Conflict in sub-Saharan Africa: private sector incentives and impacts

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<p><strong>Conflict in sub Saharan Africa: private sector incentives and impacts<br />
</strong> <br />
<em>Romesh Vaitilingam interviews Eliana La Ferrara for Vox<br />
January 2009<br />
Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/2654]</em></p>
<p><strong>Romesh Vaitilingam: </strong>Welcome to VOX Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with Eliana La Ferrara, who is Professor of Economics at Bocconi University in Milan.<br />
Eliana and I met at the European Economic Association's annual meetings in Milan in August 2008, where we spoke about her research on the causes and consequences of conflict, particularly in sub-Saharan Africa. She began by explaining how she got started in this area of research.</p>
<p><strong>Eliana La Ferrara: </strong>Well, I've been working on development since I started my career and even before, as a PhD student. And I've been always particularly interested in sub-Saharan Africa and the underlying reasons for the failure of sub-Saharan African economies to keep up with what was happening in the rest of the developing world. And one of the things that obviously strikes you when you work on the continent is the high incidence of conflict in this area. So, I started trying to understand the causes and roots of conflict. There is a fair amount of work both in political science and in economics on this, mostly exploiting cross-sectional variation across countries and looking at poverty as a determinant of conflict, or ethnic divisions and so on.<br />
And what I have tried to do is think of a slightly more microeconomic approach to conflict, in terms of studying incentives for people or institutions, groups to engage in conflict, and especially the role of the private sector. I would say my key question has been to what extent ongoing conflicts in places like sub-Saharan Africa are truly detrimental to firms. I think, this is an important question, because to the extent that there are big losses for incumbent firms, multinationals and so on from conflict, their interests to put an end to it and do what they can to lobby for the end of conflict are certainly stronger than if they survive without payment and big costs.<br />
And so what I've tried to do in the past years is really find a way to empirically tackle the questions of who is losing from conflict in private sectors and how much, if they are losing.</p>
<p><strong>Romesh: </strong>So, tell me about the kind of data that you are looking at, I mean, are you looking at conflict within countries or between countries or both?</p>
<p><strong>Eliana: </strong>No, it's mostly within countries. The kind of data actually merges information on financial markets, because we are going to talk about firms' losses by looking at how stock prices change in response to news about conflict. So, this approach which is called &quot;Event Study&quot; approach has been used in finance for a long time - looking at dividend announcements, these types of events. The difference is that I've been looking at news that was about conflict in the country and trying to understand investors' reactions to this news.<br />
So, this would be, as I said, a combination of information about stock prices which is easily available with information about ongoing conflict events. And that's the harder part in terms of data construction, because you need to study the history of conflict, understand when key turning points took place.<br />
And also, for the methodology to allow a causal interpretation of the effects, these events must be totally exogenous and unanticipated. So you want events that you can judge as being truly exogenous and unanticipated by investors and that may take a bit of work in terms, especially, of understanding the nature and evolution of the conflict.<br />
And then you basically look at what happens to abnormal returns, which would be the unexplained portion of the stock price returns in correspondence to the occurrence of these events.<br />
And so far, I have done a couple of exercises in this spirit. One paper which is joint with Massimo Guidolin, a co-author from the Federal Reserve Bank of St. Louis, was about diamond mining firms in Angola and what happened to them when Savimbi died (Jonas Savimbi was the leader of UNITA, the rebel movement) which was for everyone the end of the war basically.<br />
And another paper with coauthor from Berkeley, Stefano DellaVigna is looking at the arms producing companies and what happens to their stock prices when conflict suddenly increases or decreases in countries where they shouldn't be selling, like countries that are covered by UN arms embargoes.<br />
So, the idea is to really - because it's difficult to get direct and hard evidence on who is involved in a conflict situation - look at what investors know about it and get their information by looking at their reaction of crisis.</p>
<p><strong>Romesh: </strong>So, what kind of findings are you coming up with? I guess people would assume that an unexpected conflict event is going to be bad news for stock prices, but then again, I can't remember who it was said &quot;The time to buy is when blood is running in the streets,&quot; so maybe that's the trigger for things to fall. What do your results show?</p>
