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March 17, 2014

Crimea: Then I'll Fight You For It

Writing about web page http://www.bbc.co.uk/news/world-europe-26606097

In an old English story, a tramp was asleep in the grass by a lane. The landowner woke him roughly:

Get off my land!

The tramp replied:

How come it's your land?

The landowner:

My ancestors fought for it!

The tramp:

Then I'll fight you for it.

This story offers a dubious principle and an excellent moral. The dubious principle is that property is theft: no one's claim on property is more legitimate than anyone else's. The excellent moral is that if we lived by that principle our's would be a world of chronic insecurity and unremitting threats in which no one could sleep peacefully.

In that light, here are some facts about Russia.

  • Russia's territory covers more of the globe than any other country: more than 17 million square kilometres.
  • Russia's land border is the second longest in the world: more than 20,000 kilometres, shared with 16 sovereign neighbours.
  • Between 1870 and 2001, the Correlates of War dataset on Militarized Interstate Disputes counts 3,168 bilateral conflicts involving the show or use of force. Every dispute involves a country pair, and the same dataset also registers the country that originated the dispute. Over thirteen decades Russia (the USSR from 1917 to 1991) originated 219 disputes, more than any other country. Note, by the way, that this is not about capitalism and communism; Russia's pole position is the same both before and after the Revolution. Also-rans include the United States (in second place with 161 conflicts) China (third with 151), the UK (fourth with 119), and Iran (fifth with 112). (My more patriotic readers will want to know where Germany stands: lagging behind at sixth with 102). These results are reported by Harrison and Wolf (2012, p. 1064, footnote 29).

Why has Russia achieved this preeminent position in the history of conflict? Here are three reasons.

  • Russia is large, and small countries have little weight to throw around.
  • Russia has many neighbours, and therefore many opportunities to engage in bilateral disputes.
  • Russia's regime has always been authoritarian, with the exception of the few years either side of the collapse of communism, when Russia's borders were able to change relatively peacefully. It is an established empirical regularity that authoritarianism predisposes a state to engage in conflict (the literature is surveyed and also qualified by Harrison and Wolf).

In most of European history, borders have changed through violence. The Eurasian landmass is for the most part a vast plain, with mountains only on the margins, and without natural frontiers. The absence of natural defences other than a few rivers and wetlands has allowed armies to roam freely back and forth across vast distances, killing as they go. European sovereignty was based on possession, and sovereignty changed hands when rivals fought for it.

The stability of borders is a tremendously important condition for economic development. Unstable borders engender conflict, raiding, and killing. Stable borders can be opened for trade and the movement of merchandise and merchants. The goods, cultural values, skills, and talents that flow across stable borders enrich both sides. Stable borders also allow the development of democracy, as argued by Douglas M. Gibler (2007), whereas territorial disputes prevent it.

Russia has suffered terribly from the territorial disputes of past centuries. When the Soviet Union broke up, Russia's new borders were drawn for the most part peacefully. This was a tremendously hopeful omen for Russia's future. Particularly important were the assurances given to Ukraine in 1994: Ukraine gave up its nuclear weapons and in return the US, UK, and Russia guaranteed Ukraine's territorial integrity. It is all the more shocking that Russia has created an opportunity, which it is now seizing, to revise its border with Ukraine unilaterally and by force.

That some Russian nationalists now regret the 1994 agreement is completely irrelevant: Russia gave its word, and so did we.

In the present crisis the issue that should take precedence over all others is the integrity of European borders and the process of adjusting them lawfully and without violence. That should come before everything else, including rights of self-determination and the political composition of this or that government. No good will come of Russia's violation. We all stand to lose by it. But anyone with knowledge of Russia's history knows that Russia, of all countries, has most to lose by returning Europe to the poisoned era of conflicted borders and perpetual insecurity.

References

Gibler, Douglas M. 2007. Bordering on Peace: Democracy, Territorial Issues, and Conflict. International Studies Quarterly 51:3, pp. 509-532.

Harrison, Mark, and Nikolaus Wolf. 2012. The Frequency of Wars. Economic History Review 65:3, pp. 1055-1076. Repec handle: http://ideas.repec.org/a/bla/ehsrev/v65y2012i3p1055-1076.html.


March 05, 2014

Putin: King in Russia or Emperor of all the Russias?

Writing about web page http://www.maxkeiser.com/2014/03/liam-halligan-on-bbc-radio-4-idea-of-sanctioning-russia-pretty-mad/

After recent events in Crimea several commentators have asked for more understanding of Russia's position -- among them, for example, my old friend Liam Halligan. This is particularly important because, if we do not understand Russia, we will be unable to predict the consequences of our own actions. Because this will be a long blog, here's the short version:

  • Does Putin want primarily to be King in Russia or Emperor of All the Russias? We don't know, and it will make a big difference.
  • If Putin wants to be King, the result of his invasion of Ukraine will be to consolidate his rule, at least for a while, but any further implications are limited.
  • If Putin wants to be Emperor, a protracted and dangerous international conflict has already begun; only resolute deterrence will avert tragedy.

We need better to understand Russia, but Russia is not easy to understand. Why? The most important reason is that Russia's politics lack transparency and accountability. Consider the following. The Russian invasion was clearly well planned, yet took the world by surprise. It was undertaken despite a near total absence of popular support; according to a VTsIOM poll published on 24 February[correction: link updated, 8 March 2014], only 15 percent of Russians endorsed military intervention in Ukraine, with 73 percent opposed. Although there was no popular enthusiasm for military intervention, Russia's parliamentarians mandated it unanimously. Although there would appear to be clear blue water between the administration and public opinion, the administration's action has met with little or no popular reaction.

Russia, in short, is free of the public agonizing that signals a vibrant democracy. Nothing could show more clearly that Moscow's decisions are made in a secretive, unaccountable way, so that ordinary people expect to have no voice and remain passive.

Two related factors only add to the difficulty we face in trying to interpret Russia's behaviour. One is that the Kremlin understands the value of surprise. The sudden and unexpected character of the Russian action in Crimea deprived Russia's opponents of the chance to react promptly in a calculated way. The result has been confusion and indecision in Kiev and western capitals. While Ukrainian and Western leaders have pondered their best responses, Moscow has consolidated its gains. The result of this is an analyst's paradox. A capacity for unpredictable action is valuable, but can only be maintained by preventing adversaries from understanding how Russia will decide its next move, and therefore from predicting it. Thus, Russia's leaders must continue to behave unpredictably, avoiding any clear or systematic pattern.

A second related factor stems from the fact that, while Russia's action in Crimea was extremely successful in exploiting surprise to achieve a bloodless coup, the bloodless nature of the intervention could not have been predicted. Any panicky self-defence by Ukrainian troops or (say) Tatar civilians would have led to a bloodbath. One must suppose that Putin and his cabinet anticipated this possibility, but discounted it and went ahead regardless. As things turned out, the risk of bloodshed was not realized, but this was just lucky. In other words, Russia's leaders were prepared to take a very substantial risk. A propensity for risky behaviour is characteristic of rulers that have a great deal at stake but also fear that time is running out: the option of wait-and-see has low value for them, or is seen as also highly risky, so they act now despite the risks.

