Economic Development, Inequality, and War

1. Economic Development, Inequality, and War Paper Presented to the Faculty of Comparative CultureSophia University 23 May 2005 E. Wayne NafzigerUniversity Distinguished Professor Kansas State University

2. Economic Development, Inequality, and War Nafziger / Economic Development, Inequality and War

3. Introduction: Economic Development, Inequality, and War • Media focus on threat from failed states to rich countries. • Huntington predicts inevitable clash between the West and Islam. • However, war, state violence, and rebel resistance threatens the livelihoods of millions of poor. • 20% of African countries disrupted by war or state violence. • Cost include • refugees, • military spending, • damage to infrastructure, • disruption of trade and investment, and • diversion from development. Nafziger / Economic Development, Inequality and War

4. Economic Development, Inequality, and War • War in Africa lowers GDP per capita by 2.2% points annually. • World Bank • Need focus on: • survival income and • human rights of the world’s poorest. Nafziger / Economic Development, Inequality and War

5. Purpose of the Study • Economic stagnation and deadly political violence interact in several ways. • We analyze how • economic decline, • income inequality, • a weakening state, • rent seeking, and • competition over minerals * contribute to humanitarian emergencies. • Emergencies comprise a human-made crisis in which large numbers of people die and suffer from • war, • state violence, and • refugee displacement. Nafziger / Economic Development, Inequality and War

6. Sources of Humanitarian Emergencies • Stagnation and decline in real income, • high income inequality, • high ratio of military expenditures, * slow growth in food production, and * a tradition of violent conflict. • Failure to adjust to chronic external deficits another source. • Political variables • predatory rule, • authoritarianism, and • state decay * interact with economic variables. • The focus of the talk is on political economic factors, not econometrics. Nafziger / Economic Development, Inequality and War

7. Research Projects and Studies • Research project, 1996-2004 • UNU/WIDER, Helsinki, and • QEH, Oxford. • 17 case studies of 17 war-affected less-developed countries (LDCs), • political and economic analysis, and • econometric analysis of 124 LDCs since 1980. • Sources: - Nafziger & Auvinen, Economic Development Inequality, and War, Palgrave Macmillan, 2003. - Nafziger & Auvinen, "Economic Development, Inequality, War, and State Violence,“ World Development, 2002; and Auvinen & Nafziger, "The Sources of Humanitarian Emergencies," Journal of Conflict Resolution, 1999. - Nafziger & Väyrynen, eds., The Prevention of Humanitarian Emergencies, UNU/WIDER Studies in Development Economics, Palgrave/Macmillan, 2002. - Nafziger et al., eds., War, Hunger, and Displacement: The Origins of Humanitarian Emergencies, 2 vols., UNU/WIDER, Oxford University Press, 2000. . Nafziger / Economic Development, Inequality and War

8. Stagnation and Decline in Incomes • Emergencies in low-income LDCs. • Many are weak or failing (Holsti). • Countries more likely stagnant in real GDP per capita. • Stagnation & state failure affect • relative deprivation, • people’s perception of injustice from differences between what they expect and can keep. • Deprivation often results from class or communal inequality. • Relative deprivation spurs social discontent (Gurr). Nafziger / Economic Development, Inequality and War

9. More Findings about Humanitarian Emergencies • Emergencies are highly correlated with war, hunger, disease, and refugee flows. • Reduced living conditions during high expectations • more likely produce discontent • mobilized into political violence. • 200 million people killed in war or state violence in 20th century. • Few from rebel action or fighting between belligerents (Rummel). • Policies of power elites at root of most emergencies, not recognized in other research. • Holsti (2000) Nafziger / Economic Development, Inequality and War

10. Terrorism and State Violence • Major contributor to deaths: • Focus NOT on terrorism by opponents of state • but on terrorism by state or warlords. • Falk—terrorism • political violence by government during the French Revolution • How can terrorism exempt state violence against civilians? Nafziger / Economic Development, Inequality and War

11. Slow Growth: Analysis and Consequences • Slow growth or economic collapse puts pressure on ruling coalitions. • Elites can expand private benefit by political leaders, reducing their legitimacy. • To stop threats, political leaders use repression to suppress discontent or capture more surplus. • Repression may include direct violence or withholding food from disobedient groups (1980s’ Sudan), increasing relative deprivation and mobilization. • Slower growth can break apart ruling coalitions & worsen discontent. • Increase in wars and emergencies in Africa in 1980s and 1990s linked to economic collapse in 1970s and 1980s and stagnation in 1990s. • Africa (1.5%, 1960-95) highest death rate from 1990s’ wars (0.5% Middle East, 0.3% Asia, & 0.1 Latin America. • Income per capita lower in late 1990s than end of the 1960s (World Bank 2000). • If Africa’s economic performance had been that of other LDCs, Africa’s incidence of conflict would have been similar to other LDCs. Nafziger / Economic Development, Inequality and War

