Abstract

How do income shocks affect armed conflict? 

Theory suggests two opposite effects:

1. If labour is used to appropriate resources violently, higher wages may lower conflict by reducing labour supplied to appropriation. This is the opportunity cost effect. 

2. Alternatively, a rise in contestable income may increase violence by raising gains from appropriation. This is the rapacity effect.

Our article exploits exogenous price shocks in international commodity markets and a rich dataset on civil war in Colombia to assess how different income shocks affect conflict.

We examine changes in the price of agricultural goods (which are labour intensive) as well as natural resources (which are not). We focus on Colombia’s two largest exports, coffee and oil.

• We find that a sharp fall in coffee prices during the 1990s lowered wages and increased violence differentially in municipalities cultivating more coffee. This is consistent with the coffee shock inducing an opportunity cost effect.

• In contrast, a rise in oil prices increased both municipal revenue and violence differentially in the oil region. This is consistent with the oil shock inducing a rapacity effect.

We also show that this pattern holds in six other agricultural and natural resource sectors, providing evidence that price shocks affect conflict in different directions depending on the type of the commodity.

Introduction

Fighting, Money and Opportunity Cost as an Explanation

Civil wars have affected more than one-third of the world’s developing nations (Lacina and Gleditsch, 2005).

Yet little is understood about the channels through which income shocks perpetuate armed conflict.

Indeed, the relationship between income and conflict is theoretically ambiguous:

1. On the one hand, a rise in income may reduce conflict by increasing wages and reducing labour supplied to criminal or conflict activity (Becker, 1968; Grossman, 1991).

• This notion, that wages represent the opportunity cost of fighting, is consistent with previous cross country evidence that growth reduces the risk of civil war (Collier and Hoeffler, 1998, 2004; Fearon and Laitin, 2003; Miguel et al., 2004).

2. On the other hand, more income means there is more to fight over (Hirshleifer, 1991; Grossman, 1999).

• Accordingly, a rise in income may increase conflict by raising the return to predation and promoting rapacity over these resources.

• This form of predation is held as an explanation for why exporters of oil and other natural resources face a higher probability of experiencing civil war (Fearon, 2005).

The existence of two opposing influences, opportunity cost and rapacity, suggests that some income shocks may mitigate conflict, whereas other shocks exacerbate it, depending on the relative strength of the two effects. 

Methodology

In this article, we demonstrate that some types of income shocks increase conflict, whereas others reduce it.

We focus on exogenous income shocks induced by movements in world commodity prices, and estimate how these shocks have affected civil war dynamics in Colombia.

We employ a unique event-based dataset which records four measures of violence including:

• guerrilla attacks

• paramilitary attacks

• clashes

• war-related casualties

in over 950 municipalities from 1988 to 2005.

Our empirical strategy interacts the exogenous international commodity price with the amount of the commodity produced in each municipality.

• We find that the price of agricultural commodities (which are labour intensive) are negatively related to conflict

• When the price rises, conflict falls differentially in municipalities that produce more of these goods

• In contrast, the price of natural resources (which use labour less intensively) are positively related to conflict:

  • When the price rises, conflict rises differentially in municipalities that produce more of these resources

Results

Much of our analysis focuses on oil and coffee, the two largest Colombian exports for which high-quality data are available.

1. The negative relationship between agricultural price shocks and conflict is evident for the case of coffee:

• Sharp drop in the price of coffee during the 1990s increased violence disproportionately in municipalities cultivating more coffee.

• Our estimates imply substantial effects: the 68% fall in coffee prices over 1997 to 2003 resulted in:

  • 18% more guerrilla attacks

  • 31% more paramilitary attacks

  • 22% more clashes

  • 14% more casualties in the average coffee municipality, relative to non-coffee areas.

We also find that the coffee price fall reduced wages and work hours to a greater degree in the coffee municipalities. Taken together, these results are consistent with an account in which the coffee shock increased violence by lowering the opportunity cost of joining armed activity. 

2. In contrast, we show that a rise in oil prices led to a differential increase in conflict in the oil municipalities.

• The 137% increase in oil prices over 1998 to 2005 led:

  • Paramilitary attacks to increase by an additional 14% in the average oil producing municipality.

The oil shock also increased municipal revenue generated from taxing natural resources, and kidnapping of politicians and leaders. These results are consistent with the oil shock increasing violence by promoting rapacity over contestable resources. 

We also extend the analysis to six other major exports (covering eight of Colombia’s top 10 exports). We find that the positive relationship between natural resource price shocks and conflict holds for other commodities including coal and gold. In contrast, we find a negative correlation between agricultural price shocks and conflict in the case of sugar, banana, palm and tobacco. These results suggest that the pattern of observed effects do not arise due to idiosyncratic differences between the oil and coffee sectors. 

Our findings are consistent with the idea that price shocks generate contradictory pressures on conflict.

• A price rise may generate greater rents to fight over via a rapacity effect.

• Alternatively, they may increase wages, raising the opportunity cost of fighting.

