option value of peace

Post-conflict situations are fragile; in the past around 40 percent of them have reverted to violence within a decade, accounting for around half of all the world’s civil wars. (See earlier Collier book byte: Violence, Growth and Liberalism.)

Paul Collier, in War, Guns and Votes:

I could think of two other possibilities. The first is what is known as over-the-horizon guarantees. It is what the British government is doing in Sierra Leone. For the past few years there have been only eighty British troops stationed in the country, but the government has been given a ten-year undertaking that if there is trouble, the troops will be flown in overnight. Perhaps this has helped stabilize the society.

Sierra Leone is, at least in terms of reversion to violence, a major success. It has even weathered post-conflict elections and a change of government. The problem with the Sierra Leone example is that it is just that: one example. You cannot perform a statistical analysis on one observation, and so there is no way of knowing whether in general such guarantees would be effective. Or is there?
…
We estimate that an annual expenditure of $100 million on peacekeepers reduces the cumulative ten-year risk of reversion to conflict very substantially from around 38 percent to 17 percent. If peacekeeping forces are scaled up, the risk falls further. At $200 million per year the risk is down to around 13 percent, and at $500 million it is down to 9 percent. The next step is to convert this reduction in risk into a benefit. For that we need an estimate of the costs of conflict. I am going to use the figure of $20 billion. Although this seems enormous, for the typical civil war in a country of the bottom billion it is at the lower bound of the range of realistic costs: it is likely to be considerably too conservative.

If a civil war inflicts costs on the society of around $20 billion, then of course avoiding one confers benefits of $20 billion. By extension, a strategy that replaced an inevitable war with one that occurred only if a flipped coin came up heads would therefore be worth $10 billion. More generally, each percentage point reduction in the risk of a civil war is worth around $200 million. Recall that peacekeeping at the level of $100 million per year sustained over the post-conflict decade reduces the risk of civil war by 21 percentage points. So the value of the benefit is around $4.2 billion. Since the peacekeepers are there for a decade, their total cost is $1 billion.
…
I was invited to present these results, and the case for peacekeeping, to the panel of judges for the 2008 Copenhagen Consensus. The panel assesses ten rival research teams making the case for international public money to be spent on something. The process is terrifying: the panel consists of Nobel laureate economists, and defending my work before it reminded me of my doctoral viva more than thirty years earlier. The verdict of the panel was that peacekeeping was selected as one of the approved expenditures. In their words: “The expert panel found that peacekeeping forces in post-conflict societies could provide fair value for cost.”
…
The last country on earth where it was eliminated was Somalia during the 1970s. It would now be impossible to eliminate smallpox: since 1993 Somalia has been a no-go area. The maintenance of peace is thus a logically prior investment that opens the possibility of all other interventions. It is even possible to dress this up in the language and formulas of technical economics. Financial economists now calculate option values. The true return on a liquid asset such as a bank deposit is greater than the interest earned because it enables other investment opportunities to be seized as they arise. Peace also has an option value.

Filed under: Uncategorized, book byte