On the Economic Consequences of Civil War

Author(s): Paul Collier

Source: Oxford Economic Papers, Vol. 51, No. 1, Symposium on Trade, Technology, and
Growth (Jan., 1999), pp. 168-183
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/3488597 .
Accessed: 09/03/2014 18:29

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to Oxford
Economic Papers.

http://www.jstor.org

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
? OxfordUniversity
Press1999 Economic
Oxford Papers51 (1999),168-183 168

On theeconomic ofcivilwar
consequences
ByPaulCollier
CentrefortheStudyofAfricanEconomies, ofOxford,
University
St CrossBuilding,ManorRoad,Oxford,
OX13UL; and WorldBank
andpcollier@worldbank.org
e-mail:paul.collier@economics.oxford.ac.uk

A modeloftheeconomic ofcivilwarandthepost-war
effects A
periodis developed.
keyfeatureis theadjustmentofthecapitalstockthroughcapital Post-war
flight. this
caneither
flight be reversed
or continue,depending uponhowfarthecapital
partly
stockhasadjusted tothewar.Themodelistested ondataforallcivilwarssince1960.
Afterlongcivilwarstheeconomy recovers whereas
rapidly, after shortwarsit con-
tinuestodecline.Wethenconsidertheeffectonthecomposition ofeconomic activity,
distinguishingbetween andwar-safe
war-vulnerable activities.
Evidence forUganda
showssuchcompositional effects
tobe substantial.

1. Introduction
Thispaperinvestigates theconsequences ofcivilwarforGDP anditscomposition.
It focusesparticularly
upon thebehaviour oftheeconomy in theearlyyearsofa
peace settlement.Civil
wars areliable
to be more than
damaging international wars
in severalrespects. are
They inevitably fought on
entirely the of the
territory
country. Theyare likelyto undermine thestate:bothits institutions suchas
property rights,and itsorganisationssuchas thepolice.Bycontrast, as Herbst
(1991)hasargued, international
warstendtostrengthen thestate.Thedestruction
wrought bywarfare, andtheerosion ofinstitutions andorganisations, a
constitute
intheeconomic
deterioration environment. Itmight beexpectedthattheending of
civilwarswouldproducea consequently largepeacedividend. Thispaperargues
thatthereis no presumption ofa peacedividend fromtheendingofa civilwar.
whether
Specifically, thereis a peacedividend is showntobe contingent uponthe
duration ofthewar.Thepost-war growth ratecanbe either wellaboveor well
belowthatwhichwouldhaveoccurred without thewar.Theendofcivilwarscan
thusgiveriseto either a peacedividend ora waroverhang effect.
Section2 setsout thetheoretical framework. The argument is thatcivilwar
reducesthedesiredstockoffactors ofproduction. Somefactors arebetterable
thanothers to leavethecountry andthisgivesriseto a gradualexodusofsuch
factors.
Thebehaviour ofGDP during civilwarthusreflects a gradualadjustment
to a suddendeterioration
in theenvironment.
Bothduringthewarand afterit,the
effectsareconsequentlyon thegrowthrateofGDP ratherthansimplyon itslevel.
Section3 teststhetheoryon a comprehensive
datasetincluding
all ofthecivilwars
whichtookplaceduring1960-92,quantifying theeffectofwarand itsaftermathon

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 PAUL COLLIER 169

growth.Section4 extendsthe analysisto the compositionof GDP. Section5

concludes.

2. The effects
of civilwaron GDP: theory
Although thefocusofthepaperis on therecovery fromcivilwar,it is usefulfirst to
considertheprocessesbywhichtheeconomyis damagedduringthewar.The most
obviouswayin whichcivilwardamagestheeconomyis through thedestruction of
some resources.For example,partof the labourforceis killedor maimedand
bridgesare blownup. However,civilwarsare usuallyfoughtwithmuchlower
technology thaninternational warsand so tendto be muchlessdestructive, at least
ofphysicalcapital.A secondeffect is thedisruption causedbywarfare and theoften
concomitant socialdisorder. Forexample,someroadsbecomeunsafeand so extra
costsareincurred in achieving thesameoutcome.Civilliberties maybe suppressed,
and thereis evidencethatthesuppression of suchlibertieswilltendto reducethe
of publicexpenditure
efficiency (Ishamet al., 1996).Whilethisis not uniqueto
civilwar,thebreakdownof socialorderand theabsenceof a clearfrontlineare
morecommonto civilwarthanto international war.A thirdeffect is thediversion
of publicexpenditure fromoutput-enhancing activities.
For example,as thearmy
and its powersare expanded,thepoliceforceand the ruleof law diminish.The
enforcement costsofcontracts consequently riseand thesecurity ofproperty rights
is reduced.The costsofexpenditure diversion arisingfrom war have been quanti-
fiedby Knightet al. (1996). Fourthly, to the extentthattheseincomelossesare
regardedas temporary, therewillbe dissaving, an effectanalyticallysimilarto the
destruction of the capitalstock.Finally,in responseto the deterioration in the
economicenvironment, privateagentswillengageinportfolio substitution,shifting
theirassetsoutofthecountry. Here,assetsshouldbe understood to includehuman
as wellas physicaland financial capital.
Followingthe restoration of peace the destruction, disruption, diversion, and
dissaving effectsare all directly ameliorated. the
However, portfolio substitution
effectdependsupon privateassetchoices.The mainpointofthepaperis to draw
the implications of the portfoliosubstitution effect
forpost-wareconomicper-
formance. Althoughit mightseemesotericto focusupon portfolio choicein the
contextof civilwar,thesheerscale of capitalflightfromcapital-hostile environ-
mentssuggests thatitseffects on economicperformance are likelyto be large.For
example,a recentstudyofhowAfrican-owned wealthis dividedbetweendomestic
capitaland foreign assets finds that the latter constitute39% of thetotal(Collier
and Gunning,1999). Despiteforeign exchangecontrols, whichuntilveryrecently
havebeenprevalent in mostdeveloping countries, capitalhas evidently beenexpa-
triated.All typesof domesticcapitalcan gradually be transformed intofinancial
capitalby reducinggrossinvestment below depreciation rates.With respectto
physicalcapital, maintenance expenditures can be reduced. With respectto
human capital,householdscan reduceexpenditures on educationand training
and sendmoreeducatedhouseholdmembers abroad.Withrespectto socialcapital

