Arms and Conflict in the Middle East

Eurasia: A New Peace Agenda, edited by M. D. Intriligator
Cultural Differences between the Military and Parent Society in Democratic Countries,
edited by G. Caforio
Managing Conflict in Economic Convergence of Regions in Greater Europe, 

edited by F. Carluer
Military Missions and their Implications Reconsidered: The Aftermath of September 11th,
edited by G. Caforio and G. Kuemmel
Conflict and Peace in South Asia, edited by M. Chatterji and B. M. Jain
War, Peace, and Security, edited by Jacques Fontanel and Manas Chatterji
Armed Forces and Conflict Resolution, edited by G. Caforio, G. Kümmel and B. Purkayastha
Regional Development and Conflict Management: A Case for Brazil, 

by Raphael Bar-El Crisis, Complexity and Conflict, by I. J. Azis
Putting Teeth in the Tiger: Improving the Effectiveness of Arms Embargoes, 

edited by Michael Brzoska and George A. Lopez
Peace Science: Theory and Cases, by P. Gangopadhyay and M. Chatterji
Advances in Military Sociology: Essays in Honor of Charles C. Moskos, 12A/B,
edited by Giuseppe Caforio
Arms and Conflict in the Middle East, by Riad A. Attar

This study assesses the effect of politics and conflicts on growth in sixty-nine developing societies. Political economists (e.g., Harrod, 1939; Domar, 1946; Solow, 1957, 1988; Denison, 1967, 1985; Feder, 1982; Ram, 1986; Mintz & Huang, 1990, 1991; Ward & Davis, 1992; Mueller & Atesoglu, 1993a, 1993b; Heo & DeRouen, 1998; Heo, 1998) have not empirically examined the results of political factors on economic development and growth (but see Heo & Mintz, 2002). In this study, I developed and applied an augmented production function (PF) model to sixty-nine developing countries from 1960 to 2002 and tested it with several political and conflict variables: political freedom, institutional freedom, regime type, stability, ideology, interstate conflicts, intrastate conflicts, and total conflicts. I utilized statistical methods: non-linear least squares (NLS) and cross-national time series (CNTS) analyses to investigate the impact of political and conflict variables on economic growth (EG) from 1960 to 2002. I used mathematical and formal modeling to investigate the Arab Israeli conflict and the political economy and arms in the Middle East (ME). And I used case studies to illustrate my theories.

1.1. THE PRODUCTION FUNCTION
RESEARCH PROGRAM
The current study is an extension of the PF model research program that
began after the Great Depression in the early 1930s. The purpose of the
study is to introduce political dimensions to the PF defense-growth model
and to assess the impact of political and conflict variables on EG. The study
theorizes that excluding political factors from the PF defense-growth model
hampers any realistic explanation of the problems of EG; that the influences
of economic and military variables and their externalities effects vary across
different political contexts; that political factors are at least as important as
economic factors in determining the outcome of EG; that intrastate and interstate conflicts have differential effects on EG (both types of conflicts
have negative effects on EG; however, intrastate conflicts have more
damaging effects on growth than do interstate conflicts); and that the impact
of conflicts on EG differs across regions.
By incorporating political and conflict variables such as political freedom,
institutional freedom, regime type, regime stability, regime ideological base,
and intrastate, interstate, and total conflicts, I augmented the PF to include
the fundamental dimensions of political regimes. Consequently, the PF
model should gain more explanatory power to predict EG and development
of nations. I extended the applicability of the PF defense-growth model to
the Third World, which has a level of economic and political development
different from the First World. The main findings of the study offer
important contributions to the study of EG in developing countries and
provide guidelines to policy decision makers (PDMs) in evaluating their
‘‘guns versus butter’’ alternatives.
The study provides a preponderance of empirical evidence that the
externality of military spending hinders EG, while the externality of nonmilitary
spending promotes EG in all political contexts. This finding is huge
because it resolved a controversial issue that has been debated for more than
three decades. Also, the results of the study show that the impact of the nonmilitary
sector on EG is positive and significant in the majority of countries,
while the impact of the military sector on EG is positive and significant only
in a minority of countries.
Despite the proliferation of studies on the impact of military spending on
EG, it was inconclusive before the current research whether defense
spending hinders or promotes EG. In fact, despite many research efforts, no
strong conclusion about the relationship between military spending and EG
can be drawn from the literature. The inconsistent results led Chan (1985,
p. 405) to conclude that a review of the literature in this area is ‘‘as likely to
bewilder as it is to enlighten’’ (see also Mintz & Stevenson, 1995, p. 283).
Mintz and Stevenson (1995, p. 85) wrote, ‘‘The literature has failed to
provide any meaningful consensus on the question of whether defense
spending encourages or hinders economic growth. Indeed, any study that
fails to address these issues is unlikely to contribute to such an answer.’’ This
study significantly contributes to settling such a question.
The current study is the first to add conflict variables to the PF defensegrowth
model and test them empirically across countries and regions. The
CNTS analysis with external and internal conflicts (2,349 observations)
shows unequivocally that both types of conflicts, intrastate and interstate,
have negative effects on EG; however, the effects of intrastate conflicts have far more damaging effects on EG than do those of interstate conflicts. The
impacts of intrastate and interstate conflicts in the ME are negative and
significant under all political contexts, and the differential impact of the
more damaging effects of intrastate conflicts on EG also hold under all
political contexts. The CNTS analysis of five regions – the ME, Latin
America, Asia, Africa, and the Caribbean region – shows that the impact of
conflicts on EG differs across regions. The ME offers a preponderance of
evidence that internal and external conflicts have a negative and significant
impact on EG in all political contexts, more so than in other regions.
The current study has very important policy implications since it provides
compelling empirical evidence and guidelines to PDMs on how to allocate the
resources of their states and adopt policies that promote EG. The main
guidelines that I believe are beneficial to PDMs are as follows. First, PDMs
should reform their political system to contribute to EG. Improving levels of
freedom, democracy, and openness of the political system are as important as
economic factors to promote EG. Second, the reallocation of resources to the
civilian sector is the sine qua non to improve the performance of the economy
in developing countries. The leaders of Middle Eastern countries should pay
closer attention to this point due to the enormous amount of resources that
they spend on the military sector. Third, leaders of developing nations should
pursue policies of national reconciliation between rich and poor and among
ethnic and religious groups because domestic conflict has prodigious
damaging effects on the performance of the national economy. In the ME
in particular, economic development is more likely to improve if the leaders
pursue policies that advance domestic reconciliation and international peace.
To illuminate the above-mentioned contributions of this study and show
its importance in the evolution of the PF defense-growth model research
program, I will first review the evolution of the neo-classic PF model;
second, I will review the logic of the incorporation of defense spending
factors into the neo-classic model of EG; and finally, I will review the logic
of the incorporation of political and conflict variables into the PF defensegrowth
model.

