Sunshine 1 The Robustness of the Capitalistic Peace Theory Across Regions Honors Thesis Benjamin Sunshine Kristian Estevez ECO 4930 April 6 th 2011
Sunshine 2 Part I: Introduction The democratic peace theory states that democracies rarely, or even never, go t o war with nything else but democracy account for liberal peace? One answer might be the capitalistic peace theory which states that developed economies rarely, or even never, go to war or engage in low level disputes with each other. Recent analyses by Erik Gartzk e, Quan Li, Dominic Rohner and Charles Boehmer have interdependence v ariable in the post World War II era in the Kantian peace triangle (Gartke, 2007). Instead of measuring economic interdependence with bilateral trade, which is commonly used in the democratic peace theory literature, Gartzke emphasis that capitalism is mor e than just trade (Gartzke, 2007). Gartzke argues that economic interdependence is based on free capital markets and financial openness (Gartzke, 2007). Gartzke finds that capitalism is a powerful force and maybe more powerful then democracy as a force as an explanation for the liberal peace (Gartzke, 2007). Gartzke makes the assumption that the capitalistic peace theory is equally applicable across regions and culture, which allowed him to pool data for dyads globally. In this study I empirically examine the robustness of the capitalistic peace theory introduced by Gartzke in his The main question
Sunshine 3 that this paper seeks to explain is whether the capitalist peace theory holds acros s different region. Part II discuses the literature regarding the capitalistic peace theory. Part III discuses the four primary theories regarding the capitalistic peace theory. Part IV discuses my hypotheses that are going to be tested. Part V explains t he data used in this study. Part VI discuses the methodology used to conduct my statistical tests. Part VII reports the findings and discussions the results of my statistical test. Part VIII discuses some limitations that I came across and in part IX I con clude with some final remarks Part II: Literature Review At the most fundamental level the democratic peace theory and the capitalistic peace In his essay, Kan is that as Kant explains that the checks and balances that are inherent in a constitutional republic can preve nt them from engaging in war with each other (Kant, 1795). The reasoning behind this as Kant explains is that consent of the citizens is requited to engage in war and citizens will be very cautious about going to war because they will be the ones who will be paying for the war and they will be the ones fighting in should renounce their savage and lawless freedom, adapt themselves to public coercive laws, and thu s form an international state, which would necessarily continue to grow until it embraced all ature also unites nations which the concept of cosmopolitan right would not have protected from violence and war, and does so by
Sunshine 4 means of their mutual self interest. For the spirit of commerce sooner or later takes hold of every people, and it cannot exist translated these three factors into democracy, international organization membership/alliance membership and economic interdependence, which is known as the Kantian peace triangle (Cederman an d Rao, 2001). Other explanation have been proposed since Kant but the modern literature surround the capitalistic peace theory started in 1909 when Norman Angell first which was republished in 1910 and renam ed which was later revised in 1933. In the last version of his book Angell argues that integration of the economies in Europe had grown to such a degree that an economic war between nations would be futile and nations cannot enrich it self through conquest of its neighbors. Angell outline d two processes that decrease the incentive for integrated economies to go to war. The first process is that changes in the nature of production make it difficult to cheaply subdue and to profitably man age modern economies through force (Angell, 1933). The second process is that that the integration of world markets not only facilitates commerce but also creates new interests to prevent war because financial interdependence ensures that damage inflicted on one economy travels through the global system (Angell, 1933). Unfortunately Angell and Kant were proven wrong as two world wars and the great depression created a concern as to how can capitalism ensure s peace between countries. As the Cold War went o n the literature surrounding the capitalistic peace theory was dormant until the Likelihood on Interstate War, 1816 Bremer finds that capitali sm to be a powerful force in discourag ing In the economic sphere,
