THE ECONOMICS OF INTERNATIONAL SECURITY Also by Manas Chatterji

ANALYTICAL TECHNIQUES IN CONFLICT MANAGEMENT DISARMAMENT, ECONOMIC CONVERSION AND MANAGEMENT OF PEACE (editor with Linda Forcey) DYNAMICS AND CONFLICT IN REGIONAL STRUCTURAL CHANGE (editor with Robert E. Kuenne) ECONOMIC ISSUES OF DISARMAMENT: Contributions from Peace Economics and Peace Science (editor with Jurgen Brauer) ENERGY AND ENVIRONMENT IN THE DEVELOPING COUNTRIES (editor) ENERGY, REGIONAL SCIENCE AND PUBLIC POLICY (editor with P. van Rompuy) ENVIRONMENT, REGIONAL SCIENCE AND INTERREGIONAL MODELING (editor with P. van Rompuy) HAZARDOUS MATERIALS DISPOSAL: Siting and Management (editor) HEALTH CARE COST-CONTAINMENT POLICY: An Econometric Study MANAGEMENT AND REGIONAL SCIENCE FOR ECONOMIC DEVELOPMENT NEW FRONTIERS IN REGIONAL SCIENCE (editor with Robert E. Kuenne) SPACE LOCATION AND REGIONAL DEVELOPMENT (editor) SPATIAL, ENVIRONMENTAL AND RESOURCE POLICY IN THE DEVELOPING COUNTRIES (editor with Peter Nijkamp, T. R. Lakshann and C. R. Pathak) TECHNOLOGY TRANSFER IN THE DEVELOPING COUNTRIES (editor) The Economics of International Security Essays in Honour of Jan Tinbergen

Edited by

Manas Chatterji School of Management and Economics State University ofNew York

Henk Jager Department of Macroeconomics University ofAmsterdam and Annemarie Rima College of Economics Arnhem

M ~~- St. Martin's Press © Manas Chatterji, Henk Jager and Annemarie Rima 1994 Foreword © Lawrence R. Klein 1994 Softcover reprint of the hardcover 1st edition 1994 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

First published in Great Britain 1994 by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world

A catalogue record for this book is available from the British Library.

ISBN 978-1-349-23697-8 ISBN 978-1-349-23695-4 (eBook) DOI 10.1007/978-1-349-23695-4

First published in the United States of America 1994 by Scholarly and Reference Division, ST. MARTIN'S PRESS, INC., 175 Fifth Avenue, New York, N.Y. 10010

ISBN 978-0-312-12018-4

Library of Congress Cataloging-in-Publication Data The Economics of international security : essays in honour of Jan Tinbergen / edited by Manas Chatterji, Henk Jager, and Annemarie Rima. p. cm. Includes index. ISBN 978-0-312-12018-4 1. Economic conversion-Congresses. 2. Disarmament-Economic aspects-Congresses. 3. Military readiness-Congresses. 4. Economic sanctions-Congresses. 5. Security, International• -Congresses. III. Jager, Henk de. IV. Rima, Annemarie, 1956- HC79.D4E267 1994 338.4©76233-dc20 93-34313 CIP To Jan Tinbergen Jan Tinbergen photo: Levien Willemse Contents

List of Figures and Tables X Foreword by Lawrence R. Klein Xll Message from Jan Tinbergen xiv Notes on the Contributors xvi List of Abbreviations xviii

