Chadian-Libyan war
Chadian-Libyan war
It is widely agreed that deep pockets are crucial for military success. Yet, quantitative evidence on the connection between resources and the probability of winning wars is all but missing. Our research seeks to understand the causal relationship between financial windfalls and military victory in interstate conflicts.
The economic foundations of war
The ongoing Russia-Ukraine war has emphasised the role of economic resources in shaping military outcomes. Western economic sanctions, commodity prices, and military aid are argued to have played a critical role in the course of the conflict (Gorodnichenko et al. 2024, Garicano et al. 2022), raising bigger questions on the connection between financial resources and military success. Understanding these dynamics is crucial for policymakers navigating modern geopolitical crises.
History is laden with examples of economic power shaping military outcomes (Kennedy 2010). From Rome’s financial prowess to the industrial might of the Allies in World War II, economic resources have long been decisive factors in war. However, while it is widely accepted that wealthier nations often have stronger militaries, the causal relationship between money and military success remains largely unexplored.
Establishing the causal relationship between money and military success
To assess this causal link, we exploit the exogenous commodity price shocks across more than 700 interstate conflicts between 1977 and 2013 (Federle et al. 2024). We find that windfall gains—unexpected increases in government revenue due to commodity price surges—significantly enhance a country’s probability of military victory. This relationship primarily operates through increased military spending, demonstrating the importance of financial capacity in sustaining and strengthening a country’s war efforts.
We find that a 10 percentage point windfall gain relative to GDP increases the probability of finishing the war in the next-better outcome category by approximately 3.2 percentage points (i.e. winning instead of drawing, or drawing instead of losing). These effects hold across numerous specifications, underscoring the robustness of the relationship between financial strength and military success.
Notably, commodity-price windfalls represent shocks to government revenues, and around 10% of windfall gains are spent on military purposes in times of conflict. If we assume that increases in government revenues only affect military success via military expenditures, the effect is even larger: a 10 percentage point increase in military expenditures relative to GDP increases the probability of winning rather than drawing by around 32 percentage points.
Furthermore, we examine how the impact of financial windfalls varies across different types of conflicts. We find that the influence of economic windfalls is particularly pronounced in conflicts that involve more severe engagements. That is, the more fatal a conflict is, the more important it becomes for governments to have sufficient capital at their disposal to mobilise the resources to win the war.
Case study: The Chad-Libya conflict
One historical example that illustrates our results is the series of conflicts between Chad and Libya between early 1970 and late 1980. This case is particularly illustrative as Libya was a major oil exporter, and oil prices had been simultaneously disrupted by two major global events.
The green shaded areas in Figure 1 depict two conflict episodes between Chad and Libya, in which Libya won the first episode and lost the second. The red dashed line represents the year-on-year returns in oil prices.
Figure 1: Oil price fluctuations during Chadian-Libyan conflicts
Oil price fluctuations during Chadian-Libyan conflicts
Note: Year-on-year oil price changes between 1977 and 1988. Green shaded areas mark separate wars between Chad and Libya. Grey dashed lines denote exogenous events affecting oil prices, such as the Iranian Revolution (1979) and Saudi-Arabia free-riding OPEC (1986). Libya, a major oil-exporting country at the time, won the first but lost the second war.
Source: Federle et al. (2024).
In 1979, the onset of the Iranian Revolution drove up oil prices by 35% on impact, and an additional 45% the following year. The Libyan government subsequently transferred large amounts of these revenues into military expenditures. This enabled the financing of significant Libyan military engagements and their support for various local rebel groups aimed at overthrowing the Chadian government.
However, the tables turned in later phases of the conflict. Between 1986 and 1987, Saudi Arabia flooded the market with oil (Griffin and Neilson 1994), which inadvertently prevented Libya from purchasing Soviet arms (Ronen 2014). Libya subsequently lost the decisive Battle of Aouzou, forcing it to withdraw many of its forces from Chad; a ceasefire was agreed upon soon after.
The Chad-Libya conflict underscores the direct impact of financial constraints on a state’s ability to project power and sustain military engagements. Libya’s early success, driven by strong oil revenues, enabled extensive military action, while the later decline in oil prices restricted its war-waging capabilities. Similar patterns have been observed in other conflicts, where sudden economic downturns have forced nations to alter their military strategies or pursue diplomatic solutions. Moreover, the Chad-Libya case demonstrates how financial dependencies on volatile commodity markets can shape military strategies and alliances, further reinforcing the connection between economic stability and military resilience.