What is at stake for Russia in Ukraine that is of such value? What is Russia's action designed to achieve? Here I see two possibilities, and the opaque, unaccountable nature of Russia's politics makes it hard to discern which is the dominant factor.

I take it for granted that Russia's action in the Crimea was designed to help bring about a lasting change in the balance of forces. I cannot see that any lesser objective would justify invading a sovereign neighbour whose borders are guaranteed by two other nuclear powers (the US and UK, the third being Russia itself). But which hostile forces was the Russian action designed to counter? Does Putin mean to change the balance of forces within Russia or that in the world beyond Russia? Related to this, is Putin content to be King in Russia more or less as it is today, or does he mean to become the new Emperor of All the Russias?

Explanatory note. "All the Russias" means Great Russia (Russia proper) plus Little Russia (the Ukraine) plus White Russia (Belarus). All the Russias would be a smaller territory than the old Russian Empire (which extended to Poland, Finland, the Baltic, the Caucasus, and Central Asia) and also smaller than the Soviet Union (which lost Poland and Finland), but it would reunite all the Slavic nationalities under one authority.

There is a case for thinking that Putin just wants to be King, and his primary objective is to offset potential domestic opposition. Among Russians, his legitimacy rests on a narrative of Russia, weakened by the collapse of the Soviet Union, plundered by domestic and foreign thieves, and encircled by enemies at her borders. When Putin's position at home is weakened by stories of election-stealing or corruption, he portrays his opponents as fraudsters and agents of foreign powers and he deters many critics by putting a few of the more important out of circulation. His narrative has been sustained by the turmoil of Ukraine's unfinished transition from communism and by worsening relations with the West. On this interpretation, Putin's goal in Ukraine has been to stoke international tension for a while and so change the balance of forces domestically, within Russia. He has used the Ukrainian events to teach Russians that Ukraine's movement is not "anti-corruption" or "pro-democracy" or "pro-Europe" but "anti-Russia." And anyone in Russia who campaigns against corruption or vote-rigging is now vulnerable to proscription as anti-Russian.

If it is Putin's strategy to weaken domestic opponents and so shift the domestic balance of forces in his favour, then it is already largely successful. All that is required is for the West to put up a show of resistance, and Putin will have achieved his objective, which is to confirm that Russia is embattled and he is the Russians' only defender. He does not need a war to prove it. He will take no more risks, and he will stop here. It's hard to say how long the effects will last; they might be relatively short lived. As for Crimea, the outcome can be some messy compromise that will poison Ukrainian politics and store up future conflict, which will also serve Putin's domestic purposes.

Alternatively, and much more seriously, Putin's final objective may be to weaken external adversaries, and so to shift the balance of forces in Europe. To do this permanently would mean to redraw frontiers by creating a new Empire of All the Russias with a cordon sanitaire of neutralized states on its borders. A first step is to expose the powerlessness of the EU, to divide Europe from the US, and so to divide NATO. But in this case he has only just begun. He will continue to work to subordinate Ukraine and Belarus in a Eurasian Union, while isolating and neutralizing all Russia's less compliant neighbours, which include Georgia, Poland and the Baltic states. If that is Putin's grand project, it is probably shared by others around him.

If Putin wants to be Emperor, it is hard to see how confrontation can be avoided at some point. If Europe and NATO signal accommodation, for example, and express only token resistance to the Russian action in Crimea, then Putin will drive on towards his ultimate goal by undertaking other adventures, perhaps by going deeper into Ukraine or by setting out to humiliate other neighbours. On the other hand, to the extent that Europe and NATO show unity and put up resistance, Putin's objective will become more distant and, because time is not on his side, he will be willing to take more risks to achieve it. Only resolute deterrence will prevent violence and tragedy.

As I see it the immediate policy implications are limited. In 1994 Britain guaranteed the security of Ukraine's borders. In return, Ukraine gave up its nuclear weapons. Whatever Russia's motivation for breaking its word, we cannot honourably walk away from our own guarantee. There are many steps that Britain, Europe, and NATO should now take, that fall well short of destabilizing military intervention. Most importantly, we should take them together.

It troubles me, however, that we do not know how Russia will respond. If Putin's objective is to affect the domestic balance of forces, nothing much more will follow, except that his regime will be consolidated for a while. If his objective is to redraw Europe's boundaries, then a game has begun with many unpredictable and dangerous moves in store.


February 24, 2014

Kiev, Europe's Dangerous Crossroads

Writing about web page http://www.bbc.co.uk/news/world-europe-26312008

Europe has been at this crossroads before. An ancient multi-national empire creaks dangerously under the strains of modern nationalism and separatism. Its rulers fear the mob, and fast-moving events. It fears especially the example of a neighbouring independent state, once its colony. Above all, it fears the future.

A century ago this was the Austro-Hungarian Empire, where the Hohenzollern dynasty, ruling in Vienna, determined to crush the rising challenge of Serbian nationalism. In planning war on Serbia, the Austrian government knew that Serbia had a powerful ally, Imperial Russia. The Austrians knew they would face strong resistance. They feared their enemies, but they feared the future more. They gambled on war.

Austria was encouraged in its war aims by the rising power of Germany, which expected to take advantage of the resulting conflict to settle accounts with its own rivals and shift the balance decisively in its own favour. This too was a gamble.

Today the ancient, creaking multi-national empire is Russia itself, where the Kremlin looks to events in the neighbouring Ukraine, once ruled from Moscow, with mounting anxiety.

Note what I am not saying. I'm not saying that history repeats itself. It doesn't repeat itself at all, never mind exactly one hundred years later. Over a century the world has changed in too many ways for this to be a nice laboratory experiment with controlled conditions under which similar reagents reliably produce a similar result. All that history can tell us is some of the risks in the situation -- and not all of them, because there is always something latent or new that did not happen before.

But I am saying that Europe is at a dangerous crossroads. A popular uprising has rid Kiev of the corrupt Yanukovych regime. In this moment, 45 million Ukrainians face an unknown future. That's their problem. It's not an easy problem. If it had been easy, former president Yushchenko and former PM Tymoshenko would have solved their first time around, in 2005. They would not have fallen out and Yanukovych would not have been elected president in 2010.

The one thing that Ukrainians cannot change is their location. Russia was, is, and will remain their powerful neighbour. Many Ukrainians speak Russian and feel Russian. Whether the reformers like it or not, they have to take this into account.

The problem for Russia's president Putin begins with the fact that events in Kiev look set to put an end to his dream of uniting Ukraine with Russia and Belarus in a Eurasian Union. Worse than that, Ukraine in this moment embodies an existential threat to his rule. If the people can get rid of Yanukovych, they can get rid of Putin.

The problem for 700 million Europeans in this moment is: What will Russia do now? Does Russia have the will and the capability intervene in Ukraine by whatever means present themselves -- openly or under cover, by inducements, threats, or force? Financial inducements have been tried. Repression from within has been tried. Both have failed. What else can Russia do?

When rulers feel their survival is at stake, the normal restraints and inhibitions can melt away. They may not act rashly or precipitately; they will still calculate and if calculation suggests waiting they will wait. But what enters the calculation and with what weight may change. And pessimism is a dangerous element, because fear of the future may tilt the calculation in favour of taking a gamble on precipitate action today.

If the alternative is to be chased out of the presidential palace, the resort to violence may no longer look so bad. That's what Yanukovych showed us last week. I wonder what Putin is thinking about this morning.


