Liabilities of Globalization: Debt Ownership, Moral Hazard and Interstate Conflict with Other People’s Money

Abstract

Economists have long recognized the risks associated with moral hazard, and it is naive to think that countries or governments are any more or less immune given increased access to other people’s money in a globalizing world. Governments, through foreign financing, can expend resources with limited impact on citizens. This paper explains how economic interdependence fosters a moral hazard problem, giving rise to an underappreciated link between globalization and conflict. This has not been addressed because globalization is most often approached through the income statement, such as trade flows, or the asset side of the balance sheet, such as foreign direct investment. A series of empirical tests, including a natural experiment based on involvement in the Afghan and Iraq Wars as well as a traditional time-series cross-section analysis of militarized disputes, examines the relationship between foreign debt ownership and conflict. There is strong evidence to support the notion that states are more conflict prone when they can use other people’s money.