Sunshine 5 these results suggest that the likelihood of war starting between "have" states is considerably lower than between "have" and "have not" or between "have no t" states (Bremer, 1992, 336 337). Erik Gartzke Dominic Rohner, Quan Li and Chalres Boehmer have written numerous studies explaining that not only is capitalism the reason why developed economies do not go to war with each other but that capitalism is more powerful force then democracy in preventing war. These studies argue that nations with a high level of capital openness are able to avoid conflict with each other and maintain a lasting peace. In particular, nat ions with freer capital markets are more dependent on international investors, because the investors are likely to withdraw if the country is engaged in a war or inter state conflict. As a result, leaders of states give greater credibility to threats made by countries with higher levels of capital openness, causing the aforementioned countries to be more peaceful than others by avoiding the possibility of misrepresentation of information (Gartzke and Rohner, 2011; Gartzke and Li, 2003; Gartzke, Li and Boehm er, 2001; Gartzke, 2007). This study empirically examines the robustness of the capitalistic peace theory by seeing if there are any important regional differences. Part III: Theory It should be explained that within the capitalistic peace theory there a re four primary theories that each try to explain the capitalistic peace theory. The first theory is trade interdependence, which states that trade, and free markets are tied with development and peace, elopment, Social Order, and World ). The second theory is the size of the government introduced by Patrick McDonald. His theory states that substantial quantities of public property generate fiscal
Sunshine 6 autonomy for governments, strengthen their hold on the domestic reigns of power, and create opportunities to pursue more aggressive foreign policies. Statistical tests show that greater quantities of publicly held assets increase the likelihood that a state will participate in military confl ict. Given that the predominance of privately held property is one of the defining (McDonald, 2007; McDonald, 2010). The third theory is the economic norm theo ry, which is based on clientelism and was introduced by Michael Mousseau. Mosseau argues that bounded rationality and divergent hierarchies between clients and the states is the reason why developed economies do not go to war with each other (Mosseau, 2003 ). The fourth theory is the free capital market and capital openness theory, which was explained above in the literature review and is the basis for the rest of this study. Part IV: Hypotheses The purpose of this paper is to examine to see how robust the capitalistic peace theory is across five different regions (West, Latin America, Africa, Asia and Middle East). In order to test this, I will perform multiple regressions and compare the results. My hypotheses are therefore: H1: The Capitalistic Peace is a universal phenomenon Accepted by a finding a negative and significant relationship between joint dyads and significant relationship in any or all of the regions. H2: The Capitalistic Peace is only a western phenomenon hold in any region outside the West. I will reject H2 if I fail to find all of these relationshi ps.
Sunshine 7 Part V: Data c (he was nice enough to e mail me his data). The Gartzke study used the list of dyad states published by the Correlates of War (COW) project with the unit of analyses being the dyadic year. The Gartzke study analyzes the time period between 1950 1992. The dependent variables used by the Gartzke study is Militarized Interstate Disputes (MID) defined by the Correlates of a set of interactions between or among states involving threats to use f the dyad in question experienced a Militarized Instate Dispute (MID ) in The independent variables of interest are financial openness (FinopenLO), economic interdependence (TradeLO), democracy (DemocracyLO), economic development (GDPPCLO), contiguity (Contiguity) distance (Distance), major power status (MajorPower), allies (Allies) and capability ratio (PowerRatio). The primary independent variables are financial openness (Fin Open LO) and economic interdependence (Trade LO). The International Monetary Fund (IMF ) data is the basis for the financial openness variable. The IMF provides several indicators of market size, robustness and liberalization. The IMF publication Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) lists a series of vari ables measuring economic openness. Gartzke used an index evaluated in previous studies that takes the difference between eight and the sum of eight types of government restrictions on foreign exchange, current and capital accounts (Gartzke, 174, 2007). The trade interdependence variable is measured as exports plus imports divided by GDP (Gartzke,174, 2007). The Gartzke study used the data set on gross domestic