July 16, 2013

Protectionism: A Fairy Tale of the State and War

Writing about web page http://www.pieria.co.uk/articles/in_defence_of_protectionism

On Pieria, John Aziz writes in defence of protectionism, that is, the use of taxes and subsidies to shield a country's economy from foreign competition. He begins from the Ricardian story of the benefits of two countries sharing the benefits of free trade based on comparative advantage.

England was good at producing wool, Portugal wine, so they trade and both are better off. There is the fairy tale about how because market transactions are always voluntary and always beneficial that trade, being simply a market transaction across borders, is always win-win.

But this, he says, is a "fairy tale." In real life, he argues, comparative advantage has little to do with resource endowments and is generally artificial. Comparative advantage may be part of the historical pattern, he concedes. But it misses something essential. What's missing? He goes on.

Let's imagine a model with two different goods, say, guns and butter. England specialises in producing guns and munitions, and Portugal in butter and agricultural produce. For years, they trade and enjoy the benefit of maximising output through specialisation. Then, England starts a trade dispute with Portugal. They cease trading. England loses access to butter and various agricultural products from Portugal's large population of butter-producing cows, having to replace Portuguese butter with lower-quality and higher-priced Welsh butter. Portugal, however, loses access to guns and munitions. Although this is immediately recognised as a risk to national security, and Portugal quickly tries to start up its own domestic firearms industry, the trade dispute escalates into full-blown war and with their geostrategic advantage in guns, England swiftly triumphs and occupies Portugal.

The implication is clear. Portugal should have insured itself against the contingency of conflict with England by limiting trade through protectionism. By means of an interventionist industrial policy, Portugal would have developed its own guns and could then have resisted England.

Several things are noteworthy about this argument.

First, it too is a fairy tale. As John Aziz rightly points out, there's nothing intrinsically wrong with that. All our models are fairy tales. The point is that some are useful and others not. How can we tell? We test them against stuff that has actually happened. If they survive the confrontation, then we can use them to suggest practical implications for the future. So, the fact that it's a fairy tale is of interest, but it's not a problem. Let's move on.

Next noteworthy point: Let's test this model against something that actually happened. Not literally, because England has not been to war with Portugal since long before gunpowder came along. Replace Portugal by Germany, however, and the fairy tale suddenly acquires an ominous ring of truth. Doesn't it have an uncanny fit with what happened in 1914?

No, not exactly. In 1914 Germany and Britain went to war. While Britain was the pioneer of free trade, Germany had practised protectionism since 1879. German tariffs limited trade and promoted self-sufficiency in both industrial and agricultural goods. In Britain, by contrast, free trade accelerated the decline of agriculture and maximized the exposure of the British economy to imports. In 1913 at least 60 percent of the calories used at home for human consumption were imported. Many observers thought that left Britain ridiculously vulnerable to wartime blockade. German naval strategists agreed. It's true that in World War I food became a weapon of war just as much as guns.

Yet in the outcome it was Germany, the protectionist power, that struggled to manage the wartime disruption of trade and saw civilians die of hunger, while the British got by without serious shortages.

What explains this turnaround? As Mançur Olson (1963) argued (and before him Friedrich Aeroboe), the German economy entered the war in 1914 already weakened by protectionism. Food tariffs had encouraged peasant farmers to stay on their farms. This kept a large subsistence agriculture in being and reduced productivity and incomes. Because German farmers were already well into diminishing returns it was then hard to increase output at need, when war broke out.

As for industry, because imports of food into Germany were restricted in peacetime and labour held back in agriculture, German urban employers faced higher wage costs. To compensate for higher wage costs, industrial firms economized on labour and pushed up productivity. But across the economy as a whole, efficiency and average incomes were reduced.

A history of protectionism gave no national advantage in either World War. I've argued (in several places; see Harrison 2012 for example) that the main factors that gave systematic advantage were a country's size and wealth, and the main source of disadvantage was a peasant-based agriculture.

In that case, what's protectionism all about? In understanding protectionism, redistribution is much more important than development. Whether tariffs and subsidies raise or lower long-run growth, in the short run they redistribute income away from consumers and exporters to import-competing firms, often by very large amounts. This should draw attention to their political significance. As Dani Rodrik (1995, p. 1470) once wrote:

Saying that trade policy exists because it serves to transfer income to favored groups is a bit like saying Sir Edmund Hillary climbed Mount Everest because he wanted to get some mountain air.

In history, protectionism has given politicians a powerful instrument to bind those "favored groups" into their projects. To Bismarck, protectionism was political: it brought together the interests of "iron and rye" to share rents and support Germany's "peaceful rise." Similar motivations lie behind most real-life experiments in protectionism that I am familiar with. The only real exception is the Soviet experience of autarkic industrialization; that was different because Stalin was an absolute dictator who ruled by fear and had no need to pay off campaign funders.

Modern promoters of the developmental state (including Dani Rodrik) could reply that they advocate only those selective interventions that are designed to improve social welfare, not corrupt the political process. That's an argument I understand, but it requires a benevolent, far-sighted government with the power to intervene and the self-restraint to do so only for the common good, not for the good of its supporters. That's a bit of a problem. I don't see a political system anywhere, short of totalitarian dictatorship, in which you could advance those policies and see them implemented without vested interests jumping on your bandwagon and hijacking it for their own purposes, which will have nothing to do with social welfare.

(It's ironic, then, that John Aziz lists "graft and corruption" as a problem of trade liberalization, because opportunities for corruption are created only where the government has something to withhold.)

The historical link between protectionism and aggressive nation building is strong. Using data for 1950 to 1992 Erik Gartzke (2007) has shown that restricting a country's trade and capital flows is a good predictor of its propensity to engage in conflict. From data for 1865 and 1914, Patrick McDonald and Kevin Sweeney (2007) have shown that protectionism was a robust precursor of engagement in "revisionist" wars.

John Aziz concludes with a warning:

China's monopoly on rare earth metals which have very many military applications may have national security implications for other nations including Britain and the United States whose ability to manufacture modern military equipment might be impeded by a trade breakdown.

Shouldn't we worry? Yes, but that's because we need to understand China, not because we should be preparing for war. Indeed, one of Mancur Olson's key conclusions was that it's a mistake to think of particular raw materials, and even oil or food, as in some way "strategic" or "essential." Only the final uses of resources are essential. In practice, if some particular material suddenly becomes scarce, the price goes up and and opportunities present themselves to economize at the margin or find alternative sources or substitutes.

The price goes up, it's true. In other words, the alternatives may be costly. But the richer you are, the more easily you can meet the cost. That's why rich countries survive trade disruption and win wars. As for protectionism, to the extent that it diverts resources from their best uses, it makes the country poorer in advance and so less able to afford the measures that might become necessary in a national emergency.

Which brings me to the last noteworthy point about the arguments that John Aziz makes: They have nothing to do with personal well being. As he correctly comments:

The relative value of outcomes is simply a matter of one's criteria.

In truth, the two fairy tales that he tells differ in addressing completely different criteria. The free-trade fairy tale always was and is about the personal welfare of all members of society. Here, society is global: when trade is free, all gain, not just the residents of one country. The protectionist fairy tale, in contrast, is about nation-building and facilitating conflict in a world where elite coalitions build states, states compete for power, and a gain for one country is a loss to others.

