Guns and Oil: An Analysis of Conventional Weapons Trade in the Post-Cold War Era

By Khanna, Neha; Chapman, Duane | Economic Inquiry, April 2010 | Go to article overview

Guns and Oil: An Analysis of Conventional Weapons Trade in the Post-Cold War Era


Khanna, Neha, Chapman, Duane, Economic Inquiry


I. INTRODUCTION

The end of the Cold War saw a dramatic reduction in the international trade in conventional weapons. From an all-time peak of 86.7 billion 19995 in 1987, world arms imports fell to 51.6 billion 19995 in 1999 (Bureau of Verification and Compliance 2002). But some important trends emerged during the decade of the 1990s that warrant analysis. First, a vast majority of conventional weapons went to the Persian Gulf countries, with Saudi Arabia emerging as the world's single largest weapons importer (though by the end of the 1990s, Taiwan was a significant importer as well). On the export side, the singular dominance of the United States was notable: in 1999, its share in world arms exports was 64%, an all-time record (Bureau of Verification and Compliance 2002).

Second, the motivations underlying the trade in weapons seem to have changed fundamentally. During the Cold War, much of the arms trade was driven by geopolitical factors associated with the arms race and the action-reaction type behavior of the two superpowers. However, Matelly (2003) shows that while the arms race between the United States and the former Soviet Union can explain U.S. military expenditures between 1952 and 1989, it fails to predict these expenditures in the post-Cold War period. Anderton (1995, 532) argues that there has been a shift from political to economic motives for arms transfers.

Our goal in this article was to determine, both analytically and empirically, the main drivers of international arms transfers in the immediate post-Cold War period (1989-1999). We postulate that the key reasons for the huge transfer of weapons to the Persian Gulf region are the enormous value of the oil wealth there and the dependence of Western economies, especially the United States and its allies, on access to the reasonably priced and steady supply of crude oil from this region. (1) For most of the years between 1989 and 1999, world oil prices remained remarkably stable and between about $15-20 per barrel (the notable exceptions being the Iraq-Kuwait war year of 1990 and 1998; Chapman and Khanna 2006). This was the result of an explicit Organization of Petroleum Exporting Countries (OPEC) price policy under which production was expanded or contracted to maintain prices within the target range. Military security in the Persian Gulf region, including the export of weapons from the United States and its allies to the Persian Gulf countries, was an integral part of the institutional framework that supported the oil price arrangement (Chapman and Khanna 2001, 2006).

We employ a traditional demand and supply framework, which includes economic factors such as production costs on the supply side and income and prices on the demand side, but also incorporate the political-economic factors represented by the trade in crude oil. We find that the association between arms trade and crude oil trade is robust, regardless of the empirical specification or data sources: there is a strong and positive association between arms exports and crude oil import, on the one hand, and between arms imports and crude oil exports, on the other.

The link between arms trade and crude oil trade is not new. After the decline of military aid programs, such as the U.S. Military Assistance Program, weapons transactions became more commercial. Historically, unprecedented OPEC oil revenues in the 1970s and 1980s provided an alternative source of finance and much of these petrodollars were spent on importing weapons. Conversely, weapons-exporting countries found a means to offset the balance of payments discrepancy that resulted from the higher oil prices (Levine, Sen, and Smith 1994, 3; Smith, Humm, and Fontanel 1985, 240-241). But the period considered in this study, 1989-1999, was an era of relatively low and stable oil prices, and this argument is not very satisfactory. (2)

The outline of the article is as follows. In Section II, we describe the analytical framework for trade in conventional weapons.

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