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
170 ECONOMIC CONSEQUENCES OF CIVIL WAR

such as reputation, firmscan behaveopportunistically, depletingreputationin

returnforshorttermprofits. The resulting financialcapitalcan thenbe removed
fromthecountrythroughillicittrade(under-invoiced exportsand over-invoiced
imports). In addition to these indirect of
processes expatriation, some typesof
capitalcan be relocatedabroad. Transport equipment and livestock
areintrinsically
mobileand so relatively easyto removefromthecountry. Forexample,in Mozam-
bique duringthe 1980sthe cattlestockdeclinedby over80% (Bruck,1996). In
extremis evenless obviouslymobilephysicalcapitalcan be removed.Kapuscinski
(1988) describesthe astonishing rangeof capitalgoods whichwerepackedinto
cratesand dispatchedabroad at the onsetof the Angolancivilwar. A further
instanceof capitalexpatriation is theemigration ofthosewithskills.
However,theexodusoffactorendowments is a gradualprocessand theease of
expatriation betweentypesof factor.Whereassome typesof capitalare
differs
highlyendogenous,the suppliesof buildings,land, and unskilledlabour are
likelyto be lessresponsive.' As a stylised
representationofthesedifferences,
dichot-
omise factorendowments intothosewhichare endogenouswithrespectto war,
denotedbyN, and thosewhichare exogenous,denotedbyX.
For concreteness, it is usefulto characterise pre-waraggregate outputin the
simpleCobb-Douglas form as
Q = a.XbN'-b (1)
The rateofreturnon theendogenousfactorwillbe itsmarginal productminusits
rateofdepreciation,
d. An initialequilibriumis assumedinwhichtherateofreturn
equals thereturn,
r,obtainableon foreign assets,so that
(1 - b)N-b.aXb - d = r (2)
Now considertheeffect of civilwaron thesupplyof theendogenousasset.Civil
war reducesthe rateof returnon N relativeto thaton the foreignasset.The
disruptionand diversioneffects bothreducefactorproductivity. This lowersthe
multiplicativeconstantin (2) froma to thereby loweringtherateof returnon
N. The destructioneffect is equivalenttoaw,
an increasein therateof depreciation.
the of
Similarly, weakening property rightsis equivalentfroma privateperspective
to a further increasein the rate of depreciation. Denotingthe privaterate of
depreciationduring wartime as >
d, d, the increase in depreciationagainreduces
therateof returnon N.
Assetsheld abroad will usuallybe liquid since this characterises most asset
marketsin developedcountries.Civil war createstemporary uncertaintywith
respectto thefuturereturnon assetsheldwithinthecountry. If thewarpersists
the returnis lowerthan if the war ends forgood. Such temporary uncertainty
createsa premiumupon holdingassetsin liquid formbecausesuch assetsnow

1
Thereare somenotableexceptions.
Forexample,theland minesso commonin Angolaact in partas
land-reducingtechnical whilethemassemigration
regress, ofHutusfromRwandasubstantiallyreduced
thelabourforce.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 PAUL COLLIER 171

have an optionvalue in additionto theirunderlying rateof return,raisingthe

overallreturnto r,. The resulting increasedattractivenessof liquid assetsduring
civilwar is an instanceofthe'bad newsprinciple'(Dixitand Pindyck,1994).
As can be seen from(2), by increasingd and r whileloweringa, civil war
encouragesportfoliodiversionfromN into foreignassets.The desiredstockof
endogenousfactors willfall.Thisgivesriseto a phaseduringwhichtheactualstock
ofthevariablefactoris adjustingto itsnewdesiredlevel.The implication forGDP
is thatcivilwarwould reduceoutputboththroughthedisruption and diversion
effectswhichareone-off becausetheydirectly reduceincome,and through a phase
of reducedgrowthas thestockofN declinesrelative to itscounterfactual through
destruction, dissavings, and capitalflight.
Now supposethereis a peace settlement. Althoughpeace reducesthe costsof
economicactivity in variousways,it does not reducethemto thepre-warlevel.
Withpeace thedestruction effectceases,reducingthedepreciation rateon capital
backto itspre-war level.The disruption effectmayalso ceaseso thatthereis a one-
offincreasein productivity, althoughsome aspectsof theeffect, suchas thesup-
pression of civil liberties,mayonly recovergradually.The diversion effectwillbe
reversedby the extentof the fiscalpeace dividend.However,thismaybe quite
limitedso thattherecan onlybe a partialrestoration of productive publicexpen-
ditures.Military expenditure mightbe slowto decline:demobilisation is commonly
delayedthrough fears of its consequences,2 and the government armymay be
expanded due to the influx of rebel as
forces, in Zimbabwe. Even where military
expenditure is reducedtheremightbe littlescopeforincreases in productive public
expenditures: in theclosingstagesofwargovernments oftenadoptfiscally unsus-
tainablepositions.Forexample,in thefinalyearoftheEthiopiancivilwarthefiscal
deficitincreasedby 8% of GDP.
Becauseofthepersistence ofthediversion effect,werethestockofN-capitalfully
restoreditsproductivity wouldbe belowitspre-warlevel.Thisis one reasonwhy
althoughpeace increasesthe optimalstockof the endogenousfactor,it does not
restoreitto itscounterfactual level.A secondreasonis thatthelevelofriskis likely
to haveincreasedrelative to thepre-war situation:a peacesettlement willgenerally
notrestoreexpectations ofpeaceto theirpre-war level.Theveryfactofthecivilwar
constitutesnewsthatthesocietyis proneto civilwar.Further, it is likelyto have
polarisedthe society,so makingit easierto coordinatefuturerebellions.These
effects
maybe offset bythepeacesettlement: therebellion mayhavebeendecisively
or be
vanquished, peacemay guaranteed byexternal powers.However,as a general
proposition, societies in the a
earlyyearsafter civilwarareprobablyseenas facing
higherrisksthansocietieswhichhavehad longhistories ofpeace.The probability
of futurepeace thusriseson thenewsof current peacebut theriskof 'bad news'
does notfullyrevert to itspre-war level.Thisbothmaintains some,albeitreduced,
option value on liquidity,and depressesthereturnon N relativeto pre-warcon-