The world is a complicated place. In the same spirit as John Aziz when he notes that the free trade story has some merit, I'm going to accept that the unregulated interaction between real world economies sometimes creates losers. There have evidently been historical circumstances when protectionist policies accidentally did no harm, or even did good by accidentally correcting some market failure.

But the design of protectionism has generally been far more driven by vested interests and power building than by concern for social welfare. Those who enter themselves in the reckoning against free trade often rely on an idealized understanding of the record.

References

  • Gartzke, Erik. 2007. The Capitalist Peace. American Journal of Political Science 51:1, pp. 166-191.
  • Harrison, Mark. 2012. Pourquoi les riches ont gagné: Mobilisation et développement économique dans les deux guerres mondiales. In Deux guerres totales 1914-1918 − 1939-1945: La mobilisation de la nation, pp. 135-179. Edited by Dominique Barjot. Paris: Economica, 2012 (here's a preprint in English).
  • McDonald, Patrick J., and Kevin Sweeney. 2007. The Achilles’ Heel of Liberal IR Theory? Globalization and Conflict in the Pre-World War I Era. World Politics 59:3, pp. 370-403.
  • Olson, Mançur. 1963. The Economics of the Wartime Shortage: A History of British Food Supplies in the Napoleonic War and in World Wars I and II. Durham, NC: Duke University Press.
  • Rodrik, Dani. 1995. Political Economy of Trade Policy. In Handbook of International Economics, vol. 3, pp. 1457-1494. Edited by Gene Grossman and Kenneth Rogoff. Elsevier.

April 03, 2013

North Korea: Dangerous, but Not Crazy

Follow-up to From 1914 to 2014: The Shadow of Rational Pessimism from Mark Harrison's blog

Is the North Korean regime crazy or calculating? Here is a timeline of North Korea's actions since March 10, when I wrote last.

  • March 11: North Korea revokes the armistice ending the Korean War in 1953.
  • March 12: Kim Jong Un places the North Korean armed forces on maximum alert.
  • March 20: Attacks on South Korean news and banking websites, possibly from North Korea.
  • March 27: North Korea cuts a military hotline to the Kaesŏng special region (a joint economic project with South Korea).
  • March 29: Kim Jong Un places the North Korean armed forces on standby to strike U.S. territories.
  • March 30: North Korea warns of a state of war with South Korea.
  • April 2: North Korea will restart weapons-related nuclear facilities.
  • April 3: North Korea closes entry to the Kaesŏng special region.

In various ways, these are all costly actions. Some are financially costly to Pyongyang, such as restarting nuclear facilities and disrupting Kaesŏng-based production and trade. Other are reputationally costly, because they stake out positions that are hard to retreat from without loss of face. All of them have a common element of danger -- the risk of triggering a ruinous catastrophe.

Why is North Korea doing these things if they are so costly? In a common interpretation, the North Korean regime is crazy. They don't understand the world or know what is good for themselves. I think this is unlikely.

On the basis that the North Korean leaders are not insane, there are several possible ways to think about their actions and understand them, but in the end they all point to the same outcome.

Opportunity cost. While the measures listed above are costly, North Korea believes that it would not find a better alternative use of the resources consumed or put at risk as a result of their actions. There are few profitable opportunities for production in the world's worst economic system. Investing in confrontation may well be, for North Korea, the better alternative.

Diminishing returns.In the past, North Korea has extracted billions of dollars of aid from South Korea and the West by holding its own people hostage and showing a willingness to play with fire. The problem with this strategy is that Western countries and their Asian partners have learned how it works. As a result, the North Korean strategy has run into diminishing returns. Pyongyang can continue to extract an advantage only by going to greater and greater lengths. This means taking greater and greater risks with peace.

Rational pessimism (That's what I wrote about here). North Korea's leaders see two scenarios. In one, there is a peaceful future in which their regime will inevitably disintegrate and howling mobs will drag them into the street and tear them to pieces. In another, there is a high probability of war in which millions might perish but there is some faint chance of regime survival. You wouldn't jump at either, and you might not rush to make a choice. Still, ask yourself: If you were Kim Jong Un, and push came to shove, which would you prefer?


March 10, 2013

From 1914 to 2014: The Shadow of Rational Pessimism

Writing about web page http://www.ft.com/cms/s/0/e29e200a-6ebb-11e2-9ded-00144feab49a.html

China’s territorial claims and bellicose actions in the Western Pacific have aroused concerns about where this process could lead. In The Shadow of 1914 falls over the Pacific (in the Financial Times on 4 February), Gideon Rachman asked whether we are watching a re-run of events that led to the outbreak of World War I in 1914.

Then, a rising power (Germany) was challenging the established power (Britain) for a say in world affairs and a share in the world's colonial territories. It was not Germany's plan to make war on Britain; German leaders wanted only a say and a share. The economic, military, and naval power that they built was not made to go to war, only to prevent Britain from blocking Germany’s demands. They wanted to ensure peace and to command respect. The war that then came about was not meant to happen. The war would not have happened at all if allies, agents, proxies, and third parties beyond their control had not helped to bring it about.

Replace Britain by the United States, Germany by China, and Austria-Hungary, Russia, and Serbia by Japan, Vietnam, and North and South Korea, and you have Rachman's story in a nutshell. Rachman's conclusion is hopeful, however: China's leaders have tried to learn from history. That, and the inhibitions added by nuclear weapons, will help to avert war.

What was the role of calculation in the outbreak of World War I? Rachman writes as though the war was not calculated at all:

Leaders on all sides felt helpless as they were swept towards a war that most of them did not want.

But something is missing here. While the war was in some sense unwanted, the leaders were not helpless: they chose war. It was a calculated decision, and it was not a miscalculation: those who favoured war correctly estimated that victory was far from certain. They had a war plan for a quick victory over France that relied on a high speed military manoeuvre on a colossal scale, a decision by Britain to abstain, and a Russian mobilization that would obligingly wait until the German Army was ready to switch its focus from West to East. They knew it was an outrageous gamble.

Critical to this story was something that I will call rational pessimism. By 1912, Germany no longer felt itself the confident, rising power once led by Bismarck. Germany’s leaders had come to fear the future. Their own attempts to secure Germany’s rightful place in the sun, they feared, were leaving Germany ever weaker.

These fears were well founded. Externally, the balance of power was tilting away from Germany. More countries were adhering to the anti-German alliance of Britain and France. Britain and Russia were rearming at a pace that nullified Germanys’ own efforts. Given time, Germany would only become weaker. Within Germany the balance was tilting away from monarchism and conservatism towards parliamentary socialism. The fiscal demands of rearmament were opening up new social divisions. Germany’s Prussian bureaucracy and aristocracy felt itself more and more besieged.

Increasingly the calculation became: If we fight, we may lose but at least there is a chance that we win. If we remain at peace, we certainly lose. From this point of view the war was a gamble, but it was not a miscalculation. It was simply the choice with the highest expected value. For this reason the leaders of the Central Powers went to war full of foreboding, but they went to war anyway.

In July 1914 the German chancellor Bethmann Holweg confided in his friend Kurt Riezler, who wrote in his diary:

Russia’s military power growing fast … Austria grows ever weaker … This time things are worse than 1912, because now Austria is on the defensive against the Serb-Russian agitation. … The future belongs to Russia, which grows and grows into an ever great weight pressing down on our chest.