1.2. THE EVOLUTION OF THE
PRODUCTION FUNCTION
Solow (1988, p. xi) wrote, ‘‘Growth theory did not begin with my articles of
(1956) and (1957), and it certainly did not end there. Maybe it began with The Wealth of Nations; and probably even Adam Smith had predecessors.’’
The Physiocratic school founded by Franc-ois Quesnay (1694–1774)
preceded Adam Smith in developing the fundamental ideas to achieve
EG. The Physiocrats articulated the roles of economic activities that expand
the country’s revenue, such as industrialization, free trade, and investment.
The Physiocrats believed that a country should concentrate on manufacturing
only to the extent that the local availability of raw materials and of
suitable labor enabled it to have cost advantage over its overseas
competitors (Muller, 1978; Eltis, 1988). Thus, the complete lifting of all
restrictions on local and foreign sales of agricultural products and sufficient
private investments would only be forthcoming if the authorities improve
the general economic climate. In accordance with the Physiocratic doctrine,
the economic climate could be improved by desisting from mercantilist
policies, terminating the state’s policy of providing special privileges to
certain manufacturers, abolishing excessive dues and tolls along transport
routes, and overhauling the tax system so as to remove the disincentive
effect of the existing system. As far as the private investment is concerned,
Quesnay foresaw that the problem might arise through insufficient saving.
Therefore, it was incumbent upon the proprietors (the major source of
saving) to refrain as much as possible from unnecessary consumption
(Muller, 1978; Eltis, 1988).
In all accounts, Adam Smith’s The Wealth of Nations embodied a
penetrating analysis of the processes whereby economic wealth is produced
and distributed. The central thesis of The Wealth of Nations is that capital is
best employed for the production and distribution of wealth under
conditions of governmental non-interference, or ‘‘laissez passer-laissez
faire’’ economy, and free trade. In Smith’s view, the production and
exchange of goods can be stimulated, and a consequent rise in the general
standard of living attained, only through the efficient operations of private
industrial and commercial entrepreneurs acting with a minimum of
regulation and control by governments (Smith, 2000).
Although this view of ‘‘laissez passer-laissez faire’’ economy has undergone
considerable modification by economists in the light of historical
developments since Smith’s time, many sections of The Wealth of Nations,
notably those relating to the sources of income and the nature of capital,
have continued to form the basis for theoretical study in the field of political
economy. The Wealth of Nations has also served, perhaps more than any
other single work in its field, as a guide to the formulation of governmental
economic policies (Persky, 1989). It was Smith’s attempt to define the
institutional structure which will best harmonize the individual’s pursuit of his selfish interests with the broader interests of society. The Smithian model
is one of controlled freedom: freedom of behavior and choice exists only
within the socially established norms of conduct. Self-love and self-interests
go hand in hand with social control and socialization (Samuels, 1977,
p. 196).
After the Great Depression, the main objectives of classical economists
were to regain the stability of the market system and to redefine the steadystate
conditions of EG within the parameters of industrially advanced
societies. Struck by an unstable economic system after the Great
Depression, Harrod (1939) and Domar (1946) attempted to integrate
Keynesian analysis with elements of EG. They used the PF with little
substitutability among the inputs to argue that the capitalist system is
inherently unstable (Barro, 1999, p. 10). In pursuit of redefining economic
stability, they each arrived by noticeably different routes at a classically
simple answer: the national saving rate (s) has to be equal to the product of
the capital-output ratio (n) and the rate of growth of the effective labor force
(n); thus, they are compatible if and only if s ¼ nn. Contrary to Harrod and
Domar’s expectations, their formula proved to be explosively unstable
as a result of its simplicity and the rigidity of its assumptions (Deane, 1978,
pp. 190–204; Solow, 1988, pp. x–xvi).
The advancement of the technological factor by Robert Solow (1957,