Sunshine 8 product (GDP) and trade compiled by Kristian S. Glesditch who published a data set on gross domest ic product (GDP) and trade in the Journal of Conflict Resolution in 2001. joint democracy for the dyad by focusing on the regime score of the least democratic state in the values from 10 (highest autocracy) to +10 (highest democracy). The fourth independent variable is economic development (GDP PP LO), which is measured as gro ss domestic product (GDP) per capita (Gartzke, 175, 2007). Gartzke got the data for economic development from the Glesditch data set on gross domestic product (GDP) and trade. The fifth independent variable is geographic continuity (Non Contiguity), which measures if the dyads in question share a border or are separated by less than 150 miles of water This variable is coded 0 (border) or 1 (separated by more than 150 miles of water) (Gartzke, 176, 2007). The Gratzke study used the Correlates of War (COW) p roject direct contiguity index to measure this variable. The sixth independent variable is distance (Distance), which is meant for all dyads and is measured by the natural log of the distance in miles between capital cities (Gartzke, 176, 2007). The sevent h independent variable is major power status (Major Power) which is coded either 1 if the dyad contains a major power and 0 if the dyad contains no major power (Gartzke, 2007, 176). According to the ajor powers are China, France, United S tates, United Kingdom and USSR. The eighth independent variable is alliance membership, which correspond to whether the countries in the dyad are allies) (Gartzke, 2007, 176). The Gartzke study uses the Correlates of War (COW) project alliance membership index to measure this variable. The ninth and last independent variable is the capability ratio (Power Ratio), which is a statistical measure of national power. This variable is composed of a
Sunshine 9 country consumption, iron and steel production, military manpower and military expenditures. Capability ratio is measured as the log of the ratio of the larger to the smaller value f or a given dyad (Gartzke, 2007, 176). The Gartzke study uses the Correlates of War (COW) project composite capabilities index to measure this variable. I also created five intra regional dummy question includes two countries in the s pecific does not include countries in the same region. The variables are West (North America and Europe), Africa (Africa), Asia (Asia), LatinAm (Latin America) and MidEast (Middle East). Part VI: Methodology In order to see if there are regional differences with regards to the capitalistic peace theory five different regressions are performed for each of the five regions (West, Africa, Latin America, Asia and Middle East). In each of the fi ve regressions I will restrict the data set to only LatinAm==1, if Asia==1 and if MidEast==1). It is also important to note here that unlike the Gratzke stu dy which ran a logit regression because the dependent variable Militarized Interstate Disputes (MID) is dichotomous (coded I will run a rare event logit or relogit test. Created by Gary King and Lanhcge Zeng a rare event logit or relog it tests takes into account the fact that some dependent variables like war are observed infrequently coefficients (King and Zeng, 2001). Part VII: Findings and Discussion Figure 1 is the recreat ion of Gartzke original model. All the key independent variables (Fin
Sunshine 10 Open LO and Trade LO) are negative (an increase in finical openness and trade decreases the likelihood of a MID) and statistically significant at the .05 alpha level with p values of 032 and .000 robustness of the capitalistic peace theory. In figures 2,3,4,5 and 6 I rerun Gartzke original model but restrict the model to only the interstate dyads to test if region s matter in testing the capitalistic peace theory. Figure 2 is the test for the Western (North America and Europe) dyads. This test reveals that all the key independent variables (Fin Open LO and Trade LO) a re negative (an increase in fin ical openness and trade decreases the likelihood of a MID) and statistically significant. These results show that the capitalistic peace theory holds in the West. Figure 3 is the test for Asian dyads. This test reveals that financial openness is negative ( an increase is financial openness decrease the likelihood of a MID) and statistically significant as well The other key independent variable (Trade LO) is negative but is not significant at the .05 alpha level with a p value of .106. These results show th African dyads. This test reveals that all the key independent variab les (Fin Open LO and Trade LO) a re negative (an increase in finical openness and trade decreases the likelihood of a MID) and significant at the .05 alpha level with p values of .021 and .000 respectively. These results show that the capitalistic peace the ory holds in Africa. Figure 5 is the test for Latin American dyads. This test reveals that all the key independent variables (Fin Open LO and Trade LO) a re negative (an increase in finical openness and trade decreases the likelihood of a MID) and significa nt at the .05 alpha level with p values of .032 and .000 respectively. These results show that the capitalistic peace theory holds in Latin America as well Lastly, Figure 6 test s the Middle
