The Economic Causes and Consequences of Conflict: Where the literature stands and where we should go from here EITM Lecture – PART 2 July 8, 2011 Prof. Oeindrila Dube

Aid and conflict

Discussion: What are potential theoretical channels through which aid may affect conflict?

Theoretical channels Aid More gains from predation More conflict Economic benefits lower grievances/ raise opportunity cost of fighting Less conflict State stronger Less conflict Leakage or mis- targeting More conflict

Challenge to Identification Selection – Aid allocated toward good performers  upward bias – Aid allocated toward “basket cases”  downward bias

Aiding Violence or Peace? (De Ree and Nillesen, 2009) Does development aid affect likelihood of conflict? – In Sub-Saharan Africa Empirical strategy: – Instrument for aid flow using average donor country GDP Results – Aid reduces the duration of conflict – Aid has no significant effect on probability of conflict onset

Aid under Fire: Development Projects and Civil Conflict Crost and Johnston (2010)

Overview Does participation in major community driven development program affect violence? Within country analysis – Philippines, Regression discontinuity design – Within each province poorest 25% of municipalities eligible for a major community driven development program – Running variable: distance of poverty ranking from eligibility threshold

Feeding Conflict: The Unitended Consequences of U.S. Food Aid on Civil War Qian and Nunn (2011)

Overview What is the effect of U.S. wheat aid on conflict? – 121 recipient countries, over 1967 – 2004 Empirical strategy – Instrument U.S. wheat aid with weather in conditions in U.S. wheat producing regions – Interact wheat aid with average probability country receives food aid

First-stage Second-stage

2SLS estimates of the effect of U.S. Wheat Aid on the Probability of Conflict

Potential mechanisms Increased value of the state Diversion of food aid to armed groups Alternative mechanism: price effects?

Evidence of military aid diversion (Dube and Naidu, 2010) Rise in U.S. military found to increase paramilitary violence in Colombia Consistent with diversion since – U.S. military aid goes to the Colombian military, which is stationed in regions with bases – U.S. military aid leads to more attacks in base regions by paramilitary groups (aligned with the Colombian military) – No equivalent increase in attacks by guerilla groups

Taking stock of the aid-conflict literature Mixed results – Opposite effects of development aid within vs. across country – Food and military aid found to increase conflict Little on understanding why – Conflict reducing effects: opportunity cost vs. state capacity? – Conflict promoting effects: diversion, prize, strategic reasons? Different effects based on aid type? – Government, foreign govt./military, NGO disbursement – Project vs. program aid

3. The Economic Consequences of Conflict

Several recent papers show null effects No effect of civil war on consumption, school enrollment or nutrition in Sierra Leone (Bellows and Miguel, 2006 and 2009) – Higher participation in collective action and political participation No effect of bombings on long run poverty in Vietnam (Miguel and Roland, 2010)

Compared to non-bombed areas, bombed areas did NOT have lower… Local poverty rates Consumption levels Infrastructure Literacy Population density

Doesn’t necessarily imply war was economically inconsequential Compares districts within Vietnam – National growth rate may have been faster in the absence of war – Government investment/foreign aid could have gone to other, non-bombed regions Private foreign investment may have been greater if it were not a post-conflict country

Profiting from conflict Event study methodology to show beneficial effects of conflict on firms Stock returns of partly nationalized corporations increased during covert coups (Dube, Kaplan and Naidu, forthcoming) Diamond company stock returns declined with end of Angolan civil war (Guidolin and La Ferrara, 2008)

Stock market returns and Savimbi’s death

What “benefits” did war confer to diamond companies? Entry barriers for other diamond companies were higher Bargaining power of Angolan government lower – Licensing and rent-seeking costs for incumbent firms lower Lower transparency standards permitted more profitable dealings

Taking stock Micro results point to interesting compositional effects Micro data may not enable us to capture net effects of conflict on economic performance – Counterfactual hard to establish with cross-regional comparisons – Firm event studies are essentially case studies

Way forward on examining economic consequences of conflict Literature lacks an identified cross-country analysis of how conflict affects economic performance – Large returns to having the first good instrument More interesting to show conditions under which there are positive and negative effects – For within or cross-country analysis – Particularly since micro studies show both effects possible

References Bellows, John and Ted Miguel “War and Institutions: New Evidence from Sierra Leone” African Economic Development 96(2). Bellows, John and Ted Miguel “War Local Collective Action in Sierra Leone” Journal of Public Economics, 2009, 93(11-12), Besley, Tim and Torsten Persson “The Logic of Political Violence.” Quarterly Journal of Economics. Collier, Paul and Anke Hoeffler. “Greed and Grievance in Civil Wars” Oxford Economic Papers Oxford Economic Papers (2004): Collier and Anke Hoeffler, “On Economic Causes of Civil War,” October 1998, 50, 563–73. Collier, Paul and Anke Hoeffler “Greed and Grievance in CivilWar,” Oxford Economic Papers, 2004, 56 (4), 563–95. Crost, Benjamin and Patrick Johnston. “Aid Under Fire: Development Projects and Civil conflict.” Mimeo, Harvard Kennedy School. De Ree, Jopp and Eleonora Nillesen “Aiding Violence or Peace? The Impact of foreign aid on the risk of conflict in Sub-Saharan Africa.” Journal of Development Economics. 88: Dube, Oeindrila and Juan Vargas. “Commodity Price Shocks and Civil Conflict: Evidence from Colombia.” Mimeo, NYU.

References Dube, Oeindrila and Suresh Naidu. “Bases, Bullets and Ballots: the Impact of U.S. Military Aid on Political Conflict in Colombia.” Mimeo, NYU. Fearon, James and David D. Laitin, “Ethnicity, Insurgency, and Civil War,” American Political Science Review 2003, 97 (1), 75–90. Guidolin, M. and E. La Ferrara (2007), “Diamonds are forever, Wars are not. Is conflict bad for private firms?” American Economic Review, 97(5), Miguel, Ted, Shanker Satyanath and Ernest Sergenti “Economic Shocks and Civil Conflict: An Instrumental Variables Approach.” Journal of Political Economy. 112(4): Miguel, Ted and Shanker Satyanath. Forthcoming. “Re-examining economic Shocks and Civil Conflict.” AEJ-Applied. Miguel, Ted and Gerard Roland. The Long Run Impact of Bombing Vietnam. Journal of Development Economics (forthcoming). Qian, Nancy and Nathan Nunn. “ Feeding Conflict: the Unintended Consequences of Food Aid on Civil War.” Mimeo, Yale University. Yanagizawa-Drott, David, “Propaganda and Conflict: Theory and Evidence from the Rwandan Genocide,” Working Paper, Harvard University.