The chancellor is very pessimistic about Germany’s intellectual condition. Frightful decline of our political niveau. Individuals are becoming ever smaller and more insignificant; nobody says anything great and honest. Failure of the intelligentsia and of the professors.

This pessimism was general. When Germany’s Wilhelm II was informed of the Austrian ultimatum to Serbia, he wrote:

Now or never.

In Vienna, Kaiser Franz-Josef wrote:

If we go under, we better go under decently.

(The latter quotes are from Holger Herwig’s The First World War: Germany and Austria-Hungary, 1914-1918, published in 1997 by Arnold).)

From this perspective it becomes crystal clear why North Korea’s predicament is so dangerous. Day by day, North Korea is provoking enemies and losing friends. The tensions within the country are largely unknown but surely increasing. What insider would predict a peaceful future for the Pyongyang regime that is better than today? What does Kim Jong-Un have left to lose from gambling on conflict, no matter how poor the odds? Rational pessimism is surely tilting North Korea’s choices towards war. Still, we are not there yet.

As for China itself, the threat of war should be thought of as one for the future. It seems unlikely that China’s leaders would ever choose to gamble everything on a major war as long as they expect to gain more from a continuation of peace. Their optimism is a bulwark against war.

The risk is that optimism is fragile. China faces many problems that could sap the confidence of its leadership. Edward Luttwak (in The Rise of China vs the Logic of Strategy, published in 2012 by the Belknap Press of Harvard University) has written that China is pursuing an impossible trinity of prosperity, diplomatic influence, and military power. China’s economic growth may falter. Even if economic growth is sustained in China, the chances are that at some stage the West will recover its prosperity and technological leadership. Meanwhile China’s rearmament and territorial claims are losing it friends in Japan, Vietnam, and India. At home, there are protests over a range of issues that widens continually: the rule of law, corruption, censorship, inequality, wages and working conditions, land grabs, and pollution. China’s rulers rely on xenophobia and stories of foreign encirclement and penetration to manage these threats to their legitimacy.

Putting all this together, it is not hard to envisage a future in which China’s leaders would become rational pessimists. Would they then be held back by knowledge of history and by the possibility of nuclear war? Maybe. Is Kim Jong-Un restrained by these things today? So far, yes. If Germany’s rulers in 1914 could have seen the future, would they have chosen differently? Perhaps. Unfortunately, we can’t be sure.


May 28, 2012

Seventy Years Ago: The Week the Tide Began to Turn

Writing about web page http://www.history.navy.mil/photos/events/wwii-pac/midway/midway.htm

Seventy years ago this week, the world looked unspeakably grim.

By the end of May 1942, Germany had occupied France, Belgium, Netherlands, and Luxemburg; all of Eastern Europe not already under control of its allies Bulgaria, Hungary, and Romania, including the Baltic, the Ukraine, and a large chunk of Russia; Greece and Yugoslavia; and the former Italian colonies of North Africa. Italy wasn't helping much, but in the Far East Japan had occupied much of China, all of Indochina, Indonesia, Malaya (including Singapore), the Philippines, and part of Burma. German bombers were battering Britain's cities; German submarines were sinking Allied shipping at half a million tons a month. In Russia and Ukraine the German Army was launchng new offensives; at Khar'kov, in a battle that ended seventy years ago today, the Red Army lost a quarter of a million men. Across Europe and East Asia, millions of non-combatants were being machine-gunned, gassed, starved, and worked to death.

At this very moment, beneath the surface of these terrible events, the tide of the war was beginning to turn. Up to that time, Axis forces were advancing on all fronts. Within a few months they were in retreat everywhere.

In 1942 the war was fought in three main theatres: the Pacific, the Mediterrean, and the Eastern front. In each theatre the turning point of the war was marked by a decisive battle. These were the Battles of Midway (June 4 to 7), the seventieth anniversary of which we are about to mark; El Alamein (July 1 to 30 and October 23 to November 4); and Stalingrad (September 13 to February 2, 1943).

In obvious ways these battles could not have been more different: Midway in the remote northern Pacific, Alamein in the desert sands of Egypt, and Stalingrad in the smoking ruins of a great city on the Volga river. These battles differed also in the orders of magnitude of the forces involved. Japanese losses in four days at Midway were five ships, 250 aircraft, and 3,000 men. German losses in two weeks at the second battle of Alamein were 800 tanks and guns and 30,000 men, and in five months at Stalingrad 7,500 tanks and guns and three quarters of a million men killed or missing. Red Army losses at Stalingrad alone were half a million; do not forget these figures if you want to understand how powerfully the war continues to stir national feeling in Russia.

In other respects, these battles had important common features. Each began with an enemy offensive. The Japanese planned to use Midway Island as a launching pad from which to invade Hawaii. The Germans planned to drive the British out of North Africa; if the Mediterranean could not be an Italian lake, then let it be a German one. From Stalingrad the Germans planned to seal off the Caucasian oilfields and turn north to take Moscow from the rear.

After the offensive came the counter-offensive, which in each case took the enemy by surprise. After the successful surprise attack on the U.S. Pacific fleet at Pearl Harbor in December 1941, the Japanese believed they had finished American naval power. Just six months later, in the summer of 1942, the U.S. Navy was already three times the size of the previous year. Such was the speed of mobilization of America's industrial power, and the resilience of American national feeling, both of which had been entirely discounted in Tokyo and Berlin. The same underestimation of Allied reserves was present in the calculations of the Axis commanders at Alamein and Stalingrad.

The Allied victories of 1942/43 were no accident. Underlying them was the translation of Allied economic power into fighting power. In 1941 the Axis Powers were poised for victory. But victory would be theirs only if they exploited the advantage of the aggressor to the full. With a potential coalition of economically more powerful enemies ranged against them, they had to win every campaign quickly and avoid a stalemate at all costs. Had they done so, the war would have been over and they would have won.

Economic mobilization, the translation of economic power into fighting power, takes time. The Allies bought this time with "blood and treasure." First came the British refusal to surrender in the summer of 1940, followed by the Battle of Britain. Next came the U.S. Lend Lease Act of March 1941 which offered American aid to the British (and a few months later to the Soviet Union). The third thing was the unexpected -- in German eyes, often senseless -- resistance of the Red Army in the summer and autumn 1941, which led through appalling losses to the failure of the German invaders to take Leningrad and Moscow before the end of the year.

three_battles.jpg

Source: Harrison (1998, pp. 15-16).

Having bought time, the Allies used it to mobilize their economies. The chart shows the production of combat aircraft by the main powers year by year through the war. It illustrates how, during 1942, Allied -- and especially American -- mobilization rapidly tilted the military-economic balance against the Axis. The Allies began to outproduce Germany and Japan in aircraft, and also in munitions generally, by a substantial multiple. This advantage persisted through the end of the war, despite belated mobilization of the German and Japanese war economies. In 1942, however, the grit and bloody determination of Allied soldiers, sailors, and airmen was still required to turn material predominance into victory on the battlefield. Midway, Alamein, and Stalingrad were the signals that this had been achieved.