1 Introduction Manas Chatterji, Henk Jager and Annemarie Rima 1

PART I DISARMAMENT AND THE ECONOMICS OF PEACE

2 The Autonomous Military Power: An Economic View John Kenneth Galbraith 9

3 Development and Disarmament: The Meaning Lawrence R. Klein 14

4 Peace Economics: Future Directions and Potential Contributions to International Security Walter Isard 20

5 Disarmament, Unemployment, Budgets and Inflation William Vickrey 34

6 Disarmament for Development in Favour of the Developing Countries Jacques Fontanel 38

7 Analysing Efficient Military Spending William G. Shepherd 51

8 A Computational Analysis of the Effects of Reductions in US Military Expenditures Alan K. Fox and Robert M. Stern 62

vii viii Contents

PART II INTERNATIONAL SECURITY AND ECONOMIC SANCTIONS

9 International Peace-Keeping Forces: Economics and Politics Kenneth J. Arrow 81

10 Japan as a Post-Cold War Model Davis B. Bobrow 87

11 An Application of a 'Self-Protection' Model to the Economics of National Defence Toshitaka Fukiharu 95

12 Comprehensive Global Security: A Copernican Reversal Piet H.J.J. Terhal 106

13 Towards a Truly European Security System David Fouquet and Manuel Kohnstamm 118

14 Options for a Security Regime in Eastern Europe after the Cold War Tulia Traistaru 129

15 Problems of Disarmament and Regional Conflicts Manas Chatterji 137

16 Economic Sanctions: A Hidden Cost of the New World Order Peter A.G. van Bergeijk and Charles van Marrewijk 168

17 The Persistence and Frequency of Economic Sanctions Shane Bonetti 183

PART III ECONOMIC AND ENVIRONMENTAL CONVERSION AND GLOBAL INSTITUTIONS

18 Experiences of Soviet Conversion Stanislav Menshikov 197

19 Conversion in Czechoslovakia: Experience and Preliminary Results Ludek Urban 206 Contents ix

20 Employment Effects of US Military Spending Reductions in the Early 1990s: Some Methodological Considerations Jurgen Brauer and John Tepper Marlin 212

21 Conversion in China Chai Benliang 223

22 Measuring the Effects of Military Spending: Cross Sections or Time Series? Ron Smith 232

23 Armament and Development: An Empirical Assessment of the Impact of Military Spending on Economic Growth in Developing Countries Alex Mintz and Randolph T. Stevenson 245

24 Environmental Issues and International Security: A Commentary Iona Sebastian 254

25 The Role of International Institutions and Superpowers after the End of the Cold War Akira Hattori 259

26 A World Marshall Plan and Disarmament Robert J. Schwartz 265

Index 273 List of Figures and Tables

FIGURES

11.1 Reaction functions 101 11.2 Technological improvement and distribution of armament 102 11.3 Pareto optimum distribution in case of antagonism 103 11.4 Pareto optimum distribution in case of alliance 104 15.1 The PSIG model 155 15.2 Definition of the developing countries 159 15.3 Demographic-agricultural submodel 160 16.1 Production in neoclassical trade theory 177 17.1 Net benefit function with and without sunk cost accounting 189 17.2 The sender's net benefit function 189 17.3 Extensive form of the single shot game 190 22.1 Time-series and cross-section estimates of the regression equation 241 22.2 Relationship between the regression coefficient and the regression in case of non-linearity 242

TABLES

3.1 Burden of militarization on developing countries 15 8.1 Aggregate effects of a unilateral 25% reduction in US military expenditures on the major industrialized and developing countries 67 8.2 Change in US employment by occupation and sector due to unilateral 25% reduction in US military expenditures 69 8.3 Change in US employment by sector and region due to unilateral 25% reduction in US military expenditures 71 8.4 Change in US employment by region and occupation due to unilateral 25% reduction in US military expenditures 74 8.5 US labour market dislocation measures 75 12.1 Incidence of insecurity by class Ill 15.1 Share of Third World in global security expenditure according to region, 1950-84 141 15.2 Military spending for some developing countries 142 15.3 Socio-economic information about some developing countries 143

X List of Figures and Tables xi

15.4 World military expenditure in constant price figures 146 15.5 World trade in major conventional weapon systems, 1987-91 147 15.6 Official Chinese defence spending, 1979-90 148 15.7 Countries 156 15.8 Percentage change of variables between 1980 and 1985 157 15.9 List of variables, units and sources for India, 1950-85 164 16.1 LOGIT analysis of success and failure of economic sanctions 173 16.2 Strategies and pay-offs for the target in a two-period game 175 16.3 Impact of political uncertainty on trade 180 17.1 Pay-off matrix for a one-shot game 185 19.1 Military production in Czechoslovakia 208 21.1 Comparison of the two stages of the Chinese DSTI system 227 21.2 Characteristics of military and civilian commodities 228 23.1 Effects of the military sector on economic performance 250 A. I Total loan and grants in Marshall Plan period 270 A.2 Marshall Plan loan and grants to each country (1948-52) 271 Foreword

