International Security
Economic aspects

The linkages between economic and security issues cannot be ignored by researchers, even though economic policy and security policy may be formulated along 'separate tracks'. This was the consensus of a CEPR workshop on the 'Economic Aspects of International Security' held on June 2. The meeting was organized by Alasdair Smith, Co-Director of CEPR's International Trade programme, and was one of a series financed by a grant to the Centre from the John D. and Catherine T. MacArthur Foundation. Participants at the June workshop included civil servants and researchers in international relations as well as economists.

During the last decade international trade has remained relatively free of the restrictions which were widespread in the 1920s and 1930s. In the workshop's first paper, entitled 'Games Countries Play', Victor Norman (Norwegian School of Economics and Business Administration) discussed the strategic aspects of trade policy in an attempt to explain why free trade seemed so robust. Norman noted that economists themselves, in their analyses of rent-seeking, the political economy of protection, trade policy games and trade under imperfect competition, have outlined the strong incentives for governments to adopt protectionist policies. Such policies may aid labour-intensive industries, improve the allocation of resources in imperfectly competitive industries, and appropriate the rents from high-technology sectors. Norman argued that in order to understand protectionism it was necessary to clarify the nature of the policy games played by governments.

Protectionism may be introduced in order to influence the distribution of income. There is evidence that this is an important motivation: there seems to be less protectionist pressure in countries with well-developed, redistributive tax systems. But the main beneficiaries of protection are the owners of resources which are 'tied' to uses in protected sectors and it was unlikely, according to Norman, that such individuals are sufficiently numerous for their interests to be politically decisive.

Second, governments may be concerned to maintain an efficient private sector. Incentives are necessary in order to maintain economic efficiency, and governments need to make credible commitments not to rescue every industry which is subject to competitive pressure (nor indeed to pour funds into every high- technology project which comes along). Trade agreements with other countries may provide the best available means by which to make such a commitment, even if ideally governments would prefer a freer and more interventionist hand.

Third, Norman argued, trade policy has to be seen in the context of the other games that governments play - against firms and unions in targeted industries, against firms and workers in other industries, and against other governments. Governments faced by other governments' protectionist policies will be forced by their own domestic interest groups to retaliate; and the credibility of this threat to retaliate may suffice to deter protectionism.

In the discussion of Norman's paper, some workshop participants queried the assumption of economic rationality as the basis of government action. There was also discussion of how Norman's analysis could accommodate other protectionist measures such as subsidies and non-tariff barriers, which are inadequately covered by international agreements. In some circumstances governments may wish to use less obvious protectionist measures, but there may also be occasions when governments prefer politically visible but economically ineffective measures in order to 'buy off' interest groups.

The global accumulation of armaments has been a central concern in discussions of international security. Recent economic analyses of the international coordination of macroeconomic policies touch on many of the same issues: questions of time consistency and credibility, and the importance of 'rules' which sustain cooperative behaviour. In his paper, 'Perfect Equilibrium in a Model of Competitive Arms Accumulation', Rick van der Ploeg (LSE and CEPR) explored these parallels. Van der Ploeg's model was principally concerned with the gains from agreements to limit arms accumulation between two countries engaged in an arms race which imposes economic costs. In the absence of agreement to limit arms expenditure, the level of arms accumulation depends, van der Ploeg argued, on the nature of the commitments made by the governments. Governments decide upon paths of arms accumulation which are independent of the observed accumulation of the rival government: this is termed an 'open- loop Nash equilibrium'.

But there are many other notions of equilibrium which are conceivable. In the 'perfect Nash equilibrium', for example, governments make their policy conditional on the behaviour of the rival, and can make threats to influence the rival, but these threats must be 'credible', i.e. the rival must believe that they might be implemented. In general, the perfect Nash equilibrium has a lower rate of arms accumulation, because each country sees the effect that its own arms expenditure has on its rival's. This result suggests that earlier models which were based on the open-loop Nash equilibrium may have overestimated the costs of the arms race. The model suggests that it is desirable for countries to monitor each other's arms stocks and, more generally, to maximize the information available to each country about the other's actions. Van der Ploeg also described a variant of this model which allowed for asymmetries between East and West, with arms expenditure in the West, for example, financed by distortionary taxation. He went on to discuss other possible economic differences, such as the conventional contrast between excess supply in the West and excess demand in the East. This could imply that arms expenditure in the West had positive employment effects, while in the East it worsened the shortage of goods.

