The political economy of ethnicity

The paper investigates the effects of ethnic diversity on economic performance and the risk of violent conflict. Diversity has various detrimental microeconomic effects, tending to reduce public sector performance, increase patronage, and lower the level of trust among individuals. However, whether diversity adversely affects overall economic growth depends upon the political environment. Diversity is highly damaging to growth in the context of limited political rights, but is not damaging in democracies. The same relationship holds for the satisfactory performance of World Bank projects: in diverse societies, the risk of project failure is nearly doubled by the absence of political rights. There is a relationship between ethnic diversity and the risk of violent conflict, but it is non-monotonic. Those societies most at risk are the ones in the middle of the range of ethnic diversity. Highly diverse societies, such as are typical of Africa, are actually even safer than homogenous societies. A democratic Africa can thus reap the benefits which ethnic diversity provides in terms of a reduced risk of violence, while avoiding the potential costs of reduced growth. Both income levels and political rights are also important influences on the risk of violent conflict, and of its escalation into full civil war. Once a society has reached full scale civil war the balance of influences appears to change. The persistence of conflict, and the sustainability of a settlement, are more dependent upon ethnic composition and less dependent upon income and political rights, than are the initiation and escalation of violence. Hence, some peace settlements may need to change borders so as to increase (or reduce) the ethnic diversity of the state.

Does aid mitigate external shocks?

This paper investigates the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity-dependent countries. Using a large cross-country dataset, we find that negative shocks matter for short-term growth, while the ex ante risk of shocks does not seem to matter. We also find that both the level of aid and the flexibility of the exchange rate substantially lower the adverse growth effect of shocks. While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchange rate flexibility are partly substitutes. We investigate whether aid has historically been targeted at shock-prone countries, but find no evidence that this is the case. This suggests that donors could increase aid effectiveness by redirecting aid towards countries with a high incidence of commodity export price shocks.commodity prices; aid; growth; external shocks

Does Aid Mitigate External Shocks?

This paper investigates the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity-dependent countries. Using a large cross-country dataset, we find that negative shocks matter for short-term growth, while the ex ante risk of shocks does not seem to matter. We also find that both the level of aid and the flexibility of the exchange rate substantially lower the adverse growth effect of shocks. While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchange rate flexibility are partly substitutes. We investigate whether aid has historically been targeted at shock-prone countries, but find no evidence that this is the case. This suggests that donors could increase aid effectiveness by redirecting aid towards countries with a high incidence of commodity export price shocks.aid, commodities, export, price shocks

Greed and grievance in civil wars

We investigate the causes of civil war, using a new data set of wars during 1960-99. We test a `greed’ theory focusing on the ability to finance rebellion, against a `grievance’ theory focusing on ethnic and religious divisions, political repression and inequality. We find that greed considerably outperforms grievance. Consistent with the greed theory, both dependence upon primary commodity exports and a large diaspora substantially increase the risk of conflict. Inconsistent with the grievance theory, greater ethnic and religious diversity reduce the risk of conflict. The results are robust to correction for outliers, alternative variable definition, and variations in estimation method.Conflict, Development, Natural Resources, Panel Data

The Economic Legacy of Civil War: Firm Level Evidence from Sierra Leone

This paper positions itself among the very rare microeconomic analyses on the consequences of civil war. Up to now, most analyses on this topic are based upon household surveys. The originality of the present study is that it investigates for the first time the likely predominant route by which civil conflict affects the economy, namely through firms. The context of the study is Sierra Leone, a country that was ravaged by a violent conflict from 1991 to 2002. The approach is to use geographical variations in the intensity of conflict to estimate the impact of violence on firms, on which we have data from the World Bank 2007 Employers Survey. The proposed theory is that during the conflict, violence affects production through a form of technical regress and demand through a reduction in income. The persistent post-conflict effects are yet less obvious We assume that war forces a prolonged contraction in output skills, which slows the pace of recovery. We termed this phenomenon ‘forgetting by not doing’. The results confirm our theory. Civil war negatively impacts the existence of firms and employment, but there is no distinction between regions. However, the size of firms in 2006 is negatively affected by the intensity of the war in the area it operates. Yet, firms tend to grow twice faster in more affected areas, strikingly matching the macroeconomic rate of recovery post-conflict environments (Collier and Hoeffler, 2004). The analysis of training patterns clearly confirms the long lasting lack of skills experienced as a result of the war in areas where the conflict was more intense.entrepreneurship, national systems of innovation, SMEs, innovative capabilities, emerging economies

Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum

Currently, evidence on the ‘resource curse’ yields a conundrum. While there is much crosssection evidence to support the curse hypothesis, time series analyses using vector autoregressive (VAR) models have found that commodity booms raise the growth of commodity exporters. This paper adopts panel cointegration methodology to explore longer term effects than permitted using VARs. We find strong evidence of a resource curse. Commodity booms have positive short-term effects on output, but adverse long-term effects. The long-term effects are confined to “high-rent”, non-agricultural commodities. We also find that the resource curse is avoided by countries with sufficiently good institutions. We test the channels of the resource curse proposed in the literature and find that a substantial part of it is explained by high public and private consumption, low or inefficient total investment, and an overvalued exchange rate. Our results fully account for the cross-section results in the seminal paper by Sachs and Warner (1995).commodity prices; natural resource curse; growth

Structural Policies for Shock-Prone Developing Countries

Many developing countries periodically face large adverse shocks to their economies. We study two distinct types of such shocks - large declines in the price of a country’s commodity exports and severe natural disasters - , both of which have occurred frequently in the recent past. Unsurprisingly, adverse shocks reduce the short-term growth of constant-price GDP and we analyze which structural policies help to minimize these losses. Structural policies are incentives and regulations that are maintained for long periods, contrasting with policy responses to shocks, the analysis of which has dominated the literature. We show that some previously neglected structural policies have large effects that are specific to particular types of shock. In particular, regulations which reduce the speed of firm exit substantially increase the short-term growth loss from adverse non-agricultural export price shocks and so are particularly ill-suited to mineral exporting economies. Natural disasters appear to be better accommodated by labour market policies, perhaps because such shocks directly dislocate the population.commodity price shocks; natural disasters; growth, policies

Aid, policy, and growth in post-conflict societies

Countries emerging from civil war attract both aid and policy advice. This paper provides the first systematic empirical analysis of aid and policy reform in the post-conflict growth process. It is based on a comprehensive data set of large civil wars and covers 27 countries that were in their first decade of post-conflict economic recovery during the 1990s. The authors first investigate whether the absorptive capacity for aid is systematically different in post-conflict countries. They find that during the first three post-conflict years, absorptive capacity is no greater than normal, but that in the rest of the first decade it is approximately double its normal level. So ideally, aid should phase in during the decade. Historically, aid has not, on average, been higher in post-conflict societies, and it has tended to taper out over the course of the decade. The authors then investigatewhether the contribution of policy to growth is systematically different in post-conflict countries, and in particular, whether particular components of policy are differentially important. For this they use the World Bank policy rating database. The authors find that growth is more sensitive to policy in post-conflict societies. Comparing the efficacy of different policies, they find that social policies are differentially important relative to macroeconomic policies. However, historically, this does not appear to have been how policy reform has been prioritized in post-conflict societies.Peace&Peacekeeping,Services&Transfers to Poor,Post Conflict Reconstruction,Public Health Promotion,Gender and Development,Social Conflict and Violence,Peace&Peacekeeping,Post Conflict Reconstruction,Services&Transfers to Poor,Rural Poverty Reduction

The Political Economy of Secession.

Secessionist movements present themselves to the global public as analogues of colonial liberation movements: long-established identities are denied rights of self-determination by quasi-imperial authorities. Self-determination is presented as the solution to the challenge of peaceful coexistence between distinct peoples. The global public not only accepts this message but reinforces it: both Hollywood and diasporas relay it back to populations in developing countries. In this paper, we will argue that the discourse of secessionist movements cannot be taken at face value. We will suggest that a more realistic characterization of secessionist movements is that their sense of political identity is typically a recent contrivance designed to support perceived economic advantage, if the secession is successful, and facilitated by popular ignorance.

Opportunities and Choices..

Growth depends upon the interaction of opportunities and choices. A country, or an entire region, may fail to grow either because there are no opportunities, or because choices are made that preclude opportunities being taken. The stark phenomenon we are trying to understand is that for forty years Africa stagnated while other developing regions grew. This chapter attempts to explain this alarming phenomenon in terms of the distinctive opportunities open to the region and the distinctive choices which were made.