Download Economic Interdependence and Armed Conflict: Some

Economic Interdependence and Armed Conflict:
Some Qualifications of the Liberal Case
Gerald Schneider
University of Konstanz
[email protected]
(based on co-authored work with Margit Bussmann (Konstanz)
Günther G. Schulze (Freiburg), Vera E. Tröger (Berne))
October 30, 2003, NTNU
Structure
1. Commercial Liberalism
a) the peace-through-trade-hypothesis
b) the trade-disruption hypothesis
2. Revised versions of Commercial Liberalism
3. Globalization and Interstate War
4. Globalization and Intrastate War
5. The Impact of War on Stock Markets
6. Summary
The two hypotheses of Commercial Liberalism
1. The peace-through-trade hypothesis
Montesquieu 1748
The natural effect of commerce is to bring about peace. Two nations
which trade together, render themselves reciprocally dependent; if the one
has an interest in buying and the other an interest in selling; and all unions
are based upon mutual needs.
John Oneal/Bruce Russett 1999
“Fearful of the domestic political consequences of losing the benefits
of trade, policy-makers avoid the use of force against states with
which they engage in economically important trade.”
“Liberalism, that is, sees democratic governance, economic
interdependence, and international law as the means by which to
supersede the security dilemma rooted in the anarchy of the
international system. For states no much linked by these ties,
however, the threat of violence remains. In addition, liberal states
must fear those illiberal states that remain outside the Kantian confederatio
2. The trade-disruption hypothesis
Norman Angell 1938:
…nations persisted in methods of security which condemned them to
Insecurity so great that the end must be destruction.
William Nordhaus 2002
“While historians have documented the many miscalculations
involved in war, little has been written on faulty economic
forecasts.”
Costs and benefits of foreign policy
B'
A'
D
B
D'
A
Z'
Z
Conflict
Cooperation
The optimal level of conflict (adapted from Polachek 1980)
The opportunity costs argument
Solomon W. Polachek, JCR, 1980:
“...the price of being belligerent is an implicit price that increases with
the level of trade. Ceteris paribus, the greater the amount of trade, the
higher the price of conflict, and the less the amount of conflict that is
demanded.”
Trade disruption thesis
K. Barbieri and J. Levy in Schneider, Barbieri and Gleditsch 2003.
“Although contemporary liberal and realist theories disagree about the
effects of trade on conflict, they appear to agree on the effects of
conflict on trade. Both imply that trade and other forms of economic
interchange between states will cease or be drastically reduced once
states are engaged in serious conflicts with each other. The liberal
hypothesis that trade deters conflict is based on the premise that
conflict will substantially reduce trade or adversely affect the terms of
trade. Realist theories imply that trade, particularly in strategic goods,
will terminate between adversaries because of relative gains concerns ”
But see also J. Morrow, JCR 1997 (reprinted in Schneider et al.
Globalization and Armed Conflict).
The Problems of the Opportunity Costs Argument
1) Bordering on the tautological
2) Some possible alternatives do not offer additional analytical leverage
e.g. Signaling games
3) The statistical and the formal models rely on different units of
analysis
-
4) Discrepant findings
Consequcences:
-
´Unpacking´ the trading state
Governments depend on different domestic economic interests
Three sector model
Military sector taxes the other sectors
Trade and Hostility Preferences
Export sector
Import sector
Military sector
Median voter
Tariffs
+
-
Hostility
+
-
Revised liberal explanations of interstate war
1. The incentives for governments to use force can grow in times of
expanding economic interdependence if
- government popularity depends on the military sector
- as long as the costs of hostility are not exceedingly large
2. A tacit “war coalition” between the export sector and the military
sector is built as long as the gains from decreasing tariffs exceed the
costs of war.
3. Diversionary theories of war (“the likelihood of war grows in times
of economic crisis”) possess murky microfoundations.
Average Number of Dispute and War Onsets in Various Categories
of States, 1961–92 (Nation years)
Average number of new
MIDs
(Standard deviation)
Initiat
Target
Aggre
or
gate
Average number of new
wars
(Standard deviation)
Initiat
Target
Aggre
or
gate
Free trader
(n=1,052)
0.205
0.558
0.229
0.592
0.434
1.140
0.010
0.097
0.024
0.152
0.033
0.179
Protectionist
(n=2,192)
0.286
1.016
0.302
1.059
0.589
2.072
0.013
0.114
0.016
0.124
0.029
0.167
Conflict
Conditional
impact
Unconditional
impact
Interdependence
Peace through Trade: The Domestic Level
Can the liberal argument be used at the domestic level without
modifications? Probably not
„…liberalization – especially when undertaken
prematurely, before strong financial institutions are in place
– increased instability…one fact remains clear: instability
is not only bad for economic growth, but the costs of the
Instability are disproportionately borne by the poor.“
Joseph E. Stiglitz 2002. Globalization and its Discontents.
