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Calculating economics of war and diplomacy

As any alpha knows, not to win is to lose the hegemonic position. The rational calculation is therefore there will not be a real war in the Year of the Tiger, because talking jaw to jaw is better than war. But war is not always rational, neither are markets. And that is why big volatilities and perils lie ahead, as do opportunities.

ANDREW SHENG | New Delhi |

As war drums are being beaten over Ukraine and the Taiwan Straits, what are the economic and diplomatic options available to all parties? Former British Prime Minister Harold Macmillan attributed to Winston Churchill the quote “Jaw, jaw is better than war, war”, whereas Churchill actually said, ‘Meeting jaw to jaw is better than war.”

Why is Britain today more willing to send arms to Ukraine, when France and Germany seem more keen on diplomatic negotiations? One possible answer is that the further away from the frontlines, the braver you are in your talk. War should be furthest away from the mind of any rational global leader faced with the existential challenges of climate disaster, economic recession, huge domestic inequalities and imbalances.

Most nations need time and peace to sort out the huge damage to health and wealth from the pandemic. If we all abide to carbon emission commitments as agreed under Glasgow COP26, we have less than ten years and need huge reforms to get to NetZero. Since war is both energy consuming and carbon emitting, both conventional warfare and nuclear war will only accelerate human and planetary destruction. But war is not often rational and could be sparked by accidents or pure miscalculations.

As Rand Corporation’s latest analysis on “Stabilizing Great-Power Rivalries” suggests, a stable rivalry has two defining characteristics: (1) mutual acceptance of a shared status quo and (2) a resilient equilibrium in which the rivalry can absorb shocks and return to a stable centre. Both conditions are now shaky in the near term.

Russian President Vladimir Putin’s red line is that the United States and NATO allies have violated a verbal understanding at the end of the Cold War that Russia would agree to the reunification of West and East Germany provided NATO did not advance eastwards towards the Russian border. If Ukraine joins NATO, the alliance’s armaments would be less than 300 miles away from Moscow, an unacceptable security risk to Russian sovereignty.

Putin may be using what conflict economist Santiago Sanchez-Pages called using the conflict threat in order to improve a bargaining position. Putin has calculated that this may be the best time to negotiate a security understanding with the United States when the latter may be reluctant to engage in an all-out conflict not on her own soil. Russia and the United States have one common but important lesson why invasion does not pay: Afghanistan. It is easier to invade, but the costs of prolonged occupation are always huge.

For the US, the cost of the War on Terror was estimated at $8 trillion with the countries invaded becoming failed or failing states. The failed Afghan invasion of 1979 contributed to the collapse of the Soviet Union. Russia is unlikely to make that mistake twice. America will not want to get involved in Ukraine since the real affected parties are the Europeans. Putin may have timed his ultimatum because the United States, after the shambolic withdrawal from Afghanistan, may be reeling on four simultaneous fronts, so that even the strongest military in the world would be hard pressed to cope.

In Europe, Ukraine is clearly a flash point, but in East Asia, North Korea and the Taiwan Straits are high risks. In the Middle East, US-Iran relations are also on the brink of crisis. But many observers would agree with former Australian Prime Minister Malcolm Turnbull that “the biggest threat to American freedoms today is not China or Russia. It’s what’s going on inside the U.S.” What the American foreign policy elite is facing is the contradiction between the extension of the human rights agenda from domestic to foreign shores and the huge costs from the militarisation of foreign policy.

As Chicago International Relations realist Professor John Mearsheimer argued in his latest book, The Grand Delusion, “liberal hegemony”, defined as a foreign policy that emphasises the spread of liberal democracy, pushes America to engage in social engineering on a global scale and a “super ambitious and heavily militarized foreign policy”. “The United States has fought seven separate wars since the Cold War ended. It is a country addicted to war.”

Pulitzer Prize winner Ronan Farrow’s latest book War on Peace, laments the decline of American influence through relying on wars instead of diplomacy. He quoted former Secretary of State Hillary Clinton as saying “Diplomacy is under the gun.”

The United States is also addicted to debt, since the US national debt at $29.2 trillion or 122 per cent of 2021 GDP already exceeded the peak World War Two level of 119 per cent of GDP, even before “World War Three” has begun. Why are inflation, rising interest rates and war noises bad for global markets? Ultimately, inflation is bad for social stability and any rise in the real rate of interest is bad for fiscal deficits, as is rising military expenditure. Furthermore, having spent over two decades fighting a war against small powers, re-tooling to fight conventional and nuclear wars would require even higher military expenditure.

Investors are therefore nervous whether stock market levels can be sustained on just more quantitative easing or military expenditure. The real risk of accidents is that small powers may “free ride” by taking on bigger powers hoping that they would drag Big Power rivals into backing them. The United States’ greatest fear is that Israel, Ukraine or Taiwan may drag her into all-out wars on different fronts which she may not be able to win either militarily or economically.

As any alpha knows, not to win is to lose the hegemonic position. The rational calculation is therefore there will not be a real war in the Year of the Tiger, because talking jaw to jaw is better than war. But war is not always rational, neither are markets. And that is why big volatilities and perils lie ahead, as do opportunities.

(The writer is a Distinguished Fellow, Asia Global Institute, University of Hong Kong and a former financial regulator.)

Special to ANN.