2 See Collettaet al. (1996) and Collier(1994) fora discussionof demobilisation

experiences.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
172 ECONOMIC CONSEQUENCES OF CIVIL WAR

ditions.The increasedprobability ofwarrelativeto thepre-warsituationreduces

theexpectedproductivity ofonlypartially reversibleinvestment relative
to itspre-
warlevel.Similarly,itraisestheexpecteddepreciation rate.Thus,thepersistence of
thediversioneffect and theonlypartialcredibility ofpeace bothlowerthereturn
on N relativeto itspre-war level.WhiletheoptimalstockofN increasesas a result
of peace,it does not fullyrecoveritscounterfactual value.
The responseoftheeconomyto peacedependscrucially uponwhether thestock
ofN hasalreadyadjustedbelowitsnewlyoptimallevel.Ifithasnotthenthedecline
in N continuesas iftherehadbeenno peacesettlement. Thismightbe termeda war
overhangeffect. Conversely, ifN has alreadyadjustedbelowitsnewlyoptimallevel
thentheadjustment processgoesintoreverse. The supplyoftheendogenousfactor
can be increasedby repatriation, givingrise to a gradualpeace dividend.
Whether thestockofN hasadjustedbelowitsnewlyoptimalleveldependsupon
manydimensionsof the adjustment process,mostof whichare unlikelyto be
measurable. However,one evidentandobservable dimensionis itsduration.Ceteris
paribus,thelongerthedurationofthewarthemorelikelyit is thatthesupplyof
theendogenousfactorhas had thetimeto adjustbelowitspost-waroptimallevel.
Hence,themorelikelyit is thatpeacewillproducea peacedividendratherthana
waroverhang.
The foregoing impliesfourtestablehypotheses. First,becausecivilwarsgradually
reducethe stockof the endogenousfactor,theyreducethe growthrateof GDP
ratherthanjust itslevel.Secondly,becauseadjustment of theendogenousfactor
mayhavebeen incomplete bythetimethewarends,peace maynot end decline.
Thirdly,becausepeacemayreverse theexodusoftheendogenousfactorthereis the
potentialfor accelerated growth:that is, thereis a potentialpeace dividend.
the
Fourthly, longer hasbeen thewarthemorelikelyis theretobe a peacedividend
ratherthana waroverhang.In thelimiting case,a momentary warwilllowerthe
desiredpost-warstockof the endogenousfactorwithoutprovidingany oppor-
tunityforthisreductionto be affected, so thattheearlypost-warperiodwillbe
characterisedbya reduction in thegrowthrate.Thatis,sufficiently shortwarswill
be characterisednotbya peace dividendbutbya waroverhang.

3. The effects
of civilwaron GDP: evidence
In thissectiontheabove hypotheses are testedon a comprehensive data set.The
mainissueis whether, as impliedbytheportfolio substitutioneffect,there is some
criticaldurationof civilwarsbelowwhichgrowthcontinuesto be retarded in the
post-warperiod,and abovewhichthereis a peace dividend.
Althoughno previousstudyhas quantified thegrowtheffects of civilwarsand
theiraftermath, two recentpapersare highlypertinent. et
Knight al. (1996) have
investigatedtheeffectsof warand a
quantified peace dividend usinga 79-country
data set.Two oftheirresultsare important forthepresentstudy.The firstis their
panel regression of the ratioof investment to GDP. Warfareis foundto have a
strongly beingthemostsignificant
negativeeffect, variablein theregression. While

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 PAUL COLLIER 173

unsurprising, thisis consistent withtheunderlying presumption of Section2,

namely that civilwars reduce growth mainly bydepleting thedomestic capital
stockin itsvariousforms. Indeed,whenKnight et al. controlforphysical and
humancapital,together withmilitary spending and tradepolicy,theyfailto
finda significant effectofwarin theirgrowth regression.The secondresultof
importance concerns their estimate of the peace dividend. The sourceof the
dividend in theirstudyis entirely a reduction in militaryexpenditure. Thatis,it
is thetypeofdividend arising fromtheendoftheColdWarrather thanfrom
theendingofa civilwar.Indeed,Knight etal. specifically
control forwarfare in
quantifying the effectof reduced military on
spending growth: for a given
propensity to warfare,theymeasure thegainsfromreducing themilitary budget.
Further,theyassumethatthegainsfrom reducing militaryexpenditure areentirely
symmetrical withthecostsfrom increasing it.Theirconcept ofthepeacedividend
fromreducing military expenditure is thuscloseto thepurediversion effect
postulatedin Section2: the cost inflicted the of
by squeeze military expenditure
on productive publicexpenditures. Theotherfoureffects ofa civilwararisefrom
directlyor indirectlyfromviolence rather thanfromthecomposition ofpublic
expenditure. Their principal finding, that increased military expenditure has
significant
negative growth thus the
effects, supports postulate that the diversion
effect
is costlyto growth.
Thesecondpertinent study isthatofdeMeloetal. (1996)whichinvestigates the
effect
ofcivilwarsin thetransition economies ofEastern Europe on the average
growth rateovertheperiod1989-94.Theyincludein theirgrowth regression a
dummy variable 'regional tension' for 'persistent internal conflictsor conflict-
related
blockades'. Thevariable ishighly significantandreduces theannualaverage
growth rateduring thefiveyearsby9%. Sincesomeoftheconflicts endedbefore
1994thisconflates growth performance during the war with that afterthewar.
However, because ofthe limited number of observations no distinctioncould be
made.
Thepresent paperexplicitly theeffects
quantifies ofcivilwaron growth both
during thewar and the
during first
five
post-war The
years. datasetused for
growth
ratesis thenow-standard PennWorldTables,coveringtheperiod1960-89.The
innovation is to combinethiswiththestandard
sourceon civilwars(Smalland
Singer,1982,1994).Thisdatasetgivesthedatesofthestarting
andending ofall
civilwarssince1816bymonth, defined
ona common setofobjective This
criteria.3
permits a focusuponcivilwaras opposedtothewiderconceptdeployed inboth

