Political violence and economic growth

This paper analyzes the economic growth impact of organized political violence. First, the authors articulate the theoretical underpinnings of the growth impact of political violence in a popular model of growth under uncertainty. The authors show that, under plausible assumptions regarding attitudes toward risk, the overall effects of organized political violence are likely to be much higher than its direct capital destruction impact. Second, using a quantitative model of violence that distinguishes between three levels of political violence (riots, coups, and civil war), the authors use predicted probabilities of aggregate violence and its three manifestations to identify their growth effects in an encompassing growth model. Panel regressions suggest that organized political violence, especially civil war, significantly lowers long-term economic growth. Moreover, unlike most previous studies, the authors also find ethnic fractionalization to have a negative and direct effect on growth, though its effect is substantially ameliorated by the institutions specific to a non-factional partial democracy. Third, the results show that Sub-Saharan Africa has been disproportionately impacted by civil war, which explains a substantial share of its economic decline, including the widening income gap relative to East Asia. Civil wars have also been costly for Sub-Saharan Africa. For the case of Sudan, a typical large African country experiencing a long-duration conflict, the cost of war amounts to $46 billion (in 2000 fixed prices), whichis roughly double the country's current stock of external debt. Fourth, the authors suggest that to break free from its conflict-underdevelopment trap, Africa needs to better manage its ethnic diversity. The way to do this would be to develop inclusive, non-factional democracy. A democratic but factional polity would not work, and would be only marginally better than an authoritarian regime.