Security and financial crises

The other night I was at an on the record talk given by the Chairman of the Joint Chiefs of Staff, Admiral Michael Mullen, to the Young Professionals in Foreign Policy organization. During his talk he briefly mentioned that the current financial crisis may have important security implications for the U.S. and world.

I was privileged to be called on by the Admiral during the Q&A portion and asked him to give some more details on how he thought the financial crisis may affect security. His response had a few interesting theoretical points to it.

Interestingly, he didn't mentioned the most common micro-political economy argument: an economic downturn means the relative cost of engaging in conflict rather than production has decreased for people, so more individuals will engage in conflict. Such an explanation has been discussed by many researchers (for simple summaries of the findings, see here and here).

Instead, the Admiral focused on the macro-economic implications. For instance, the financial crisis could put pressure on government budgets, which could then weaken military and security spending in a nation. He specifically mentioned Pakistan, where a decreased military budget could mean a big gain for the Taliban and Al Qaeda.

He also noted that oil producing countries, which derive most of their government budget from oil revenues, could see an especially difficult budget crisis. This argument is counter to much of the literature on natural resource shocks, which argue that conflict arises when such revenues increase, not decrease.

Most interestingly to me, he discussed how decreased government budgets could decrease politically popular spending in nations, thus leading to a crisis of expectations for citizens. This would be important for both absolute real spending, and spending growth. If governments are increasing a certain sector, but then have to back off, it could lead to dissatisfaction and eventually conflict. I'm not aware of any work on this question.

From the Admiral's comments, there is no doubt in his mind that without proper foresight, we will see an increase in conflict if the current economic crisis continues.