GTN

Global Trade Negotiations.

Trade and Conflict Last Updated April 2005

An Introduction

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s trade barriers are aggressively torn down through the WTO, and regional/bilateral trade agreements, the question arises as to what the impact of globalization has been and will be for the developing world. Traditionally, free trade analyses have focused on economic impacts – such as labor displacement, income inequality, resource exploitation, and national economic growth. But it is increasingly difficult to ignore the political ramifications of many of these economic impacts. This series on Trade and Conflict will examine the political economy of violence and how globalization has factored into recent international and internal armed conflicts. This first report will explicate the theoretical underpinnings of trade and conflict, and lay out the debate on how free trade affects conflict. The subsequent reports will be case studies of countries. These studies will closely examine the linkages between violent conflict and trade, particularly trade in natural resources. The series will also include information on the indicators commonly used to research the relationship between trade and conflict, as well as a scrutiny of how trade policies pursued by the WTO and major industrialized countries impact such conflicts. The Main Debate: does trade reduce or exacerbate conflict? There has been a considerable amount of formal research on the impact that economic liberalism (mainly, free trade and global economic inter-dependence) has on conflict. Meanwhile, members of international organizations, governments, and civil society groups have formed distinct opinions, which they actively promote. This has resulted in a complex, multifaceted debate. The debate has become particularly contentious as the pace of liberalization has sped up in recent years and the threat of violent conflict in developing countries has persisted. The classic neo-liberal argument is that increased international trade makes conflict too costly, and thus countries that participate in trade are more likely to be peaceful (Polachek, Robst et al. 1999). This applies to both international and internal conflicts. International conflicts are avoided because they disrupt trade relations and threaten the economic growth countries experience from trade. Internal conflicts are also avoided because international trade requires good governance and peace. In addition, trade brings economic growth and improved living conditions within the country, reducing the grievances that are triggers for domestic conflict. A related argument is that economic liberalism actually encourages democratization and peace. In the field of political science, it is widely accepted that democracies do not fight other democracies (Russet 1993). The crux of the neo-liberal argument is a straight-forward expected utility calculation. If a country expects greater welfare gains from trade than from war, it will choose to maintain peaceful relationships. On the level of individuals within a country, the same logic is applied. If a person expects to make more money working than from fighting, he or she will choose to work rather than take up arms (Polachek 1980). The

GTN decision to go to war or take up arms is considered to be irrational, and therefore impervious to rational economic or political solutions. Unfortunately, this neat explanation makes a number of inaccurate assumptions. First, it assumes that the benefits of international trade are evenly spread throughout society. Second, it assumes that trade in all kinds of goods has the same pacifying effect on countries. Lastly, it assumes that conflict is all cost and no gain. Alternative arguments concerning trade and conflict set out to address each of these assumptions (Schneider, Barbieri et al. 2003). The closest off-shoot of the neo-liberal argument is the postulation that trade reduces conflict, but only when trade is symmetrical between countries or when countries trade in certain kinds of goods. For example, when two countries are equally dependent on one another, they are unlikely to succumb to the use of force to resolve conflict. Since both countries face the same high cost of violent conflict, they will both opt for peace to preserve their mutually beneficial trade relationship (Dorussen 2004). But if the trade relationship and its benefits are unevenly distributed, trade may actually trigger violent conflict. The theory that asymmetrical trade exacerbates tensions between countries originates in dependency theory from the 1960s (Schneider, Barbieri et al. 2003). Dependency theorists argue that trade patterns between “core” (industrialized) countries and “periphery” (unindustrialized) countries deepen existing inequalities and provoke international conflict. Periphery countries export raw materials to core countries, which in turn convert the raw materials into value-added goods to sell back to the periphery. As core countries sell increasingly valuable goods, periphery countries become stuck in a parasitic trade relationship. They end up buying back the product of their natural resources for far more than they sold them, without any opportunity to develop their own industrial capabilities. This inequitable trade relationship has the potential to spark conflict (Barbieri 2002). For example, core countries often resort to force to protect large investments in periphery countries against nationalization and breakdown of governance, e.g. U.S. interventions in Latin America to protect agricultural and mining investments (Dorussen 2004). This theory is further refined when the impact of specific products on the state of peace or conflict is considered. In calculating the cost of conflict, it matters how easily goods, suppliers, and consumers can be substituted in times of conflict. Trade in goods that rely on the maintenance of the trade relationship in question will have a more pacifying effect than trade in goods that can be sold in a number of alternative markets and that experience significantly less disruption during violent conflict (Dorussen 2004). The sunk cost of infrastructure, means of production, and human capital also affect how much a country suffers from the disruption of normal trade, with goods requiring sophisticated infrastructure, technology, and skilled labor having the most pacifying effect. In order to determine what kind of trade impacts violent conflict, it is necessary to disaggregate trade data into sectors when studying trade and conflict (Dorussen 2004). Disaggregating trade data into sectors captures the difference between goods with high versus low opportunity costs, goods that require high skilled labor versus low skilled labor, goods that are high-tech versus low-tech, and goods whose gains are highly appropriable versus those that are hard to loot. The many sectors defined in the literature are: food and related products, clothing and apparel, primary chemical and metal industries and building suppliers, high-skilled labor manufacturing, and nonmanufacturing primary goods. Sometimes the classification can become complicated. For example, nonmanufacturing primary goods usually have high opportunity costs because it is difficult to reallocate the means of production to another good, and in the case of oil and minerals, the sunk cost of infrastructure is