<p><strong>Eliana: </strong>Well, I can tell you, certainly for the first paper, the one on Angola, we started the project thinking that we would definitely find gains at the end of the war in terms of stock price returns. And we found the opposite. So, we were looking at firms that were already in the country and in correspondence with Savimbi's death, their stock prices actually plunged rather than going up. And for us, this is was a surprising finding, ex post even talking to people working in the industry, they said it was not so surprising in the sense that those were firms that for many years had learned how to work in such an environment, and the end of the war actually meant more competition, lower barriers to entry. It also meant possibly more pressure, international pressure for transparency - diamond licenses as well as many other licenses, when we talk about minerals and primary commodities that are not always allocated on a very transparent basis. And so all these combined factors actually might have hurt the firms when the war ended rather than the opposite.<br />
So, I think this message says that, certainly the overall welfare benefits were extremely high and also for future potential investors, but in terms of incumbent firms, it's not always obvious that they may not learn to live or even benefit from a conflict situation.<br />
In the other paper, the one on arms, the question is slightly different because there we are trying to use this as a tool for detecting violations of the embargo. So, in that case, the question was more, given that it's difficult to find someone with an illegal shipment of arms somewhere, can we just look for firms whose prices unexpectedly jump up or down when something let's say in Somalia happens and they shouldn't be selling to Somalia.<br />
So, in that case what we are trying to do is, propose this as an alternative or complementary&nbsp;&nbsp; sorry not an alternative, this is a certainly a complimentary way of detecting violations to direct investigations. And we are finding that measures of transparency in the export licensing schemes and other proxies that we can use to measure the extent to which a country is really enforcing regulations on embargoes are surprisingly well predicting which firms are found violating the embargo.<br />
And again, we find firms both in the developing and in the industrialized world doing this. But again, some measures of the incidence of this violation seem to correlate with things like corruption and again low transparency in the export licensing scheme. So, there seems to be a call from that line of research for more international coordination and stricter monitoring of how different countries enforce these embargos. It surprisingly lacks the way national laws implement these types of UN resolutions.</p>
<p><strong>Romesh: </strong>Are there other general lessons from your research for the development community for people involved in conflict resolution in the international sort of peacemaking community, what kind of things might you think about drawing from your research?</p>
<p><strong>Eliana: </strong>I think there is certainly a fascinating body of results when you look at economic analysis of conflict nowadays that looks at rebel groups' impact on households. And for policy-makers and development practitioners who are interested in actually coping with the aftermath of the conflict and so on, I would think that that is probably the more important part of research to be looking at. What I'm trying to do, I think might help more possibly in the conflict prevention or even in the ongoing conflict situations by giving governments and international actors information on specific sectors or countries and international partners who should be encouraged to do more than they are currently doing.<br />
So, if you wish, I have been reading a lot of advocacy group reports and I find that they are extremely helpful, but they often don't reach the academic world and even in terms of empirical backing, they are not always perceived as being completely objective or credible.<br />
So, what I thought this line of research could help with is trying to bring to the level of analysis that we have for development economic research some issues which are often at the border between economics, human rights, politics, whatever, and do it with methods and possibly a rigor which is comparable to what we use for more traditional topics. So, I think if that succeeds, it's important for the development community.</p>
<p><strong>Romesh: </strong>Eliana La Ferrara, thank you very much.</p>
<p><strong>Eliana: </strong>You are welcome. Thanks.</p>

Topics:  Development Institutions and economics

Tags:  sub-Saharan Africa, Conflict

"Diamonds Are Forever, Wars Are Not. Is Conflict Bad for Private Firms?" (with M. Guidolin), American Economic Review, 97(5), 1978-93, 2007.

"Detecting illegal arms trade" (with S. DellaVigna), mimeo, 2007.

Both available at http://www.igier.unibocconi.it/whos.php?vedi=1189&tbn=albero&id_folder=177

Professor of Economics, Bocconi University and CEPR Research Fellow

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