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DO ECONOMIC POLICIES IN RELATION TO WAR PROMOTE OR HINDER THE SEARCH FOR A CULTURE OF PEACE? WHAT SUGGESTIONS CAN WE MAKE TO FIND PEACE THROUGH DEFENSE ECONOMICS? The endless list of conflicts and wars from the past century suggests that, in the search for peace, nations have opted for violence in an effort to solve international disputes. Economically, war has extreme benefits, however, there are several long-term setbacks to running a war economy. The question now is: in the search for peace, will war successfully suppress the enemy, or will war simply propagate brutality and eventually wreak economic catastrophe? It is important to consider a nation’s economic policies in relation to war, since these reflect the prosperity and development of a nation, and help to identify how some economies succeed opposed to others. In the search for a culture of peace national decisions in regard to standards of living, international trade and military spending each have the potential to induce peaceful outlooks or conversely, destructive ramifications. War and international trade are closely related; trade disputes and protectionism both have the ability to instigate war. When countries trade, they rely on their supplies of factor endowments, which can often determine economic policies. For example, during WW1 many nations imported war-related goods and services from Germany, resulting in the country’s economic boom. New war policies lowered the unemployment rate, spurred industrial production and created a nationwide economic euphoria. Moreover, countries with natural resources, such as coal or metal, saw exports rise during WW1 due to other nations desiring the commodities for producing military goods, resulting in an export boom. This in turn strengthened the exporting country’s currency as other nations purchased their currency in order to obtian commodities.

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D2 D1

Above is a diagram depicting the increase in value of currency (US $ is used as an example). With the increase in demand for war-imports, the demand for the foreign currency increases resulting in a shift of the demand curve to the right. In this specific case, the value of the U.S. dollar rises from ‘P1’ to ‘P2’. Thus, it is apparent that during war, countries producing military goods prosper from greater foreign demand. However, war and strategic industries can also spark international disputes, and thus hinder the search for a culture of peace. Strategic industries, in particular, are considered reasons for protectionism. Refusing trade with other countries to protect a country’s supply of military goods counters the WTO’s goal of creating peace by eliminating trade barriers. In the last century trading conflicts have caused international dispute, leading to tariffs, sanctions, and embargoes being imposed on aggressor nations. Therefore, it should be everyone’s goal to support economic integration if a culture of peace is to be created. Interdependency of countries fosters a peaceful atmosphere, and thus improves conditions for trade and settlement of conflicts. The creation of more FTAs 1 would be beneficial because they allow international labor migration, remove trade barriers, and encourage countries to use their comparative advantages and factor endowments. NAFTA 2 for example has been successful in raising employment and standards of living in Northern Mexico. Moreover, the SAARC3 has alleviated tensions among members, who historically have experienced cultural and ethnic conflicts. Despite certain economic gains and the 1 2

Free Trade Areas North American Free Trade Area

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movement towards peace, there are several losses associated with economic integration: sunset and sunrise industries may fail, over specialization and dumping may occur, and domestic employers could lose work to foreign low-cost labor. However, in the search for a culture of peace, economic integration is vital. Interdependency will make nations less likely to fight their economic partners, since they fear trade losses will be higher than military gains. Human development indicates a nation’s progression towards either peace or war. If a nation is highly developed with an equitable society, then it is less likely to engage in war. Conversely, if a country has low human development levels, citizens of the nation will be unhappy and feel underprivileged, leading to societal disunity, unrest and potentially corruption. The Human Development Index (HDI) measures many aspects, including quality of health, education and standard of living. When contemplating the idea of achieving peace, it is important to realize that a nation needs to be internally peaceful to maintain good relations with other countries. Thus, a country with a high HDI level will be more likely to cooperate with other countries. For example, New Zealand is considered the world’s most peaceful nation based on GPI 4 measures. With an HDI of 0.950, New Zealand ranks relatively high with its quality standards of living and majority of educated citizens. In contrast, Iraq has an HDI of 0.583. Iraq has a low standard of living, amplified by the corruption stemming from wars and violence. Presently, its government is struggling to repay foreign dept and is forced to implement austerity measures. Moreover, Iraq’s economy is heavily dependent on the petroleum sector. Its oil revenue is unevenly distributed among the citizens, with lobby groups receiving a majority of the income, creating inequality within the nation. In comparison to New Zealand, Iraq has an unemployment 5 rate of 18.0%, which is noticeably higher than New Zealand’s 6.80%. The unemployment rate reflects a nation’s prosperity and standards of living. The costs of unemployment are severe, and can often hinder peace. For example, high levels of unemployment may spur more frequent crime, gang activity and vandalism. Additionally, government spending on unemployment benefits has an opportunity cost. Governments also receive less tax revenue from income, in addition to losses in sales taxes due to decreased consumption. In cases of long-term unemployment, governments will intervene to try and lower unemployment rates. In particular, government’s will implement supplyand demand-side policies if there is structural unemployment 6. For example, interventionist policies like subsidies or training could be provided to improve the expertise of workers, allowing them to have improved skills that can be used for a broader range of jobs. However, the opportunity cost of such policies would be government spending on projects that positively influence HDI, for example 3

The South Asian Association for Regional Cooperation; Members include Bangladesh, India, Bhutan, the Maldives, Nepal, Sri Lanka, Afghanistan and Pakistan. 4 Global Peace Index 5 Unemployment: “people of working age who are without work, available for work and actively seeking employment” (IB Econ. Book) 6 Structural Unemployment: Unemployment when there is a permanent fall in demand for a particular type of labor

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infrastructure and health care. On the other hand, governments could promote free markets by reducing unemployment benefits, thereby motivating people to find work. Unfortunately, this policy negatively affects the disabled, elderly and sick, who may rely on unemployment benefits for survival. Hence, the overall standard of living will be lowered, since unemployment benefits could no longer be spent on food, shelter and other life essentials. Other forms of unemployment, in particular real-wage unemployment7, also worsen standards of living. Government’s can lower the minimum wage or abolish trade union power to tackle this unemployment, another way of promoting the free market. However, this will worsen the distribution of income and may reduce the standard of living for those working at minimum wage. Evidently, there is a strong correlation between unemployment and HDI as lower development impacts economic prosperity and standards of living. Clearly war will not create a culture of peace, however, economic theory suggests that there are several advantages at the aggregate level to nations who spend on military. Military spending will increase GDP, thereby shifting out aggregate demand. The effect of increased aggregate demand varies between the Neo-classical and Keynesian outlook, as shown in Figures 1 and 2.