GTN great. From an opportunity cost perspective, this would lead one to expect that trade in primary commodities would have a pacifying effect since conflict would extremely costly. But at the same time, these goods do not require a highly skilled labor force and the gains can be appropriated through looting. So if one is considering conflict as a function of economic opportunity, then non-manufactured goods do not necessarily have a pacifying effect (Dorussen 2004). One particularly interesting finding is that countries that trade in natural resources are more prone to internal conflict than countries that trade in manufactured goods, with the risk of conflict increasing when a country relies on natural resources for 30% or more of its GDP (Dorussen 2004). The problem with this high-level of dependence on natural resources is two-fold: first, the inequitable manner in which natural resources are extracted and traded tends to create tensions between the economic elite and the local population; and second, natural resources provide ripe economic opportunities for repressive governments and violent rebels to finance themselves during conflict episodes (Keen 1998). The expected utility model employed by neo-liberals provides a good explanation for how trade has diminished the number of international conflicts in recent times. Yet, the developing world is still mired in intense internal conflicts. To account for these cases, it is necessary to re-examine the expected utility model. Clearly there is either some other non-economic motivation behind such conflicts, or there is some economic benefit of war not captured by the classic neo-liberal argument. Previous political science studies on civil war tended to focus on political ideology, ethnic hatreds, and social demands as the core causes of conflict. Economic literature has taken a different angle. One of the most prominent economic theories on civil wars is that conflict is triggered by “greed” or the desire for self-enrichment, rather than socio-political “grievances” (Collier 1999). The possibility that economic agendas can cause conflict is hugely important to consider since it could impact the kinds of policy interventions the international community uses to promote peace (Collier 1999). The greed thesis posits that there are myriad ways for actors involved in conflict to not only self-finance but to profit from conflict. This provides a motivation for taking up arms, and it can even protract or expand conflicts by making peace a relatively unattractive option for those involved in the war economy. The desire for economic self-enrichment of a few actors has devastating impacts on the majority of the populace. But as long as war is more lucrative than peace, armed actors have no incentive to resolve the conflict (Collier and Hoeffler 2001). In fact, many researchers have observed that enemies will actually collude to prolong the conflict since neither side is interested in returning to peace (Keen 1998). To get a sense for how much the economic of civil war motivate conflict it is important to lay out exactly how conflict can actually be profitable for those involved. Natural Resources and Civil War Even if a civil war was initiated because of long-standing socio-political grievances, economists still argue that lucrative natural resources come to play an integral role in conflict. In some cases, it appears that conflict is primarily motivated by a desire to gain control over these resources while in others seems that natural resources serve to prolong or intensify an ideologically or grievance motivated conflict (Renner 2002). As mentioned above, natural resources themselves spark conflict because the costs and benefits of extracting and trading are highly inequitable. While a tiny economic elite profit from extracting and selling natural resources, the cost is shouldered by the local population. The locals are rarely consulted about extraction projects and are frequently displaced by force during such projects. Furthermore, as the

