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Wednesday, July 13, 2011

War and Trade

"Hope is tomorrow's veneer over today's disappointment." - Evan Esar


The futility of autarky and thinking that economic globalisation prevents war:

"What the dictators could not match was the capitalist democracies’ commercial capacities for war. This aspect of state capacity is illustrated by a twentieth-century paradox. Since the Napoleonic era, European governments have worried about food security. Britain has relied overwhelmingly on imported calories. Despite this, in two world wars Britain had little difficulty in feeding its people (Olson 1963). In contrast, those countries that believed themselves secure were the first to run short of food. In the last quarter of the nineteenth century Germany’s leaders worked hard to limit their exposure to international trade and to protect agriculture. In 1914 Russia went to war, assured of the availability of a large peacetime surplus of exportable grains. Yet it was Russian and German cities that were stalked by hunger (Offer 1989; Broadberry and Harrison 2005).

It was easier for Britain to feed itself from the other side of the world than for Berlin, Vienna, St Petersburg, or Constantinople to induce farmers thirty miles distant from the capital to feed their own people. Why was this? Britain had invested not in agriculture but in something more important: the gains from international trade. These were not only direct gains in the Ricardian sense of returns to specialization, but also indirect gains from the establishment of an overseas trading network that would robustly survive the disruptions of continental war. The Russian, German, Austro-Hungarian, and Ottoman Empires had inferior external networks, although Russia was helped by peripheral membership of the Anglo- French network. But there was more: these countries, with their large peasant populations, could not maintain the integration of their own domestic markets under the pressure of wartime mobilization. Unable to trade with the cities on peacetime terms, their peasant farmers seceded from the war effort, retreating into subsistence activities, leaving the soldiers and war workers without food.

To varying degrees, these countries had a commercial capacity for war that was greatly inferior to Britain’s. They thought they were safe; they perceived the British to be at risk. When war broke out, they expected Britain to starve. Using commerce rather than agriculture, however, the British fed themselves to standards little short of peacetime through two world wars. In both world wars, moreover, the Allies were able to multiply the military value of coalition resources through long-distance economic cooperation that the Central and Axis Powers could not match.

The lesson of this narrative is straightforward: war and trade are not exclusive. The same conclusion can be reached in other ways, however. Using panel data from 1950, Martin, Mayer, and Thoenig (2008) have shown that trade had a double effect on the relative frequency of pairwise conflict.More bilateral trade reduced this frequency, but more multilateral trade raised it. Over time both multilateral and bilateral openness increased on average, but the net effect was positive. For any country pair separated by less than 1,000 kilometers, globalization from 1970 to 2000 raised the probability of conflict by one fifth (from 3.7 to 4.5 percent). On the interpretation of Martin and his co-authors, the same forces that widened the scope of multilateral trade made bilateral war less costly. As longdistance trade costs fell, open economies could increasingly wage war against some (most likely close by), while continuing to reap the gains from trade with others (at a distance). This phenomenon might also offer a key to the weaknesses of economic sanctions identified by Davis and Engerman (2003, 2006)."

--- The Frequency of Wars / Mark Harrison, Nikolaus Wolf
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