Trade unions force the minimum wage above the market-clearing price

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From a Keynesian perspective, unless full-employment is already reached, military spending will positively impact the economy. The shift in AD will increase standards of living by reducing unemployment and raising incomes. However, from a neo-classical perspective, the resulting inflation could damage savings, reduce purchasing power and create labor unrest. Moreover, inflation would make exports less competitive: some domestic firms may then seek protectionism, leading to trade disputes. Moreover, it is important to consider the multiplier effect 8, which will increase AD by more than the government’s original injection. This is because government investment into 8

Government spending, an injection into the circular flow of income, will be multiplied through the economy as people receive a share of the income and then spend a part of what they receive.

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Military Goods

military goods will trickle through several industries, becoming income for workers and a part thereof being spent on domestic goods. For example, the production of one tank requires input from 200 different firms 9. So, not only does military spending benefit these 200 firms, but 70% 10 of the injection will then be recycled back through the economy. Increased GDP from the multiplier effect will lead to economic growth, which attracts foreign investment. However, military spending has an opportunity cost11, since the money could have been injected into other economic activities, like health or education. It is also important to consider the effect of military spending on the workforce. Military spending encourages research and development on new technology and infrastructure, for which new jobs are required. Not only does this make industrial output more efficient and productive, thereby stimulating economic growth and shifting the PPC12 outwards, but new jobs will reduce the unemployment rate, and consequently raise incomes. For example, during WW2 American manufacturing wages increased 50%, industrial output was 96% more efficient and Figure 3: Production Possibility Curve corporate profits doubled. This again means more domestic goods and services are consumed and the standard of living improves. In a peace economy, lack of demand in these industries will create structural unemployment. On the other hand, some soldiers will be taken away from the workforce because of war. This reduces the labor factor of production and means some expertise may be lost. A War can also be extremely detrimental to a nation and its economy. Firstly, loss of life negatively affects society and the economy must suffer from the lost earnings of soldiers. Secondly, mobilization for war requires that scarce materials be used to produce military goods. Redirecting scarce resources from other areas of economic spending is an opportunity cost. Thirdly, war destroys physical capital and scarce materials are used for reconstruction 13. Fourth, taxes or borrowing will increase to fund the military spending. Fifth, military spending means that the economy produces less consumer goods. This has an opportunity cost, as shown in Figure 3.

B Goods 9

Opall-Rome, Barbara. "A Boost For Israeli Armor Industry." 30 Apr. 2007. Web. 11 Oct. 2010. 10 The US marginal propensity to consume is 0.7, meaning 70% of American incomes are spent on domestic goods and services 11 The next best alternative forgone 12 Production Possibility Curve 13 "Defense Economics." Britannica Online Encyclopedia. Web. 15 Sept. 2010. <>.

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If an economy produces at point A, they will be allocating all of their resources to military goods. At point B, an economy will be producing only consumer goods. Excess military spending may reduce the standard of living since an economy will produce less consumer goods. National policies in regard to economic integration, human development and military spending can either accelerate or hinder the search for a culture of peace. Interdependency promotes peace, however is potentially harmful to domestic producers. Nations with higher standards of living are less likely to engage in war, however, government policies that reduce unemployment to promote development can have several negative effects. Finally, military spending leads to economic growth, however, it adds to inflation, works against peace, and has an opportunity cost. Deciding on the amount of defense depends on the level of threat, and must be carefully considered against the economic benefits and negatives. Overall, although war does improve the economy in the short-run, long-term economic stability as well as a culture of peace is best achieved through economic integration and increased human development.

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Bibliography "The Worldâ&#x20AC;&#x2122;s Most Peaceful Countries: Peace Equals Prosperity - BusinessWeek." Bloomberg Businessweek. Web. 11 Oct. 2010. "Human Development Index." Wikipedia, the Free Encyclopedia. Web. 11 Oct. 2010. <>. "Defense Economics." Britannica Online Encyclopedia. Web. 15 Sept. 2010. <>. Cheap Wars by Jonathan Nitzan, Ph.D. Associate Professor of Political Economy, and Shimshon Bichler, Lecturer of Political Economy Brzezinski, Zbigniew: Out of Control: Global Turmoil on the Eve of the Twenty-first Century, Prentice Hall & IBD, 1994, ASIN B000O8PVJI Goodwin, Doris K. "The Way We Won: America's Economic Breakthrough During World War II | The American Prospect." The American Prospect. Web. 29 Sept. 2010. <>. "Information Is Beautiful: War Games." Web. 19 Sept. 2010. <>. Blink, Jocelyn, and Ian Dorton. Economics: Course Companion. Oxford: Oxford UP, 2007. Print. Opall-Rome, Barbara. "A Boost For Israeli Armor Industry." 30 Apr. 2007. Web. 11 Oct. 2010.

Submitted by Munich International School Team members: Tiara Kawser Tracy Tarrach Alexander Liegl Tassilo Bayern Stephanie Smith

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