Monday, July 24, 2006

Postwar Economics

You'd think that wartime devastation would bode ill for the economic prospects of Iraq's most war-torn cities. For example, you might expect that the Japanese cities of Hiroshima and Nagasaki, which were destroyed by nuclear weapons, would have experienced slower than usual economic growth in the decades following World War II.

Surprisingly, though, long-run economic growth is resilient to the damages of war. Edward Miguel and Gerard Roland, economists at UC Berkeley, examined bombing patterns in Vietnam and found that after a generation, the heavily bombed areas shared more or less identical economic indicators with areas subjected to far less or zero bombing.

So what, in particular, might we expect Iraq's postwar economy to look like in another generation? Austan Goolsbee proposes some answers to these questions in his latest New York Times column. Citing the Miguel-Roland study and others, Goolsbee suggests that the devastation of war, in and of itself, will have minimal bearing on Iraq's prospects for economic recovery. Instead, he argues that Iraq's artificial borders pose the biggest threat to prosperity because they force a contentious mix of ethnic and religious groups to live within the same national boundaries. Read Goolsbee's column to learn more about obstacles to economic recovery in post-war Iraq.

1. Miguel and Roland found no links between the intensity of wartime bombardment and long-term economic performance. What comparisons did they make in order to arrive at this conclusion?

2. The absence of a link between wartime devastation and economic stagnation does not suggest that war is "good" for the economy. Sure, spending during wartime and reconstruction can temporarily accelerate growth, but what are the opportunity costs of going to war or rebuilding afterwards? That is, what do nations forgo when they devote resources to war? Here's an archived entry about the costs of war.

3. Wartime destruction may not create long-term obstacles to economic prosperity, but history does raise some red flags about Iraq's borders. Consider the "Artificial States" hypothesis of economists Alberto Alesina, Janina Matuszeski, and William Easterly: National borders that (1) divide ethnic groups into separate countries or (2) appear unusually straight on the map typically enclose lots of internal ethnic and religious conflict. According to the column, what are the differences between natural and artificial borders? How are the post-war economic recoveries of Japan, Europe, and Vietnam consistent with the "Artificial States" hypothesis?

4. Although more straight-edged than some African nations, the British-drawn Iraqi borders surround a volatile mix of ethnic (Kurd and Arab) and religious (Sunni and Shia) divisions. According to Alesina, in what ways do ethnic (or religious) conflicts divert resources from the pursuit of economic prosperity? How is Iraq's mineral wealth likely to affect its internal ethnic and religious strife? Natural resources and governing institutions are two of the many determinants of economic growth. What does the "Artificial States" study suggest about the relative importance of each?

5. Given the evidence from the "Artificial States" study, what policies, if any, might moderate the internal strife of artificial states? Consider migration policies and the constitutional provision of authority among regional and national governments.

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