# **1 Introduction**

The danger of internal conflict and its potential importance for the process of economic and social development hardly needs emphasis. The set of countries which are failing most chronically to meet the Millennium Development Goals (MDGs) consists disproportionately of conflict-affected states. This has been recognized by the international community and the analysis of, and initiatives for, fragile and conflict-affected states (FCS) have been growing rapidly. In addition to addressing drivers of conflict and fragility these initiatives, so is the hope, should improve economic development.

This report tries to understand why some countries fail to recover from conflict. In other words, our goal is to understand how conflict affects economic development beyond the conflict period. This is a difficult task. There is most likely a two-way relationship between conflict and development, which has been captured by the idea of a “conflict trap”.<sup>1</sup> In addition, there are also factors that impact both conflict and development. Besley and Persson (2008), for example, argue both theoretically and empirically that the countries affected by internal conflicts are those that invest less in state capacity. In their analysis, low state capacity, conflict and lack of development are driven by factors like the abundance of natural resources and weak political institutions. The problem of policies for recovery is therefore not only to address different channels through which conflict impacts the economy in the long run but to address other elements which both inhibit development and lead to conflict. In short, the two-way relationship between conflict and development and the multitude of confounding factors such as state capacity make it impossible to develop policy without a clear idea of the mechanisms at play.

The aim of this report is not to re-invent the wheel. There is a lot of previous work in this area which has been summarized, for example, in the World Development Report 2011 (WDR). The report analyzes the spurs of violence in FCS and explains why recovery from conflict is hard to address. The core message of the WDR is that in order to break the vicious cycle of violence, FCS should strengthen legitimate institutions and restore citizen security, justice and job opportunities.

We add to this through the lens of the most recent wave of research in the area. The backbone to our analysis is the analysis of the contemporaneous effect of conflict which we present in section 2. We show, using standard panel fixed effect regressions, that economic growth during conflict incidence is significantly lower. This is true both at the country and ethnic group levels. Local disruptions of the economy in conflict seem to play an important role in this loss.

In section 3 we argue that this impact is also crucial to understand the lack of long term development in FCS. FCS grow as fast as other countries outside the conflict period, i.e. average growth is not significantly lower before a renewed outbreak of conflict. Peace stability is therefore a key factor in explaining a lack of long term

> 1This is the core idea that supports the World Bank Policy Research Report provided by Collier et al. (2003). The authors summarize the idea of conflict trap as a situation where _if development succeeds, countries become progressively safer from violent conflict, making subsequent development easier. While where development fails, countries are at high risk of becoming caught in a conflict trap in which war wrecks the economy and increases the risk of further war._