In the past 30 years the world has become much less poor everywhere except in fragile countries. By 2015 most of the world’s poor are expected to live in fragile countries, and most of these countries are affected by civil conflicts. In addition to exacting a huge toll on human life, civil conflicts cause protracted, severe disruption of economic activities and infrastructure, and are key constraints to development in many countries.
Trade and trade policy can greatly affect the risk of conflict. Trade encourages the reallocation of resources to more efficient activities, and thus opens up opportunities and creates jobs. However, changes in relative prices as a result of trade can also destroy opportunities and jobs in declining sectors, and the people affected by these losses may, under certain conditions, turn to violence as a source of income. Changes in real incomes generated by trade are particularly important in fragile states, where trade flows tend to be larger and more volatile than other external flows, such as aid, remittances and foreign investment. In addition, the majority of fragile countries are net food importers, so they are particularly exposed to the recent swings in international food prices.
This report examines how changes in imports and exports affect the risk and intensity of conflict and suggests ways in which policy makers might use trade to reduce this risk. The report also makes a number of contributions to the nascent but growing empirical literature on the relationship between changes in trade and conflict. It uses three different sets of data to do so: the experience of conflict across countries from 1960 to 2010, conflict across states in Nigeria from 2004 to 2013, and conflict during the Second Intifada in the West Bank and Gaza from September 2000 to December 2004.
The analysis considers three main mechanisms for how trade-related changes can affect conflict. The opportunity cost effect holds that changes in real incomes, for example driven by changes in trade prices, change incentives for participating in conflict by changing the return on participation in violence compared with more productive activities. The rapacity (sometimes called “state prize”) effect refers to the idea that valuable economic resources can provide an incentive to fight over their control. And the resource effect recognizes that both government and rebels may fund their activities by taxing the production of commodities, so that changes in their value affect the ability to sustain conflict.
The empirical results provide strong support for the rapacity effect. Increases in the prices of exported oil and mineral commodities substantially raise the risk conflict. An increase in the value of these exports of 10 percent raises the risk of conflict by 2.2 percent on average across countries. The higher the value of resources that can be easily appropriated through fighting, such as minerals and oil, the greater is the incentive to fight over them.
The finding from Nigerian states is similar: a 10 percent increase in the price of oil raises the number of conflict events by 2 percent. These results are also consistent with other intra-country evidence from Colombia, the Democratic Republic of Congo, and from Sub-Saharan Africa.
When the Nigerian government started using some of the oil revenues to demobilize and reintegrate the militants in the oil-producing regions, the positive relation between oil price and conflict intensity disappeared. This finding supports the “resource effect,” which recognizes that the government (and sometimes also the rebels) may fund their activities by taxing the production of commodities, so that changes in their value affect the ability to repress or buy off the rebels, at least in the short term.
While the cross-country evidence provides little support for the opportunity cost hypothesis, the country case studies provide strong support for the opportunity cost effect. This difference is likely due to two reasons. First, the availability of data within countries allows one to isolate the impact of commodity price changes on real incomes. Second, the large heterogeneity across countries can mask effects that may be important within individual countries. In Nigeria, conflict is significantly related to changes in real incomes driven by commodity indexes that reflect both production (higher prices, less conflict) and consumption (higher prices, more conflict) by the households. The importance of changes in real incomes in affecting conflict also applies to the Boko Haram attacks since 2010.
The opportunity cost hypothesis holds in the West Bank and Gaza, where exogenous sectoral increases in export revenues were associated with subsequent lower levels of conflict during the Second Intifada in localities where private sector employment in that sector was significant. These findings confirm the evidence emerging from other within-country studies.
Intense trading with neighbors reduces the duration as well as the intensity of conflict. This trade reduces the incentives of contiguous countries to fuel civil conflict in their neighbors similarly to the case of inter-state wars. These incentives may be particularly strong in areas, such as much of sub-Saharan Africa, where there are strong ethnic ties across borders. Trading with neighbors is also associated with a lower risk of conflict when such trade occurs under regional trade agreements.
The strength of the effect of commodity exports on conflict varies across and within countries and depends on a number of local conditions. Changes in economic conditions have a much greater potential for generating conflict where there are deep-seated, historical grievances among groups, where economic inequality is high, and where government institutions are weak or corrupt.