GTN demand for natural resources increases, the intensity of disputes over ownership also increases. These tensions can cause isolated skirmishes or trigger massive secessionist movements (Renner 2002). To be clear, the violence in civil wars does not just come from rebel movements. Top-down violence is also common in countries that depend heavily on natural resources (Keen 1998). The most important factor in top-down violence is the weakness of state governance. In order for the weak state to maintain control over valuable resources, it must turn to violence and repression. Also, its weakness limits its ability to fund the military force behind its repression. Thus, the ability to self-finance becomes crucial in maintaining control. Soldiers quickly learn that they can earn plenty by exploiting natural resources and the civilian economy (Keen 1998). It is a great irony that many of the states engaged in self-financed conflicts are actually congratulated by international finance institutions such as the International Monetary Fund (IMF) for their fiscal responsibility, while soldiers use looting and violence to sustain themselves (Keen 2002-2003). In the case of bottom-up violence, or violence instigated by the populace, the key factors are social and economic exclusion, the absence of political organization, and the break-down of the legal system (Keen 1998). While there are certainly long-term goals that people pursue through revolution, many participants in bottom-up violence are trying to satisfy much more short-term goals. Unemployment, abject poverty, and the absence of any social welfare can make joining a rebel movement an appealing option for the poor. Without political organization, it seems unlikely that long-term grievances will ever be addressed. This lack of revolutionary coordination or discipline leads to prolonged, decentralized violence with armed actors focused primarily on their economic gain. And finally, without a functioning legal system, the sense of impunity for violent acts fuels the conflict. Actions that would be considered illegal during peacetime are deemed “justifiable” during war (Renner 2002). Natural resources can be harnessed by both corrupt governments and rebels to further their economic agendas. The resources most commonly associated with conflict fall into two categories: lootable/taxable (diamonds, illegal drugs, timber) and non-renewable (oil, minerals, natural gas) (Renner 2002). When armed actors have access to lootable resources, they can make steep profits by pillaging stocks, engaging in illegal extraction practices, levying a ‘tax’ on producers, and selling the resources on the black market (Keen 1998). Rebel illegal extraction practices include granting illegal concessions to foreign companies, forcing civilians and/or combatants to work, and extracting ransoms to allow the passage of goods. Governments can also engage in illegal extraction practices by keeping revenues off the books, awarding concessions through corrupt patronage networks, and using extreme violence to depopulate resource-rich areas (Renner 2002). Non-renewable resources are exploited slightly differently. Because they tend to be harder to extract and require more highly-skilled labor than lootable resources, it is harder to gain directly from the resources. For example, in the case of oil, rebels are unable to extract it directly. Instead, rebels will kidnap employees, obstruct trade routes, and use violence to threaten the companies involved in extracting the oil. Governments benefit by pocketing the revenues from the oil concession, forming paramilitary protection squads, and accepting bribes to protect the foreign company’s investment (Renner 2002). Beyond the exploitation of natural resources, some economic activities are significantly more profitable in times of conflict. Conflict disrupts normal channels of commerce and creates shortages. Governments and rebels can exploit the opportunity that shortages present for their own gain. For example, they can

GTN profit from selling food, trading arms, selling stolen goods, exploiting the poor, felling timber against national and international law, participating in the drug trade, and forming local monopolies through the use of violence (Keen 2002-2003). Alarming Ramifications The ramifications of natural resource war economies have been felt for decades and will continue to cast a long shadow over the growth and development of afflicted countries for years to come. In the case studies, specific conflicts and their impacts will be discussed in depth. But overall, the social, economic, and political stability of these countries has been destroyed. Individual actors may be profiting, but the society as a whole suffers tremendously. Conflict disrupts education, undermines legal institutions, triggers health crises, and damages the country’s prospect for long-term economic growth. The consequences for the population are limitless. Most notable are the impacts on health and poverty. The average life expectancy plummets as disease, crumbing health infrastructure, shortages of trained health professionals, and rising homicide rates ravage the population. With most of the population living in extreme poverty, no one has the resources to invest in education, health, or the rebuilding of social, legal, and political institutions. From the viewpoint of an average citizen, getting involved with the war economy becomes a necessity since legitimate forms of economic survival are undermined by conflict. This means that civilians also get drawn into the conflict even though they would be better off without the violence and exploitation. Worse still, when seemingly senseless acts of violence are examined through the war-economy lens, it becomes apparent that these acts are actually highly motivated by rational economic and political goals. The use of genocide, mass killing, torture, rape, and extreme violence become part of the war economy, helping armed actors finance themselves and establish their dominance. The Impact of Globalization From the medieval wars onward, warriors have used looting, pillaging, and plundering to finance the war and for self-enrichment. What is so different about the resource wars happening today? I argue that globalization has helped make conflict lucrative for armed actors. While making money has always been part of making war, now making money has become the ultimate end. This means that the point is not to win the war, resolve the conflict, and return to peace, but rather to feed and perpetuate the wartime economy. This applies to both sides of the conflict, resulting in a disturbing pattern of cooperative conflict waged at the expense of the rest of the population. In exploiting natural resources, rebels and governments depend on a couple of key factors: open global markets for selling illegally extracted resources, unethical foreign companies willing to buy illegal concessions, bargain with rebels, or cooperate with a corrupt and repressive regime, and a free flow of small arms from other countries. Globalization has made all three of these much easier to come by, as markets are progressively liberalized, non-tariff barriers are struck down, and more and more companies engage in global business. The role that globalization plays in making these resource wars possible must be reconciled with the prevailing belief that trade has a pacifying effect.

