CONFLICT ECONOMICS: THEORETICAL AND EMPIRICAL APPLICATIONS Nasser Elkanj A thesis submitted in fulfilment for the degree of Doctor of Philosophy School of Economics and Finance University of Western Sydney Australia 2009 DEDICATION To my Late Grandfathers Nasser Elkanj and Ibrahim Elbitar To my Father, Mother and my three Sisters i ACKNOWLEDGEMENTS This thesis would not have been completed without the help and assistance of several persons. First, my deepest gratitude and sincere appreciation goes to my supervisor Dr. Partha Gangopadhyay. His encouraging support and continuous advice was the driving force behind this work. Partha, you made my last three years a pleasant journey in which you always gave freely of your precious time and made me feel that my work had been your own priority over your family. Thank you so much Partha. I would like also to express my heartfelt thanks to my co-supervisor Dr. Kevin Daly for his advice, guidance and support. In addition, I am greatly indebted to the University of Western Sydney for offering me a scholarship to pursue my dream. I wish to thank Associate Dean (Research) in College of Business Professor Bobby Banerjee and Professor John Lodewijks (Head of School) for being consistently helpful and supportive. I wish to thank Professor Raja Junankar, Dr. John Ablett and Mr. Neil Hart for approving my research proposal. I am extremely grateful to Associate Professor Craig Ellis for his support when I first applied to the Doctoral program. I would like also to thank Dr. Girijasankar Mallik, Dr. Andrew Marks, and Dr. Anil Mishra for their support. I wish to thank the administration in the School of Economics and Finance, especially Mrs Patricia Fournier, Ms Trish O’Brien, Mrs Judy Foster, Ms Carolyn Love, Mr Craig Berry, Ms Nikki Gallaway, and Ms Amanda Grey for their help. Also special thanks to Ms Lorraine Starr for her great assistance. ii I wish to thank my second family in Australia, Bey Family, who have been so close to and always supporting me whenever I needed. Finally, I would like to thank all my colleagues for their help and support especially Khaled Kourouche, the Kourouche family, Amro Elfayoumi and Mohamed Elafif. iii STATEMENT OF AUTHENTICATION The work presented in this thesis is, to the best of my knowledge and belief, original except as acknowledged in the text. I hereby declare that I have not submitted this material, either in whole or in part, for a degree at this or any other institution. 2009 iv TABLE OF CONTENTS DEDICATION............................................................................................. i ACKNOWLEDGEMENTS..................................................................... ii STATEMENT OF AUTHENTICATION............................................. iv TABLE OF CONTENTS..........................................................................v LIST OF TABLES................................................................................... xii LIST OF ILLUSTRATIONS .................................................................xiv ABSTRACT ............................................................................................xvi CHAPTER 1 .............................................................................................. 1 1.1 Defining Conflict....................................................................................... 1 1.2 Research Problems .................................................................................... 4 1.3 Literature Review...................................................................................... 6 1.3.1 General Review ............................................................................. 7 1.3.2 Models of Conflict ........................................................................10 1.3.3 The Economics Origin of Conflict.................................................13 1.3.4 Conflict Management Procedures (CMP)......................................21 1.4 Research Methodology.............................................................................25 1.4.1 The Relation between Inequality and Conflicts .............................26 1.4.2 Conflict Management Procedures..................................................28 1.5 Plan of the Thesis .....................................................................................31 1.5.1 Chapter 2 ......................................................................................31 1.5.2 Chapter 3 ......................................................................................32 1.5.3 Chapter 4 ......................................................................................32 1.5.4 Chapter 5 ......................................................................................33 v 1.5.4 Chapter 6 ......................................................................................34 1.5.5 Chapter 7 ......................................................................................35 1.5.5 Chapter 8 ......................................................................................36 1.6 Research Objectives .................................................................................36 CHAPTER 2 .............................................................................................37 2.1 Introduction..............................................................................................37 2.2 Twin Forces of Globalisation: Conflicts with Democratisation and the Spread of Market Ethos .........................................................................40 2.3 The Role of Privatisation in Globalisation: As a Vehicle of Change of Capital Ownership and Structure ...........................................................44 2.4 The Politics of Capital Allocation: A Baseline Model...............................49 2.4.1 The Basic Setting..........................................................................49 2.4.2 Vote Maximisation and Electoral Motives of the Incumbent Government ...............................................................................53 2.4.3 Optimal Choice of Capital Allocation and Distribution Failure .....55 2.4.4 Determination of the Intersectoral Term of Trade (T.O.T).............58 2.4.5 The Existence and Stability of Equilibrium Terms of Trade ..........61 2.4.6 An Alternative Formulation of Terms of Trade p ..........................64 2.4.7 The New Model of Terms of Trade and Electoral Motive..............67 2.4.8 Associated Dynamics of the Equilibrium Path: Electoral Motive, Optimal Allocation of Capital and the Time-Path of Terms of Trade .........................................................................................71 2.4.8.4 The Relevant Fixed Point of the Proposed Time-Path:................74 2.4.9 The Chaotic Regime: Simple Model with Complex Dynamics ......75 2.4.10 Summary ....................................................................................76 vi CHAPTER 3 .............................................................................................78 3.1 Politics of Allocation of Defence Spending in a Bi-sectoral Model...........78 3.1.1 Introduction ..................................................................................78 3.1.2 Allocation of Defence Spending in Bi-sectoral Model...................82 3.1.3 Comparative Statics (Under Assumption 5)...................................91 3.1.4 Comparative Statics (Under an Alternative Assumption)...............92 3.2 Discussion and Conclusion.......................................................................94 CHAPTER 4 .............................................................................................98 4.1 Introduction to International Tension: Global Roots of Local Conflicts ....98 4.1.1 The Influence of World War I on Global Chasms and Ongoing Tensions: Historical Diary of Relevant Events .........................100 4.1.2 Mutual Assured Destruction and the Onset of the Cold War and the Fragmentation of the Globe......................................................108 4.1.3 Genesis of the Cold War .............................................................110 4.1.4 World War II and Post War Complexities (1939–1947) ..............111 4.1.5 The Korean War and the First Battlefield after World War II (1947– 1953) .......................................................................................113 4.1.6 An Era of Crisis after Crisis (1953–1962) ...................................117 4.1.7 Emergence of Détente (1962–1979)............................................122 4.1.8 The Genesis of the ‘Second Cold War’ (1979–1985)...................123 4.1.10 Emergence of the New Era of Globalisation..............................131 4.2 Global Partnerships in Conflicts and Terrorism: Can there be Endogenously-driven Terror Cycles?...................................................134 4.2.1 Introduction ................................................................................134 vii 4.2.2 Basic Heuristics ..........................................................................135 4.2.3 Observation ................................................................................140 CHAPTER 5 ...........................................................................................142 5.1 Introduction............................................................................................142 5.1.1 A Descriptive Foundation for Irrevocable Decisions in Conflict Escalation ................................................................................144