Peace Dividend

Peace dividend describes a state in which a country is no longer at war, and its government can afford to reduce defense spending and reallocate it elsewhere. Peace dividend also may refer to a rise in market sentiment, which in turn sparks an increase in stock prices, after a war ends or a major threat to national security has been eliminated. The money recouped from defense spending is generally used for the good of society and human or sustainable development — projects that involve new housing, education, and health care, for example.

Peace dividend suggests the economic benefits that are derived from converting military production into civilian production. The term, peace dividend often arises in discussions about the guns-and-butter theory — that is, the polar choices a country may face between spending its resources on goods that benefit local citizenry or applying those resources to military forces and equipment. United States President, George H.W. Bush and U.K. Prime Minister, Margaret Thatcher were the first to use the term peace dividend in the early 1990s at the end of the Cold War, when the United States and most of its allies cut military spending.

In theory, a peace dividend makes sense as a positive result of ending a war, but in practice, it is not easy for a peace dividend to become reality. The basic economic opportunity from reduced defense budgets comes from the substantial real benefits of using resources for civilian, not military purposes. Thus, defense conversion involves a shift in an economy's guns-and-butter mix. In a modern market economy, this shift needs to come about by purposefully employing a combination of specific government actions and market mechanisms.

The process of converting defense production into nondefense civilian production is problematic in terms of reallocating real resources. There are potential major gains from reduced defense spending, particularly over the long-term; but in the short-term defense cuts typically lead to the unemployment or underemployment of labor, capital, and other resources.

The United States and the countries of the former Soviet Union led the way in reducing defense spending, but in the former most of the savings went to reduce the overall budget deficit and national debt, and in the latter, the reductions were largely swallowed up in recession and economic crisis. And, in Western Europe, the transitional costs of the end of the Cold War, combined with the inadequacy of government responses, made most countries there worse, not better, off. Defense cuts took place in an unplanned flurry, with little co-ordination between state and industry, or among governments.

Following the Cold War, reduced military spending across much of the developed world did not result in the hoped-for surge in funds for investment at home:

• A country cannot just cut defense spending at war’s end without an economic restructuring plan in place. Governments need to take the lead by assisting companies or regions to restructure, or at least by developing and communicating restructuring plans. Critics say that, for the most part, no country had a clear strategy for handling the run-down of defense after the Cold War.

• In order to be able to make tractors (“butter”) instead of tanks (“guns”), for example, a stable environment for change needs to be present, including new markets and new investment, guided by a strong government. For most countries, this confluence of factors simply did not exist at that time.

• Moreover, although defense spending did decline in the 1990s, the Gulf War served to distort that trend. Then, with the War in Afghanistan and the Iraq War, military spending rose again in the 2000s. So, perhaps another reason for the lack of a peace dividend is that we really never did experienced peace.