1988) opened up growth theory to a wider variety of real-world facts and a
closer connection with general economic theory. Solow (1957, 1988) and
Denison (1967, 1985) are credited for having developed the well-known neoclassical
aggregate PF, which posits that EG is a function of changes in
input of capital, effective labor force, and technology. An economy is
growing at a ‘‘steady state,’’ according to Solow (1988, p. 4), if ‘‘its output,
employment, and capital stocks grow exponentially, and its capital to
output ratio is constant.’’ Thus, the growth of the output can be explained
by the variations of capital and labor.
Later, it became a strong tradition to use the neo-classical PF approach in
studying the defense-growth relationship (Heo, 1999, 2000; Sandler &
Hartley, 1995; Heo & Mintz, 2002). Gershon Feder (1982) used this
approach by dividing the aggregate economic output into export and nonexport
sectors. A number of studies have since followed Feder in exploring
the relationship between exports and EG in which the GDP of a country is
made as a function of the growth rates of different inputs such as labor,
capital, and exports. Following the logic of the neo-classical PF approach, Ram (1986)
developed a two-sector growth (government and private sectors) model to examine the relationship between government spending and EG. Ram
suggested that the public and private sectors differ with respect to
productivity. The two-sector PF framework outlined by Ram (1986) was
adopted from the reasoning developed by Feder (1982, pp. 61–67). In
several articles, Mintz and Huang (1990, 1991) and Huang and Mintz (1990,
1991) developed a three-equation model employing a neo-classical PF model
to test the impact of defense spending, including externalities on EG in the
United States. Mintz and Huang (1990, 1991) and Ward and Davis (1992)
have tested not only the economic effects of military and non-military public
expenditures on growth but also the externality effects of these expenditures.
The defense-growth PF model prior to Mueller and Atesoglu (1993a,
1993b) did not include the impact of technological change on EG. Mueller
and Atesoglu (1993a, 1993b) included technological progress in their model,
utilizing the concept of the Hicks neutral technological change, which
basically means that changes in technology do not change the share of
income going to the factors of production and the factor ratios. In other
words, this concept will allow us to measure the effects of technological
progress separately without affecting the contribution that labor and capital
make to the growth (Heo, 1999). Heo and Mintz (2002) noticed that the
defense-growth PF model can be benefited by including technology
progress. The authors concurred with Solow (1988, p. 35), who suggested
that technological progress is necessary for steady growth to be possible,
and with Denison (1985), who contended that the advancement in
technology provides a way to produce at lower cost. Thus, Heo and Mintz
(2002) concluded that technological progress is the cornerstone for the
persistent long-term growth of output per unit of input.
Furthermore, Heo and DeRouen (1998) suggested that Mueller and
Atesoglu (1993a, 1993b) implicitly assumed that technological progress in
the non-military public sector and technological progress in the non-military
private sector are identical. Thus, Heo and DeRouen (1998) argued that it is
theoretically more reasonable to separate the private and non-military
government sectors while keeping technological change effects in the model.
They claimed that this division of the sectors allows the economic effects of
defense spending on growth to be measured more accurately.
Despite the vast number of studies on the defense-growth relationship, the
political variables were absent from the defense-growth PF model. Heo and
Mintz (2002) extended the PF model of Ram (1986), Mintz and Huang
(1990), and Ward and Davis (1992) to include a political factor (political
party) and tested this model using empirical data on the United States from
1948 to 1996. The augmented Heo–Mintz (H–M) defense-growth-political PF model introduced a new research program which paved the way to
explore the impact of other political factors on the growth and development
of nations. I argue that the H–M contribution was the most important
contribution to the PF since Solow incorporated the technological factor into it.