Incremax Procedure
Figure 4.1. Effect of Conflict on Welfare 92
Figure 4.2. Determination of Optimal Conflict/Cooperation 94
Figure 6.1. Side 1's Budget Opportunity Set 148
Figure 6.2. Cheaper to Attack than to Defend 151
Figure 6.3. Options Allowed by Small and Large Budgets 152
Figure 6.4. Defense Cheaper than Attack 152
Figure 6.5. Importance of Anticipating Adversary's Preferences 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 Bombing 167
Figure 7.4 U.S. Casualties and Destruction of Iraqi Military Capital 168
Figure 7.5. Optimal Bombing Points at the "Statistical Value of 170
Life" to U.S.
Figure 9.1 An Empty Feasible Negotiation Region 213
Figure 9.2 START Negotiation Set 214
xii List of Illustrations
List of Charts page
Chart 3.1. Soviet Union. Military Expenditures versus Consumption, 80
Investment in Nonmaterial Sectors, Nonmilitary Government
Expenditures, Investment in Material Sectors, and GNP
Chart 3.2. Personal Consumption versus Military Expenditures 81
Chart 3.3. Government Expenditures versus Military Expenditures 81
Chart 3.4. Investment in Non-material sectors (INNMAT) versus 82
Military Expenditures
Chart 3.5. Investment in Material Sectors (INMAT) versus 82
Military Expenditures
Chart 3.6. Gross National Product (GNP) versus Military Expenditures 83
xiii
List of Tables
page
Table 1.1. Deviation from LINK Baseline Projections with 20
Endogenous Defense Spending: Feedback from
Shocked Arms-Race Model
Table 1.2. Selected Differences Between Free-market Theory and 37
Defense Market Practice
Table 2.1. Defense in the United States Economy 58
Table 4.1. Trade - Attribute Data Set Variable List 98
Table 4.2. Impact of Trade on Conflict by Year 100
Table 4.3. Corroborative Evidence: Conflict Regressions 101
Disaggregated by Type of Interaction
Table 4.4. Dependent Variable Defense Expenditure 103
Table 4.5. The Simultaneous Determination of Trade and Conflict 104
Table 4.6. Probability Values for the Granger Causality Test, 107
1867-1978 US/WARSAW PACT Data
Table 4.7. The Conflict-Trade Relationship Enhanced by Import 110
Demand Elasticities
Table 4.8. The Conflict-Trade Relationship Enhanced by Dyadic 112
Trade Elasticities
Table 5.1. Coefficient Estimates of Cross-Sectional Determinants of 131
Aggregate and Non-Arms Bilateral Trade Flows
Table 5.2. Coefficient Estimates of Cross-Sectional Determinants of 134
Non-Arms Bilateral Trade Flows
Table 5.3. Coefficient Estimates of Cross-Sectional Determinants of 136
Non-Arms Bilateral Trade Flows with Military Expenditures
as Variables
Table 5.4. Coefficient Estimates of Cross-Sectional Determinants of 137
Bilateral Arms Trade Flows
Table 6.1. Relative Number of Reliable, Deliverable Warheads Potentially 149
Purchased and Operated for $X Billion in 1965
Table 6.2. Relative Number of Reliable, Deliverable Warheads Potentially 153
Purchased and Operated for $Y Billion in 1990
Table 7.1. Incremental Costs and Elasticities of Bombing 173
Table 7.2. IRAQ Gross National Product 1980-1981 175
Table 7.3. Iraq's International Trade in Arms 176
xiv List of Tables
Table 8.1. Military Expenditures (ME) as a percent of GNP and of 185
Central Government Expenditures (CGE) for Selected
Countries, 1978
Table 8.2. Weighted Least Squares Estimates for Average Real 197
Military Expenditures for the Period 1968-1971, ME6871
and 1972-1976, ME7276, Along with Estimates for
Selected Years
Table 8.3. Weighted Two-Stage Least Squares Estimates for Average 199
Real Military Expenditures for the Period 1968-1971,
ME6871 and 1972-1976, ME7276, Along with Estimates
for Selected Years
Table 9.1. Delivery Platforms and Warheads Possessed by U.S. and 210
U.S.S.R. in 1990 and in Proposed START Reductions
Table 11.1. Share of Third World in Global Security Expenditure, 237
According to Regions, 1950-1984 (in percentages)
Table 11.2. The Third World External Debt, Selected Regions, 1982-90 244
Table 11.3. Military expenditure and external public debt-service as 245
shares of current government revenue, selected Third
World countries, 1987
XV
Preface
This book is jointly sponsored by ECAAR (Economists Against the Arms Race)
and PSS(I) (The Peace Science Society, International). ECAAR is a recently
organized group of economists (including a number of Nobel Laureates in
economics and others of world renown) concerned with research and policy
development aimed at controlling the arms race and the reduction of military
expenditures.
