Butter, Guns and Ice-creamEconomic Theories of Conflict

Raul Caruso

raul.caruso@unicatt.it

I. The Economic Theory of conflict

Conflict and Economics

Conflict, as a rational activity, plays as large a role in economic development as do production and exchange.

You can buy something, but you can also steal it. You can appropriate, confiscate, grab, plunder instead of producing, contracting or exchanging.

A definition which embraces the main characteristics of conflict could be: a conflict is a destructive interaction which involves strategic, interdependent decisions in the presence of coercion and anarchy .

Simple Classical Intuition

This dichotomy was first emphasized by Vilfredo Pareto in 1902 when he stated:

«The efforts of men are utilized in two different ways: they are directed to the production or transformation of economic goods, or else to the appropriation of goods produced by others».

The first - productive activities - are beneficial for society, whilst the latter- unproductive and even destructive - are detrimental to welfare and development.

The classical labelling introduced by Samuelson is ‘Butter’ and ‘Guns’.

Cornerstones and LiteratureThe recent pionereeing contribution is by Hirshleifer(1988)

and following contributions (Grossman, AER, 1991, Skaperdas, AER, 1992, Grossman and Kim, JPE, 1995, Neary, EI, 1997, Anderton et al., EI,1999, Noh, PC, 1999, Dixit, 2004, Munster, ET, 2007), (see the survey by Garfinkel and Skaperdas 2007).

Most contributions analyze a one-sector economy. Agents are supposed to split their resources endowment in ‘butter’ and ‘guns’. The trade-off is simple: as guns increase, butter must decrease. There is no alternative allocation for available resources. Produce or Predate.

Common results of this literature

(i) conflict is a redistributive activity. Thus, the poorer parties are able to improve their relative position to the opponents.

(ii) Asymmetry in technology of fighting does matter. That is, the relative advantage of one conflict technology over another must be negligible to produce cooperation between parties.

(iii) Productive technology does lower the incentive to fighting. Moreover, the higher is the productive interdependence between parties the lower will be the incentive to conflict.

Conflict and endogenous institutions

The economic theory of conflict contributes to studying the endogenous development of institutions in societies where property rights are not fully enforced. In this vein, recent studies by Dixit (2004), Acemoglu and Robinson (2006), Greif (2006) and North et al. (2009) contributed in different ways to the study of institutions through a theoretical reasoning which took into account the existence the conflict from the start.

Economic development of societies

I would explain the motivation of this paper quoting Baumol (1990)

[…]while the total supply of entrepreneurs varies among societies, the productive contribution of the society's entrepreneurial activities varies much more because of their allocation between productive activities such as innovation and largely unproductive activities such as rent seeking or organized crime. This allocation is heavily influenced by the relative payoffs society offers to such activities. This implies that policy can influence the allocation of entrepreneurship more effectively than it can influence its supply […]

II. Enrichment of the theory: Modeling a dual economy in the

presence of conflict

Modeling a dual economy

The implicit assumption of classical models is that all butter is contested. There is no alternative allocation for available resources. Produce or Predate. But, we can consider a two-sector economy:

Contested Sector two agents struggle in order to appropriate the maximum possible

fraction of a contestable output. Uncontested Sectoreach agent holds secure property rights over the production of

some goods. Parties involved in a conflict can have some income and wealth secure from appropriation.

Why uncontested?

Institutional settings: There could be sectors where enforcement of property rights can be more effective than others.

Geography, there could be geographical factors shielding some sectors from destructive conflicts and violent appropriation. In general, there could physical obstacles to appropriation.

Butter, Guns and Ice Cream

With a contested-uncontested distinction, there are three possible allocations of resources, (i) guns, (ii) butter, and (iii) ice-cream. Ice-cream denotes all the productive activities which are not under threat of appropriation. In other words, all the business activities which are not directly affected by the existence of a bloody conflict.

In such a case the opportunity cost of conflicts would be related not only to the contested production but also to the production of goods which are not subject to appropriation.

III. A Basic Model

The Model

There are two agents. They have a positive resources endowment which can be split in ‘butter’(x), ‘guns’(G) and ‘ice-creams’(y):

2,1, iGxyRiiii

The model

Therefore, at a certain point in time, income accruing to each agent is a function of contributions of both sectors as:

ijixxggSyYSYW jijiiiiii ,2,1),,,,()(,

And the social outcome (as total income) is given by:

),(),( 2121

21

SSCYYYUY

WWTW

Results

(a) as the productivity in the ice-cream increases, a party will prefer to allocate more resources to it; and (b) whenever the warring parties do not sufficiently value the losses from foregone production and destruction in the short-term, they have fewer incentives to allocate resources to the uncontested sector.

Simple results

(1) The opportunity cost of conflicts is related not only to the production of butter but also to the production of ice-cream.