3 Singerand Smalldefinecivilwar on threecriteria: militaryactioninternalto themetropole,

active
participationofthenationalgovernment, and effective
resistance
bybothsides.Thisdefinition
produces
a classification
whichis somewhat too restrictive
forourpurposes.Forexample,Ethiopiais notclassified
as havingexperiencedcivilwaron thesecriteria.
In thepresentstudytheirdefinition
hasbeenbroadened
slightlyto includewhattheyterm'extra-systemic' wars,whichbringsEthiopiaintotheset,whilestill
excludinginter-state
wars.A fullerdiscussionof theSingerand Smalldata setis givenin Collierand
Hoeffler (1998).

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
174 ECONOMIC CONSEQUENCES OF CIVIL WAR

Knightet al. and thepioneering appliedgrowthstudiesofBarro(1991). Combin-

ing the data setsprovides sampleof 92 countriesofwhich19 had civilwars.
a
The dependentvariablewas thedecadeaveragepercapitaGDP growthrateof
each countrybetween1960 and 1989.This makesthestudydirectly comparable
withotherrecentworkon thedeterminants ofgrowthsuchas Easterly and Levine
(1998) and closelycomparableto studieswhichtakeas thedependent variablethe
growthaverageover periodslongerthan a decade,such as Sachs and Warner
(1995). The disadvantage withsucha formulation is thattheshort-term dynamics
of the growthprocessare not analysed;the advantageis thatby includingonly
structuralvariablescharacterising theeconomyat thestartofthedecadetheprob-
lemofendogeneity is reduced.In themainresults presented belowOLS wasusedas
in Easterlyand Levine,and Sachsand Warner.The resultsare thentestedagainst
fixedand randomeffects models.
Civil war is introducedinto the regressionthroughthreevariableswhich
betweenthemcapturetheeffects bothduringthewar and in the firstfiveyears
of subsequentpeace. The first, Warmonths, is themonthsof warfareduringthe
decade.It measurestheconcurrent effectsofwar.The othertwofocuson thefirst
fivepost-waryears.One variable(Postwar)is thenumberofthesepotentialrecov-
erymonthsduringthedecade.The other(Legacy)interacts Postwarwiththetotal
length(in months)of thepreceding war.Thus,a warwhichbeganin December
1957and endedin December1967wouldpotentially influencetheaveragegrowth
rateduringthe 1960sthroughtherebeing84 monthsofwar,throughtherebeing
24 monthsofpost-warrecovery, and through thesepost-war monthsstarting from
a legacyof 120 monthsof war. It would also potentially influencethe average
growthrateduringthe1970sthrough therebeing36 monthsofpost-warrecovery,
and through thesepost-war monthsstarting froma legacyof 120monthsofwar.If
thereis a peace dividendirrespective ofthedurationofthewar,thenPostwarwill
be positiveand significant whereasLegacywill be insignificant. If, however,as
postulatedabove,the durationof the war determines whetherthereis a peace
dividendor a war overhang,thenPostwarwill be negativeand significant and
Legacy willbe positive and There
significant. willthen be some criticalduration
of warfare belowwhichpeace yieldsa waroverhanginsteadof a dividend.
The otherexplanatory variablesareall nowfairly standardin growth regressions.
Dummiesforall threedecadeswereincludedin lieu of a constantterm,together
with continentdummies.Two endowmentsat the startof the decade were
included:thelevelof secondary schooling(enteredas a log), and thelevelofper
capita income. It was found that thebestfunctional formforincomewassimplyits
square. Two country-specific characteristics
wereincluded:the degreeof ethno-
linguisticfractionalisationand whether thecountrywas landlocked.Easterlyand
Levine(1998) foundthatan indexofethno-linguistic fragmentation,measuredas
of 1960, significantly reducedgrowth.The index shows the chances of two
randomlydrawnpeople beingfromdifferent ethno-linguistic groups.Although
potentially the index mightbe correlatedwithcivil war, Collierand Hoeffler

