Economics of National Security
Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM
- Chair: Martin Feldstein, Harvard University
AbstractOver the past decade the United States has invested substantial resources in protecting its troops against improvised explosive devices (IEDs). Using newly declassified military records on individual IED explosions in Afghanistan from 2006-2014, we show that detonation and casualty rates did not decline during this period. Consistent with historical evidence from other substate conflicts, qualitative evidence from the Afghan conflict suggests that insurgents adapted quickly to neutralize military investments.
Insecurity and Industrial Organization: Evidence From Afghanistan
AbstractOne-fifth of the world's population lives in countries affected by fragility, violence and conflict, impeding long-term economic growth. However, little is known about how firms respond to local changes in security, partly because of the difficulty of measuring firm activity in these settings. This paper makes two contributions. First, we develop a method for observing private sector activity using mobile phone metadata, and validate this measure with administrative and survey-based data on over 2,300 firms in Afghanistan. Second, we use this new measure of firm activity to examine how local insecurity affects firm activity. We first illustrate this method using an empirical case study of the 2015 Taliban attack on Kunduz, Afghanistan's fifth largest city. We then generalize this approach by studying how nationwide location decisions of the Afghan private sector respond to over 100 large terrorist attacks occurring over the course of four years. We find that firms reduce presence in districts following major increases in violence; that these effects persist for up to six months; and that larger firms are more responsive to violence. We discuss potential mechanisms, firms' strategic adaptations, and implications for policymakers.
The Sword and the Shield: The Economics of Targeted Sanctions
AbstractWhile broad economic sanctions have long been used as instruments of foreign policy, targeted sanctions focusing on specific individuals, entities, and transactions are relatively new and less understood. We present a model of firm performance under sanctions where the target government may be incentivized to “shield” some firms from the full brunt of sanctions. Then, using detailed firm and individual-level data, this paper empirically estimates the impact of targeted sanctions, focusing on sanctions deployed by the United States and the European Union against primarily Russian targets after the crisis in Ukraine in 2014 as a natural experiment. We find, on average, a sanctioned or associated company loses about one-quarter of its operating revenue, over one-half of its asset value, and about one-third of its employees relative to their non-sanctioned peers, suggesting targeted sanctions are quite “smart” in the sense of hitting the intended targets with relatively minimal collateral damage. We also find some evidence of spillover impact onto technically non-sanctioned targets. Finally, we find that “strategic” firms selling high-priority goods to the regime systemically outperform non-strategic firms under sanctions, consistent with our shielding hypothesis and demonstrating the policy tradeoff between the tactical and the strategic impact of targeted sanctions.
University of California-San Diego
Harvard University and NBER
- H4 - Publicly Provided Goods
- H5 - National Government Expenditures and Related Policies