(2) as the productivity in the uncontested sector increases each agent will prefer to allocate more resources to the uncontested sector, namely in the production of ice cream;

(3)when the conflict is perceived to be non-destructive each agent has fewer incentives to invest in the uncontested sector.

Examples

Fitting examples could be drawn from many developing African countries experiences the famous ‘resource curse’. Warlords compete by investments in guns to appropriate a fraction of the contested resource (butter).

In many cases, bloody conflicts are localized in mineral-abundant regions, while other territories are not greatly affected by war and predation. In less developed countries, agriculture and small manufacturing presumably constitute a large portion of economic activity of these uncontested territories. Such sectors can be included within the class of ice-cream.

Table 1 - Contributions to GDP in selected countries - values expressed in % -

Agriculture Manufacturing Mining

Angola 1995 7.4 4.05 59.9

2006 8 3.7 58.8

Nigeria 1995 32.34 10.2 40.2

2006 33.11 3.52 39.5

Chad 1995 36.8 11.9 0.6

2006 21.3 6.7 46.2

Mozambique 1995 33.9 7.4 0.6

2006 21.5 13.0 5.9

Source: Unctad

Hence…..

A society with a higher proportion of resources devoted to ice-cream could be considered preferred. Whenever a higher proportion of resources is allocated to the uncontested sector, fewer resources will be allocated to the contested sector.

The likelihood of (re) descending into a bloody conflict should be decreasing in the level of ice-cream.

Economic analysis of Civil wars

There is a widespread agreement that the incidence of civil wars is positively associated with the abundance of natural resources. See among others: Collier and Hoeffler (1998/2000/2004), Le Billon (2001a), De Soysa (2002), Sambanis (2001/2002), Bannon and Collier (2003), Fearon and Laitin (2003), Fearon (2005), Humphreys (2005), Lujala et al. (2005), De Soysa and Neumayer (2007), Collier and Rohner (2008).

Enrichment

It is possible to to complement the existing literature on civil wars by highlighting the relationship between different sectors of economy and the incidence of civil wars In particular, the structure of an economy is captured through the breakdown of GDP by main sectors: (i) manufacturing sector; (ii) mining sector; (iii) agriculture.

Such an approach is theoretically underpinned by a distinction between contested and uncontested sectors.

Policy Implications

Clearly, the cooperative management of contested resources - what we have termed butter - is the most important issue. To stress other points consider:

(1) reducing arms spending; (2) providing economic incentives to ice-

cream production;(3) improving productivity in the long run;

Reduction of Guns

A common but erroneous belief is that government should increase military spending in order to ensure the stability of social order and guarantee security . Two theoretical points counter this idea:

(1) First, it is clear that military spending has an adverse effect on economic growth by crowding out private productive investments.

(2) Second, social systems based upon threats and deterrence are intrinsically unstable

Swords-Hunt

Reduction of arms cannot be limited only to government and rival fighting groups. It is well-known that small arms tend to proliferate among the citizens and residents of war-torn countries. This phenomenon can increase violence, which, even if it is not committed to overthrowing the ruling government, negatively affects economic and social development.

Swords-Hunt

A civilian disarmament plan should be implemented, followed by the enforcement of strict gun control laws. The most famous historical example is the Japanese sword hunt (katana-gari), which occurred in 1588. Before the hunt, civilians were free to carry weapons for personal defense. There is evidence that the Japanese peasantry achieved an improvement in living standards However, it took a long time. It Begun in 1588, and the final step took place only in 1876.

Swords Hunt: Note

However, violent seizure of weapons could be also counter-effective. A sword hunt policy can be sustained if and only if the government is sufficiently credible. Credibility, trust and legitimacy take time to root themselves in the public consciousness. Therefore, in order to sustain such a plan in the short-term, a policy of monetary compensation favoring voluntary disarmament could be adopted.

Economic Incentives for Ice Cream Production

Incentivizing ice-cream production implies a broad spectrum of policies favoring and encouraging the development of businesses not directly affected by conflict. In the long-run, this policy can shape the whole structure of the economy. Ross compares Nigeria and Indonesia. whilst the Nigerian government has focused on development of the petroleum sector, the Indonesian government has been committed to create incentives for productive sectors such as manufacturing and agriculture.

Productivity

We said that productivity in the production of ice-cream can be considered as a force countervailing the incentives for conflict. Then,consider:

(1) Investments in education;

(2) Public provision of health services;

(3) Reduction of Military spending (one more time)( this is also a qualitative concept)

Military Spending (to close the story)

The Nobel L. Klein demonstrated that military expenditures decreased total factor productivity over the period 1971-1991 in five countries of Southern Cone region.

That is, investments in guns affect negatively the production of ice cream both quantitatively (less ice cream) and qualitatively (worst ice cream)

Education and Health

Schooling and health improve productivity in the long run. Public policies of education and health cannot be postponed.