Military expenditure is the key mechanisms driving military success
The key mechanism linking economic windfalls to military success is military spending. Figure 2 depicts the responses of military expenditures (left panel), government revenues (centre panel), and external debt (right panel) in percentage points of GDP to a one percentage point windfall gain relative to GDP. We allow responses to differ depending on the sign of the shock, with the responses to positive windfalls shown in the blue bars and those to negative windfalls in the red bars. The vertical lines indicate 90% confidence bands.
We find that, in times of conflict, approximately 50% of commodity price windfalls are absorbed into government revenues, and about 10% are allocated to military expenditures. These additional funds allow countries to invest in superior weaponry, increasing their probabilities of winning military disputes.
Figure 2: Impact of windfall gains of one percentage point of GDP during conflict
Impact of windfall gains of one percentage point of GDP during conflict
Impact of windfall gains of one percentage point of GDP during conflict
Note: Figure shows responses of military expenditures, government revenues, and external debt relative to pre-shock GDP to 1 percentage point windfall shocks in times of conflict. Red bars indicate responses to negative windfalls, blue bars indicate responses to positive windfalls. Vertical lines signify 90% confidence bands.
Moreover, financial windfalls not only facilitate immediate military engagement, but also enhance logistical and strategic capabilities. Increased budgets enable the expansion of training programmes, procurement of advanced technology, and strengthening of defence infrastructure. These cumulatively contribute to a nation’s overall military readiness and effectiveness.
Policy implications for economic stability and conflict prevention
Our findings have significant policy implications. First, they highlight the role of global commodity markets in shaping geopolitical stability. Resource-rich nations that experience windfalls may adjust their military strategies, with some using additional resources to strengthen defences or fund military campaigns, indicating that commodity price volatility can influence geopolitical dynamics.
Second, understanding the economic drivers of military success can inform foreign policy and conflict prevention strategies. For instance, economic sanctions targeting resource rents can be effective in curtailing a country’s war-waging capabilities. Military aid also plays a decisive role, as demonstrated by the substantial support provided to Ukraine, which has significantly influenced battlefield dynamics. The combination of sanctions and targeted financial assistance has the potential to shift war outcomes by depleting an aggressor’s resources while bolstering the defensive capacity of the opposing side.
Additionally, policymakers must consider the risks associated with overreliance on volatile commodity revenues for military funding—economic diversification strategies are necessary to mitigate the impact of price fluctuations.
Understanding the economics of warfare is crucial
Our study presents the first causal evidence linking economic windfalls to military success in interstate conflicts. By leveraging exogenous commodity price shocks, we demonstrate that unexpected financial gains significantly improve the probability of military victory via increased government revenues and military spending. Our research contributes to a deeper understanding of the economic foundations of war, offering critical insights for policymakers and defence analysts alike.
As global conflicts continue to evolve (Rohner 2024), understanding the economics of warfare remains crucial. Policymakers must recognise that financial stability is not just an economic issue, but also a matter of international security.
References
Federle, J, D Rohner, and M Schularick (2024), “Who wins wars?” CEPR Discussion Paper.
Garicano, L, D Rohner, and B Weder di Mauro (eds.) (2022), "Global economic consequences of the war in Ukraine: Sanctions, supply chains and sustainability," CEPR.
Gorodnichenko, Y, I Korhonen, and E Ribakova (eds.) (2024), “Russian economy on war footing: A new reality financed by commodity exports,” Unpublished manuscript.
Griffin, J M, and W S Neilson (1994), “The 1985–86 oil price collapse and afterwards: What does game theory add?” Economic Inquiry, 32(4): 543–561.
Kennedy, P (2010), "The rise and fall of the great powers: Economic change and military conflict from 1500 to 2000," Vintage.
Rohner, D (2024), "The peace formula: Voice, work and warranties, not violence," Cambridge University Press.
Ronen, Y (2014), “Vestiges of the Cold War in Libya’s ‘Arab Spring’: Revisiting Libya’s relations with the Soviet Union,” Journal of Middle Eastern and Islamic Studies (in Asia), 8(2): 66–95.