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?

Coffee farmer. Click image to expand.
Colombian coffee farmer

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.

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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.