The Nobel Gary Becker (1981) said: The policy that I have been trying to promote for ten years or more, and now has been implemented, at least in Brazil and Mexico which I follow very carefully, is to “bribe” the poor parents to keep their children in school. By that I mean to give them a monthly supplement conditional on three things: that children attend school regularly, that they do well, and that children attend regular health check-ups. Because health is a problem for the very poor, the program combines attendance and performance at school with health checks.

Table 2 - Priorities in Public Spending (% GDP)

Public expenditure

on health (%) Public expenditure on

Education (%) Military

Spending (%)

2004 1991 2002-2005* 1990 2005

Angola 1.5 - 2.6 2.7 5.7

Nigeria 1.4 0.9 - 0.9 0.7

Chad 1.5 1.6 2.1 - 1

Mozambique 2.7 - 3.7 5.9 0.9

Source: Undp. Human Development Report 2007. * data refer to the most recent year available during the period specified.

IV. Globalization and conflict

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Aims and potential contributions

1) Following the previous idea, the relative profitability between sectors has an impact on intensity of conflict and economic outcomes.

2) The empirical section contributes to the empirical economic literature on civil wars and resource curse in African countries (see among others Collier and Hoeffler (1998/2000/2004), Fearon and Laitin (2003), De Soysa. I., Neumayer E., (2007).

3) This work also contributes to the debate about the impact of globalization on domestic conflict in LDCs.

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The Model: Assumptions (reprise)The world is made of region 1, region 2 and the rest of the world (ROW).

Regions can produce two tradable goods which are to be sold to ROW. Economy of both regions is made of:

(1) Contested Sector The two regions struggle in order to appropriate the maximum possible fraction of a contestable output. It is assumed to exhibit CRS;

(2) Uncontested Sector each region holds secure property rights over the production of some goods. It is assumed to exhibit DRS.

There are three possible allocations of resources, (i) guns, (ii) butter, and (iii) ice-cream. Butter and guns denote the classical trade-off between production and appropriation in contested sectors. Ice-cream denotes all the productive activities which are not under threat of appropriation.

The opportunity cost of conflict would be related not only to the contested production but also to the production of goods which are not subject to appropriation. In this work the opportunity cost of conflict is related to the relative profitability of the two sectors.

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The Model: Timing

(1) in the first stage, agents observe an exogenous price for both butter and ice-cream. They are SOE.

(2) agents move simultaneously and choose an optimal level of guns and ice cream. The supply of both butter and guns is determined through conflict;

(3) Market clears and prices of butter and ice-cream take shape.

(4) Payoffs are assigned, final incomes are attained and the final outcome of the regions is realised

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Payoffs

221121 yGyGRRCY CSF as axiomatized by Skaperdas (ET, 1996)

2,1, iGxyR iiii

The resources endowment is to be divided between

Guns, butter and ice-cream

the final income of each agent is a function of

contributions of both sectors

2,1,, ipSYSYW iiiii

CYGGqS ii 21,

2,1,/, 2121 iGGGGGq ii

Initial Relative

Price of butter in terms

of ice-cream

ss yyYyyY 222111 ;

Butter and Guns

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1/1

1/**2

*1 2

4

sss

s

pTRGGG

the quantity of butter and guns is increasing in the initial relative price of butter in terms of ice-cream.

Ice Cream

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the higher is the initial relative price of butter in terms of ice-cream, the smaller will be the production of ice-cream. In particular, it is also interesting that the supply of ice-cream increases in the degree of productivity only in the presence of a combination of p and s . That is, when p is high enough, it can dominate the beneficial impact on production emerging in the presence of an adequate degree of productivity.

)1/(1* 20/ si sepsy 0/* pyi

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The Rest of the World1. The rest of the world (ROW) has Cobb- Douglas preferences.

2. The ROW purchases the total supply of butter and ice cream and maximizes its utility under the constraint

=

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Market Clearing equations

The supply of the different commodities is nothing but the equilibrium quantities of butter and ice-cream chosen by regions:

Prices after conflict

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The price of butter is decreasing in the initial relative price only in the presence of specific combinations of p, s and TR. the price of ice-cream is unambiguously increasing in p.

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Results

(1) the supply of butter and guns are increasing in the initial relative price of butter in terms of ice-cream.

(2) The supply of ice-cream is increasing in the degree of productivity if and only if the initial relative price of butter in terms of ice-cream is low enough.

(3) Final prices of Ice-cream are increasing in the initial relative price of butter in terms of ice-cream.

(4) Final income of both regions is decreasing in the initial relative price of butter in terms of ice-cream

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A novel Empirical Application

to explain Civil Wars in Sub-Saharan Africa (1995-2006)

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Novelty of this work

Following the theoretical predictions the analysis focuses not only on the commodity prices (aka price of butter) but rather on the relative price of commodities in terms of manufactures (aka price of Ice-cream).