London: Allen Lane, p. 67.
Theoretical underpinnings: Distributional theories of trade
policy making
1. Heckscher-Ohlin (Stolper-Samuelson)
2. Ricardo-Viner
Strategic explanations:
1. Alesina/Drazen: War of attrition model to explain
the delay of economic reforms
2. Bargaining models with outside options
Hypotheses:
1) Economically open countries are less prone to domestic conflict.
(long-term effects)
2) The process of economic liberalization increses the risik of domestic
violence (short-term effects).
Expected influence of different variables on civil war
Independent
variable
Openness
Liberalization
Development
Development2
Democracy
Democracy2
Population
Peace years
−
+
+
−
+
−
+
−
Effects of foreign economic openness and
liberalization on civil war, 1980-2000.
CIVIL WAR
All variables at mean
0.12
Peace years increased by one SD;
Other variables at mean
-87.9 %
Population increased by one SD;
Other variables at mean
+42.4 %
Development increased by one SD;
Other variables at mean
-57.5 %
Development decreased by one SD;
Other variables at mean
-34.5 %
Democracy increased by one SD;
Other variables at mean
-78.9 %
Democracy decreased by one SD;
Other variables at mean
-29.0 %
Liberalization increased by one SD;
Other variables at mean
+9.8 %
Openness increased by one SD;
Other variables at mean
-55.6 %
Qualification of the trade disruption thesis
→ Collective beliefs matter
1. Markets react negatively to escalations and
positively to cooperative events
2. War-induced stock market rallies occur if an
escalatory move lowers the anticipated costs.
3. Markets can punish false compromises. Hence,
not all cooperation is rewarded.
4. International crises increase the uncertainty of the
stock market and lead to more volatility.
New Tests of the Trade Disruption Thesis: Research
Design
- Time period: 1990 to 2000
- Four stock market indices (CAC, DAX, DJI, FTSE)
- Three long-lasting conflicts:
a) Iraq-Security Council and its members
b) Israel-Palestinians
c) Ex-Yugoslavia
- Combination of event data analysis and financial econometrics
- ARMA/ARCH Models
- Unit of analysis: Days
- Sources: KEDS and King/Lowe
12000
Stock Price
10000
DJI
FTSE
DAX
CAC
8000
6000
4000
2000
0
87
88
89
90
91
92
93
94
Year
95
96
97
98
99
00
01
02
Iraq against the UN
Sum of Goldstein Values per Day
60
40
20
0
-20
-40
-60
-80
-100
Irak Conflict
-120
-140
-160
87
88
89
90
91
92
93
94
Year
95
96
97
98
99
00
01
02
80
60
40
20
0
-20
-40
-60
-80
-100
-120
-140
-160
-180
Palestine conflict: sum of daily goldstein values
Israel-Palestinians
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
80
Yugoslavia conflict: sum of daily goldstein values
60
40
20
0
-20
-40
-60
Ex-Yugoslavia
-80
-100
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Impact of three wars on the (differenced) Dow Jones Index
C
1,807766
0,583217
3,099647
0,0019
GOLF_SUMGOLD
-0,28407
0,07412
-3,832553
0,0001
GOLF_SUMGOLD(-1)
0,102171
0,083397
1,225108
0,2205
-0,043035
0,066286
-0,649228
0,5162
0,059664
0,061163
0,975486
0,3293
0,03819
0,052331
0,729777
0,4655
0,010667
0,051244
0,208161
0,8351
PAL_SUMGOLD
PAL_SUMGOLD(-1)
YUG_SUMGOLD
YUG_SUMGOLD(-1)
C
40,53377
11,11923
3,645377
0,0003
ARCH(1)
0,052528
0,008388
6,262535
0
GARCH(1)
0,872286
0,023054
37,83667
0
GOLF_SEVERITY(-1)
7,725061
19,5499
0,395146
0,6927
PAL_SEVERITY(-1)
19,72538
15,38831
1,281842
0,1999
YUG_SEVERITY(-1)
32,64324
11,2058
2,913066
0,0036
R-squared
0,152928
Mean dependent var
2,889205
Adjusted R-squared
0,144806
S.D. dependent var
69,28182
S.E. of regression
64,06953
Akaike info criterion
10,20496
Sum squared resid
11559411
Schwarz criterion
10,26357
Log likelihood
-14483,45
F-statistic
18,82936
Durbin-Watson stat
2,070494
Prob(F-statistic)
0
Conclusion
1. Commercial liberalism is largely right.
2. Qualifications are:
- Interstate war is possible in times of growing trade
ties.
- Poor countries that embark onto a course of
foreign economic liberalization are sometimes
facing an increased likelihood of domestic
conflict.
- War-induced stock market rallies are rational and
the evidence is largely in support of the
disruption thesis.
3. Next step: Beef up the findings with case studies!!!