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 PAUL COLLIER 175

(1998) showthathighlyfragmented societieshaveno greater riskofcivilwarthan

homogeneous ones. Sachs and Warner (1995) pioneered use of a land-locked
the
locationas an explanationof slowgrowth.Beinglandlockedis a non-policyim-
pedimentto tradeand mostanalystsfindthattradepromotesgrowth.4
Policyvariableswere omittedbecause some of the effects of civilwar work
throughpolicies. For the
example, portfolio substitutionconsequentupon civil
war can be expectedto increasethe premiumon the parallelexchangerate.
Thereis indeeda highcorrelation betweencivilwarand thesizeofthepremium.
Sincethepremiumis oftenfoundto be themostimportant policyinfluence on
and
growth(Easterly Levine,1998; Sachs and Warner,1995) its inclusion would
detractfromthetrueeffect of civilwar.A similarargument couldbe madewith
respectto thefiscaldeficit. Growthregressions tendto be sensitive to specification.
However,thislargely arisesbecausemanypolicyvariablestendto be highlycorre-
lated so thatdependingupon whichare included,quite different policiesmay
appearto be important forthegrowthprocess.By excludingpolicyvariableswe
are leftwitha less sensitive specification.5
The results,usingheteroscedasticity-consistent standarderrors,are reportedin
Table 1.
Clearly,thenon-warvariablesarenotthefocusof our attention (althoughthey
are almostall significant). However,the'convergence effect'has implications for
post-warrecovery: the coefficient on incomeindicatesthatpoor countriesgrow
fasterthanrichercountries controlling fortheothervariables. A country withhalf
the mean incomewould grow2.5% more rapidlythan a countrywithmean
income,evaluatedat themeanof othervariables.This providessome automatic
peacedividendeffect: ifa country immiserises itself
through civilwaritwillhavean
enhancedpost-wargrowthratebyvirtueof itspoverty. Thiseffect wouldpredict
thatthe post-wargrowthratewould be fasterthe longerthe durationof the
previouswar. For example,a countrywhichbegan a 15-yearwar withmean
incomewould add 1.7% to its growthratein the firstpost-waryear.However,
sinceincomeat thebeginning ofthedecadeis one oftheexplanatory this
variables,
effectis largely
controlled forand so is over-and-abovetheeffects shownbythetwo
post-warvariables.
Now considertheeffects of civilwar.Duringcivilwar theannualgrowthrate
is reducedby 2.2%.6 A 15-yearcivil war would thus reduceper capita GDP

4 Possibly,
ethno-linguistic
fragmentation reducesgrowth bya similarprocessofimpeding trade.Gravity
modelsof tradeflowsfindthatiftwo countriessharea commonlanguagetradeflowsare significant
increased(Foroutanand Pritchett,1993).Hence,itmaybe thelinguistic rather
thantheethnicaspectof
fragmentation whichis costlyforgrowth.
5 Forexample, ifthecountryor timedummiesaredropped,althoughtheperformance oftheregression
deterioratesthecoefficients
on theremaining variablesare littlechanged.
6 Sincetheduration ofthewaris measuredin monthsand thedependent variableis theaveragegrowth
rateduringthedecade,thecoefficienton Warmonths mustbe multiplied by 120to arriveat theeffect
on
theannualgrowthrate.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
176 ECONOMIC CONSEQUENCES OF CIVIL WAR

of civilwarand peace upon thegrowthof GDP

Table 1 Effects

Variable coefficient t-ratio

dummy 1960s 0.0606 7.00*

dummy 1970s 0.0802 6.44*
dummy 1980s 0.0420 4.39*
Africa -0.0159 - 3.37*
Latin America -0.0235 - 8.13*
income squared - 0.00056 - 4.10*
schooling(LN) 0.0270 3.05*
fractionalisation - 0.00023 - 4.41*
landlocked - 0.0056 - 1.54
warmonths - 0.00018 - 4.43*
postwarmonths - 0.00022 - 2.11t
legacy 0.0000040 2.25t

* at the 1% level.
= significant
at the5% level.
t = significant
Adj.r2= .42,F = 18.06,n = 259.
Breusch-Pagan test= 32.02 (criticalvaluefor95% = 18.31).

by around 30%.7 The fivepost-waryearsmustbe assessedthroughthe joint

effectsof the Postwarand Legacyvariables.The Postwarcoefficient is negative
whereasthe Legacycoefficient is positive,both being significant: shortwars
cause continuedpost-wardecline,while sufficiently long wars give rise to a
phase of rapidgrowth.Duringthe fiveyearsfollowing a war whichonlylasted
one year,thegrowthratewouldbe 2.1% lowerthanhad thewarnot happened.
This is not significantly different fromthe 2.2% growthcost of the war phase.
By contrast, aftera 15-yearwar the post-wargrowthrateis enhancedby 5.9%
perannum.
Theseresultsareconsistent withthewaroverhang effectpredictedforshortcivil
warsand withthepotentialforrapidgrowthafterlongcivilwarsimpliedby the
repatriationof previouscapitalflight. The prediction thattherewouldbe a con-
tinuingexodusofcapitalaftershortwarswas basedupontheproposition thatthe
post-warenvironment is lesscapital-friendly
thanthepre-war environment. Thisis
due partlyto thepersistence ofthediversion effect,and partlyto theincreasein the
perceivedriskof civilwar (whichCollieret al., 1998,haveshownto be a rational
expectation).Sucha largepersistence effectshoulddepresstheexpectedreturnon
capitalrelativeto its pre-warlevelfora givencapitalstock,givingriseto a war
overhangeffect. An alternative interpretationis thattherisksof renewedwarare

7This estimateshouldbe qualified.Becausethedependentvariableis theaveragegrowthrateovera

decade,therangeoftheWarmonths variableis boundedat 120.A 15-year
civilwarwouldbe treatedas
(say) a 120-monthwarin one decadeand a 60-month warin thenext.The application
ofthecoefficient
on Warmonths to a 15-yearcivilwaris thusan extrapolation
out ofthesamplerange.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 PAUL COLLIER 177

Table 2 OLS versusfixedand randomeffects

models

reducedsample fullsample
OLS model fixedeffects randomeffects
Variable coeff. t-ratio coeff. t-ratio coeff. z-ratio

constant 0.0354 3.86* - - 0.0416 - 9.17*

income - - - - 0.0318 15.72*
income squared-0.00047 -2.59t -0.00045 1.51 -0.00274 - 10.66*
schooling(LN) 0.0309 2.74* 0.0337 1.55 0.0136 1.74T
fragmentation - 0.00023 -3.75* - 0.00023 - 2.07t - 0.00020 - 3.38*
landlocked -0.0078 -1.72 -0.0060 -0.70 -0.0085 - 2.26t
warmonths -0.00021 - 2.96* -0.00020 - 2.34t -0.00020 - 3.83*
postwarmonths -0.00023 - 1.05 -0.00035 - 1.14 -0.00028 - 1.66T
legacy 0.0000032 0.93 0.0000039 0.88 0.0000042 1.38

*= significantat the 1% level.

t= significant
at the5% level.
at the 10% level.
S= significant
FixedeffectsmodelversusOLS: F = 1.085.
Randomeffects
modelversusOLS: LagrangeMultiplier
Test:4.61.

