Dismal Science: Will falling commodities prices cause civil wars in commodity-rich countries?

The search for better economic policy.
Oct. 20 2008 2:30 PM

Will There Be Blood?

Will falling oil prices cause civil wars?

(Continued from Page 1)

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.

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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.

Ray Fisman is a professor of economics at the Columbia Business School and co-author of The Org: The Underlying Logic of the Office. Follow him on Twitter.

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