What Is a Peace Dividend?

A peace dividend is an economic boost a country will get from a peace that follows a war. In theory, at that time the government can afford to reduce defense spending and reallocate the money to domestic policy priorities.

This assumes that 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 healthcare, for example.

A 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.

Key Takeaways

  • A "peace dividend" is the hypothetical boost to a country's economy after it settles a peace following a war.
  • The term was first popularized in the U.S. in the late 1960s during the Vietnam war. It came back into fashion at the end of the 20th century as western powers assumed growth would grow following the fall of Soviet communism.
  • The reality or extent of a peace dividend is disputed by scholars.

Understanding a Peace Dividend

According to the Oxford English Dictionary, the phrase peace dividend was first used in Fortune magazine in 1968: "In Washington, the magic phrase is ‘the Peace Dividend’...."

At the time, American policymakers were looking forward to the fall of communism in South-East Asia and the markets that would be opened for American corporations. They also assumed that the spending associated with the war would be diverted into public projects once the war was over following the guns-and-butter theory popularized by macroeconomists in the mid-20th century.

Richard Nixon, in his acceptance speech for the Republican nomination for President of the United States in 1972 made both these points:

My fellow Americans, the peace dividend that we hear so much about has too often been described solely in monetary terms—how much money we could take out of the arms budget and apply to our domestic needs. By far the biggest dividend, however, is that achieving our goal of a lasting peace in the world would reflect the deepest hopes and ideals of all of the American people. Lincoln Quoted Speaking on behalf of the American people, I was proud to be able to say in my television address to the Russian people in May, we covet no one else's territory, we seek no dominion over any other nation, we seek peace, not only for ourselves, but for all the people of the world.

Unfortunately, the continued growth of U.S. inflation in the 1970s wiped out the money saved from the end of the military operation in Vietnam. But the idea that opening markets for U.S. interests would have economic benefits carried over to later presidents and became a rationale for winning the cold war conflict.

In 1992, U.S. President George H.W. Bush promised to cut military spending after the West had witnessed the collapse of the Soviet Union and the U.S. had won a lightning military victory over Saddam Hussein in the first Gulf War. The resulting peace dividend was intended to cut military spending by over 3.3% after inflation and reallocate the money to domestic programs.

The field of Democrat contenders that year wanted to cut the defense budget even further, with Bill Clinton calling for $140 billion in savings "by trimming Federal bureaucracy and slashing the military budget." Clinton won the election but Clinton's opportunity to realign the budget never produced any tangible results.

If there has been a peace dividend, it has been in the enormous growth of the world economy in the wake of globalization from 1991 to the present, especially in East Asia, South-East Asia, and Brazil.

Why a Peace Dividend Is Difficult to Realize

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.

In the U.S., the build-up to both World War I and World War II created economic booms. When the U.S. entered World War I it was in recession, but "a 44-month economic boom ensued from 1914 to 1918, first as Europeans began purchasing U.S. goods for the war and later as the United States itself joined the battle." The government also borrowed extensively to finance the war effort, which also stimulated the economy.

During the Vietnam era, increased military spending and government borrowing overheated the economy and led to inflation, but prolonged defense spending also created entrenched economic interests that argued de-mobilization would kill jobs and industries. 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.

In the 1980s, President Reagan's defense spending, including the "star wars" missile system was a break with the tradition of reducing spending after the end of a conflict. In the 2000s and 2010s, administrations from George W. Bush to Barack Obama maintained high levels of defense spending to fight the global war on terror. Former President Trump showed, despite his isolationist rhetoric, that his administration presided over the largest defense budgets in history.

As James Miller and Michael O'Hanlon claim, "In early December 2018, Trump went as far as to call current levels of U.S. defense spending “crazy,” only to announce plans for a $750 billion defense budget just a week later."

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 coordination between state and industry, or among governments.

Peace Dividends and Inequality

The global financial crisis of 2008 also draws into question the validity of a peace dividend. After nearly two decades of global economic growth, the political and economic unity that was the foundation of a recurring peace dividend has been shaken by populist movements. These populist movements have been seen across the world, from Donald Trump in the U.S. to Marine Le Pen in France to Geert Wilders in the Netherlands to Narendra Modi in India.

Discontent among the people left behind, both those in developed countries who live in rural areas and still developing countries over the uneven distribution of goods secured during the peace, promises more political instability and perhaps an end to the peace. As Sanjeev Gupta, Benedict Clements, Rina Bhattacharya, and Shamit Chakravarti have demonstrated, the movement from peace to war can be very harmful to economic growth.

In the final analysis, the peace dividend, if it exists, has not been deposited or enjoyed. This is primarily best seen in the continuing global conflicts that the U.S. has been involved in over the past two decades. These include the ongoing war in Afghanistan, the crisis in Iraq, the rise of Isis, and the Civil War in Syria, all while inequality in the country continues to widen.