Sunshine 11 Eastern dyads. This test reveals that all the key independent var iables (Fin Open LO and Trade LO) a re negative (an increase in finical openness and trade decreases the likelihood of a MID) and significant at the .05 alpha level with p values of .010 and .000 respectively. These results show that the capitalistic peace theory holds in the Middle East. These 5 tests reveal some important ideas behinds the robustness of the capitalistic peace theory. First I can reject H2 ( The capitalistic peace theory is only a western phenomenon) because even though I found a negative a nd significant relationship in the West, I did not find that the capitalistic peace theory does not hold in any region outside the West. Second I can accept H1 ( The capitalistic peace theory is a universal phenomenon) because I found a negative and signifi cant relationship between financial openness and Militarized Interstate Disputes (MID) in every region. The fact that I can accept H1 is important because it shows that capitalistic peace theory is a universal phenomenon. These facts show that no matter if you are a dyad in Africa, Asia, Latin America, the West and the Middle East capitalism will reduce the chances of conflict. Part VIII: Limitations Even though the results support my hypotheses; additional research is needed to provide more accuracy to m y findings One limitation is that my study only tested dyads between 1950 1992 so there is still almost two decades of recent data that can be used to enlarge the sample size Future studies should incorporate data since 1992 which and retest to see if my results still hold. Post 1992 data could provide additional insights because it will incorporate a world after the end of the Cold War. Another limitation is the militarized interstate disputes (MID) variable, which is defined a set of interactio ns between or among states involving threats to use military force, displays
Sunshine 12 of military force, or actual uses of military force This definition does not really tap into the concept of war. I believe that this variable overestimates the number of wars t hat has actually occurred because it counts the threat and the display of force instead of just counting the use of force or a conflict that resulted in causalities. Future studies should try to find a better variable that taps into the concept of war. A third limitation is the fact that I pooled data for all dyads globally to create my 5 regions. Bruce Russert and John O neal who in 2001 who are the pioneers of the democratic peace theory warn that many things are missing from their model, especially the consideration of perception and different patterns of behavior for particular subgroup of state and by geographical regions (Russert and Oneal, 2001). Part IX: Conc lusion The literature regarding the capitalistic peace theory is large and has expanded examine and understand another dimension of the capitalistic peace theory to see if there is a regional dimension to this theory. Even though as stated earlier future studies is needed to fix and extend my results, this study is very promising. This study offers evidence suggesting that the capitalistic peace theory holds generall y around the regions of the world and is not limited to any specific region These results have implications especially revolving around American foreign policy. Promotin g democracy around the world has been a cornerstone of American foreign policy. In hi Ultimately, the best strategy to ensure our security and to build a durable peace is to support the advance of democracy
Sunshine 13 elsewhere. Democracies don't attack each other." In a 2008 press conferenc e regarding the Iraq democracies don't go to war with each other. And the reason why is the people of most societies don't like war, and they understand what war means.. .. I've got great faith in democracies to promote peace. And that's why I'm such a strong believer that the way forward in the Middle East, the broader Middle East, is to promote democracy." Maybe American foreign policy experts should take a step back and reexamine its strategy of promoting democracy around the world. Instead of promoting democracy around the world, American foreign policy experts should instead promote capitalism to countries that are unstable. Once a strong economy is established and the chances of war are reduced, democracy can soon follow. If both capitalism and democracy fails the United States can just follow Thomas Golden Arches Theory of Conflict Prevention and build a bunch he world which will reduce the chances of conflict.