12. Predatory states • Amid decline, predatory rule and ethnic competition for state largess. • Predatory rule degrade the state • personalistic rule through coercion, • economic lures, and • personality politics • Elites extract resources from state rather than providing incentives for growth. • Holsti: Ruling elites and allies use positions to plunder economy through • graft, • corruption, and • extortion in private business • Ake: the African state is privatized • elites appropriate for private interests. • Use state funds for corruption, • from petty survival for clerks to thefit (kleptocracy) at the top. • Väyrynen: “Humanitarian crises are more likely to occur where the state is weak and thus subject to widespread policies to acquire private benefit from public resources.” Nafziger / Economic Development, Inequality and War

13. State Failure and Predatory Behavior • State failure not necessarily from poor (inadequate) public institutions. • Instead, “state failure harms most people [but] benefits government elites & allies.” • Ruling elites may not benefit from • free entry, • upholding rule of law, and • fighting corruption. • Instead political leaders may benefit more from • profit-seeking in politics they control • than from building a prosperous democracy. • Such tactics widespread in diamond and petroleum exporters, • e.g., Sierra Leone, Angola, Congo - Kinshasa, and Liberia. • Predatory behavior has lower pay-off in mineral-poor economies • e.g., Tanzania. Nafziger / Economic Development, Inequality and War

14. Stagnation & conflict • Most emergency countries, with population near subsistence, have experienced long periods of stagnation. • LDC growth in 1960s & 1970s faster than 1980s & 1990s. • Early 1990s’ increased emergencies partly connected to LDCs’ poor growth of 1980s accompanied by state decay. • Ruling groups had fewer benefits to distribute to allies and ethnic communities. • To repress potential rebels, rulers struggled for control of resources, allied with other strongmen, and strengthened their military. Nafziger / Economic Development, Inequality and War

15. Slow growth causes emergencies • Evidence indicates that (other things equal): • slow real growth explains humanitarian emergencies. • Emergencies in turn reduce growth. • But econometrics shows that causation • is stronger from growth to emergencies • than vice versa. • Negative growth interacts with political plunder in a downward spiral, • such as in Angola, Ethiopia, Sudan, Somalia, Liberia, Sierra Leone, and Zaire (Congo). Nafziger / Economic Development, Inequality and War

16. Explanatory Variables (1) LDEATREF (2) LHUMEMER (3) LCOHE Constant 7.31*** (2.67) 4.27** (1.85) 15.07*** (2.51) LGDPGRO[-1] ‑1.83*** (0.55) ‑1.16*** (0.38) -2.54*** (0.52) LGINI[-1] 0.29** (0.12) 0.18** (0.08) 0.36*** (0.11) LGNPCAP[-1] ‑0.15*** (0.03) ‑0.07*** (0.02) -0.19*** (0.03) LIMFGNP[-1] ‑0.10*** (0.03) ‑0.05*** (0.02) -0.06** (0.03) LCPIDIFF[-1] 0.26*** (0.06) 0.20*** (0.04) 0.27*** (0.05) LMILCENT[-1] 0.18*** (0.03) 0.16*** (0.02) 0.15*** (0.03) LDEATRAD 0.04*** (0.01) A 0.02* (0.01) R square 0.18 0.16 0.19 N 663 663 663 DW 0.34 0.31 0.38 TABLE 1HUMANITARIAN EMERGENCIES: OLS REGRESSION MODELS Note: The figures are parameter estimates and standard errors (in parentheses), respectively. LGDPGRO = ln real GDP growth; LGINI = ln gini index; LGNPCAP = ln GNP per capita; LIMFGNP = ln use of IMF credit/GNP; LCPIDIFF= ln consumer price index, annual change; LMILCENT = ln military expenditures/GNP; LDEATRAD = ln deaths from domestic violence 1963-77; except for LDEATRAD, all explanatory variables are lagged one year [-1]. Coefficient significant *** = at the 1 per cent level (2-tailed test), ** = 5 per cent level and * = 10 per cent level; a = not significant; DW = Durbin-Watson test statistic for serial correlation. Nafziger / Economic Development, Inequality and War

17. Stagnation and Adjustment • Stagnation is often accompanied by chronic trade deficits, necessitating economic stabilization and reform. • Failing to adjust is costly. • The longer this failure, the more painful the adjustment. Most LDCs face frequent balance-of-payments problems, which reduce control by political leaders. • However, minerals and a strong military can provide the warlord with security that postpones adjustment. • LDCs changed strategies in 1980s & 1990s, following slow growth, reduced aid, increasing debt, and the increasing market orientation of DCs & international agencies. • New strategies challenged existing rulers, increasing private use of public resources, and repression. • Spending cuts reduced money for clients & increased military and police power for survival. Nafziger / Economic Development, Inequality and War

