Economics 101: Do wars ever make economic sense?

There is a palpable fear in the Middle East that a full-blown regional conflict could break out; if it were to happen, the costs would be catastrophic.

Given the manifest economic devastation that violent conflict would bring about, why do people still start wars?

Before answering this question, it is worth clarifying exactly why war is usually an irrational enterprise. This issue is analysed in game theory, which is a branch of mathematical economics. Violent conflict has a direct economic cost on all parties, including the victorious one: armament; mobilisation; loss of life; damage to infrastructure; and so on. An armed engagement results in a reconfiguration of resource ownership, such as when a country claims new territory from a neighbouring country, or pirates seize a ship. Game theorists consider such actions “irrational” because all of the warring parties would be better off if they accepted the post-conflict resource reconfiguration without the preceding violent exchange.

To illustrate, in 1776, what was about to become the United States, declared independence from Britain. After eight years of combat, leading to the death of over 100,000 people, and millions of dollars of military expenditure, Britain formally accepted the colonies’ independence in the Treaty of Paris. Had the terms of the treaty been accepted by both sides in 1775, then in principle, thousands of lives and millions of dollars would have been saved by the warring factions. An analogous argument can be made in virtually every example of violent conflict, whether it is two children fighting in a playground, or the Second World War.

The strategy of conveying the irrationality of violence in an attempt to avert it is regularly deployed by prospective warriors. For example, a robber will often brandish a gun and remind you that it is in your interest to surrender your possessions without resisting; and foreign naval vessels that illegally enter another country’s waters may be met with harmless warning shots.

Unfortunately, individuals and governments have a long history of violent conflict, despite its apparent irrationality. What explains this phenomenon?

________

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________

Game theory tells us that the decisive factor is uncertainty (technically referred to as “imperfect information”) by the prospective warriors about the goals, the resolve and the military capabilities of the different parties.

To see why, let us return to the example of American independence. Had the terms of the 1783 Treaty of Paris been offered to King George III’s representatives in 1775, they would have surely rejected them, because they were convinced of their military superiority over the colonies. The British would have rationally surmised: “Why on earth would we surrender the ability to control and tax the colonies if a small expeditionary force would be sufficient to crush the insurgency?” In other words, they didn’t believe that the Americans had the military might to resist British rule; as a result, the expected cost of the war was considerably lower than the implied losses in the Treaty of Paris. The British did not fight to the death, however. They fought long enough to realise that they could not beat their colonies, whereupon it became rational to concede defeat.

The British probably also suffered from uncertainty regarding the colonists’ will. Perhaps they overestimated the prevalence of loyalists, or underestimated the rebels’ resolve. Similarly, if you suspect that a robber is either too cowardly to use the gun that he is brandishing, or that it might be fake, then you may refuse to hand over your wallet. This might force the robber to shoot you, possibly non-lethally, to demonstrate his ability to coerce you into surrendering your possessions. It costs him a bullet and a higher prison sentence in the event that he gets caught, but such costs are necessary for him to overcome the uncertainty that is interrupting his asset seizure.

Returning to the Middle East at present, what kind of uncertainty might be pushing prospective warriors closer to war? Prior to 2001, and more specifically to the US invasions of Afghanistan and Iran, the configuration of resource ownership in the Middle East was quite stable, and the different powers had a good sense of each other’s military capabilities. Today, the extensive use of proxies and non-state actors has created a great deal of uncertainty regarding the military resources at the disposal of each government, creating the possibility that two different countries overestimate their own power - a precursor to war.

What can be done to de-escalate? One strategy is to use mediators to credibly disseminate information about military capabilities. For example, a team of UN experts with inside knowledge of each side’s military prowess might successfully convince one of the parties to backdown preemptively by demonstrating to it that its aggression will result in its own defeat.

Unfortunately, with much military information being sensitive and secret, there are limits to what can be credibly conveyed verbally; and that is why the world’s history is littered with wars that initially seem like economic folly, but turn out to be, upon closer inspection, inevitable information-gathering exercises.

