The Coase Theorem, Sudan-South Sudan War Non-Edition

It’s always fun to find new ways to apply the Coase Theorem, particularly in situations of international relations.  So, we’ve seen it raised as a way of talking about bribing Libyan generals not to fight, how to avoid war over conflicting economic claims in the South China Sea, and lots of other situations.  There’s something useful about seeing how Coasean logic might apply, even far afield of conventional law and economics.  But it’s also worth noting that some situations in which the Coase Theorem ought most easily to apply in real life – where, at bottom, it’s just about money – things don’t work as one might have hoped.

Thus, the rapidly heating up war between Sudan and South Sudan.  It is about oil, which is to say, for the two regimes it is about the money – with oil production being the only thing keeping each regime afloat.  In that sense, there’s a strong common interest that should allow party bargaining.  But the Coase Theorem requires as a condition to bargain that the parties have clear legal entitlements and liabilities in order to provide a reference framework for bargaining.  One might have thought that the international settlement that brought about the then-peaceful separation of South Sudan from Sudan would therefore have insisted on clear legal entitlements to the oil fields, production facilities, transport of oil, in the interests of both parties.  Unfortunately it left all this open, along with the final question of the borders.

With no clear legal entitlement – let alone a way to enforce it short of using force – there is no clear basis for bargaining, even when there is a common value of money via oil.  Clear titles would then have provided a basis for prior bargaining over who would get what in the division of payoffs.  Moreover, each party would presumably have seen that the transaction costs involved in war – to deny the other any entitlement to which it might lay claim by destroying the ability to exploit the resource at all – would far exceed the benefits even of winning.  Unfortunately, it is not so far turning out that way; the legal entitlements themselves are the object of the war:

[R]ather than sparking an all-out military confrontation, each side’s aim may now be to target one another’s oil facilities and wait for their opponent to crumble under armed insurgencies, popular unrest and fuel shortages. The two countries have already driven their economies to the brink of implosion since the South split away, cleaving the vital oil industry in two. Squabbling over oil payments and border fighting has withered combined crude output – previously the main source of foreign currency and state revenues for both countries – from around 500,000 barrels a day before partition to just over a tenth of that. Food prices are soaring on both sides of the border and currencies reeling as officials scramble to make up for the sudden loss of revenues in countries already reeling from years of war, mismanagement and U.S. trade sanctions.

But despite their weaknesses, both sides have consistently reckoned they have the upper hand on their foe, partly explaining why fighting has escalated despite the obvious fact that neither side can actually afford to fight a war … “Khartoum is fighting for its survival,” said Peter Bashir Gbandi, a deputy for the ruling Sudan People’s Liberation Movement (SPLM) in the South’s national assembly, during an emotional Juba panel debate packed with bellicose comments and broadcast live on radio …. many in the South have predicted Sudan’s President Omar Hassan al-Bashir, in power since a 1989 coup, will soon meet the same fate as leaders in neighbouring Egypt and Libya.

If the South can hold out a few months longer, the reasoning goes, Sudan’s people will surely overthrow their government and replace it with a regime more receptive to Juba’s demands. Khartoum, on the other hand, sees a good chance the South – already hit by domestic rebellions, horribly violent cattle raiding and widespread poverty – will soon run out of money and descend into ungovernable chaos.  The result is what Harry Verhoeven, a University of Oxford researcher who has studied Sudan extensively, calls a “war of attrition” in which both sides wait for the other to crumble internally or run out of the funds and fuel needed to wage war.

As background to Sudan and South Sudan, I recommend The Sudan Handbook, put out by scholars of the Rift Valley Institute (of which I am a senior fellow) – reviewed here by Tom Porteous of Human Rights Watch.