Sunday, January 20, 2008

Another take on resource dependence and conflict

Christa Brunnschweiler and Erwin Bulte have a new working paper on the effects of natural resource dependence on the risk of civil war onset (link). They begin with the observation that "resource dependence" is likely endogenous to politics and conflict. Exploitation of resources is likely to depend on politics and conflict likelihood. Also, the denominator of the resource dependence variable, gross income, is obviously endogenous. Thus, "simple" regressions of conflict onset on resource dependence will not yield reliable estimates; nonetheless, the literature is replete with these types of regressions. They use IV regression on 5-year panels to overcome this endogeneity problem. Their findings:
Our main findings turn received wisdom upside down. We find that resource dependence is indeed an endogenous variable in conflict regressions, and that properly accounting for this endogeneity removes the statistical association between dependence and conflict. In a follow-up regression we demonstrate, not surprisingly, that a country’s history with respect to war and peace is a significant determinant of resource dependence – clenching our main result. Moreover, we find a significant negative relationship between resource abundance and the onset of war, possibly because of an income effect, suggesting that the label “resource curse” seems misplaced. Resource-rich countries have on average a lower propensity to enter a civil war, but countries that do end up with civil strife (possibly resource-poor ones) will experience increasing dependence on the primary sector.

It's good to see people trying to make further strides to deal with the obvious endogeneity problems in predicting conflict based on economic variables. Let's look at their instruments, though:

The main conditioning variables serving as exogenous instruments for [resource dependence] and ln(gdp) are average openness to trade over the previous 5-year period (openness); a dummy variable for a presidential-type system of government; latitude; percent of land area in the tropics; and distance to the nearest coast or navigable river.

Do any of these plausibly satisfy the exclusion restriction as instruments for resource dependence in predicting conflict onset? I'm not so sure. They would do well to conduct sensitivity analysis along the lines of what was mentioned in this post.

Also, there is some circularity in the way they arrive at their conclusion about the endogeneity of resource dependence to conflict. This conclusion comes from the negative and significant coefficient on "number of peace years" in the IV-first stage regression predicting resource dependence. Why shouldn't we be concerned about the endogeneity of "number of peace years" in this regression?

Anyway, the evidence here is far from a slam dunk, but I actually believe their story: politics and conflict drive the macro economy as much as they are responses to it. But the fact is, this is a really hard claim to demonstrate.

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