In the discussion of the paper, several workshop participants questioned these economic asymmetries; the arms race, it was argued, imposed resource costs on Western economies too. Van der Ploeg's analysis also stimulated considerable discussion of the importance of monitoring, its implication that countries should make monitoring facilities available, and the absence in the model of disagreement between the Soviet Union and the United States about their actual levels of armaments. It was also suggested that it may be more important to monitor investment in future arms-production capability than current stocks of arms.

There are clear and important links between economic security and national security, yet international discussions of the two issues follow separate tracks, and few attempts are made to exploit the linkages between them. Ron Smith (Birkbeck College, London) explored this paradox in his paper 'Linkages Between Economic and Security Policy Coordination'. Wars, military preparations and embargoes had obvious economic effects, Smith observed. Economic phenomena such as trade in strategically important goods had equally clear implications for national security. Yet even when such linkages are recognized, there is a tendency for experts in the respective fields to see only one set of linkages and to ignore possible feedbacks, Smith argued. The economist may take account of the economic effects of military expenditure, but will often ignore the effects economic events on security.

In principle, optimal policy coordination among countries should be all-embracing, and take full account of all these links. Smith argued that, nevertheless, 'separate tracking' may be preferable in practice. Policy formulation can be partitioned into manageable segments, and progress can be made in some areas unhindered by problems in others. Speed of response to crisis is another argument for separate tracking. But the real linkages between economics and security should still be explored and analysed.

Smith's paper provoked a very lively discussion. There was general, though not unanimous, agreement with Smith's central argument that linkages were important but that separate tracking should be the norm. One participant observed that in discussions on the European Community, economists typically assumed that political considerations were decisive, while political experts assumed that economic considerations must be dominant. Among the linkages discussed were the role of defence asymmetries in US- Japanese economic relations, and the interaction of defence and economic considerations in research and development policies. One participant argued that while it was relatively common for economic considerations to be subordinated to defence and security needs, the converse was rarely the case. Another participant, however, cited the handling of the Polish debt crisis as an example of the primacy of economic considerations.

The Latin American external debt crisis has subjected the international financial system to severe strains and has had serious political as well as economic consequences in Latin America itself. There have been many proposals to contain the crisis, emanating from the commercial banks, the US Treasury and from the Latin American countries themselves. In the final paper of the workshop Esperanza Duran (Royal Institute of International Affairs) analysed the failure of the debtor countries to adopt coordinated policies.

Some of the Latin American countries' demands, she argued, were unrealistic, but the main reason for their failure to coordinate policy was the divergence of their interests, especially after the launching of the Baker initiative by the United States. Nevertheless, the 'Cartagena group', the forum of Latin American debtor countries, has had some influence on the search for a long-run solution to the debt problem.

Discussion of Duran's paper focussed on the desirability of spreading the burden of the debt crisis between borrowers and lenders. Participants also identified problems arising from the inflexibility of many of the Latin American economies, from the difficulties they experienced in financing the public sector, from capital flight and from corruption. The view was expressed that the gains from economic reform were of much greater potential significance than the debts, but that solutions to the debt problem would only be acceptable to the lenders if the gains were not to be squandered by bad policies.

The meeting concluded with a general discussion of research priorities in the area of economics and security. The design of the international economic system after the decline of US hegemony was suggested as a promising subject for research. Participants disagreed on the desirability of putting effort into definition of the general area. There was, however, a consensus that the links between economics and security identified at the workshop could best be tackled by experts from different backgrounds but with related skills.