Decline causes war---studies.

This paper contributes to the research on the macroeconomic origins of conflict. Based on a sample of 133 low and middle-income countries over a 30-year period, it analyses to what extent changes in a country’s commodity terms-of-trade (ToT) can explain an increase in the incidence and intensity of conflicts through their effect on aggregate income. While the evidence from previous studies on the link between macroeconomic conditions and conflict is rather inconclusive, we find a significant relationship. Our baseline model finds that a negative commodity ToT shock leads to an increase in the number of conflict events and fatalities in our sample. Moreover, the effect plays out over several years albeit with decreasing strength after the second year; and its magnitude is twice as large for Low-Income Countries and Fragile and Conflict-affected States when compared with the sample average. In addition, our results show that macroeconomic shocks are creating more violence in countries with higher inequality and in cases where fiscal policy faces relatively stronger constraints on financing a response to the initial shock to incomes. Our results are robust to a number of plausible variations in model specification. The paper’s results, in conjunction with previous studies that emphasize the economic cost of conflicts, suggest the presence of a fragility trap—a vicious cycle of worsening economic conditions and deteriorating conflicts. Effective policies and well-tailored external financial support could be expected to help countries address the challenge.

The world suffers from a large number of violent conflicts. According to the Uppsala Conflict Data Program Georeferenced Event Dataset (UCDP GED), 1 which identifies conflict events as incidences of the use of armed force by an organized actor against another organized actor, or against civilians that result in at least one direct death, 17,000 conflicts occurred in 2021. These claimed almost 120,000 deaths. And while the incidence of conflicts subsided somewhat after the surge associated with the Arab Spring, their frequency over recent years has remained almost twice as high as that experienced in the outgoing decade of the 20th century (Figure 1).

How can economic conditions affect the likelihood of conflict? Since conflicts arise from complex political, social, and ethnic contexts, singling out an individual determinant seems infeasible. However, it is plausible to assume that economic factors, such as changes in aggregate income levels, would contribute to the dynamics that foster conflict. For instance, higher inflation would reduce purchasing power, thereby increasing the inclination of individuals to participate in violence. Less opportunities for gainful employment or reductions in salaries and wages may have similar effects. These would be the case especially in situations where governments are lacking the means to effectively mitigate economic hardship as macroeconomic shocks deplete their fiscal coffers.

Recent years have seen several major economic shocks on a global scale with a negative effect on output and thus aggregate income, including the Covid-19 pandemic, an increasing number of severe climate events, and Russia’s invasion of Ukraine. The Ukraine war has had a particularly strong impact on households’ purchasing power through its effect on energy, food, and fertilizer prices (Figure 2). Low-Income Countries (LICs) have been hit the most, as they host sizeable populations of poor and vulnerable households while their social safety nets tend to remain underdeveloped (see Rother et al., 2022).

Against the current background of elevated global economic pressures and a high incidence of conflicts, this paper seeks to contribute to a better understanding of the causality between the two phenomena. In particular, we hope that a deeper understanding of the transmission channels from economic shocks to violence will help policymakers at the national level and in international institutions with policy design—aimed at both preventing conflicts in the first place and at achieving durable exits from the vicious cycle of recurrent conflict and economic stagnation, which was identified elsewhere as a fragility trap (see Commission on State Fragility, Growth, and Development, 2018).2

Specifically, we use the broad commodity Terms-of-Trade (ToT) index compiled by Gruss and Kebhaj (2019) as a source of exogenous income variation. Based on that index, we employ the local projection method pioneered by Jorda (2005) to analyze the effects from ToT changes on the incidence and intensity of violent conflicts, which could show persistence over several years. Our data on conflicts comes from the Uppsala Conflict Data Program Georeferenced Events Dataset (UCDP GED) (Sundberg and Melander, 2013), which defines conflict events as incidences of the use of armed force by an organized actor against another organized actor, or against civilians that result in at least one direct death. In addition, we investigate transmission mechanism through which macroeconomic shocks affect conflicts by interacting the ToT shock variable with suitable proxies for the respective channels:

i. an opportunity cost channel: lower employment or lower pay could incentivize individuals to participate in non-productive activities such as violence (e.g., Becker, 1968; Figes, 1996; Weinstein, 2005; Collier and Hoeffler, 2004). Our modeling captures this channel by the level of inequality in an economy: the more unequal an economy as measured by the Gini coefficient, unemployment, and the share of the population affected by food insecurity, the larger the fraction of poor households with a low opportunity cost to engage in violent activity.

ii. a state capacity channel: lower national income leads to lower government revenue, weakening its capacity to prevent conflict or mitigate its economic fallout (e.g., Fearon and Laitin, 2003; Besley and Persson, 2008b, 2010). In our estimations, we proxy state capacity with the level of fiscal deficits and external debt as a share of GDP.

iii. a predation channel: higher commodity prices associated with an increase in income could cause conflict over the distribution of rents (e.g., Hirshleifer, 1991; Besley and Persson, 2008a; Adhvaryu et al., 2021). Previous studies often emphasized the importance of this channel for countries with oil and other natural resources (e.g., Ross, 2004).

The empirical results of our paper can be summarized as follows. First, a negative ToT shock significantly increases the incidence and intensity of conflict as measured by the number of conflict events. Our estimates indicate that a negative shock equivalent to one percent of GDP leads to an increase of 0.05 conflict events per one million people. The estimate of 0.05 events per one million people can explain 1.6 percent of the average conflict incidences that countries in our sample experience. Notably, the explanatory power of ToT shocks is twice as large for Low-Income Countries (LICs) and Fragile and Conflict-affected States (FCS). We complement this analysis by employing the number of fatalities caused by conflict as an alternative measure that tracks conflict intensity rather than conflict incidence. The respective results point in the same direction: a negative ToT shock of one point of GDP is associated with an increase of 0.39 fatalities per one million people, which explains about 0.75 percent of the average fatality count that sample countries experience. Second, we find that the impact of a commodity ToT shock is larger in countries with higher inequality and limited fiscal capacity. The former effect is consistent with the opportunity cost channel, whereas the latter supports the state capacity channel. Looking at the relative explanatory power of various variables to model fiscal capacity, we find that external debt is more relevant than fiscal balance and domestic debt. This is consistent with the criticality of external debt for LICs with limited domestic financing sources. Third, we explore spillover effects from ToT shocks to conflicts in neighboring countries and find that the number of conflict events increases in a statistically significant way within two to three years of the initial shock.