# **2 and Economic Growth**

Civil wars affect economic conditions in two stages: during conflict and during the postwar period. We start our analysis by exploring the first stage, i.e. the relationship between violence and economic activity during conflict. We then turn towards the recovery from conflict. It turns out that the contemporaneous cost of conflict is essential to comprehend the observed lack of long term development in FCS. This is because many FCS do not experience stable peace. Economic recovery happens on average but it does not last long enough. This is why understanding the contemporaneous effects of conflict is essential to understand long term development.

However, the direct economic cost of conflict incidence is not the only channel through which civil wars impact the development of the affected territories. In this report we explore two ways in which the detrimental effects of conflict spread to the recovery period: the humanitarian crisis triggered by wars (sections 4 and 5) and the contraction of investments due to instability (section 6). Both of these effects will force growth in the recovery period downwards. This is important as it indicates that the contemporaneous effects we turn towards now might be an underestimate.

The macroeconomic impact of civil wars has been studied extensively. Collier (1999) analyzes the effects of violence on GDP growth using cross-county data on internal wars which occurred between 1960 and 1992. He finds that civil conflict is correlated with a contemporaneous reduction of GDP per capita growth of 2.2 percent.<sup>2</sup> On a regional level, Abadie and Gardeazabal (2003) investigate the economic effect of the Basque terror campaign and estimate a reduction of the GDP per capita of approximately 10 percent.

There are several channels through which violence retards development. During conflict there is a direct cost caused by the destruction of resources that would have been employed in production. This directly impacts contemporaneous economic performance in the affected territory and can affect recovery as well. In addition, the economic activity of countries involved in civil conflicts is damaged indirectly by an increase in production costs and insecurity in transport. Fear spreads the economic costs of conflict. We will show, for example, that the number of people running away from violence is far larger than the number of fatalities. Apart from this very direct impact of fear there are several indirect effects including the deviation of resources towards armament or the faltering of investment due to a lack of perspective. All these ideas have been explored in the academic literature.<sup>3</sup> In what follows we will take an agnostic view regarding the channel through which the contemporaneous effect of violence on growth arises. Instead, we will simply look at correlates at the country and ethnic group level. It is nonetheless an important question whether the effect of violence is coming from the local level or whether the main channel is the political and state crisis that coincides with civil war. We will turn towards this

> 2This effect is comparable to estimates we compute and discuss in this section.

> 3See Blattman and Miguel (2010) for a review of the literature. Mueller (2013) provides a recent review of the literature on the economic costs of violence.

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