perceivedto be higheraftera shortwarthana longone,sinceshortwarsmaybe

inconclusive. In thisrespectthedesiredcapitalstockmaybe loweraftershortwars
than afterlong ones. However,Collierand Hoeffler (1998) testforthisand find
thatthe durationof war does not have a significant effecton the probability of
subsequent war. Hence, such a perceptionwould not be a rationalexpectation.8
In the above OLS analysisthe growthperformance in each decade has been
treatedas an observationignoringthe information thatthe same countrymay
appearthreetimes.This is themodelused,forexample,by Easterlyand Levine
(1998). We now testtheOLS modelagainstfixedand randomeffects models.
In orderto testagainstthefixedeffectsmodelthesamplehasto be reducedfrom
93 countries to 78 due to thelackofdatacovering morethanone decadefora few
countries.The OLS regression on thefullsamplewas repeatedforthesub-sample.
The resultsare shownin Table 2. The OLS model is not rejectedwhen tested
againstthefixedeffects model.However,thereductionin thesamplesize reduces
thesignificance of all thewar-related althoughthecoefficients
variables, are little
altered.Warmonthsremainssignificant at 1% but Postwarmonths and Legacy
become insignificant. Hence, the panel can only be used to test whether
Warmonths remainssignificant.Warmonths remainssignificant
in thefixedeffects
model.
The randomeffects modelcanbe testedon thefullsample.AgaintheOLS model
is notrejectedwhentestedagainsttherandomeffects model.TheWarmonths and

8
I am indebtedto a referee
forthispoint.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 178 ECONOMIC CONSEQUENCES OF CIVIL WAR

Postwarmonths variablesremainsignificant,
althoughLegacydropsa littlebelow
at
significance the 10% level.
Overall,thetestsdo notprovidea basisforrejecting
theOLS resultsreportedin Table 1.

4. The effects
of civilwaron thecompositionof GDP
The previoussectionshavefocusedupon GDP in aggregate. However,itwouldbe
if, the
surprising given largeaggregate effectswhich are caused by civilwar,these
wereneutralbetweensectors.Sectorsmaydiffer bothwithrespectto theirsuscept-
ibilityto the disruptionand diversioneffectsand because theyhave different
intensities as betweenendogenousand exogenousfactors.These compositional
effectsare potentially testablebut unfortunately requiremuchmoreinformation
thanis presently availablein the internationally comparabledata sets,especially
sincedata is particularly weakforcivilwareconomies.The approachtakenhereis
firstto classifysectorsaccordingto theirwar vulnerability, and thento testthe
predicted change in the sharesofgroupsofsectorsusingan unusually reliablesetof
NationalAccounts.The underlying hypothesis is thatcivilwaraffects thecomposi-
tion of activitypartlythroughincreasingthe cost of transactions and partly
the
throughreducing supply of N-factors.
The cost of transactions is increasedby civilwarthroughthe destruction, dis-
ruption, and diversion effects. The costs oftransportation increase as infrastructure
and securitydeteriorate, and the abilityto enforcecontractsis reducedas the
institutions of civil societyare weakened,trustdeclines,timehorizonsshorten
due to uncertainty, and opportunismbecomes more profitable.Turningto
factorintensities, it is reasonableto expectthatduringcivilwar the suppliesof
physicaland humancapitalwillcontractrelativeto land,buildings, and unskilled
labour.Againthischangesthecompositionof theeconomyin two ways.Those
sectorswhicharerelatively intensive in capitaltendto contract relative to theother
sectors.Further, the fallin demandforphysicaland humancapitalreducesthe
outputof the capital-providing sectors.A finaldemandeffect is on thedefence
industry itself.However,mostcivilwarsoccurin low-incomecountriesin which
the defencesupplyindustry is small.In Uganda it was negligible and it is not
consideredin thesubsequentanalysis.
To summarise, activities withanyof fourcharacteristics tendto contract: those
whichare intensive in eithercapitalor transactions, and thosewhichsupplyeither
capitalor transactions. It is quitepossibleforan activity to havemorethanone of
thesecharacteristics.
Naturally, NationalAccountsarenotdisaggregated according to thesecharacter-
istics.It is therefore not possibleto make a comprehensive rankingof activities
accordingto theirvulnerability to civilwar. However,some activitiesare suffi-
cientlyobviouslydistinctive thatit is possibleto makepartialrankings. Sectorsare
now classified to
according whether theircharacteristics are suchas to makethem
manifestly war vulnerable, or manifestly war invulnerable, leavingthosesectors
whichare insufficiently distinctive in a third,unclassified, category.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 PAUL COLLIER 179