Why was the struggle so much, much more intense on the Eastern front? From mid-1941 through mid-1944 this was where 90 percent of German fighting power was focused. To occupy the territory of Ukraine and European Russia, kill the Jews, decimate the Slavic population, and resettle this vast landmass as a German colony, was Hitler's prime objective. The Soviet economy, although large, remained poor and industrially less developed, so that it was on the Eastern front that German resources were most evenly matched. The Allies' material advantages were much greater elsewhere. If the Axis could not win in Russia, it would not win anywhere else. On the Eastern front a war of mutual annihilation developed, in which both sides threw everything they had and more into the scales. As I discussed in a paper entitled "Why Didn't the Soviet Economy Collapse in 1942?" (Harrison 2005), Hitler had every right to expect final victory. The Soviet Union only just managed to retain a critical advantage over Germany, based on mass production, colossal sacrifice, and utter ruthlessness.

Up to the summer of 1942, the forces of the Axis were advancing everywhere; from the beginning of 1943 they retreated on all fronts. After this it was no longer possible for the Axis powers to win the war against the economically more developed, more mobilized, and more powerful Allies. One of the most horrifying faces of the war is seen in the fact that, despite this, years of intense fighting still lay ahead. Through 1943, 1944, and into 1945 the German and Japanese Armies and Navies retreated continuously, killing and being killed every day and every inch of the way, maintaining discipline and cohesion, not giving up until the last possible moment. Every day of those years their governments persisted in genocidal policies that destroyed millions of lives through famine, overwork, and systematic mass killing.

Without Midway, Alamein, and Stalingrad our world today would be far different from the one we know. The Axis powers might have ended the war victoriously, with consequences that we can only guess at. Alternatively, the war would have been dragged out in some other way, but there would have been no Allied victory in 1945. Or perhaps there could still have been victory in 1945, but the evolution of events would have been entirely different. Regardless of events on the battlefield, by the summer of 1945 the Americans would have had the atomic bomb. If the war still raged in Europe, the first victims of atomic warfare would more likely have been German than Japanese.

References

  • Harrison, Mark. 1998. Economic Mobilization for World War II: an Overview. In The Economics of World War II: Six Great Powers in International Comparison, pp. 1-42. Edited by Mark Harrison. Cambridge: Cambridge University Press.
  • Harrison, Mark. 2005. Why Didn't the Soviet Economy Collapse in 1942? In A World at Total War: Global Conflict and the Politics of Destruction, 1939-1945, pp. 137-156. Edited by Roger Chickering, Stig Förster, and Bernd Greiner. Cambridge: Cambridge University Press. RePEc handle: http://ideas.repec.org/p/wrk/warwec/603.html

May 23, 2012

Greece: Can’t Pay/Won’t Pay?

Writing about web page http://www.erim.eur.nl/ERIM/Research/Centres/Business_History/News/News_Detail?p_item_id=7362016&p_pg_id=

How much can one country squeeze out of another? I was prompted to think about this on Monday, when I spoke in Rotterdam at the launch of a major new book: Occupied Economies: An Economic History of Nazi-Occupied Europe, 1939-1945, by Hein Klemann (a Dutch historian) and Sergei Kudryashov (a Russian historian).

The main story of the book is how Germany extracted resources from occupied Europe that paid for one third of its war costs – and the consequences for the countries that paid. When you read history, it’s natural also to think about the present: what has changed, and what is the same. So, I thought about Greece.

Seventy years ago, Greece was under German occupation. Between 1942 and 1944, according to Klemann and Kudryashov, Germany took from Greece goods and services worth 3.5 billion Reichsmarks. Per head of the Greek population, this was between RM500 and RM600 per head, which was about the average for Germany’s occupied territories.

That sounds like a lot, but what did it mean to Greece? The back of my envelope shows the following calculation. In 1942, Germany imported external resources worth about 15 per cent of its national income. Klemann and Kudryashov show that Greeks were average contributors. Before the war, Greece’s national income per head of its population was about half Germany’s. So, a sum that in wartime was worth 15 per cent to Germans was worth at least 30 per cent to Greeks. Given Germany's wartime economic expansion, and the likely economic decline of Greece, I guess the upper limit could easily have been half of Greece’s national income in 1942 and 1943.

The point is that Germany’s wartime exploitation of occupied Europe was a very big deal, and Greece was no exception.

Now roll the clock forward seven decades. Look how the scenery has changed. The world is relatively peaceful and world markets are open for business. In Greece, average real incomes are six times the level of 1938. But Greeks are smarting under the national humiliation of being expected to pay for their public debt. Eighty per cent of that debt is held abroad, a large share of it by Germany. But the debt is an obligation that Greece assumed completely voluntarily. The Greeks are not under duress of any kind; the creditors have placed no landing craft on Greek beaches; in Kefalonia, no villagers are held hostage, and no Athenian commuters must show their papers at military checkpoints.

Still, the Greek sense of victimhood is so strong that they are not actually repaying anything at all. Instead, their government is continuing to borrow on the basis of being granted partial forgiveness. The fact that eighty per cent of Greek debt is held abroad implies that Greece should be exporting more than it imports if it wants just to cover the interest on the debt that remains. This year Greece's current account deficit is expected to be 5 per cent of its GDP, so that Greek foreign liabilities are rising, not falling. Meanwhile there is a political stalemate, and the anti-bailout parties (which together form a majority) argue they can slow or reverse the fiscal consolidation required to reduce the rate of new borrowing while keeping the creditors and the European Commission on board and disagreeing with each other about everything else.

Economic history suggests that it is exceptionally difficult to persuade a country to hand over a significant fraction of its national income to foreigners over any sustained period of time. Naked force will do the trick, but nothing less will do.

Today Germany is Europe's creditor. Writing in the Financial Times, my Warwick colleagues Marcus Miller and Robert Skidelsky recently (2012) drew a parallel with Germany's own experience after the 1919 Treaty of Versailles. Victorious in the Great War, the Allies imposed a large war indemnity upon Germany. This was mainly counterproductive, arousing German national feeling and resistance to the peace with regrettable consequences.

How much did the Allies actually extract from the German economy under the reparations imposed at Versailles? The accounting comes from a classic paper by Sally Marks (1978). The treaty’s headline figure was 132 billion gold marks, around two and a half times Germany's prewar national income. Of the 132 billion total the Allies themselves never expected to get more than 50 billion (the so-called A and B bonds). Germany paid a first instalment right away by handing over state properties valued at 8 billion; today's analogue might be the transfer of a few Greek islands. Germany paid the next billion in 1921 to get the Allies out of customs posts and an area around Dusseldorf that they continued to occupy. Then, the repayments stopped. In response the French occupied the Ruhr valley in 1923, netting another billion in compulsory deliveries of coal and other stocks. When the French moved out, payments fell away again and were repeatedly rescheduled. At their termination by the Lausanne Convention in 1932, Germany had paid barely 20 billion marks in total. In practice, most of that sum was borrowed from the United States, creating new debts on which Hitler later defaulted. Marks concluded:

The tangled history of reparations remains to confound the historian and also to demonstrate the futility of imposing large payments on nations which are either destitute or resentful and sufficiently powerful to translate that resentment into effective resistance.

Note the terminology, which we'll come back to. "Destitute" = "Can't pay." "Resentful and ... powerful" = "Won't pay."

