Commodity prices, conflict, and development

    There is no doubt that conflict can lower economic activity by raising insecurity and draining labor and talent out of productive activities and into military/criminal/redistributive activities. Economists have long recognized this possibility and pointed out that the likelihood of conflicts depends, amongst other things, on the relative returns.  

  Ray Fishman over at Slate summarizes a nice recent research paper by economists Oeindrila Dube and Juan Vargas which looks at the relationship between commodity prices and conflict in Colombia.  Fishman's  post is entitled "Will there be blood? Will falling commodity prices cause civil war?"  There are two opposing forces.  A few excerpts: 
...Poor farmers impoverished by lower crop prices may be eager recruits for rebel groups who can promise a better livelihood from stolen loot than what the soil can provide (not to mention protection from pillaging, since unaligned farmers may be easy prey for either rebels or government troops). A cheaper cup of joe may thus translate into conflict in the coffee-growing world. (It has, in fact, been suggested that the mass murder in 1994 of perhaps 1 million Tutsis in Rwanda was triggered by the 50 percent fall in the price of Arabica beans, the economic lifeblood of Rwanda's poor farmers.)

Then again, lower prices may also mean less conflict. One of the great ironies of modern economic history is that natural resources can be less an economic blessing than a curse (the so-called natural resource curse). One reason for this apparent paradox is that resource-abundant countries suffer through frequent civil conflicts as competing factions struggle for control over oil wells, diamond mines, and other sources of natural wealth (and use the resulting revenues to fuel further conflict). If resource prices fall, then there's less wealth to bicker over, less reason to fight, and less cash on hand to purchase further armaments.

Given these two opposing forces, when should we expect price drops to trigger more violence, and when should we expect less? Dube and Vargas argue that the critical difference is the "labor intensity" of extracting a resource—that is, the value of workers relative to the cost of buildings and machines. For example, a farmer tending his land may need little more than a strong back and a shovel, but an oil rig may cost billions and a pipeline billions more. Subsistence farming is labor-intensive; oil drilling is capital-intensive.

When farm prices (or those of other labor-intensive resources) go up, the benefits are widespread, and many laborers see their incomes increase accordingly. But higher oil prices bring gains only to the privileged few who own the wells (and perhaps also their relatively small workforce), leading to even greater conflict over who controls the increasingly valuable oil.  

The war-torn nation of Colombia serves as an ideal testing ground for the researchers' theories of civil conflict. 
Read the full post for the findings. 

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