The mostfavoured activity wouldbe one whichwas transactions-extensive,

capital-extensive,andwhoseoutputwasneither transactions services norcapital.
Among the National Accounts categories these characteristics applyonlyto arable
subsistence Three
agriculture. groups of activitiescan be identified as disadvan-
taged.Thefallindemand fordomestic capital goodsappliesquitespecifically tothe
construction Thefallindemandfortransactions
sector. services willaffect trans-
port,distribution, and finance. The mainactivity intensive in bothcapitaland
transactions is manufacturing.
Thispartial ranking assigns activitiesto threegroups: war-invulnerable (arable
subsistence agriculture); war-vulnerable (construction, transport, distribution,
finance,manufacturing); andunclassified (allotheractivities). Sixtestable predic-
tionsfollow from thisassignment. Thefirst three arethatduring civilwaroutput of
thefirstgroup would expand relativeto GDP,output of the second group would
contract,and,iftheunclassified groupgenuinely consists ofactivities which arenot
atypicallyaffectedonewayortheother, itsshareofGDPshouldnotbealtered. The
remaining three concern the post-war period. The effects of civil war on the
composition of GDP are not automatically reversed in the post-war period because
theeffectonfactor supplies isnotautomatically reversed.Asdiscussed inSections 2
and3,theperiodfollowing short civilwarstendstobecharacterised bycontinuing
lossofcapital. Only after long civilwars is the declinein the capital stock reversed.
Hence,it is onlyafterlongcivilwarsthatpeaceunambiguously reverses the
compositional changes. For such wars the predictions are therefore that the war-
invulnerable groupshouldcontract, thewar-vulnerable groupexpand,and the
unclassifiedactivities
remain unaltered as sharesofGDP.
Evidence on theeffect ofprolonged civilwaron thecomposition ofGDP is
muchmoreproblematic thanthaton aggregate GDP. Thereis no international
data set on thecomposition of GDP at constant pricescomparable to those
availableforaggregate GDP.9In placeofmulti-country panelsresort is madeto
data on a singlecountry, Uganda,whichexperienced a 15-yearperiodof
intermittent civilwar.Ugandais particularly well-suited forsuchan analysis
because,by the modest standards ofa country which has experienced a prolonged
civilwar,itsNational Accounts areofgoodquality. Socialdisturbance ona massive
scalebeganabruptly in 1972whenPresident Amindeclared 'economic war'against
theAsiancommunity, triggering anexodusofhumanandfinancial capital, andan
expansion in the The
army. subsequent periodic warfare was resolved in
only 1986
whentheNRAguerrilla forces tookKampala. Fora moredetailed discussion ofthe
effects
ofthewarseeCollierandPradhan (1998).
By 1971the UgandanNationalAccounts werewell-established so thatthe
pre-warcomposition of the economyis knownwithreasonable confidence.
Duringthe ensuing15 yearsthe qualityof the NationalAccountsnaturally

9The Penn World

Tables,whichis the mostnearlyappropriate,
does not providea breakdownof
activities
suitableforthebreakdown derivedin Section4.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
180 ECONOMIC CONSEQUENCES OF CIVIL WAR

Table 3 The compositionofUgandanGDP bywar-vulnerability

(% shareofGDP
at 1991constantprices)

1971 1986 1993-4

War-vulnerablesectors 42.5 24.0 28.7

hightransactionand asset intensity 8.8 4.4 6.0
transaction-providing 21.2 16.1 17.2
asset-providing 12.5 3.5 5.5
War-invulnerablesector 20.5 36.0 32.1
low transactionand asset intensity
supplyingneithertransactionsnor assets
Unassignedactivities 37.0 40.0 39.2

Note:TheNationalAccountsprovidedataat 1966pricesfor1963- 85 and at 1991pricesfrom1982-93/

4. 1982was selectedas theyeartobe usedforconversion from1966to 1991prices.Sinceoutputchanges
1971-82 are only measuredat 1966 prices,the conversionof 1971 outputto 1991 pricesis only
approximate. SectorI in 1971 at 1991 pricesis approximated as: [(sectorI in 1971 at 1966 prices)/
(sectorI in 1982at 1966prices].[sector
I in 1982at 1991prices].Thishastheadvantage thatsince1982-
91 GDP was calculatedupona consistent setofdefinitions
ofsectors, changesin definitionsbetweenthe
1966seriesandthe1991seriesonlyleadto a mis-estimate to theextentthattheyalterthegrowth rateof
thesectorbetween1971-82.Total GDP in 1971at 1991priceswas thencalculatedas thesum of the
sectoraloutputsso revalued.Notethatthiswilldiffer froma directadjustment oftotalGDP in 1971by
thefactor[(totalGDP in 1982at 1991prices)/(total GDP in 1982at 1966prices)].Sectorsharesin 1971
at 1991pricesare thensectoroutput/GDP.

deteriorated.However,thesubsequentperiodof peace has been sufficiently long

thattheyare now of quite highquality.Moreover,the NationalAccountshave
recently been rebuiltback to 1986. One probleminevitablewithlong National
Accountstimeseriesis thatthereis a changeofthebaseyearin whichtheconstant
priceseriesare measured.The treatment ofthisproblemis discussedin thenotes
to Table 3.
Table 3 reportsthe compositionof GDP accordingto the threegroupsof
war-invulnerable,war-vulnerable, and war-neutralactivitiesproposedabove. It
comparesthestructure of theeconomyat constant1991pricesin 1971 (thelast
pre-disturbanceperiod),1986 (theend of thecivilwar),and 1993-4.
No attemptis made to specify a counterfactual. it is evidentthat
Qualitatively,
the activityproxyingwar-invulnerability, arable subsistenceagriculture, would
normallydecline as a share of GDP duringthe growthprocess,while those
proxyingwar-vulnerability would increase,thoughnot necessarily more rapidly
than the war-neutral activities.Fortunately,
in the case of Uganda the com-
positionalchangesare so dramaticthatit is reasonableto attribute a substantial
part of themto theeffects of civilwar.
Duringtheperiodof thewar,thewar-invulnerable nearlydoubledas a
activity
share of GDP whereasin the absenceof war it would have been expectedto
contract.Conversely, the shareof the war-vulnerable groupof activitiesnearly
halved.Duringthepost-warperiodbothofthesechangeswerepartially reversed,
althoughevenby 1993-4thecompositionof GDP morecloselyresembled thatat

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 PAUL COLLIER 181

the end of the war thanthatof 1971. Despitethesesubstantial changesin both

directionson the partof thewar vulnerableand invulnerable groups,the unas-
signedgroup maintained a sharein the narrow range37-40%, suggesting thatit
indeedconsistsof activitieswhichare at leastin aggregatewar-neutral.
The six predictions concerning the compositionof activityduringand aftera
prolongedcivilwararethussupported on theUgandandata.Thisfallswellshortof
a rigoroustest,but it suggests
thatthehypotheses are worthpursuingon similar
data setsforothercountrieswhichhave experienced prolongedcivilwar.With
data on sectorsharesat constantpricesthewar and post-warperiods
sufficient
couldbe introduced as dummyvariablesin a timeseriesanalysisalongsimilarlines
to thatof Section3, withthedependent variablechangedfromthegrowthrateto
sectorshares.

