In today's Sunday Times, Austan Goolsbee discusses calculating the long-term prognosis for stability in Iraq using not military or political metrics, but the pricing of Iraqi government debt. The price of Iraqi bonds, after all, contains the credit spread (the risk premium) that markets—politically unbiased—place on the Iraqi government's chance of default. Like most of Dr Goolsbee's writings, the article is a good read.
If not satiated, the article is based on a paper by MIT economist Michael Greenstone entitled Is the "Surge" Working? Some New Facts. As an NBER working paper, you can download a copy, but it costs $5 USD, which seems decidedly counterpoint to a dedication to promoting a greater understanding of how the economy works. Thankfully, SSRN has copies gratis.
Anyhow, here is the paper's conclusion:
There is a paucity of facts about the effects of the recent military "Surge" on conditions in Iraq and whether it is paving the way for a stable Iraq. Selective, anecdotal and incomplete analyses abound. Policy makers and defense planners must decide which measures of success or failure are most important, but until now few, if any, systematic analyses were available on which to base those decisions. This paper applies modern statistical techniques to a new data file derived from more than a dozen of the most reliable and widely-cited sources to assess the Surge’s impact on three key dimensions.
The analysis reveals mixed evidence on the Surge’s effect on key trends in Iraq. The security situation has improved insofar as civilian fatalities have declined without any concurrent increase in casualties among coalition and Iraqi troops. However, other areas, such as oil production and the number of trained Iraqi Security Forces have shown no improvement or declined. Making sound decisions about how to proceed in Iraq based on such conflicting indicators is challenging and uncertain. Moreover, this uncertainty may allow analyst judgment and politics to play too large a role.
There is, however, another way to assess the Surge. This paper has shown how data from world financial markets can be used to shed light on the central question of whether the Surge has increased or diminished the prospect of a functioning Iraq. An appeal of using financial markets is that traders’ only concern is to make profitable decisions and this necessarily requires making correct projections. There isn’t room for personal biases in this setting and it therefore isn’t surprising that financial markets have a good track record of predicting future events.
I examine the price of Iraqi state bonds, which the Iraqi government is currently servicing, on world financial markets. After the Surge, there is a sharp decline in the price of the Iraqi bonds, relative to alternative bonds. This decline signaled an increase of approximately 40% in the market’s expected annual probability of default. This finding suggests that to date the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it. In many respects, it is consistent with recent assessments that fail to find that Surge has led to substantial progress toward meeting many of the 18 congressionally mandated benchmarks for progress in Iraq (GAO 2007).
This paper has produced a series of new facts on the Surge’s impact. It is straightforward to update these facts as new data becomes available. Further, the new facts can be used to aid decision making about the future of the Surge.
More broadly, the paper shows that even in unconventional wars, it is feasible to measure and analyze important outcomes to learn about the war’s success. Finally, it highlights that world financial markets may be an important new source of information to judge a war’s success.
Dr Greenstone shows that the yield on Iraqi bonds increased to 11.32% in August 2007, from 9.60% in January 2007. He concludes that this prices in a "40% increase in the market's expectation that Iraq will default." Lovely.