Since offsetting wage effects will be larger for commodities that use relatively more labour, price increases to labour intensive commodities will reduce conflict, whereas price increases to non-labour intensive goods will increase conflict. This contrasting effect has been shown theoretically by Dal Bó and Dal Bó (2011). 

How this Article Builds upon the Literature

Our article builds on the current literature in several ways:

1. First, although previous within country studies have shown a correlation between economic conditions and violence (Deininger, 2003; Barron et al., 2004; and Do and Iyer, 2010), the broad scope of our dataset enables cleaner identification of this effect.

• By employing municipality fixed effects, we control for time-invariant municipal characteristics that may be correlated with economic conditions and conflict outcomes.

• In addition, we instrument the cross-sectional production of several commodities that we are not able to measure in the beginning of the sample period, circumventing concerns that the measured quantities have been endogenously determined. For example, we instrument municipal coffee cultivation using:

  • rainfall and temperature

  • coal production using coal reserves

  • and gold production using historical measures of precious metal mining

2. Second, although there is a rich theoretical literature on the relationship between economic conditions and warfare (including Grossman, 1991; Hirshleifer, 1991; Skarpedas, 1992; Grossman and Kim, 1995; Esteban and Ray, 1999; Bates et al., 2002; Fearon, 2008; Chassang and Padró i Miquel, 2009), our article presents micro-empirical evidence consistent with the opportunity cost mechanism by showing that coffee price shocks affect both labour market outcomes and violence.

• These results are in line with the cross-country analysis of Besley and Persson (2011), which shows that natural disasters are negatively correlated with income per capita and induce greater political violence.

• Our results are also consistent with Brückner and Ciccone (2010), which demonstrates that negative shocks to export prices increase risk of civil war in countries across Sub-Saharan Africa. However, our analysis differs from this paper in two ways:

• We firstly exploit international price changes that are driven by supply shocks originating in other nations, which helps ensure that they are exogenous to conflict across Colombian municipalities.

• In addition, by showing positive effects of natural resource price shocks on conflict, we demonstrate that different types of commodity prices have different effects.

3. The notion that a larger appropriation sector leads to more conflict or crime has been formalised in several key theoretical accounts including the classic crime model of Becker (1968), and the related framework of Dal Bó and Dal Bó (2011), which we adapt in this article.

• It also forms the crux of theoretical accounts which model conflict technology as a ‘contest success function’ (Tullock, 1980), and specify how fighting investments by contesting parties translate into winning probabilities.

• For example, in the seminal paper of Grossman (1991) conflict is proportional to the amount of time devoted by peasants to insurrection or soldiering activities; and in Esteban and Ray (2008), conflict is proportional to the number of militants from both contesting parties who engage in conflict. The idea is that having more combat personnel increases the fighting effort of groups and raises the share of resources dissipated in unproductive conflict activities. 

4. Our examination of the rapacity channel builds on previous work linking natural resources to civil war (Collier and Hoeffler, 2004; Fearon, 2005; Humphreys, 2005; Snyder and Bhavnani, 2005; and Snyder, 2006; see Ross, 2004 for a comprehensive review).

•  Caselli and Coleman (2006) additionally theoretically highlight the role of resources in fuelling conflict between coalitions whose membership is enforced by ethnicity.

• More recent work in this area include Besley and Persson (2010), whose theory demonstrates that resource dependence can increase the propensity towards conflict while lowering income and state capacity; Mitra and Ray (2010), who show that income increases of one group trigger greater ethnic violence in India; and Caselli and Michaels (2013) who find that oil windfalls in Brazil increase the incidence of illegal activities by local politicians. 

5. In addition, our article presents direct evidence against several alternative mechanisms.

• One such account posits that a fall in coffee prices led farmers to plant more coca, and this substitution towards drug crops led to more violence in the coffee region. However, we use satellite data on coca cultivation to demonstrate that the coffee shock did not result in differential coca planting in coffee municipalities.

• This is important given the findings of Angrist and Kugler (2008), that violent deaths escalated differentially in Colombia’s coca departments during the late 1990s.

• Our analysis replicates the finding that coca promoted war-related casualties at the municipality level, but also shows an independent effect of the other commodity shocks on conflict outcomes while controlling for coca. 

6. Given contention of collusion between paramilitary groups and the state, it is also possible that local governments invite these armed groups into oil areas, sharing revenue with them in exchange for protection services.

• However, we show that the oil shock does not induce more paramilitary violence in municipalities where local councils are composed of more pro-paramilitary politicians, but does lead to larger increases in paramilitary massacres, suggesting that violence does not reflect direct increases in security provision.

7. Finally, we demonstrate that the increase in attacks cannot be attributed to changes in migration or decreases in government enforcement.

The remainder of the article is organised as follows:

• Section 2 provides background on the institutional context.

• Section 3 describes the mechanisms through which commodity shocks can affect conflict outcomes.

• Section 4 describes the data and the methodology.

• Section 5 presents the results on conflict, mechanisms, and alternative accounts.

• Section 6 concludes.