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10/3/2010

Economics of Conflict,
War, and Peace

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w.StoneGardenEconomics.com
Session 9.1
Capital: Major conventional weapons
-- Overview

-- Brauer/Williamson model

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 1

Major conventional weapons: trade (1)


World arms transfer
volume, 1950-2008, in
constant 1990 USD
million; trend indicator
value (TIVs)

Source: SIPRI arms


transfers database

Note: TIVs are not


financial values.

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 2

Major conventional weapons: trade (2)

Brauer in Sandler/Hartley, 2007, p. 979.

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 3

1
10/3/2010

Major conventional weapons: production

Brauer in Sandler/Hartley, 2007, p. 986.

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 4

Background (1)

 Two “stylized” facts


 First expansion, then decline of the number of
states that produce/export conventional arms
(whole-units) from 1950s to 2000s
 Transnationalization of conventional arms
production, esp. of component production;
integration into transnationalized supply chains

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 5

Background (2)

Exporters 50s 60s 70s 80s 90s 00s


(whole-units)

High 20 25 27 30 32 26
income
co e [32]]
[3 [[26]
6]
states
Non-high 9 23 38 37 27 21
income [43] [39]
states
Brauer in Sandler/Hartley, 2007, p. 985.

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 6

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10/3/2010

What is to be explained?

 Addition of states as arms producers/exporters


(whole-units), esp. of non-high income states
 Drop-off of states as arms producers/exporters
(whole-units), esp. of non-high income states
 Transnationalization of arms production, esp. of
components t
 Integration of non-high income and some high-
income states into transnationalized arms
production and component supply chain
 Integrate fall of post-Cold War demand and
continuous unit-cost increase (Dunne/Surry:
“structural disarmament”) into the model

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 7

A heuristic model (1)


T – technical efficiency
$ ΔT – difference between make or buy
(valuation)

High cost differential => don’t make in-


state but buy from out-of-state market

ΔT
k (asset
k* k** specificity)

High agency cost High agency cost differential


ΔC
differential => => in-state agency cost <
in-state agency out-of-state agency cost
cost > out-of- ΔA (note: k > k*)
state agency cost A – agency efficiency
(note: k < k*) ΔA – difference between make or buy
J. Brauer; Fall 2010 Economics of Conflict, War, and Peace
Chulalongkorn University Session 9.1 8

A heuristic model (2)


$ There is a value of k** above
which in-state production
(valuation)

is at an advantage relative to
out-of-state procurement

ΔT
k (asset
k** specificity)
k < k** k > k**
ΔC
ΔC > 0 ΔC < 0

ΔA
There is a value of k** below which in-state production
is at a disadvantage relative to out-of-state procurement
J. Brauer; Fall 2010 Economics of Conflict, War, and Peace
Chulalongkorn University Session 9.1 9

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10/3/2010

A heuristic model (3)


ΔT is the difference in technical efficiency between
$ in-state and out-of-state production; so, even if in-state
production becomes 5% more efficient but out-of-state
(valuation)

production becomes 10% more efficient, ΔT will still


shift upward to ΔT’ …

ΔT’
ΔT
k (asset
k* k** specificity)
ΔC’
ΔC

ΔA

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 10

A heuristic model (4)


ΔT is the difference in technical efficiency between
$
in-state and out-of-state production; so, even if in-state
production becomes 5% more efficient but out-of-state
(valuation)

production becomes 10% more efficient, ΔT will still


shift upward to ΔT’ …

D ΔT’
ΔT
k (asset
k* k** k*** specificity)
ΔC’
ΔC

ΔA

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 11

Playing with the model

 If ΔT rises to ΔT’, k** shifts right to k***


 more contracting out (buying on the intern’l arms market)
 If ΔT falls, k** shifts left
 less contracting out (buying more from the home market)
 If ΔA rises,
rises k**
k shifts right
 if the difference in agency cost rises [in our disfavor]
 more contracting out (buying fewer home-made items)
 If ΔA falls, k** shifts left
 less contracting out (buying fewer foreign items)
 If both ΔT and ΔA change, the move of k** depends
on the relative shifts (and directions) of ΔT and ΔA
J. Brauer; Fall 2010 Economics of Conflict, War, and Peace
Chulalongkorn University Session 9.1 12

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10/3/2010

An extreme case
$
(valuation)

ΔT
k (asset
k*** k* k** specificity)

ΔC

ΔA

ΔA’ ΔC’

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 13

Some implications (1)


 Prior to the end of the Cold War (ΔA constant), ΔT shifted
downward as states “developed” and k** shifted leftward,
resulting in more in-state arms production
 Thus, high-income states producing/exporting whole-units went
from n=20 to n=30 and non-high income states from n=9 to n=37
 With the end of the Cold War, agency costs of contracting-out
contracting out
have fallen (ΔA shifts upward) and the cost of technical
inefficiency (ΔT constant) has become more apparent, leading
some states to drop out of whole-unit production (k** shifts
rightward)
 Also, post-Cold War demand drop-off leads to smaller production
runs (higher T and, probably, higher ΔT’s)

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 14

Some implications (2)


 In addition, technical requirements push T upward and, probably,
the ΔT’s, disadvantaging some states
 This might explain why post-Cold War we seem to see some
states dropping out of whole-unit production and more states
engaged in transnationalized component production
 There is capacity for efficient component production but not
whole-unit production and there is willingness (ΔA) to transfer
component technology but not whole-unit technology (battles
over offsets-technologies)
 The model also suggest that states that refuse to integrate into
the transnationalized component supply-chain and that insist on
whole-unit production might find themselves carrying unusually
high defense production/procurement burdens

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 15

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10/3/2010

Conclusion
 Heuristically, the model makes some sense
 It suggests that for the industry as a whole, agency efficiency,
technical efficiency, and asset specificity drive decisionmaking
behavior
 The challenge now is to work up some real-world case studies and
to apply/refine the model; convert from post-hoc to make predictions

J. Brauer; Fall 2010 Economics of Conflict, War, and Peace


Chulalongkorn University Session 9.1 16

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