Dutch economists have been world leaders in the scholarly study of peace, security, arms limitation, and related subjects. The Tin bergen Institute, the research institute and graduate school of the Erasmus University Rotterdam, the University of Amsterdam, and the Free University Amsterdam, and the Dutch/Flemish Association of Economists for Peace carried their traditional role forward by convening the conference on Economics of International Security in The Hague, 21-23 May 1992. The setting was entirely appropriate for the occasion. The Peace Palace, an early twentieth-century structure which had housed many historic meet• ings to further the cause of peace, was ideal for the presentations and delib• erations described in this volume. In his opening address Jan Tinbergen, who has contributed so much in a rich lifetime to the economics of peace, evoked in the audience feelings of nostalgia when he spoke of his and other studies for the League of Nations in another peace-loving place, Geneva. The work of the successor organization, the United Nations, and other multilateral institutions who serve the cause of peace will figure promi• nently in this book. When economists attempt to deal with the economics of peace, they must go far afield in order to deal with all the details that arise in the profes• sional analysis of the peace process. The following chapters cover such issues, in their relation to peace, as economic development, macroeconomic ac• tivity levels, economic efficiency, arms reduction, national defence, local conflicts, the use of sanctions, conversion from military to civilian activities, financing defence, use of the peace dividend, environmental aspects of in• ternational security, and world reconstruction. Naturally, the economics of peace involves assessments of the end of the Cold War, economic restructuring in Eastern Europe and the former Soviet Union, the ongoing international arms traffic, and the new alignments for national or international security. This wide range of subjects is covered in the present volume. The reasoning is economic and uses quantitative, econo• metric or mathematical techniques where helpful or necessary. These are not passionate pleas for peace, which have their place in search of lofty aims, but they are the cool analyses of economics. They are objective and credible. For many years, advocates of the economics of peace have laboured individually and in isolation, but a core group have persisted, and now in• dividuals are more frequently banding together to make a more coherent presentation of their subject. Our Dutch hosts have contributed much to the

xii Foreword xiii growing subject by bringing together so many researchers at one time. They have helped the international group Economists Allied for Arms Reduction (ECAAR) show how economists have an effective voice in promoting the study of peace from the viewpoint of their discipline.

University of Pennsylvania LAWRENCE R. KLEIN Message from Jan Tinbergen

Mr Mayor and Mrs Havermans, Colleagues and Friends, Ladies and Gentle• men,

The subject of the papers that follow is important; it is the question to be or not to be. Before taking it up I think a scientific characterization of the congress where they were first presented is in order. Our subject is one proof of the extent to which scientific activity has expanded as a conse• quence ot the expansion of society. A recent example of the widening of scientific activity is the impact of environmental pollution on various sci• ences. The reports to the Club of Rome constitute well-known develop• ments. The first, 'The Limits to Growth' by the Meadows couple and their collaborators, showed that the security of humankind is threatened not only by armament races, but also by pollution of our environment, population growth, the growth of chemical industries, the number of cars and other developments. Many of these problems are new, but also, in a way, simply the modem shape of threats discovered long ago. Think, for example, of what Malthus told us. Other old problems that are still with us originated from the Great Depression. The unusual depth and length of that depression led the League of Nations - the predecessor of the United Nations - to in• tensify research into business cycles. The League requested that Gottfried von Haberler write a survey of business-cycle theories. Once developed, the theories had to be tested to enable the governments of member countries to apply the best anticyclical economic policies. Economic science has by no means been the only science showing the features just sketched. Physics is another example. After the discovery of radioactivity physicists took up the research into the atom's structure and discovered a completely new set of problems, with new types of force, op• erating in the world of the smallest particles, of immense significance to our understanding of the world of the largest units, the stars and the uni• verse, and its creation. One of the groups that organized this conference, ECAAR (or, in Dutch, EVV), was created as a reaction to the tremendous threat caused by nuclear arms, themselves a consequence of the discovery of nuclear energy. To us it was clear that that threat poses such a challenge to human welfare that it is our duty to study the possibility of eliminating war as a means of settling conflicts between governments, or between groups of human beings, religious, political or other. Although the threat is now less serious than at the time of the Cold War,

xiv Message from Jan Tinbergen XV

1t IS still considerable, as is illustrated by the - to me - incomprehensible events in Yugoslavia and the Commonwealth of Independent States (CIS), the former Soviet Union. A wide area of useful research is in front of us, one problem being how - that is, by what set of political instruments - the globe, our planet Earth, can be managed. Elsewhere (in a publication of the Nuclear Age Peace Foundation) I have formulated a brief sketch of how the United Nations (UN) might be re• formed and strengthened in order to manage our planet. I hope that it con• tains some useful elements, if only the rudiments of a discussion of some concrete proposals. One proposal is that a number of specialized UN agencies be empowered to impose on member governments the policy the agencies consider optimum. Thus the United Nations Environmental Program (UNEP) should be entitled to impose the best environmental policy, the Food and Agriculture Organization (FAO) the best agricultural policy, and so on. Moreover, some new specialized agencies should be created; among them, a World Treasury and a World Police Force. As I have said, these proposals are meant to start a discussion of their feasibility, and, in particular, a dis• cussion by people closer to today's reality. Let me complete my attempt at suggesting useful research subjects with one more issue. Better information has induced the population of under• developed ('poor') countries to increase migration to developed ('rich') ones. These immigrants create problems in the poor quarters of rich cities, com• peting with the local population for jobs and dwellings, among other things. Because of cultural differences they irritate the local population and are irritated by that local population. Such conflicts provide an incentive to rightist politicians to propose keeping the immigrants outside the rich countries, by using violence if necessary. I think this is a bad policy. The much better alternative is to make available more development assistance and so create employment and provide better incomes to citizens in poor countries. This would make migration unnecessary. This would be better for poor and rich countries alike; a good reason for the rich countries to make more aid available. It would reduce another threat of conflict. I hope that in this opening address I have presented some examples of how we may discuss in a concrete way the implementation of the ideals of economists on behalf of peace.

