1. Economics of Conflict, War, and Peace
Prof. Dr. Jurgen Brauer; Summer 2009
Chulalongkorn University; Bangkok, Thailand
Session 4.2
Capital: Major conventional weapons

2. Major conventional weapons: trade (1)
Brauer in Sandler/Hartley, 2007, p. 978.
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

3. Major conventional weapons: trade (2)
Brauer in Sandler/Hartley, 2007, p. 979.
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

4. Major conventinal wepons: production
Brauer in Sandler/Hartley, 2007, p. 986.
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

5. Economics of Conflict, War, and Peace Session 4.2
Background (1)
Two “stylized” facts
First expansion, then decline of number of states that produce/export conventional arms (whole-units) from 1950s to 2000s
Transnationalization of conventional arms production, esp. of component production; integration into transnationalized supply chains
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

6. Economics of Conflict, War, and Peace Session 4.2
Background (2)
Exporters
(whole-units)
50s
60s
70s
80s
90s
00s
High
income
states 20 25 27 30 32
[32] 26
[26]
Non-high 9 23 38 37
[43] 21
[39]
Exporters of major conventional weapons (from Brauer, 2007, in Sandler/Hartly Handbook of Defense Economics, vol. 2), based on Brauer (1991, 2000, and updates)
Brauer in Sandler/Hartley, 2007, p. 985.
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

7. Economics of Conflict, War, and Peace Session 4.2
What is to be explained?
Addition of states as arms producers/exporters (whole-units), esp. of non-high income states
Drop-off of states as arms producers/exporters (whole-units), esp. of non-high income states
Transnationalization of arms production, esp. of components
Integration of non-high income and some high-income states into transnationalized arms production and component supply chain
Integrate fall of post-Cold War demand and continuous unit-cost increase (Dunne/Surry: “structural disarmament”) into the model
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

8. Economics of Conflict, War, and Peace Session 4.2
A heuristic model (1)
T – technical efficiency
ΔT – difference between make or buy $
High cost differential => don’t make in-state but buy in out-of-state market
(valuation) ΔT k
(asset
specificity) k*
k**
High agency cost differential => in-state agency cost < out-of-state agency cost
(note: k > k*)
High agency cost differential => in-state agency cost > out-of-state agency cost
(note: k < k*) ΔC ΔA
A – agency efficiency
ΔA – difference between make or buy
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

9. Economics of Conflict, War, and Peace Session 4.2
A heuristic model (2) $
There is a value of k** above which in-state production
is at an advantage relative to out-of-state procurement
(valuation) ΔT k
(asset
specificity)
k**
k < k**
k > k** ΔC
ΔC > 0
ΔC < 0 ΔA
There is a value of k** below which in-state production
is at a disadvantage relative to out-of-state procurement
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

10. Economics of Conflict, War, and Peace Session 4.2
A heuristic model (3)
ΔT is the difference in technical efficiency between
in-state and out-of-state production; so, even if in-state production becomes 5% more efficient but out-of-state production becomes 10% more efficient, ΔT will still shift upward to ΔT’ … $
(valuation)
ΔT’ ΔT k
(asset
specificity) k*
k**
ΔC’ ΔC ΔA
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

11. Economics of Conflict, War, and Peace Session 4.2
A heuristic model (4)
ΔT is the difference in technical efficiency between
in-state and out-of-state production; so, even if in-state production becomes 5% more efficient but out-of-state production becomes 10% more efficient, ΔT will still shift upward to ΔT’ … $
(valuation)
ΔT’ D ΔT k
(asset
specificity) k*
k**
k***
ΔC’ ΔC ΔA
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

12. Economics of Conflict, War, and Peace Session 4.2
Playing with the model
If ΔT rises to ΔT’, k** shifts right to k***
more contracting out
If ΔT falls, k** shifts left
less contracting out
If ΔA rises, k** shifts right
if the difference in agency cost rises
If ΔA falls, k** shifts left
If both ΔT and ΔA change, the move of k** depends on the relative shifts (and directions) of ΔT and ΔA
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

13. Economics of Conflict, War, and Peace Session 4.2
An extreme case $
(valuation) ΔT k
(asset
specificity)
k*** k*
k** ΔC ΔA
ΔC’
ΔA’
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

14. Economics of Conflict, War, and Peace Session 4.2
Some implications (1)
Prior to the end of the Cold War (ΔA constant), ΔT shifted downward as states “developed” and k** shifted leftward, resulting in more in-state arms production
Thus, high-income states producing/exporting whole-units went from n=20 to n=30 and non-high income states from n=9 to n=37
With the end of the Cold War, agency costs of contracting-out have fallen (ΔA shifts upward) and the cost of technical inefficiency (ΔT constant) has become more apparent, leading some states to drop out of whole-unit production (k** shifts rightward)
Also, post-Cold War demand drop-off leads to smaller production runs (higher T and, probably, higher ΔT’s)
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

15. Economics of Conflict, War, and Peace Session 4.2
Some implications (2)
In addition, technical requirements push T upward and, probably, the ΔT’s, disadvantaging some states
This might explain why post-Cold War we seem to see some states dropping out of whole-unit production and more states engaged in transnationalized component production
There is capacity for efficient component production but not whole-unit production and there is willingness (ΔA) to transfer component technology but not whole-unit technology (battles over offsets-technologies)
The model also suggest that states that refuse to integrate into the transnationalized component supply-chain and that insist on whole-unit production might find themselves carrying unusually high defense production/procurement burdens
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2

16. Economics of Conflict, War, and Peace Session 4.2
Conclusion
Heuristically, the model makes some sense (to me at least)
It suggests that for the industry as a whole, agency efficiency, technical efficiency, and asset specificity drive decisionmaking behavior
The challenge now is to work up some real-world case studies and to apply/refine the model; convert from post-hoc to make predictions
Prof. J. Brauer; Summer 2009 Chulalongkorn U., Bangkok
Economics of Conflict, War, and Peace Session 4.2