By modern standards, the Allied occupation of Germany's revenue offices and valuable territories after the Great War looks like an intolerable infringement of national sovereignty. In fact there were many precedents for this, which the Allies merely followed. A recent paper by Kris Mitchener and Marc Weidenmier (2010) analyses 43 such cases from the nineteenth century. Today Greek opinion is inflamed by the idea of a European Commission representative in its budget office; Athens last came under foreign financial supervision in 1898, having defaulted on an indemnity arising from war with Turkey the previous year.

Based on this and other cases, Mitchener and Weidenmeier show that "supersanctions," when the creditor countries applied direct military pressure or directly supervised the debtor's fiscal offices, generally sufficed to restore the debtor's credit by enough to reduce bond yields and allow access to fresh borrowing.

What creates the power of sovereigns to resist their creditors, if direct force is not applied? Writing during the last major international debt crisis, Simon Bulow and Ken Rogoff (1989) argued that sovereign debtors are able to play on their creditors' impatience and desire to rescue something from the situation; faced with the threat of complete default and the need to apply draconian penalties, the creditors will be satisfied with partial compliance. The debtors will pay just enough to keep open their access to fresh borrowing.

The result is the phenomenon of continual rescheduling clearly visible in recent renegotiation of the Greek debt. Indeed it would seem that no one has read Bulow and Rogoff more carefully than Alexis Tsipras, leader of Greece's largest anti-bailout faction, the left-wing Syriza Party.

Despite partial default and bailout, Greece remains insolvent. Strictly interpreted, insolvency means that the debtor cannot pay. But the history of sovereign debt and default tells us that “Won’t pay” and “Can’t pay” are hard to tell apart, and it is in the debtor’s interest to make them look the same.

Allied failure to predict and manage this after World War I helped to poison Germany’s international relations and domestic politics in the 1920s. Miller and Skidelsky argue that Germany, which suffered so much after 1919, should not do the same to Greece today. I agree. But a far sighted reconciliation does not look likely, and might not even by welcomed by those Greek politicians who are now happily reinventing the tradition of Greece as a victim of foreign exploiters.

References


May 14, 2012

The Dam Busters: Their Place in (Economic) History

Writing about web page http://www2.warwick.ac.uk/knowledge/culture/dambusters

Written for Warwick's Knowledge Centre in preparation for Wednesday night's sixty ninth anniversary of the dam raids.

The dams of Germany’s industrialized Ruhr valley were an obvious target for the Royal Air Force Bomber Command in World War II. The dams supplied hydroelectric power and water for cities, steel making, and canal transport. In turn, these provided the means to supply Germany with the tanks, aircraft, guns, shells, and ships required for Hitler’s war.

Operation Chastise, the Dam Busters’ raid, took place on the night of May 16/17, 1943. Tactically, it was a partial success. The Möhne and Eder dams collapsed, but the Eder reservoir was of secondary importance and the dam on the Sorpe was not seriously damaged. Some small towns and industrial facilities were flooded, and some roads were washed away. There was a temporary loss of water production and electric power. At least 1,300 civilians died; more than half were Ukrainian forced labourers. Eight of the 19 aircraft were lost and 53 of the 133 aircrew killed.

What were the effects of the dam raids on Germany’s war economy? From the beginning of 1942 through May 1943, German war production expanded at about 5 per cent a month. At the time of the dam raids it was already more than twice the level of two years previously when Germany had been about to launch the greatest land invasion of all time, its attack on the Soviet Union. In the month of the dam raids, however, the increase of German war production was halted and the German economic mobilization marked time for nearly a year.

How much of this was due to the Dam Busters? In 1943 British and American bombers dropped 130,000 tons of bombs on German cities and factories, and ten times that quantity in 1944 (Zilbert 1981). Up to a million German civilians lost their lives (Falk 1995). In this context the dam raids were a pinprick. Thus, while the raid was mounted at an important moment, it would be hard to identify any particular effect of the Dam Busters’ skill and heroism on the German war effort.

The dams were quickly rebuilt and water supplies were restored. Were these indirect costs important? Albert Speer, the minister of armament, had to divert 7,000 forced labourers from building German fortifications in occupied France and Netherlands to rebuild the dams (Speer 1970, p. 281). It has been suggested that this contributed to Allied success in the 1944 D-Day landings (McKinstry 2009), but the claim seems far-fetched. In May 1943 the Germans still had a year to complete their coastal fortifications. Much more important to Allied success on D-Day were numbers, surprise, and the German lack of air cover.

When Operation Chastise was planned, RAF Bomber Command did not take into account either D-Day or the indirect cost to Germany of diverting scarce labour from the fortification of occupied Europe. In fact, the RAF hoped to bomb Germany into defeat before D-Day became necessary. In this way, the operation expressed the persistent belief in a powerful knock-out blow that would somehow disable the German war economy and deprive its armed forces of the means to fight. Somewhere, they thought, if only it could be found and attacked, was a critical weak point of the German war economy that could cause it to collapse. Perhaps the dams were such a weak point.

Speer later suggested that the direct effects of the raid would have been greater if the RAF had organized follow-up raids to disrupt the rebuilding. But the lack of follow-up also expressed the mistaken belief of the time in the efficacy of a single knock-out blow. Two centuries of experience of economic warfare and sanctions (summed up by Olson 1963) have taught us that this belief is generally unfounded.

Bombing Germany did not win the war, but it did bring forward the moment of German defeat. Bombing was highly disruptive and made mobilization ever more costly (see Overy 1994 and Tooze 2006). For a long period the German leaders were able to restrict the consequences to the civilian economy, so that conditions of life, consumption, and work deteriorated but war production could still expand. Civilian life was maintained by the human capacity for adaptation to difficulties and habituation to fear. Disaffection was kept in check by an effective police state, growing hatred of the Allied bombers, increasing awareness of Germany’s own war crimes, and rising fear of the possible consequences of defeat. Requisitioning food and slave labourers from the occupied territories also helped. That was the basis on which Germany was able to fight on against economically more powerful enemies for years.

Only when German territory was directly attacked did the war economy finally unwind. The indirect effects of Allied bombing also helped to bring that moment nearer. Allied bombing weakened the German ground forces because it distracted German air power away from the Eastern Front (against the Red Army) and France (against the 1944 Allied landings). Defending against air attack was very costly for Germany. At the peak of war mobilization, one third of German war production took the form of night fighters, anti-aircraft guns, searchlights, and radar.

Bombing Germany was costly to both sides. On one side the German economy was disrupted and a million civilians died. On the other side 18,000 Allied bombers were lost, along with 100,000 highly trained and educated aircrew.

The Dam Busters were one small element of a total war. They did not provide a breakthrough, but they added to the slowly growing burdens on the German economy, which arose through channels that were largely unintended and unforeseen. The Dam Busters also boosted Allied morale and Churchill’s status with the Americans and the Russians. Without them, the book (Brickhill 1951) and the film of the book could not have been made. These gave a sense of heroism and past glory to many a British schoolboy. I don’t know what the girls thought; we never asked them.