Sunshine 14 Appendix Figure 1: Recreation of Gartzke Original Model MID Robust Coef. Std. Err. z P>z [95% Conf. Interval] Fin Open LO .0729224 .0340114 2.14 0.032 .1395835 .0062614 Trade LO 2.606402 .47643 5.47 0.000 3.540188 1.672617 Democracy LO .0419816 .0102914 4.08 0.000 .0621523 .0218108 GDP PP LO 27.26214 11.93469 2.28 0.022 50.6537 3.870583 Non Contiguity 1.271483 .1660028 7.66 0.000 1.596843 .9461238 Distance .2879046 .0581047 4. 95 0.000 .4017878 .1740214 Major Power .1630439 .16074 1.01 0.310 .4780885 .1520008 Allies .9802459 .1437991 6.82 0.000 1.262087 .698405 Power Ratio .2446795 .0417438 5.86 0.000 .3264959 .1628631 _cons .0806641 .5393076 0.15 0.881 1.137 688 .9763593 Figure 2: West MID Robust Coef. Std. Err. z P>z [95% Conf. Interval] Fin Open LO 3.374504 .8684514 3.89 0.000 5.076638 1.672371 Trade LO 2.881867 1.26017 2.29 0.022 5.351755 .4119786 Democracy LO .0693797 .018889 3.67 0.000 .10 64016 .0323578 GDP PP LO 2.012794 24.02547 0.08 0.933 45.07626 49.10185 Non Contiguity .7843005 .2704708 2.90 0.004 1.314414 .2541874 Distance .0519188 .1446975 0.36 0.720 .231683 .3355206 Major Power .1005734 .325398 0.31 0.757 .7383417 .537 1949 Allies .6285995 .278678 2.26 0.024 .0824005 1.174798 PowerRatio .281295 .1128669 2.49 0.013 .50251 .06008 _cons 9.439058 2.5245 3.74 0.000 14.38699 4.491129
Sunshine 15 Figure 3: Asia MID Robust Coef. Std. Err. z P>z [95% Conf. Interval] Fin Open LO .4211245 .1273841 3.31 0.001 .6707927 .1714564 Trade LO 3.280595 2.028758 1.62 0.106 7.256889 .6956982 Democracy LO .0496316 .0267727 1.85 0.064 .0028418 .1021051 Depen LO 131.9447 47.36584 2.79 0.005 224.78 39.10934 Non Contiguity 2.0 86747 .8363743 2.49 0.013 .4474834 3.726011 Distance .797352 .2217289 3.60 0.000 1.231933 .3627713 Major Power 1.059103 .7827475 1.35 0.176 .4750538 2.59326 Allies 1.117662 .5905316 1.89 0.058 .0397586 2.275083 Power Ratio .237728 .1032904 2.30 0.021 .4401735 .0352825 _cons 8.892738 1.902407 4.67 0.000 5.164088 12.62139 Figure 4: Africa MID Robust Coef. Std. Err. z P>z [95% Conf. Interval] Fin Open LO .078343 .0339784 2.31 0.021 .1449394 .0117467 Trade LO 4.142012 .5926022 6.99 0.00 0 5.303491 2.980534 Democracy LO .044534 .0104831 4.25 0.000 .0650804 .0239875 GDP PP LO 35.82447 16.3244 2.19 0.028 67.81971 3.829223 Non Contiguity 1.123947 .1720331 6.53 0.000 1.461126 .7867682 Distance .3877666 .0642033 6.04 0.000 .5136027 .2619304 Major Power .1227934 .1573785 0.78 0.435 .4312497 .1856628 Allies .6612927 .1490276 4.44 0.000 .9533815 .3692039 Power Ratio .2801453 .044857 6.25 0.000 .3680635 .1922272 _cons 1.130566 .6090468 1.86 0.063 .0631435 2.3242 76