18. Income Inequality • High income inequality increases risks of emergencies. • Income inequality fuels social discontent & political instability (Alesina and Perotti). • Predatory and authoritarian rulers’ policies increase inequality. • We found relationships between income inequality and war • by using income concentration measures from Deininger and Squire (1996) • Others lacked data on distribution Nafziger / Economic Development, Inequality and War

19. Grievances, Greed, and Emergencies • Collier argues • “Inequality does not seem to effect the risk of conflict. Rebellion does not seem to be the rage of the poor. . . . Conflict is not caused by divisions, rather it actively needs to create them. . . . However, it is the military needs of the rebel organization which have created this political conflict rather than the objective grievances.” • World Bank researchers • Greed rather than grievances drive civil wars • Our findings indicate both grievances & greed drive war & emergencies. • High inequality may contribute to emergencies even with rapid growth. Nafziger / Economic Development, Inequality and War

20. Relative & absolute deprivation • Igbo elites in Nigeria experienced absolute deprivation during growth in the early 1960s. • The East lost oil tax revenues from federal change in mineral export allocation to regions. • High income concentration increases relative deprivation. • Rising income disparities by class, region, and community increase the risk of political disintegration. • Regional factors include • educational and employment differences, • revenue allocation, and • language discrimination. • Examples include 1960s’ Nigeria, 1950s’ & 1960s’ Pakistan, Hutu & Tutsi conflict in Burundi & Rwanda, 1980s’ & early 1990s’ Yugoslavia, & Sri Lanka. Nafziger / Economic Development, Inequality and War

21. Inequality and war • Large inequality associated with war & insurgency, especially if less advantaged can identify perpetuators of poverty. • Relative deprivation from inequality may occur with growth, as in 1960s’ Nigeria, or even when the disadvantaged group's relative position is improving, as non-white South Africans 1960s-from the 1960s through early 1980s. • Nigeria, South Africa, & Chiapas, Mexico illustrate diverse patterns of government discrimination, economic inequality, fuel social discontent, and emergencies. • Once a population is dissatisfied with income inequality, as majority nonwhites in white-ruled South Africa, rising expectations may spur the revolt and state hostile action that increases the risk of an emergency (Davies, 1962). Nafziger / Economic Development, Inequality and War

22. Competition for Natural Resources • Collier: • Primary commodities and their exports increase civil wars. • Mwanasali: • Primary exports’ advantages to belligerents: • generic products so origin can be concealed; • heavily taxable; and • uncomplicated production processes. • De Soysa: • civil war unrelated to per capita availability of natural resources • agricultural • mineral • Once De Soysa includes only minerals, she finds the greater mineral wealth, the greater the incidence of conflict. Nafziger / Economic Development, Inequality and War

23. Minerals, Conflict, and State Violence • Why do minerals contribute to conflict and state violence? • During cold war, superpowers provided aid for LDCs. LDCs extracted resources from major powers. • Aid provided support for patronage. • When cold war ended, LDCs required new strategies and fund sources. • Many Afro-Asian LDCs needed control of resources for military and police power but only minimal services. • With International Monetary Fund (IMF)/World Bank emphasis on the market, predatory rulers could undermine bureaucracies to build personal power at the expense of health, education, and agricultural development (Reno, Väyrynen). Nafziger / Economic Development, Inequality and War

24. Minerals, Conflict, and State Violence • The struggle for control over minerals and other natural resources are important sources of conflict. • Rulers in Angola, Sierra Leone, Liberia, and Congo - Kinshasa used exclusive contracts with foreign firms for minerals to “regularize” sources of revenue—no governmental agency for taxes (Reno). • In comparison, Tanzania lacked the tradable resources to become predatory (Väyrynen). Nafziger / Economic Development, Inequality and War

25. Liberalization and Adjustment in Sierra Leone • With aid decline, Sierra Leone pressured by IMF/WB for liberalization and adjustment. • In 1991, creditors of Sierra Leone offered loans and debt rescheduling worth $625 million, about 80 per cent of GNP, if it reduced government expenditure. • Freetown heeded World Bank's advice to use private operators to run state services. • Privatization shifted clientage from government to private sector. • Sierra Leone's ruling elites used foreign firms for power & to defeat rivals. • In the 1990s, Sierra Leon heads of state relied on contracts with foreign firms for diamonds to stabilize revenue, foreign mercenaries to replace the army, & foreign contractors for providing other state services. Nafziger / Economic Development, Inequality and War