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Civil Wars in Sub-Saharan Africa 1995-2006

Few studies address directly the impact of commodities prices. Besley and persson (2008, wp), Bruckner and Ciccone (2010, EJ), Angrist and Kluger (2008, RES), Dube and Vargas (2008, wp).

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Prices of commoditiesI used alternatively commodities indexes (source IMF):

(1) an aggregate commodity price index; (2) an Oil price index; (3) the Commodity Nonfuel Price Index; (4) a metals price index.

0

65

130

195

Dec 1994 Jun 1997 Dec 1999 Jun 2002 Dec 2004 Jun 2007

Boom in the latest years

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Prices of Manufactures

Under the assumption of an international convergence of prices [recent studies show that a convergenge of prices occurred especially for low-tech manufactures ], I apply the Manufactures Unit Value Index (MUV). It is a trade-weighted index of the five major developed countries’ exports of manufactured goods. That is, I assume that the MUV index can be used as world price of manufactures index. It is in US$.

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Basic Specification

I created a panel dataset for the occurrence of civil wars in Sub-Saharan Africa which spans from 1995 to 2006. Eventually I estimate the following random effects panel probit model:

ititikt uMUVitycomCivilwar 2110 mod

The incidence of a civil war is captured through a dummy variable which takes the value of unity in the presence of a civil war and zero otherwise. The expected signs for the coefficients of commodity prices (+) and MUV (-) are positive and negative respectively.

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Incidence of Civil wars and Price of Commodities. Commodity Price Index (t-1) 1.94*** .41 OIL price index (t-1) .54* .32 .45* nonfuel price index (t-1) 1.58 .76 metals price index (t-1) .92 1.32 MUV (t-1) -5.09*** -3.84** -4.54 -7.04*** -3.55** -4.91*** -6.99*** -6.37** -4.08* HDI1995 -10.99*** -20.52*** -10.14*** -15.01** Literacy -1.23*** -.24 Polity -0.09** -.11*** -.16*** -0.08*** -.11*** -.10 -0.07*** -.07 -0.05* Density of Population .20 .61 -.08 -.24 .57*** -0.07 .25** .84*** -.20 Ethpol -1.20 -1.50 -6.02*** 2.21 -1.84* Ethfrac .99 1.62 -.90 -2.71* -.56 Forest area .002 .57*** -.21* .33** .02 0.08 .52*** .26*** Landlocked .05 -.73 .25 -.19 .33 .89** Const 25.21** 14.25* 19.09*** 35.46*** 12.14* 17.05 27.55 19.90** 13.74 Obs. 360 408 408 360 480 480 408 360 432 Groups 30 34 34 30 41 41 35 30 36 Log Likelihood -89.92 -119.73 -118.93 -86.47 -148.25 -145.33 -99.38 -88.34 -134.76 Wald 42.12 49.61 26.25 49.79 41.79 19.56 41.00 48.03 22.36

LR 94.83 187.54 186.20 100.57 244.00 224.64 135.13 100.67 205.95

Implications for GDP Growth

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Eventually I estimate the following fixed effects panel OLS model to study the impact of MUV on GDP growth

The expected signs for the coefficients of commodity prices (-) and MUV (+) are negative and positive respectively.

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Consider the classical point about Prices of Commodities and LDCS

(few years ago)1) Many LDCs are dependent upon the exports of a

small number of commodities. According to FAO(2003), as many as 43 LDCs depend upon only one commodity

2) Oversupply of commodities was assumed to drive the prices down. Oversupply is based upon enhancements of productivity and emergence of new producers

3) The decline of prices for some selected commodities has been so significant that the increase in volume did not compensate for the decline of prices.

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To summarise the results1) the evidence on the impact of commodity prices on actual

civil conflict is not fully conclusive;

2) The Oil price index appears to be significantly associated with the incidence of a civil war. However, such association appears to be only weakly significant in only two specifications;

3) There is a robust negative association between the world prices of manufactures and the likelihood of a civil war;

4) There is a robust positive association between the world prices of manufactures and the GDP growth

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To summarize this presentation

(1) The opportunity cost of conflict depends on relative profitability of contested and uncontested production.

(2) Productivity in the uncontested sector and relative profitability are countervailing forces which shape the resources allocation between butter, guns and ice-cream

(3) Civil wars in Africa depend also on relative profitability of primary commodities and manufacturing sectors.

(4) An increase in world prices of manufactures would make civil wars less likely so sustaining GDP growth

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Discussion and Policy Implications

This appears to be crucial nowadays when the new geography of trade is likely to induce in the next future a downward pressure on prices of several categories of manufactures (ex. China). In many developing countries, in the presence of low prices for low-tech manufactures, the relative profitability of contested productions would increase so fuelling the emergence of actual conflicts.

Thanks!!!