Omar Al-Ubaydli is a researcher at Derasat, Bahrain. We welcome economics questions from our readers via e-mail (omar@omar.ec) or tweet (@omareconomics)

The White Lotus: Season three

Creator: Mike White

Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell

Rating: 4.5/5

In the Restaurant: Society in Four Courses
Christoph Ribbat
Translated by Jamie Searle Romanelli
Pushkin Press

Student Of The Year 2

Director: Punit Malhotra

Stars: Tiger Shroff, Tara Sutaria, Ananya Pandey, Aditya Seal

1.5 stars

Specs

Engine: Dual-motor all-wheel-drive electric

Range: Up to 610km

Power: 905hp

Torque: 985Nm

Price: From Dh439,000

Available: Now

How Sputnik V works

The biog

Fatima Al Darmaki is an Emirati widow with three children

She has received 46 certificates of appreciation and excellence throughout her career

She won the 'ideal mother' category at the Minister of Interior Awards for Excellence

Her favourite food is Harees, a slow-cooked porridge-like dish made from boiled wheat berries mixed with chicken

Test

Director: S Sashikanth

Cast: Nayanthara, Siddharth, Meera Jasmine, R Madhavan

Star rating: 2/5

UPI facts

More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

RACE CARD

5pm: Wathba Stallions Cup – Handicap (PA) Dh70,000 (Turf) 2,200m
5.30pm: Khor Al Baghal – Conditions (PA) Dh80,000 (T) 1,600m
6pm: Khor Faridah – Handicap (PA) Dh80,000 (T) 1,600m
6.30pm: Abu Dhabi Fillies Classic – Prestige (PA) Dh110,000 (T) 1,400m
7pm: Abu Dhabi Colts Classic – Prestige (PA) Dh110,000 (T) 1,400m
7.30pm: Khor Laffam – Handicap (TB) Dh80,000 (T) 2,200m

In numbers: PKK’s money network in Europe

Germany: PKK collectors typically bring in $18 million in cash a year – amount has trebled since 2010

Revolutionary tax: Investigators say about $2 million a year raised from ‘tax collection’ around Marseille

Extortion: Gunman convicted in 2023 of demanding $10,000 from Kurdish businessman in Stockholm

Drug trade: PKK income claimed by Turkish anti-drugs force in 2024 to be as high as $500 million a year

Denmark: PKK one of two terrorist groups along with Iranian separatists ASMLA to raise “two-digit million amounts”

Contributions: Hundreds of euros expected from typical Kurdish families and thousands from business owners

TV channel: Kurdish Roj TV accounts frozen and went bankrupt after Denmark fined it more than $1 million over PKK links in 2013

Formula Middle East Calendar (Formula Regional and Formula 4)

Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi

Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi

Round 3: February 7-9, Dubai Autodrome – Dubai

Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi

Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia

Paris Can Wait
Dir: Eleanor Coppola
Starring: Alec Baldwin, Diane Lane, Arnaud Viard
Two stars

What is blockchain?

Blockchain is a form of distributed ledger technology, a digital system in which data is recorded across multiple places at the same time. Unlike traditional databases, DLTs have no central administrator or centralised data storage. They are transparent because the data is visible and, because they are automatically replicated and impossible to be tampered with, they are secure.

The main difference between blockchain and other forms of DLT is the way data is stored as ‘blocks’ – new transactions are added to the existing ‘chain’ of past transactions, hence the name ‘blockchain’. It is impossible to delete or modify information on the chain due to the replication of blocks across various locations.

Blockchain is mostly associated with cryptocurrency Bitcoin. Due to the inability to tamper with transactions, advocates say this makes the currency more secure and safer than traditional systems. It is maintained by a network of people referred to as ‘miners’, who receive rewards for solving complex mathematical equations that enable transactions to go through.

However, one of the major problems that has come to light has been the presence of illicit material buried in the Bitcoin blockchain, linking it to the dark web.

Other blockchain platforms can offer things like smart contracts, which are automatically implemented when specific conditions from all interested parties are reached, cutting the time involved and the risk of mistakes. Another use could be storing medical records, as patients can be confident their information cannot be changed. The technology can also be used in supply chains, voting and has the potential to used for storing property records.

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THE BIG MATCH

Arsenal v Manchester City,

Sunday, Emirates Stadium, 6.30pm

The National's picks

4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young

Abu Dhabi GP schedule

Friday: First practice - 1pm; Second practice - 5pm

Saturday: Final practice - 2pm; Qualifying - 5pm

Sunday: Etihad Airways Abu Dhabi Grand Prix (55 laps) - 5.10pm

Ultra processed foods

- Carbonated drinks, sweet or savoury packaged snacks, confectionery, mass-produced packaged breads and buns

- margarines and spreads; cookies, biscuits, pastries, cakes, and cake mixes, breakfast cereals, cereal and energy bars;

- energy drinks, milk drinks, fruit yoghurts and fruit drinks, cocoa drinks, meat and chicken extracts and instant sauces

- infant formulas and follow-on milks, health and slimming products such as powdered or fortified meal and dish substitutes,

- many ready-to-heat products including pre-prepared pies and pasta and pizza dishes, poultry and fish nuggets and sticks, sausages, burgers, hot dogs, and other reconstituted meat products, powdered and packaged instant soups, noodles and desserts.

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