The PSS(I) is a group of quantitative political scientists, sociologists,
psychologists, geographers, regional scientists, and a limited umber of economists
and other social scientists and professionals who conduct basic research on conflict
and the peace process. The findings of the non-economists in this group are
essential for economists to consider in adapting their theoretical and applied
research to the complex world of reality.
At a recent meeting of Trustees and Directors of ECAAR it was urged that (1)
the various findings of economists pertaining to conflict, arms escalation,
disarmament and related topics published in diverse and scattered journals and
books be summarized in a literature survey, and (2) there be brought together some
of the basic research by leading economists on selected topics of critical importance
to the field. Accordingly, this book. It contains a summary of the peace economics
literature by the editors, and selected seminal contributions to the field of peace
economics largely drawn from papers presented at recent conferences and joint
meetings of ECAAR and PSS(I). In selecting papers for this book, along with the
survey, the editors sought to achieve a fairly comprehensive coverage of the newly
emerging peace economics field as well as a presentation of its nature and scope.
In line with the objectives of ECAAR they have tried to put out a product that would
have considerable value for economists and other scholars, in particular those
entering the field and concerned with the impacts of arms reduction and conversion
by the major powers and the escalation of military expenditures elsewhere.
We wish to acknowledge the excellent typing and graphics of our secretaries,
Helena Wood, Pamela Allain and Beverly Bylund. We also are grateful for the many
suggestions from members of ECAAR and PSS(I) on topics to be covered in this
volume, and in particular to Robert Schwartz, founder of ECAAR, for
encouragement.
WALTER ISARD
Cornell University
CHARLES H. ANDERTON
College of the Holy Cross
Economies of Arms Reduction and the Peace Process
W. Isard and CH. Anderton (Editors)
© 1992 Elsevier Science Publishers B.V. All rights reserved.
Chapter 1
A SURVEY OF THE PEACE ECONOMICS LITERATURE
Walter Isard and Charles H. Anderton
Cornell University
and
College of the Holy Cross
1.1 Introduction
In this chapter we wish to present a short, but compact survey of the main
strands of thought in the literature on peace economics. A more detailed and
thorough survey requires a book-length manuscript currently being written.
There are many ways in which this survey can be organized. One way would
address first the question of why there is conflict, proceed to the identification of
specific economic factors generating or lying behind conflicts, hone into the
consequent phenomena of military expenditures and arms races, perhaps then
investigate the interplay of economic factors in specific conflicts (including those
leading to major unrest, wars, revolutions and terrorism), examine the basis for arms
control, and finally at all stages probe into the manifold direct and indirect effects
(the impact) of arms escalation, control and disarmament.
To proceed in this way, however, is not very useful. The literature on peace
economics is heiter skelter, appearing in diverse journals and books without
adhering to any semblance of organization. Hence we choose to present first some
general conceptual materials to help identify the myriad of forces and problems that
have been encountered. Then we proceed to survey the literature, for the most part
on operational models and hypothesis testing, following the four approaches
suggested by economic reasoning that Arrow (chapter 2) uses in treating the
economic effects of arms reduction. These are: standard resource allocation theory,
macroeconomic stability analysis, modern growth theory, and political economy
thinking. We find examination of the literature in this manner at least as good if not
better than any other that has been proposed. However, we discuss writings on
arms race models and arms control which are the outgrowth of the standard
resource allocation problem in a separate section. Also since there are extensive
2 W. Isard and CH. Anderton
writings on sectoral and regional impacts of military expenditures which employ
models derived from both standard resource allocation theory and macroeconomic
stability analysis, we add a section on these impacts after the discussion of
macroeconomic stability analysis. Finally, we end up with a section on conflict
management analysis and procedures, a topic of concern to all social sciences and
many professions, and one on which economists have made notable contributions.