JAN TINBERGEN Notes on the Contributors

Kenneth J. Arrow, Joan Kenney Professor of Economics and Operations Research. Nobel Laureate in Economics.

Chai Benliang, Senior Analyst, China Defence Science and Technology Information Center, Beijing.

Peter A.G. van Bergeijk, Ministry of Economic Affairs, The Netherlands.

Davis B. Bobrow, Professor of Political Science and Dean, Graduate School of Public and International Studies, University of Pittsburgh.

Shane Bonetti, Professor of Economics, University of St Andrews.

Jurgen Brauer, Assistant Professor of Economics, Augusta College.

Manas Chatterji, Professor of Management and Economics, Binghamton University- State University of New York. Guest Professor, Pelling Uni• versity and Distinguished Visiting Professor of Management at the Indian Institute of Management, Calcutta.

Jacques Fontanel, Professor of Economics and Director Espace Europe, Faculty of Economic Science, University of Grenoble, France.

David Fouquet, European Research Associates, Brunsch, Belgium.

Alan K. Fox, Institute of Public Policy Studies, University of Michigan.

Toshitaka Fukiharu, Professor of Economics, Kobe University.

John Kenneth Galbraith, Paul M. Warburg Professor of Economics, Harvard University, Emeritus.

Akira Hattori, Professor of Economics, Fukuoka University.

Walter Isard, Professor of Economics, Cornell University, Emeritus. Founder of the social science disciplines Regional Science and Peace Science.

Henk Jager, Professor of International Economics, University of Amster• dam.

xvi Notes on the Contributors xvii

Lawrence R. Klein, Benjamin Franklin Professor of Economics, University of Pennsylvania, Emeritus. Nobel Laureate in Economics.

Manuel Kohnstamm, European Research Associates, Brunsch, Belgium.

John Tepper Marlin, Chief Economist, City of New York Comptroller's Office, and advisor to Council of Economic Priorities, New York.

Charles van Marrewijk, Associate Professor of Economics, Erasmus University.

Stanislav Menshikov, Visiting Professor of Economics, Erasmus University.

Alex Mintz, Professor of Political Science, Texas A & MUniversity.

Annemarie Rima, Past Director, Tinbergen Institute, Amsterdam/Rotterdam. Presently at HEAO, Arnhem, The Netherlands.

Robert J. Schwartz, is a trustee and treasurer of Economists Allied for Arms Reduction (ECAAR), New York.

Iona Sebastian, World Bank.

William G. Shepherd, Professor of Economics, University of Massachu• setts, Amherst.

Ron Smith, Professor of Economics, Birkbeck College, London University and London Business School.

Robert M. Stern, Professor of Economics, University of Michigan.

Randolph T. Stevenson, University of Rochester.

Piet H.J.J. Terhal, Associate Professor of Economics, Erasmus University.

Jan Tinbergen, Professor of Economics, Erasmus University, Emeritus. Nobel Laureate in Economics. lulia Traistaru, University of Warwick and Polytechnic Institute of Bucharest.

Ludek Urban, Professor of Economics, Charles University.

William Vickrey, Professor of Economics, Columbia University, Emeritus. Past President of American Economic Association. List of Abbreviations

CEPR Centre for Economic Policy Research (British) CFE (Negotiations on) Conventional Armed Forces in Europe c.i.f. carriage, insurance and freight CIS Commonwealth of Independent States COMECON Council for Mutual Economic Assistance f.o.b. free on board MAD Minimum Average Duration NBER National Bureau of Economic Research (US) PRIO (International) Peace Research Institute, Oslo (Norway) SALT Strategic Arms Limitation Treaty SAM Surface to Air Missile START Strategic Arms Reduction Talks UNCTAD United Nations Center for Trade and Development UNIDIR United Nations Institute for Disarmament Research WPA Warsaw Pact Organization WTO Warsaw Treaty Organization

xviii