References

  • Brickhill, Paul. 1951. The Dam Busters. London: Evans.
  • Falk, Stanley L. 1995. Strategic Air Offensives. In The Oxford Companion to the Second World War, pp. 1067-1079. Edited by I. C. B. Dear. Oxford: Oxford University Press.
  • Milward, Alan S. 1965. The German Economy at War. London: Athlone.
  • McKinstry, Leo. 2009. “Bomber Harris thought the Dambusters’ attacks on Germany ‘achieved nothing’.” The Telegraph, August 15.
  • Overy, Richard J. 1994. War and Economy in the Third Reich. Oxford: Oxford University Press.
  • Speer, Albert. 1970. Inside the Third Reich. London: Macmillan.
  • Olson, Mancur. 1963. The Economics of the Wartime Shortage. Durham, NC: Duke University Press.
  • Tooze, Adam. 2006. The Wages of Destruction: The Making and the Breaking of the Nazi Economy. London: Allen Lane.
  • Zilbert, Edward R. 1981. Albert Speer and the Nazi Ministry of Arms: Economic Institutions and Industrial Production in the German War Economy. London: Associated University Presses.

April 02, 2012

Russia's Great War, Civil War, and Recovery

Writing about web page http://www2.warwick.ac.uk/fac/soc/economics/news/?newsItem=094d43a2365e99f001366436ff461cde

Tomorrow I'm flying to Moscow to collect a prize, which I will share with my coauthor Andrei Markevich. This is the Russian national prize for applied economics, which was announced last week. The prize, sponsored by a consortium of Russian universities, research institutes, and business media, is awarded every second year. The award is for our paper "Great War, Civil War, and Recovery: Russia’s National Income, 1913 to 1928," published in the Journal of Economic History 71:3 (2011), pp. 672-703. A postprint is available here.

The spirit of the paper is as follows. In 1914 Russia joined in World War I. In 1917 there was a revolution, and Russia’s part in that war came to an end. A civil war began, that petered out in 1920. It was followed immediately by a famine in 1921. We calculate that by the end of all this Russia had suffered 13 million premature deaths, nearly one in ten of the population living within future Soviet borders in 1913. After that, the Russian economy recovered, but was soon swept up in Stalin's five-year plans to "catch up and overtake" the West.

We calculate Russia’s real national income year by year from 1913 to 1928; this has never been done before on a consistent GDP basis. National income can be measured three ways, which ought to give the same answer (but rarely do): income (wages, profits, ...), expenditure (consumption, investment, ...), and output (of industry, agriculture, ...). We measure output. Data are plentiful, but of uneven quality and coverage. The whole thing is complicated by boundary changes. Between 1913 and 1922 Russia gave up three per cent of its territory, mainly in the densely settled western borderlands; this meant the departure of one fifth of its prewar population. The demographic accounting is complicated not only by border changes but also by prewar and wartime migrations, war deaths, and statistical double counting.

Our paper looks first at the impact of World War I, in which Russia went to war with Germany and Austria-Hungary. Initially the war went went well for Russia, because Germany found itself unexpectedly tied down on the western front. Even so, Germany quickly turned back the Russian offensive and would have defeated Russia altogether but for its inability to concentrate forces there.

During the war nearly all the major European economies declined (Britain was an exception). The main reason was that the strains of mobilization began to pull them apart, with the industrialized cities going in one direction and the countryside going in another. In that context, we find that Russia’s economic performance up to 1917 was better than has been thought. Our study shows that until the year of the 1917 revolution Russia’s economy was declining, but by no more than any other continental power. While wartime economic trends shed some light on the causes of the Russian revolution, they certainly do not support an economically deterministic story; if anything, our account leaves more room for political agency than previous studies.

In the two years following the Russian revolution, there was an economic catastrophe. By 1919 average incomes in Soviet Russia had fallen to less than half the level of 1913. This level is seen today only in the very poorest countries of the world, and had not been seen in eastern Europe since the seventeenth century. Worse was to come. After a run of disastrous harvests, famine conditions began to appear in the summer of 1920 (in some regions perhaps as early as 1919). In Petrograd in the spring of 1919 an average worker’s daily intake was below 1,600 calories, about half the level before the war. Spreading hunger coincided with a wave of deaths from typhus, typhoid, dysentery and cholera. In 1921 the grain harvest collapsed further, particularly in the southern and eastern grain-farming regions. More than five million people may have died in Russia at this time from the combination of hunger and disease.

Because we have shown that the level of the Russian economy in 1917 was higher than previously thought, we find that the subsequent collapse was correspondingly deeper. What explains this collapse? The obvious cause was the Russian civil war, which is conventionally dated from 1918 to 1920. However, we doubt that this is a sufficient explanation. First, the timing is awkward, because the economic decline was most rapid in 1918 and this was before the most widespread fighting. Second, there are signs that Bolshevik policies of economic mobilization and class warfare were an independent factor spreading chaos and decline. These policies were continued and even intensified for a year after the civil war ended and clearly contributed to the disastrous famine of 1921.

Because of the famine, economic recovery did not begin until 1922. At first recovery was very rapid, promoted by pro-market reforms, but it slowed markedly as the Soviet government began to revert to mobilization policies of the civil-war type. We show that as of 1928 the Russian recovery was delayed by international standards. The result was that, when Stalin launched the first five year plan for rapid forced ndustrialization, the Soviet economy's recovery from the Civil War was not complete. By implication, some of the economic growth achieved under the five-year plans should be attributed to delayed restoration of pre-revolutionary economic capacity.

In concluding the paper, we reflect on the state in the history of modern Russia. It seems important for economic development that the state has the right amount of "capacity," not too little and not too much. When the state has the right amount of capacity there is honest administration within the law; the state regulates and also protects private property and the freedom of contract. When the state has too little capacity it cannot prevent outbreaks of deadly violence, and security ends up being privatized by gangs and warlords. When the state has too much capacity it can starve and kill without restraint. In Russian history the state has usually had too little capacity or too much. In World War I the state had too little capacity to regulate the war economy and it was eventually pulled apart by competing factions. Millions died. In the Civil War, the state acquired too much capacity; more millions died.

Andrei Markevich and I have many debts. Our first thanks go, of course, to the sponsors of the prize. After that, we are conscious of owing a huge amount to our predecessors, many of whom should be better known than they are, but I'm going to leave the history of the subject to those interested enough to consult the paper. A number of people helped us generously, especially Paul Gregory, Andrei Poletaev, Stephen Wheatcroft, and the journal editors and referees. Of course, I'm personally grateful to Andrei. It’s hard to say which of us did what (between May 2009 and January 2011 our paper went through exactly 50 revisions), but you’ll see that Andrei is named as first author.

Beyond any personal feelings, I'm thrilled by the recognition of economic history. When he announced the award, the jury chairman Professor Andrei Yakovlev was asked if this wasn't an "unexpected" outcome for an award in applied economics. Yakovlev described it as an "important precedent," recognizing that "explanations of many of the processes that we have seen in Russia in the last twenty years lie in history." He pointed out that most western countries have historical national accounts going back through the nineteenth century (and England's now go back through the thirteenth). Such data help us to understand the here and now, by showing how we got here.


Mark Harrison writes about economics, public policy, and international affairs. He is a Professor of Economics at the University of Warwick. He is also a research fellow of Warwick’s Centre on Competitive Advantage in the Global Economy, the Centre for Russian and East European Studies at the University of Birmingham, and the Hoover Institution on War, Revolution, and Peace at Stanford University.



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