Misunderstood peace dividends

A decade ago I led a group of US government and military officials to Egypt. We heard often that Egyptians were disenchanted with the peace agreement with Israel, then more than 10 years old. Highest on the list of disappointments was the failure to achieve a peace dividend. As an economist, I was sorry that their assessments were so devoid of economic analysis. Even worse, I heard this same tune from very high US officials posted in Egypt.

The belief that GDP will surely rise once peace treaties have been signed reveals an abysmal economic naivet. Indeed, a 1997 World Bank study found that "the relationship between military spending and growth is not significant for most developing countries." But the lament persists. Its popular embrace by the masses is understandable. But its acceptance by high authorities is dangerous because it undermines support for the peace process.

For a peace treaty to catapult economic development to new heights, five conditions must be met:

*Defense spending must in fact be reduced so resources can be freed for more economical pursuits. This is often not the case. To the degree that regimes are buttressed by their own militaries or that civilian authorities are fearful of cutting military budgets, reductions may not take place. In an economy like Egypt's or Pakistan's, for example, defense cuts not only risk alienating the military, but would unleash thousands of workers into economies with already high unemployment. Also, to the degree that other threats exist, military outlays may only be shifted to another front rather than reduced.

*Resources released by defense cuts must be channeled into public or private investment. Productivity and output can increase only through human or physical capital development. If defense reductions are put into private or public consumption - another palace, greater subsidies for bread, sports stadiums, or even public housing - there's little reason to expect higher growth.

*Public funds must be effectively spent. Building roads to nowhere, for example, adds nothing to productivity, though it may well feather some contractors' nests.

*Appropriate and effective economic support mechanisms to facilitate growth are critical. Countries with distorted price systems, excessive government regulation, weak property rights, incomplete capital markets, and uneconomic sociocultural "baggage" will find it exceedingly difficult to spur growth under any circumstances. If the real economy is structurally unsound, no form of injections - redirected military outlays, foreign aid, or capital inflows - is likely to matter much.

*There must be an absence of disruptive external shocks, such as recession in major trade partners, an Asian "contagion," or steeply falling commodity prices, which could overwhelm the economic gains that stem from appropriate redirection of defense outlays.

Despite popular complaints, there have been both real and significant peace dividends in the Mideast. Unnecessary and futile wars have cost thousands of lives. To the degree that peace treaties and agreements have been respected, the deaths of large numbers of young men and women have been avoided, with bones of contention adjudicated in other ways. This is the real peace dividend.

When the eight-year Iran-Iraq war ended, each nation got a real peace dividend, but not the expected economic progress. Indeed, the squandering of the economic dividends of peace seems a sad but permanent part of history. We can be assured that if Syria-Israel discussions bring peace, two to three years later Syrian lamentations about the failure of the peace dividend will be heard.

US officials, rather than swallowing this bogus claim, should emphasize that the burden is on peace-agreement participants to effectively utilize the blessings of peace. Indeed, the "no peace dividend" argument is pure obfuscation to minimize regime accountability by pointing a finger at foreigners for domestic economic failures. This is dangerous, puting both peace and peace dividends in jeopardy. We need to do better.

*Donald Losman is a professor of economics at the National Defense University, in Washington.

(c) Copyright 1999. The Christian Science Publishing Society

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