GTN Following articles in this series will explore the role of removing tariff and non-tariff barriers, forming investment agreements, and liberalizing financial flows on internal conflicts. Particular attention will be paid to regional and bilateral agreements that often receive much less press and attention than the proceedings of the WTO. The Danger of Over-emphasizing Greed over Grievance It is compelling to consider how economic incentives can create and prolong internal conflicts, but it should not be the only lens through which violence is interpreted. The over-emphasis of greed over grievance factors has changed the way civil war is conceptualized. Most importantly, how policy-makers view the legitimacy and motivation of armed groups will determine which policies they choose in trying to resolve the conflict (Ballentine and Nitzschke 2003) . For example, recent policy solutions have been limited to economic policies that seek to resolve natural resource wars by cutting off the sources of financing that sustain armed actors and encouraging further globalization to make peace relatively more profitable (Keen 2002-2003). Both of these solutions ignore the deep-seeded socio-economic and political grievances that motivate the insurgencies. Despite economists’ arguments that grievances variables have less explanatory power than greed variables, political scientists still maintain that inequality is a major driving factor in modern civil wars. Without addressing income inequality, political repression, and ancient ethnic/religious tensions, economic policies will be unable to enact lasting peace. Reducing the conflict to economic terms almost guarantees that any peace agreement will be vulnerable to “peace spoilers” who stand to gain enormous windfalls from cheating. Instead, economic policies must be combined with a wider set of inducements that address socio-economic and political grievances (Ballentine and Nitzschke 2003). Part of the reason that the greed hypothesis captures the attention of researchers and policy-makers is that econometric analyses has shown that greed factors do a better job of explaining why some countries experience violent internal conflict than grievance factors. It seems grievances are just used by armed actors as public rhetoric to justify extreme violence and gain sympathy, but at the heart of the conflict, people are really just pursuing their rational self-interest by exploiting economic opportunities. However, it is not inconsequential how these factors are defined by researchers. How does one measure greed and grievance, and how does that impact the study? In a subsequent article, the indicators will be explored in depth to show the controversy behind the way these factors are defined and what data is used. The perspective that economists have provided into the causes of violent conflict is invaluable. But it is important that grave socio-economic and political grievances are not eclipsed by the idea of rational selfinterest. As globalization has shown, life rarely follows the neat logic of economic models. This only strengthens to argument for examining what the relationship between free trade and violent conflict. No one can seriously discuss free trade without admitting that there are both winners and losers in the global economy. Those who have not been able to reap the benefits of international trade, or those who are worse off, have valid grievances ranging from the inequitable distribution of wealth to the violent seizure of land by the government and foreign corporations. These grievances must be added to the calculus of how globalization has changed the political economy of developing countries. ■

GTN Works Consulted Ballentine, K. and H. Nitzschke (2003). "Beyond Greed and Grievance: Policy Lessons from Studies in the Political Economy of Armed Conflict." International Peace Academy: Program on Economic Agendas in Civil Wars. Barbieri, K. (2002). The Liberal Illusion: Does trade promote peace? Ann Arbor, University of Michigan Press. Collier, P. (1999). Doing Well out of War. Conference on Economic Agendas in Civil Wars, London, The World Bank. Collier, P. and A. Hoeffler (2001). "Greed and Grievance in Civil War." World Bank. Dorussen, H. (2004). Heterogeneous Trade Interests and Conflict: It matters what you trade with whom. SGIR/PanEuropean Conference on International Relations, The Hague. Keen, D. (1998). The Economic Functions of Violence in Civil Wars. Oxford, Oxford University Press. Keen, D. (2002-2003). Conflict, Trade and Economic Agendas, Committee for Conflict Transformation Support. 2005. Polachek, S. W. (1980). "Conflict and Trade." Journal of Conflict Resolution, 24: 55-78. Polachek, S. W., J. Robst, et al. (1999). "Liberalism and Interdependence: Extending the Trade-Conflict Model." Journal of Peace Research, 36(4): 405-480. Renner, M. (2002). The Anatomy of Resource Wars. Danvers, The Worldwatch Institute. Russet, B. M. (1993). Grasping the Democratic Peace: Principles for a Post-Cold War World. Princeton, Princeton University Press. Schneider, G., K. Barbieri, et al., Eds. (2003). Globalization and Armed Conflict. Lanham, Rowman & Littlefield Publishers, Inc.

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