With the global banking system teetering on the edge of collapse and the Dow Jones Industrial Average experiencing a series of stomach-churning gyrations, it's easy to get nostalgic for the good old days when our biggest worry was $120-a-barrel oil. Given the single-minded focus in recent days on the financial crisis and its myriad causes, it may have escaped your notice that the price of oil has quietly made its way back down to $70 per barrel. Other commodities have seen similar declines, with wheat and corn prices off by 40 percent from their recent highs. This should provide some relief to recession-battered American consumers. But what does it mean for the countries where those commodities come from?
In a recent paper, economists Oeindrila Dube and Juan Vargas use data on Colombia's decades-old civil war to show that the stakes may be much higher for resource-dependent economies, where the ups and downs of commodity markets can literally mean the difference between war and peace.
How are commodities prices connected to civil strife? 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. The country is "blessed" with extensive deposits of oil, gold, and other capital-intensive resources, as well as some of the world's richest soil for growing labor-intensive agricultural goods like coffee. It is also cursed with a seemingly interminable and bloody civil war. The roller-coaster ride of recent coffee and oil prices offers the economists an opportunity to figure out whether higher prices translate into less violence in the country's coffee regions and more violence in oil regions.
Using newspaper reports of violent skirmishes in 950 Colombian municipalities between 1988 and 2005, Dube and Vargas find that when coffee prices went up, violence went down in locations where a large fraction of land area was under coffee cultivation. When coffee prices fell, however, as they did by almost 70 percent in the late 1990s, violence in coffee areas rose dramatically. The researchers estimate that an additional 500 deaths may have resulted from the increased conflict that came from lower coffee prices. The opposite was true for oil: It was higher prices that intensified conflict in areas with productive oil wells or pipelines. (Since both coffee and oil prices are traded in global markets, it is unlikely that price increases were caused by panicking commodities traders spooked by increased civil-war violence in Colombia.)
To reduce violence in Colombia and other commodities-rich countries, care has to be taken to recognize how fluctuating prices actually affect the situation on the ground. If lower coffee prices drive poor farmers to desperation, we need to do something to cushion the blow to their incomes. One recent suggestion from University of California, Berkeley, economist Edward Miguel and myself is to shift some amount of international development assistance away from long-term investment and toward short-term emergency aid for countries hard-hit by a collapse in prices of labor-intensive commodities. (Countries would similarly get aid if pummeled by weather shocks like drought.) This aid would kick in as soon as prices headed south, before famine or war broke out. So we'd channel aid to Colombia's farmers when coffee prices fell (or if the Colombian rain gods failed to nurture their crops). These emergency funds would be scaled back when prices stabilized—as they did in 2001—or the rains returned.
A very different logic applies to the prices of capital-intensive commodities like gold, diamonds, and oil. Some pointers on what to do may come from countries like Finland (forestry and minerals) and Botswana (diamonds) that have managed their resources for the good of all citizens. Each has strong political institutions that give voice to the people and ensure that would-be political rogues and warlords never get rich through divide-and-conquer tactics. One must be somewhat circumspect in drawing generalizations from Botswana (a postage-stamp-sized African nation) or from the Finns (or from any other Scandinavians, who are simply too nice to be trusted). But it does suggest that "institution building"—the development buzzword of the moment—to nurture democracy and financial accountability is a crucial foundation for any nation cursed with too many diamonds or too much oil.
America's botched attempts at building exactly these institutions in the oil-rich nation of Iraq highlights the challenges of a heavy-handed approach to democratic reform. But when the global aid community tried a more hands-off approach in ensuring that the proceeds of an oil pipeline in Chad would benefit the country's people, policymakers learned how easy it is for corrupt dictators, already enriched by oil revenues, to thumb their noses at would-be institution builders.
A lot of smart people have spent a lot of time thinking about how to escape the resource curse, though their ideas usually require the participation of mining or drilling companies or the well-meaning collaboration of countries' leaders. As long as there are companies that pursue profits at any cost and political leadership remains in the hands of venal dictators, people in the developing world may continue to lament their unfortunate abundance of natural resources. However, if Dube and Vargas are right, they can be thankful that perhaps falling prices will mean less violence, at least for now.