5. Conclusion
Civilwar is a sufficiently
devastating phenomenonthatit is likelyto have large
effects on both the leveland compositionof economicactivity. This paper has
proposedsimpletheoreticalframeworks for theseeffectsand testedthem for
war and post-warperiods.During civil wars GDP per capita declinesat an
annual rateof 2.2% relativeto its counterfactual. The explanationproposedin
thispaper is thatthe declineis partlybecausewar directly reducesproduction
and partlybecauseit causesa gradualloss of thecapitalstockdue to destruction,
dissaving,and the substitutionof portfoliosabroad. These affectsectors
The sectorintensivein capitaland transactions
differentially. (manufacturing),
and the sectorswhichsupplycapital(construction) and transactions (transport,
distribution,and finance),contractmorerapidlythanGDP as a whole.The sector
with opposite characteristics(arable subsistenceagriculture)expands relative
to GDP.
Despite these severeeffectsof civil war the restoration of peace does not
necessarily a
produce dividend.Peace does not recreateeitherthe fiscalor the
riskcharacteristicsof thepre-wareconomy:thereis a higherburdenof military
expenditureand a greaterrisk of renewedwar. The desiredcapital stock is
consequently lowerthan had therebeen no war, althoughbeing higherthan
thatdesiredduringthe war.Becausedownwardadjustment of the capitalstock
is a slowprocess,thatprevailingat theend ofthewarmaystillbe abovenotonly
its desiredwartimelevel but its desiredpost-warlevel.In this case, whichis
inevitableifthewar is verybrief,thedeclinein thecapitalstockcan be expected
to continue,yieldinga war overhangeffect. Empirically,if a civilwar lastsonly
a year,it was foundto cause a loss of growthduringthefirstfiveyearsof peace
of 2.1% per annum,a loss not significantly different
fromthat had the war
continued.
However,if the war has been sufficiently long the capital stock will have
adjustedto a levelbelowthatdesiredin post-warconditions.In thiscase capital
repatriationenablesthe economyto growmorerapidlythanduringthepre-war

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
182 ECONOMIC CONSEQUENCES OF CIVIL WAR

thispeacedividendfortheendingofprolongedcivilwarswas
period.Empirically,
foundto be large.
changescausedby prolongedcivilwar.
Peace also reversesthe compositional
An implicationis thatafterthe end of long wars the war-vulnerable
activities
the
experienceveryrapid growth: generalisedpeace dividendis augmentedby
compositional change.

Acknowledgements
I wouldliketo thankAnkeHoeffler
forresearch
assistance forcomments
andtworeferees on
a previous
draft.

References
Barro,R.J.(1991). 'EconomicGrowthin a CrossSectionofCountries', Journal
Quarterly of
Economics,106,407-44.
Bruck,T. (1996). 'The EconomicEffects
ofWar',M.Phil.thesis,OxfordUniversity.
I. (1996). TheTransition
Colletta,N.J.,Kostner,M. and Wiederhofer, fromWartoPeacein
Sub-SaharanAfrica, WorldBank,Washington, DC.
Collier, P. (1994). 'Demobilisationand Insecurity:
a Studyin the Economicsof the
TransitionfromWar to Peace',Journal ofInternational 3, 343-51.
Development,
Collier, P. and Gunning,J.W. (1999). 'ExplainingAfricanEconomic Performance',
JournalofEconomic Literature,forthcoming.
Collier,P. and Hoeffler,A. (1998). 'On the EconomicCauses of Civil Wars', Oxford
EconomicPapers,50, 563-73.
Collier,P., Hoeffler,A. and Soderbom,M. (1998). 'On the Durationof Civil War and
Post-warPeace',mimeo,CentrefortheStudyofAfrican Economics,OxfordUniversity.
Collier,P. and Pradhan,S. (1998). 'EconomicAspectsoftheUgandanTransition to Peace',
in H.B. Hansenand M. Twaddle(eds), Developing James
Uganda, Currey,London.
Dixit,A.K. and Pindyck,R.S. (1994). Investment underUncertainty,
PrincetonUniversity
Press,Princeton, NJ.
Easterly,W. and Levine,P. (1998). 'Africa'sGrowthTragedy:Policyand EthnicDivisions',
Quarterly JournalofEconomics, CXII, 1203-50.
Foroutan,F. and Pritchett, L. (1993). 'Intra-sub-Saharan
AfricanTrade:is it too Little?',
Journal ofAfricanEconomies, 2(1), 74-105.
Herbst,J.(1990). 'War and theStatein Africa',International 14(4), 117-39.
Security,
Isham, J., Kaufmann,D. and Pritchett, L. (1996). 'Government and the Returnson
Investment',WorkingPaper No. 1550, Policy ResearchDepartment,World Bank,
Washington, DC.
Kapuscinski,R. (1988). Another
Day ofLife,PenguinBooks,London.
Knight,M., Loayza,N. and Villanueva,D. (1996). 'The PeaceDividend:Military
Spending
Cuts and EconomicGrowth',IMF StaffPapers,43, 1-37.
de Melo M., Denizer,C. and Gelb,A. (1996). 'FromPlan to Market',PolicyResearch
WorkingPaper1564,WorldBank,Washington, DC.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions
 PAUL COLLIER 183

SachsJ.D.andWarner, A. (1995).'EconomicReformandtheProcessofGlobalIntegration',
Brookings
Papersin Economic 25th
Activity, Anniversary 1-118.
Issue,
Small,M. andSinger,J.D.(1982).ResorttoArms:International
andCivilWar,1816-1980,
Hills,CA.
Sage,Beverly
Small,M. and Singer, of WarProject:International
J.D.(1994).'Correlates and Civil
War Data: 1816-1992',Inter-UniversityConsortiumforPolitical
and SocialResearch,
AnnArbor, MI.

This content downloaded from 130.225.157.199 on Sun, 9 Mar 2014 18:29:03 PM

All use subject to JSTOR Terms and Conditions