2.1 The General Conceptual Framework and Some Basic Issues
In setting forth a general conceptual framework, we need to broaden the
economist's traditional study of cooperation, rivalry and conflict among economic
behaving units and organizations to cover the study of peace and war, as Hirshleifer
(1988) has proposed. Hirshleifer calls for a general equilibrium framework to
embrace within economics the full variety of conflicts. To understand the operation
of the world economy and most national economies, "peaceful" production and
exchange ways of generating income and utility need to be complemented by
appropriative-type ways and efforts. These efforts, associated with military
expenditures, weaponry accumulation and conflict that can lead to physical
violence, are designed to secure resources of others or to defend against loss of
resources to others. In a real sense, most national economies are geared
simultaneously to war and peace -- each being typically located along a spectrum
whose extremes are "absolute peace and total war". "Individuals and groups can
choose between two main ways of acquiring income: (1) producing economic
goods, versus (2) seizing what other parties have produced....It is the fact that
intrusive efforts (and defending against them) can be as renumerative as production
or exchange that makes conflict a permanent feature of life" (p. 202). Accordingly,
Hirshleifer sets up a model involving a resource partition function, a contestable-
income production function, a combat power function and an income distribution
1
function.
In a vein more consistent with arms race modelling, other scholars have
developed general conceptual frameworks. For example, for nation J (opposing
nation L) the societal resource allocation problem at a given point of time can be
stated in a highly simplified manner as:
Max WJ = WJ(CJ, S^) (1.1)
subject to:
TJ(CJ, MJ, KJ, l_J) = 0 (1.2)
Survey of Peace Economics 3
SJ= fJ(SJ, SL φ) (1.3)
e
SJ = (1-a)S^ + MJ (1.4)
where:
J
W = social welfare (utility) of J.
J
C = J's production of civilian (consumption and investment) goods.
Sg = J's perceived level of national security.
J
Τ = J's transformation function (production possibility frontier).
J
M = J's production of military goods, to be viewed as additions to J's stock of these
goods.
J J
K , L = J's stock of capital and labor, each defined broadly to include all of J's
resources.
J L
S ,S = J's and L's stock of military goods, respectively.
φ = parameter reflecting the quality of military goods in J and L, the state of the
international environment, and other exogenous factors affecting J's security,
α = rate of depreciation (covering obsolescence) of military goods.
= J's stock of military goods at the previous point of time.
Nation L faces a similar economic-choice problem, although the specific form of J's
and L's functions will differ. The link that gives rise to the arms race is the assumed
negative externality of each nation's stock of military goods on its adversary's
security.
Explicit treatment of security as a variable addresses Hirshleifer's defense
against invasion or appropriation by another nation (behaving unit) of one's
resources. It less adequately addresses Hirshleifer's appropriative efforts to acquire
resources, since acquisition and accumulation of power and other noneconomic
2
commodities tend to loom much larger in governing such efforts. Nonetheless, the
recent Iraq invasion of Kuwait may be interpreted by some as basically
economically motivated to possess and control more oil resources; and the
subsequent repossession of these oil resources and reassignment of them to a
restored Kuwait government represents an economically based appropriation
(reappropriation) effort to maintain oil resources for trade in a "free world".
The basic framework of eqs. 1.1-1.4 has been used by Dumas (1972) and
Anderton (1990a) to illustrate the fundamental economic nature of arms rivalry.
Many of the relationships have been developed in a more in-depth fashion by a
number of scholars. For example, McGuire (1965) embodied many of the
relationships when he considered the role of secrecy in the arms race. Isard (1988,