26. Control territory & destroy state • Rulers sometimes “destroy state agencies,” using violence to extract resources from their people (Reno). • In Liberia, Charles Taylor used foreign firms to amass power. • Taylor's territory had own currency, telecommunications, airfields, export trade in primary products, arms imports, and port. • Taylor, a warlord before 1997, controlled territory by building patronage, easier than building a state and its bureaucracy (Reno). • Taylor-land’s GNP was $100-$200 million from 1990 to 1996 (Reno 2000). Nafziger / Economic Development, Inequality and War

27. “Warlord” Approach • Even Zaire’s President Mobutu Sese Seko (1965-1997) mimicked the “warlord” approach. • Foreign firms served as source of patronage. • Indigenous commercial interests tied to the state’s. • Mobutu survived state collapse, but fell because his strategy of milking state assets had reached a limit, seriously weakening patronage. Nafziger / Economic Development, Inequality and War

28. Benefit-cost for rulers • Although state failure increases vulnerability to war, some rulers & warlords profit more from war than peace. • War and state failure may result from rulers and warlords benefiting from the harm of the population. • Mineral wealth increases relative deprivation for allies and rebels. Nafziger / Economic Development, Inequality and War

29. Democracy and Authoritarianism • What is the relationship between political conflict and authoritarianism? • Authoritarianism is conducive to conflict because repression increases opposition activity. • An inverted U-relationship: autocratic governments face much more revolutionary opposition than democracies. • But mild repression incites conflict and intense repression deters it. • Authoritarian regimes may cling to power during relative prosperity but are more prone to collapse during economic crises. • Authoritarian regimes are also more dependent on foreign lenders to stay in power. During adjustment, Turkey and Morocco were supported by the IMF, World Bank, and other lenders. Nafziger / Economic Development, Inequality and War

30. Other Factors • Military expenditures/GNP contributes to emergencies. • Military resources support predatory and authoritarian rulers. • Authoritarianism lacks political mechanisms to settle grievances, increasing the risk of rebellion. • Or a strong military is a constant threat to civilian LDC regimes. • In very poor countries, increased spending for military may produce starvation and destitution. • Finally a tradition of political violence increases susceptibility to war, • e.g., Rwanda, Burundi, and Colombia. Nafziger / Economic Development, Inequality and War

31. Ethnicity • Ethnic identity is not a primordial “given.” • Ethnicity is • created, • manifested, • combined, and • reconstituted • in struggles to share benefits from modernization and self-government, • but is not a source of these struggles (Nafziger et al., 2000). • Widner (1999): e.g., Yoruba people in Nigeria. • Elites use identification with ethnic communities, and even accentuate them, to transfer potential hostility from inequalities and power disparities from their communities to others’. Nafziger / Economic Development, Inequality and War

32. Conclusions • A major factor responsible for 1990s’ increased emergencies was: • LDCs’ prior stagnation and its contribution to state decay. • Slow growth and accompanying chronic external deficits increase vulnerability to emergencies. • Large income inequality contributes to • ethnic and class discrepancies • that contributes to crises. • The competition for mineral resources by warlords and traders in weak states increases vulnerability to war and state violence. • Ethnicity is not usually a source of conflict but often emerges during conflict, sometimes as an invention of politicians. Nafziger / Economic Development, Inequality and War

33. Conclusions • The Third World, with the support of the international community, must strengthen and restructure the political economy of poor, unequal, and weak states. • LDCs need to make economic and political institutional changes • a legal system, • financial institutions, • increased taxing capacity, • investment in basic education and infrastructure, • well-functioning resource and exchange markets, • programs for weaker segments, and • democratic institutions that accommodate and co-opt the country’s ethnic and regional communities. • Institutional development increases the productivity of private investment and public spending and enhances the effectiveness of governance. Nafziger / Economic Development, Inequality and War

34. Conclusions • DCs & international agencies bear substantial responsibility for modifying the international economic order to enhance growth and adjustment. • LDCs must demand consideration of their economic interests within present international economic and political institutions. • The interests of the Third World can be served by • its enhanced flexibility and self-determination in adjustment and liberalization; • a shift in the goals and openness of the IMF and World Bank; • the restructuring of the international economic system for trade and capital flows; • the opening of rich countries’ markets; • more technological transfer by foreign companies, • bilateral donors, and • international agencies; • a greater coherence of aid programs; and • increased international funding to reduce • food crises, • directly help the poor, • ameliorate external shocks, and • write down debt burdens. Nafziger / Economic Development, Inequality and War

35. Conclusions • Some vulnerable countries are not amenable to political economy solutions. • Policies of governing elites are indeed at the root of most emergencies, and usually some powerful factions in society benefit from them. • Yet a large number of countries vulnerable to emergencies have the will to change. • Thus, there is much scope for • international, • national, and • nongovernmental economic and political actors • To co-ordinate long-term policies • to reduce the developing world’s vulnerability to humanitarian emergencies. Nafziger / Economic Development, Inequality and War