Sunshine 16 Figure 5: Middle East MID Robust Coef. Std. Err. z P>z [95% Conf. Interval] Fin Open LO .0792987 .0369998 2.14 0.032 .151817 .0067804 Trade LO 2.597759 .5422513 4.79 0.000 3.660552 1.534966 Democracy LO .0385977 .0105729 3.65 0.000 .0 593203 .0178752 GDP PP LO 30.71063 13.53169 2.27 0.023 57.23226 4.189006 Non Contiguity 1.250181 .1665672 7.51 0.000 1.576647 .9237153 Distance .2565189 .062439 4.11 0.000 .3788972 .1341407 Major Power .2817906 .1649092 1.71 0.087 .605 0068 .0414256 Allies .7831089 .1529229 5.12 0.000 1.082832 .4833855 Power Ratio .2511508 .0431339 5.82 0.000 .3356917 .16661 _cons .3891618 .5750764 0.68 0.499 1.516291 .7379672 Figure 6: Latin America MID Robust Coef. Std. Err. z P>z [95% Conf. Interval] Fin Open LO .0907378 .0352247 2.58 0.010 .159777 .0216986 Trade LO 2.529978 .4759906 5.32 0.000 3.462903 1.597054 Democracy LO .0385246 .0105484 3.65 0.000 .0591991 .01785 GDP PP LO 29.73544 12.73722 2.33 0.020 54.69993 4.770943 Non Contiguity 1.270018 .1660112 7.65 0.000 1.595394 .9446419 Distance .287333 .0600839 4.78 0.000 .4050953 .1695708 Major Power .2033408 .1641124 1.24 0.215 .5249952 .1183136 Allies .9862195 .1483032 6.65 0.000 1.276889 .6955 505 Power Ratio .2402475 .0425415 5.65 0.000 .3236273 .1568676 _cons .0105524 .5574577 0.02 0.985 1.10315 1.082045
Sunshine 17 Works Cited Angell, Norman. The Great Illusion, 1933. New York: Arno, 1972. Print. Bremer, Stuart. "Dangerous Dyads: Conditions A ffecting the Likelihood of Interstate War, 1816 1965." Journal of Conflict Resolution 36.2 (1992): 309 41. Print. Cederman, Lars Erik, and Mohan P. Rao. "Exploring the Dynamics of the Democratic Peace." Journal of Conflict Resolution 45.6 (2001): 818 33. Print. Gartzke, Erik. "The Capitalist Peace." American Journal of Political Science 51.1 (2007): 166 91. Print. Gartzke, Erik, and Dominic Rohner. "The Political Economy of Imperialism, Decolonization and Development." British Journal of Political Scien ce (2011): 1 32. Print. Gartzke, Erik, and Quan Li. "War, Peace, and the Invisible Hand: Positive Political Externalities of Economic Globalization." International Studies Quarterly 47.4 (2003): 561 86. Print. Gartzke, Erik, Quan Li, and Charles Boehmer. "Investing in the Peace: Economic Interdependence and International Conflict." International Organization 55.2 (2003): 391 438. Print. Kant, Immanuel. Perpetual Peace [Whitefish, Mt.]: Kessinger, 2007. Print. King, Gary, and Langche Zang. "Explaining R are Events in International Relations." International Organization 55.3 (2003): 693 715. Print. Levy, Jack S. "Domestic Politics and War." Journal of Interdisciplinary History 18.4 (1988): 653 73. Print. McDonald, Patrick J. "Capitalism, Commitment, and Peace." International Interactions 36.2 (2010): 146 68. Print.
Sunshine 18 McDonald, Patrick J. "The Purse Strings of Peace." American Journal of Political Science 51.3 (2007): 569 82. Print. Mousseau, Michael. "The Nexus of Market Society, Liberal Preferences, and Democratic Peace: Interdisciplinary Theory and Evidence." International Studies Quarterly 47.4 (2003): 483 510. Print. Russett, Bruce M., and John R. Oneal. Triangulating Peace: Democracy, Interdependence, and International Organizations New York: Norto n, 2001. Print. Weede, Erich. Economic Development, Social Order, and World Politics Boulder, CO: Lynne Rienner, 1996. Print.