A Financial Analysis Approach on the Impact of Economic Interdependence on Interstate Conflicts

Abstract

There is a long-standing debate on whether economic interdependence can have an impact and play a crucial role in diminishing interstate conflict. Two schools of thought advocating two opposite beliefs regarding this debate are Realism and Liberalism. The former suggests that economic interdependence does not necessarily promote peace, whereas the latter trusts that it does. According to Liberalism, there is a direct connection between trade and conflict, in other words, between economic factors and security issues. On the contrary, Realists argue that what applies to the international system also applies to trade policy; hence economic cooperation among states has a limited effect when it comes to national security issues. This study attempts to shed light on this debate, i.e. whether bilateral economic relations can affect interstate conflict. To achieve that it uses a theoretical framework derived from the disciplines of international political economy enhanced with a quantitative-financial analysis that employs a series of econometric models in order to identify macroeconomic variables that have an impact on the interstate conflict. Three dyads of countries that have recorded interstate conflict are employed (India-Pakistan, Russia-Ukraine and Yemen-Saudi Arabia). The defense expenses are used as a proxy of interstate conflict, whereas the imports and the exports from one country to the other are the variables that capture the economic interdependence. Evidence is found that exports have a positive impact on defense expenses. This means that economic interdependence does not necessarily lessen interstate conflict, which can be useful at the hands of policymakers.