Economics of Conflict, War, and Peace Prof. Dr. Jurgen Brauer; Summer 2009 Chulalongkorn University; Bangkok, Thailand Session 1.4 Modeling conflict

Economics of Conflict, War, and Peace Session 1.4 Modeling conflict Two models today Boulding’s LSG model Arms trade taxation model (Brzoska/Brauer) Small arms supply and demand Supply and demand Shifts in supply and demand Elasticities of supply and demand Intervention/s in the market; black market [more models throughout the course] Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Economics of Conflict, War, and Peace Session 1.4 Boulding’s model (1) Loss of Strength Gradient (LSG), i.e., a slope parameter K H F M C G g l L A is dominant B is dominant Boulding’s “mutual unconditional viability” model A D B D is the boundary of equal strength with height C Source: Boulding (1970 [1968]), p. 118 Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Economics of Conflict, War, and Peace Session 1.4 Boulding’s model (2) Now let’s “play” … Let AH = a (A’s home strength) Let BK = b (B’s home strength) Let AB = s (distance between A and B) and let ΔAH/ΔAB = c (the slope of A’s strength gradient toward B) Then a – b = cs becomes an equilibrium condition where B is “just conditionally viable” with respect to A So if a > b, A’s greater home strength must be “neutralized” either by a steeper slope (|c|) of A’s strength function toward B (that is, less effective power projection by A toward B), or by a greater distance (s) between A and B (or a combination of both). For A, distance s is not a strategic variable, but a and |c| are (and vice versa for B), that is, increase home strength and/or decrease the slope of the strength gradient (smaller |c|) to result in a greater reach of A’s strength toward B. “Effective distance” diminishes and increases the risk of war. Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Economics of Conflict, War, and Peace Session 1.4 Boulding’s model (3) A is dominant over the entire range B is conditionally viable … the condition being A’s disposition toward B H (a) secure conditional viability (b) insecure conditional viability F G K M Boulding’s “conditional viability” model L A B Source: Boulding (1970 [1968]), p. 118 Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Economics of Conflict, War, and Peace Session 1.4 Boulding’s model (4) “Loss” [gain] of Strength Gradient (LSG), i.e., the slope parameter is positive! G L C F H K M B is dominant over A A is dominant over B Boulding’s “mutual conditional viability” model; originally published 1962; applies to nuclear weapons and ballistic missile developments; still applicable today; doctrine of mutually assured destruction (MAD) A D B Source: Boulding (1970 [1968]), p. 119 Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Brzoska/Brauer model (1) Brzoska, 2004, p. 151 Reduce volume of arms trade Reduce spending on arms imports Create revenue for a fund … … to compensate war victims or general economic development P/unit Tax revenue S S But … This argument relies on the demand side What will suppliers do? (For one thing, they will only receive P*) P* P* P* Here, for example, why, when, and how often are mixed in a single figure. D Q (arms) Q* Q* Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Brzoska/Brauer model (2) Possible supply-side reactions … Why should suppliers voluntarily reduce arms exports? What benefits do they gain that outweigh their costs of export losses? Strategic behavior; why be the first to reduce exports? No enforcer in case of non-compliance; lower P* causes tax evasion problem Higher P* encourages new entries into the market (domestic production of former arms importers) Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Brzoska/Brauer model (3) If S is inelastic (steep slope) ... Market P* will not rise as much But P* will fall more, hurting weak producers, encouraging evasion Q will fall not as much R will rise, benefiting producer governments … but R may be fungible by reducing “normal” foreign aid budgets S’ S’ P/unit S S D Q (arms) Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Brzoska/Brauer model (4) If D is inelastic (steep slope) … Market P* will rise more, encouraging customer substitution (self-production or illegal trade) P* will not fall as much Q will fall not as much R will rise, benefiting producer governments … but R may be fungible by reducing “normal” foreign aid budgets P/unit S S D’ D Q (arms) Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Brzoska/Brauer model (5) Brzoska’s estimates Base case: Arms trade (weapons/supplies) value $50 billion Tax: 10% | E(d) = - 0.5 | E(s) = +1.0 (i.e., flat S slope) P* up by 6.5% | Q* down by 3.2% | TR = $51.5bn R (sellers) = $46.4bn | R (gov) = $5.1bn Tax: 10% | E(d) = - 0.5 | E(s) = +10.0 (i.e., flatter S slope) P* up by 9.5% | Q* down by 0.5% (?) | TR = $54.5bn R (sellers) = $49.0bn = E (buyers) | R (gov) = $5.5bn Tax: 10% | E(d) = - 0.1 (i.e., steeper D slope) | E(s) = +10.0 P* up by ~10.0% | Q* down by ~0.0% | TR = ~$55.0bn R (sellers) = ~$50.0bn = E (buyers) | R (gov) = ~$5.0bn Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4

Brzoska/Brauer model (6) Likely tax incidence If S is flat (perfectly price elastic) [competitive suppliers] Then a tax can be fully rolled over to buyers If D is steep (perfectly price inelastic) [inelastic demand] Thus it seems likely that an arms trade tax results in higher buyer prices So R collected in producer countries to help fund war victims compensation is transferred to victim countries, which are also buyers of arms => aid fungibility issue Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok Economics of Conflict, War, and Peace Session 1.4